[Federal Register Volume 68, Number 211 (Friday, October 31, 2003)]
[Notices]
[Pages 62109-62121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27460]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48706; File No. SR-Amex-2003-65]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the American Stock Exchange LLC 
Relating to Enhanced Corporate Governance Requirements Applicable to 
Listed Companies

October 27, 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 June 23, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On September 9, 2003, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Claudia Crowley, Vice President, Listing 
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division 
of Market Regulations, Commission, dated September 5, 2002 
(``Amendment No. 1''). In Amendment No. 1, Amex added p;roposed rule 
language to paragraph (c) of Section 801 to clarify that although 
the corporate governance requirements contained in Part 8 are not 
applicable to passive business organizations (such as royalty 
trusts) or to derivatives and special purpose securities listed 
pursuant to Amex Rules 1000, 10000A and 1200 and Sections 106, 107 
and 118B, issuers of such securities are required to comply with 
Sections 121 and 803 to the extent required by Rule 10A-3 under the 
Act.

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[[Page 62110]]

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

    The Amex proposes to amend Sections 101, 110, 120, 121, 401, 402, 
610 and 1009 of the Amex Company Guide, and adopt new Sections 801 
through 808 of the Amex Company Guide to enhance the corporate 
governance requirements applicable to listed companies. Below is the 
text of the proposed rule change. Proposed new language is in italics; 
proposed deletions are in brackets.
American Stock Exchange Company Guide
Sec. 101, General
    No change.

Commentary

.01 Corporate Governance Standards

    In addition to the numerical listing standards, the Exchange has 
adopted certain corporate governance listing standards, which are set 
forth in Part 8.
    .0[1]2 Future Priced Securities--No change.
Sec. 110, Securities of Foreign Companies
    The Exchange recognizes that every corporate entity must operate in 
accordance with the laws and customary practices of its country of 
origin or incorporation. Therefore, in evaluating the eligibility for 
listing of a foreign based entity, the Exchange will consider the laws, 
customs and practices of the applicant's country of domicile, to the 
extent not contrary to the federal securities laws (including but not 
limited to Rule 10A-3 under the Securities Exchange Act of 1934), 
regarding such matters as: (i) The election and composition of the 
Board of Directors; (ii) the issuance of quarterly earnings statements; 
(iii) shareholder approval requirements; and (iv) quorum requirements 
for shareholder meetings. A company seeking relief under these 
provisions should provide written certification from independent local 
counsel that the non-complying practice is not prohibited by home 
country law. In addition, the company must provide English language 
disclosure of any significant ways in which its corporate governance 
practices differ from those followed by domestic companies pursuant to 
the Exchange's standards. This disclosure may be provided either on the 
company's Web site and/or in its annual report as distributed to 
shareholders in the U.S. If the disclosure is only available on the Web 
site, the annual report must so state and provide the web address at 
which the information may be obtained.
    Since business practices may vary among foreign companies, the 
following information is presented solely as a guide rather than as a 
set of inflexible rules:
    (a) through (e)--No change.
Policies--[Conflicts of Interest] Related Party Transactions, 
Independent Directors and Audit Committees, [and] Voting Rights, Quorum 
Requirements and Limited Partnerships
Sec. 120, [Conflicts of Interest] Certain Relationships and 
Transactions
    Related party transactions must be subject to appropriate review 
and oversight by the company's Audit Committee or a comparable body of 
the Board of Directors. [Each company shall conduct an appropriate 
review of all related party transactions on an ongoing basis and shall 
utilize the company's Audit Committee or a comparable body of the Board 
of Directors for the review of potential conflict of interest 
situations where appropriate.]
Sec. 121, Independent Directors and Audit Committee
    A. Independent Directors:
    [The Exchange requires that] Each [domestic] listed company[ies] 
must have a sufficient number of independent directors on its [the 
company's] Board of Directors (a) such that at least a majority of such 
directors are independent directors (subject to the exceptions set 
forth in Section 801 and, with respect to small business filers, 
Section 121B(2)(c)), and (b) to satisfy the audit committee requirement 
set forth below. [Independent directors are not officers of the company 
and are, in the view of the company's board of directors, free of any 
relationship that would interfere with the exercise of independent 
judgment.] ``Independent director'' means a person other than an 
officer or employee of the company or its subsidiaries. No director 
qualifies as independent unless the Board of Directors affirmatively 
determines that the director does not have a material relationship with 
the listed company that would interfere with the exercise of 
independent judgment. In addition, audit committee members must also 
comply with the requirements set forth in paragraph B(2) below. The 
following is a non-exclusive list of persons who shall not be 
considered independent:
    (a) A director who is, or during the past three years was, employed 
by the company or by any parent or subsidiary of the company 
[corporation or any of its affiliates for the current year or any of 
the past three years]; *
    (b) A director who accepts or has an immediate family member who 
accepts any [compensation] payments from the company [corporation] or 
any [of its affiliates] parent or subsidiary of the company in excess 
of $60,000 during the current or previous fiscal year, other than 
compensation for board service, payments arising solely from 
investments in the company's securities, compensation paid to an 
immediate family member who is an employee of the company or a parent 
or subsidiary of the company (but not if such person is an executive 
officer of the company or any parent or subsidiary of the company), or 
benefits under a tax-qualified retirement plan, or non-discretionary 
compensation; *
    (c) A director who is an [member of the] immediate family member of 
an individual who is, or has been in any of the past three years, 
employed by the company [corporation] or any [of its affiliates] parent 
or subsidiary of the company as an executive officer[. Immediate family 
includes a person's spouse, parents, children, siblings, mother-in-law, 
father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-
law, and anyone who resides in such person's home]; *
    (d) A director who is a partner in, or a controlling shareholder or 
an executive officer of, any [for-profit business] organization to 
which the company [corporation] made, or from which the company 
[corporation] received, payments (other than those arising solely from 
investments in the company's [corporation's] securities) that exceed 5% 
of the recipient's [corporation's or business organization's] 
consolidated gross revenues for that year, or $200,000, whichever is 
more, in any of the [past] most recent three fiscal years; *
    (e) A director of the listed company who is employed as an 
executive officer of another entity where any of the listed company's 
executive[s] officers serve on that entity's compensation committee;
    (f) A director who is or was a partner or employee of the company's 
outside auditor, and worked on the company's audit engagement, during 
the past three fiscal years.*

    * During the three years immediately following [insert effective 
date of rule change] the applicable ``look back'' period shall be 
the period since [insert effective date of the rule change] for 
independent directors who are not members of the Audit Committee.

    B. Audit Committee:
([a]1) Charter
    Each Issuer must certify that it has adopted a formal written audit 
committee charter and that the Audit

[[Page 62111]]

Committee has reviewed and reassessed the adequacy of the formal 
written charter on an annual basis. The charter must specify [the 
following]:
    ([i]a) The scope of the audit committee's responsibilities, and how 
it carries out those responsibilities, including structure, processes, 
and membership requirements;
    ([ii]b) The audit committee's responsibility for ensuring its 
receipt from the outside auditors of a formal written statement 
delineating all relationships between the auditor and the company, 
consistent with Independence Standards Board Standard 1, and the audit 
committee's responsibility for actively engaging in a dialogue with the 
auditor with respect to any disclosed relationships or services that 
may impact the objectivity and independence of the auditor and for 
taking, or recommending that the full board take, appropriate action to 
oversee the independence of the outside auditor; and
    ([iii]c) [the outside auditor's ultimate accountability to the 
board of directors and the audit committee, as representatives of 
shareholders, and these shareholder representatives' 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)] That the audit 
committee is vested with all responsibilities and authority required by 
Rule 10A-3 under the Securities Exchange Act of 1934.
([b]2) Composition
    ([i]a) Each issuer must have, and certify that it has and will 
continue to have, an A[a]udit C[c]ommittee of at least three members, 
[comprised solely of independent directors] each of whom [is]:
    (i) Satisfies the independence standards specified in Section 121A 
and Rule 10A-3 under the Securities Exchange Act of 1934; and
    (ii) Is able to read and understand fundamental financial 
statements, including a company's balance sheet, income statement, and 
cash flow statement [or will become able to do so within a reasonable 
period of time after his or her appointment to the audit committee]. 
Additionally, each issuer must certify that it has, and will continue 
to have, at least one member of the audit committee [that] who has past 
employment experience in finance or accounting, requisite professional 
certification in accounting, or any other comparable experience or 
background which results in the individual's financial sophistication, 
including but not limited to being or having been a chief executive 
officer, chief financial officer, [or] other senior officer with 
financial oversight responsibilities, or an active participant on one 
or more public company audit committees.
    ([ii]b) Notwithstanding paragraph ([i]a), one director who is not 
independent as defined in Section 121A, but who satisfies the 
requirements of Rule 10A-3 under the Securities Exchange Act of 1934 
(see sub-paragraph (a)(i)), and is not a current officer or employee or 
an immediate family member of such person [employee], may be appointed 
to the A[a]udit C[c]ommittee, if the board, under exceptional and 
limited circumstances, determines that membership on the committee by 
the individual is required by the best interests of the 
company[corporation] and its shareholders, and the board discloses, in 
the next annual meeting proxy statement (or in its next annual report 
on SEC Form 10-K or equivalent if the issuer does not file an annual 
proxy statement) subsequent to such determination, the nature of the 
relationship and the reasons for that determination. A director 
appointed to the Audit Committee pursuant to this exception may not 
serve for in excess of two consecutive years and may not chair the 
Audit Committee.
    ([iii]c) [Exception for] Small Business Filers--[Paragraphs (b)(i) 
and (b)(ii) do not apply to] I[iI]ssuers that file reports under SEC 
Regulation S-B[. Such issuers] are subject to all requirements 
specified in this Section, except that such issuers are only required 
to maintain a Board of Directors comprised of at least 50% independent 
directors, [must establish] and [maintain] an Audit Committee of at 
least two [members, a majority of the members of which shall be] 
members, comprised solely of independent directors who also meet the 
requirements of Rule 10A-3 under the Securities Exchange Act of 1934.

See also Section 803.

* * * Commentary

    .01 ``Immediate family member'' includes a person's spouse, 
parents, children, siblings, mother-in-law, father-in-law, brother-in-
law, sister-in-law, son-in-law, daughter-in-law, and anyone who resides 
in such person's home or is financially dependent upon such person.
    .02 ``Parent'' or ``subsidiary'' includes entities that are 
consolidated with the issuer's financial statements.
    .03 ``Officer'' shall have the meaning specified in Rule 16a-1(f) 
under the Securities Exchange Act of 1934, or any successor rule.
    .04 ``Executive Officer'' shall have the meaning specified in Rule 
3b-7 under the Securities Exchange Act of 1934, or any successor rule.
    .05 Foreign companies are permitted to follow home country practice 
in lieu of the audit committee requirements specified in this Section 
and in accordance with the provisions of Section 110, except that such 
companies must comply with Rule 10A-3 under the Securities Exchange Act 
of 1934.
Sec. 401, Outline of Exchange Disclosure Policies
    The Exchange considers that the conduct of a fair and orderly 
market requires every listed company to make available to the public 
information necessary for informed investing and to take reasonable 
steps to ensure that all who invest in its securities enjoy equal 
access to such information. In applying this fundamental principle, the 
Exchange has adopted the following [seven] eight specific policies 
concerning disclosure, each of which is more fully discussed (in a 
Question and Answer format) in Sec.  402:
    (a) through (g)--No change.
    (h) Receipt of Audit Opinion with Going Concern Qualification--A 
company is required to publicly disclose that it has received an audit 
opinion that contains a going concern qualification. (See Section 
610(b).)
Sec. 402, Explanation of Exchange Disclosure Policies
    (a) Immediate Public Disclosure of Material Information
    Q. What standard should be employed to determine whether disclosure 
should be made?
    A. Immediate disclosure should be made of information about a 
company's affairs or about events or conditions in the market for its 
securities when either of the following standards are met:
    (i) Where the information is likely to have a significant effect on 
the price of any of the company's securities; or
    (ii) Where such information (including, in certain cases, any 
necessary interpretation by securities analysts or other experts) is 
likely to be considered important by a reasonable investor in 
determining a choice of action.
    Q. What kinds of information about a company's affairs should be 
disclosed?
    A. Any material information of a factual nature that bears on the 
value of a company's securities or on decisions as to whether or not to 
invest or trade in such securities should be disclosed.

[[Page 62112]]

Included is information known to the company concerning:
    (i) Its property, business, financial condition and prospects;
    (ii) Mergers and acquisitions;
    (iii) Dealings with employees, suppliers, customers and others; and
    (iv) Information concerning a significant change in ownership of 
the company's securities by insiders, principal shareholders, or 
control persons.
    In those instances where a company deems it appropriate to disclose 
internal estimates or projections of its earnings or of other data 
relating to its affairs, such estimates or projections should be 
prepared carefully, with a reasonable factual basis, and should be 
stated realistically, with appropriate qualifications. Moreover, if 
such estimates or projections subsequently appear to have been 
mistaken, they should be promptly and publicly corrected.
    Q. What kinds of events and conditions in the market for a 
company's securities may require disclosure?
    A. The price of a company's securities (as well as a reasonable 
investor's decision whether to buy or sell those securities) may be 
affected as much by factors directly concerning the market for the 
securities as by factors concerning the company's business. Factors 
directly concerning the market for a company's securities may include 
such matters as the acquisition or disposition by a company of a 
significant amount of its own securities, an event affecting the 
present or potential dilution of the rights or interests of a company's 
securities, or events materially affecting the size of the ``public 
float'' of its securities.
    While, as noted above, a company is expected to make appropriate 
disclosure about significant changes in insider ownership of its 
securities, the company should not indiscriminately disclose publicly 
any knowledge it has of the trading activities of outsiders, such as 
trading by mutual funds or other institutions, for such outsiders 
normally have a legitimate interest in preserving the confidentiality 
of their securities transactions.
    Q. What are some specific examples of a company's affairs or market 
conditions typically requiring disclosure?
    A. The following events, while not comprising a complete list of 
all the situations which may require disclosure, are particularly 
likely to require prompt announcements:[;]
    [sbull] A joint venture, merger or acquisition;
    [sbull] The declaration or omission of dividends or the 
determination of earnings;
    [sbull] A stock split or stock dividend;
    [sbull] The acquisition or loss of a significant contract;
    [sbull] A significant new product or discovery;
    [sbull] A change in control or a significant change in management;
    [sbull] A call of securities for redemption;
    [sbull] The borrowing of a significant amount of funds;
    [sbull] The public or private sale of a significant amount of 
additional securities;
    [sbull] Significant litigation;
    [sbull] The purchase or sale of a significant asset;
    [sbull] A significant change in capital investment plans;
    [sbull] A significant labor dispute or disputes with subcontractors 
or suppliers;
    [sbull] An event requiring the filing of a current report under the 
Securities Exchange Act;
    [sbull] Establishment of a program to make purchases of the 
company's own shares;
    [sbull] A tender offer for another company's securities;
    [sbull] An event of technical default or default on interest and/or 
principal payments;[.]
    [sbull] Board changes and vacancies; and
    [sbull] Receipt of an audit opinion that contains a going concern 
qualification (see also Section 610(b)).
    Q. When may a company properly withhold material information?
    A. Occasionally, circumstances such as those discussed below may 
arise in which--provided that complete confidentiality is maintained--a 
company may temporarily refrain from publicly disclosing material 
information. These situations, however, are limited and constitute an 
infrequent exception to the normal requirement of immediate public 
disclosure. Thus, in cases of doubt, the presumption must always be in 
favor of disclosure.
    (i) When immediate disclosure would prejudice the ability of the 
company to pursue its corporate objectives.
    Although public disclosure is generally necessary to protect the 
interests of investors, circumstances may occasionally arise where 
disclosure would prejudice a company's ability to achieve a valid 
corporate objective. Public disclosure of a plan to acquire certain 
real estate, for example, could result in an increase in the company's 
cost of the desired acquisition or could prevent the company from 
carrying out the plan at all. In such circumstances, if the unfavorable 
result to the company outweighs the undesirable consequences of non-
disclosure, an announcement may properly be deferred to a more 
appropriate time.
    (ii) When the facts are in a state of flux and a more appropriate 
moment for disclosure is imminent.
    Occasionally, corporate developments give rise to information 
which, although material, is subject to rapid change. If the situation 
is about to stabilize or resolve itself in the near future, it may be 
proper to withhold public disclosure until a firm announcement can be 
made, since successive public statements concerning the same subject 
(but based on changing facts) may confuse or mislead the public rather 
than enlighten it.
    For example, in the course of a successful negotiation for the 
acquisition of another company, the only information known to each 
party at the outset may be the willingness of the other to hold 
discussions. Shortly thereafter, it may become apparent to the parties 
that it is likely an agreement can be reached. Finally, agreement in 
principle may be reached on specific terms. In such circumstances (and 
assuming the maintenance of strict confidentiality), a company need not 
issue a public announcement at each stage of the negotiations, 
describing the current state of constantly changing facts, but may 
await agreement in principle on specific terms. If, on the other hand, 
progress in the negotiations should stabilize at some other point, 
disclosure should then be made if the information is material.
    Whenever material information is being temporarily withheld, the 
strictest confidentiality must be maintained, and the company should be 
prepared to make an immediate public announcement, if necessary. During 
this period, the market action of the company's securities should be 
closely watched, since unusual market activity frequently signifies 
that a ``leak'' may have occurred. This is one reason why it is 
important to keep the company's Listing Qualifications Analyst fully 
apprised of material corporate developments.

    Note: Federal securities laws may restrict the extent of 
permissible disclosure before or during a public offering of 
securities or a solicitation of proxies. In such circumstances (as 
more fully discussed below), a company should discuss the disclosure 
of material information in advance with the Exchange and the 
Securities and Exchange Commission. It is the Exchange's experience 
that the requirements of both the securities laws and regulations 
and the Exchange's disclosure policy can be met even in those 
instances where their thrust appears to be different.


[[Page 62113]]


    Q. What action is required if rumors occur while material 
information is being temporarily withheld?
    A. If rumors concerning such information should develop, immediate 
public disclosure becomes necessary. (See also ``Clarification or 
Confirmation of Rumors and Reports'', Section 402(c).)
    Q. What action is required if insider trading occurs while material 
information is being temporarily withheld?
    A. Immediate public disclosure of the information in question must 
be effected if the company should learn that insider trading, as 
defined in Sec.  402(f) has taken or is taking place. In unusual cases, 
where the trading is insignificant and does not have any influence on 
the market, and where measures sufficient to halt insider trading and 
prevent its recurrence are taken, exemptions might be made following 
discussions with the Exchange. The company's Listing Qualifications 
Analyst, through the facilities of the Exchange's Stock Watch 
Department, can provide current information regarding market activity 
in the company's securities and help assess the significance of such 
trading.
    Q. How can confidentiality best be maintained?
    A. Information that is to be kept confidential should be confined, 
to the extent possible, to the highest possible echelons of management 
and should be disclosed to officers, employees and others on a ``need 
to know'' basis only. Distribution of paperwork and other data should 
be held to a minimum. When the information must be disclosed more 
broadly to company personnel or others, their attention should be drawn 
to its confidential nature and to the restrictions that apply to its 
use, including the prohibition on insider trading. It may be 
appropriate to require each person who gains access to the information 
to report any transaction which he effects in the company's securities 
to the company. If counsel, accountants, financial or public relations 
advisers or other outsiders are consulted, steps should be taken to 
ensure that they maintain similar precautions within their respective 
organizations to maintain confidentiality.
    In general, it is recommended that a listed company remind its 
employees on a regular basis of its policies on confidentiality.
    (b)--No change.
Sec. 610, Publication of Annual Report
    (a) A listed company is required to publish and furnish to its 
shareholders (or to holders of any other listed security when its 
common stock is not listed on a national securities exchange) an annual 
report containing audited financial statements prepared in conformity 
with the requirements of the Securities and Exchange Commission. The 
company must disclose in its annual report to security holders, for the 
year covered by the report: (a) The number of unoptioned shares 
available at the beginning and at the close of the year for the 
granting of options under an option plan; and (b) any changes in the 
exercise price of outstanding options, through cancellation and 
reissuance or otherwise, except price changes resulting from the normal 
operation of anti-dilution provisions of the options. Three copies of 
the report must be filed with the Exchange.
    (b) A listed company that receives an audit opinion that contains a 
going concern qualification must make a public announcement through the 
news media disclosing the receipt of such qualified opinion. Prior to 
the release of the public announcement, the listed company must provide 
such announcement to the Amex's StockWatch and Listing Qualifications 
Departments.* The public announcement shall be made as promptly as 
possible, but not more than seven calendar days following the filing of 
such audit opinion in a public filing with the Securities and Exchange 
Commission.

    * Notification should be provided to the Amex's StockWatch 
Department at (212) 306-8383 (telephone), (212) 306-1488 
(facsimile), and to the Listing Qualifications Department at (212) 
306-1331 (telephone), (212)-306-5325 (facsimile).

Part 8. Corporate Governance Requirements

Sec. 801, General

    In addition to the quantitative listing standards set forth in Part 
1, this Part 8 specifies certain corporate governance listing 
standards. These standards apply to all listed companies, subject to 
the following exceptions, to the extent not inconsistent with Rule 10A-
3 under the Securities Exchange Act of 1934:
    (a) Controlled Companies--A company in which over 50% of the voting 
power is held by an individual, a group or another company (a 
``controlled company'') is not required to comply with Sections 802(a), 
804 or 805. A controlled company that chooses to take advantage of any 
or all of these exceptions must disclose in its annual meeting proxy 
statement (or in its next annual report on SEC Form 10-K or equivalent 
if the issuer does not file an annual proxy statement) that it is a 
controlled company and the basis for that determination.
    (b) Limited Partnerships and Companies in Bankruptcy--Limited 
partnerships and companies in bankruptcy are not required to comply 
with Sections 802(a), 804 or 805.*
    (c) Other entities--Part 8 is not applicable to passive business 
organizations (such as royalty trusts) or to derivatives and special 
purpose securities listed pursuant to Amex Rules 1000, 1000A and 1200 
and Sections 106, 107 and 118B. However, issuers of such securities are 
required to comply with Sections 121 and 803 to the extent required by 
Rule 10A-3 under the Securities Exchange Act of 1934.\4\
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    \4\ See Amendment No. 1, supra note 3.
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    (d) Closed-End Management Companies--Such issuers are subject to 
extensive federal regulation and are therefore only required to comply 
with the audit committee requirements specified in Section 121 and 803 
to the extent required by Rule 10A-3 under the Securities Exchange Act 
of 1934.
    (e) Foreign Issuers--See Section 110.
    (f) Preferred and debt listings--Companies listing only preferred 
or debt securities on the Exchange are only required to comply with 
Sections 121 and 803 to the extent required by Rule 10A-3 under the 
Securities Exchange Act of 1934.

    * If a limited partnership is managed by a general partner 
rather than a board of directors, the audit committee requirements 
applicable to the listed entity should be satisfied by the general 
partner.

Sec. 802, Board of Directors

    (a) At least a majority of the directors on the Board of Directors 
of each listed company must be independent directors as defined in 
Section 121A, except for (i) a controlled company (see Section 801), 
and (ii) a Small Business filer (see Section 121B(2)(c)).
    (b) Each company shall hold meetings of its Board of Directors on 
at least a quarterly basis. The independent directors shall meet on a 
regular basis as often as necessary to fulfill their responsibilities, 
including at least annually in executive session without the presence 
of non-independent directors and management.
    (c) The Board of Directors of each listed company may not be 
divided into more than three classes. Where the company's charter 
provides for classes, they should be of approximately equal size and 
tenure and directors' terms of office should not exceed three years.*
    (d) A listed company is not permitted to appoint or permit an 
Exchange

[[Page 62114]]

employee or Floor Member to serve on its Board of Directors.
    (e) Listed companies are urged to develop and implement continuing 
education programs for all directors, including orientation and 
training programs for new directors (see also Commentary .01 to Section 
807)

* Paragraph (c) is not intended to restrict the number of terms of 
office that a director may serve, whether consecutive or otherwise.
Sec. 803, Independent Directors and Audit Committee
    (a) No security is eligible for listing unless the issuer is in 
compliance with the audit committee requirements of Rule 10A-3 under 
the Securities Exchange Act of 1934, subject to an opportunity to cure 
any defects thereof in accordance with the procedures set forth in 
Section 1009 and Part 12. If a member of the issuer's audit committee 
ceases to be independent in accordance with the requirements of Rule 
10A-3 under the Securities Exchange Act of 1934 (and the corresponding 
provisions of Section 121B(2)(a)(i)) for reasons outside the member's 
reasonable control, that person, with notice to the Exchange, may 
remain an audit committee member of the issuer until the earlier of the 
next annual shareholders meeting of the issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent. The text of Rule 10A-3 under the Securities Exchange Act 
of 1934 is reproduced in Commentary .01.
    (b) A listed issuer must notify the Exchange promptly after an 
executive officer of the issuer becomes aware of any material 
noncompliance by the listed issuer with the requirements of paragraph 
(a).
    (c) Any notification required pursuant to paragraphs (a) or (b) 
should be provided to the Exchange's Listing Qualifications Department 
at (212) 306-1331 (telephone), (212)-306-5325 (facsimile).
    (d) The requirements of paragraphs (a) and (b) are operative as of
    (i) July 31, 2005 for foreign private issuers and small business 
issuers (as defined in Rule 12b-2 under the Securities Exchange Act of 
1934); or
    (ii) For all other listed issuers, the earlier of the listed 
issuer's first annual shareholders meeting after January 15, 2004 or 
October 31, 2004.

See also Section 121.

Commentary * * *

    .01 For the convenience of listed companies, the text of Rule 10A-3 
under the Securities Exchange Act of 1934 is reproduced below (as 
adopted April 25, 2003). Rule 10A-3--Listing standards relating to 
audit committees.
    (a) Pursuant to section 10A(m) of the Act (15 U.S.C. 78j-1(m)) and 
section 3 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7202):
    (1) National securities exchanges. The rules of each national 
securities exchange registered pursuant to section 6 of the Act (15 
U.S.C. 78f) must, in accordance with the provisions of this section, 
prohibit the initial or continued listing of any security of an issuer 
that is not in compliance with the requirements of any portion of 
paragraph (b) or (c) of this section.
    (2) National securities associations. The rules of each national 
securities association registered pursuant to section 15A of the Act 
(15 U.S.C. 78o-3) must, in accordance with the provisions of this 
section, prohibit the initial or continued listing in an automated 
inter-dealer quotation system of any security of an issuer that is not 
in compliance with the requirements of any portion of paragraph (b) or 
(c) of this section.
    (3) Opportunity to cure defects. The rules required by paragraphs 
(a)(1) and (a)(2) of this section must provide for appropriate 
procedures for a listed issuer to have an opportunity to cure any 
defects that would be the basis for a prohibition under paragraph (a) 
of this section, before the imposition of such prohibition. Such rules 
also may provide that if a member of an audit committee ceases to be 
independent in accordance with the requirements of this section for 
reasons outside the member's reasonable control, that person, with 
notice by the issuer to the applicable national securities exchange or 
national securities association, may remain an audit committee member 
of the listed issuer until the earlier of the next annual shareholders 
meeting of the listed issuer or one year from the occurrence of the 
event that caused the member to be no longer independent.
    (4) Notification of noncompliance. The rules required by paragraphs 
(a)(1) and (a)(2) of this section must include a requirement that a 
listed issuer must notify the applicable national securities exchange 
or national securities association promptly after an executive officer 
of the listed issuer becomes aware of any material noncompliance by the 
listed issuer with the requirements of this section.
    (5) Implementation.
    (i) The rules of each national securities exchange or national 
securities association meeting the requirements of this section must be 
operative, and listed issuers must be in compliance with those rules, 
by the following dates:
    (A) July 31, 2005 for foreign private issuers and small business 
issuers (as defined in Sec.  240.12b-2); and
    (B) For all other listed issuers, the earlier of the listed 
issuer's first annual shareholders meeting after January 15, 2004, or 
October 31, 2004.
    (ii) Each national securities exchange and national securities 
association must provide to the Commission, no later than July 15, 
2003, proposed rules or rule amendments that comply with this section.
    (iii) Each national securities exchange and national securities 
association must have final rules or rule amendments that comply with 
this section approved by the Commission no later than December 1, 2003.
    (b) Required standards.
    (1) Independence.
    (i) Each member of the audit committee must be a member of the 
board of directors of the listed issuer, and must otherwise be 
independent; provided that, where a listed issuer is one of two dual 
holding companies, those companies may designate one audit committee 
for both companies so long as each member of the audit committee is a 
member of the board of directors of at least one of such dual holding 
companies.
    (ii) Independence requirements for non-investment company issuers. 
In order to be considered to be independent for purposes of this 
paragraph (b)(1), a member of an audit committee of a listed issuer 
that is not an investment company may not, other than in his or her 
capacity as a member of the audit committee, the board of directors, or 
any other board committee:
    (A) Accept directly or indirectly any consulting, advisory, or 
other compensatory fee from the issuer or any subsidiary thereof, 
provided that, unless the rules of the national securities exchange or 
national securities association provide otherwise, compensatory fees do 
not include the receipt of fixed amounts of compensation under a 
retirement plan (including deferred compensation) for prior service 
with the listed issuer (provided that such compensation is not 
contingent in any way on continued service); or
    (B) Be an affiliated person of the issuer or any subsidiary 
thereof.
    (iii) Independence requirements for investment company issuers. In 
order to be considered to be independent for purposes of this paragraph 
(b)(1), a member of an audit committee of a listed issuer that is an 
investment company may not, other than in his or

[[Page 62115]]

her capacity as a member of the audit committee, the board of 
directors, or any other board committee:
    (A) Accept directly or indirectly any consulting, advisory, or 
other compensatory fee from the issuer or any subsidiary thereof, 
provided that, unless the rules of the national securities exchange or 
national securities association provide otherwise, compensatory fees do 
not include the receipt of fixed amounts of compensation under a 
retirement plan (including deferred compensation) for prior service 
with the listed issuer (provided that such compensation is not 
contingent in any way on continued service); or
    (B) Be an ``interested person'' of the issuer as defined in section 
2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(19)).
    (iv) Exemptions from the independence requirements.
    (A) For an issuer listing securities pursuant to a registration 
statement under section 12 of the Act (15 U.S.C. 78l), or for an issuer 
that has a registration statement under the Securities Act of 1933 (15 
U.S.C. 77a et seq.) covering an initial public offering of securities 
to be listed by the issuer, where in each case the listed issuer was 
not, immediately prior to the effective date of such registration 
statement, required to file reports with the Commission pursuant to 
section 13(a) or 15(d) of the Act (15 U.S.C. 78m(a) or 78o(d)):
    (1) All but one of the members of the listed issuer's audit 
committee may be exempt from the independence requirements of paragraph 
(b)(1)(ii) of this section for 90 days from the date of effectiveness 
of such registration statement; and
    (2) A minority of the members of the listed issuer's audit 
committee may be exempt from the independence requirements of paragraph 
(b)(1)(ii) of this section for one year from the date of effectiveness 
of such registration statement.
    (B) An audit committee member that sits on the board of directors 
of a listed issuer and an affiliate of the listed issuer is exempt from 
the requirements of paragraph (b)(1)(ii)(B) of this section if the 
member, except for being a director on each such board of directors, 
otherwise meets the independence requirements of paragraph (b)(1)(ii) 
of this section for each such entity, including the receipt of only 
ordinary-course compensation for serving as a member of the board of 
directors, audit committee or any other board committee of each such 
entity.
    (C) An employee of a foreign private issuer who is not an executive 
officer of the foreign private issuer is exempt from the requirements 
of paragraph (b)(1)(ii) of this section if the employee is elected or 
named to the board of directors or audit committee of the foreign 
private issuer pursuant to the issuer's governing law or documents, an 
employee collective bargaining or similar agreement or other home 
country legal or listing requirements.
    (D) An audit committee member of a foreign private issuer may be 
exempt from the requirements of paragraph (b)(1)(ii)(B) of this section 
if that member meets the following requirements:
    (1) The member is an affiliate of the foreign private issuer or a 
representative of such an affiliate;
    (2) The member has only observer status on, and is not a voting 
member or the chair of, the audit committee; and
    (3) Neither the member nor the affiliate is an executive officer of 
the foreign private issuer.
    (E) An audit committee member of a foreign private issuer may be 
exempt from the requirements of paragraph (b)(1)(ii)(B) of this section 
if that member meets the following requirements:
    (1) The member is a representative or designee of a foreign 
government or foreign governmental entity that is an affiliate of the 
foreign private issuer; and
    (2) The member is not an executive officer of the foreign private 
issuer.
    (F) In addition to paragraphs (b)(1)(iv)(A) through (E) of this 
section, the Commission may exempt from the requirements of paragraphs 
(b)(1)(ii) or (b)(1)(iii) of this section a particular relationship 
with respect to audit committee members, as the Commission determines 
appropriate in light of the circumstances.
    (2) Responsibilities relating to registered public accounting 
firms. The audit committee of each listed issuer, in its capacity as a 
committee of the board of directors, must be directly responsible for 
the appointment, compensation, retention and oversight of the work of 
any registered public accounting firm engaged (including resolution of 
disagreements between management and the auditor regarding financial 
reporting) for the purpose of preparing or issuing an audit report or 
performing other audit, review or attest services for the listed 
issuer, and each such registered public accounting firm must report 
directly to the audit committee.
    (3) Complaints. Each audit committee must establish procedures for:
    (i) The receipt, retention, and treatment of complaints received by 
the listed issuer regarding accounting, internal accounting controls, 
or auditing matters; and
    (ii) The confidential, anonymous submission by employees of the 
listed issuer of concerns regarding questionable accounting or auditing 
matters.
    (4) Authority to engage advisers. Each audit committee must have 
the authority to engage independent counsel and other advisers, as it 
determines necessary to carry out its duties.
    (5) Funding. Each listed issuer must provide for appropriate 
funding, as determined by the audit committee, in its capacity as a 
committee of the board of directors, for payment of:
    (i) Compensation to any registered public accounting firm engaged 
for the purpose of preparing or issuing an audit report or performing 
other audit, review or attest services for the listed issuer;
    (ii) Compensation to any advisers employed by the audit committee 
under paragraph (b)(4) of this section; and
    (iii) Ordinary administrative expenses of the audit committee that 
are necessary or appropriate in carrying out its duties.
    (c) General exemptions.
    (1) At any time when an issuer has a class of securities that is 
listed on a national securities exchange or national securities 
association subject to the requirements of this section, the listing of 
other classes of securities of the listed issuer on a national 
securities exchange or national securities association is not subject 
to the requirements of this section.
    (2) At any time when an issuer has a class of common equity 
securities (or similar securities) that is listed on a national 
securities exchange or national securities association subject to the 
requirements of this section, the listing of classes of securities of a 
direct or indirect consolidated subsidiary or an at least 50% 
beneficially owned subsidiary of the issuer (except classes of equity 
securities, other than non-convertible, non-participating preferred 
securities, of such subsidiary) is not subject to the requirements of 
this section.
    (3) The listing of securities of a foreign private issuer is not 
subject to the requirements of paragraphs (b)(1) through (b)(5) of this 
section if the foreign private issuer meets the following requirements:
    (i) The foreign private issuer has a board of auditors (or similar 
body), or has statutory auditors, established and selected pursuant to 
home country legal or listing provisions expressly requiring

[[Page 62116]]

or permitting such a board or similar body;
    (ii) The board or body, or statutory auditors is required under 
home country legal or listing requirements to be either:
    (A) Separate from the board of directors; or
    (B) Composed of one or more members of the board of directors and 
one or more members that are not also members of the board of 
directors;
    (iii) The board or body, or statutory auditors, are not elected by 
management of such issuer and no executive officer of the foreign 
private issuer is a member of such board or body, or statutory 
auditors;
    (iv) Home country legal or listing provisions set forth or provide 
for standards for the independence of such board or body, or statutory 
auditors, from the foreign private issuer or the management of such 
issuer;
    (v) Such board or body, or statutory auditors, in accordance with 
any applicable home country legal or listing requirements or the 
issuer's governing documents, are responsible, to the extent permitted 
by law, for the appointment, retention and oversight of the work of any 
registered public accounting firm engaged (including, to the extent 
permitted by law, the resolution of disagreements between management 
and the auditor regarding financial reporting) for the purpose of 
preparing or issuing an audit report or performing other audit, review 
or attest services for the issuer; and
    (vi) The audit committee requirements of paragraphs (b)(3), (b)(4) 
and (b)(5) of this section apply to such board or body, or statutory 
auditors, to the extent permitted by law.
    (4) The listing of a security futures product cleared by a clearing 
agency that is registered pursuant to section 17A of the Act (15 U.S.C. 
78q-1) or that is exempt from the registration requirements of section 
17A pursuant to paragraph (b)(7)(A) of such section is not subject to 
the requirements of this section.
    (5) The listing of a standardized option, as defined in Sec.  
240.9b-1(a)(4), issued by a clearing agency that is registered pursuant 
to section 17A of the Act (15 U.S.C. 78q-1) is not subject to the 
requirements of this section.
    (6) The listing of securities of the following listed issuers are 
not subject to the requirements of this section:
    (i) Asset-Backed Issuers (as defined in Sec.  240.13a-14(g) and 
Sec.  240.15d-14(g));
    (ii) Unit investment trusts (as defined in 15 U.S.C. 80a-4(2)); and
    (iii) Foreign governments (as defined in Sec.  240.3b-4(a)).
    (7) The listing of securities of a listed issuer is not subject to 
the requirements of this section if:
    (i) The listed issuer, as reflected in the applicable listing 
application, is organized as a trust or other unincorporated 
association that does not have a board of directors or persons acting 
in a similar capacity; and
    (ii) The activities of the listed issuer that is described in 
paragraph (c)(7)(i) of this section are limited to passively owning or 
holding (as well as administering and distributing amounts in respect 
of) securities, rights, collateral or other assets on behalf of or for 
the benefit of the holders of the listed securities.
    (d) Disclosure. Any listed issuer availing itself of an exemption 
from the independence standards contained in paragraph (b)(1)(iv) of 
this section (except paragraph (b)(1)(iv)(B) of this section), the 
general exemption contained in paragraph (c)(3) of this section or the 
last sentence of paragraph (a)(3) of this section, must:
    (1) Disclose its reliance on the exemption and its assessment of 
whether, and if so, how, such reliance would materially adversely 
affect the ability of the audit committee to act independently and to 
satisfy the other requirements of this section in any proxy or 
information statement for a meeting of shareholders at which directors 
are elected that is filed with the Commission pursuant to the 
requirements of section 14 of the Act (15 U.S.C. 78n); and
    (2) Disclose the information specified in paragraph (d)(1) of this 
section in, or incorporate such information by reference from such 
proxy or information statement filed with the Commission into, its 
annual report filed with the Commission pursuant to the requirements of 
section 13(a) or 15(d) of the Act (15 U.S.C. 78m(a) or 78o(d)).
    (e) Definitions. Unless the context otherwise requires, all terms 
used in this section have the same meaning as in the Act. In addition, 
unless the context otherwise requires, the following definitions apply 
for purposes of this section:
    (1)(i) The term affiliate of, or a person affiliated with, a 
specified person, means a person that directly, or indirectly through 
one or more intermediaries, controls, or is controlled by, or is under 
common control with, the person specified.
    (ii)(A) A person will be deemed not to be in control of a specified 
person for purposes of this section if the person:
    (1) Is not the beneficial owner, directly or indirectly, of more 
than 10% of any class of voting equity securities of the specified 
person; and
    (2) Is not an executive officer of the specified person.
    (B) Paragraph (e)(1)(ii)(A) of this section only creates a safe 
harbor position that a person does not control a specified person. The 
existence of the safe harbor does not create a presumption in any way 
that a person exceeding the ownership requirement in paragraph 
(e)(1)(ii)(A)(1) of this section controls or is otherwise an affiliate 
of a specified person.
    (iii) The following will be deemed to be affiliates:
    (A) An executive officer of an affiliate;
    (B) A director who also is an employee of an affiliate;
    (C) A general partner of an affiliate; and
    (D) A managing member of an affiliate.
    (iv) For purposes of paragraph (e)(1)(i) of this section, dual 
holding companies will not be deemed to be affiliates of or persons 
affiliated with each other by virtue of their dual holding company 
arrangements with each other, including where directors of one dual 
holding company are also directors of the other dual holding company, 
or where directors of one or both dual holding companies are also 
directors of the businesses jointly controlled, directly or indirectly, 
by the dual holding companies (and, in each case, receive only 
ordinary-course compensation for serving as a member of the board of 
directors, audit committee or any other board committee of the dual 
holding companies or any entity that is jointly controlled, directly or 
indirectly, by the dual holding companies).
    (2) In the case of foreign private issuers with a two-tier board 
system, the term board of directors means the supervisory or non-
management board.
    (3) In the case of a listed issuer that is a limited partnership or 
limited liability company where such entity does not have a board of 
directors or equivalent body, the term board of directors means the 
board of directors of the managing general partner, managing member or 
equivalent body.
    (4) The term control (including the terms controlling, controlled 
by and under common control with) means the possession, direct or 
indirect, of the power to direct or cause the direction of the 
management and policies of a person, whether through the ownership of 
voting securities, by contract, or otherwise.
    (5) The term dual holding companies means two foreign private 
issuers that:
    (i) Are organized in different national jurisdictions;

[[Page 62117]]

    (ii) Collectively own and supervise the management of one or more 
businesses which are conducted as a single economic enterprise; and
    (iii) Do not conduct any business other than collectively owning 
and supervising such businesses and activities reasonably incidental 
thereto.
    (6) The term executive officer has the meaning set forth in Sec.  
240.3b-7.
    (7) The term foreign private issuer has the meaning set forth in 
Sec.  240.3b-4(c).
    (8) The term indirect acceptance by a member of an audit committee 
of any consulting, advisory or other compensatory fee includes 
acceptance of such a fee by a spouse, a minor child or stepchild or a 
child or stepchild sharing a home with the member or by an entity in 
which such member is a partner, member, an officer such as a managing 
director occupying a comparable position or executive officer, or 
occupies a similar position (except limited partners, non-managing 
members and those occupying similar positions who, in each case, have 
no active role in providing services to the entity) and which provides 
accounting, consulting, legal, investment banking or financial advisory 
services to the issuer or any subsidiary of the issuer.
    (9) The terms listed and listing refer to securities listed on a 
national securities exchange or listed in an automated inter-dealer 
quotation system of a national securities association or to issuers of 
such securities.

Instructions to Sec.  240.10A-3.

    1. The requirements in paragraphs (b)(2) through (b)(5), (c)(3)(v) 
and (c)(3)(vi) of this section do not conflict with, and do not affect 
the application of, any requirement or ability under a listed issuer's 
governing law or documents or other home country legal or listing 
provisions that requires or permits shareholders to ultimately vote on, 
approve or ratify such requirements. The requirements instead relate to 
the assignment of responsibility as between the audit committee and 
management. In such an instance, however, if the listed issuer provides 
a recommendation or nomination regarding such responsibilities to 
shareholders, the audit committee of the listed issuer, or body 
performing similar functions, must be responsible for making the 
recommendation or nomination.
    2. The requirements in paragraphs (b)(2) through (b)(5), (c)(3)(v), 
(c)(3)(vi) and Instruction 1 of this section do not conflict with any 
legal or listing requirement in a listed issuer's home jurisdiction 
that prohibits the full board of directors from delegating such 
responsibilities to the listed issuer's audit committee or limits the 
degree of such delegation. In that case, the audit committee, or body 
performing similar functions, must be granted such responsibilities, 
which can include advisory powers, with respect to such matters to the 
extent permitted by law, including submitting nominations or 
recommendations to the full board.
    3. The requirements in paragraphs (b)(2) through (b)(5), (c)(3)(v) 
and (c)(3)(vi) of this section do not conflict with any legal or 
listing requirement in a listed issuer's home jurisdiction that vests 
such responsibilities with a government entity or tribunal. In that 
case, the audit committee, or body performing similar functions, must 
be granted such responsibilities, which can include advisory powers, 
with respect to such matters to the extent permitted by law.
    4. For purposes of this section, the determination of a person's 
beneficial ownership must be made in accordance with Sec.  240.13d-3.

Sec. 804, Board Nominations

    (a) Each listed company (except for a controlled company as defined 
in Commentary .01 to Section 121) must obtain approval of Board of 
Director nominations either by a Nominating Committee comprised solely 
of independent directors or by a majority of the independent directors.
    (b) Notwithstanding paragraph (a) above, if the Nominating 
Committee is comprised of at least three members, one director who is 
not independent as defined in section 121A, and is not a current 
officer or employee or an immediate family member of such person, may 
be appointed to the Nominating Committee, if the board, under 
exceptional and limited circumstances, determines that membership on 
the committee by the individual is required by the best interests of 
the company and its shareholders, and the board discloses, in the next 
annual meeting proxy statement (or in its next annual report on SEC 
Form 10-K or equivalent if the issuer does not file an annual proxy 
statement) subsequent to such determination, the nature of the 
relationship and the reasons for that determination. A director 
appointed to the Nominating Committee pursuant to this exception may 
not serve for in excess of two years.
    (c) Notwithstanding paragraph (a) above, if the Nominating 
Committee is comprised of at least three members, and if the exception 
described in paragraph (b) above is not relied upon, one director who 
owns 20% or more of the company's common stock or voting power 
outstanding, and is not independent as defined in section 121A because 
that director is also an officer, may be appointed to the Nominating 
Committee if the 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 proxy statement 
subsequent to such determination (or in its next annual report on SEC 
Form 10-K or equivalent if the issuer does not file an annual proxy 
statement), the nature of the relationship and the reasons for the 
determination.

* * * Commentary

    .01 If a company is legally required by contract or otherwise to 
provide third parties with the ability to nominate and/or appoint 
directors (e.g., preferred stock rights to elect directors upon 
dividend default, shareholder agreements, management agreements), the 
selection and nomination of such directors is not subject to approval 
by the Nominating Committee or a majority of independent directors.

Sec. 805, Executive Compensation

    (a) Each listed company (except for a controlled company as defined 
in Commentary .01 to section 121) must obtain approval of its Chief 
Executive Officer's compensation either by a Compensation Committee 
composed of independent directors or by a majority of the independent 
directors on its Board of Directors. The Chief Executive Officer, in 
consultation with such Compensation Committee, or a majority of the 
independent directors on the company's Board of Directors, as 
applicable, shall recommend to the Board of Directors for its approval 
compensation for other officers (see Commentary .04 to section 121).
    (b) Notwithstanding paragraph (a) above, if the Compensation 
Committee is comprised of at least three members, one director who is 
not independent as defined in section 121A, and is not a current 
officer or employee or an immediate family member of such person, may 
be appointed to the Compensation Committee, if the board, under 
exceptional and limited circumstances, determines that membership on 
the committee by the individual is required by the best interests of 
the company and its shareholders, and the board discloses, in the next 
annual meeting proxy statement (or in its next annual report on SEC 
Form 10-K or equivalent if the issuer does not file an annual proxy 
statement) subsequent to such

[[Page 62118]]

determination, the nature of the relationship and the reasons for that 
determination. A director appointed to the Compensation Committee 
pursuant to this exception may not serve for in excess of two years.

* * * Commentary

    .01 The requirement to obtain approval of either the Compensation 
Committee or a majority of the independent directors does not preclude 
a company from seeking board ratification or approval as may be 
required to comply with applicable tax or State corporate laws.

Sec. 806, Stock Option Plans

    See Section 711.

Sec. 807, Code of Conduct and Ethics

    Each company shall adopt a Code of Conduct and Ethics, applicable 
to all directors, officers, and employees, which also complies with the 
definition of a ``code of ethics'' as set forth in item 406 of SEC 
Regulation S-K (or item 406 of SEC Regulation S-B with respect to a 
company which files reports under SEC Regulation S-B).

* * * Commentary

    .01 While each company should determine the appropriate standards 
and guidelines for inclusion in its Code, all Codes must promote honest 
and ethical conduct, including the ethical handling of actual or 
apparent conflicts of interest between personal and professional 
relationships; full, fair, accurate, timely, and understandable 
disclosure in periodic reports and documents required to be filed by 
the company; compliance with applicable Exchange and governmental rules 
and regulations; prompt internal reporting of violations of the Code to 
an appropriate person or persons identified in the Code; and 
accountability for adherence to the Code.

Sec. 808, Foreign Companies

    See Section 110.
Sec. 1009, Continued Listing Evaluation and Follow-Up
    (a) The following procedures shall be applied by the Exchange staff 
to companies identified as being below the Exchange's continued listing 
policies and standards. Notwithstanding such procedures, when [the 
Exchange staff deems it] necessary or appropriate:
    (i) The Exchange staff may issue a Warning Letter to a company with 
respect to a minor violation of the Exchange's corporate governance or 
shareholder protection requirements (other than violations of the 
requirements pursuant to Rule 10A-3 under the Securities Exchange Act 
of 1934); or
    (ii) For the protection of investors, the Exchange may immediately 
suspend trading in any security, and make application to the SEC to 
delist the security [trading in any security can be suspended 
immediately, and application made to the SEC to delist the security].
    (b) through (i)--No change.
* * * * *

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

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

1. Purpose
    The Exchange is proposing to adopt comprehensive enhancements to 
the corporate governance requirements applicable to listed companies in 
order to promote accountability, transparency and integrity by such 
companies. The proposal encompasses significant changes to the 
following: board of director composition and independence standards, 
audit committee composition and authority, compensation and nominating 
committees, and ethics and disclosure obligations.\5\
---------------------------------------------------------------------------

    \5\ The Commission notes that the Amex has committed to consider 
appropriate revisions to its proposed rule change to achieve 
consistency with corporate governance listing standards approved by 
the Commission for other SROs. Telephone conference between Claudia 
Corwley, Vice President, Listing Qualitifcation, Amex, and Nancy J. 
Sanow, Assistant Director, Division of Market Regulation, Commision, 
on October 27, 2003.
---------------------------------------------------------------------------

Increased Board Independence

    Most listed companies would be required to have a board of 
directors comprised of a majority of independent directors. In 
addition, the definition of ``independent'' would be tightened. Each 
listed company's board of directors would be required to affirmatively 
determine that an independent director has no material relationship 
with the company that would interfere with the exercise of independent 
judgment. However, certain specified relationships would preclude a 
board finding of independence. The current rules already specify 
certain of these relationships and the proposed changes would expand 
and clarify the types of relationships included in this category. 
Finally, independent directors serving on the audit committee would be 
subject to heightened requirements mandated by SEC Rule 10A-3, as 
described later.
    Pursuant to the proposed rule change, the following individuals 
would not qualify as independent directors:
    [sbull] Current officers and employees of the company or its 
subsidiaries.
    [sbull] An individual who is or was employed by the company or any 
parent or subsidiary of the company during the past three years.
    [sbull] An individual who accepts (or whose immediate family member 
\6\ accepts) any payment from the company (or any parent or subsidiary 
of the company) in excess of $60,000 during the current or previous 
fiscal year. Compensation for board service, payments arising solely 
from investments in the company's securities, compensation paid to an 
immediate family member who is a non-executive officer employee of the 
company (or any parent or subsidiary of the company), or benefits under 
a tax-qualified retirement plan or non-discretionary compensation will 
not be included in the $60,000.
---------------------------------------------------------------------------

    \6\ The definition of ``immediate family member'' would be 
expanded to include anyone who resides in the director's home or is 
financially dependent upon the director, as well as the currently 
specified family relationships.
---------------------------------------------------------------------------

    [sbull] An individual who is a partner, controlling shareholder or 
executive officer of any organization to which or from which the 
company made or received payments that exceed five percent of the 
recipient's consolidated gross revenues or $200,000 (whichever is more) 
in any of the most recent three fiscal years.
    [sbull] An individual who is an immediate family member of an 
individual who is or has been employed by the company (or any parent or 
subsidiary of the company) as an executive officer during any of the 
past three years.
    [sbull] An individual who is an executive officer of another entity 
where any of the listed company's executive officers serve on the 
compensation committee.
    [sbull] An individual who is or was a partner or employee of the 
company's outside auditor, and worked on the audit engagement, during 
any of the past three fiscal years.
    In view of the significant difficulties which many listed companies 
may face

[[Page 62119]]

in recruiting enough independent directors to maintain a board with a 
majority of independent directors, the three year ``look back'' periods 
contained in certain of the independence requirements would be applied 
prospectively for independent directors who are not members of the 
audit committee. Thus for the first three years after the requirement 
becomes effective, the applicable ``look back'' period would be to the 
date the requirement to have a board comprised of a majority of 
independent directors becomes effective.
    Listed companies would also be required to hold board meetings on 
at least a quarterly basis, and the independent directors serving on 
the board would be required to meet in executive session (i.e., without 
the presence of non-independent directors) as often as necessary but at 
least once a year.

Audit Committees

    The Exchange is proposing to adopt the rule changes mandated by 
Commission Rule 10A-3 under the Act to prohibit the listing of any 
security of an issuer that is not in compliance with the specified 
minimum audit committee standards with respect to independence and 
responsibilities. These standards would be incorporated into Sections 
121 and 803 of the Amex Company Guide. In accordance with SEC Rule 10A-
3, a listed company would be required to notify the Exchange promptly 
after an executive officer of the company becomes aware of any material 
noncompliance by the company, and any company not in compliance with 
the specified requirements would be afforded an opportunity to cure any 
defects thereof in accordance with the procedures set forth in Section 
1009 and Part 12 of the Amex Company Guide. In addition, if a member of 
a listed company's audit committee ceases to meet the heightened audit 
committee independence requirements for reasons outside the member's 
reasonable control, with notice to the Exchange, that person would be 
permitted to remain an audit committee member until the earlier of the 
next annual shareholders meeting or one year from the occurrence of the 
event that caused the member to be no longer independent.
    Listed companies (other than small business filers as discussed 
below) would continue to be required to maintain an audit committee of 
at least three independent directors. However, each director would now 
be required to satisfy both the general Amex independence standards as 
well as the heightened standards applicable to audit committee members 
as mandated by SEC Rule 10A-3. In addition, the Exchange would continue 
to require that each member of the audit committee be financially 
literate and that one member be financially sophisticated. While a 
listed company would continue to be able to appoint one non-employee 
director to the audit committee who does not meet the general Amex 
independence definition, pursuant to the ``exceptional and limited 
circumstances'' exception,\7\ the proposed changes would permit the 
director in question to serve on the audit committee for only two 
years, and this director would not be permitted to not chair the audit 
committee. Anyone appointed pursuant to this exception would, of 
course, need to be qualified to serve on the committee under the 
heightened audit committee independence standards. Additionally, the 
audit committee responsibilities and charter requirements would be 
expanded to specify that the audit committees must be vested with all 
responsibilities and authority required by SEC Rule 10A-3.
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    \7\ See Section 121B(2)(b) of the Amex Company Guide.
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    Finally, audit committees would be required to hold meetings on at 
least a quarterly basis.

Compensation and Nominating Committees

    The proposed rule changes would also increase the role of 
independent directors in the nomination and compensation decision-
making process. For most listed companies, board nominations and chief 
executive officer compensation would have to be approved by a committee 
composed entirely of independent directors or by a majority of the 
independent directors on the company's board. One non-independent 
director would be permitted to be appointed to the compensation 
committee and/or the nominating committee pursuant to the ``exceptional 
and limited circumstances exception'' noted above. In addition, a 
director who is not independent as a result of being an officer of the 
company but who owns 20% or more of the company's stock could be 
appointed to the nominating committee in lieu of utilizing the 
``exceptional and limited circumstances'' exception.

Ethics and Disclosure

    The proposed changes would impose increased ethics and disclosure 
requirements in a number of respects. First, all Amex employees and 
Floor members would be prohibited from serving on the board of 
directors of any listed company. The Exchange believes that this 
prohibition is imperative in order to avoid even the appearance of a 
conflict of interest that could potentially interfere with its 
regulatory role and responsibilities. Second, all Amex listed companies 
would be required to adopt a code of ethics that meets the definition 
of a ``code of ethics'' under the Sarbanes-Oxley Act of 2002.\8\ Third, 
listed companies would be required to issue a press release disclosing 
receipt of an audit opinion that contains a going concern qualification 
from the company's outside auditor, as well as any board changes and 
vacancies. And fourth, as discussed below, foreign issuers that elect 
to comply with certain home country corporate governance practices in 
lieu of Amex requirements would be required to provide disclosure 
thereof.
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    \8\ See Item 406 of Regulation S-K and Item 406 of Regulation S-
B.
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Applicability

    The new corporate governance listing standards would apply to all 
listed companies with the exception of passive business organizations 
(such as royalty trusts) and derivatives and special purpose securities 
listed pursuant to Amex Rules 1000, 1000A and 1200 and Sections 106, 
107 and 118B of the Amex Company Guide. Because of the nature and 
structure of such issuers, the Exchange does not believe that it is 
necessary or appropriate to apply the enhanced corporate governance 
requirements to them. However, issuers of some securities would be 
required to comply with Commission Rule 10A-3 to the extent required of 
them. In addition, the following types of issuers would be subject to 
limited exceptions as follows:
    [sbull] Controlled Companies: A company in which over 50% of the 
voting power is held by an individual, a group or another company would 
not be required to comply with the requirement to have a board of 
directors comprised of a majority of independent directors, or with the 
compensation and nominating committee requirements. However, a 
controlled company that chooses to take advantage of any or all of 
these exceptions would be required to disclose in its annual meeting 
proxy that it is a controlled company and the basis for that 
determination. Controlled companies would, however, be subject to all 
other corporate governance requirements including those pertaining to 
audit committees.
    [sbull] Limited Partnerships and Companies in Bankruptcy: Limited

[[Page 62120]]

partnerships and companies in bankruptcy would not be required to 
comply with the requirement to have a board of directors comprised of a 
majority of independent directors, or with the compensation and 
nominating committee requirements.
    [sbull] Closed-End Management Companies: These issuers would be 
required to comply with the Exchange's audit committee requirements 
only to the extent required by SEC Rule 10A-3. Because closed-end 
management companies are subject to pervasive federal regulation 
relating, to among other things, their management structure and 
governance, the Exchange does not believe it is necessary or 
appropriate to apply the remaining corporate governance requirements to 
such issuers.
    [sbull] Foreign Issuers: Foreign listed companies would be 
permitted to comply with home country practices as set forth in Section 
110 of the Amex Company Guide, to the extent that such practices are 
not contrary to the federal securities laws. However, a foreign issuer 
would be required to provide English language disclosure of any 
significant ways in which its corporate governance practices differ 
from those followed by domestic companies pursuant to the Exchange's 
standards.
    [sbull] Preferred and Debt Listings: Companies listing only 
preferred or debt securities on the Exchange would have to comply only 
with the Exchange's audit committee requirements to the extent required 
by SEC Rule 10A-3.
    [sbull] Small Business Filers: The requirements applicable to small 
business filers would be enhanced. Under the proposed changes, such 
companies would be subject to the new corporate governance 
requirements, except that they would only be required to have a board 
of directors comprised of at least 50% independent directors and an 
audit committee of at least two independent directors. Such issuers 
would, of course, be required to comply with SEC Rule 10A-3.
    The proposed changes would also authorize the Exchange staff to 
issue a public warning letter to a listed company for a minor violation 
of the Exchange's corporate governance and shareholder protection 
requirements. Amex rules do not currently provide for any sanction 
other than delisting for a company that has violated a corporate 
governance or shareholder protection requirement. Because delisting is 
obviously an extreme sanction that can be detrimental to a company's 
shareholders--the intended beneficiaries of such requirements--
exchanges often do not have an appropriate approach to deal with these 
violations. Accordingly, the proposed changes would authorize Amex 
staff to issue a warning letter to a listed company for a minor 
corporate governance violation. Issuance of such letters would be 
subject to appropriate due process (i.e., the staff would be required 
to advise the company of the apparent violation with an opportunity to 
respond prior to issuance of the warning letter) and would also require 
public disclosure by the company and correction within an appropriate 
time frame. Flagrant or repeat violations may subject the company to 
delisting.

Transition

    The Exchange believes that many listed companies would face 
significant obstacles in complying with the enhanced board composition 
requirements. Therefore, other than for the audit committee 
requirements mandated by SEC Rule 10A-3, the new requirements, which 
require changes to board and committee composition and structure, would 
become effective two years following Commission approval. However, if a 
company already has a staggered board in place, and a change is 
required with respect to a director whose term does not expire during 
the two-year period, the company would have an additional year to fully 
comply with the board composition requirement. Companies listing in 
connection with an initial public offering or transferring from another 
marketplace that does not have substantially similar standards would be 
required to comply within two years of listing. Companies transferring 
from another marketplace which does have substantially similar 
standards would be given at least as long as any transition period 
afforded by that marketplace to comply.
    The proposals that do not require changes to board composition 
would become effective six months following Commission approval. These 
changes include disclosure requirements, code of ethics requirements, 
and meeting requirements.
    The public warning letter provision and the prohibition on Amex 
employees and Floor members serving on listed company boards will be 
effective upon SEC approval.
    The audit committee changes implementing SEC Rule 10A-3 would 
become operative as required, on July 31, 2005 for foreign private 
issuers and small business filers, and for all other issuers by the 
earlier of either the issuer's first annual shareholders meeting after 
January 15, 2004 or October 31, 2004.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act \9\ in general and furthers the 
objectives of Section 6(b)(5)\10\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, to protect investors 
and the public interest, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. 
Specifically, the Exchange represents that the proposed rule change, as 
amended, is designed to increase investor protection by promoting 
accountability, transparency, and integrity by listed companies.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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, as 
amended, will impose any burden on competition.

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

    The Exchange did not receive any written comments on the proposed 
rule change.

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

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

[[Page 62121]]

interested in commenters' views on whether it is appropriate to permit 
small business filers to maintain a Board comprised of at least 50 
percent independent directors, rather than a majority of independent 
directors, and to have an audit committee comprised of only two 
independent directors. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of 
the submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Amex.
    All submissions should refer to the File No. SR-Amex-2003-65 and 
should be submitted by November 21, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27460 Filed 10-30-03; 8:45 am]
BILLING CODE 8010-01-P