NYSE Proposes Rules to Calm 'Moments of Madness'

The New York Stock Exchange (NYSE) has drafted proposed rules and recommendations designed to guide the markets past a crisis of confidence that NYSE Chairman Richard Grasso calls "moments of madness" in the days following the Enron collapse. Some of the NYSE's points have already proven controversial with the business community, but Securities and Exchange Commission (SEC) Chairman Harvey Pitt hails them as "a significant step in addressing major concerns raised by the investing public."

Changes for Companies

Key changes proposed for companies listed on the NYSE include the following:

  • Audit committees will have sole responsibility for hiring and firing the company's auditors. Currently, they are the "ultimate" authority, but management is often heavily involved in the process.
  • Independent directors must comprise a majority of the board. Currently, audit committees must have at least three independent directors, but there is no requirement for the entire board.
  • Director independence will require a five-year cooling off period for former employees of the listed company or its independent auditor. Currently, the cooling off period is three years and it does not apply to former employees of the auditor.
  • Listed companies must adopt and publish codes of business conduct and ethics and must promptly disclose any waivers of the codes for directors or executive officers. There are no current requirements in this area.
  • CEOs of listed companies must annually certify they have no reasonable cause to believe the financial information is inaccurate or incomplete. There are no current requirements of this nature on CEOs.
  • Shareholders must be given the opportunity to vote on all equity-based compensation plans. Currently, shareholder approval is required for plans in which officers and directors may participate, but broad-based plans and one-time employment inducements are exempt.

Recommendations for Regulators

The NYSE has also drafted a series of recommendations for Congress and the SEC. These include:

  • Establishing a new private-sector organization, funded separately from the accounting industry itself, to monitor and govern public accountants.
  • Calling for the SEC to evaluate the impact of Regulation FD (Fair Disclosure) on earnings guidance and to consider reforms.
  • Prohibiting relationships between auditors and their clients that would affect the fairness and objectivity of audits.
  • Calling on the SEC to require companies to report complete Generally Accepted Accounting Principles (GAAP)-based financial information before any reference to "pro forma" or "adjusted" financial information.
  • Calling for the SEC to exercise more active oversight of the Financial Accounting Standards Board (FASB) to improve the quality of GAAP and the speed of FASB actions.
  • Asking the SEC to improve disclosures about critical accounting alternatives and assumptions in the management's discussion and analysis (MD&A) portion of reports.
  • Requiring the prompt disclosure of insider transactions.

Separately, the NASDAQ stock exchange announced it will be undertaking a second round of rule changes, and some of these will closely mirror the ones proposed by the NYSE.

Download the NYSE's Press Release, Summary of Proposed Changes, and Full Report.

-Rosemary Schlank


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