USA Law and Practice Contributed by: Matt Hurd, Melissa Sawyer and Scott Crofton, Sullivan & Cromwell LLP
officers serve on the other company’s com - pensation committee. Executive Sessions The NYSE and Nasdaq require independent directors to hold executive sessions once and twice a year, respectively, without the presence of management. The NYSE requires disclosure of the name of the presiding director at each executive session or the method by which that presiding director was selected. The NYSE also requires a listed company to disclose the meth - od for interested parties (not just stockholders) to communicate with the presiding director of the executive session or the independent direc - tors as a group. Composition of Board Committees The stock exchanges generally require public companies to have three board committees: audit, compensation and nominating and corpo - rate governance. Stock exchange rules and the federal securities laws include extensive rules regarding the composition and responsibilities of these three committees. Boards of public com - panies typically have other committees in addi - tion to the three mandatory committees. Audit Committee NYSE- and Nasdaq-listed companies must have an audit committee with at least three members who are independent under the stock exchange rules and Rule 10A-3 under the Exchange Act. In order to be considered independent under Rule 10A-3 under the Exchange Act, audit commit - tee members must not accept any consulting, advisory or other compensatory fee from the listed company or its subsidiaries, or be affili - ated with the listed company or its subsidiaries. In addition, Nasdaq precludes a director who participated in the preparation of the financial statements of the company or its subsidiaries
in the past three years from serving as an audit committee member. The NYSE and Nasdaq require all audit commit - tee members to have a certain level of financial literacy and one member to have a certain level of financial expertise. The NYSE also restricts service on multiple audit committees, providing that if a director serves on the audit committee of more than three public companies, the board must determine that such service would not impair the director’s ability to serve effectively on the listed company’s audit committee, and the board must disclose that determination publicly. In addition to imposing requirements for audit committee members, stock exchange rules and the federal securities laws also specify certain powers and responsibilities that audit commit - tees must have, including: • appointing and overseeing outside auditors; • establishing procedures for the receipt and treatment of complaints regarding accounting matters; and • authority to engage and pay independent advisers. The NYSE mandates additional responsibili - ties of audit committees that are not otherwise required by Nasdaq rules, including: • annually reviewing the report of the listed company’s independent auditor relating to the auditor’s quality control procedures, any quality control issues identified and measures taken to address such issues; • reviewing and discussing the listed com - pany’s annual and quarterly financial state - ments with management and the independent auditor;
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