American Bankers Association

June 27, 2003

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

RE: NYSE Proposed Revisions to Corporate Governance Listing Standards, File No. 2002-33, 68 Federal Register 19063 (April 17, 2003).

Dear Mr. Katz:

The American Bankers Association welcomes the opportunity to offer its comments on new corporate governance standards proposed to be set forth in Section 303A of the New York Stock Exchange's ("NYSE") Listed Company Manual. The new corporate governance standards address several corporate governance issues, including the requirement that a majority of the board of directors of NYSE listed companies must be "independent directors" as that term is proposed to be defined in Section 303A.

The issues of director independence and corporate governance generally are extremely important to ABA and its members. The ABA brings together all categories of banking institutions to best represent the interest of this rapidly changing industry. Its membership-which includes the community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks-makes ABA the largest banking trade association in the country. Consistent with its leadership role among banking trade associations and in light of the enactment of the Sarbanes-Oxely Act ("Act"), the ABA commissioned a handbook on corporate governance issues and offered it free of charge to members. In addition, at the direction of Aubrey Patterson, Chairman of ABA and Chairman and CEO, BancorpSouth, Tupelo, Mississippi, ABA has formed a task force to examine corporate governance issues. Key issues under study by the task force include the make-up and roles of boards of directors and board committees, the definition of "independent" directors and the potential extension of the Act by bank regulators to non-publicly traded banks.

The NYSE's proposal is of keen interest to our members. Many of our members are listed on the NYSE and, thus, are directly impacted by this proposal. Publicly traded banks and bank holding companies not listed on the NYSE or any other exchange are also very interested in certain aspects of this proposal as they must disclose in their annual proxy statements whether their audit committee members meet certain exchange listing requirements regarding audit committee independence. Finally, banks and bank holding companies that are not publicly traded are also interested in the NYSE's proposal as federal banking laws require banks with assets in excess of $500 million and strongly encourage banks with assets under $500 million to establish independent audit committees. To the extent the NYSE, the NASDAQ, the regional exchanges, and the Securities and Exchange Commission ("SEC") collectively redefine independence as it relates to audit committee membership, all non-publicly traded banks and bank holding companies will likely be impacted.


While the NYSE's proposal address several issues relating to the roles and responsibilities of independent directors generally, the ABA's comment letter will address only those aspects of the NYSE proposal that define director independence.

Independent Directors

The NYSE proposes to require that a majority of board of directors of NYSE listed companies must be "independent" as that term is defined under proposed Section 303A. Currently, NYSE rules only require that listed companies have audit committees comprised solely of independent directors.

In order for a director to be deemed "independent," proposed Section 303A would require the board of directors to affirmatively determine and disclose 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). The commentary explains that a board may adopt and disclose categorical standards to assist it in making determinations of independence and may make a general disclosure if a director meets these standards. Determinations of director independence that do not meet these categorical standards must be specifically explained in the company's annual proxy statement or annual report on Form 10-K.

The ABA strongly supports the requirement that all NYSE listed companies have a majority of independent directors seated on their boards. We also support the requirement that the board affirmatively determine that directors are, in fact, independent. And while we would have preferred that the NYSE provide a safe harbor for certain banking transactions,1 we do believe that the ability of a board to adopt and disclose categorical standards to assist it in making determinations of independence and make general disclosure that directors meet these standards will give banking organizations sufficient flexibility to ensure that ordinary course of business transactions with directors and director-affiliated organizations when made on non-preferential terms will not impair a director's independence. In addition, we believe that the ability to adopt categorical standards and disclose generally that directors meet these standards will ensure that privacy is maintained concerning the specifics of private final matters.

The NYSE has also proposed objective standards for measuring director independence that require that:

  • A director who receives or whose immediate family member receives more than $100,000 per year in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior services is presumed not to be independent until five years after he or she ceases to receive more than $100,000 per year in such compensation. This presumption can be rebutted by the board with full disclosure in the annual proxy statement or annual report filed on Form 10-K.

  • A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by a present or former internal or external auditor of the company is not "independent" until five years after the end of the affiliate or the auditing relationship.

  • A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed company's present executives serves on that company's compensation committee is not "independent" until five years after the end of such service or the employment relationship.

  • A director who is an executive officer or an employee, or whose immediate family member is an executive officer of another company (A) that accounts for at least 2% or $1 million, whichever is greater, of the listed company's consolidated gross revenues, or (B) for which the listed company accounts for at least 2% or $1 million, whichever is greater, of such other company's consolidated gross revenues, in each case is not independent until five years after falling below such threshold.

The ABA believes that these objective standards are workable and is, thus, supportive of them. Unlike the NASDAQ's proposed listing requirements limiting payments to directors to $60,000, the NYSE's proposed listing requirement limits compensation to $100,000. The distinction between payments and compensation is critical, as a ban on payments could prohibit directors from obtaining home mortgage loans, home equity lines of credit, credit cards, checking accounts, savings accounts, certificates of deposit or personal lines of credit through the same bank on whose board they sit.

As we have previously pointed out to the SEC,2 suggesting that extending credit or paying interest on deposits involves a payment that would render a director "not independent" will force our members into a "Catch-22" situation: either lose valuable and legitimate business by driving directors to seek to have their individual financial services needs met by competing organizations or, alternatively, have the pool of qualified business leaders available to sit on banking organization boards significantly reduced. We believe that the NYSE's focus on compensation, rather than payments, is most appropriate. We also note that the Congress, in adopting Section 10(a)(m)(3) of the Sarbanes-Oxley Act, similarly focused on compensation in addressing the independence of board audit committees.

We are also supportive of the requirement that if the NYSE listed company accounts for 2% or $1 million, whichever is greater, of a director-affiliated company's consolidated gross revenues, then the director will not be deemed to be "independent." We have reviewed this standard with our corporate governance task force which consists of representatives from both large and small, public and non-public banking organizations. Members of the task force were confident that the majority of directors sitting on the boards of banking organizations impacted by the exchanges and SRO listing standards would be able to satisfy this requirement.

Definition of Family Members

Section 303A would define "immediate family member" to include "a person's spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person's home. As we previously stated,3 this definition is far superior to the overly broad definition proposed by the NASDAQ.

Effective Date and Look-back Provision

Section 303A provides that those provisions that call for an adjustment to the composition of the company's board or committees would be required to be implemented by the company's annual meeting occurring after January 1, 2004. As the majority of publicly traded banks and bank holding companies are calendar year reporting companies, the proposal, if approved by the SEC, would be effective for next year's spring proxy season.

Several of the situations listed in Section 303A that would preclude a finding of independence contain five-year look-back provisions. We understand that these look-back provisions will only apply on a going forward basis with respect to director independence and that the five-year look-back provisions will be phased-in as the amendments to Section 303A age. We support this phased-in approach. Without a suitable phase-in of those new independent requirements, we could anticipate wholesale turnover of bank and bank holding company boards. The loss of a vast number of knowledgeable and qualified directors from bank and bank holding company boards would, we submit, have a very deleterious impact on the safety and soundness of the banking system.

We would prefer, however, a shorter look-back provision. Specifically, we would suggest a three-year look-back similar to that proposed by the NASDAQ.


In conclusion, the ABA appreciates the opportunity to comment on the NYSE's proposed listing standards. We strongly support the flexibility and workable guidance offered by the NYSE proposal and hope that the NASDAQ proposal will be revised similarly. Should you wish to discuss these matters further, please do not hesitate to contact the undersigned.

Sincerely yours,

Sarah A. Miller

1 For example, we previously advocated that the NYSE grant a safe harbor for non-preferential extensions of credit to directors made in compliance with the Federal Reserve Board's Regulation O, 12 CFR 215.
2 See Letter from the American Bankers Association to Jonathan G. Katz, addressing File No. SR-NASD-2002-141, dated April 16, 2003.
3 Id.