The U.S. Securities and Exchange Commission (SEC) recently approved rule changes submitted by the New York Stock Exchange (NYSE) amending certain of the NYSE’s corporate governance requirements set forth in Section 303A of theNYSE Listed Company Manual. These rule changes, which become effective January 1, 2010, impact areas such as director independence, compliance transition periods and website posting requirements, among others. The SEC also approved NASDAQ Stock Market LLC (Nasdaq) rule changes which became effective on December 7, 2009. These changes require, rather than recommend, listed companies to notify Nasdaq prior to the release of material information and modified language that was inconsistent with SEC guidance on the use of company websites to satisfy public disclosure requirements. The most significant rule changes are summarized below, including their effect on Canadian foreign private issuers (FPIs).

NYSE Rule Changes

Section 303A.00 - Introduction (Loss of FPI Status)

When a listed company loses foreign private issuer status, it may become subject to a number of NYSE corporate governance requirements to which it was not previously subject. The revised rules establish a transition period for a company that determines that it no longer qualifies as a FPI. The new provision references SEC Rule 3b-4, which requires a FPI to test its FPI status once a year on the last business day of its second fiscal quarter (the Determination Date). If the listed company no longer qualifies as a FPI as of the Determination Date, it will be required to comply with the NYSE corporate governance listing standards prescribed for U.S. domestic companies beginning on the first day of the next fiscal year (within six months) following the Determination Date, including requirements to:

  • satisfy the majority independent board requirement;
  • satisfy the web site posting requirements;
  • have fully independent nominating and compensation committees; and
  • have a three-person audit committee whose members comply with the applicable independence requirements.

In addition, a company that ceases to be a FPI will be required to comply with the NYSE’s shareholder approval requirements for equity compensation plans as of the Determination Date; but, such a company will be granted a limited transition period with respect to discretionary plans and formula plans in place prior to the Determination Date so that additional grants may be made without shareholder approval under such plans after the Determination Date and during a transition period. Subject to limited exceptions for formula plans, the transition period is the later of six months, or the first annual meeting following the Determination Date, but in no event later than one year following the Determination Date.

Applicability to Canadian FPIs

The rule changes clarify applicable compliance dates. Canadian listed companies that fail to qualify as FPIs on the Determination Date should now be aware that they will need to comply with NYSE requirements for U.S. domestic listed companies within the time periods described above, to the extent that they have not already been voluntarily complying with those requirements.

Section 303A.02 - Modification of Director Independence Disclosures

Currently, the NYSE rules require a listed company to disclose specified information regarding independent directors, including the identity of its independent directors and the basis for the independence determinations. Item 407 of Regulation S-K under the U.S. Securities Act of 1933, as amended, has similar (and, in some cases, more extensive) director independence requirements. The rule amendments replace the director independence disclosure requirements currently set forth in Section 303A.02 with a provision that, instead, requires compliance with the disclosure requirements set forth in Item 407(a) of Regulation S-K.1 As a result, a listed company that is in compliance with Item 407 can know that it is in compliance with Section 303A, and vice versa. While the commentary to the amended NYSE rules will no longer state that a listed company may adopt and disclose categorical standards for director independence, companies may continue to find the adoption or continued use of such standards useful or appropriate in assessing director independence, provided that the detailed disclosure of all transactions, relationships and arrangements that were considered for each director identified as independent are made as required by Item 407(a)(3).

Applicability to Canadian FPIs

While FPIs are not required to comply with Section 303A.02, they are required, under Section 303A.11, to disclose any significant differences between their corporate governance practices and those of U.S. domestic listed companies under the NYSE rules. Therefore, Canadian FPIs who wish to state that they comply fully with all NYSE domestic issuer corporate governance requirements must revise their practices and disclosure to meet the requirements of Item 407(a) of Regulation S-K. Alternatively, they should consider whether any differences between Item 407(a) requirements and their Canadian corporate governance practices rise to the level of significant differences for purposes of their Section 303A.11 disclosure.

Disclosure Requirements of Item 407(a) of Regulation S-K

Item 407(a) of Regulation S-K requires a company to identify each director and each nominee for director that is independent under the independence standards applicable to the company which, in the case of an NYSE listed company, would be the independence standards set forth in Section 303A.02. In addition, since the NYSE rules contain independence requirements for committees of the board of directors, Item 407(a) requires identification of each director that is a member of the compensation, nominating or audit committee that is not independent under the NYSE independence standards. If a company has its own definitions for determining whether its directors, nominees for director and members of board committees are independent, the company must also disclose whether these definitions are available to security holders on the company’s web site and, if so, provide the web site address. If not, a copy of these policies is to be included in an appendix to the company’s proxy statement at least once every three fiscal years or if the policies have been materially amended since the beginning of the company’s last fiscal year. If a current copy of the policies is not available on the company’s web site and is not included as an appendix to the proxy statement, the proxy statement must identify the most recent fiscal year in which the policies were so included. Item 407(a) also requires a company to disclose its reliance on any exemption from the NYSE requirement that a majority of the board of directors be independent and to explain the basis for its conclusion that such exemption is applicable. Finally, Item 407(a)(3) of Regulation S-K specifies that for each director and director nominee that is identified as independent, a company must describe, by specific category or type, any transactions, relationships or arrangements not otherwise disclosed pursuant to the related person transaction disclosure requirements of Item 404(a) of Regulation S-K that were considered by the board of directors in making the independence determination. The foregoing disclosures under Item 407(a) must also be provided for any person who has served as a director during any part of the last completed fiscal year.

Section 303A.05 - Compensation Committee

The rule changes provide that the charter of the Compensation Committee must require the Committee to produce a Compensation Committee report satisfying the disclosure requirements of Item 407(e)(5) of Regulation S-K

Applicability to Canadian FPIs

Canadian FPIs should consider whether, and to what extent, their practices and disclosure differ from this requirement and implications for their Section 303A.11 disclosure.

Section 303A.06 - Audit Committee

Currently, listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended. The rule changes add a clarification that listed companies must disclose their reliance on, and the effect of, certain exceptions from Rule 10A-3. The rule changes also provide that the Audit Committee’s charter must require the Audit Committee to prepare a report meeting the requirements of Item 407(d)(3)(i) of Regulation S-K.

Applicability to Canadian FPIs

The requirement to disclose reliance upon an exemption will generally not affect Canadian FPIs other than those relying upon the exemption for newly listed issuers, as Canadian FPIs are not generally eligible to rely on the other exceptions to Rule 10A-3. Canadian FPIs should also review the requirements of Item 407(d)(3)(i) of Regulation S-K and assess its implications for their Section 303A.11 disclosure.

Section 303A.11 - Foreign Private Issuer Disclosure

Currently, the NYSE rules allow FPIs to disclose significant differences between their corporate governance and that of U.S. domestic listed companies on their website and/or in their annual report. The rule changes clarify that FPIs that file their annual report on Form 20-F must include the statement of differences in that report (as required by Item 16G of Form 20-F). All other FPIs may either include the statement of differences in their annual report (Form 40-F or Form 10-K, as applicable) or make it available through their website while only disclosing in their annual report that the statement of differences is available on the website, along with the website address.

Applicability to Canadian FPIs

This rule change will not affect Canadian FPIs filing annual reports on Form 20-F. Those Canadian FPIs filing annual reports on Form 40-F of Form 10-K will continue to have the option of including the statement of differences in their annual report or making it available on their website.

Section 303A.12 - Notices of Non-Compliance with Corporate Governance Requirements

Currently, a listed company must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material noncompliance with Section 303A. The rule changes will require prompt notification of any non-compliance with Section 303A, not just material non-compliance. Also, the amended rules eliminate the requirement that a listed company disclose in its annual report that it has filed the CEO certification required by NYSE rules regarding compliance with corporate governance listing standards and the CEO/CFO certifications required by SEC rules.

Applicability to Canadian FPIs

Every listed company, including Canadian FPIs, will now have to notify the NYSE promptly when they become aware of any non-compliance with Section 303A. However, when considering the scope of this requirement, Canadian FPIs should note that they are only subject to certain provisions of Section 303A and so are only required to notify the NYSE of non-compliance in relation to the requirements of: Section 303A.06 - Audit Committee; Section 303A.11 - Foreign Private Issuer Disclosure; and Section 303A.12(b) and (c) - Certification Requirements.

Section 303A.14 - Website Requirement

The current section 303A.14 will be redesignated as Section 307.00. The revised Section 307.00 will specify that a company’s website must be accessible from the United States, must clearly indicate in the English language the location of the documents on the website that are required to be posted. Such documents must be printable in the English language.

Applicability to Canadian FPIs

This rule change will not affect Canadian FPIs since documents on Canadian FPI websites will already be printable in English, or in both French and English.

Other Notable NYSE Rule Changes

  • Sections 303A.04; 303A.05; 303A.07; 303A.09; 303A.10 - Amendments Related to Required and Optional Website Postings: Under the NYSE rules, a listed company is required to post the charters of its audit, compensation, and nominating/corporate governance committees, corporate governance guidelines, and its code of business conduct and ethics on its website, and state in its proxy statement or annual report that these documents are so posted. The NYSE rule changes add a website posting disclosure requirement to each of the applicable provisions and require that a company’s proxy statement or annual report state that such documents are available on its website and provide the website address. The amended rules, however, eliminate the requirement that a company state that these documents are available in print to any shareholder upon request. The rule changes will also allow a listed company to disclose certain information on its website that currently may only be disclosed in a proxy statement or annual report.2 The listed company would need to disclose in its annual report that the information is available on its website and provide the website address.
  • Section 303A.03 - Executive Sessions; Communications with Directors: Companies may hold regular executive sessions of independent directors as an alternative to executive sessions of non-management directors, and all interested parties (not just shareholders) must be able to communicate concerns regarding the listed company to the presiding director or to the non-management or independent directors as a group.3
  • Section 303A.10 - Waivers of Code of Business Conduct and Ethics: Disclosure to shareholders of any waiver from a listed company’s code of business conduct and ethics that is granted to an executive officer or director must now be made within four business days (as opposed to “promptly,” which the NYSE’s prior guidelines indicated was two to three business days) of the determination by the company to grant the waiver through a press release, website disclosure or filing of a report on Form 8-K with the SEC.
  • Section 303A.00 - Transition Period Requirements: The amended rules revise the phase-in period for compliance requirements relating to director independence, website posting requirements and board committees for companies listing in connection with their IPOs, that cease to qualify as a FPI (as discussed above), that list in conjunction with spin-off or carve-out transactions and for companies emerging from bankruptcy, transferring from another market or ceasing to be a “controlled company.”

Applicability to Canadian FPIs

While not required to comply with the above provisions, Canadian FPIs should consider these rule changes in relation to the requirement under Section 303A.11 that FPIs disclose any significant differences between their home jurisdiction corporate governance practices and those of U.S. domestic listed companies.

NASDAQ Rule Changes

Effective on December 7, 2009, Nasdaq Marketplace Rules have been amended to require, rather than recommend, that listed companies provide the Nasdaq Market Watch Department with at least ten minutes’ notification prior to releasing material information. This notice must be made through the electronic disclosure submission system available at, except in emergency situations.4 In an emergency situation (such as a lack of computer or internet access, technical problems on either the company or Nasdaq system, etc.), companies may continue to notify via telephone or facsimile. The Nasdaq rule allows a Nasdaq listed company to make public disclosure “through any Regulation FD compliant method (or a combination of methods).”

Changes have also been made to a previous Nasdaq interpretation that was inconsistent with SEC interpretive releases on the use of company websites. The SEC guidance states that under appropriate circumstances, posting information on a company website could be a sufficient method of public disclosure under Regulation FD, while the former Nasdaq interpretation stated that a website posting alone will not satisfy Regulation FD. The Nasdaq interpretation has been revised to be consistent with the SEC guidance. It now states that a website posting alone may not by itself satisfy Regulation FD disclosure requirements and thus Nasdaq public disclosure requirements.