[Federal Register Volume 68, Number 208 (Tuesday, October 28, 2003)]
[Notices]
[Pages 61494-61499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27097]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48668; File No. SR-BSE-2003-07]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Boston Stock Exchange, Inc. To Amend Its Listed 
Securities Requirements Relating to the Mandatory Establishment of 
Independent Audit Committees for All Listed Issuers

October 21, 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 16, 2003, the Boston Stock Exchange, Inc. (``BSE'' 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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add new requirements concerning audit 
committees to its Listed Securities Requirements in Chapter XXVII of 
the Rules of the Board of Governors of the BSE (``BSE Rules''). The 
Exchange states that the proposed rule change will address the 
requirements of Rule 10A-3 under the Act relating to the mandatory 
establishment of independent audit committees for all listed 
issuers.\3\ The text of the proposed rule change is below. Text in 
italics indicates material to be added.
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    \3\ 17 CFR 240.10A-3.
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* * * * *

Chapter XXVII

Listed Securities--Requirements

    Sec. 1-9. No change.

Sec. 10. Corporate Governance

    A. Audit Committees: All issuers with securities listed on the 
Boston Stock Exchange will be required to establish an independent 
audit committee that shall be defined as: `` An independent committee 
(or equivalent body) established by and amongst the board of directors 
of an issuer for the purpose of overseeing the accounting and financial 
reporting processes of the Company and audits of the financial 
statements of the Company; and if no such body exists with respect to 
the Company, the entire board of directors.'' All issuers with 
securities listed on the Boston Stock Exchange shall comply with the 
following rules:
    1. Required Standards for Audit Committee Pursuant to SEC Rule 10A-
3:
    (a) Pursuant to section 10A(m) of the Act (15 U.S.C. 78j-1(m)) and 
section 3 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7202):
    (1) National securities exchanges. The rules of each national 
securities exchange registered pursuant to section 6 of the Act (15 
U.S.C. 78f) must, in accordance with the provisions of this section, 
prohibit the initial or continued listing of any security of an issuer 
that is not in compliance with the requirements of any portion of 
paragraph (b) or (c) of this section.
    (2) National securities associations. The rules of each national 
securities association registered pursuant to section 15A of the Act 
(15 U.S.C. 78o-3) must, in accordance with the provisions of this 
section, prohibit the initial or continued listing in an automated 
inter-dealer quotation system of any security of an issuer that is not 
in compliance with the requirements of any portion of paragraph (b) or 
(c) of this section.
    (3) Opportunity to cure defects. The rules required by paragraphs 
(a)(1) and (a)(2) of this section must provide for appropriate 
procedures for a listed issuer to have an opportunity to cure any 
defects that would be the basis for a prohibition under paragraph (a) 
of this section, before the imposition of such prohibition. Such rules 
also may provide that 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 applicable national securities exchange or 
national securities association, 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.
    (4) Notification of noncompliance. The rules required by paragraphs 
(a)(1) and (a)(2) of this section must include a requirement that a 
listed issuer must notify the applicable national securities exchange 
or national securities association 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.
    (5) Implementation.
    (i) The rules of each national securities exchange or national 
securities association meeting the requirements of this section must be 
operative, and listed issuers must be in compliance with those rules, 
by the following dates:
    (A) July 31, 2005 for foreign private issuers and small business 
issuers (as defined in Sec.  240.12b-2); 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.
    (ii) Each national securities exchange and national securities 
association must provide to the Commission, no later than July 15, 
2003, proposed rules or rule amendments that comply with this section.
    (iii) Each national securities exchange and national securities 
association must have final rules or rule amendments that comply with 
this section approved by the Commission no later than December 1, 2003.
    (b) Required standards.
    (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.
    (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

[[Page 61495]]

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, unless the rules of the national securities exchange or 
national securities association provide otherwise, 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 subsidiary thereof, 
provided that, unless the rules of the national securities exchange or 
national securities association provide otherwise, 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 (15 U.S.C. 80a-
2(a)(19)).
    (iv) Exemptions from the independence requirements.
    (A) For an issuer listing securities pursuant to a registration 
statement under section 12 of the Act (15 U.S.C. 78l), or for an issuer 
that has a registration statement under the Securities Act of 1933 (15 
U.S.C. 77a et seq.) 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 (15 U.S.C. 78m(a) or 78o(d)):
    (1) All but one 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 90 days from the date of effectiveness 
of such registration statement; 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, the Commission may exempt from the requirements of paragraphs 
(b)(1)(ii) or (b)(1)(iii) of this section a particular relationship 
with respect to audit committee members, as the Commission determines 
appropriate in light of the circumstances.
    (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 securities that is 
listed on a national securities exchange or national securities 
association subject to the requirements of this section, the listing of 
other classes of securities of the listed issuer on a national 
securities exchange or national securities association is not subject 
to the requirements of this section.

[[Page 61496]]

    (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 this section, the listing 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 
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 (15 U.S.C. 
78q-1) 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 Sec.  
240.9b-1(a)(4), issued by a clearing agency that is registered pursuant 
to section 17A of the Act (15 U.S.C. 78q-1) 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 Sec.  240.13a-14(g) and 
Sec.  240.15d-14(g));
    (ii) Unit investment trusts (as defined in 15 U.S.C. 80a-4(2)); and
    (iii) Foreign governments (as defined in Sec.  240.3b-4(a)).
    (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) Disclosure. Any listed issuer availing itself of an exemption 
from the independence standards contained in paragraph (b)(1)(iv) of 
this section (except paragraph (b)(1)(iv)(B) of this section), the 
general exemption contained in paragraph (c)(3) of this section or the 
last sentence of paragraph (a)(3) of this section, must:
    (1) Disclose its reliance on the exemption and its assessment of 
whether, and if so, how, such reliance would materially adversely 
affect the ability of the audit committee to act independently and to 
satisfy the other requirements of this section in any proxy or 
information statement for a meeting of shareholders at which directors 
are elected that is filed with the Commission pursuant to the 
requirements of section 14 of the Act (15 U.S.C. 78n); and
    (2) Disclose the information specified in paragraph (d)(1) of this 
section in, or incorporate such information by reference from such 
proxy or information statement filed with the Commission into, its 
annual report filed with the Commission pursuant to the requirements of 
section 13(a) or 15(d) of the Act (15 U.S.C. 78m(a) or 78o(d)).
    (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

[[Page 61497]]

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 Sec.  
240.3b-7.
    (7) The term foreign private issuer has the meaning set forth in 
Sec.  240.3b-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 system of a national securities association or to issuers of 
such securities. Instructions to Sec.  240.10A-3.
    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 Instruction 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 Sec.  240.13d-3.
    2. Compliance:
    (a) Certification: Initially, issuers listed on the Boston Stock 
Exchange or issuers applying for listing on the Exchange shall submit a 
statement indicating compliance with this Rule by the dates of 
effectiveness indicated below, and annually thereafter, in conjunction 
with the filing of the issuer's annual audited financial statement. 
Such issuers shall inform the Exchange promptly in the event of any of 
the following:
    (1) A change in membership of any member of the audit committee, 
and a statement indicating compliance with this Rule as it pertains to 
any new member of such committee;
    (2) Any event that would materially alter the independence of the 
audit committee or otherwise violate any of the Rules set forth herein 
or SEC Rule 10A-3;
    (3) Any amendment to the corporate charter of the issuer having any 
effect on the issuer's audit committee;
    (4) Upon the issuers executive officer becomes aware of 
noncompliance by the issuer with any part of this Rule; and
    (5) Any reliance upon any exemption or exclusion from this Rule.
    (b) Response to Exchange Inquiries: Listed companies shall promptly 
respond to any inquiry by the Exchange regarding the companies' audit 
committee, its independence, or the members thereof.
    (c) Enforcement and Opportunity To Cure Defects: A listed issuer 
that has been deemed not in compliance with this Rule shall be given 
notice of such non-compliance and given thirty (30) days from the time 
of notice to either rectify the matter or submit a plan of resolution 
in writing to the Exchange. Upon submission of such, the Exchange shall 
determine whether the issuer into complied with this Rule or will 
comply within a reasonable time, not to exceed six months. If a member 
of a listed issuer's audit committee ceases to be independent as set-
forth herein, such issuer may request, in writing, that such member 
remain on the audit committee 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, provided however, that 
the event that caused non-independence was outside such member's 
reasonable control. In the event that the issuer fails to so comply, 
the Exchange shall take the following measures:
    (1) Thirty (30) days after notice of non-compliance: all securities 
of the issuer listed on the Exchange shall be suspended from trading 
pending resolution of the matter.
    (2) Sixty (60) days after notice of suspension: all securities of 
the issuer listed on the Exchange, shall be involuntarily delisted from 
the Exchange.
    (d) Effectiveness: Small business issuers and foreign private 
issuers must be in compliance with the provisions of this Section 10A 
by July 31, 2005. All other issuers listed on the Exchange must be in 
compliance with this Rule no later than the earlier of the issuer's 
first annual shareholders meeting after January 15, 2004, or in no case 
later than October 31, 2004.
    B. (Reserved for Future Rules Relating to Corporate Governance 
Standards).
* * * * *

[[Page 61498]]

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The BSE states that the purpose of the proposed rule change is to 
add a rule to its Listed Securities Requirements in Chapter XXVII of 
the BSE Rules to address the requirements of Rule 10A-3 under the Act 
\4\ relating to the mandatory establishment of independent audit 
committees for all listed issuers. Specifically, under the Exchange's 
proposed rule, the Exchange will be prohibited from listing, or 
continuing to list, any issuer that is not in compliance with certain 
requirements by July 31, 2005 for foreign private issuers and small 
business issuers, and the earlier of the first annual shareholders 
meeting after January 15, 2004, but in no case later than October 31, 
2004 for all other issuers.
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    \4\ 17 CFR 240.10A-3.
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    First, listed issuers will be required to establish an audit 
committee that shall be defined as: ``An independent committee (or 
equivalent body) established by and amongst the board of directors of 
an issuer for the purpose of overseeing the accounting and financial 
reporting processes of the Company and audits of the financial 
statements of the Company; and if no such body exists with respect to 
the Company, the entire board of directors.'' For the purposes of this 
rule, an audit committee member shall not be considered independent if: 
(1) such member accepts, either directly or indirectly, any consulting, 
advisory, or other compensatory fee from the issuer; or (2) is an 
affiliated person of the issuer or any subsidiary thereof.
    Second, audit committees of listed issuers 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. Further, each audit committee must establish procedures for 
the receipt, retention and treatment of the 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. To such end, each audit committee must have the authority to 
engage independent counsel and other advisors, as it determines 
necessary to carry out its duties, and each issuer must provide 
adequate funding for the audit committee.
    The Exchange notes that this filing is restricted to the audit 
committee rules required by Rule 10A-3 under the Act.\5\ The Exchange 
intends to file additional proposed rule changes relating to other 
corporate governance listing standards.\6\ The Exchange is confident 
that the steps outlined above demonstrate a commitment to corporate 
governance and restoration of investor confidence to the U.S. 
securities markets. In particular, the Exchange believes that the rules 
outlined above will foster independent and vigilant audit committees 
with meaningful authority. In turn, these audit committees will ensure 
that investors receive accurate and reliable corporate financial 
information from BSE listed companies. The Exchange believes that such 
information is not only fundamental to the liquidity and vibrancy of 
the markets, but will also serve to restore confidence in the national 
market system.
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    \5\ See Securities Act Release No. 8220, Securities Exchange Act 
Release No. 47654, and Investment Company Act Release No. 26001 
(April 9, 2003), 68 FR 18788 (April 16, 2003).
    \6\ Telephone conversation between Anthony Stankiewicz, Vice-
President and Corporate Secretary, BSE, and Ira L. Brandriss, 
Special Counsel, Division of Market Regulation, Commission, on 
October 21, 2003.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \8\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
and, in general, to protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change, as amended, that 
are filed with the Commission, and all written communications relating 
to the proposed rule change, as amended, 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 BSE. All submissions should refer to 
file number SR-BSE-2003-07 and should be submitted by November 18, 
2003.

[[Page 61499]]

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27097 Filed 10-27-03; 8:45 am]
BILLING CODE 8010-01-P