200 PARK AVE., NEW YORK NY 10166-4193

CHICAGO IL 60601-9703
1400 L STREET, N.W.
WASHINGTON, DC 20005-3502
LOS ANGELES, CA 90071-1543
SAN FRANCISCO, CA 94111-5894

May 7, 2003

Mr. Jonathan G. Katz,
Securities and Exchange Commission
450 Fifth Street, N.W.

Washington, D.C. 20549

Re:   Proposed Rule Change by The New York Stock Exchange, Inc. Relating
to Corporate Governance Standards (File no. SR-NYSE-2002-33)         

Dear Mr. Katz:

We are responding to Release No. 34-47672 in which the Securities and Exchange Commission (the "Commission") solicited comments on the proposal by The New York Stock Exchange to amend its rules relating to corporate governance standards.

The NYSE should be commended for its initiatives to improve the corporate governance standards of its listed companies, but we believe that certain aspects of its proposal could be impractical in application and result in unintended adverse consequences. We have set forth below specific components of the proposal that we believe, based on our review, and on discussion with clients, can be improved or clarified.

I. The definition of "immediate family" used for determining the independence of directors should be the same as the Commission's definition and boards of directors should determine whether directors' other family relationships compromise their independence.

We believe that the proposal's definition of "immediate family" is far too broad. The proposal automatically disqualifies directors of listed companies from being considered to be independent if they or members of their immediate families hold certain positions or have certain relationships with the listed companies. In the proposal, the NYSE defines "immediate family" as 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 employees) who shares such person's home."1 This definition is substantially broader than the Commission's rules implementing Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act"), in which the Commission defines immediate family as a "person's spouse, minor children or stepchildren or children or stepchildren sharing the director's home."2 We urge that the definition of "immediate family" in the final NYSE rules be harmonized with the definition utilized under Section 301.

The NYSE definition of "immediate family" in the proposed rules is the same definition that the NYSE currently employs for determining the independence of audit committee members.3 However, the NYSE's proposed corporate governance standards are substantially more far-reaching than its current requirements and the use of such a broad term to determine independence under them would, in our view, disqualify a great number of well-qualified directors who are, in fact, independent. The proposed standards require that listed companies have a majority of independent directors on their boards of directors as well as have compensation and nominating/governance committees composed entirely of independent directors.4

The NYSE stated in its introduction to the proposal that "close family relationships preclude independence." We agree with this statement, but believe that because of the proposed definition's breadth many of the "immediate family" relationships that it would cover could be quite distant. For example, a director would be disqualified from being independent if a step-sister whom she has never met were an executive of a company on whose compensation committee an executive officer of the listed company serves5. Or, a director would be disqualified if the husband of a sister from whom he is estranged is an executive office of a company that accounts for 2% of the listed company consolidated gross revenues.

In our view, these types of relationships should not be per se bars to independence. Rather, we believe that the definition of immediate family member under the NYSE rules should be the same as the definition adopted by the Commission in its rules implementing Section 301 of the Act. Moreover, as the NYSE itself has noted, this definition is more in line with the common understanding of the term.6 Other family relationships should certainly be considered in examining a director's independence, but they should not be determinative or even create a presumption that a director is not independent. A listed company's board of directors should make the independence determination based on all relevant facts and circumstances.

II. Boards of directors should have more flexibility in applying the 2% or $1 million threshold test.

We believe that the business relationship threshold test should be a flexible standard and that the NYSE should clarify when listed companies are to apply it. The NYSE proposal states that a director is not independent if he or she is an executive officer or employee of, or has an immediate family member who is an executive officer of, another company that (A) 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, until five years after falling below such threshold.7 Although we support the NYSE's attempt to set clear guidelines to regulate business relationships that could potentially cause conflicts of interest and compromise directors' independence, we believe that the proposed test would be difficult to implement and would not, in many cases, be the most accurate measure of the materiality of a business relationship.

In particular, we believe that the proposed rule may not account for unusual or non-recurring transactions or other events. For example, if a director were an executive at a company which normally accounts for a minimal amount of a listed company's consolidated gross revenues has a year in which it accounts for more than 2% of the listed company's consolidated gross revenues, such director could not be independent for five years after that year.

We are also concerned that the per se bar on business relationships may make it substantially more difficult for listed companies to attract directors with experience in the listed company's industry or in related businesses. Listed companies and potential director candidates could conclude that service as a director would effectively preclude future business relationships that, in many cases, would be beneficial to both parties. In our view, it is one thing to disqualify a director from consideration of a particular matter in which he or she may have a conflict of interest, but it is quite another for a business relationship with a listed company to be a per se bar to independence for all purposes.

We also believe that any numerical per se bar on business relationships is arbitrary and may effectively lead to a "safe harbor." That is, relationships falling below the threshold would not be considered to taint director independence. In many cases, business relationships that account for less than the proposed numerical thresholds would, in fact, affect director independence. In this sense, we believe the proposed test is potentially both over- and under-inclusive.

On a more technical level, we note that the proposed rule does not indicate when a listed company is to apply the threshold test. Although we assume it is on an annual basis, the final rule should specify the date or dates on which the standard should be tested, taking into account the time needed to identify and elect directors.

III. The final rules should clarify the process for communicating with non-management directors.

The NYSE proposal requires that listed companies disclose a method for interested parties to communicate directly and confidentially with the presiding director or all non-management directors.8 It indicates that these companies can use the same process established for communications to the audit committee in compliance with Section 301 of the Act. It is our view that the final rule should clarify what processes and methods the NYSE considers effective in fulfilling this requirement.

We believe that such clarification is advisable because the audit committee process under Section 301 of the Act addresses a much more limited set of circumstances than the NYSE proposal regarding communications with non-management directors. The audit committee process requires listed companies to establish procedures for the receipt, retention, and treatment of complaints from listed company employees on accounting, internal accounting controls or auditing matters, as well as for confidential anonymous submissions by listed company employees of concerns regarding questionable accounting or auditing matters.9 In short, the Section 301 requirement only applies to complaints by listed company employees relating to auditing and accounting matters. In contrast, the process for communicating with non-management directors under the NYSE proposal would be open to all "interested parties." We believe that the use of the Section 301 process could cause a listed company's presiding director and/or non-management directors to be inundated with complaints regarding matters over which the board has no direct oversight. Moreover, it is possible that disgruntled employees, vendors or others with whom the listed companies conduct business could misuse the complaint procedure to overburden non-management directors. We suggest that the final rules substantially limit the communication procedure to cover only material matters over which the board of directors has direct oversight. Moreover, in our view, the final rules should clarify that the board is entitled to establish a process involving management to appropriately screen communications.

We appreciate the opportunity to comment to the Commission on the proposed NYSE rules, and would be happy to discuss any questions the Commission may have with respect to this letter. Any questions about this letter may be directed to John MacCarthy (312-558-5876), David Kroenlein (212-294-2645) or Daniel Ninivaggi (212-294-6787).

Very truly yours,

Winston & Strawn

cc: Richard A. Grasso, Chairman and Chief Executive Officer of The New York Stock Exchange, Inc.

Richard P. Bernard, Executive Vice-President and General Counsel of The New York Stock Exchange, Inc.

Annemarie Tierney, Senior Counsel, The New York Stock Exchange, Inc.

1 General Commentary to proposed Section 303A(2)(b) of the Listed Company Manual.
217 CFR 301.
3 Section 303.02(A) of the Listed Company Manual.
4 Proposed Sections 303A(1), (4)(a), and (5)(a) of the Listed Company Manual.
5 We are assuming that because of its breadth this definition covers step-siblings and parents. However, we also suggest that the final rule provide clarification on this issue.
6The NYSE stated in a letter to the Commission regarding proposed standards for listed company audit committees that "we believe that the scope of the family member in the Proposing Release (No. 33-8173, 34-47137) is appropriate and consistent with the common understanding of that term in the U.S. "Letter of the NYSE to the Commission dated February 21, 2003, available on the Commission's website at:
7 Proposed Section 303A (2)(b)(iv) of the Listed Company Manual.
8 See Commentary to proposed Section 303A(3) of the Listed Company Manual.
9 17 CFR 301