[Federal Register Volume 68, Number 200 (Thursday, October 16, 2003)]
[Notices]
[Pages 59666-59673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26101]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48601; File No. SR-Phlx-2003-51]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Listing 
Standards Regarding Issuers' Audit Committees and Delisting Procedures

October 8, 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 July 14, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') 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 the Phlx. 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 Phlx proposes to amend Phlx Rule 849, Audit Committee/Conflicts 
of Interest, and Phlx Rule 811, Delisting Policies and Procedures. The 
majority of the proposed rule changes are intended to comply with the 
requirements of new Commission Rule 10A-3 under the Act.\3\ 
Specifically, the new listing standards proposed to be adopted by the 
Exchange pursuant to Commission Rule 10A-3 would require that:
---------------------------------------------------------------------------

    \3\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (1) Each member of the audit committee of the issuer must be 
independent according to specified criteria (proposed Phlx Rule 
849(b)(1));\4\
---------------------------------------------------------------------------

    \4\ Currently, Phlx Rule 849 requires listed companies to 
maintain audit committees, a majority of the members of which are 
``independent directors'' as defined in Phlx Rule 851. This current 
requirement would remain in effect pending the implementation of the 
higher standards proposed in this rule change. (Phlx Rule 851 
requires listed issuers to maintain a minimum of two independent 
directors on their boards. It also defines ``independent director'' 
as a person other than an officer or employee of the company or its 
subsidiaries or any other individual having a relationship which, in 
the opinion of the board of directors, would interfere with the 
exercise of independent judgment in carrying out the 
responsibilities of a director.)
---------------------------------------------------------------------------

    (2) The audit committee of each issuer must be directly responsible 
for the appointment, compensation, retention and oversight of the work 
of any registered public accounting firm engaged for the purpose of 
preparing or issuing an audit report or performing other audit, review 
or attest services for the issuer, and each such registered public 
accounting firm must report directly to the audit committee (proposed 
Phlx Rule 849(b)(2));
    (3) Each audit committee must establish procedures for the receipt, 
retention and treatment of complaints regarding accounting, internal 
accounting controls or auditing matters, including procedures for the 
confidential, anonymous submission by employees of the issuer of 
concerns regarding questionable accounting or auditing matters 
(proposed Phlx Rule 849(b)(3));
    (4) Each audit committee must have the authority to engage 
independent counsel and other advisors, as it determines necessary to 
carry out its duties (proposed Phlx Rule 849(b)(4)); and
    (5) Each issuer must provide appropriate funding for the audit 
committee (proposed Phlx Rule 849(b)(5)).
    Additional changes relating to audit committee charters, audit 
committee

[[Page 59667]]

composition requirements, audit committee approval of related party 
transactions, and revisions to the Exchange's delisting rule are also 
proposed.\5\
---------------------------------------------------------------------------

    \5\ The Exchange intends to file additional proposed rule 
changes relating to other corporate governance listing standards, 
including board independence and independent committees, issuers' 
codes of conduct, and announcement of going concern qualification in 
the near future. The New York Stock Exchange (``NYSE'') and the 
National Association of Securities Dealers (``NASD'') have proposed 
a number of rule changes in these areas. See, e.g., Securities 
Exchange Act Release Nos. 47516 (March 17, 2003), 68 FR 14451 (March 
25, 2003) (SR-NASD-2002-141, a proposed rule change relating to 
board independence and independent committees); 48123 (July 2, 
2003), 68 FR 41191 (July 10, 2003) (SR-NASD-2002-77, disclosure of 
audit opinions with going concern qualifications); 48125 (July 2, 
2003), 68 FR 41194 (July 10, 2003) (SR-NASD-2002-139 and Amendment 
No. 1 thereto, requiring listed companies to adopt a code of conduct 
for all directors, officers, and employees); and 47672 (April 11, 
2003), 68 FR 19051 (April 17, 2003) (SR-NYSE-2002-33 and Amendment 
No. 1 thereto, proposing corporate governance rule changes). The 
Commission has recently approved NYSE and Nasdaq proposals relating 
to shareholder approval of equity compensation plans. See Securities 
Exchange Act Release No. 48108 (June 30, 2003), 68 FR 39995 (July 3, 
2003) (approving SR-NYSE-2002-46 and SR-NASD-2002-140). The Exchange 
filed a proposed rule change relating to equity compensation on 
September 30, 2003 ( File No. SR-Phlx-2003-67).
---------------------------------------------------------------------------

    Below is the text of the proposed rule change. Proposed new 
language is italicized; deletions are in brackets.
Rule 849. Audit Committee/Conflicts of Interest
 Rule 849
    (a) A listed company shall establish and maintain an audit 
committee, a majority of the members of which shall be independent 
directors, as defined in Rule 851. [The audit committee shall conduct 
an appropriate review of all related party transactions on an ongoing 
basis in order to review for potential conflict of interest 
situations]. The requirements set forth in this Rule 849(a) shall 
continue to apply pending the implementation of the new requirements 
set forth in 849(b)-(j) and Commentary Sections (1)-(4). Listed issuers 
must be in compliance with such new requirements, subject to any 
applicable exemptions set forth therein, by the following dates: (A) 
July 31, 2005 for foreign private issuers and small business issuers as 
defined in Commission Rule 12b-2 under the Securities Exchange Act of 
1934 (the ``Act''); and (B) for all other listed issuers, the earlier 
of the listed issuer's first annual shareholders meeting after January 
15, 2004, or October 31, 2004.
    (b) Listing Standards Relating to Audit Committees. Each issuer of 
securities listed on the Exchange must have, and certify that it has 
and will continue to have, an audit committee, as defined in Section 
3(a)(58) of the Securities Exchange Act of 1934, of at least three 
members each of whom meet the following criteria.
    (1) Independence.
    (i) Each member of the audit committee must be a member of the 
board of directors of the listed issuer, and must otherwise be 
independent; provided that, where a listed issuer is one of two dual 
holding companies, those companies may designate one audit committee 
for both companies so long as each member of the audit committee is a 
member of the board of directors of at least one of such dual holding 
companies. The following restrictions apply to every audit committee 
member:
    (A) Employees. A director who is an employee (including non-
employee executive officers) of the company or any of its affiliates 
may not serve on the audit committee until three years following the 
termination of his or her employment. In the event the employment 
relationship is with a former parent or predecessor of the company, the 
director could serve on the audit committee after three years following 
the termination of the relationship between the company and the former 
parent or predecessor. ``Affiliate'' for purposes of this subsection 
(A) includes a subsidiary, sibling company, predecessor, parent 
company, or former parent company.
    (B) Business Relationship. A director (a) who is a partner, 
controlling shareholder, or executive officer of an organization that 
has a business relationship with the company, or (b) who has a direct 
business relationship with the company (e.g., as a consultant), may 
serve on the audit committee only if the issuer's board of directors 
determines in its business judgment that the relationship does not 
interfere with the director's exercise of independent judgment. In 
making a determination regarding the independence of a director 
pursuant to this paragraph, the board of directors should consider, 
among other things, the materiality of the relationship to the issuer, 
to the director, and, if applicable, to the organization with which the 
director is affiliated.
    ``Business relationships'' can include commercial, industrial, 
banking, consulting, legal, accounting and other relationships. A 
director can have this relationship directly with the company, or the 
director can be a partner, officer or employee of an organization that 
has such a relationship. The director may serve on the audit committee 
without the above-referenced board of directors' determination after 
three years following the termination of, as applicable, either (a) the 
relationship between the organization with which the director is 
affiliated and the company, (b) the relationship between the director 
and his or her partnership status, shareholder interest or executive 
officer position, or (c) the direct business relationship between the 
director and the company.
    (C) Cross Compensation Committee Link. A director who is employed 
as an executive of another corporation where any of the company's 
executives serves on that corporation's compensation committee may not 
serve on the audit committee.
    (D) Immediate Family. A director who is an Immediate Family member 
of an individual who is an executive officer of the company or any of 
its affiliates cannot serve on the audit committee until three years 
following the termination of such employment relationship. ``Immediate 
Family'' includes a person's spouse, parents, children, siblings, 
mothers-in-law and fathers-in-law, sons and daughters-in-law, and 
anyone (other than employees) who shares such person's home.
    (ii) Independence requirements for non-investment company issuers. 
In order to be considered to be independent for purposes of this 
paragraph (b)(1), a member of an audit committee of a listed issuer 
that is not an investment company may not, other than in his or her 
capacity as a member of the audit committee, the board of directors, or 
any other board committee:
    (A) Accept directly or indirectly any consulting, advisory, or 
other compensatory fee from the issuer or any subsidiary thereof, 
provided that compensatory fees do not include the receipt of fixed 
amounts of compensation under a retirement plan (including deferred 
compensation) for prior service with the listed issuer (provided that 
such compensation is not contingent in any way on continued service); 
or
    (B) Be an affiliated person of the issuer or any subsidiary 
thereof.
    (iii) Independence requirements for investment company issuers. In 
order to be considered to be independent for purposes of this paragraph 
(b)(1), a member of an audit committee of a listed issuer that is an 
investment company may not, other than in his or her capacity as a 
member of the audit committee, the board of directors, or any other 
board committee:
    (A) Accept directly or indirectly any consulting, advisory, or 
other compensatory fee from the issuer or any

[[Page 59668]]

subsidiary thereof, provided that compensatory fees do not include the 
receipt of fixed amounts of compensation under a retirement plan 
(including deferred compensation) for prior service with the listed 
issuer (provided that such compensation is not contingent in any way on 
continued service); or
    (B) Be an ``interested person'' of the issuer as defined in section 
2(a)(19) of the Investment Company Act of 1940.
    (iv) Exemptions from the independence requirements.
    (A) For an issuer listing securities pursuant to a registration 
statement under section 12 of the Act, or for an issuer that has a 
registration statement under the Securities Act of 1933 covering an 
initial public offering of securities to be listed by the issuer, where 
in each case the listed issuer was not, immediately prior to the 
effective date of such registration statement, required to file reports 
with the Commission pursuant to section 13(a) or 15(d) of the Act;
    (1) [Reserved]; and
    (2) A minority of the members of the listed issuer's audit 
committee may be exempt from the independence requirements of paragraph 
(b)(1)(ii) of this section for one year from the date of effectiveness 
of such registration statement.
    (B) An audit committee member that sits on the board of directors 
of a listed issuer and an affiliate of the listed issuer is exempt from 
the requirements of paragraph (b)(1)(ii)(B) of this section if the 
member, except for being a director on each such board of directors, 
otherwise meets the independence requirements of paragraph (b)(1)(ii) 
of this section for each such entity, including the receipt of only 
ordinary-course compensation for serving as a member of the board of 
directors, audit committee or any other board committee of each such 
entity.
    (C) An employee of a foreign private issuer who is not an executive 
officer of the foreign private issuer is exempt from the requirements 
of paragraph (b)(1)(ii) of this section if the employee is elected or 
named to the board of directors or audit committee of the foreign 
private issuer pursuant to the issuer's governing law or documents, an 
employee collective bargaining or similar agreement or other home 
country legal or listing requirements.
    (D) An audit committee member of a foreign private issuer may be 
exempt from the requirements of paragraph (b)(1)(ii)(B) of this section 
if that member meets the following requirements:
    (1) The member is an affiliate of the foreign private issuer or a 
representative of such an affiliate;
    (2) The member has only observer status on, and is not a voting 
member or the chair of, the audit committee; and
    (3) Neither the member nor the affiliate is an executive officer of 
the foreign private issuer.
    (E) An audit committee member of a foreign private issuer may be 
exempt from the requirements of paragraph (b)(1)(ii)(B) of this section 
if that member meets the following requirements:
    (1) The member is a representative or designee of a foreign 
government or foreign governmental entity that is an affiliate of the 
foreign private issuer; and
    (2) The member is not an executive officer of the foreign private 
issuer.
    (F) In addition to paragraphs (b)(1)(iv)(A) through (E) of this 
section, if the Commission exempts from the requirements of paragraphs 
(b)(1)(ii) or (b)(1)(iii) of Commission Rule 10A-3 under the Act a 
particular relationship with respect to audit committee members, as the 
Commission determines appropriate in light of the circumstances, such 
relationship shall also be exempt from the requirements of paragraphs 
(b)(1)(ii) or (b)(1)(iii) of this Rule 849.
    (2) Responsibilities relating to registered public accounting 
firms. The audit committee of each listed issuer, in its capacity as a 
committee of the board of directors, must be directly responsible for 
the appointment, compensation, retention and oversight of the work of 
any registered public accounting firm engaged (including resolution of 
disagreements between management and the auditor regarding financial 
reporting) for the purpose of preparing or issuing an audit report or 
performing other audit, review or attest services for the listed 
issuer, and each such registered public accounting firm must report 
directly to the audit committee.
    (3) Complaints. Each audit committee must establish procedures for:
    (i) The receipt, retention, and treatment of complaints received by 
the listed issuer regarding accounting, internal accounting controls, 
or auditing matters; and
    (ii) The confidential, anonymous submission by employees of the 
listed issuer of concerns regarding questionable accounting or auditing 
matters.
    (4) Authority to engage advisers. Each audit committee must have 
the authority to engage independent counsel and other advisers, as it 
determines necessary to carry out its duties.
    (5) Funding. Each listed issuer must provide for appropriate 
funding, as determined by the audit committee, in its capacity as a 
committee of the board of directors, for payment of:
    (i) Compensation to any registered public accounting firm engaged 
for the purpose of preparing or issuing an audit report or performing 
other audit, review or attest services for the listed issuer;
    (ii) Compensation to any advisers employed by the audit committee 
under paragraph (b)(4) of this section; and
    (iii) Ordinary administrative expenses of the audit committee that 
are necessary or appropriate in carrying out its duties.
    (c) General exemptions.
    (1) At any time when an issuer has a class of common equity or 
similar securities that is listed on a national securities exchange or 
national securities association subject to the requirements of listing 
standards which comply with the requirements of Commission Rule 10A-3 
under the Act, the listing of other classes of securities on the 
Exchange is not subject to the requirements of this section.
    (2) At any time when an issuer has a class of common equity 
securities (or similar securities) that is listed on a national 
securities exchange or national securities association subject to the 
requirements of listing standards which comply with the requirements of 
Commission Rule 10A-3 under the Act, the listing on the Exchange of 
classes of securities of a direct or indirect consolidated subsidiary 
or an at least 50% beneficially owned subsidiary of the issuer (except 
classes of equity securities, other than non-convertible, non-
participating preferred securities, of such subsidiary) is not subject 
to the requirements of this section.
    (3) The listing of securities of a foreign private issuer is not 
subject to the requirements of paragraphs (b)(1) through (b)(5) of this 
section if the foreign private issuer meets the following requirements:
    (i) The foreign private issuer has a board of auditors (or similar 
body), or has statutory auditors, established and selected pursuant to 
home country legal or listing provisions expressly requiring or 
permitting such a board or similar body;
    (ii) The board or body, or statutory auditors is required under 
home country legal or listing requirements to be either:
    (A) Separate from the board of directors; or
    (B) Composed of one or more members of the board of directors and

[[Page 59669]]

one or more members that are not also members of the board of 
directors;
    (iii) The board or body, or statutory auditors, are not elected by 
management of such issuer and no executive officer of the foreign 
private issuer is a member of such board or body, or statutory 
auditors;
    (iv) Home country legal or listing provisions set forth or provide 
for standards for the independence of such board or body, or statutory 
auditors, from the foreign private issuer or the management of such 
issuer;
    (v) Such board or body, or statutory auditors, in accordance with 
any applicable home country legal or listing requirements or the 
issuer's governing documents, are responsible, to the extent permitted 
by law, for the appointment, retention and oversight of the work of any 
registered public accounting firm engaged (including, to the extent 
permitted by law, the resolution of disagreements between management 
and the auditor regarding financial reporting) for the purpose of 
preparing or issuing an audit report or performing other audit, review 
or attest services for the issuer; and
    (vi) The audit committee requirements of paragraphs (b)(3), (b)(4) 
and (b)(5) of this section apply to such board or body, or statutory 
auditors, to the extent permitted by law.
    (4) The listing of a security futures product cleared by a clearing 
agency that is registered pursuant to Section 17A of the Act or that is 
exempt from the registration requirements of Section 17A pursuant to 
paragraph (b)(7)(A) of such section is not subject to the requirements 
of this section.
    (5) The listing of a standardized option, as defined in Commission 
Rule 9b-1(a)(4) under the Act, issued by a clearing agency that is 
registered pursuant to Section 17A of the Act is not subject to the 
requirements of this section.
    (6) The listing of securities of the following listed issuers are 
not subject to the requirements of this section:
    (i) Asset-Backed Issuers (as defined in Commission Rules 13a-14(g) 
and 15d-14(g) under the Act);
    (ii) Unit investment trusts (as defined in 15 U.S.C. 80a-4(2)); and
    (iii) Foreign governments (as defined in Commission Rule 3b-4(a) 
under the Act).
    (7) The listing of securities of a listed issuer is not subject to 
the requirements of this section if:
    (i) The listed issuer, as reflected in the applicable listing 
application, is organized as a trust or other unincorporated 
association that does not have a board of directors or persons acting 
in a similar capacity; and
    (ii) The activities of the listed issuer that is described in 
paragraph (c)(7)(i) of this section are limited to passively owning or 
holding (as well as administering and distributing amounts in respect 
of) securities, rights, collateral or other assets on behalf of or for 
the benefit of the holders of the listed securities.
    (d) [Reserved]
    (e) Definitions. Unless the context otherwise requires, all terms 
used in this section have the same meaning as in the Act. In addition, 
unless the context otherwise requires, the following definitions apply 
for purposes of this section:
    (1)(i) The term affiliate of, or a person affiliated with, a 
specified person, means a person that directly, or indirectly through 
one or more intermediaries, controls, or is controlled by, or is under 
common control with, the person specified.
    (ii)(A) A person will be deemed not to be in control of a specified 
person for purposes of this section if the person:
    (1) Is not the beneficial owner, directly or indirectly, of more 
than 10% of any class of voting equity securities of the specified 
person; and
    (2) Is not an executive officer of the specified person.
    (B) Paragraph (e)(1)(ii)(A) of this section only creates a safe 
harbor position that a person does not control a specified person. The 
existence of the safe harbor does not create a presumption in any way 
that a person exceeding the ownership requirement in paragraph 
(e)(1)(ii)(A)(1) of this section controls or is otherwise an affiliate 
of a specified person.
    (iii) The following will be deemed to be affiliates:
    (A) An executive officer of an affiliate;
    (B) A director who also is an employee of an affiliate;
    (C) A general partner of an affiliate; and
    (D) A managing member of an affiliate.
    (iv) For purposes of paragraph (e)(1)(i) of this section, dual 
holding companies will not be deemed to be affiliates of or persons 
affiliated with each other by virtue of their dual holding company 
arrangements with each other, including where directors of one dual 
holding company are also directors of the other dual holding company, 
or where directors of one or both dual holding companies are also 
directors of the businesses jointly controlled, directly or indirectly, 
by the dual holding companies (and, in each case, receive only 
ordinary-course compensation for serving as a member of the board of 
directors, audit committee or any other board committee of the dual 
holding companies or any entity that is jointly controlled, directly or 
indirectly, by the dual holding companies).
    (2) In the case of foreign private issuers with a two-tier board 
system, the term board of directors means the supervisory or non-
management board.
    (3) In the case of a listed issuer that is a limited partnership or 
limited liability company where such entity does not have a board of 
directors or equivalent body, the term board of directors means the 
board of directors of the managing general partner, managing member or 
equivalent body.
    (4) The term control (including the terms controlling, controlled 
by and under common control with) means the possession, direct or 
indirect, of the power to direct or cause the direction of the 
management and policies of a person, whether through the ownership of 
voting securities, by contract, or otherwise.
    (5) The term dual holding companies means two foreign private 
issuers that:
    (i) Are organized in different national jurisdictions;
    (ii) Collectively own and supervise the management of one or more 
businesses which are conducted as a single economic enterprise; and
    (iii) Do not conduct any business other than collectively owning 
and supervising such businesses and activities reasonably incidental 
thereto.
    (6) The term executive officer has the meaning set forth in 
Commission Rule 3b-7.
    (7) The term foreign private issuer has the meaning set forth in 
Commission Rule 3b-4(c).
    (8) The term indirect acceptance by a member of an audit committee 
of any consulting, advisory or other compensatory fee includes 
acceptance of such a fee by a spouse, a minor child or stepchild or a 
child or stepchild sharing a home with the member or by an entity in 
which such member is a partner, member, an officer such as a managing 
director occupying a comparable position or executive officer, or 
occupies a similar position (except limited partners, non-managing 
members and those occupying similar positions who, in each case, have 
no active role in providing services to the entity) and which provides 
accounting, consulting, legal, investment banking or financial advisory 
services to the issuer or any subsidiary of the issuer.
    (9) The terms listed and listing refer to securities listed on a 
national securities exchange or listed in an automated inter-dealer 
quotation

[[Page 59670]]

system of a national securities association or to issuers of such 
securities. 
    (f) Opportunity to cure defects. A listed issuer shall have the 
opportunity provided for in Rule 811 to cure any defects that would be 
the basis for delisting under paragraph (a) of this section, before the 
imposition of such delisting. Additionally, if a member of an audit 
committee ceases to be independent in accordance with the requirements 
of this section for reasons outside the member's reasonable control, 
that person, with notice by the issuer to the Exchange, may remain an 
audit committee member of the listed issuer until the earlier of the 
next annual shareholders meeting of the listed issuer or one year from 
the occurrence of the event that caused the member to be no longer 
independent. 
    (g) Notification of noncompliance. Listed issuers must notify the 
Exchange promptly after an executive officer of the listed issuer 
becomes aware of any material noncompliance by the listed issuer with 
the requirements of this section. 
    (h) Audit Committee Charter. The board of directors must adopt and 
approve a formal written charter for the audit committee. The audit 
committee must review and reassess 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) That the outside auditor is ultimately accountable to the 
board of directors and the audit committee of the company, that the 
audit committee and board of directors have the 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), and that the audit 
committee is vested with all responsibilities and authority required by 
Rule 10A-3 under the Securities Exchange Act of 1934; and 
    (iii) That the audit committee is responsible for ensuring that the 
outside auditor submits on a periodic basis to the audit committee a 
formal written statement delineating all relationships between the 
auditor and the company and that the audit committee is responsible for 
actively engaging in a dialogue with the outside auditor with respect 
to any disclosed relationships or services that may impact the 
objectivity and independence of the outside auditor and for 
recommending that the board of directors take appropriate action in 
response to the outside auditors' report to satisfy itself of the 
outside auditors' independence. 
    (i) Expertise Requirement of Audit Committee Members. 
    (i) Each member of the audit committee must be financially 
literate, as such qualification is interpreted by the company's board 
of directors in its business judgment, or must become financially 
literate within a reasonable period of time after his or her 
appointment to the audit committee; and 
    (ii) At least one member of the audit committee must have 
accounting or related financial management expertise, as the Board of 
Directors interprets such qualification in its business judgment. 
    (j) Written Affirmation. As part of the initial listing process, 
and with respect to any subsequent changes to the composition of the 
audit committee, and otherwise approximately once each year, each 
company should provide the Exchange written confirmation regarding: 
    (i) any determination that the company's board of directors has 
made regarding the independence of directors pursuant to any of the 
subparagraphs above; 
    (ii) the financial literacy of the audit committee member; 
    (iii) the determination that at least one of the audit committee 
members has accounting or related financial management expertise; and 
    (iv) the annual review and reassessment of the adequacy of the 
audit committee charter. 
    (k) Related Party Transactions. Each issuer shall conduct an 
appropriate review of all related party transactions on an ongoing 
basis and all such transactions must be approved by the company's audit 
committee or another independent body of the board of directors. For 
purposes of this rule, the term ``related party transaction'' shall 
refer to transactions required to be disclosed pursuant to SEC 
Regulation S-K, Item 404. 
Commentary:
    1. The requirements in paragraphs (b)(2) through (b)(5), (c)(3)(v) 
and (c)(3)(vi) of this section do not conflict with, and do not affect 
the application of, any requirement or ability under a listed issuer's 
governing law or documents or other home country legal or listing 
provisions that requires or permits shareholders to ultimately vote on, 
approve or ratify such requirements. The requirements instead relate to 
the assignment of responsibility as between the audit committee and 
management. In such an instance, however, if the listed issuer provides 
a recommendation or nomination regarding such responsibilities to 
shareholders, the audit committee of the listed issuer, or body 
performing similar functions, must be responsible for making the 
recommendation or nomination.
    2. The requirements in paragraphs (b)(2) through (b)(5), (c)(3)(v), 
(c)(3)(vi) and Commentary 1 of this section do not conflict with any 
legal or listing requirement in a listed issuer's home jurisdiction 
that prohibits the full board of directors from delegating such 
responsibilities to the listed issuer's audit committee or limits the 
degree of such delegation. In that case, the audit committee, or body 
performing similar functions, must be granted such responsibilities, 
which can include advisory powers, with respect to such matters to the 
extent permitted by law, including submitting nominations or 
recommendations to the full board.
    3. The requirements in paragraphs (b)(2) through (b)(5), (c)(3)(v) 
and (c)(3)(vi) of this section do not conflict with any legal or 
listing requirement in a listed issuer's home jurisdiction that vests 
such responsibilities with a government entity or tribunal. In that 
case, the audit committee, or body performing similar functions, must 
be granted such responsibilities, which can include advisory powers, 
with respect to such matters to the extent permitted by law.
    4. For purposes of this section, the determination of a person's 
beneficial ownership must be made in accordance with Rule 13d-3 under 
the Act.
Rule 811. Delisting Policies and Procedures
    Rule 811. Once Exchange staff identifies a company as being below 
the Exchange's continued listing criteria (and not able to otherwise 
qualify under an initial listing standard), Exchange staff will so 
notify the company by letter. This letter will also provide the company 
with an opportunity to provide the Exchange staff with a plan (the 
``Plan'') advising the Exchange of action the company has taken, or 
will take, that would bring it into compliance with the continued 
listing standards within three months of receipt of the letter. The 
company has 30 days from the receipt of the letter to submit its Plan 
to the Exchange for review; if it does not submit a Plan within this 
period the Exchange will promptly initiate delisting proceedings as 
provided in subsections (a)-(g) below. The Exchange's Allocation, 
Evaluation and Securities Committee (the ``Committee'')

[[Page 59671]]

will evaluate the Plan and determine whether the company has made 
reasonable demonstration in the Plan of an ability to regain compliance 
with the continued listing standards within the three month period. The 
Committee will make such determination within 45 days of receipt of the 
proposed Plan, and will promptly notify the company of its 
determination in writing. If the Committee does not accept the Plan, 
the Exchange will promptly initiate delisting proceedings as provided 
in subsections (a)-(g) below. If Exchange staff accepts the Plan, the 
three month Plan period will commence on the date the issuer is 
notified of such acceptance. The Exchange will then review the company 
on a periodic basis for compliance with the Plan. If the company does 
not show progress consistent with the Plan, the Committee will review 
the circumstances and variance, and determine whether such variance 
warrants the commencement of delisting procedures. Should the Committee 
determine to proceed with delisting procedures, it may do so regardless 
of the company's continued listing status at that time. If, prior to 
the end of the three month Plan period, the company is able to 
demonstrate compliance with the continued listing standards at the end 
of the three month Plan period, the Exchange will deem the Plan period 
over. If the company does not meet continued listing standards at the 
end of the three month Plan period, the Exchange will promptly initiate 
delisting procedures. If the company, within twelve months of the end 
of the Plan (including any early termination of the Plan period) is 
again determined to be below continued listing standards, the Committee 
will examine the relationship between the two incidents of falling 
below continued listing standards and re-evaluate the company's method 
of recovery from the first incident. It will then take appropriate 
action which, depending upon the circumstances, may include truncating 
the procedures described above or immediately initiating delisting 
procedures.
    Whenever the Exchange determines that it is appropriate to consider 
removing a security from listing [(or from unlisted trading)] for other 
than routine reasons (redemptions or maturities) it will follow the 
following procedures:
    (a)-(g) No change.

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 Phlx 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 Phlx 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 purpose of the proposed rule change is to amend Phlx Rule 849 
to provide enhanced listing standards related to Phlx-listed issuers' 
audit committees, and to amend Phlx Rule 811 to incorporate a procedure 
to provide issuers a ``cure period'' prior to being delisted for 
failure to meet Exchange listing standards. The changes are summarized 
below.
    Rule 849, Audit Committee/Conflicts of Interest.
    Independence--Background. Currently, Phlx Rule 849 requires listed 
companies to maintain audit committees, a majority of the members of 
which are ``independent directors'' as defined in Phlx Rule 851. Phlx 
Rule 851 requires listed issuers to maintain a minimum of two 
independent directors on its board and defines ``independent director'' 
as a person other than an officer or employee of the company or its 
subsidiaries or any other individual having a relationship which, in 
the opinion of the board of directors, would interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director. This current requirement would remain in effect pending 
the implementation of the higher standards proposed in Phlx Rules 
849(b)-(j). Proposed Phlx Rule 849(b) would require a listed issuer to 
have, and to certify that it has and will continue to have, an audit 
committee, as defined in Section 3(a)(58) of the Act, of at least three 
members, each of whom meet certain criteria set forth in proposed Phlx 
Rule 849(b).
    Independence--Blue Ribbon Committee Recommendations. Proposed Phlx 
Rule 849(b)(1)(i) would require each member of the audit committee to 
be a member of the board of directors of the listed issuer and to be 
otherwise independent.\6\ Proposed Rules 849(b)(1)(i)(A) through (D) 
are based in large part upon Rule 5.3(b)(3)(i)-(iv) of PCX Equities, 
Inc.,\7\ and would preclude employees and those with business 
relationships from serving on a listed company's audit committee. They 
would also prohibit audit committee service by a director who is 
employed as an executive of another corporation where any of the 
company's executives serves on that corporation's compensation 
committee. Further, a director who is an ``Immediate Family'' member of 
an individual who is an executive officer of the company or any of its 
affiliates cannot serve on the audit committee until three years 
following the termination of such employment relationship.
---------------------------------------------------------------------------

    \6\ However, where a listed issuer is one of two dual holding 
companies, those companies may designate one audit committee for 
both companies so long as each member of the audit committee is a 
member of the board of directors of at least one of such dual 
holding companies.
    \7\ PCX Equities, Inc. Rules 5.3(b)(3)(i)-(iv) were approved by 
the Commission on February 7, 2001. See Securities Exchange Act 
Release No. 43941 (February 7, 2001), 66 FR 10545 (February 15, 
2001) (approving SR-PCX-00-40). The rules had been proposed to 
conform to recommendations made in 1999 by the Blue Ribbon Committee 
on Improving Effectiveness of Corporate Audit Committees (the ``Blue 
Ribbon Committee'') and rule changes adopted by other self-
regulatory organizations. The Blue Ribbon Committee's 
recommendations were intended to strengthen the independence of the 
audit committee, make the audit committee more effective, and 
address mechanisms for accountability among the audit committee, the 
outside auditors, and management.
---------------------------------------------------------------------------

    Independence--Rule 10A-3 Requirements. Proposed Phlx Rules 
849(b)(1)(ii) and (iii) prescribe certain independence requirements for 
audit committee members of non-investment company issuers and for 
investment company issuers, respectively, which are mandated by 
Commission Rule 10A-3(b)(1)(ii) and (iii). Proposed Phlx Rules 
849(b)(1)(iv)(A) through (F) provide a number of exemptions from the 
Phlx Rule 849(b)(1) independence requirements as permitted by 
Commission Rule 10A-3(b)(1)(iv).\8\
---------------------------------------------------------------------------

    \8\ The Commission notes that Phlx did not include the exception 
provided for in Commission Rule 10A-3(b)(1)(iv)(A)(1).
---------------------------------------------------------------------------

    Responsibilities Relating to Registered Public Accounting Firms, 
Complaints, Authority to Engage Advisers and Funding. Phlx Rules 
849(b)(2)-(5) provide for the audit committee's responsibility to 
select and oversee the issuer's independent accountant, procedures for 
handling complaints regarding the issuer's accounting practices, the 
authority of the audit committee to engage advisors, and funding for 
the independent auditor and any outside advisors engaged by the

[[Page 59672]]

audit committee. As noted above, these standards are required by 
Commission Rule 10A-3(b)(2)-(5).
    General Exemptions. Phlx Rule 849(c)(1)-(7) provides a number of 
exemptions from Phlx Rule 849, which are provided for in Commission 
Rule 10A-3(c).
    Definitions. Phlx Rule 849(e) defines a number of terms used in 
Phlx Rule 849, including the terms ``affiliate'' and ``control,'' and 
also including the term ``board of directors'' in the case of foreign 
private issuers with a two-tier board system or a limited partnership 
or limited liability company where such entity does not have a board of 
directors or equivalent body.
    Opportunity to Cure Defects. Phlx Rule 849(f) provides that a 
listed issuer shall have the opportunity provided for in Phlx Rule 811 
(see below) to cure any defects that would be the basis for delisting 
under Phlx Rule 849(a) before the imposition of such delisting. It also 
provides that if a member of an audit committee ceases to be 
independent in accordance with the requirements of Phlx Rule 849 for 
reasons outside the member's reasonable control, that person, with 
notice by the issuer to the Exchange, may remain an audit committee 
member of the listed issuer until the earlier of the next annual 
shareholders meeting or one year from the occurrence of the event that 
caused the member to be no longer independent.
    Notification of Noncompliance. Proposed Phlx Rule 849(g) requires 
listed issuers to notify the Exchange promptly after an executive 
officer of the listed issuer becomes aware of any material 
noncompliance by the listed issuer with the requirements of Phlx Rule 
849.
    Audit Committee Charter. Proposed Phlx Rule 849(h) requires the 
board of directors to adopt and approve a formal written charter for 
the audit committee, and requires the audit committee to review and 
reassess the adequacy of the formal written charter on an annual basis. 
The proposed rule details the required content of the charter.
    Expertise Requirement of Audit Committee Members. Proposed Phlx 
Rule 849(i) requires each member of the audit committee to be 
financially literate or become financially literate within a reasonable 
period of time after his or her appointment to the audit committee. It 
requires at least one member of the audit committee to have accounting 
or related financial management expertise.
    Written Affirmation. Proposed Phlx Rule 849(j) provides that as 
part of the initial listing process, and with respect to any subsequent 
changes to the composition of the audit committee, and otherwise 
approximately once each year, each listed company should provide the 
Exchange written confirmation regarding determinations of directors' 
independence, the financial literacy of audit committee members, the 
determination that at least one of the audit committee members has 
accounting or related financial management expertise, and the annual 
review and reassessment of the adequacy of the audit committee charter.
    Related Party Transactions. Proposed Phlx Rule 849(k) replaces the 
second sentence of current Phlx Rule 849. It defines ``related party 
transactions'' and requires issuers to conduct an appropriate review of 
all such transactions on an ongoing basis. It also requires all such 
transactions to be approved by the audit committee or another 
independent body of the board of directors.
    Commentary. Commentary sections 1-4 replicate the Instructions 
adopted by the Commission as part of Rule 10A-3, and are designed to 
clarify the applicability of certain other Rule 849 provisions.
    Rule 811, Delisting Policies and Procedures.
    Rule 811, Delisting Policies and Procedures, is proposed to be 
amended by the addition of introductory text prior to subsection (a). 
The new language would provide a process pursuant to which a company 
identified by Exchange staff as being below the Exchange's continued 
listing criteria would be provided an opportunity to provide Exchange 
staff with a plan advising the Exchange of action the company has 
taken, or will take, that would bring it into compliance with the 
continued listing standards within three months (the ``Plan''). The 
company would have 30 days from receipt of a letter from the Exchange 
notifying the company of the deficiency to submit the plan. The 
Exchange's Allocation, Evaluation and Securities Committee, within 45 
days of receipt of the proposed plan, will determine whether the 
company has made a reasonable demonstration of an ability to regain 
compliance with the continued listing standards within the three month 
period. If Exchange staff accepts the Plan, the three-month Plan period 
will commence on the date the issuer is notified of such acceptance. If 
the company does not show progress consistent with the Plan, it may 
proceed with delisting. If the company does not meet continued listing 
standards at the end of the three month Plan period, the Exchange will 
promptly initiate delisting procedures.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, to protect investors 
and the public interest and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. 
Specifically, Amex believes the proposed rule change is designed to 
increase investor protection by promoting accountability, transparency 
and integrity by listed companies.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or received.

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 Phlx 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.

[[Page 59673]]

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 Phlx. All 
submissions should refer to File No. SR-Phlx-2003-51 and should be 
submitted by November 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26101 Filed 10-15-03; 8:45 am]
BILLING CODE 8010-01-P