NYSE Merger with Euronext and Changes to the Independence Policy

Yesterday, we noted that the NYSE Group and Euronext had dramatically different independence policies with respect to board membership. How did the merger, announced on Valentines Day last week, deal with these disparities? 

First, the NYSE asked for and got “transitional rules,” which essentially placed the existing independence policy in abeyance until 2008, at least for the European directors. The rules allowed nine directors of Euronext to immediately sit on the board of the new holding company, NYSE Euronext. The justification? “It is important that the former Euronext Supervisory Board members be permitted to serve on the initial Board of Directors of NYSE Euronext because of their depth of experience with the Euronext markets. The transition period is designed to allow for this.”  Exchange Act Release No. 55026 n. 17 (Dec. 29, 2006). In other words, they should remain on the board because of their connections to market participants, something clear from their biographies.  That explanation would, of course, justify a complete elimination of the restriction on representatives of registered broker-dealers and listed companies sitting on the board and more or less conflicts with the NYSE Group's current policy that attempts to minimize the influence of the entities it regulates. It also ignores the fact that directors can be found with “market experience” that otherwise meet the independence requirement.

The NYSE Group has all but admitted that the policy will reduce the board’s independence by noting that the number of directors subject to this “transitional” policy will not be a majority. “Any potential issues created by the transition period are expected to be mitigated by the fact that, upon the consummation of the Combination, half of anticipated [sic] the board of directors of NYSE Euronext will be composed of former NYSE Group directors, all of which qualify as independent under the NYSE Group Independence Policy.” Exchange Act Release No. 55026 n. 17 (Dec. 29, 2006).  Perhaps, but a strength of the NYSE Group Board has been an entirely independent board. The transitional Board will be far from that.

How did the Commission address these concerns? It ignored them. Despite the issue having been raised in a comment letter written by this author, the agency made no mention of the transitional rules in the adopting release.  The Commission merely obtained a representation that, "following consummation" of the merger, the directors on NYSE Regulation (the non-profit regulatory subsidiary), NYSE Market, and the Exchange would "remain on" their respective boards.  

Other, permanent, changes in the independence policy will be discussed tomorrow.