Comment on SR-NYSE-2004-41

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Five Giralda Farms Eileen M. Lach
Madison, NJ 07940 Vice President, Corporate Secretary
and Associate General Counsel
973 660 6073 tel
973 660 7538 fax
lache@wyeth.com

November 30, 2004

Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Attn: Jonathan G. Katz, Secretary
E-mail address: rule-comments@sec.gov
RE: File No. SR-NYSE-2004-41
NYSE Standards Relating to Corporate Governance Release No 34-50625
Ladies and Gentlemen:
I am writing on behalf of Wyeth to express our concerns regarding the
Commission’s recent order granting accelerated approval of the proposed rule
change to amend, among other things, NYSE Rule 303A.02(b)(iii), as amended by
Amendments Nos. 1, 2 and 3. In addition, as explained more fully below, we are
requesting that at a minimum the Commission modify proposed Rule
303A.02(b)(iii) to clarify that during the transition period any director who will not
be independent by virtue of proposed Rule 303A.02(b)(iii) once the proposed Rule
becomes effective may be affirmatively deemed independent during such transition
period.
I. Background and Reasons for Recommendations
Paragraph (b)(iii) of Rule 303A.02 contains a bright-line standard which precludes
a director from being deemed independent for NYSE purposes if the director has
certain affiliations with the company’s external auditor. The primary implications
of this Rule are that a director who does not satisfy this standard (i) may not serve
on a listed company’s audit, nominating/corporate governance or compensation
committees and (ii) may not be counted toward the requirement that the listed
company maintain a majority of independent directors on its Board.
We fully appreciate the importance of independent board members, and in fact
Wyeth prides itself on having a Board which, other than for our CEO, is comprised
solely of non-employee independent directors. Moreover, we fully support the
notion that for a director to be appropriately considered “independent”, the
director, particularly if he or she serves on the audit committee, should be free from
any real or apparent conflict of interest. We believe, however, that Rule 10A-3
Wyeth Pharmaceuticals
Wyeth Consumer Healthcare
Fort Dodge Animal Health 2
under the Securities Exchange Act of 1934 effectively addresses this issue and
adequately ensures that this key board committee will indeed be free from conflicts
(including any potential conflicts a director may have by virtue of his or her
relationship with the company’s external auditor). We note that under Rule 10A-3,
each member of the audit committee must be independent, meaning that the
member may not be affiliated with the issuer nor receive, directly or indirectly, any
compensation from the issuer (other than for service as a director). Indirect
compensation in this case appropriately applies a pecuniary interest test to the
individual director and includes any fees paid to accounting firms in which the
director, or the director’s spouse or children sharing the director’s household, are
partners.
Current NYSE Rule 303A.02(b)(iii), as approved on November 4, 2003 after an
exhaustive process that lasted over a year and was subject to multiple comment
periods (the “Current Rule”), already imposes a standard more stringent than SEC
Rule 10A-3. Indeed, the Current Rule already disqualifies any director whose
immediate family member is an employee of the listed company’s external auditor
in a “professional capacity,” and broadly defines “immediate family member” for
purposes of this test as including the director’s spouse, parents, children, siblings,
mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law
and anyone else (other than domestic employees) who lives in the director’s home.
The breadth of the Current Rule would be particularly troubling in and of itself but
for the qualification introduced through the definition of “professional capacity,”
which excludes family members who may be employed in one of a firm’s non-
audit service groups.
In the amendment of NYSE Rule 303A.02(b)(iii) filed on August 30, 2004, the
NYSE proposed to discard the “professional capacity” distinction for audit firm
partners, but to concomitantly narrow the definition of “immediate family
member” for purposes of paragraph (b)(iii) so as to conform more closely to the
SEC’s Rule 10A-3 definition (i.e., spouse, minor children, and adult children
sharing the director’s home).
In the Second and Third Amendments filed on October 28, 2004 and November 2,
2004, respectively, the NYSE has returned to the broad definition of immediate
family member applicable under the Current Rule (which includes non-dependent
children and in-laws), but has deleted the notion of “professional capacity” which
had provided an exclusion for those employees in non-audit areas of practice and is
critical to maintaining a rational balance between avoiding conflicts of interests
while not unfairly characterizing otherwise independent directors as non-
independent. The new rule, therefore, would combine the most expansive parts of
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the Current Rule and of the August 30 proposed revision, removing the principle of
equity from the standard. If adopted, we believe this latest standard will result in
companies having to remove highly qualified directors who have served companies
well for years, and further shrink the pool of qualified directors from which
companies may choose. Such directors who would not satisfy the revised standard
have no true direct or indirect conflict of interest. With the decrease in the number
of worldwide accounting firms to the “Big Four” discussed below, there is a
concomitant overall decrease in accounting firm job opportunities and an increase
in probability of employment at any such firm. In addition, such an expansive
group of relatives would include new additions through marriage, outside of the
director’s realm of control, thereby disqualifying the director from his or her
previous independence.
As you are aware, there are only four major top-tier public accounting firms at this
time from which large issuers typically choose in selecting their independent
auditors. These firms are global companies that offer a variety of services
including many outside of auditing/assurance services. Each of these four firms,
according to their internet websites, employ approximately 100,000 or more
employees. PricewaterhouseCoopers LLP (“PwC”), the external auditor selected
by Wyeth’s audit committee and ratified by stockholders at its 2004 Annual
Meeting, employed 122,820 people and had 7,879 partners as of June 2003
(according to PwC’s internet website). Very few of the partners at PwC have any
relationship with the Wyeth engagement and many of them provide services and
have expertise outside of audit services and, in fact, are not even accountants.
These partners who have no connection with the services PwC provides to Wyeth
would have, at best, a negligible personal pecuniary interest in the Wyeth
engagement. It is difficult to understand how one of these numerous partners
working outside of the audit area, who is also an emancipated adult, but who
happens to be a son, daughter or in-law of a board member, could have any impact
whatsoever on such board member’s ability to be independent from either the
issuer or the audit firm in question.
II. Recommendations
For the reasons set forth above, we strongly urge the Commission to modify the
NYSE Rule 303A.02(b)(iii). Although we feel that the recommendation set forth
in paragraph 1 below is the most reasonable, we recognize that the SEC has certain
objectives regarding the test embodied in paragraph (b)(iii) and we therefore offer
additional alternatives for the Commission’s consideration. We believe that, at a
minimum, the recommendation set forth in paragraph 4 below should be included
as part of any amendments to the NYSE’s 303A standards.
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1. Reinstitute the limited definition of “immediate family member”. The
definition of immediate family member proposed by the Exchange in its
August 30, 2004 filing is consistent with the definition the SEC established
under Rule 10A-3. This definition more appropriately identifies potential
conflicts of interest by applying a pecuniary interest test.
2. Retain “professional capacity” definition. If the expanded definition of
immediate family member is retained, include the principle of equity
embodied by the definition of “professional capacity” from the Current
Rule that would exclude directors with no real or apparent conflict of
interest.
3. Change to disclosure item. If the expanded definition of immediate family
member that would cover all family members who serve as partners is
retained, modify paragraph (b)(iii) so that violations of the standard by
virtue of the expanded immediate family definition would be a disclosure
item (in the issuer’s proxy materials) rather than a bright-line test barring
independence. Retooling the revised paragraph (b)(iii) into a partial bright-
line test and partial disclosure test could prove to be a workable
compromise and allow stock