[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]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \4\ 17 CFR 230.144.
    \5\ 17 CFR 229.404.
    \6\ American Law Institute, Principles of Corporate Governance 
Sec. 1.34 (1994).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \7\ Independence Standard No. 1, Independence Discussions with 
Audit Committees (January 1999), which can be found on-line at 
www.cpaindependence.org.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).

[FR Doc. 99-26624 Filed 10-12-99; 8:45 am]
BILLING CODE 8010-01-M