[Federal Register Volume 64, Number 197 (Wednesday, October 13, 1999)]
[Notices]
[Pages 55505-55508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26624]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41981; File No. SR-Amex-99-38]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange LLC Amending the Exchange's Audit
Committee Requirements
October 6, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 20, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to amend its listing standards pertaining to
audit committee requirements. The text of the proposed rule change is
as follows. Proposed new language is italicized; deletions are in
brackets.
Section 121. INDEPENDENT DIRECTORS AND AUDIT COMMITTEE
A. Independent Directors:
The Exchange requires that domestic listed companies have [at least
two] a sufficient number of independent directors to satisfy the audit
committee requirement set forth below. [, that is,] Independent
directors [who] are not officers of the company [; who are neither
related to its officers nor represent concentrated or family holdings
of its shares;] and are [who], in
[[Page 55506]]
the view of the company's board of directors, [are] free of any
relationship that would interfere with the exercise of independent
judgment. The following persons shall not be considered independent:
(a) a director who is employed by the corporation or any of its
affiliates for the current year or any of the past three years;
(b) a director who accepts any compensation from the corporation
or any of its affiliates in excess of $60,000 during the previous
fiscal year, other than compensation for board service, benefits
under a tax-qualified retirement plan, or non-discretionary
compensation;
(c) a director who is a member of the immediate family of an
individual who is, or has been in any of the past three years,
employed by the corporation or any of its affiliates as an executive
officer. Immediate family includes a person's spouse, parents,
children, siblings, mother-in-law, father-in-law, brother-in-law,
sister-in-law, and anyone who resides in such person's home;
(d) a director who is a partner in, or a controlling shareholder
or an executive officer of, any for-profit business organization to
which the corporation made, or from which the corporation received,
payments (other than those arising solely from investments in the
corporation's securities) that exceed 5% of the corporation's or
business organization's consolidated gross revenues for that year,
or $200,000, whichever is more, in any of the past three years;
(e) a director who is employed as an executive of another entity
where any of the company's executives serve on that entity's
compensation committee.
B. Audit Committee:[-Listed companies shall establish and
maintain an audit committee. The Exchange recommends that such
committees be composed solely of independent directors; however, a
company shall be in compliance with this requirement if at least a
majority of the committee's members are independent directors.]
(a) Charter
Each Issuer must certify that it has adopted a formal written
audit committee charter and that the Audit Committee has reviewed
and reassessed the adequacy of the formal written charter on an
annual basis. The charter must specify the following:
(i) the scope of the audit committee's responsibilities, and how
it carries out those responsibilities, including structure,
processes, and membership requirements;
(ii) the audit committee's responsibility for ensuring its
receipt from the outside auditors of a formal written statement
delineating all relationships between the auditor and the company,
consistent with Independence Standards Board Standard 1, and the
audit committee's responsibility for actively engaging in a dialogue
with the auditor with respect to any disclosed relationships or
services that may impact the objectivity and independence of the
auditor and for taking, or recommending that the full board take,
appropriate action to ensure the independence of the outside
auditor; and
(iii) the outside auditor's ultimate accountability to the board
of directors and the audit committee, as representatives of
shareholders, and these shareholder representatives' ultimate
authority and responsibility to select, evaluate, and, where
appropriate, replace the outside auditor (or to nominate the outside
auditor to be proposed for shareholder approval in any proxy
statement).
(b) Composition
(i) Each issuer must have, and certify that it has and will
continue to have, an audit committee of at least three members,
comprised solely of independent directors, each of whom is able to
read and understand fundamental financial statements, including a
company's balance sheet, income statement, and cash flow statement
or will become able to do so within a reasonable period of time
after his or her appointment to the audit committee. Additionally,
each issuer must certify that it has, and will continue to have, at
least one member of the audit committee that has past employment
experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or
background which results in the individual's financial
sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with
financial oversight responsibilities.
(ii) Notwithstanding paragraph (i) one director who is not
independent as defined in Rule 4200, and is not a current employee
or an immediate family member of such employee, may be appointed to
the audit committee, if the board, under exceptional and limited
circumstances, determines that membership on the committee by the
individual is required by the best interests of the corporation and
its shareholders, and the board discloses, in the next annual proxy
statement subsequent to such determination, the nature of the
relationship and the reasons for that determination.
(iii) Exception for Small Business Filers--Paragraphs (b)(i) and
(b)(ii) do not apply to issuers that file reports under SEC
Regulation S-B. Such issuers must establish and maintain an Audit
Committee of at least two members, a majority of the members of
which shall be independent directors.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
In February 1999, the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees (``Blue Ribbon Committee'')
issued a report containing ten recommendations aimed at strengthening
the independence of the audit committee; making the audit committee
more effective; and addressing mechanisms for accountability among the
audit committee, the outside auditors, and management.\3\ In response
to the Blue Ribbon Committee's six recommendations regarding listing
standards, the Exchange proposes these rule changes relating to its
audit committee requirements. These changes fall into three general
areas: (1) The definition of independence; (2) the structure and
membership of the audit committee; and (3) the audit committee charter.
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\3\ Report and Recommendations of the Blue Ribbon Committee on
Improving the Effectiveness of Corporate Audit Committees (1999). A
copy of this Report can be found on-line at www.nasdaqnews.com.
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With regard to the definition of independence, the Exchange
proposes to provide greater specificity for all directors, not just for
those serving on the audit committee. Specifically, consistent with the
recommendations of the Blue Ribbon Committee, the Exchange proposes to
augment its current definition of ``independent director'' with five
relationships that would disqualify a director from being considered
independent because these relationships could impair a director's
independent judgment as a result of financial, familial, or other
material ties to management or the corporation. The first of these
relationships is a director who is employed by the corporation or any
of its affiliates for the current year or any of the past three years.
The second is a director who accepts any compensation from the
corporation or any of its affiliates in excess of $60,000 during the
previous fiscal year, other than compensation for board service,
benefits under a tax-qualified retirement plan, or non-discretionary
compensation. The third relationship is a director who is a member of
the immediate family of an individual who is, or has been in any of the
past three years, employed by the corporation or any of its affiliates
as an executive officer. The fourth relationship is a director who is a
partner in, or a
[[Page 55507]]
controlling shareholder or an executive officer of, any for-profit
business organization to which the corporation made, or from which the
corporation received, payments (other than those arising solely from
investments in the corporation's securities) that exceed 5 percent of
the corporation's or business organization's consolidated gross
revenues for that year, or $200,000, whichever is more, in any of the
past three years. The final relationship is a director who is employed
as an executive of another entity where any of the company's executives
serve on that entity's compensation committee.
Although the above-enumerated relationships are similar to those
recommended by the Blue Ribbon Committee, the Exchange looked to
existing SEC rules and other pronouncements to provide additional
specificity. In this regard, the five-year ban recommended by the Blue
Ribbon Committee was reduced to three years, which the Exchange views
as a more reasonable period while still greater than the SEC's rule 144
\4\ two year time frame. Furthermore, although the Blue Ribbon
Committee recommended that a director who received any compensation
from the corporation (other than for board service or under a tax-
qualified retirement plan) be disqualified form being considered
independent, the Exchange believes that a compensation threshold of
$60,000 is appropriate as it corresponds to the de minimis threshold
for disclosure of relationships that may affect the independent
judgment of directors set forth in SEC Regulation S-K, Item 404.\5\ In
addition, the Exchange believes that the receipt of non-discretionary
compensation should not automatically disqualify a director from being
considered independent. Furthermore, the proposed rule change provides
further clarification of the fourth relationship by specifying that
payments resulting solely from investments in the corporation's
securities will not prevent a director from being considered
independent and by looking to the American Law Institute's measurement
of ``significant'' when determining what payments to or from a company
could impair a director's independent judgment.\6\ Lastly, the Exchange
believes that the heightened independence standard should apply to all
issuers due to the importance of this issue.
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\4\ 17 CFR 230.144.
\5\ 17 CFR 229.404.
\6\ American Law Institute, Principles of Corporate Governance
Sec. 1.34 (1994).
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With regard to the structure and membership qualifications of the
audit committee, the Exchange proposes to change the required
composition of the audit committee from at least two to at least three
members. Furthermore, the audit committee must be comprised solely of
independent directors rather than a majority of independent directors.
The Exchange is conscious of the fact that in exceptional
circumstances, issuers may appropriately conclude that it would be in
the best interests of a corporation for a non-independent director to
serve on the audit committee. In such exceptional and limited
circumstances, a non-independent director can serve on the audit
committee, provided that the board determines that it is required by
the best interests of the corporation and its shareholders, and the
board discloses the reasons for the determination in the next annual
proxy statement. Due to the nature of this exception, however, a
corporation could have no more than one non-independent director
serving on its audit committee. Also, current employees or officers, or
their immediate family members may not serve on the audit committee
under this exception.
As a result of the audit committee's responsibility with respect to
a corporation's accounting and financial reporting, the Exchange
believes that audit committee members should have a basic understanding
of financial statements. As such, the proposed rule change requires
that each member of the audit committee be able to read and understand
fundamental financial statements, including a company's balance sheet,
income statement, and cash flow statement or become able to do so
within a reasonable period of time after his or her appointment to the
audit committee. Furthermore, in order to further enhance the
effectiveness of the audit committee, at least one member of the audit
committee must have past employment experience in finance or
accounting, requisite professional certification in accounting, or any
other comparable experience or background which results in the
individual's financial sophistication, including being or having been a
chief executive officer, chief financial officer, or other senior
officer with financial oversight responsibilities.
The Exchange is sensitive to the potential burden that the proposed
changes to the audit committee composition requirements may place on
small companies. Therefore, the Exchange proposes to exempt those
corporations that file under SEC Regulation S-B from these proposed
changes. Corporations that are small business filers will be held to
the existing Exchange requirements with respect to audit committee
composition, that is, they must maintain an audit committee of at least
two members, a majority of whom are independent directors.
With regard to the audit committee charter, the Exchange believes
that a written charter would help the audit committee as well as
management and the corporation's auditors recognize the function of the
audit committee and the relationship among these parties. As such, the
proposed rule change would require each audit committee to adopt a
formal written charter. This charter must specify the scope of the
audit committee's responsibilities, and how it carries out those
responsibilities, including structure, processes, and membership
requirements. In addition, the charter must specify the audit
committee's responsibility for ensuring its receipt from the outside
auditors of a formal written statement delineating all relationships
between the auditor and the company, consistent with Independence
Standards Board 1,\7\ and the audit committee's responsibility for
actively engaging in a dialogue with the auditor with respect to any
disclosed relationships or services that may impact the objectivity and
independence of the auditor and for taking, or recommending that the
full board take appropriate action to ensure the independence of the
outside auditor. Also, the charter must specify the outside auditor's
ultimate accountability to the board of directors and the audit
committee, as representatives of shareholders, and these shareholder
representatives' ultimate authority and responsibility to select,
evaluate, and, where appropriate, replace the outside auditor (or to
nominate the outside auditor to be proposed for shareholder approval in
any proxy statement). Issuers would be required to review their charter
on an annual basis.
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\7\ Independence Standard No. 1, Independence Discussions with
Audit Committees (January 1999), which can be found on-line at
www.cpaindependence.org.
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The Exchange proposes to allow directors serving on the audit
committee at the time the proposed rule change is approved by the
Commission to continue serving on the audit committee until they are
re-elected or replaced. The Exchange also believes that the new rules
should be made effective 18 months after the proposed rule change is
approved by the Commission to provide issuers adequate time to recruit
the requisite members.
[[Page 55508]]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act,\8\ which requires, among other things,
the Exchange's rules to be designed to prevent fraudulent and
manipulative acts and practices and, in general, to protect investors
and the public interest. As noted above, the Exchange's proposed rule
change is aimed at improving the effectiveness of audit committees of
Exchange issuers, which is consistent with these goals. Accordingly,
this proposal is properly within the discretion of the Exchange.
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\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange did not solicit or receive written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Amex. All submissions should refer to the File No. SR-Amex-99-38 and
should be submitted by November 3, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
[FR Doc. 99-26624 Filed 10-12-99; 8:45 am]
BILLING CODE 8010-01-M