[Federal Register Volume 64, Number 244 (Tuesday, December 21, 1999)]
[Notices]
[Pages 71518-71523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42232; File No. SR-Amex-99-38]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the American Stock Exchange LLC Amending the Exchange's Audit 
Committee Requirements and Notice of Filing and Order Granting 
Accelerated Approval of Amendments No. 1 and No. 2 Thereto

December 14, 1999.

I. Introduction

    On September 20, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change amending the Exchange's audit 
committee requirements.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240. 19b-4.
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    The Federal Register published the proposed rule change for comment 
on October 13, 1999.\3\ In response, the Commission received 12 comment 
letters.\4\ On November 15, 1999 and December 9, 1999, the Exchange 
submitted Amendments No. 1 \5\ and No. 2,\6\ respectively, to the 
proposed rule change. This order approves the proposed rule change and 
grants accelerated approval to Amendments No. 1 and No. 2. The 
Commission is also soliciting comment on Amendments No. 1 and No. 2 to 
the proposed rule change.
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    \3\ Securities Exchange Act Release No. 41981 (Oct. 6, 1999), 64 
FR 55505. The Nasdaq Stock Market, Inc. and The New York Stock 
Exchange, Inc. have proposed rule changes relating to audit 
committees. See Securities Exchange Act Release No. 41982 (Oct. 6, 
1999), 64 FR 55510 (Oct. 13, 1999) (``Nasdaq Proposal''), and 
Securities Exchange Act Release No. 41980 (Oct. 6, 1999), 64 FR 
55514 (Oct. 13, 1999) (``NYSE Proposal'').
    \4\ Most commenters favored the proposed rule change but 
recommended certain modifications to the proposed rules. The comment 
letters are discussed in Section III of this order.
    \5\ Letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq-Amex Market Group, to Richard Strasser, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated November 12, 1999 (``Amendment No. 1''). The 
Exchange submitted Amendment No. 1 to require issuers listed as of 
the effective date of Commission approval of the proposed rule 
change to adopt a formal written audit committee charter within six 
months of the effective date of the proposed rule change. As 
originally filed, the proposed rule change required issuers to adopt 
the required charter within eighteen months of the effective date of 
the proposed rule change. Amendment No. 1 also states that issuers 
that applied for listing prior to the effective date of the proposed 
rule change would qualify for listing under the listing standards in 
force at the time of their application, and receive the same grace 
periods provided to currently listed issuers.
    \6\ Letter from Sara Nelson Bloom, Associate General Counsel, 
Nasdaq-Amex Market Group, to Richard Strasser, Assistant Director, 
Division, Commission, dated December 8, 1999 (``Amendment No. 2''). 
The Exchange submitted Amendment No. 2 to revise proposed Section 
121B(a)(ii) of the Amex Company Guide to provide that the audit 
committee is required to oversee the independence of the outside 
auditor, rather than ensure the independence of the outside auditor. 
Amendment No. 2 also revises the Exchange's definition of immediate 
family found in Section 121A(c) to include sons-in-law and 
daughters-in-law. Finally, Amendment No. 2 corrects a technical 
error in proposed Section 121B(b)(ii) by replacing a reference to 
Rule 4200 with a reference to Section 121A.
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II. Description of the Proposed Rule Change

A. Background

    In February 1999, the Blue Ribbon Committee on Improving the 
Effectiveness of Corporate Audit Committees (``Blue Ribbon Committee'') 
issued a report containing 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.\7\ In response to the 
Blue Ribbon Committee's recommendations, the Exchange proposes to amend 
its listing standards regarding audit committee requirements. The 
proposed changes cover 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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    \7\ 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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    The text of the proposed rule change, as amended by Amendments No. 
1 and No. 2, is as follows. Language deleted by Amendments No. 1 and 
No. 2 is in brackets. Language added by Amendments No. 1 and No. 2 is 
in italics.

[[Page 71519]]

Section 121. INDEPENDENT DIRECTORS AND AUDIT COMMITTEE
    A. Independent Directors:
    The Exchange requires that domestic listed companies have a 
sufficient number of independent directors to satisfy the audit 
committee requirement set forth below. Independent directors are not 
officers of the company and are, in the view of the company's board of 
directors, 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, 
son-in-law, daughter-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:
(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 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] 
oversee 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] Season 121A, 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.

B. Independence

    The Exchange proposes to narrow its current definition of 
``independent director'' by specifying five new relationships that 
could repair a director's independent judgment as a result of 
financial, familial, or other material ties to management or the 
corporation. The proposed definition will apply to all directors, not 
just those serving on audit committees. Under the proposed rule change, 
directors with any of the following five relationships will not be 
considered independent: (1) Employment by the corporation or any of its 
affiliates for the current year or any of the past three years; (2) 
acceptance of 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; (3) 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; (4) partnership in, or a controlling 
shareholder or an executive officer, or 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 five 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; or (5) employment as an executive of another entity 
where any of the company's executives serve on that entity's 
compensation committee.

C. Structure and Membership of the Audit Committee

    The Exchange also proposes to change the structure and membership 
qualifications of the audit committee. Specifically, the Exchange 
proposes to change the required composition of the audit committee from 
at least two to at

[[Page 71520]]

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 the 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 its 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 for a 
corporation's accounting and financial reporting, the Exchange believes 
that audit committee members should have a basic understanding of 
financial statements. Therefore, the proposed rule change requires each 
member of the audit committee to 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 that results in the 
individuals' 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 (``Small Business Filers'').\8\ 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.
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    \8\ Small Business Filer is defined by Regulation S-B as an 
issuer that: (i) has revenue of less than $25,000,000; (ii) is a 
U.S. or Canadian issuer; and (iii) if a majority owned subsidiary, 
the parent corporation is a small business issuer. 17 CFR 
228.10(a)(1).
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D. Charter

    The Exchange believes that a written charter will 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. The proposed rule change requires each issuer to 
adopt a formal written charter. This charter must specify the scope of 
the audit committee's responsibilities, and how the committee carriers 
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 Standard 1.\9\ The charter must specify 
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 oversee the independence of the outside auditor. 
Finally, it 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 an outside for 
shareholder approval in any proxy statement). The proposed rule change 
requires issuers to review their charter on an annual basis.
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    \9\ 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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E. Implementation

    In order to minimize disruption to existing issuer audit 
committees, to permit current audit committee members to serve out 
their terms, and to allow adequate time to recruit the requisite 
members, the Exchange proposes to provide its issuers listed as of the 
effective date of the proposed rule change eighteen months after the 
proposed rule change is approved by the Commission to meet the audit 
committee structure and membership requirements.
    Additionally, the Exchange proposes that issuers listed as of the 
effective date of the rule change be provided six months following the 
date of Commission approval of the proposed rule change to adopt a 
formal written audit committee charter as required by proposed Section 
121(B)(a) of the Amex Company Guide.\10\
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    \10\ See Amendment No. 1, supra n.5.
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    Further, for issuers that applied for listing prior to the 
effective date of the proposed rule change, the Exchange proposes that 
they be able to qualify for listing under the listing standards in 
force at the time of their application, and to receive the same grace 
periods provided to currently listed issuers, as described above. Also, 
in order to avoid prejudicing issuers that transfer to the Exchange 
from Nasdaq and the New York Stock Exchange, the Exchange proposes that 
these issuers be afforded the same grace periods they would have 
received under their previous market's implementation schedule.

III. Comments

    As of December 9, 1999, the Commission received 12 comment letters 
on the proposed rule change.\11\ In general, the commenters favored the 
proposed rule change but recommended certain modifications. One 
commenter stated that it does not support the new rules.\12\
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    \11\ See letters from: Ernst & Young LLP (``E&Y'') dated 
November 1, 1999; Dorsey & Whitney LLP (``Dorsey'') (on behalf of 
nine closed-end investment management companies whose stock is 
listed on the Exchange) dated October 28, 1999; Deloitte & Touche 
LLP (``Deloitte'') dated November 3, 1999; Council of Institutional 
Investors (``CII'') dated November 8, 1999; Brian T. Borders on 
behalf of the National Venture Capital Association (``NVCA'') dated 
November 12, 1999; Investment Company Institute (``ICI'') dated 
November 3, 1999; American Federation of Labor and Congress of 
Industrial Organizations (``AFL-CIO'') dated November 29, 1999; 
Mayer, Brown & Platt on behalf of Morgan Stanley Dean Witter 
(``MSDW'') dated November 29, 1999; Association of Publicly Traded 
Companies (``APTC'') dated December 6, 1999; Robert A. Profusek 
(``Profusek'') dated December 3, 1999; Stanley Keller and Richard 
Rowe (``Keller and Rowe'') dated December 7, 1999; and The Committee 
on Securities Regulation of the Business Law Section of the New York 
State Bar Association (``NYSBA'') dated December 1, 1999.
    \12\ APTC Letter at 2.
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    In particular, the CII supports the new requirements, but stated 
that the proposed override provision, which allows a company's board to 
include a non-independent director on the audit committee is not 
appropriate because companies should not have a problem

[[Page 71521]]

finding financially literate, truly independent directors.\13\ In 
addition, the AFL-CIO stated that the restriction period for former 
employees, or relatives of former employees, should be five years 
instead of three years.\14\ The AFL-CIO also stated that the $60,000 
threshold to disqualify a candidate because of a significant 
relationship is not stringent enough.\15\ Another commenter, on the 
other hand, stated that a quantitative test is too inflexible.\16\ 
Keller and Rowe stated that former non-executive employment should be 
treated as a significant business relationship.\17\ Keller and Rowe 
also stated that consultants who receive from the company more than a 
de minimis amount of compensation should be treated as employees, while 
consultants who do not should be treated as having a business 
relationship with the company.\18\ According to this comment letter, 
the company's board should be permitted to determine that the 
compensation does not impair the director's objectivity. Keller and 
Rowe also objected to the financial expertise requirement and stated 
that no director will want to be designated the financial expert 
because of the added exposure to liability.\19\
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    \13\ CII Letter, at 2; see also AFL-CIO Letter at 2.
    \14\ AFL-CIO Letter at 2.
    \15\ Id.
    \16\ Profusek Letter at 2. In addition, Keller and Rowe stated 
that this provision might preclude a number of highly qualified 
candidates from serving on audit committees. Keller and Rowe Letter 
at 3.
    \17\Keller and Rowe Letter at 2.
    \18\Id. at 3.
    \19\ Id.; see also NYSBA Letter at 6.
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    Deloitte stated that requiring a company's board or audit committee 
to ``ensure'' the independence of the outside auditor goes beyond what 
can reasonably be expected of the board and the audit committee in 
their oversight role.\20\ Deloitte suggested that the Exchange replace 
the word ``ensure'' with ``monitor'' or ``actively oversee.''\21\ E&Y 
supported the proposed rule change, but stated that the Exchange should 
not exempt Small Business Filers from the financial literacy and 
expertise requirements and also should expand its definition of 
immediate family member to include sons-in-law and daughters-in-
law.\22\ NYSBA stated that the company's board should be required to 
adopt the audit committee charter, rather than the audit committee 
adopting the charter subject to board approval.\23\ NYSBA also opposed 
requiring the audit committee to evaluate and reassess the adequacy of 
the audit committee on an annual basis because there is no standard to 
measure the adequacy of the charter.\24\
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    \20\ Deloitte Letter, at 1.
    \21\ Id. at 2.
    \22\ E&Y Letter at 4.
    \23\ NYSBA Letter at 2.
    \24\ Id. at 4-5.
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    APTC stated that the proposed rule change will be counter 
productive to the goal of better audit committees.\25\ In addition, 
APTC stated that the proposed rule chnage will disadvantage smaller 
companies more than larger companies, but concluded that it is 
appropriate to apply the proposed change to all companies, regardless 
of size.\26\ Moreover, APTC is opposed to the proposal's financial 
literacy requirement.\27\ APTC believes that the financial literacy 
requirement may deprive audit committees of the service of individuals 
with ``exceptional character and/or operation experience.''\28\ The 
commenter suggested that the Exchange replace this requirement with a 
requirement that the committee as a whole possess a certain level of 
financial acumen.\29\
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    \25\ APTC Letter at 2.
    \26\ Id. at 3.
    \27\ Id. at 4-5.
    \28\ Id.
    \29\ Id. at 5.
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    In addition, the NVCA stated that the proposed rule change should 
exclude venture capital investors from the independence 
qualifications.\30\ The NVCA also stated that the proposed rule change 
should give companies that have just completed an initial public 
offering eighteen months to comply with the new requirements and that 
the exemption for Small Business Filers should be expanded to apply to 
companies with less than $50 million in revenue.\31\
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    \30\ NVCA Letter at 5.
    \31\ Id. at 4.
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    Finally, three commenters stated that the proposed rule change 
should not apply to closed-end investment companies.\32\ ICI and MSDW 
noted that closed-end investment companies are adequately regulated 
under the 1940 Act.\33\ These two commenters also stated that the 
potential abuses that the proposed rule change is designed to address 
do not exist with respect to closed-end investment funds, because the 
assets of closed-end funds consist exclusively of investment securities 
and thus there is no opportunity to ``manage'' earnings or results 
through the selective application of accounting policies.\34\
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    \32\ ICI Letter at 2; MSDW Letter at 1; Keller and Rowe letter 
at 5. In addition, Keller and Rowe stated that the proposed rule 
change should exempt all investment companies because their audit 
committee members are already required not to be ``interested 
persons'' as that term is defined in Section 2(a)(9) of the 
Investment company Act of 1940 (``1940 Act''). Moreover, Dorsey 
supported the application of the proposed rule change to investment 
companies. Dorsey Letter at 3.
    \33\ ICI Letter at 3-4; MSDW Letter at 2.
    \34\ ICI Letter at 3; MSDW letter at 1. ICI and MSDW also noted 
that the independent accountants of investment funds are selected by 
the independent directors of the fund.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange,\35\ and, in 
particular, the requirements of Section 6(b)(5) of the Act.\36\ The 
Commission believes that the proposed rule change will protect 
investors by improving the effectiveness of audit committees of 
companies listed on the Exchange. The Commission also believes that the 
new requirements will enhance the reliability and credibility of 
financial statements of companies to inappropriately distort their true 
financial performance. Further, the Commission also notes that the 
Exchange is amending its own listing standards, which is a function 
within the Exchange's discretion, as long as those changes are 
consistent with the Act.
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    \35\ In approving the proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \36\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that the proposed definition 
of independence will promote the quality and reliability of a company's 
financial statements. The Commission believes that directors without 
financial, familial, or other material personal ties to management will 
be more likely to objectively evaluate the propriety of management's 
accounting, internal control, and financial reporting practices. For 
these reasons, the Commission believes that the proposal's prohibition 
against employees serving on the audit committee is appropriate and 
that the Exchange should not be required to distinguish between 
executive and non-executive employees.\37\
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    \37\ See Keller and Rowe Letter at 2.
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    The Commission also believes that the proposed provision that 
permits a company to appoint one director to its audit committee who is 
not independent, if the board determines that membership on the 
committee by the individual is required by the best interests of the 
corporation and its shareholders, adequately balances the need for 
objective, independent directors with the company's need for 
flexibility in exceptional and unusual

[[Page 71522]]

circumstances. The Commission believes that the requirement that the 
company disclose in its next proxy statement the nature of the 
director's relationship to the issuer and the board's reasons for 
determining the appointment was in the best interests of the 
corporation will adequately guard against abuse of the proposed 
exception to the independence requirement. Moreover, the Commission 
believes that the $60,000 threshold to determine if a potential audit 
committee director has a significant business relationship with the 
company is a reasonable measure to balance the company's need to 
recruit audit committee members with the independence requirement.\38\
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    \38\ The Commission does not believe that the Exchange should 
require its listed companies to adopt a separate provision on 
consultants. See Keller and Rowe Letter at 3.
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    The Commission does not believe that venture capital investors 
should be excluded from the Exchange's definition of independence. The 
Commission does not view the proposed rule change as posing an undue 
hardship on venture capital firms or companies listed on the Amex. The 
Commission notes that the proposed rule change will only prohibit 
venture capital investors from sitting on a company's audit committee 
if the investor does not fall within the Exchange's definition of 
independent. The proposed rule change will not prohibit previously 
eligible investors from serving on the company's board. The Commission 
also notes that a venture capital investor that is not considered 
independent may serve on the company's audit committee, if the board 
determines it is in the best interests of the corporation and its 
shareholders and the company discloses its reasons for the 
determination and the nature of the director's relationship to the 
company in its next annual proxy statement.
    In addition, the Commission believes that requiring companies to 
adopt formal written charters specifying the audit committee's 
responsibilities, and how it carries out those responsibilities, will 
help the audit committee, management, investors, and the company's 
auditors recognize the function of the audit committee and the 
relationship among the parties. Moreover, the Commission believes that 
requiring the charter to specify that the audit committee is 
responsible for taking, or recommending that the company's full board 
take, appropriate action to oversee the independence of the outside 
auditor will make it more likely that companies will select objective, 
unbiased auditors.
    The Commission believes that the proposed rule change's 
compositional requirement that each issuer have an audit committee 
composed of three independent directors who are able to read and 
understand fundamental financial statements will enhance the 
effectiveness of the audit committee and help to ensure that audit 
committee members are able to adequately fulfill their 
responsibilities. The Commission believes that requiring each audit 
committee member to satisfy this standard will help to ensure that the 
committee as a whole is financially literate.\39\ Moreover, the 
Commission considers that requiring one member of the audit committee 
to have past employment experience in finance or accounting, requisite 
professional certification in accounting, or any other comparable 
experience or background that indicates the individual's financial 
sophistication, will further enhance the effectiveness of the audit 
committee in carrying out its financial oversight responsibilities. In 
addition, the Commission does not believe that companies will 
experience undue difficulty recruiting an audit committee member that 
satisfies the financial expertise requirements. Moreover, the 
Commission believes that the proposed rule change appropriately exempts 
Small Business Filers from the proposed composition requirements 
because these companies may experience more difficulty meeting these 
enhanced requirements. The Commission notes that these companies will 
remain subject to existing Exchange rules on audit committees, which 
require an audit committee to have at least two members, a majority of 
whom are independent.
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    \39\ See APTC Letter at 5.
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    Moreover, the Commission has concluded that the Exchange's decision 
to include investment companies in the proposed rule change is 
warranted. While the Commission recognizes that the opportunity for 
some types of financial reporting abuses may be limited by the nature 
of fund assets,\40\ it believes that audit committee do play an 
important role in overseeing the financial reporting process for 
investment companies.
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    \40\ See Keller and Rowe Letter at 5; ICI Letter at 3; MSDW 
Letter at 1.
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    The Commission finds good cause for approving Amendments No. 1 and 
No. 2 to the proposed rule change prior to the thirtieth day after 
publication in the Federal Register. The Commission notes that 
Amendment No. 1 revises the implementation time periods for the 
proposed rule change solely to provide greater clarity to issuers and 
to investors. The Commission believes that Amendment No. 1 will enable 
issuers to determine when they must comply with the new requirements 
and will enable investors to determine when to rely on the protections 
afforded by the proposed rule change. The Commission notes that 
Amendment No. 2 simply clarifies that the audit committee is required 
to oversee, rather than ensure, the independence of the company's 
outside auditors; makes a technical correction to section 121A; and 
expands the Exchange's definition of ``immediate family.'' The 
Commission believes that accelerated approval will allow the Exchange 
to simultaneously make all relevant modifications to the Amex Company 
Guide and will avoid potential confusion. Accordingly, the Commission 
finds good cause to accelerate approval of Amendments No. 1 and No. 2 
to the proposed rule change, consistent with sections 6(b)(5) \41\ and 
19(b) \42\ of the Act.
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    \41\ 15 U.S.C. 78f(b)(5).
    \42\ 15 U.S.C. 78s(b).
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V. 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 Co9mmission and any persons, 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 January 11, 2000

VI. Conclusion

    For the foregoing reasons, the Commission finds that the Exchange's 
proposal to amend its audit committee requirements is consistent with 
the requirements of the Act and the rule and regulations thereunder.

[[Page 71523]]

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\43\ that the amendment proposed rule change (SR-Amex-99-38) is 
approved.

    \43\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33051 Filed 12-20-99; 8:45 am]
BILLING CODE 8010-01-M