(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

NYSE Adopts Corporate Governance Measures

The New York Stock Exchange board of directors approved changes in its listing standards aimed at helping to restore investor confidence by "empowering and ensuring the independence of directors and strengthening corporate-governance practices." The NYSE board adopted the final recommendations of its corporate accountability and listing standards committee following a two-month comment period. The exchange stated that it will promptly submit a rule filing to the Securities and Exchange Commission for review.

The board adopted the committee recommendation that independent directors must comprise a majority of a board. Under the revised standards, companies must have a nominating committee, compensation committee and an audit committee comprised solely of independent directors. About 75 percent of the companies whose stocks trade on the exchange already meet this requirement, stated the exchange. Currently, listed companies must have a minimum three-person audit committee composed solely of independent directors. There are no current provisions concerning the establishment or composition of nominating or compensation committees. Another new provision would require the non-management directors must meet without management in regular executive sessions.

Definition of Independence

Under the new listing standards, for a director to be deemed "independent," the board would be required to affirmatively determine that the director has no material relationship with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company. While the existing definition precludes any relationship with the company that may interfere with the exercise of director's independence from management and the company, the board is not required to make an affirmative finding of independence.

Independence also requires a five-year "cooling-off" period for former employees of the listed company or of its independent auditor, and for former employees of any company whose compensation committee includes an officer of the listed company. Immediate family members of these people are also similarly restricted. This expands the current three-year rule that applies only to former employees of the listed company.

Shareholder Approval of Options Plans

Under the new listing standards, shareholders would be given the opportunity to vote on all stock-option plans, except employment-inducement options, option plans acquired through mergers and tax-qualified plans such as ESOPs and 401(k)s. Brokers may vote customer shares on proposals for such plans only pursuant to customer instructions. Currently, broad-based plans and one-time employment inducements are exempt. Brokers can vote customer shares without instructions as long as the proposal is not contested and the proposal does not cover more than five percent of outstanding stock.

The NYSE stated that it would be desirable for the exchange to establish a working group to advise on possible mechanisms to facilitate the proposal this broker vote provision. The establishment of any such group would not, however, delay the effectiveness of the broker vote proposal.

Ethics and Education

Listed companies will be required to adopt and publish a code of business conduct and ethics, and must promptly disclose any waivers of the code for directors or executive officers. Listed foreign private issuers would also be required to disclose any significant ways in which their corporate-governance practices differ from NYSE rules. According to the exchange, this provision was not intended to be a "laundry list" and may be made in a brief, general summary of material differences.

Additionally, the revised listing standards provide that the exchange urges every listed company to establish an orientation program for new board members. In conjunction with leading authorities in corporate governance, the NYSE will develop a directors institute, described by the exchange as its first formal program for director education.

The committee originally proposed that each listed-company's CEO must certify annually that he or she is not aware of any violation by the company of NYSE corporate governance standards. However, the NYSE stated that it should "defer to the recent SEC order and the Sarbanes-Oxley Act regarding the CEO certifications on the quality of disclosure." The CEO certification on NYSE rule compliance was retained. The SEC and NYSE certifications must also be disclosed in each company's annual report to shareholders.

The NYSE may also issue a public reprimand letter for violation of a corporate-governance standard, in addition to the existing penalty of delisting. Upon submission to the SEC, the proposals will be published for public comment prior to SEC consideration.