LETTER TO THE NEW YORK STOCK EXCHANGE

Dated: June 25, 2002

New York Stock Exchange
Corporate Accountability and Listing Standards Committee
11 Wall Street
New York, NY 10005

RE:   Report of Corporate Accountability and Listing Standards Committee

Gentlemen:

On behalf of the American Association of Bank Directors, we are submitting the following comments concerning the recommendations of the Committee on changes to the corporate governance rules of the New York Stock Exchange.

The American Association of Bank Directors, a non-profit trade association representing the interests of bank and savings institution directors since 1989, has long encouraged its members to consider and adopt appropriate corporate governance measures to help ensure that banks and savings institutions appoint and retain active and independent-minded board members.

Although we agree with many of your proposals, we do have concerns about a proposed change in the definition of an "independent" director.

Existing New York Stock Exchange rules define an "independent" director to preclude any relationship with the listed company that may interfere with the exercise of a director's independence from management and the company.

The proposed rule would provide that for a director to be deemed "independent", the board must affirmatively determine 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 proposed rules would also make the determination of who is an "independent" much more significant than under current rules.

Under current rules, a listed company must have an audit committee composed of at least three independent directors. Under the proposed rules, independent directors must comprise a majority of a board, and the nomination and compensation committees must also consist solely of independent directors.

The proposed rules would require the boards of listed companies to certify that a director has no material relationship with the listed company. This certification process is significantly different than the process under current rules, which require the board to exercise judgment as to whether the individual director is independent. The current rules also define independence based on whether the director has a material relationship with the listed company, not on whether a director's relationship with the company may interfere with the director's independence. The proposed rules require that the Board decide independence on whether there is a "material" relationship with the company, regardless of whether there is even a perception that such a relationship will affect the director's independence.

A "material relationship" is not defined, so that a board of a listed company will have no guideposts with which to make the required certification.

For bank holding companies listed on the New York Stock Exchange, loans represent an extremely common relationship between a director or an affiliated company and the bank holding company or its bank subsidiary. Many, if not most, bank directors or their interests borrow funds from their banks, and many banks encourage their board members to do business with their banks. Loans to insiders are tightly regulated under Regulation O of the Federal Reserve Board, and are scrutinized during frequent examinations by banking regulators. Banks cannot legally make loans to directors unless the loans are made on substantially the same terms as, and following credit-underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with the noninsiders, and do not involve more than the normal risk of repayment or present other unfavorable features. Directors who borrow from their banks undoubtedly could qualify to borrow at other banks under comparable terms and conditions, but choose to borrow from their bank so that their bank will have the benefit from the business.

Thus, although many lending relationships might be deemed "material relationships" under your proposed rules, they normally would not interfere with the exercise of a director's independence from management because a credit-worthy director or a credit-worthy company affiliated with the director can borrow elsewhere on comparable terms.

In only rare cases would a director's lending relationship with his or her bank interfere with his or her independence from management. For example, if a loan, although sound when booked, becomes a problem loan as a result of the decline in the financial health of the director or his or her company, the director's relationship with management may change, and the new relationship may interfere with the director's independence.

Under current New York Stock Exchange rules, if a director's loan has become a problem loan, this change should lead the board to decide that the director no longer can be considered independent.

We do not yet know the extent to which bank holding companies listed on the New York Stock Exchange will have difficulty complying with the proposed rule, but in the near future, AABD will send out a survey to listed bank holding companies or financial holding companies to determine the possible effect of the proposed rule. We will report to you the results of the survey as soon as possible.

Based on what we know at this time, we recommend that the New York Stock Exchange discard the section of the proposed rule which imposes an affirmative obligation on a board of a listed company to determine that a director does not have a "material relationship" with the company, and to return to the current rule which ties the classification of a director as independent to a judgment that a relationship with the company may interfere with the exercise of the director's independence from management and the company.

Sincerely,

David Baris