[Federal Register Volume 68, Number 208 (Tuesday, October 28, 2003)]
[Notices]
[Pages 61500-61507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27135]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48669; File No. SR-CHX-2003-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated To Amend Certain 
Provisions of Its Rules Relating to the Governance of Issuers That List 
Securities on the Exchange

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 23, 2003, the Chicago Stock Exchange, Incorporated (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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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 amend certain provisions of its rules 
relating to the governance of issuers that list securities on the CHX. 
Specifically, the CHX seeks to amend its Tier I and Tier II listing 
standards to enhance its requirements relating to the roles and 
responsibilities of independent directors and independent board 
committees, including audit committees, nominating committees and 
compensation committees. The Exchange also seeks to amend its 
maintenance standards to set out a process that would allow an issuer 
an opportunity to cure a failure to meet the Exchange's maintenance 
listing standards, including its governance-related standards. The text 
of the proposed rule change is below.\3\ Text in brackets indicates 
material to be deleted, and text in italics indicates material to be 
added.
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    \3\ The rule text as set forth herein includes several minor 
technical revisions that the Exchange has committed to correct by 
filing an amendment. Telephone conversation between Kathleen M. 
Boege, Vice-President and Associate General Counsel, CHX, and Ira L. 
Brandriss, Special Counsel, Division of Market Regulation 
(``Division''), Commission, on October 10, 2003.
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* * * * *
Chicago Stock Exchange Rules
ARTICLE XXVIII
Listed Securities
* * * * *
Maintenance Standards Applicable to All Tier I Issues
    RULE 17A. The Exchange reserves the right to delist the securities 
of any corporation, subject to Securities and Exchange Commission 
Rules, which engages in practices not in the public interest or whose 
assets have been depleted to the extent that the company can no longer 
operate as a going concern or whose securities have become so closely 
held that it is no longer feasible to maintain a reasonable market in 
the issue. Furthermore, the Exchange reserves the right to delist the 
securities of any corporation which has drastically changed its 
corporate structure and/or its type of operation. The Exchange may also 
make an appraisal of, and determine on an individual basis, the 
suitability for continued listing of an issue in the light of all 
pertinent facts whenever it deems such action appropriate, even though 
a security meets enumerated criteria (including, but not limited to, 
continued listing on the NYSE, Amex or Nasdaq National Market). Many 
factors may be considered in this connection, including, but not 
limited to, abnormally low selling price or volume of trading, or 
failure to comply with required corporate governance standards.
* * *Interpretations and Policies
    If the Exchange identifies a Tier I issue as being below the 
Exchange's maintenance listing requirements, the Exchange will notify 
the issuer by letter of its determination and the reasons for that 
determination. In this letter, the Exchange will provide the issuer 
with an opportunity to provide the Exchange with a plan (the ``Plan'') 
to cure the deficiency. Within 10 business days of the receipt of the 
Exchange's letter, the issuer must contact the Exchange to confirm its 
receipt of the letter and to report to the Exchange whether or not the 
issuer intends to present a Plan. If the issuer notifies the Exchange 
that it does not intend to present a Plan, the

[[Page 61501]]

Exchange will commence proceedings to suspend and/or delist the issue.
    The issuer must present any Plan within 45 days after its receipt 
of the Exchange's letter. The Plan must describe definitive action that 
the issuer has taken, or is taking, that would bring it into conformity 
with the Exchange's maintenance listing requirements within 18 months 
of receipt of the letter, or within any shorter time period required by 
the Exchange. (The Exchange will not approve any Plan, under which an 
issuer is curing a deficiency under SEC Rule 10A-3, which extends 
beyond the earlier of 12 months or the first annual shareholders' 
meeting (for circumstances beyond the reasonable control of an issuer) 
and 6 months (for other circumstances)). The Plan also must set 
quarterly milestones against which the Exchange will evaluate its 
progress. Exchange staff will evaluate the Plan and determine whether 
the issuer has made a reasonable demonstration in the Plan of an 
ability to come into compliance with the Exchange's maintenance listing 
requirements. The Exchange will notify the issuer of its determination 
within 45 days after receipt of the Plan. If the Exchange does not 
accept the Plan, it will commence proceedings to suspend and/or delist 
the issue.
    If the Exchange accepts the Plan, the Exchange will review the 
issuer on a quarterly basis to determine the issuer's progress under 
the Plan. If the issuer fails to meet a material provision of the Plan 
or one or more of its quarterly milestones, the Exchange will review 
the facts and circumstances and determine whether to initiate 
proceedings to suspend and/or delist the issue; provided however, that 
if an issuer fails to meet a material provision of the Plan that 
relates to compliance with its obligations under SEC Rule 10A-3, the 
Exchange will immediately commence proceedings to suspend and/or delist 
the issue. If, for circumstances that do not involve compliance with 
SEC Rule 10A-3, the Exchange determines that continued listing is 
warranted, the Exchange will continue to review the issuer's progress 
under the Plan on at least a quarterly basis. If the issuer achieves 
compliance with the Exchange's maintenance listing requirements before 
the Plan expires under its terms, the Exchange may choose to consider 
the Plan ended as of that earlier date.
    If an issuer, within one year after the termination of a Plan, is 
again determined to have failed to meet the Exchange's maintenance 
listing requirements, the Exchange will review the facts and 
circumstances (including whether the issuer has fallen into non-
compliance with the same standards at issue in its earlier Plan) and 
will take appropriate action, which could include, but its not limited 
to, shortening the time periods associated with the submission of any 
new Plan or immediately commencing proceedings to suspend and/or delist 
the issue.
    These procedures do not prevent the Exchange from suspending 
trading in an issue immediately, whenever it finds that it is necessary 
to do so for the protection of investors.
* * * * *
Tier I Corporate Governance and Disclosure Standards
Corporate Governance
    RULE 19. The following Rule 19 applies [only] to Tier I issuers:
    (a) Board of Directors.
    (1) General Rule. Each issuer shall maintain a board of directors 
consisting of a majority of independent directors; however, each small 
business issuer shall be required only to maintain a board of directors 
consisting of at least 50% independent directors. Independent directors 
must have regularly scheduled meetings at which only independent 
directors are present.
    (2) Exceptions. A controlled company is exempt from the 
requirements of this paragraph (a).
    (b) Audit Committee. Each issuer shall establish and maintain an 
audit committee, of at least three persons, that meets the following 
standards.
    (1) Audit Committee Composition
    (A) Each member of the audit committee: (i) Must be an independent 
director as defined in subparagraph (o) below; (ii) must meet the 
criteria for independence set forth in SEC Rule 10A-3; and (iii) must 
be able to read and understand fundamental financial statements, 
including a company's balance sheet, income statement and cash flow 
statement.
    (B) Exceptions.
    (i) One director who is not independent, but who meets the criteria 
set forth in SEC Rule 10A-3 and who is not a current officer or 
employee (or an immediate family member of a current officer or 
employee) may be appointed to the audit committee, if the issuer's 
board under exceptional and limited circumstances, determines that 
membership on the committee by the individual is required by the best 
interests of the corporation and its shareholders, and the board 
discloses, in the next annual proxy statement subsequent to such 
determination, the nature of the relationship and the reasons for that 
determination. A member appointed under this exception may not serve on 
the audit committee for more than two years under this exception 
(unless he or she ultimately satisfies the definition of an independent 
director) and may not chair the audit committee.
    (ii) If a member of an audit committee ceases to meet the 
independence criteria set forth in SEC Rule 10A-3 for reasons outside 
the person's reasonable control, that person may remain a member of the 
committee until the earlier of the next annual shareholders' meeting or 
one year from the occurrence of the event that caused the member to no 
longer meet the independence criteria. The issuer must promptly notify 
the Exchange if this circumstance occurs.
    (iii) A small business issuer is only required to maintain an audit 
committee of at least two (not three) independent directors, but is 
otherwise required to comply with the provisions of this paragraph 
(b)(1).
    (2) Audit Committee Responsibilities and Authority. The audit 
committee must have, at a minimum, (A) the responsibilities and 
authority set forth in SEC Rule 10A-3; and (B) the obligation to 
conduct an appropriate review of all related party transactions on an 
ongoing basis and to review potential conflict of interest situations 
where appropriate.
    (3) Audit Committee Charter. Each issuer must certify that it has 
adopted a formal written audit committee charter and that the audit 
committee has reviewed and reassessed the adequacy of the formal 
written charter on an annual basis. The charter must specify:
    (A) the committee's purpose--which, at a minimum, must be to:
    (i) assist board oversight of (a) the integrity of the company's 
financial statements, (b) the company's compliance with legal and 
regulatory requirements, (c) the independent auditor's qualifications 
and independence, and (d) the performance of the company's internal 
auditors and independent auditors; and
    (ii) prepare the required report to be included in the company's 
annual proxy statement or, if the company does not file a proxy 
statement, in the company's annual report; and
    (B) the duties and responsibilities of the audit committee, which 
must, at a minimum, include (i) all duties and responsibilities that 
are set out in SEC Rule 10A-3 and section 303A(7)(c) and (d) of the 
Sarbanes-Oxley Act; and (ii) the obligation to conduct an appropriate 
review of all related party transactions on an ongoing basis and to 
review

[[Page 61502]]

potential conflict of interest situations where appropriate.
    (c) Nominating Committee
    (1) General Rule. The nomination of the issuer's directors shall be 
determined either by (A) a majority of the independent directors; or 
(B) a nominating committee comprised solely of independent directors.
    (2) Exceptions.
    (A) If the nominating committee is comprised of at least three 
persons, one director, who is not independent, but who is not a current 
officer or employee (or an immediate family member of a current officer 
or employee), may be appointed to the nominating committee if the 
issuer's board, under exceptional and limited circumstances, determines 
that such individual's membership on the committee is required by the 
best interests of the company and its shareholders, and the board 
discloses, in the next annual meeting proxy statement subsequent to 
such determination, the nature of the relationship and the reasons for 
the determination. A member appointed under this exception may not 
serve longer than two years (unless he or she ultimately satisfies the 
definition of an independent director).
    (B) Alternatively, if the nominating committee is comprised of at 
least three persons, and if the exception described in paragraph (c)(2) 
above is not relied upon, one director who owns 20% of more of the 
company's common stock or voting power outstanding, and is not 
independent because that director is also an officer, may be appointed 
to the nominating committee if the issuer's board determines that such 
individual's membership on the committee is required by the best 
interests of the company and its shareholders, and the board discloses, 
in the next annual meeting proxy statement subsequent to such 
determination, the nature of the relationship, and the reasons for the 
determination.
    (C) A controlled company is exempt from the requirements of this 
paragraph (c).
    (D) If a company is legally required by contract or otherwise to 
provide third parties with the ability to nominate directors (for 
example, preferred stock rights to elect directors upon a dividend 
default, shareholder agreements and management agreements), the 
selection and nomination of those directors need not be subject to the 
nominating committee process.
    (d) Compensation Committee.
    (1) Compensation of the issuer's chief executive officer shall be 
determined either by (A) a majority of the independent directors 
meeting in executive session or (B) a compensation committee comprised 
solely of independent directors meeting in executive session.
    (2) Compensation of all other officers, as that term is defined in 
section 16 of the Act, shall be determined either by (A) a majority of 
the issuer's independent directors or (B) a compensation committee 
comprised solely of independent directors. The chief executive officer 
may be present during deliberations regarding compensation of other 
officers, but may not vote.
    (3) Exceptions.
    (A) If the compensation committee is comprised of at least three 
persons, one director who is not independent and is not a current 
officer or employee (or an immediate family member or a current officer 
or employee), may be appointed to the compensation committee if the 
issuer's board, under exceptional and limited circumstances, determines 
that such individual's membership on the committee is required by the 
best interests of the company and its shareholders, and the board 
discloses, in the next annual meeting proxy statement subsequent to 
such determination, the nature of the relationship and the reasons for 
the determination. A member appointed under this exception may not 
serve longer than two years (unless he or she ultimately satisfies the 
definition of an independent director).
    (B) A controlled company is exempt from the requirements of this 
paragraph (d).
    (e) Code of Business Conduct and Ethics. Each issuer shall adopt a 
code of conduct and ethics applicable to all directors, officers and 
employees that complies with the requirements of section 406(c) of the 
Sarbanes-Oxley Act and the rules thereunder. Waivers of the code's 
provisions for directors and executive officers must be approved by the 
issuer's board of directors. The issuer must make this code publicly 
available and must disclose, in its public filings, waivers of the code 
for directors or executive officers.
    (f) Governance-Related Certifications.
    (1) Annual Certification. Each issuer's chief executive officer 
annually must certify to the Exchange that he or she is not aware of 
any violation by the issuer of the standards set out in paragraphs (a) 
through (e) of this rule.
    (2) Interim Certifications. Each issuer's chief executive officer 
must promptly notify the Exchange after any executive officer of the 
issuer becomes aware of any material non-compliance by the issuer with 
the standards set out in paragraphs (a) through (e) of this rule.
    [(a)] (g) Annual Reports. No change to text.
    [(b)] (h) Quarterly Reports. No change to text.
    [(c)] (i) Other Reports. No change to text.
    [(d) Each listed company shall establish and maintain an Audit 
Committee, a majority of the members of which shall be independent 
directors, as defined below.]
    [(e) Each listed company shall maintain a minimum of two 
independent directors on its board of directors. For purposes of this 
section, ``independent director'' shall mean 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.]
    [(f)] (j) Annual Meeting. No change to text.
    [(g)] (k) Proxy Solicitations. No change to text.
    [(h) Each issuer shall conduct an appropriate review of all related 
party transactions on an ongoing basis and shall use the company's 
audit committee or a comparable body for the review of potential 
conflict of interest situations where appropriate.]
    [(i)] (l) Stock Certificates. No change to text.
    [(j)] (m) Shareholder Approval of Employee Stock Option Plans. No 
change to text.
    [(k)] (n) Stock Transfer Facilities. No change to text.
    (o) Definitions. For purposes of this Article XXVIII, unless the 
context requires otherwise:
    (1) ``Controlled company'' means a company of which more than 50% 
of the voting power is held by an individual, a group or another 
company.
    (2) ``Immediate family member'' includes a person's spouse, 
parents, children, siblings, mothers and fathers-in-law, sons and 
daughters-in-law, brothers and sisters-in-law and any person who has 
the same residence.
    (3) ``Independent director'' means a person other than an officer 
or employee of the issuer or its subsidiaries or any other individual 
having a relationship, which, in the opinion of the issuer's board of 
directors, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director. The following persons 
shall not be considered independent:
    (A) A director who is, or during the past three years was, employed 
by the

[[Page 61503]]

issuer or by any parent or subsidiary of the issuer;
    (B) A director who accepts or who has an immediate family member 
who accepts any payments from the issuer or any parent or subsidiary of 
the issuer in excess of $60,000 during the current fiscal year or any 
of the past three fiscal years, other than compensation for board 
service, payments arising solely from investments in the issuer's 
securities, compensation paid to an immediate family member who is an 
employee of the issuer or a parent or subsidiary of the issuer (but not 
if such person is an executive officer of the company or any parent or 
subsidiary of the company), benefits under a tax-qualified retirement 
plan, or non-discretionary compensation;
    (C) A director who is an immediate family member of an individual 
who is, or during the past three years was employed by the issuer or by 
any parent or subsidiary of the issuer as an executive officer;
    (D) A director who is a partner in, or a controlling shareholder or 
an executive officer of, any organization to which the issuer made, or 
from which the issuer received, payments (other than those arising 
solely from investments in the company's securities) that exceed 5% of 
the recipient's consolidated gross revenues for that year, or $200,000, 
whichever is more, in the current fiscal year or any of the past three 
fiscal years;
    (E) A director of the issuer who is employed as an executive 
officer of another entity where any of the executive officers of the 
issuer serve on the compensation committee of such other entity, or if 
such relationship existed during the past three years; or
    (F) A director who is or was a partner or employee of the issuer's 
outside auditor, and worked on the issuer's audit, during the past 
three years.
    (4) ``Sarbanes-Oxley Act'' means the Sarbanes-Oxley Act of 2002.
    (5) ``Small business issuer'' means any issuer that meets the 
definition of that term set out in SEC Rule 12b-2.

* * * Interpretations and Policies

    .01 No change to text.
    .02 Controlled Companies. If an issuer relies on a controlled 
company exemption from the requirements of paragraphs 19(a), 19(c) or 
19(d), above, it must disclose in its annual meeting proxy statement 
that it is a controlled company and provide the basis for that 
determination.
    .03 General Exemptions from Governance Rules. The requirements of 
this rule do not apply to the following entities, as described below:
    (1) Limited partnerships and companies in bankruptcies are not 
required to comply with sections (a), (c) and (d) above.
    (2) Closed-end management companies are not required to comply with 
any provision of this rule other than section (b) above and are only 
required to comply with that provision to the extent required by SEC 
Rule 10A-3.
    (3) Passive business organizations (such as royalty trusts) or 
derivatives and special purpose entities that are exempt from the 
requirements of SEC Rule 10A-3 are not subject to any requirement under 
this rule.
    (4) Foreign issuers will be permitted to comply with their home 
country practices with respect to corporate governance (and thus are 
exempt from the requirements of sections (a)-(f), above), except to the 
extent that SEC Rule 10A-3 requires compliance with specific audit 
committee requirements.
    (5) Issuers listing only preferred or debt securities on the 
Exchange typically will not be required to adhere to the requirements 
set out in sections (a)-(f) because they will be subject to the 
multiple listing exception described in Interpretation .04, below. To 
the extent required by SEC Rule 10A-3, these issuers will only be 
required to comply with section (b) above.

    .04 Dual and Multiple Listings. 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 requirements substantially 
similar to those set forth in sections (a)-(d) above, and that class of 
security has not been suspended from trading on that market, the issuer 
shall not be required to separately meet the requirements set forth in 
sections (a)-(d) above with respect to that class of securities or any 
other class of securities. Governance requirements of other markets 
will be considered to be substantially similar to the requirements of 
sections (a)-(d) above if they are adopted by the New York Stock 
Exchange, the American Stock Exchange or the National Association of 
Securities Dealers (for the Nasdaq National Market or Small Cap Market) 
or if they otherwise require, subject to exceptions approved by the 
Commission, that the issuer maintain (1) a board of directors, a 
majority of whom are independent directors (50% of whom are independent 
directors, for a small business issuer); (2) an audit committee, 
consisting of at least three persons (two persons, for a small business 
issuer), all of whom are independent directors who meet the 
requirements of SEC Rule 10A-3; (3) a written audit committee charter 
that provides information about the committee's duties and 
responsibilities; (4) a nominating committee or other body, a majority 
of whom are independent directors; and (5) a compensation committee or 
other body, a majority of whom are independent directors.
    Similarly, when an issuer has a class of securities that is listed 
on a national securities exchange or national securities association 
subject to requirements substantially similar to those set forth in 
sections (a)-(d) above, and that class of security has not been 
suspended from trading on that market, a direct or indirect 
consolidated subsidiary of the issuer, or an at least 50% beneficially-
owned subsidiary of the issuer, shall not be required to separately 
meet the requirements set forth in sections (a)-(d) above with respect 
to any class of securities it issues, except classes of equity 
securities (other than non-convertible, non-participating preferred 
securities) of such subsidiary.
    .05 Transition Periods and Compliance Dates. Sections (a)-(f) will 
become effective pursuant to the following schedule:
    (1) The audit committee requirements mandated by SEC Rule 10A-3 
(and the exception set out in section (b)(1)(B)(ii) in this rule) will 
become effective as set out in Rule 10A-3.
    (2) The other requirements of sections (a)-(f) will become 
effective two years after the date that they are approved by the 
Commission. If an issuer has a board with staggered terms, and a change 
is required with respect to a director whose term does not apply within 
this two-year period, the issuer will have an additional year to comply 
with the requirements of section (a).
    (3) Except as otherwise required by SEC Rule 10A-3, an issuer 
listing securities on the Exchange in connection with an initial public 
offering or transferring from another marketplace that does not have 
governance standards substantially similar to the standards set out in 
sections (a)-(f), above, will be required to comply with sections (a)-
(f) within two years after listing on the Exchange. An issuer 
transferring from a market that does have governance standards 
substantially similar to those set out in sections (a)-(f) above must 
comply with those provisions at the time that they list; provided, 
however, that an issuer that transfers during another market's 
transition period to new governance standards will be allowed to comply 
with the Exchange's requirements

[[Page 61504]]

within any transition period that had been provided by the other 
marketplace.
* * * * *
Tier II Corporate Governance, Disclosure, and Miscellaneous 
Requirements
    RULE 21. The following Rule 21 applies only to Tier II issuers:
    (a) Each issuer shall comply with the governance requirements set 
out in Rule 19 (a)-(f) of this Article and is subject to 
Interpretations .02-.05 of that rule.
    [(1) Each listed company shall establish and maintain an Audit 
Committee, a majority of the members of which shall be independent 
directors.]
    [(2) Each listed company shall maintain a minimum of two 
independent directors on its board of directors. For purposes of this 
section, ``independent director'' shall mean 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.]
    ([3]b) Stock Certificates. No change to text.
    ([4]c) Changes to Listing Standards. No change to text.
* * * * *
Tier II Maintenance Standards
    RULE 22. (a) The Exchange reserves the right to delist the 
securities of any corporation, subject to Securities and Exchange 
Commission Rules, which engages in practices not in the public interest 
or whose assets have been depleted to the extent that the company can 
no longer operate as a going concern or whose securities have become so 
closely held that it is no longer feasible to maintain a reasonable 
market in the issue. Furthermore, the Exchange reserves the right to 
delist the securities of any corporation which has drastically changed 
its corporate structure and/or its type of operation. The Exchange may 
also make an appraisal of, and determine on an individual basis, the 
suitability for continued listing of an issue in the light of all 
pertinent facts whenever it deems such action appropriate, even though 
a security meets enumerated criteria (including, but not limited to, 
continued listing on the NYSE, Amex or Nasdaq National Market). Many 
factors may be considered in this connection, including, but not 
limited to, abnormally low selling price or volume of trading, or 
failure to comply with required corporate governance standards.
    (b)-(d) No change to text.

* * * Interpretations and Policies

    If the Exchange identifies a Tier II issue as being below the 
Exchange's maintenance listing requirements, the Exchange will notify 
the issuer by letter of its determination and the reasons for that 
determination. In this letter, the Exchange will provide the issuer 
with an opportunity to provide the Exchange with a plan (the ``Plan'') 
to cure the deficiency. Within 10 business days of the receipt of the 
Exchange's letter, the issuer must contact the Exchange to confirm its 
receipt of the letter and to report to the Exchange whether or not the 
issuer intends to present a Plan. If the issuer notifies the Exchange 
that it does not intend to present a Plan, the Exchange will commence 
proceedings to suspend and/or delist the issue.
    The issuer must present any Plan within 45 days after its receipt 
of the Exchange's letter. The Plan must describe definitive action that 
the issuer has taken, or is taking, that would bring it into conformity 
with the Exchange's maintenance listing requirements within 18 months 
of receipt of the letter, or within any shorter time period required by 
the Exchange. (The Exchange will not approve any Plan, under which an 
issuer is curing a deficiency under SEC Rule 10A-3, which extends 
beyond the earlier of 12 months or the first annual shareholders' 
meeting (for circumstances beyond the reasonable control of an issuer) 
and 6 months (for other circumstances)). The Plan also must set 
quarterly milestones against which the Exchange will evaluate its 
progress. Exchange staff will evaluate the Plan and determine whether 
the issuer has made a reasonable demonstration in the Plan of an 
ability to come into compliance with the Exchange's maintenance listing 
requirements. The Exchange will notify the issuer of its determination 
within 45 days after receipt of the Plan. If the Exchange does not 
accept the Plan, it will commence proceedings to suspend and/or delist 
the issue.
    If the Exchange accepts the Plan, the Exchange will review the 
issuer on a quarterly basis to determine the issuer's progress under 
the Plan. If the issuer fails to meet a material provision of the Plan 
or one or more of its quarterly milestones, the Exchange will review 
the facts and circumstances and determine whether to initiate 
proceedings to suspend and/or delist the issue; provided however, that 
if an issuer fails to meet a material provision of the Plan that 
relates to compliance with its obligations under SEC Rule 10A-3, the 
Exchange will immediately commence proceedings to suspend and/or delist 
the issue. If, for circumstances that do not involve compliance with 
SEC Rule 10A-3, the Exchange determines that continued listing is 
warranted, the Exchange will continue to review the issuer's progress 
under the Plan on at least a quarterly basis. If the issuer achieves 
compliance with the Exchange's maintenance listing requirements before 
the Plan expires under its terms, the Exchange may choose to consider 
the Plan ended as of that earlier date.
    If an issuer, within one year after the termination of a Plan, is 
again determined to have failed to meet the Exchange's maintenance 
listing requirements, the Exchange will review the facts and 
circumstances (including whether the issuer has fallen into non-
compliance with the same standards at issue in its earlier Plan) and 
will take appropriate action, which could include, but its not limited 
to, shortening the time periods associated with the submission of any 
new Plan or immediately commencing proceedings to suspend and/or delist 
the issue.
    These procedures do not prevent the Exchange from suspending 
trading in an issue immediately, whenever it finds that it is necessary 
to do so for the protection of investors.
* * * * *

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 CHX states that the purpose of the proposed rule change is to 
amend certain provisions of its rules relating to the governance of 
issuers that list securities on the Exchange. Specifically, the CHX 
seeks to amend its listing standards to enhance its requirements 
relating to the roles and responsibilities of independent directors and 
independent board committees

[[Page 61505]]

(including audit committees, nominating committees and compensation 
committees), which are set forth in CHX Article XXVIII, Rules 19 and 21 
(collectively, the ``CHX Governance Standards''). The proposed 
amendments to the CHX Governance Standards constitute a comprehensive 
group of significant changes to the Exchange's listing standards and 
are intended to enhance investor confidence by helping to ensure the 
independence of corporate directors and strengthening corporate 
governance practices. The Exchange believes that the additional 
proposed changes to the Exchange's maintenance listing standards, which 
are found in CHX Article XXVIII, Rules 17A and 22, will ensure 
continued compliance with the CHX Governance Standards, while also 
providing issuers an opportunity to cure failures to meet those (and 
other) on-going requirements.\4\
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    \4\ A few additional clerical changes are also made; these 
changes re-number the paragraphs within affected rules and add new 
headings for certain paragraphs.
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    These changes to the CHX Governance Standards and to the CHX's 
maintenance listing standards are designed to comply with the 
provisions of Section 10A(m) under the Act \5\ and SEC Rule 10A-3 
thereunder; \6\ they also include additional enhancements to the 
Exchange's governance requirements for listed companies.\7\ In most 
respects, the Exchange believes that proposed changes are substantially 
similar to governance changes proposed by the National Association of 
Securities Dealers, Inc. and the American Stock Exchange LLC.\8\ The 
Exchange also states that a few of the proposed changes--particularly 
those made to the CHX maintenance standards or incorporated within at 
least one new definition--mirror existing rules or proposals of the New 
York Stock Exchange, Inc. (``NYSE'').\9\
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    \5\ 15 U.S.C. 78j-1(m).
    \6\ 17 CFR 10A-3. The Commission notes that the CHX intends to 
amend the proposed rule change to fully conform with SEC Rule 10A-3. 
Telephone conversation between Kathleen M. Boege, Vice-President and 
Associate General Counsel, CHX, and Ira L. Brandriss, Special 
Counsel, Division, Commission, on October 10, 2003.
    \7\ The Commission notes that the CHX will consider amendments 
to the proposed rule change once the Commission approves proposals 
on corporate governance matters filed by other exchanges. Telephone 
conversation between Kathleen M. Boege, Vice-President and Associate 
General Counsel, CHX, and Ira L. Brandriss, Special Counsel, 
Division, Commission, on October 10, 2003.
    \8\ See Securities Exchange Act Release No. 47516 (March 17, 
2003), 68 FR 14451 (March 25, 2003) (SR-NASD-2002-141) and SR-Amex-
2003-65.
    \9\ See Securities Exchange Act Release No. 47672 (April 11, 
2003), 68 FR 19051 (April 17, 2003) (SR-NYSE-2002-33) and NYSE 
Listed Company Manual Section 802.
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    The CHX Governance Standards will apply to all companies listing 
common stock on the Exchange, with particular exemptions for controlled 
companies, limited partnerships, companies in bankruptcy, closed-end 
management companies and foreign issuers. Under proposed Article 
XXVIII, Rule 19, Interpretation and Policy .03, passive business 
organizations (such as royalty trusts) will not be subject to these 
standards, nor will the standards apply to derivatives or special 
purpose securities, if those entities and securities are exempt from 
the requirements of Rule 10A-3 under the Act.\10\ Under proposed 
Article XXVIII, Rule 19, Interpretation and Policy .04, additional 
exemptions will exist for dual and multiple listings, where the same or 
another class of security of the company is already listed on another 
national securities exchange or national securities association that 
has similar governance-related requirements. The proposed CHX 
Governance Standards will apply to companies that list securities under 
Tier I or Tier II of the CHX's listing standards.
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    \10\ 17 CFR 240.10A-3.
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    Summarized below are the principal categories of change to the CHX 
Governance Standards.

Definition of ``Independence''

    The Exchange believes that it is critical for investors to have 
confidence that an individual serving as an independent director does 
not have any relationship with the issuer (or its officers) that would 
impair the director's independence. Accordingly, in addition to the 
existing CHX rule language, which generally precludes any relationship 
that would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director, the proposed 
amendments specifically identify six categories of persons who shall 
not be considered independent under proposed CHX Article XXVIII, Rule 
19(o)(3).
    In general, persons who shall not be considered independent 
include: (i) A director employed by the issuer or its parent or 
subsidiary during the previous three years; (ii) a director who accepts 
(or who has immediate family members who accept) any payments from the 
issuer in excess of $60,000 during the current year or any of the past 
three fiscal years (other than compensation for board service, payments 
from investments in the issuer's securities, compensation to non-
executive family members, tax-qualified retirement benefits or non-
discretionary compensation); (iii) a director who is an immediate 
family member of an individual who is, or who served during the 
previous three years, as an executive officer of the issuer or its 
parent or subsidiary; (iv) a director who is a principal (i.e., a 
partner, controlling shareholder or executive officer) in any 
organization that received payments from the issuer, or that made 
payments to the issuer, exceeding 5% of the recipient's consolidated 
gross revenues for the year or $200,000, whichever, is greater; (v) a 
director who is an executive officer of another entity, if there is 
compensation committee overlap between the issuer and such entity 
currently or during the past three years; and (vi) a director who was a 
partner or employee of the issuer's outside auditor, and worked on the 
issuer's audit, during any of the past three years.
    Under proposed CHX Article XXVIII, Rule 19(o)(2), the proposed 
amendments define an immediate family member as a person's spouse, 
parents, children, siblings, mothers and fathers-in-law, sons and 
daughters-in-law, brothers and sisters-in-law and any person who has 
the same residence as the director in question.

Independent Board and Board Committees

    Through the exercise of independent judgment, independent directors 
act on behalf of investors to maximize shareholder value and guard 
against conflicts of interest. Accordingly, under proposed Article 
XXVIII, Rule 19(a), the proposed amendments require most issuers to 
maintain a majority of independent directors on their boards; small 
business issuers will be required to have boards consisting of at least 
50% independent directors. The proposed rule also requires regularly 
convened executive sessions of the independent directors. The Exchange 
states that regularly scheduled executive sessions will encourage and 
enhance communication among independent directors. A controlled company 
would be exempt from this requirement.\11\
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    \11\ Under the definition in proposed in CHX Article XXVIII, 
Rule 19(o)(1), a ``controlled company'' would mean a company of 
which more than 50% of the voting power is held by an individual, 
group or other company.
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    Under proposed CHX Article XXVIII, Rule 19(c), the nomination of 
the issuer's directors will be determined by independent directors. 
Independent director oversight of the director nomination process 
should enhance investor confidence in the selection of well-qualified 
director nominees. This

[[Page 61506]]

rule would not apply in cases where the right to nominate a director 
legally belongs to a third party.\12\
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    \12\ The rule incorporates other limited exceptions that would 
permit certain persons to serve on the nominating committee, if the 
issuer's board determines that a person's membership on the 
committee is required by the best interests of the company and its 
shareholders and the board discloses the nature of the relationship 
and the basis for its determination in the next annual meeting proxy 
statement following that determination. An issuer's chief executive 
officer would be permitted to participate in the deliberations 
relating to the compensation of other officers, but would not be 
allowed to vote.
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    The proposal under proposed CHX Article XXVIII, Rule 19(d) also 
contemplates independent director approval of the compensation of an 
issuer's officers.\13\ The Exchange believes this oversight will help 
ensure that appropriate executive incentives are in place, consistent 
with the board's responsibility to maximize shareholder value.
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    \13\ Controlled companies would be exempt from this requirement, 
and a specific exception would exist to allow certain persons to 
serve on the compensation committee in exceptional and limited 
circumstances.
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Audit Committee Requirements

    Under proposed CHX Article XXVIII, Rule 19(b), the proposed 
amendments would expand existing CHX requirements relating to audit 
committee composition and would include new requirements relating to 
that committee's role and authority. With very limited exceptions set 
forth in the proposed rule, each member of an issuer's audit committee: 
(i) Must be an independent director; (ii) must meet the criteria for 
independence set forth in SEC Rule 10A-3; and (iii) must be able to 
read and understand fundamental financial statements, including a 
company's balance sheet, income statement and cash flow statement.\14\
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    \14\ Nothing in the rule exempts an issuer from the requirements 
of section 10A(m) under the Act, 15 U.S.C. 78j-1(m), and Rule 10A-3 
thereunder.
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    The proposed amendment would require each issuer's audit committee 
to have the responsibilities and authority set out in SEC Rule 10A-3 
(and to act in accordance with those provisions) and to have a written 
charter to specify the audit committee's minimum purposes, duties and 
responsibilities, including those that are required by the SEC Rule and 
by the Sarbanes-Oxley Act.\15\ The written charter must be reviewed, 
and its adequacy must be reassessed on an annual basis by the audit 
committee.
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    \15\ Pub. L. 107-204, 116 Stat. 745 (2002).
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Code of Business Conduct and Ethics

    Under the proposed rules, each issuer would be required to adopt a 
code of conduct and ethics that applies to its directors, officers and 
employees and that meets the requirements of section 406(c) of the 
Sarbanes-Oxley Act. Under proposed CHX Article XXVIII, Rule 19(e), 
waivers of the code for directors and officers would need to be 
approved by the issuer's board of directors and be made publicly 
available.

Governance-Related Certifications

    Given the importance of the requirements set forth in the CHX 
Governance Standards, the proposed amendments contain a requirement 
that each issuer's chief executive officer certify, on an annual basis, 
that he or she is not aware of any violation by the issuer of any 
standard set forth in CHX Article XXVIII, Rules 19(a)-(e). Further, 
under proposed CHX Article XXVIII, Rule 19(f), such chief executive 
officer is required to promptly notify the Exchange if any executive 
officer of the issuer becomes aware of any material non-compliance by 
the issuer with those standards.

Changes to CHX Maintenance Standards

    For both Tier I and Tier II issuers under proposed CHX Article 
XVIII, Rules 17A and 22, the proposed amendments contemplate a process 
whereby the Exchange would provide non-compliant issuers with notice 
and an opportunity to cure the stated deficiency. These provisions 
would apply to situations in which an issuer fails to meet governance-
related standards, as well as those in which an issuer fails to meet 
other maintenance standards.
    In general, the proposed rule amendments would require the Exchange 
to notify a non-compliant issuer in writing of the Exchange's 
determination and the reasons for such determination. The issuer would 
then be required to respond within 10 business days to confirm its 
receipt of the letter and to advise the Exchange whether or not the 
issuer intends to submit a plan for curing the deficiency. Any plan 
must describe definitive action that the issuer has taken or is taking 
that would bring it into conformity with the Exchange's standards 
within 18 months, or within any shorter period of time required by the 
Exchange.\16\ The plan must be submitted within 45 days after receiving 
the Exchange's determination of deficiency. If the Exchange accepts the 
plan, the Exchange would assess the issuer's progress on a quarterly 
basis. If the Exchange does not accept the plan, the Exchange would 
initiate proceedings to suspend and/or delist the issue. While the plan 
is in effect, the Exchange could initiate proceedings to suspend and/or 
delist the issue if the issuer fails to meet a material provision of 
the plan or fails to meet quarterly milestones.
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    \16\ The proposed rule confirms that the Exchange would not 
accept a plan that is designed to cure a deficiency under SEC Rule 
10A-3 if the plan extends beyond the earlier of 12 months or the 
first annual shareholders' meeting (for circumstances beyond the 
reasonable control of an issuer) and 6 months (for other 
circumstances).
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    The foregoing procedures would not preclude the Exchange from 
taking immediate action to suspend trading in an issue, if such action 
is necessary for the protection of investors.

Application of Standards to Issuers With Dual or Multiple Listings

    Because the majority of the Exchange's issuers have securities that 
are also listed on one or more other markets, the Exchange has included 
a provision in its proposed rule amendments under proposed CHX Article 
XVIII, Rule 19, Interpretation and Policy .04 that would exempt such 
issuers from the CHX Governance Standards if the issuer is listed on a 
national securities exchange or national securities association with 
listing standards substantially similar to the CHX Corporate Governance 
Standards. The proposed rule text contains specific criteria that must 
be considered when determining whether another market's governance 
standards are ``substantially similar.''

Schedule for Effectiveness of Proposed Rule Changes

    The CHX anticipates that the proposed rule changes to CHX 
Governance Standards will become effective in accordance with the 
timetable set forth in proposed CHX Article XXVIII, Rule 19, 
Interpretation and Policy .05. In general, following Commission 
approval of the proposed rule changes: (i) The audit committee 
requirements mandated by Rule 10A-3 under the Act (and the exception 
set out in CHX Article XXVIII, Rule 19(b)(1)(B)(ii)) will become 
effective as set out in Rule 10A-3 for all issuers; (ii) the other CHX 
Governance Standards will become effective two years after they are 
approved by the Commission, with a one-year ``grace period'' for 
issuers with staggered term boards; and (iii) issuers listing on the 
Exchange in connection with an initial public offering or transferring 
from another marketplace with different governance standards will be 
required to comply with CHX Governance Standards within

[[Page 61507]]

two years after listing on the CHX.\17\ Changes to CHX Maintenance 
Standards will become effective upon Commission approval.
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    \17\ An issuer transferring to the CHX from another market with 
substantially similar governance standards must comply with such 
governance standards at the time the issuer lists with the CHX, or 
within any transition period that was provided by the other 
marketplace.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \18\ in general, and furthers the 
objectives of section 6(b)(5) of the Act \19\ in particular, because it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 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 solicited or received. The Exchange, 
however, did notify its issuers of the types of proposed rule changes 
that it was contemplating and has not received any objections to those 
proposals. One issuer's verbal comments `` seeking flexibility in the 
effective dates of, or the scope of the exceptions from, the proposals 
for the new independence requirements `` have been incorporated into 
the Exchange's rule proposal.

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 CHX. All submissions should refer to 
file number SR-CHX-2003-19 and should be submitted by November 18, 
2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27135 Filed 10-27-03; 8:45 am]
BILLING CODE 8010-01-P