[Federal Register Volume 68, Number 132 (Thursday, July 10, 2003)]
[Notices]
[Pages 41194-41196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17475]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48125; File No. SR-NASD-2002-139]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. To Amend NASD Rule 4350 To Require Listed 
Companies To Adopt a Code of Conduct for All Directors, Officers, and 
Employees

July 2, 2003.
    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 October 10, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On January 15, 
2003, Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated January 
15, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend Rule 4350 to require listed companies to 
adopt a code of conduct for all directors, officers and employees.\4\ 
Issuers must comply with the rule as of six months from the date of 
approval.
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    \4\ See also Securities Exchange Act Release No. 47516 (March 
17, 2003), 68 FR 14451 (March 25, 2003) (NASD 2002-141) for a 
description of additional proposed revisions to NASD's corporate 
governance listing standards.
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    The text of the proposed rule change is below. Proposed new 
language is in italics.

4350. Qualitative Listing Requirements for Nasdaq National Market and 
Nasdaq Small Cap Market Issuers Except for Limited Partnerships Traded 
on the Nasdaq National Market
    (a)-(l) No change.
    (m) Each Issuer shall adopt a code of conduct applicable to all 
directors, officers and employees, which shall be publicly available. A 
code of conduct satisfying this rule must comply with the definition of 
a ``code of ethics'' set out in Section 406(c) of the Sarbanes-Oxley 
Act of 2002 (``the Sarbanes-Oxley Act'') and any regulations 
promulgated thereunder by the Commission. In addition, the code must 
provide for an enforcement mechanism. Any waivers of the code for 
directors or executive officers must be approved by the Board and must 
be disclosed in the issuer's public filings, not later than the next 
periodic report.
IM-4350-7:
    Ethical behavior is required and expected of every corporate 
director, officer and employee whether or not a formal code of conduct 
exists. The requirement of a publicly available code of conduct 
applicable to all directors, officers and employees of an issuer is 
intended to demonstrate to investors that the board and management of 
Nasdaq issuers have carefully considered the requirement of ethical 
dealing and have put in place a system to ensure that they become aware 
of and take prompt action against any questionable behavior. For 
company personnel, a code of conduct with enforcement provisions 
provides assurance that reporting of questionable behavior is protected 
and encouraged, and fosters an atmosphere of self-awareness and prudent 
conduct.
    Rule 4350(m) requires issuers to adopt a code of conduct complying 
with the definition of a ``code of ethics'' under Section 406(c) of the 
Sarbanes-Oxley Act of 2002 (``the Sarbanes-Oxley Act'') and any 
regulations promulgated thereunder by the Commission. Thus, the code 
must include such standards as are reasonably necessary to promote the 
ethical handling of conflicts of interest, full and fair disclosure, 
and compliance with laws, rules and regulations, as specified by the 
Sarbanes-Oxley Act. However, the code of conduct required by Rule 
4350(m) must apply to all directors, officers, and employees. Issuers 
can satisfy this obligation by adopting one or more codes of conduct, 
such that all directors, officers and employees are subject to a code 
that satisfies the definition of a ``code of ethics.''
    As the Sarbanes-Oxley Act recognizes, investors are harmed when the 
real or perceived private interest of a director, officer or employee 
is in conflict with

[[Page 41195]]

the interests of the company, as when the individual receives improper 
personal benefits as a result of his or her position with the company, 
or when the individual has other duties, responsibilities or 
obligations that run counter to his or her duty to the company. Also, 
the disclosures an issuer makes to the Commission are the essential 
source of information about the company for regulators and investors--
there can be no question about the duty to make them fairly, accurately 
and timely. Finally, illegal action must be dealt with swiftly and the 
violators reported to the appropriate authorities.
    Each code of conduct must require that any waiver of the code for 
executive officers or directors may be made only by the board and must 
be promptly disclosed to shareholders, along with the reasons for the 
waiver. This disclosure requirement provides investors the comfort that 
waivers are not granted except where they are truly necessary and 
warranted, and that they are limited and qualified so as to protect the 
company to the greatest extent possible. Disclosure should be made in 
the issuer's regular public filings, not later than the next periodic 
report. Thus, a domestic issuer must make this disclosure in its next 
quarterly or annual report, whichever is sooner, and foreign issuers 
must make it in their next semi-annual report. An issuer may 
alternatively choose to include this disclosure in an 8-K filed before 
its next periodic report.
    Each code of conduct must also contain an enforcement mechanism 
that ensures prompt and consistent enforcement of the code, protection 
for persons reporting questionable behavior, clear and objective 
standards for compliance, and a fair process by which to determine 
violations.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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. Nasdaq 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change requires companies to adopt and make 
publicly available a code of conduct applicable to directors, officers, 
and employees, which complies with the definition of a ``code of 
ethics'' set out in Section 406(c) of the Sarbanes-Oxley Act of 2002 
and any regulations promulgated by the Commission thereunder, and 
provides for an enforcement mechanism. Any waivers of the code for 
directors or executive officers must be approved by the board and must 
be promptly made publicly available. By expressly setting out the 
inherent obligation of ethical conduct in this manner, Nasdaq intends 
to provide further assurance to investors, regulators and itself that 
each of its issuers has in place a system to focus attention throughout 
the company on the obligation of ethical conduct, encourage reporting 
of potential violations, and deal fairly and promptly with questionable 
behavior. A code of conduct provides objective standards for 
compliance, increasing transparency and accountability in this key 
area.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\5\ in general and with 
section 15A(b)(6) of the Act,\6\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \5\ 5 15 U.S.C. 78o-3.
    \6\ 6 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were not solicited. Nasdaq received one comment, 
stating that requiring a code of conduct applicable to all employees 
would be extremely burdensome for companies with large numbers of 
hourly employees and that such employees were unlikely to be faced with 
ethical issues. Nasdaq believes that the rule filing, as amended, 
addresses this concern by clarifying that companies have the 
flexibility to design more than one code of conduct, such that there is 
an appropriate code for various types of employees. Thus, a company 
could adopt a simpler code for its hourly employees than for its senior 
management in recognition of the fewer ethical issues typically facing 
hourly employees.

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 amended 
proposal 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 
NASD. All submissions should refer to file number SR-NASD-2002-139 and 
should be submitted by July 31, 2003.


[[Page 41196]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-17475 Filed 7-9-03; 8:45 am]
BILLING CODE 8010-01-P