[Federal Register Volume 68, Number 211 (Friday, October 31, 2003)]
[Notices]
[Pages 62146-62157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27409]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48700; File No. SR-PCX-2003-35]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. To 
Amend Its Corporate Governance and Disclosure Policies

October 24, 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 Pacific Exchange, Inc. (``PCX'' 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. On 
October 14, 2003, the Exchange filed an amendment to the proposal.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule

[[Page 62147]]

change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Steven B. Matlin, Senior Counsel, PCX, to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated October 8, 2003 (``Amendment No.1''). In Amendment 
No.1, the Exchange made changes to proposed rule text in PCX Rule 
5.3(k)(5)(B)(ii)(a).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through its wholly owned subsidiary, PCX Equities, 
Inc. (``PCXE''), is proposing to amend its Corporate Governance and 
Disclosure Policies. The Exchange states that these changes are aimed 
at helping to restore investor confidence by strengthening listed 
companies' corporate governance practices.\4\ The text of the proposed 
rule change, as amended, is set forth below.\5\ Text in brackets 
indicates material to be deleted, and text in italics indicates 
material to be added.\6\
---------------------------------------------------------------------------

    \4\ The Commission notes that the PCX will consider amendments 
to the proposed rule change once the Commission approves proposals 
on corporate governance matters filed by other exchanges. Telephone 
conversation between Steven B. Matlin, Senior Counsel, PCX, and Ira 
L. Brandriss, Special Counsel, Division of Market Regulation 
(``Division''), Commission, on October 23, 2003.
    \5\ 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 Steven B. 
Matlin, Senior Counsel, PCX, and Ira L. Brandriss, Special Counsel, 
Division, Commission, on October 23, 2003.
    \6\ The Commission notes that the PCX listing rules provide 
standards for the listing of two different tiers of securities, to 
which the proposed rule change makes reference. As stated in PCX 
Rule 5.2(b): ``A listing under the Tier I designation generally 
signifies that the company has achieved maturity and high status in 
its industry in terms of assets, earnings, and shareholder interest, 
and acceptance. The Tier II designation is limited, except for 
specific circumstances as discussed [earlier in the provision], to 
the listing of common stock, preferred stock, bonds and debentures, 
and warrants. A listing under the Tier II designation generally 
signifies that the company has limited commercial operations, lower 
capitalization, and lacks a demonstrated earnings history.''
---------------------------------------------------------------------------

* * * * *
PCX Equities, Inc.
Rule 5
Listings
    Rules 5.1-5.2-No change.
Section 3. Corporate Governance and Disclosure Policies
Corporate Governance and Disclosure Policies
    Rule 5.3 The Corporation shall require that specific corporate 
governance and disclosure policies be established by domestic issuers 
of any equity security listed pursuant to Rule 5.2. Issuers of 
securities under the Tier I designation must comply with the provisions 
of Rules 5.3(c)-(o). Issuers of securities under the Tier II 
designation must comply with the provisions of Rules 5.3(a)-(i)(4) and 
5.3(k)(5). Issuers of any security that is listed pursuant to the Rules 
of the Corporation must comply with the provisions of Rule 5.3(k)(5). 
[The Corporation, however, will not require an issuer of such security 
under the Tier II designations to comply with the provisions for an 
audit committee as set forth in this Rule 5.3(b).]
    Rule 5.3(a)--No change.
Independent Directors [/Audit Committee]
Rule 5.3(b). Independent Directors [/Audit Committee]
    The Corporation shall require that each listed domestic issuer have 
at least two independent directors on its board of directors. [Such 
issuer shall maintain an audit committee. All audit committee members 
shall be independent directors that satisfy the audit committee 
requirement set forth below.
    [(1) 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
    [(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.
    [(2) Composition/Expertise Requirement of Audit Committee Members.
    [(i) Each audit committee will consist of at least three 
independent directors, all of whom have no relationship to the company 
that may interfere with the exercise of their independence from 
management and the company (``Independent'');
    [(ii) 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
    [(iii) 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.
    [(3) Independence Requirement of Audit Committee Members. In 
addition to the definition of Independent provided in 5.3(b)(2)(i), the 
following restrictions shall apply to every audit committee member:
    [(i) 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'' includes a subsidiary, sibling 
company, predecessor, parent company, or former parent company.
    [(ii) 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., a consultant) may serve 
on the audit committee only if the company'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 company, 
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

[[Page 62148]]

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.
    [(iii) 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.
    [(iv) 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.
    [(v) Notwithstanding the requirements of subparagraphs (3)(i) and 
(3)(iv), one director who is no longer an employee or who is an 
Immediate Family member of a former executive officer of the company or 
its affiliates, but is not considered independent pursuant to these 
provisions due to the three-year restriction period, may be appointed, 
under exceptional and limited circumstances, to the audit committee if 
the company's board of directors determines in its business judgment 
that membership on the committee by the individual is required by the 
best interests of the corporation and its shareholders, and the company 
discloses, in the next annual proxy statement subsequent to such 
determination, the nature of the relationship and the reasons for that 
determination.
    [(4) 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.
    [(5) ``Officer'' has the meaning specified in Rule 16a-1(f) under 
the Securities Exchange Act of 1934, or any successor rule.
    [(6) Initial Public Offering. Companies listing in conjunction with 
their initial public offering (including spin-offs and carve outs) will 
be required to have two qualified audit committee members in place 
within three months of listing and a third qualified member in place 
within twelve months of listing.]
    Rules 5.3(c)-(i)(4)--No change.
Rule 5.3(j) Corporate Governance Guidelines/Code of Conduct
    (1) Corporate Governance Guidelines. Listed companies must adopt 
and disclose corporate governance guidelines. Each listed company's Web 
site must include its corporate governance guidelines, the charters of 
its most important committees (including at least the audit, 
compensation and nominating committees) and the company's code of 
business conduct and ethics. Each company's annual report must state 
that the foregoing information is available on its Web site, and that 
the information is available in print to any shareholder who requests 
it. The following subjects must be addressed in the corporate 
governance guidelines:
    (A) Director qualification standards. These standards should, at 
minimum, reflect the independence requirements set forth in subsection 
(k) below. Companies may also address other substantive qualification 
requirements, including policies limiting the number of boards on which 
a director may sit, and director tenure, retirement and succession.
    (B) Director responsibilities. These responsibilities should 
clearly articulate what is expected from a director, including basic 
duties and responsibilities with respect to attendance at board 
meetings and advance review of meeting materials.
    (C) Director access to management and, as necessary and 
appropriate, independent advisors.
    (D) Director compensation. These guidelines should include general 
principles for determining the form and amount of director compensation 
(and for reviewing those principles, as appropriate).
    (E) Director orientation and continuing education.
    (F) Management succession. Succession planning should include 
policies and principles for CEO selection and performance review, as 
well as policies regarding succession in the event of an emergency or 
the retirement of the CEO.
    (G) Annual performance evaluation of the board. The board should 
conduct a self-evaluation at least annually to determine whether it and 
its committees are functioning effectively.
    (2) Code of Business Conduct and Ethics. Listed companies must 
adopt and disclose a code of business conduct and ethics for directors, 
officers and employees, and promptly disclose any waivers of the code 
for directors or executive officers. The code of business conduct and 
ethics must require that any waiver of the code for executive officers 
or directors may be made only by the board or a board committee and 
must be promptly disclosed to shareholders. The code of business 
conduct and ethics must also contain compliance standards and 
procedures that will facilitate the effective operation of the code. 
All codes should address the following topics:
    (A) Conflicts of interest. A conflict of interest occurs when an 
individual's private interest interferes in any way, or even appears to 
interfere, with the interests of the corporation as a whole.
    (B) Corporate opportunities. Employees, officers and directors 
should be prohibited from (1) taking for themselves opportunities that 
are discovered through the use of corporate property, information or 
position; (2) using corporate property, information, or position for 
personal gain; and (3) competing with the company.
    (C) Confidentiality. Employees, officers and directors should 
maintain the confidentiality of information entrusted to them by the 
company or its customers, except when disclosure is authorized or 
legally mandated. Confidential information includes all non-public 
information that might be of use to competitors, or harmful to the 
company or its customers, if disclosed.
    (D) Fair dealing. Each employee, officer and director should 
endeavor to deal fairly with the company's customers, suppliers, 
competitors and employees. None should take unfair advantage of anyone 
through manipulation, concealment, abuse of privileged information, 
misrepresentation of material facts, or any other unfair dealing 
practices.

[[Page 62149]]

    (E) Protection and proper use of company assets. All employees, 
officers and directors should protect the company's assets and ensure 
their efficient use.
    (F) Compliance with laws, rules and regulations. The company should 
proactively promote compliance with laws, rules and regulations, 
including insider trading laws.
    (G) Encouraging the reporting of any illegal or unethical behavior 
to appropriate personnel. The company should proactively promote 
ethical behavior. The company must ensure that employees know that the 
company will not allow retaliation for reports made in good faith.
Independent Directors/Board Committees
Rule 5.3(k) Independent Directors/Board Committees
    The Corporation shall require that each listed domestic issuer have 
a majority of independent directors on its board of directors, except 
that a domestic issuer of which more than 50% of the voting power is 
held by an individual, a group or another company need not have a 
majority of independent directors on its board or have nominating/
corporate governance and compensation committees composed of 
independent directors as set forth in Rule 5.3(k). However, all such 
controlled companies must have at least a minimum three person audit 
committee and otherwise comply with the audit committee requirements 
provided for in this Rule 5.3(k)(5).
    (1) Independent Directors. For purposes of this Rule 5.3(k), no 
director qualifies as independent unless the board of directors 
affirmatively determines that the director has no material relationship 
with the listed company, either directly or as a partner, shareholder 
or officer of an organization that has a relationship with the company. 
Companies must disclose these determinations. The basis for a board 
determination that a relationship is not material must be disclosed in 
the company's annual proxy statement. A board may adopt and disclose 
categorical standards to assist it in making determinations of 
independence and may make a general disclosure if a director meets 
these standards. Any determination of independence for a director who 
does not meet these standards must be specifically explained. A company 
must disclose any standard it adopts. In the event that a director with 
a business or other relationship that does not fit within the disclosed 
standards is determined to be independent, a board must disclose the 
basis for its determination.
    In addition, the following directors do not qualify as independent 
directors:
    (A) A director who is a former employee of the listed company whose 
employment ended within the past five years.
    (B) A director who is, or in the past three years has been, 
affiliated with or employed by a (present or former) auditor of the 
company (or of an affiliate). Such director cannot be independent until 
three years after the end of either the affiliation or the auditing 
relationship.
    (C) A director who is, or in the past five years has been, part of 
an interlocking directorate in which an executive officer of the listed 
company serves on the compensation committee of another company that 
concurrently employs the director.
    (D) A director with an immediate family member in any the foregoing 
categories. 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.
    (2) Regularly Scheduled Non-Management Directors Executive 
Sessions. The non-management directors of each company must meet at 
regularly scheduled executive sessions without management. Non-
management directors are all those who are not company officers, and 
includes such directors who are not independent by virtue of a material 
relationship, former status or family membership, or for any other 
reason. There need not be a single presiding director at all executive 
sessions of the non-management directors. If one director is chosen to 
preside at these meetings, his or her name must be disclosed in the 
annual proxy statement. Alternatively, a company may disclose the 
procedure by which a presiding director is selected for each executive 
session. In order that interested parties may be able to make their 
concerns known to the non-management directors, a company must disclose 
a method for such parties to communicate directly with the presiding 
director or with the non-management directors as a group.
    (3) Nominating/Corporate Governance Committee. Listed companies 
must have a Nominating Committee/Corporate Governance Committee 
composed entirely of independent directors, except that if such 
committee is made up of three or more individuals, then one member of 
the committee need not be an independent director. The committee must 
have a written charter that addresses:
    (A) The committee's purpose, which at a minimum, must be to: 
identify individuals qualified to become board members, and to select, 
or to recommend that the board select, the director nominees for the 
next annual meeting of shareholders; and develop and recommend to the 
board a set of corporate governance principles applicable to the 
company.
    (B) The committee's goals and responsibilities, which must reflect, 
at a minimum, the board's criteria for selecting new directors, and 
oversight of the evaluation of the board and management.
    (C) An annual performance evaluation of the committee.
    (D) Committee member qualifications, committee member appointment 
and removal, committee structure and operations (including authority to 
delegate to subcommittees), and committee reporting to the board.
    (E) The committee's authority to retain and terminate any search 
firm to be used to identify director candidates, including the sole 
authority to approve the search firm's fees and other retention terms.
    If a company is 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 
such directors need not be subject to the nominating committee process.
    Boards may allocate the responsibilities of the nominating/
corporate governance committee and the compensation committee to 
committees of their own denomination, provided that the committees are 
composed entirely of independent directors, except that if such 
committee is made up of three or more individuals, then one member of 
the committee need not be an independent director. Any such committee 
must have a published committee charter.
    Controlled companies need not comply with the requirements of this 
provision.
    (4) Compensation Committee. Listed companies must have a 
compensation committee composed entirely of independent directors, 
except that if such committee is made up of three or more individuals, 
then one member of the committee need not be an independent director. 
The committee must have a written charter that addresses:

[[Page 62150]]

    (A) The committee's purpose which, at a minimum, must be to 
discharge the board's responsibilities relating to compensation of the 
company's executives, and to produce an annual report on executive 
compensation for inclusion in the company's proxy statement, in 
accordance with applicable rules and regulations.
    (B) The committee's duties and responsibilities, which, at a 
minimum, must be to:
    (i) Review and approve corporate goals and objectives relevant to 
CEO compensation, evaluate the CEO's performance in light of those 
goals and objectives, and set the CEO's compensation level based on 
this evaluation.
    (ii) Make recommendations to the board with respect to incentive-
compensation plans and equity-based plans.
    (C) An annual performance evaluation of the compensation committee.
    (D) Committee member qualifications, committee member appointment 
and removal, committee structure and operations (including authority to 
delegate to subcommittees), and committee reporting to the board.
    (E) The committee's authority to retain and terminate a consultant 
to assist in the evaluation of a director, CEO or senior executive 
compensation. The Committee shall have the sole authority to approve 
the consultant's fees and other retention terms.
    Controlled companies need not comply with the requirements of this 
provision.
    (5) Audit Committee.
    (A) General Provisions.
    (i) Each listed company must have an audit committee as defined by 
Section 3(a)(58) of the Securities and Exchange Act of 1934. The audit 
committee must be composed entirely of independent directors. The audit 
committee must comply with all the rules and procedures set forth in 
Rule10A-3 of the Securities and Exchange Act of 1934. If a member of 
the audit committee ceases to be independent for reasons outside the 
member's reasonable control, that person, with notice by the issuer to 
the Corporation, may remain an audit committee member of the listed 
issuer until the earlier of the next annual meeting or special meeting 
of the listed issuer or one year from the occurrence of the event that 
caused the member to be no longer independent. Should an individual who 
ceases to be independent for reasons outside the member's reasonable 
control remain a member of the audit committee after the time permitted 
by this Rule 5.3(k)(5)(A)(i), then the Corporation shall remove the 
issuer's securities from listing pursuant to the procedures set forth 
in Rule 5.5(m).
    (ii) Listed issuers, other than foreign private issuers and small 
business issuers (as defined in Rule 12b-2 of the Securities and 
Exchange Act of 1934), must be in compliance with this Rule 5.3(k)(5) 
by the earlier of their first annual shareholders meeting after January 
15, 2004, or October 31, 2004. Foreign private issuers and small 
business issuers must be in compliance with this Rule 5.3(k)(5) by July 
31, 2005.
    (iii) If an executive officer of a listed issuer becomes aware of 
any material noncompliance by the listed issuer with the requirements 
of this Rule 5.3(k)(5), the listed issuer must promptly notify the 
Corporation of such noncompliance.
    (iv) To be eligible for continued listing, a listed issuer must 
comply with all of the requirements set forth in this Rule 5.3(k)(5). 
Except as provided for in Rule 5.3(k)(5)(A)(i), should a listed issuer 
fail to comply with any of the requirements set forth in this Rule 
5.3(k)(5) for a period of six (6) consecutive months, then the 
Corporation shall remove the issuer's securities from listing pursuant 
to the procedures set forth in Rule 5.5(m). A listed issuer who is not 
in compliance with the requirements of Rule 5.3(k)(5) must provide the 
Corporation with plan of remediation within 15 days after notifying the 
Corporation of such noncompliance. The listed issuer must provide the 
Corporation with written monthly updates on the progress of the plan of 
remediation.
    (B) Written Charter. The audit committee must have a written 
charter that addresses:
    (i) The committee's purpose which, at a minimum, must be to:
    (a) Assist board oversight of (1) the integrity of the company's 
financial statements, (2) the company's compliance with legal and 
regulatory requirements, (3) the independent auditor's qualifications 
and independence, and (4) the performance of the company's internal 
audit function and independent auditors.
    (b) Prepare the report that SEC rules require be included in the 
company's annual proxy statement.
    (ii) The duties and responsibilities of the audit committee, which, 
at a minimum, must be to:
    (a) 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.
    (b) At least annually, obtain and review a report by the 
independent auditor describing the firm's internal quality control 
procedures; any material issues raised by the most recent internal 
quality-control review, or peer review, of the firm, or by any inquiry 
or investigation by governmental or professional authorities, within 
the preceding five years, respecting one or more independent audits 
carried out by the firm, and any steps taken to deal with any such 
issues; and (to assess the auditor's independence) all relationships 
between the independent auditor and the company.
    (c) Discuss the annual audited financial statements and quarterly 
financial statements with management and the independent auditor, 
including the company's disclosure under ``Management Discussion and 
Analysis of Financial Condition and Results of Operations.''
    (d) Discuss earnings press releases, as well as financial 
information and earnings guidance provided to analysts and rating 
agencies.
    (e) Engage independent counsel and other advisers, as it determines 
necessary to carry out its duties.
    (f) Discuss policies with respect to risk assessment and risk 
management.
    (g) Meet separately, periodically, with management, with internal 
auditors (or other personnel responsible for the internal audit 
function) and with independent auditors.
    (h) Review with the independent auditor any audit problems or 
difficulties and management's response.
    (i) Set clear policies for hiring employees or former employees of 
the independent auditors.
    (j) Report regularly to the board of directors.
    (k) Review major issues regarding accounting principles and 
financial statement presentations; including any significant changes in 
the company's selection or application of accounting principles, and 
major issues as to the adequacy of the company's internal controls and 
any special audit steps adopted in light of material control 
deficiencies.
    (l) Review analyses prepared by management and/or the independent 
auditor setting forth significant financial reporting issues and 
judgments made in connection with the preparation of the financial 
statements, including analyses

[[Page 62151]]

of the effects of alternative GAAP methods on the financial statements.
    (m) Review the effect of regulatory and accounting initiatives, as 
well as off-balance sheet structures, on the financial statements of 
the company.
    (n) Review earnings press releases (paying particular attention to 
any use of ``pro forma,'' or ``adjusted'' non-GAAP, information), as 
well as financial information and earnings guidance provided to 
analysts and rating agencies.
    (o) Establish procedures for: (1) the receipt, retention, and 
treatment of complaints received by the issuer regarding accounting, 
internal accounting controls, or auditing matters and (2) the 
confidential, anonymous submission by employees of the issuer of 
concerns regarding questionable accounting, internal accounting 
controls or auditing matters.
    (iii) An annual performance evaluation of the audit committee.
    (C) Composition/Expertise Requirement of Audit Committee Members.
    (i) Each audit committee will consist of at least three independent 
directors, as defined in Rule 5.3(k)(1).
    (ii) 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.
    (iii) 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.
    (D) 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.
    (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.
    (iv) The annual review and reassessment of the adequacy of the 
audit committee charter.
    (6) Internal Audit Function. Each listed company must have an 
internal audit function. This does not necessarily mean that a company 
must establish a separate internal audit department or dedicate 
employees to the task on a full-time basis. It is sufficient for the 
company to have in place an appropriate control process for reviewing 
and approving its internal transactions and accounting. A company may 
outsource this function to a firm other than its independent auditors.

Rule 5.3(l). Reserved

CEO Certification

Rule 5.3(m). CEO Certification

    Each listed company CEO must certify to the Corporation each year 
that he or she is not aware of any violation by the company of the 
Corporation's corporate governance listing standards. The certification 
filed with the Corporation, as well as the CEO/CFO certifications 
required to be filed with the SEC regarding the quality of the 
company's public disclosure, must be disclosed in the listed company's 
annual report to shareholders.

Listed Foreign Private Issuers

Rule 5.3(n). Listed Foreign Private Issuers

    Listed foreign private issuers must disclose any significant ways 
in which their corporate governance practices differ from those 
followed by domestic companies under the Corporation's listing 
standards. Listed foreign private issuers must comply with the 
provisions of Rule 5.3(k)(5). Listed foreign private issuers may 
provide this disclosure either on their Web site (provided it is in the 
English language and accessible from the United States) and/or in their 
annual report as distributed to shareholders in the United States 
(again, in the English language). If the disclosure is only made 
available on the Web site, the annual report shall so state and provide 
the web address at which the information may be obtained.

Deadline for Compliance

Rule 5.3(o). Deadline for Compliance

    Tier I listed issuers, other than Tier I foreign private issuers 
and Tier I small business issuers (as defined in Rule 12b-2 of the 
Securities and Exchange Act of 1934), must be in compliance with all 
applicable sections of Rule 5.3 by the earlier of (1) their first 
annual shareholders meeting after January 15, 2004, or (2) October 31, 
2004. Tier I foreign private issuers and Tier I small business issuers 
must be in compliance with all applicable sections of Rule 5.3 by July 
31, 2005.
Section 4. Suspension, Public Reprimand or Issuer Withdrawal from 
Listing
] 7957E Suspension/Public Reprimand
    Rule 5.4(a). The Corporation [Board of Directors] may suspend 
dealings in or institute proceedings to remove any security from listed 
or unlisted trading privileges. The Corporation may issue a public 
reprimand letter to any listed company that violates a Corporation 
listing standard. The Corporation shall remove any security from listed 
or unlisted trading privileges if the listed company violates any 
provisions of Rule 5.3(k)(5).
    Rule 5.4(b)--No change.
Section 5. Maintenance Requirements and Delisting Procedures
] 7957G Maintenance Requirements and Delisting Procedures
    Rule 5.5(a). The Corporation does not rate or evaluate any security 
dealt in on the Corporation. In making a determination concerning 
listing and delisting it acts normally upon information furnished it by 
the issuer, and it does not verify this information from independent 
sources or gather independent information about the issuers whose 
securities are dealt in on the Corporation.
    As a matter of policy, when a listed company fails to meet any of 
the listing maintenance requirements and has more than one class of 
securities listed, the Corporation will give consideration to delisting 
all such classes. However, the Corporation may continue the listing of 
one class of securities regardless of its decision to delist another 
class, except for failure to comply with Rule 5.3(k)(5) in which case 
all such classes shall be delisted. The securities of a company will be 
subject to suspension and/or withdrawal from listing and registration 
as a listed issue if the Corporation finds that a listed company fails 
to meet the maintenance requirements as set forth in this Rule 5.5, or 
fails to comply with the Corporation's listing policies or agreements.
    Commentary:
    .01 When the issuer fails to meet any provision of the applicable 
maintenance requirements of this Rule 5.5, the Exchange shall determine 
whether to suspend dealings in the security and/or request the issuer 
to take action to remedy any identified deficiency. Should the issuer 
fail to correct any deficiency, the Exchange shall take action to 
delist the security.
    .02 Securities listed under the Tier I designation will not be 
granted waivers from the Corporation's maintenance

[[Page 62152]]

requirements. Any security that no longer meets the Tier I maintenance 
requirements, but meets the Tier II maintenance requirements, will be 
reclassified as a Tier II security. The Corporation, however, may grant 
a waiver for the continued listing of any security in cases where the 
security remains listed on either the NYSE, Amex, or Nasdaq National 
Market; provided, however, that the Corporation determines that there 
is a reasonable basis for a waiver. In such cases, the security will be 
included under the Tier II designation.
    .03 Any security approved by the Board of Directors for listing 
prior to July 22, 1994 must meet one of the following:
    (a) To qualify for inclusion under the Tier I designation, a 
security must meet the applicable initial listing requirements as set 
forth in Rule 5.2 (including any index product listed pursuant to Rule 
8); however, a security listed on either the NYSE, Amex, or Nasdaq 
National Market may be designated as a Tier I security so long as it 
meets the applicable Tier I maintenance requirements in this Rule 5.5; 
or
    (b) Any security not meeting the applicable maintenance 
requirements must do so within six months of July 22, 1994. Until such 
time, the former standards will be applied and the security will be 
designated as a Tier II security.
    Rule 5.5(b)--(l)--No change.
] 7957T Delisting Procedures
    Rule 5.5(m). Whenever the Corporation determines that it is 
appropriate to either suspend dealings in and/or remove securities from 
listing pursuant to Rule 5.3 or [this] Rule 5.5, except for other than 
routine reasons (e.g., redemptions, maturities, etc.) or violations of 
Rule 5.3(k)(5) in which case the Corporation shall initiate delisting a 
listed company's securities, it will follow, insofar as practicable, 
the following procedures:
    (1) The Corporation shall notify the issuer in writing describing 
the basis on which the Corporation is considering the delisting of the 
company's security. Such notice shall be sent by certified mail and 
shall include the time and place of a meeting to be held by the 
Corporation to hear any reasons why the issuer believes its security 
should not be delisted. Generally, the issuer will be notified at least 
three (3) weeks prior to the meeting and will be requested to submit a 
written response.
    (2) If, after such meeting, the Corporation determines that the 
security should be delisted, the Corporation shall notify the issuer by 
telephone (if possible, the same day of the meeting) and in writing of 
the delisting decision and the basis thereof. The written notice will 
also inform the issuer that it may appeal the decision to the Board of 
Directors and request a hearing.
    (3) Concurrent with the Corporation's decision to delist the 
issuer's security, the Corporation will prepare a press announcement, 
which will be disseminated to the Market Makers and the investing 
public no later than the opening of trading the business day following 
the Corporation's decision (the Securities Qualification Department 
will also distribute the information to the ETP Holders). Accordingly, 
the suspension of trading in the issuer's security will become 
effective at the opening of business on the day following the 
Corporation's decision.
    (4) If the issuer requests an appeal hearing, it must file its 
request along with (i) a $2,500 delisting appeal fee and (ii) an answer 
to the causes specified by the Corporation with the Secretary of the 
Corporation no later than five (5) business days following service of 
notice of the proposed delisting. If the issuer does not request a 
hearing within the specified period of time, or it does not submit the 
$2,500 fee to the Corporation in the form and manner prescribed, the 
Corporation will submit an application to the Securities and Exchange 
Commission to strike the security from list of companies listed on the 
Corporation. The Corporation will furnish a copy of such application to 
the issuer in accordance with Section 12 of the Securities Exchange Act 
of 1934 and the Rules promulgated there under.
    (5) If a request for a hearing is made and the requirements of Rule 
5.5(m)(4) are met within the time specified, the issuer will be 
entitled to an appeal hearing and the Corporation will provide the 
issuer at least fifteen (15) business days notice of the time and place 
of the hearing.
    (6) The hearing shall be held before the Board Appeals Committee 
appointed by the Board of Directors for such purpose. Only those 
members of the Board Appeals Committee who attend the hearing may vote 
with respect to any decisions the Committee may make.
    (7) Any documents or other written material the issuer wishes to 
consider should be submitted to the appropriate office of the 
Corporation at least five (5) business days prior to the date of the 
hearing.
    (8) At the hearing, the issuer must prove its case by presenting 
testimony, evidence, and argument to the Board Appeals Committee. The 
form and manner in which the actual hearing will be conducted will be 
established by the Board Appeals Committee so as to assure the orderly 
conduct of the proceeding. At the hearing, the Board Appeals Committee 
may require the issuer to furnish additional written information that 
has come to its attention.
    (9) After the conclusion of the proceeding, the Board Appeals 
Committee shall make its decision. The decision of the Board Appeals 
Committee shall be in writing with one copy served upon the issuer and 
the second copy filed with the Secretary of the Corporation. Such 
decision shall be final and conclusive. If the decision is that the 
security of the issuer is to be removed from listing, an application 
shall be submitted by the Corporation to the Securities and Exchange 
Commission to strike the security from listing and registration, and a 
copy of such application shall be provided to the issuer in accordance 
with Section 12 of the Securities Exchange Act of 1934 and the Rules 
promulgated there under. If the decision is that the security should 
not be removed from listing, the issuer shall receive a notice to that 
effect from the Corporation.
* * * * *

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
    In light of the recent failures of a number of significant 
companies due to the lack of diligence, ethics and controls, the PCXE 
chose to review its corporate governance and disclosure policies. In 
September 2002, the PCXE Board of Directors formed a subcommittee to 
review the PCXE's current corporate governance and disclosure 
standards. The goal of the subcommittee was to enhance the 
accountability, integrity, and

[[Page 62153]]

transparency of the Exchange's listed companies.
    In addition to reviewing the PCXE's corporate governance and 
disclosure policies, the subcommittee also reviewed the changes 
mandated by the Sarbanes-Oxley Act of 2002. In a release effective 
April 25, 2003, the Commission directed all national securities 
exchanges and national securities associations to prohibit the listing 
of any security of an issuer that is not in compliance with the audit 
committee requirements mandated by the Sarbanes-Oxley Act of 2002.\7\ 
These requirements relate to the independence of audit committee 
members, 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 audit committee.
---------------------------------------------------------------------------

    \7\ 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).
---------------------------------------------------------------------------

    The Exchange represents that the proposed new corporate governance 
and disclosure policies are designed to further the ability of honest 
and well-intentioned directors, officers, and employees to perform 
their functions effectively. The resulting proposal would also allow 
shareholders to more easily and efficiently monitor the performance of 
companies and directors in order to reduce the instances of lax and 
unethical behavior.
    The proposals for new corporate governance and disclosure policies 
would be codified in PCXE Rule 5.3. The new standards in PCXE Rule 5.3 
would apply to listed companies designated as Tier I issuers except for 
the new provisions on audit committees that are mandated by the 
Sarbanes-Oxley Act of 2002.\8\ These provisions, which are contained in 
Rule 5.3(k)(5), would apply to all PCX listed securities.
---------------------------------------------------------------------------

    \8\ See PCXE Rule 5.3(k)(5).
---------------------------------------------------------------------------

    Listed issuers, other than foreign private issuers and small 
business issuers, would have to be in compliance with Rule 5.3(k)(5) by 
the earlier of: (1) their first annual shareholders meeting after 
January 15, 2004, or (2) October 31, 2004. Foreign private issuers and 
small business issuers that are listed would have to be in compliance 
with the new listing rules by July 31, 2005.
    Tier I listed issuers, other than Tier I foreign private issuers 
and Tier I small business issuers (as defined in Rule 12b-2 of the Act 
\9\), would have to be in compliance with all applicable sections of 
Rule 5.3 by the earlier of: (1) their first annual shareholders meeting 
after January 15, 2004, or (2) October 31, 2004. Tier I foreign private 
issuers and Tier I small business issuers would have to be in 
compliance with all applicable sections of Rule 5.3 by July 31, 2005.
    The following are proposed requirements that would become 
incorporated in the PCXE's corporate governance and disclosure 
policies.
    (1) Listed companies must adopt and disclose corporate governance 
guidelines.
    Listed companies would be required to adopt and disclose corporate 
governance guidelines. Each listed company's Web site would be required 
to include its corporate governance guidelines, the charters of its 
most important committees (including at least the audit, compensation 
and nominating committees), and the company's code of business conduct 
and ethics. Each company's annual report would have to state that the 
foregoing information is available on its Web site, and that the 
information is available in print to any shareholder who requests it.
    The following subjects would have to be addressed in the corporate 
governance guidelines:
    [sbull] Director qualification standards. These standards should, 
at minimum, reflect the independence requirements set forth in proposed 
subsection 5.3(k). Companies may also address other substantive 
qualification requirements including policies limiting the number of 
boards on which a director may sit and director tenure, retirement, and 
succession.
    [sbull] Director responsibilities. These responsibilities should 
clearly articulate what is expected from a director, including basic 
duties and responsibilities with respect to attendance at board 
meetings and advance review of meeting materials.
    [sbull] Director access. Directors must be given access to 
management and, as necessary and appropriate, independent advisors.
    [sbull] Director compensation. These guidelines should include 
general principles for determining the form and amount of director 
compensation (and for reviewing those principles, as appropriate).
    [sbull] Director orientation. The company must provide an 
orientation and continuing education for its directors.
    [sbull] Management succession. Succession planning should include 
policies and principles for CEO selection and performance review, as 
well as policies regarding succession in the event of an emergency or 
the retirement of the CEO.
    [sbull] Annual performance evaluation of the board. The board 
should conduct a self-evaluation at least annually to determine whether 
it and its committees are functioning effectively.
    (2) Code of Business Conduct.
    Listed companies would have to adopt and disclose a code of 
business conduct and ethics for directors, officers, and employees, and 
promptly disclose any waivers of the code for directors or executive 
officers. The code of business conduct and ethics would have to require 
that any waiver of the code for executive officers or directors may be 
made only by the board or a board committee and would have to be 
promptly disclosed to shareholders. The code of business conduct and 
ethics would also have to contain compliance standards and procedures 
that would facilitate the effective operation of the code.
    All codes should address the following topics:
    [sbull] Conflicts of interest. A conflict of interest occurs when 
an individual's private interest interferes in any way, or even appears 
to interfere, with the interests of the corporation as a whole.
    [sbull] Corporate opportunities. Employees, officers and directors 
should be prohibited from: (i) Taking for themselves opportunities that 
are discovered through the use of corporate property, information, or 
position; (ii) using corporate property, information, or position for 
personal gain; and (iii) competing with the company.
    [sbull] Confidentiality. Employees, officers, and directors should 
maintain the confidentiality of information entrusted to them by the 
company or its customers, except when disclosure is authorized or 
legally mandated. Confidential information includes all non-public 
information that might be of use to competitors, or harmful to the 
company or its customers, if disclosed.
    [sbull] Fair dealing. Each employee, officer, and director should 
endeavor to deal fairly with the company's customers, suppliers, 
competitors, and employees. None should take unfair advantage of anyone 
through manipulation, concealment, abuse of privileged information, 
misrepresentation of material facts, or any other unfair dealing 
practices.
    [sbull] Protection and proper use of company assets. All employees, 
officers, and directors should protect the company's assets and ensure 
their efficient use.
    [sbull] Compliance with laws, rules and regulations. The company 
should proactively promote compliance with

[[Page 62154]]

laws, rules, and regulations, including insider trading laws.
    [sbull] Encouraging the reporting of any illegal or unethical 
behavior to appropriate personnel. The company should proactively 
promote ethical behavior. The company must ensure that employees know 
that the company will not allow retaliation for reports made in good 
faith.
    (3) Listed companies must have a majority of independent directors.
    Each domestic issuer would be required to have a majority of 
independent directors on its board of directors, except that a domestic 
issuer of which more than 50% of the voting power is held by an 
individual, a group, or another company would not need to have a 
majority of independent directors on its board or have nominating/
corporate governance and compensation committees composed of 
independent directors. However, all such controlled companies would be 
required to have at least a minimum three-person audit committee and 
otherwise comply with the audit committee requirements.
    (4) In order to tighten the definition of ``independent director'' 
for purposes of these standards:
    (a) No director would qualify as independent unless the board of 
directors affirmatively determines that the director has no material 
relationship with the listed company, either directly or as a partner, 
shareholder, or officer of an organization that has a relationship with 
the company. Companies would have to disclose these determinations.
    The basis for a board determination that a relationship is not 
material would have to be disclosed in the company's annual proxy 
statement. A board could adopt and disclose categorical standards to 
assist it in making determinations of independence, and could make a 
general disclosure if a director meets these standards. Any 
determination of independence for a director who does not meet these 
standards would have to be specifically explained. A company would be 
required to disclose any standard it adopts. In the event that a 
director with a business or other relationship that does not fit within 
the disclosed standards is determined to be independent, a board would 
be required to disclose the basis for its determination.
    (b) In addition, the following directors would not qualify as 
independent directors:
    (i) A director who is a former employee of the listed company whose 
employment ended within the past five years.
    (ii) A director who is, or in the past three years has been, 
affiliated with or employed by a (present or former) auditor of the 
company (or of an affiliate). Such director could not be independent 
until three years after the end of either the affiliation or the 
auditing relationship.
    (iii) A director who is, or in the past five years has been, part 
of an interlocking directorate in which an executive officer of the 
listed company serves on the compensation committee of another company 
that concurrently employs the director.
    (iv) A director with an immediate family member in any of the 
foregoing categories. 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.
    (5) Regularly Scheduled Executive Sessions without Management.
    In order to empower non-management directors to serve as a more 
effective check on management, non-management directors of each company 
would have to meet at regularly scheduled executive sessions without 
management. Non-management directors are all those who are not company 
officers, and include such directors who are not independent by virtue 
of a material relationship, former status or family membership, or for 
any other reason. There would not need to be a single presiding 
director at all executive sessions of the non-management directors. If 
one director is chosen to preside at these meetings, his or her name 
would have to be disclosed in the annual proxy statement. 
Alternatively, a company could disclose the procedure by which a 
presiding director is selected for each executive session. In order 
that interested parties may be able to make their concerns known to the 
non-management directors, a company would be required to disclose a 
method for such parties to communicate directly with the presiding 
director or with the non-management directors as a group.
    (6) Nominating/Corporate Governance Committee.
    Listed companies would be required to have a Nominating Committee/
Corporate Governance Committee composed entirely of independent 
directors, except that if such committee is made up of three or more 
individuals, then one member of the committee would not need to be an 
independent director.
    The committee would be required to have a written charter that 
addresses:
    [sbull] The committee's purpose, which, at a minimum, would be 
required to be: to identify individuals qualified to become board 
members, and to select, or to recommend that the board select, the 
director nominees for the next annual meeting of shareholders; and to 
develop and to recommend to the board a set of corporate governance 
principles applicable to the company.
    [sbull] The committee's goals and responsibilities, which would be 
required to reflect, at a minimum, the board's criteria for selecting 
new directors, and oversight of the evaluation of the board and 
management.
    [sbull] An annual performance evaluation of the committee.
    [sbull] Committee member qualifications, committee member 
appointment and removal, committee structure and operations (including 
authority to delegate to subcommittees), and committee reporting to the 
board.
    [sbull] The committee's authority to retain and terminate any 
search firm to be used to identify director candidates, including sole 
authority to approve the search firm's fees and other retention terms.
    If a company is 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 
such directors would not need to be subject to the nominating committee 
process.
    Boards could allocate the responsibilities of the nominating/
corporate governance committee and the compensation committee to 
committees of their own denomination, provided that the committees are 
composed entirely of independent directors, except that if such 
committee is made up of three or more individuals, then one member of 
the committee would not need to be an independent director. Any such 
committee would be required to have a published committee charter.
    Controlled companies would not need to comply with the requirements 
of this provision.
    (7) Compensation Committee.
    Listed companies would be required to have a compensation committee 
composed entirely of independent directors, except that if such 
committee is made up of three or more individuals, then one member of 
the committee would not need to be an independent director.
    The committee would be required to have a written charter that 
addresses:
    [sbull] The committee's purpose which, at a minimum, would be 
required to be: to discharge the board's responsibilities relating to 
compensation of the

[[Page 62155]]

company's executives, and to produce an annual report on executive 
compensation for inclusion in the company's proxy statement, in 
accordance with applicable rules and regulations.
    [sbull] The committee's duties and responsibilities, which, at a 
minimum, would be required to be to:
    (i) Review and approve corporate goals and objectives relevant to 
CEO compensation, evaluate the CEO's performance in light of those 
goals and objectives, and set the CEO's compensation level based on 
this evaluation.
    (ii) Make recommendations to the board with respect to incentive-
compensation plans and equity-based plans.
    [sbull] An annual performance evaluation of the compensation 
committee.
    [sbull] Committee member qualifications, committee member 
appointment and removal, committee structure and operations (including 
authority to delegate to subcommittees), and committee reporting to the 
board.
    [sbull] The committee's authority to retain and terminate a 
consultant to assist in the evaluation of a director, CEO or senior 
executive compensation. The Committee would need to have the sole 
authority to approve the consultant's fees and other retention terms.
    Controlled companies would not need to comply with the requirements 
of this provision.
    (8) Audit Committee.
    Each listed company would be required to have an audit committee as 
defined by Section 3(a)(58) of the Act.\10\ The audit committee would 
have to be composed entirely of independent directors. The audit 
committee would be required to comply with all the rules and procedures 
set forth in Rule 10A-3 of the Act.\11\ If a member of the audit 
committee ceases to be independent for reasons outside the member's 
reasonable control, that person, with notice by the issuer to the 
Exchange, could remain an audit committee member of the listed issuer 
until the earlier of the next annual or special meeting of the listed 
issuer or one year from the occurrence of the event that caused the 
member to be no longer independent. Should an individual who ceases to 
be independent for reasons outside the member's reasonable control 
remain a member of the audit committee after the time permitted, then 
the Exchange would be required to remove the issuer's securities from 
listing.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78c(a)(58).
    \11\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    Listed issuers, other than foreign private issuers and small 
business issuers (as defined in Rule 12b-2 of the Act\12\), would have 
to be in compliance with Rule 5.3(k)(5) by the earlier of their first 
annual shareholders meeting after January 15, 2004, or October 31, 
2004. Foreign private issuers and small business issuers would have to 
be in compliance with Rule 5.3(k)(5) by July 31, 2005.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.12b-2.
---------------------------------------------------------------------------

    If an executive officer of a listed issuer becomes aware of any 
material noncompliance by the listed issuer with the audit committee 
requirements, the listed issuer would be required to promptly notify 
the Exchange of such noncompliance.
    To be eligible for continued listing, a listed issuer would have to 
comply with all of the audit committee requirements. Except for the 
situation where an audit committee member ceases to be independent for 
reasons outside the member's reasonable control, should a listed issuer 
fail to comply with any of the audit committee requirements for a 
period of 6 consecutive months, then the Exchange would be required to 
remove the issuer's securities from listing. A listed issuer who is not 
in compliance with the requirements of Rule 5.3(k)(5) would have to 
provide the Corporation with a plan of remediation within 15 days after 
notifying the Corporation of such noncompliance. The listed issuer 
would have to provide the Corporation with written monthly updates on 
the progress of the plan of remediation.
    The audit committee would be required to have a written charter 
that addresses:
    [sbull] The committee's purpose, which, at a minimum, would be 
required to 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 
audit function and independent auditors.
    (ii) Prepare the report that SEC rules require be included in the 
company's annual proxy statement.
    [sbull] The duties and responsibilities of the audit committee, 
which, at a minimum, would be required to be to:
    (i) 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.
    (ii) At least annually, obtain and review a report by the 
independent auditor describing the firm's internal quality control 
procedures; any material issues raised by the most recent internal 
quality-control review, or peer review, of the firm, or by any inquiry 
or investigation by governmental or professional authorities, within 
the preceding five years, respecting one or more independent audits 
carried out by the firm, and any steps taken to deal with any such 
issues; and (to assess the auditor's independence) all relationships 
between the independent auditor and the company.
    (iii) Discuss the annual audited financial statements and quarterly 
financial statements with management and the independent auditor, 
including the company's disclosure under ``Management Discussion and 
Analysis of Financial Condition and Results of Operations.''
    (iv) Discuss earnings press releases, as well as financial 
information and earnings guidance provided to analysts and rating 
agencies.
    (v) Engage independent counsel and other advisers, as it determines 
necessary to carry out its duties.
    (vi) Discuss policies with respect to risk assessment and risk 
management.
    (vii) Meet separately, periodically, with management, with internal 
auditors (or other personnel responsible for the internal audit 
function), and with independent auditors.
    (viii) Review with the independent auditor any audit problems or 
difficulties and management's response.
    (ix) Set clear policies for hiring employees or former employees of 
the independent auditors.
    (x) Report regularly to the board of directors.
    (xi) Review major issues regarding accounting principles and 
financial statement presentations, including any significant changes in 
the company's selection or application of accounting principles, and 
major issues as to the adequacy of the company's internal controls and 
any special audit steps adopted in light of material control 
deficiencies.
    (xii) Review analyses prepared by management and/or the independent 
auditor setting forth significant financial reporting issues and 
judgments made in connection with the preparation of the financial 
statements, including analyses

[[Page 62156]]

of the effects of alternative GAAP methods on the financial statements.
    (xiii) Review the effect of regulatory and accounting initiatives, 
as well as off-balance sheet structures, on the financial statements of 
the company.
    (xiv) Review earnings press releases (paying particular attention 
to any use of ``pro forma,'' or ``adjusted'' non-GAAP, information), as 
well as financial information and earnings guidance provided to 
analysts and rating agencies.
    (xv) Establish procedures for: (a) The receipt, retention, and 
treatment of complaints received by the issuer regarding accounting, 
internal accounting controls, or auditing matters, and (b) the 
confidential, anonymous submission by employees of the issuer of 
concerns regarding questionable accounting, internal accounting 
controls or auditing matters.
    [sbull] An annual performance evaluation of the audit committee.
    The composition of the Audit Committee would be required to be as 
follows:
    (i) Each audit committee would be required to consist of at least 
three independent directors.
    (ii) Each member of the audit committee would be required to be 
financially literate, as such qualification is interpreted by the 
company's board of directors in its business judgment, or become 
financially literate within a reasonable period of time after his or 
her appointment to the audit committee.
    (iii) At least one member of the audit committee would be required 
to have accounting or related financial management expertise, as the 
board of directors interprets such qualification in its business 
judgment.
    [sbull] 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.
    (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.
    (iv) The annual review and reassessment of the adequacy of the 
audit committee charter.
    (9) Internal Audit Function.
    Each listed company would be required to have an internal audit 
function. This does not necessarily mean that a company would be 
required to establish a separate internal audit department or dedicate 
employees to the task on a full-time basis. The Exchange states that it 
would be sufficient for the company to have in place an appropriate 
control process for reviewing and approving its internal transactions 
and accounting. A company could outsource this function to a firm other 
than its independent auditors.
    (10) CEO Certification.
    Each listed company CEO would have to certify to the Exchange each 
year that he or she is not aware of any violation by the company of the 
Exchange's corporate governance listing standards. The certification 
filed with the Exchange, as well as the CEO/CFO certifications required 
to be filed with the SEC regarding the quality of the company's public 
disclosure, would have to be disclosed in the listed company's annual 
report to shareholders.
    (11) Listed Foreign Private Issuers.
    Listed foreign private issuers would have to disclose any 
significant ways in which their corporate governance practices differ 
from those followed by domestic companies under the Exchange's listing 
standards. Listed foreign private issuers would be required to comply 
with the provisions of Rule 5.3(k)(5). Listed foreign private issuers 
could provide this disclosure either on their web site (provided it is 
in the English language and accessible from the United States) and/or 
in their annual report as distributed to shareholders in the United 
States (in the English language). If the disclosure is only made 
available on the web site, the annual report would be required to so 
state and provide the web address at which the information may be 
obtained.
    (12) Deadline for Compliance.
    Tier I listed issuers, other than Tier I foreign private issuers 
and Tier I small business issuers (as defined in Rule 12b-2 of the 
Act\13\), would have to be in compliance with all applicable sections 
of Rule 5.3 by the earlier of their first annual shareholders meeting 
after January 15, 2004 or October 31, 2004. Tier I foreign private 
issuers and Tier I small business issuers would have to be in 
compliance with all applicable sections of Rule 5.3 by July 31, 2005.
---------------------------------------------------------------------------

    \13\ 17 CFR 240.12b-2.
---------------------------------------------------------------------------

    (13) Suspension/Public Reprimand.
    Under the proposed rule change, the Exchange could suspend dealings 
in or institute proceedings to remove any security from listed or 
unlisted trading privileges. The Exchange could issue a public 
reprimand letter to any listed company that violates an Exchange 
listing standard. The Corporation would be required to remove any 
security from listed or unlisted trading privileges if the listed 
company violates any provisions of Rule 5.3(k)(5).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \14\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \15\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market, 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 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 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

    Written comments on the proposed rule change were neither solicited 
nor 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 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, as amended, 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

[[Page 62157]]

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 
PCX. All submissions should refer to file number SR-PCX-2003-35 and 
should be submitted by November 21, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27409 Filed 10-30-03; 8:45 am]
BILLING CODE 8010-01-P