[Federal Register Volume 68, Number 218 (Wednesday, November 12, 2003)]
[Notices]
[Pages 64154-64182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28187]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48745; File Nos. SR-NYSE-2002-33, SR-NASD-2002-77, SR-
NASD-2002-80, SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141]


Self-Regulatory Organizations; New York Stock Exchange, Inc. and 
National Association of Securities Dealers, Inc.; Order Approving 
Proposed Rule Changes (SR-NYSE-2002-33 and SR-NASD-2002-141) and 
Amendments No. 1 Thereto; Order Approving Proposed Rule Changes (SR-
NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138 and SR-NASD-2002-139) 
and Amendments No. 1 to SR-NASD-2002-80 and SR-NASD-2002-139; and 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
Nos. 2 and 3 to SR-NYSE-2002-33, Amendment Nos. 2, 3, 4 and 5 to SR-
NASD-2002-141, Amendment Nos. 2 and 3 to SR-NASD-2002-80, Amendment 
Nos. 1, 2, and 3 to SR-NASD-2002-138, and Amendment No. 2 to SR-NASD-
2002-139, Relating to Corporate Governance

November 4, 2003.

I. Introduction

    On August 16, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (SR-NYSE-2002-33) to amend its 
Listed Company Manual (``NYSE Manual'') to implement significant 
changes to its listing standards that are aimed to ensure the 
independence of directors of listed companies and to strengthen 
corporate governance practices of listed companies (``NYSE Corporate 
Governance Proposal''). On April 4, 2003, the NYSE submitted Amendment 
No. 1 to the NYSE Corporate Governance Proposal.\3\ On April 17, 2003, 
the proposed rule change, as amended by NYSE Amendment No. 1, was 
published for comment in the Federal Register.\4\ The

[[Page 64155]]

Commission received 68 comment letters on the NYSE proposal.\5\ On 
October 8, 2003, the NYSE filed Amendment No. 2 to the NYSE Corporate 
Governance Proposal.\6\ On October 20, 2003, the NYSE filed Amendment 
No. 3 to the NYSE Corporate Governance Proposal.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated April 3, 2003 (``NYSE Amendment 
No. 1''). NYSE Amendment No. 1 replaced the original filing in its 
entirety. Telephone call between Annemarie Tierney, Office of 
General Counsel, NYSE, and Jennifer Lewis, Special Counsel, 
Division, Commission, on April 9, 2003.
    \4\ See Securities Exchange Act Release No. 47672 (April 11, 
2003), 68 FR 19051 (``NYSE Notice'').
    \5\ A list of commenters on the rule proposals of the NYSE and 
the National Association of Securities Dealers, Inc. (``NASD''), who 
submitted correspondence as of October 13, 2003, is attached as 
Exhibit A to this order. The public files for the NYSE and NASD rule 
proposals, including all comment letters received on the proposals, 
are located at the Commission's Public Reference Room, 450 Fifth 
Street, NW, Washington DC 20549-0102. See infra, note.
    \6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
October 8, 2003 (``NYSE Amendment No. 2''). NYSE Amendment No. 2 
amended portions of the proposal as described below.
    \7\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
October 17, 2003 (``NYSE Amendment No. 3''). In Amendment No. 3, 
NYSE proposed to require that the audit committee charter of a 
closed-end or open-end management investment company address the 
responsibility of the audit committee to establish procedures for 
the confidential, anonymous submission of concerns regarding 
questionable accounting or auditing matters, but not to require the 
procedures to be set forth in the charter, as would have been 
required under Amendment No. 2.
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    On October 9, 2002, the NASD, through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), filed with the Commission, pursuant to 
section 19(b)(1) of the Exchange Act, and Rule 19b-4 thereunder, a 
proposed rule change (SR-NASD-2002-141) to amend NASD Rules 4200 and 
4350(c) and (d) to modify requirements relating to board independence 
and independent committees (``Nasdaq Independent Director Proposal''). 
On March 11, 2003, NASD, through Nasdaq, filed Amendment No. 1 to the 
Nasdaq Independent Director Proposal.\8\ On March 25, 2003, the 
proposed rule change, as amended by Amendment No. 1 to the Nasdaq 
Independent Director Proposal, was published for comment in the Federal 
Register.\9\ The Commission received 24 comment letters on the Nasdaq 
Independent Director Proposal.\10\ On July 16, 2003, Nasdaq filed 
Amendment No. 2 to the Nasdaq Independent Director Proposal.\11\ On 
October 10, 2003, Nasdaq filed Amendment No. 3 to the Nasdaq 
Independent Director Proposal.\12\ On October 16, 2003, Nasdaq filed 
Amendment No. 4 to the Nasdaq Independent Director Proposal.\13\ On 
October 30, 2003, Nasdaq filed Amendment No. 5 to the Independent 
Director Proposal.\14\ On June 11, 2002, the NASD, through Nasdaq, 
filed with the Commission, pursuant to section 19(b)(1) of the Exchange 
Act, and Rule 19b-4 thereunder, a proposed rule change (SR-NASD-2002-
77) to amend NASD Rule 4350(b) to add a requirement for issuers to 
announce publicly any audit opinions with going concern qualifications 
(``Nasdaq Going Concern Proposal''). On July 10, 2003, the NASD Going 
Concern Proposal was published for comment in the Federal Register.\15\ 
The Commission received no comments on the proposal.
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    \8\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated March 11, 2003. Amendment No. 
1 to the Nasdaq Independent Director Proposal replaced the original 
filing in its entirety.
    \9\ See Securities Exchange Act Release No. 47516 (March 17, 
2003), 68 FR 14451.
    \10\ See supra note.
    \11\ See letter from Sara Nelson Bloom, Associate General 
Counsel, Nasdaq, to Katherine A. England, Assistant Director, 
Division, Commission, dated July 15, 2003.
    \12\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated October 9, 2003. Amendment No. 
3 to the Nasdaq Independent Director Proposal replaced in full the 
Nasdaq Independent Director Proposal and Amendment Nos. 1 and 2 
thereto. See Section IV. infra, describing aspects of the proposed 
revisions.
    \13\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated October 15, 2003. Amendment 
No. 4 to the Nasdaq Independent Director Proposal made several 
revisions to the narrative section of the previous amendment.
    \14\ See letter from Sara Nelson Bloom, Associate General 
Counsel, Nasdaq, to Katherine A. England, Assistant Director, 
Division, Commission, dated October 29, 2003. Amendment No. 5 to the 
Nasdaq Independent Director Proposal related to the proposed 
requirement that investment company audit committees establish 
procedures for the confidential, anonymous submission of concerns 
regarding questionable accounting or auditing matters. Amendment No. 
5 removed a sentence in the narrative section of the proposal that 
stated that the procedures would be required to be set forth in the 
audit committee charter.
    \15\ See Securities Exchange Act Release No. 48123 (July 2, 
2003), 68 FR 41191 (``Nasdaq Notice'').
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    On June 11, 2002, the NASD, through Nasdaq, filed with the 
Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 
19b-4 thereunder, a proposed rule change (SR-NASD-2002-80) to amend 
NASD Rule 4350(h) to require an issuer's audit committee or another 
independent body of the board of directors to approve related party 
transactions (``Nasdaq Related Party Transactions Proposal''). On 
December 30, 2002, the NASD, through Nasdaq, submitted Amendment No. 1 
to the Nasdaq Related Party Transactions Proposal.\16\ On July 16, 
2003, the proposed rule change, as amended, was published for comment 
in the Federal Register.\17\ The Commission received no comments on the 
proposal. On October 3, 2003, the NASD, through Nasdaq, submitted 
Amendment No. 2 to the Nasdaq Related Party Transactions Proposal.\18\ 
On October 6, 2003, the NASD, through Nasdaq, submitted Amendment No. 3 
to the Nasdaq Related Party Transactions Proposal.\19\
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    \16\ See letter from John D. Nachman, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated December 30, 2002.
    \17\ See Securities Exchange Act Release No. 48137 (July 8, 
2003), 68 FR 42152.
    \18\ See letter from John D. Nachman, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated October 2, 2003. In Amendment No. 2 to the Nasdaq Related 
Party Transactions Proposal, Nasdaq proposed to (1) add language to 
NASD Rule 4350(h) to clarify that each issuer shall conduct an 
appropriate review of all related party transactions for potential 
conflict of interest situations, and (2) require that the rule 
change become effective 60 days following Commission approval.
    \19\ See letter from John D. Nachman, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated October 3, 2003. In Amendment No. 3 to the Nasdaq Related 
Party Transactions Proposal, Nasdaq proposed that the rule change 
become effective on January 15, 2004.
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    On October 9, 2002, the NASD, through Nasdaq, filed with the 
Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 
19b-4 thereunder, a proposed rule change (SR-NASD-2002-138) to amend 
NASD Rule 4350(a) to require foreign issuers to disclose any exemptions 
they may receive from Nasdaq's corporate governance listing standards 
(``Nasdaq Issuer Applicability Proposal''). On July 10, 2003, the 
Nasdaq Issuer Applicability Proposal was published for comment in the 
Federal Register.\20\ The Commission received one comment letter on the 
Nasdaq Issuer Applicability Proposal.\21\ On August 15, 2003, the NASD, 
through Nasdaq, submitted Amendment No. 1 to the Nasdaq Issuer 
Applicability Proposal.\22\ On October 10, 2003, the NASD, through 
Nasdaq, submitted Amendment No. 2 to the Nasdaq Issuer Applicability 
Proposal.\23\

[[Page 64156]]

On October 23, 2003, the NASD, through Nasdaq, submitted Amendment No. 
3 to the Nasdaq Issuer Applicability Proposal.\24\
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    \20\ See Securities Exchange Act Release No. 48124 (July 2, 
2003), 68 FR 41193.
    \21\ See supra note.
    \22\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated August 15, 2003. Amendment No. 
1 replaced in full the Nasdaq Issuer Applicability Proposal. In 
Amendment No. 1 to the Nasdaq Issuer Applicability Proposal, Nasdaq 
proposed to exempt registered management investment companies, 
asset-backed issuers and other passive issuers, and cooperatives 
from most provisions of NASD Rule 4350.
    \23\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated October 9, 2003. Amendment No. 
2 replaced in full the Nasdaq Issuer Applicability Proposal and 
Amendment No. 1 thereto. In Amendment No. 2 to the Issuer 
Applicability Proposal, Nasdaq proposed to clarify that (1) 
Investment companies (including business development companies) are 
subject to all the requirements of NASD Rule 4350, except that 
registered management investment companies are exempt from the 
requirements of NASD Rule 4350(c); (2) asset-backed issuers and 
certain other passive issuers are exempt from the requirements of 
NASD Rule 4350(c) and (d); and (3) certain cooperative entities are 
exempt from NASD Rule 4350(c), however, each of these entities must 
comply with all federal securities laws, including without 
limitation, section 10A(m) of the Exchange Act and Rule 10A-3 
thereunder.
    \24\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated October 23, 2003. Amendment 
No. 3 replaced in full the Nasdaq Issuer Applicability Proposal and 
Amendment Nos. 1 and 2 thereto. In Amendment No. 3 to the Nasdaq 
Issuer Applicability Proposal, Nasdaq proposed to set forth the 
dates by which companies would be required to come into compliance 
with the proposed rule changes that are the subject of this Order; 
add new Rules 4200A and 4350A to incorporate the sections of Rules 
4200 and 4350 that would continue to apply until the proposed rule 
changes become effective; and exempt registered management 
investment companies, asset-backed issuers, and unit investment 
trusts from the requirement of proposed subsection (n) of NASD Rule 
4350 regarding codes of conduct.
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    On October 10, 2002, the NASD, through Nasdaq, filed with the 
Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 
194-4 thereunder, a proposed rule change (SR-NASD-2002-139) to amend 
NASD Rule 4350(n) to require listed companies to adopt a code of 
conduct for all directors, officers, and employees (``Nasdaq Code of 
Conduct Proposal''). On January 15, 2003, the NASD, through Nasdaq, 
submitted Amendment No. 1 to the Nasdaq Code of Conduct Proposal.\25\ 
On July 10, 2003, the proposed rule change, as amended, was published 
for comment in the Federal Register.\26\ The Commission received two 
comment letters on the Nasdaq Code of Conduct Proposal. \27\ On October 
6, 2003, the NASD, through Nasdaq, submitted Amendment No. 2 to the 
Nasdaq Code of Conduct Proposal.\28\ This order approves the NYSE 
Corporate Governance Proposal, as amended by NYSE Amendment Nos. 1, 2, 
and 3; the Nasdaq Independent Director Proposal, as amended by 
Amendment Nos. 1, 2, 3, 4, and 5 to the Nasdaq Independent Director 
Proposal; the Nasdaq Going Concern Proposal; the Nasdaq Related Party 
Transactions Proposal, as amended by Amendment Nos. 1, 2, and 3 to that 
proposal; the Nasdaq Issuer Applicability Proposal, as amended by 
Amendment Nos. 1, 2, and 3 to that proposal; and the Nasdaq Code of 
Conduct Proposal, as amended by Amendment Nos. 1 and 2 to that 
proposal. The Commission is granting accelerated approval to Amendment 
Nos. 2 and 3 to the NYSE Corporate Governance Proposal, Amendment Nos. 
2, 3, 4, and 5 to the Nasdaq Independent Director Proposal, Amendment 
Nos. 2 and 3 to the Nasdaq Related Party Transactions Proposal, 
Amendment Nos. 1, 2, and 3 to the Nasdaq Issuer Applicability Proposal, 
and Amendment No. 2 to the Nasdaq Code of Conduct Proposal, as 
discussed below, and is soliciting comments from interested persons on 
these amendments.
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    \25\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated January 15, 2003.
    \26\ See Securities Exchange Act Release No. 48125 (July 2, 
2003), 68 FR 41194.
    \27\ See supra note.
    \28\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated October 3, 2003. In Amendment 
No. 2 to the Nasdaq Code of Conduct Proposal, Nasdaq proposed to re-
letter the section of NASD Rule 4350 addressing the code of conduct 
requirement as subsection (n), add cross-references to 17 CFR 
228.406 and 17 CFR 229.406, and clarify that any waivers of the code 
for directors or executive officers would be required to be 
disclosed in a Form 8-K within five days.
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II. Description of the NYSE and Nasdaq Proposals

A. History

    In 1998, the NYSE and NASD sponsored a committee to study the 
effectiveness of audit committees. This committee became known as the 
Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit 
Committees (``Blue Ribbon Committee''). In its 1999 report, the Blue 
Ribbon Committee recognized the importance of audit committees and 
issued ten recommendations to enhance their effectiveness.\29\ In 
response to these recommendations, the NYSE and the NASD, as well as 
other exchanges, revised their listing standards relating to audit 
committees.\30\ In February 2002, in light of several high-profile 
corporate failures, the Commission's Chairman at that time requested 
that the NYSE and NASD, as well as the other exchanges, review their 
listing standards, with an emphasis this time on all corporate 
governance listing standards, and not just those provisions relating to 
audit committees.\31\ After reviewing their corporate governance 
listing standards, the NYSE and the NASD, through Nasdaq, filed 
corporate governance reform proposals with the Commission in 2002.\32\
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    \29\ See Report and Recommendations of the Blue Ribbon Committee 
on Improving the Effectiveness of Corporate Audit Committees 
(February 1999). The Blue Ribbon Committee Report is available at 
http://www.nyse.com.
    \30\ See Securities Exchange Act Release Nos. 42233 (December 
14, 1999), 64 FR 71529 (December 21, 1999) (NYSE); 42231 (December 
14, 1999), 64 FR 71523 (December 21, 1999) (NASD); 42232 (December 
14, 1999), 64 FR 71518 (December 21, 1999) (American Stock 
Exchange); 43941 (February 7, 2001), 66 FR 10545 (February 15, 2001) 
(Pacific Exchange).
    \31\ See Commission Press Release No. 2002-23 (February 13, 
2002).
    \32\ See File Nos. SR-NYSE-2002-33, SR-NASD-2002-77, SR-NASD-
2002-80, SR-NASD-2002-138, SR-NASD-2002-139, SR-NASD-2002-141.
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    In January 2003, pursuant to the Sarbanes-Oxley Act of 2002 
(``Sarbanes-Oxley Act''),\33\ the Commission proposed Rule 10A-3 under 
the Exchange Act,\34\ which directs each national securities exchange 
and national securities association to prohibit the listing of any 
security of an issuer that is not in compliance with the audit 
committee requirements specified in Rule 10A-3. Because the provisions 
concerning audit committees in the NYSE and Nasdaq corporate governance 
reform proposals, as filed with the Commission, did not conform in all 
respects with the audit committee requirements set forth in Rule 10A-3 
as proposed by the Commission, both the NYSE and Nasdaq revised their 
proposals.\35\ In April 2003, the Commission adopted Rule 10A-3.\36\ In 
order to conform their proposals to the requirements of final Rule 10A-
3, and to incorporate comments from the public and revisions suggested 
by the Commission's staff, the NYSE and Nasdaq each filed further 
amendments to their proposals.\37\ Significant aspects of the proposed 
rule changes, as amended, are described below.
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    \33\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \34\ See Securities Exchange Act Release No. 47137 (January 8, 
2003), 68 FR 2637, (January 17, 2003).
    \35\ See NYSE Amendment No. 1, supra note 3, and Amendment No. 1 
to the Nasdaq Independent Director Proposal, supra note 8.
    \36\ 17 CFR 240.10A-3.
    \37\ See NYSE Amendment Nos. 2 and 3, supra notes 6 and 7; and 
NASD Amendment Nos. 2, 3, and 4, supra notes 11, 12, and 13 
respectively.
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B. NYSE Proposals

    According to the NYSE, the NYSE Corporate Governance Proposal is 
designed to further the ability of honest and well-intentioned 
directors, officers, and employees of listed issuers to perform their 
functions effectively. The NYSE believes that the proposal also will 
allow shareholders to more easily and efficiently monitor the 
performance of companies and directors in order to reduce instances of 
lax and unethical behavior.\38\
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    \38\ See NYSE Corporate Governance Proposal.

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[[Page 64157]]

1. Independence of Majority of Board Members
    NYSE section 303A(1) of the NYSE Manual would require the board of 
directors of each listed company to consist of a majority of 
independent directors.\39\ Pursuant to NYSE section 303A(2) of the NYSE 
Manual, no director would qualify as ``independent'' unless the board 
affirmatively determines that the director has no material relationship 
with the company (either directly or as a partner, shareholder or 
officer of an organization that has a relationship with the company). 
The company would be required to disclose the basis for such 
determination in its annual proxy statement or, if the company does not 
file an annual proxy statement, in the company's annual report on Form 
10-K \40\ filed with the Commission.\41\ In complying with this 
requirement, a board would be permitted to adopt and disclose standards 
to assist it in making determinations of independence, disclose those 
standards, and then make the general statement that the independent 
directors meet those standards.\42\
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    \39\ See NYSE section 303A(1). See infra Section II.B.12. 
concerning Controlled Companies and other entities that would be 
exempt from this requirement.
    \40\ The NYSE proposes that for all provisions of NYSE section 
303A that call for disclosure in a company's Form 10-K, if a company 
subject to such a provision is not a company required to file a Form 
10-K, then the provision shall be interpreted to mean the annual 
periodic disclosure form that the company files with the Commission. 
If a company is not required to file either an annual proxy 
statement or an annual periodic report with the Commission, the 
disclosure shall be made in the annual report required under NYSE 
section 203.01. See NYSE Amendment No. 2, supra note, and NYSE 
section 303A--General Application--References to Form 10-K.
    \41\ See Commentary to NYSE section 303A(2)(a).
    \42\ Id.
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2. Definition of Independent Director
    In addition, the NYSE proposes to tighten its current definition of 
independent director as follows. First, a director who is an employee, 
or whose immediate family member is an executive officer, of the 
company would not be independent until three years after the end of 
such employment relationship (``NYSE Employee Provision'').\43\ 
Employment as an interim Chairman or CEO would not disqualify a 
director from being considered independent following that 
employment.\44\ Second, a director who receives, or whose immediate 
family member receives, more than $100,000 per year in direct 
compensation from the listed company, except for certain permitted 
payments,\45\ would not be independent until three years after he or 
she ceases to receive more than $100,000 per year in such compensation 
(``NYSE Direct Compensation Provision'').\46\
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    \43\ See NYSE section 303A(2)(b)(i). In NYSE Amendment No. 2, 
supra note , the NYSE proposes the NYSE Employee Provision.
    \44\ See Commentary to NYSE section 303A(2)(b)(i).
    \45\ Permitted payments would include director and committee 
fees and pension or other forms of deferred compensation for prior 
service, provided such compensation is not contingent in any way on 
continued service. See NYSE section 303A(2)(b)(ii). In addition, 
compensation received by a director for former service as an interim 
Chairman or CEO would not be required to be considered. See 
Commentary to NYSE section 303A(2)(b)(ii). In NYSE Amendment No. 2, 
supra note , the NYSE proposes to add that compensation received by 
an immediate family member for service as a non-executive employee 
of the listed company would also not be required to be considered. 
In NYSE Amendment No. 2, supra note , the NYSE also proposes to 
revise various look-back provisions from five years to three years.
    \46\ See NYSE section 303A(2)(b)(ii). In NYSE Amendment No. 2, 
supra note , the NYSE proposes to revise the NYSE Direct 
Compensation Provision to be a bright-line test, rather than a 
rebuttable presumption.
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    Third, a director who is affiliated with or employed by, or whose 
immediate family member is affiliated with or employed in a 
professional capacity by, a present or former internal or external 
auditor of the company would not be independent until three years after 
the end of the affiliation or the employment or auditing 
relationship.\47\
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    \47\ See NYSE section 303A(2)(b)(iii).
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    Fourth, a director who is employed, or whose immediate family 
member is employed, as an executive officer of another company where 
any of the listed company's present executives serve on that company's 
compensation committee would not be independent until three years after 
the end of such service or the employment relationship (``NYSE 
Interlocking Directorate Provision'').\48\
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    \48\ See NYSE section 303A(2)(b)(iv).
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    Fifth, a director who is an executive officer or an employee, or 
whose immediate family member is an executive officer, of a company 
that makes payments to, or receives payments from, the listed company 
for property or services in an amount which, in any single fiscal year, 
exceeds the greater of $1 million, or 2% of such other company's 
consolidated gross revenues, would not be independent until three years 
after falling below such threshold (``NYSE Business Relationship 
Provision'').\49\ The NYSE proposes to clarify this proposal with 
respect to charitable organizations by adding a commentary noting that 
charitable organizations shall not be considered ``companies'' for 
purposes of the NYSE Business Relationship Provision, provided that the 
listed company discloses in its annual proxy statement, or if the 
listed company does not file an annual proxy statement, in its annual 
report on Form 10-K filed with the Commission, any charitable 
contributions made by the listed company to any charitable organization 
in which a director serves as an executive officer if, within the 
preceding three years, such contributions in any single year exceeded 
the greater of $1 million or 2% of the organization's consolidated 
gross revenues.\50\
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    \49\ See NYSE section 303A(2)(b)(v).
    \50\ See NYSE Amendment No. 2, supra note 6, and Commentary to 
NYSE section 303A(2)(b)(v).
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    The NYSE also proposes to clarify this proposal by adding 
commentary explaining that both the payments and the consolidated gross 
revenues to be measured shall be those reported in the last completed 
fiscal year, and that the look-back provision applies solely to the 
financial relationship between the listed company and the director or 
immediate family member's current employer. A listed company would not 
need to consider former employment of the director or immediate family 
member.\51\
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    \51\ Id.
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    The NYSE proposes to define ``immediate family member'' to include 
a person's spouse, parents, children, siblings, mothers- and fathers-
in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and 
anyone (other than domestic employees) who shares such person's 
home.\52\ The NYSE also proposes that references to ``company'' include 
any parent or subsidiary in a consolidated group with the company.\53\
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    \52\ See General Commentary to NYSE section 303A(2)(b). In NYSE 
Amendment No. 2, supra note 6, the NYSE proposes to add that when 
applying the look-back provisions in NYSE section 303A(2)(b), listed 
companies need not consider individuals who are no longer immediate 
family members as a result of legal separation or divorce, or those 
who have died or become incapacitated.
    \53\ See NYSE Amendment No. 2, supra note 6, Commentary to NYSE 
section 303A(2)(a), and General Commentary to section 303A(2)(b).
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    The NYSE further proposes to revise the phase-in of the look-back 
requirement that the NYSE had previously proposed by applying a one-
year look-back for the first year after adoption of these new 
standards.\54\ The NYSE also proposes to change all of the look-back 
periods from five years to three years.\55\ The three-year look-back 
would begin to apply from the date that

[[Page 64158]]

is the first anniversary of Commission approval of the proposed rule 
change.\56\
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    \54\ See NYSE Amendment No. 2, supra note 6, and General 
Commentary to NYSE section 303A(2)(b).
    \55\ See NYSE Amendment No. 2, supra note 6.
    \56\ See NYSE Amendment No. 2, supra note 6, and General 
Commentary to NYSE section 303A(2)(b).
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3. Separate Meetings for Board Members
    NYSE proposes to require the non-management directors of each NYSE-
listed company to meet at regularly scheduled executive sessions 
without management.\57\
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    \57\ See NYSE section 303A(3).
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    In addition, NYSE proposes to require listed companies to disclose 
a method for interested parties to communicate directly with the 
presiding director of such executive sessions, or with the non-
management directors as a group.\58\ Companies may utilize the same 
procedures they have established to comply with Rule 10A-3(b)(3).\59\
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    \58\ See Commentary to NYSE section 303A(3). In NYSE Amendment 
No. 2, supra note , the NYSE proposes to delete the previously 
proposed requirement that interested parties be able to communicate 
confidentially, in addition to directly, with such parties.
    \59\ See Commentary to NYSE section 303A(3).
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4. Nominating/Corporate Governance Committee
    NYSE proposes to require each listed company to have a nominating/
corporate governance committee composed entirely of independent 
directors.\60\ The NYSE also proposes to require such committee to have 
a written charter that addresses, among other items, the committee's 
purpose and responsibilities, and an annual performance evaluation of 
the nominating/corporate governance committee (``NYSE Nominating/
Corporate Governance Committee Provision'').\61\ The NYSE further 
proposes to clarify that the committee would be required to identify 
individuals qualified to become board members, consistent with the 
criteria approved by the board.\62\
---------------------------------------------------------------------------

    \60\ See NYSE section 303A(4)(a). See infra Section II.B.12. 
concerning Controlled Companies and other entities that would be 
exempt from this requirement.
    \61\ See NYSE section 303A(4)(b).
    \62\ See NYSE Amendment No. 2, supra note 6, and NYSE section 
303A(4)(b).
---------------------------------------------------------------------------

5. Compensation Committee
    NYSE proposes to require each listed company to have a compensation 
committee composed entirely of independent directors.\63\ The NYSE also 
proposes to require the compensation committee to have a written 
charter that addresses, among other items, the committee's purpose and 
responsibilities, and an annual performance evaluation of the 
compensation committee (``NYSE Compensation Committee Provision'').\64\ 
The Compensation Committee also would be required to produce a 
compensation committee report on executive compensation, as required by 
Commission rules to be included in the company's annual proxy statement 
or annual report on Form 10-K filed with the Commission.\65\ Further, 
the NYSE proposes to (1) delete the previously proposed statement that 
the compensation committee has the sole authority to determine the 
compensation of the chief executive officer (``CEO''),\66\ and provide 
that either as a committee or together with the other independent 
directors (as directed by the board), the committee would determine and 
approve the CEO's compensation level based on the committee's 
evaluation of the CEO's performance; \67\ and (2) add a provision to 
the commentary on this section indicating that discussion of CEO 
compensation with the board generally is not precluded.\68\
---------------------------------------------------------------------------

    \63\ See infra Sections II.B.12. concerning Controlled Companies 
and other entities that would be exempt from this requirement.
    \64\ See NYSE section 303A(5)(a).
    \65\ See NYSE Amendment No. 2, supra note 6, and NYSE section 
303A(5)(b)(i)(C).
    \66\ See NYSE Amendment No. 2, supra note 6, and NYSE section 
303A(5)(a).
    \67\ Id.
    \68\ See NYSE Amendment No. 2, supra note 6, and Commentary to 
NYSE section 303A(5).
---------------------------------------------------------------------------

6. Audit Committee
a. Composition
    NYSE sections 303A(6) and 303A(7) would require each NYSE-listed 
company to have a minimum three-person audit committee composed 
entirely of directors that meet the independence standards of both NYSE 
section 303A(2) and Rule 10A-3.\69\ The NYSE also proposes to delete 
the previously proposed commentary relating to NYSE section 303A(6) and 
replace it with the following: ``The Exchange will apply the 
requirements of Rule 10A-3 in a manner consistent with the guidance 
provided by the Securities and Exchange Commission in SEC Release No. 
34-47654 (April 1, 2003). Without limiting the generality of the 
foregoing, the Exchange will provide companies with the opportunity to 
cure defects provided in Rule 10A-3(a)(3).''\70\
---------------------------------------------------------------------------

    \69\ See NYSE sections 303A(6) and 303A(7). The Commission notes 
that new Rule 303A would incorporate various provisions of existing 
NYSE rules on corporate governance for listed companies, including, 
for example, requirements that an audit committee have a written 
charter and that such committee be comprised of at least three 
independent directors who meet certain financial literacy 
requirements.
    \70\ See NYSE Amendment No. 2, supra note 6, and Commentary to 
NYSE section 303A(6).
---------------------------------------------------------------------------

    In addition, the Commentary to NYSE section 303A(7)(a) would 
require that each member of the audit committee be financially 
literate, as such qualification is interpreted by the board in its 
business judgment, or must become financially literate within a 
reasonable period of time after his or her appointment to the audit 
committee.\71\ In addition, at least one member of the audit committee 
would be required to have accounting or related financial management 
expertise, as the company's board interprets such qualification in its 
business judgment.\72\ The NYSE also proposes to clarify that while the 
Exchange does not require that a listed company's audit committee 
include a person who satisfies the definition of audit committee 
financial expert set forth in Item 401(e) of Regulation S-K, a board 
may presume that such a person has accounting or related financial 
management experience.\73\
---------------------------------------------------------------------------

    \71\ See Commentary to NYSE section 303A(7)(a).
    \72\ Id.
    \73\ See NYSE Amendment No. 2, supra note 6, and Commentary to 
NYSE section 303A(7)(a).
---------------------------------------------------------------------------

    If an audit committee member simultaneously serves on the audit 
committee of more than three public companies, and the listed company 
does not limit the number of audit committees on which its audit 
committee members serve, each board would be required to determine that 
such simultaneous service would not impair the ability of such member 
to effectively serve on the listed company's audit committee and to 
disclose such determination.\74\
---------------------------------------------------------------------------

    \74\ Id.
---------------------------------------------------------------------------

b. Audit Committee Charter and Responsibilities
    NYSE section 303A(7)(c) would require the audit committee of each 
listed company to have a written audit committee charter that 
addresses: (i) The committee's purpose; (ii) an annual performance 
evaluation of the audit committee; and (iii) the duties and 
responsibilities of the audit committee (``NYSE Audit Committee Charter 
Provision'').
    The NYSE Audit Committee Charter Provision provides details as to 
the duties and responsibilities of the audit committee that must be 
addressed. These include, at a minimum, those set out in Rule 10A-
3(b)(2), (3), (4) and (5),\75\ as well as the responsibility to

[[Page 64159]]

annually obtain and review a report by the independent auditor; discuss 
the company's annual audited financial statement and quarterly 
financial statements with management and the independent auditor; 
discuss the company's earnings press releases, as well as financial 
information and earnings guidance provided to analysts and rating 
agencies; discuss policies with respect to risk assessment and risk 
management; meet separately, periodically, with management, with 
internal auditors (or other personnel responsible for the internal 
audit function), and with independent auditors; review with the 
independent auditors any audit problems or difficulties and 
management's response; set clear hiring policies for employees or 
former employees of the independent auditors; and report regularly to 
the board.\76\
---------------------------------------------------------------------------

    \75\ See NYSE section 303A(7)(c). In NYSE Amendment No. 2, supra 
note, the NYSE proposes to cross-reference the sections of Rule 10A-
3 that set forth the required duties and responsibilities of the 
audit committee, instead of detailing these requirements in NYSE 
Rule 303A as it had previously proposed.
    \76\ See NYSE section 303A(7)(c)(iii).
---------------------------------------------------------------------------

7. Internal Audit Function
    NYSE section 303A(7)(d) would require each listed company to have 
an internal audit function.\77\
---------------------------------------------------------------------------

    \77\ See NYSE section 303A(7)(d).
---------------------------------------------------------------------------

8. Corporate Governance Guidelines
    NYSE section 303A(9) would require each listed company to adopt and 
disclose corporate governance guidelines. The following topics would be 
required to be addressed: director qualification standards; director 
responsibilities; director access to management and, as necessary and 
appropriate, independent advisors; director compensation; director 
orientation and continuing education; management succession; and annual 
performance evaluation of the board.\78\ Each company's website would 
be required to include its corporate governance guidelines and the 
charters of its most important committees, and the availability of this 
information on the Web site or in print to shareholders would need to 
be referenced in the company's annual report on Form 10-K filed with 
the Commission.\79\
---------------------------------------------------------------------------

    \78\ See Commentary to NYSE section 303A(9).
    \79\ Id.
---------------------------------------------------------------------------

9. Code of Business Conduct and Ethics
    NYSE section 303A(10) would require each listed company to adopt 
and disclose a code of business conduct and ethics for directors, 
officers and employees, and to promptly disclose any waivers of the 
code for directors or executive officers.\80\ The commentary to this 
section sets forth the most important topics that should be addressed, 
including conflicts of interest; corporate opportunities; 
confidentiality of information; fair dealing; protection and proper use 
of company assets; compliance with laws, rules and regulations 
(including insider trading laws); and encouraging the reporting of any 
illegal or unethical behavior. Each code would be required to contain 
compliance standards and procedures to facilitate the effective 
operation of the code. Each listed company's Web site would be required 
to include its code of business conduct and ethics, and the 
availability of the code on the website or in print to shareholders 
would need to be referenced in the company's annual report on Form 10-K 
filed with the Commission.\81\
---------------------------------------------------------------------------

    \80\ See NYSE section 303A(10).
    \81\ See Commentary to NYSE section 303A(10).
---------------------------------------------------------------------------

10. CEO Certification
    NYSE section 303A(12)(a) would require the CEO of each listed 
company to certify to the NYSE each year that he or she is not aware of 
any violation by the company of the NYSE's corporate governance listing 
standards. This certification would be required to be disclosed in the 
company's annual report or, if the company does not prepare an annual 
report to shareholders, in the company's annual report on Form 10-K 
filed with the Commission.\82\
---------------------------------------------------------------------------

    \82\ See NYSE section 303A(12)(a).
---------------------------------------------------------------------------

    In addition, NYSE section 303A(12)(b) would require the CEO of each 
listed company to promptly notify the NYSE in writing after any 
executive officer of the listed company becomes aware of any material 
non-compliance with any applicable provisions of the new 
requirements.\83\
---------------------------------------------------------------------------

    \83\ See NYSE section 303A(12)(b). In NYSE Amendment No. 2, 
supra note, the NYSE proposes to clarify that the notification would 
be required to be in writing.
---------------------------------------------------------------------------

11. Public Reprimand Letter
    NYSE section 303A(13) would allow the NYSE to issue a public 
reprimand letter to any listed company that violates an NYSE listing 
standard.\84\
---------------------------------------------------------------------------

    \84\ See NYSE section 303A(13). In NYSE Amendment No. 2, supra 
note, the NYSE proposes to clarify that this lesser sanction was not 
intended for use in the case of companies that fail to comply with 
the requirements of Rule 10A-3. See Commentary to NYSE section 
303A(13).
---------------------------------------------------------------------------

12. Exceptions to the NYSE Corporate Governance Proposals
    The NYSE proposes to exempt any listed company of which more than 
50% of the voting power is held by an individual, a group or another 
company (``Controlled Company'') from the requirements that its board 
have a majority of independent directors, and that the company have 
nominating/corporate governance and compensation committees composed 
entirely of independent directors. A company that chose to take 
advantage of any or all of these exemptions would be required to 
disclose that choice, that it is a Controlled Company, and the basis 
for the determination in its annual proxy statement or, if the company 
does not file an annual proxy statement, in the company's annual report 
on Form 10-K filed with the Commission.\85\ Limited partnerships and 
companies in bankruptcy proceedings also would be exempt from 
requirements that the board have a majority of independent directors 
and that the issuer have nominating/corporate governance and 
compensation committees composed entirely of independent directors.\86\
---------------------------------------------------------------------------

    \85\ See NYSE section 303A--General Application--Equity 
Listings--Controlled Companies.
    \86\ Id.
---------------------------------------------------------------------------

    The NYSE considers the requirements of section 303A to be 
unnecessary for closed-end and open-end management investment companies 
that are registered under the Investment Company Act of 1940 
(``Investment Company Act'') \87\, given the pervasive federal 
regulation applicable to them. However, the NYSE proposes that 
registered closed-end management investment companies (``closed-end 
funds'') would be required to: (1) Have a minimum three-member audit 
committee that satisfies the requirements of Rule 10A-3; (2) comply 
with the requirements of the NYSE Audit Committee Charter Provision; 
and (3) comply with the certification and notification provisions 
regarding non-compliance.\88\ Closed-end funds also would be excluded 
from the disclosure requirement relating to an audit committee member's 
simultaneous service on more than three audit committees, but would be 
subject to the requirement for the board to determine that such 
simultaneous service would not impair the ability of such member to 
effectively serve on the listed company's audit committee.\89\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 80a-1 et seq.
    \88\ See NYSE section 303A--General Application--Equity 
Listings--Closed-End and Open End Funds.
    \89\ Id. See also NYSE Amendment No. 2, supra note.
---------------------------------------------------------------------------

    The NYSE also proposes to require business development companies, 
which are a type of closed-end management investment company defined in 
section 2(a)(48) of the

[[Page 64160]]

Investment Company Act \90\ that are not registered under the 
Investment Company Act, to comply with all of the provisions of NYSE 
section 303A applicable to domestic issuers, except that the directors 
of such companies, including audit committee members, would not be 
required to satisfy the independence requirements set forth in NYSE 
section 303A(2) and 303A(7)(b).\91\ For purposes of NYSE sections 
303A(1), (3), (4), (5), and (9), a director of a business development 
company would be considered to be independent if he or she is not an 
``interested person'' of the company, as defined in section 2(a)(19) of 
the Investment Company Act.\92\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 80a-2(a)(48).
    \91\ See NYSE Amendment No. 2, supra note and NYSE section 
303A--General Application--Equity Listings--Closed-End and Open-End 
Funds.
    \92\ 15 U.S.C. 80a-2(a)(19).
---------------------------------------------------------------------------

    Open-end management investment companies (``open-end funds''), 
which can be listed as Investment Company Units, and are more commonly 
known as Exchange Traded Funds or ETFs, would be required to: (1) Have 
an audit committee that satisfies the requirements of Rule 10A-3, and 
(2) notify the Exchange in writing of any material non-compliance.\93\
---------------------------------------------------------------------------

    \93\ See NYSE Amendment No. 2, supra note, and NYSE section 
303A--General Application--Closed-End and Open-End Funds.
---------------------------------------------------------------------------

    In addition, the NYSE proposes also to require the audit committees 
of closed-end and open-end funds to establish procedures for the 
confidential, anonymous submission by employees of the investment 
adviser, administrator, principal underwriter, or any other provider of 
accounting related services for the investment company, as well as 
employees of the investment company, of concerns regarding questionable 
accounting or auditing matters.\94\ This responsibility would be 
required to be addressed in the audit committee charter.\95\
---------------------------------------------------------------------------

    \94\ See NYSE Amendment No. 2, supra note, and NYSE section 
303A--General Application--Equity Listings--Closed-End and Open-End 
Funds.
    \95\ See NYSE Amendment No. 3.
---------------------------------------------------------------------------

    NYSE proposes that except as otherwise required by Rule 10A-3, the 
new requirements also would not apply to passive business organizations 
in the form of trusts (such as royalty trusts) or to derivatives and 
special purpose securities (such as those described in NYSE sections 
703.16, 703.19, 703.20, and 703.21). To the extent that Rule 10A-3 
applies to a passive business organization, listed derivative, or 
special purpose security, the requirement to have an audit committee 
that satisfies the requirements of Rule 10A-3, and the requirement to 
notify the NYSE in writing of any material non-compliance, also would 
apply.\96\
---------------------------------------------------------------------------

    \96\ See NYSE section 303A--General Application--Other Entities. 
In NYSE Amendment No. 2, supra note, the NYSE proposes to add 
language to clarify the application of Rule 10A-3 to passive 
business organizations.
---------------------------------------------------------------------------

    The new requirements generally would not apply to companies listing 
only preferred or debt securities on the NYSE. To the extent required 
by Rule 10A-3, however, all companies listing only preferred or debt 
securities on the NYSE would be required to: (1) Have an audit 
committee that satisfies the requirements of Rule 10A-3, and (2) notify 
the Exchange in writing of any material non-compliance.\97\
---------------------------------------------------------------------------

    \97\ See NYSE section 303A--General Application--Preferred and 
Debt Listings. In NYSE Amendment No. 2, supra note, the NYSE 
proposes to add language to clarify the application of Rule 10A-3 to 
companies listing only preferred or debt securities.
---------------------------------------------------------------------------

13. Application to Foreign Private Issuers
    NYSE section 303A would permit NYSE-listed companies that are 
foreign private issuers, as such term is defined in Rule 3b-4 under the 
Exchange Act,\98\ to follow home country practice in lieu of the new 
requirements, except that such companies would be required to: (1) Have 
an audit committee that satisfies the requirements of Rule 10A-3; (2) 
notify the NYSE in writing after any executive officer becomes aware of 
any non-compliance with any applicable provision; and (3) provide a 
brief, general summary of the significant ways in which its governance 
differs from those followed by domestic companies under NYSE listing 
standards.\99\ Listed foreign private issuers would be permitted to 
provide this disclosure either on their website (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 
accordance with Sections 103.00 and 203.01 of the NYSE Manual.\100\ If 
the disclosure is made available only on the website, the annual report 
would be required to state this and provide the web address at which 
the information may be obtained.\101\
---------------------------------------------------------------------------

    \98\ 17 CFR 240.3b-4.
    \99\ See NYSE section 303A--General Application--Equity 
Listings--Foreign Private Issuers, and NYSE section 303A(11). In 
NYSE Amendment No. 2, supra note , the NYSE proposes to clarify the 
application of Rule 10A-3 to foreign private issuers.
    \100\ See Commentary to NYSE section 303A(11).
    \101\ Id.
---------------------------------------------------------------------------

14. Proposed Implementation of New Requirements
    In NYSE Amendment No. 2, the NYSE proposes a revised implementation 
schedule for the new requirements. Pursuant to the new schedule, listed 
companies would have until the earlier of their first annual meeting 
after January 15, 2004, or October 31, 2004, to comply with the new 
standards. However, if a company with a classified board is required to 
change a director who would not normally stand for election in such 
annual meeting, the company would be permitted to continue such 
director in office until the second annual meeting after such date, but 
no later than December 31, 2005. Notwithstanding the foregoing, foreign 
private issuers would have until July 31, 2005, to comply with any Rule 
10A-3 audit committee requirements.\102\
---------------------------------------------------------------------------

    \102\ See NYSE Amendment No. 2, supra note, and NYSE section 
303A--General Application--Effective Dates/Transition Period.
---------------------------------------------------------------------------

    Companies listing in conjunction with their initial public offering 
\103\ would be required to have one independent member at the time of 
listing, a majority of independent members within 90 days of listing, 
and fully independent committees within one year. They would be 
required to meet the majority of independent board requirement within 
12 months of listing.\104\
---------------------------------------------------------------------------

    \103\ In NYSE Amendment No. 2, supra note, NYSE proposes that 
for purposes of section 303A, a company would be considered to be 
listing in conjunction with an initial public offering if, 
immediately prior to listing, it does not have a class of common 
stock registered under the Exchange Act. The NYSE also proposes to 
permit companies that are emerging from bankruptcy or have ceased to 
be Controlled Companies within the meaning of section 303A to phase 
in independent nomination and compensation committees and majority 
independent boards on the same schedule as companies listing in 
conjunction with an initial public offering. However, for purposes 
of the requirement that a company have an audit committee that 
complies with the requirements of Rule 10A-3, and the requirement 
that a company notify the Exchange in writing of any material non-
compliance, a company will be considered to be listing in 
conjunction with an initial public offering only if it meets the 
conditions of Rule 10A-3(b)(1)(iv)(A). Investment companies are not 
subject to this exemption under Rule 10A-3(b)(1)(iv)(A), however. 
See NYSE section 303A--General Application--Effective Dates/
Transition Period.
    \104\ See NYSE Amendment No. 2, supra note, and NYSE section 
303A--General Application--Effective Dates/Transition Period.
---------------------------------------------------------------------------

    Companies listing upon transfer from another market would have 12 
months from the date of transfer in which to comply with any 
requirement to the extent the market on which they were listed did not 
have the same requirement. To the extent the other market has a 
substantially similar requirement but also had a transition period from 
the effective date of that

[[Page 64161]]

market's rule, which period had not yet expired, the company would have 
the same transition period as would have been available to it on the 
other market. This transition period for companies transferring from 
another market would not apply to the audit committee requirements of 
Rule 10A-3 unless a transition period is available under Rule 10A-
3.\105\
---------------------------------------------------------------------------

    \105\ Id.
---------------------------------------------------------------------------

C. Nasdaq Proposals

    According to Nasdaq, the purpose of the Nasdaq Independent Director 
Proposal is to provide greater transparency regarding certain 
relationships that would preclude a board of directors from finding 
that an individual can serve as an independent director, and to 
increase the role of independent directors on board committees.\106\ In 
Nasdaq's view, the proposal is intended to enhance investor confidence 
in the companies that list on Nasdaq.\107\ According to Nasdaq, the 
purpose of the Nasdaq Going Concern Proposal is to bring notice of a 
going concern qualification to investors and potential investors;\108\ 
the purpose of the Nasdaq Related Party Transactions Proposal is to 
improve investor protection;\109\ the purpose of the Nasdaq Issuer 
Applicability Proposal is to alert investors to the exemptions that may 
be granted to foreign issuers;\110\ and the purpose of the Nasdaq Code 
of Conduct Proposal is to provide further assurance to investors, 
regulators, and Nasdaq that each of Nasdaq's issuers has in place a 
system to focus attention throughout the company on the obligation of 
ethical conduct, encourage reporting of potential violations, and deal 
fairly and promptly with questionable behavior.\111\
---------------------------------------------------------------------------

    \106\ See Nasdaq Independent Director Proposal.
    \107\ Id.
    \108\ See Nasdaq Going Concern Proposal.
    \109\ See Nasdaq Related Party Transactions Proposal
    \110\ See Nasdaq Issuer Applicability Proposal.
    \111\ See Nasdaq Code of Conduct Proposal.
---------------------------------------------------------------------------

1. Independence of Majority of Board Members
    Nasdaq proposes to amend Nasdaq Rule 4200, which sets forth 
definitions, and Nasdaq Rule 4350, which governs qualitative listing 
requirements for Nasdaq National Market and Nasdaq SmallCap Market 
issuers (other than limited partnerships). Under the amendment to NASD 
Rule 4350(c)(1), a majority of the directors on the board of a Nasdaq-
listed company would be required to be independent directors, as 
defined in NASD Rule 4200. Nasdaq proposes to require each listed 
company to disclose in its annual proxy (or, if the issuer does not 
file a proxy, in its Form 10-K or 20-F) those directors that the board 
has determined to be independent under NASD Rule 4200.\112\
---------------------------------------------------------------------------

    \112\ See Amendment No. 3 to the Nasdaq Independent Director 
Proposal, supra note, and NASD Rule 4350(c)(1).
---------------------------------------------------------------------------

    If an issuer fails to comply with this requirement due to one 
vacancy, or one director ceases to be independent due to circumstances 
beyond their reasonable control, Nasdaq proposes to require the issuer 
to regain compliance with the requirement by the earlier of its next 
annual shareholders meeting or one year from the occurrence of the 
event that caused the failure to comply with this requirement.\113\ 
Nasdaq proposes to require any issuer relying on this provision to 
provide notice to Nasdaq immediately upon learning of the event or 
circumstance that caused the non-compliance.\114\
---------------------------------------------------------------------------

    \113\ Id.
    \114\ Id.
---------------------------------------------------------------------------

    Pursuant to current NASD Rule 4200(a)(15), a director would not be 
independent if the director is an officer or employee of the company or 
its subsidiaries, or any other individual having a relationship which, 
in the opinion of the company's board, would interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director.\115\
---------------------------------------------------------------------------

    \115\ See NASD Rule 4200(a)(15).
---------------------------------------------------------------------------

    The NASD proposes to revise NASD Rule 4200(a)(15)(A) through (E) 
and add subparagraphs (F) and (G). NASD Rule 4200(a)(15) provides a 
list of relationships that would preclude a board finding of 
independence. First, a director who is, or at any time during the past 
three years was, employed by the company or by any parent or subsidiary 
of the company, would not be deemed independent (``Nasdaq Employee 
Provision'').\116\
---------------------------------------------------------------------------

    \116\ See NASD Rule 4200(a)(15)(A).
---------------------------------------------------------------------------

    Second, a director who accepts or has a Family Member \117\ who 
accepts any payments from the company, or any parent or subsidiary of 
the company, in excess of $60,000 during the current fiscal year or any 
of the past three fiscal years, other than certain permitted 
payments,\118\ would not be deemed independent (``Nasdaq Payments 
Provision'').\119\
---------------------------------------------------------------------------

    \117\ In Amendment No. 3 to the Independent Director Proposal, 
supra note, Nasdaq proposes to define ``Family Member'' as ``a 
person's spouse, parents, children and siblings, whether by blood, 
marriage or adoption, or anyone residing in such person's home.'' 
See NASD Rule 4200(a)(14).
    \118\ Permitted payments would include compensation for board or 
board committee service; payments arising solely from investments in 
the company's securities; compensation paid to a Family Member who 
is a non-executive employee of the company or a parent or subsidiary 
of the company; benefits under a tax-qualified retirement plan, or 
non-discretionary compensation; and loans permitted under section 
13(k) of the Exchange Act. 78 U.S.C. 78m(k). See NASD Rule 
4200(a)(15)(B). In Amendment No. 3 to the Independent Director 
Proposal, supra note, Nasdaq proposes to add compensation for board 
committee service and loans permitted under section 13(k) of the 
Exchange Act to permitted payments. See also infra note 122.
    \119\ See NASD Rule 4200(a)(15)(B).
---------------------------------------------------------------------------

    Nasdaq proposes to state in the interpretive material to its rules 
(``Interpretive Material'') that the Nasdaq Payments Provision is 
generally intended to capture situations where a payment is made 
directly to, or for the benefit of, the director or a family member of 
the director.\120\ For example, consulting or personal service 
contracts with a director or family member of the director or political 
contributions to the campaign of a director or a family member of the 
director would be considered under the Nasdaq Payments Provision.\121\
---------------------------------------------------------------------------

    \120\ See Amendment No. 3 to the Independent Director Proposal, 
supra note 12.
    \121\ See NASD IM-4200--Definition of Independence--Rule 
4200(a)(15).
---------------------------------------------------------------------------

    Third, a director who is a Family Member of an individual who is, 
or at any time during the past three years was, employed by the company 
or by any parent or subsidiary of the company as an executive officer, 
would not be deemed independent (``Nasdaq Family of Executive Officer 
Provision'').\122\
---------------------------------------------------------------------------

    \122\ See NASD Rule 4200(a)(15)(C). In Amendment No. 3 to the 
Independent Director Proposal, supra note, Nasdaq proposes a 
conforming change in subparagraph (B) of NASD Rule 4200 to indicate 
that employment compensation to a Family Member of an Independent 
Director as permitted in that subparagraph applies only when the 
Family Member is not an executive of the company.
---------------------------------------------------------------------------

    Fourth, a director who is, or has a Family Member who is, a partner 
in, or a controlling shareholder or an executive officer of, any 
organization to which the company made, or from which the company 
received, payments for property or services in the current or any of 
the past three fiscal years that exceed 5% of the recipient's 
consolidated gross revenues for that year, or $200,000, whichever is 
more, other than certain permitted payments,\123\ would not be deemed 
independent (``Nasdaq Business Relationship Provision'').\124\ In

[[Page 64162]]

Amendment No. 3 to the Nasdaq Independent Director Proposal, Nasdaq 
proposes to add Interpretive Material clarifying the application of the 
Nasdaq Business Relationship Provision. The Interpretive Material 
states that this proposal is generally intended to capture payments to 
an entity with which the director or Family Member of the director is 
affiliated by serving as a partner (other than a limited partner), 
controlling shareholder or executive officer of such entity.\125\ The 
Interpretive Material states that under exceptional circumstances, such 
as where a director has direct, significant business holdings, it may 
be appropriate to apply the corporate measurements in the Nasdaq 
Business Relationship Provision, rather than the individual 
measurements of the Nasdaq Payments Provision, and that issuers should 
contact Nasdaq if they wish to apply the rule in this manner.\126\ The 
Interpretive Material further notes that the independence requirements 
of the Nasdaq Business Relationship Provision are broader than the 
rules for audit committee member independence set forth in Rule 10A-
3(e)(8) under the Exchange Act.\127\
---------------------------------------------------------------------------

    \123\ Permitted payments would include payments arising solely 
from investments in the company's securities, and payments under 
non-discretionary charitable contribution matching programs. See 
NASD Rule 4200(a)(15)(D). In Amendment No. 3 to the Independent 
Director Proposal, supra note, Nasdaq proposes to include payments 
under non-discretionary charitable contribution matching programs as 
permitted payments.
    \124\ See NASD Rule 4200(a)(15)(D). In Amendment No. 3 to the 
Independent Director Proposal, supra note, Nasdaq proposes to expand 
this proposal to include Family Members, and to clarify that 
disqualifying payments are payments for ``property or services.''
    \125\ See Amendment No. 3 to the Independent Director Proposal, 
supra note, and NASD-IM--4200--Definition of Independence--Rule 
4200(a)(15).
    \126\ Id.
    \127\ Id.
---------------------------------------------------------------------------

    Moreover, the Interpretive Material states that under the Nasdaq 
Business Relationship Provision, a director who is, or who has a Family 
Member who is, an executive officer of a charitable organization may 
not be considered independent if the company makes payments to the 
charity in excess of the greater of the greater of 5% of the charity's 
revenues or $200,000.\128\ The Interpretive Material also discusses the 
treatment of payments from the issuer to a law firm in determining 
whether a director who is a lawyer may be considered independent.\129\ 
The Interpretive Material notes that any partner in a law firm that 
receives payments from the issuer is ineligible to serve on that 
issuer's audit committee.\130\
---------------------------------------------------------------------------

    \128\ Id.
    \129\ Id.
    \130\ Id.
---------------------------------------------------------------------------

    Fifth, a director of the listed company who is, or has a Family 
Member who is, employed as an executive officer of another entity at 
any time during the past three years where any of the executive 
officers of the listed company serves on the compensation committee of 
such other entity, would not be deemed independent (``Nasdaq 
Interlocking Directorate Provision'').\131\
---------------------------------------------------------------------------

    \131\ See NASD Rule 4200(a)(15)(E). In Amendment No. 3 to the 
Independent Director Proposal, supra note, Nasdaq proposes to expand 
this proposal to include Family Members.
---------------------------------------------------------------------------

    Sixth, a director who is, or has a Family Member who is, a current 
partner of the company's outside auditor, or was a partner or employee 
of the company's outside auditor, and worked on the company's audit, at 
any time, during the past three years, would not be deemed independent 
(``Nasdaq Auditor Relationship Provision'').\132\
---------------------------------------------------------------------------

    \132\ See NASD Rule 4200(a)(15)(F). In Amendment No. 3 to the 
Independent Director Proposal, supra note, Nasdaq proposes to expand 
this proposal to include a director who is, or has a Family Member 
who is, a current partner of the company's outside auditor, 
regardless of whether such partner worked on the company's audit.
---------------------------------------------------------------------------

    Seventh, Nasdaq proposes that, in the case of an investment 
company, a director would not be considered independent if the director 
is an ``interested person'' of the company as defined in section 
2(a)(19) of the Investment Company Act, other than in his or her 
capacity as a member of the board of directors or any board 
committee.\133\ This provision would be in lieu of the other tests for 
independence specified in the rule.
---------------------------------------------------------------------------

    \133\ See NASD Rule 4200(a)(15)(G) and Amendment No. 3 to the 
Nasdaq Independent Director Proposal, supra note.
---------------------------------------------------------------------------

    With respect to the look-back periods referenced in the Nasdaq 
Employee Provision, the Nasdaq Family of Executive Officer Provision, 
the Nasdaq Interlocking Directorate Provision, and the Nasdaq Auditor 
Relationship Provision, Nasdaq proposes to clarify that ``any time'' 
during any of the past three years should be considered,\134\ and to 
add Interpretive Material stating that these three year look-back 
periods commence on the date the relationship ceases. As an example, 
the Interpretive Material states that a director employed by the 
company would not be independent until three years after such 
employment terminates.\135\ Nasdaq also proposes to add Interpretive 
Material stating that the reference to a ``parent or subsidiary'' in 
the definition of independence is intended to cover entities the issuer 
controls and consolidates with the issuer's financial statements as 
filed with the Commission (but not if the issuer reflects such entity 
solely as an investment in its financial statements). The Interpretive 
Material also adds that the reference to ``executive officer'' has the 
same meaning as the definition in Rule 16a-1(f) under the Exchange 
Act.\136\
---------------------------------------------------------------------------

    \134\ See Amendment No. 3 to the Independent Director Proposal, 
supra note, and NASD Rules 4200(a)(15)(A), (C), (E), and (F).
    \135\ See Amendment No. 3 to the Independent Director Proposal, 
supra note and NASD IM-4200 `` Definition of Independence `` Rule 
4200(a)(15).
    \136\ Id. 17 CFR 240.16a-1(f).
---------------------------------------------------------------------------

2. Separate Meetings for Board Members
    Nasdaq proposes to require independent directors to have regularly 
scheduled meetings at which only independent directors would be 
present.\137\
---------------------------------------------------------------------------

    \137\ See NASD Rule 4350(c)(2).
---------------------------------------------------------------------------

3. Compensation of Officers
    Nasdaq proposes to require the compensation of the CEO of a listed 
company to be determined or recommended to the board for determination 
either by a majority of the independent directors, or by a compensation 
committee comprised solely of independent directors (``Nasdaq 
Compensation of Executives Provision'').\138\ In addition, the 
compensation of all other officers would have to be determined or 
recommended to the board for determination either by a majority of the 
independent directors, or a compensation committee comprised solely of 
independent directors.\139\
---------------------------------------------------------------------------

    \138\ See NASD Rule 4350(c)(3)(A). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to 
delete the requirement that the independent directors meet in 
executive session to determine CEO compensation, and add the 
requirement that the CEO may not be present during voting or 
deliberations.
    \139\ See NASD Rule 4350(c)(3)(B). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to add 
the option that the compensation of the CEO and other officers could 
be recommended to the board for its determination rather than 
determined by the committee.
---------------------------------------------------------------------------

    Under the Nasdaq proposal, if the compensation committee was 
comprised of at least three members, one director, who is not 
independent (as defined in NASD Rule 4200) and is not a current officer 
or employee or a Family Member of such person, would be permitted to be 
appointed to the committee if the board, under exceptional and limited 
circumstances, determines that such individual's membership on the 
committee is required by the best interests of the company and its 
shareholders, and the board discloses, in the next annual meeting proxy 
statement subsequent to such determination (or, if the issuer does not 
file a proxy, in its Form 10-K or 20-F), the nature of the relationship 
and the reasons for the determination.\140\ A member appointed under 
such exception would not be permitted to serve longer than two years.
---------------------------------------------------------------------------

    \140\ See NASD Rule 4350(c)(3)(C).

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

[[Page 64163]]

4. Nomination of Directors
    Nasdaq proposes to amend NASD Rule 4350(c) to require director 
nominees to either be selected or recommended for the board's selection 
either by a majority of independent directors, or by a nominations 
committee comprised solely of independent directors (``Nasdaq Director 
Nomination Provision'').\141\
---------------------------------------------------------------------------

    \141\ See NASD Rule 4350(c)(4)(A). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to add 
the option that director nominees could be recommended for the 
board's selection.
---------------------------------------------------------------------------

    If the nominations committee is comprised of at least three 
members, one director, who is not independent (as defined in NASD Rule 
4200) and is not a current officer or employee or a Family Member of 
such person, would be permitted to be appointed to the committee if the 
board, under exceptional and limited circumstances, determines that 
such individual's membership on the committee is required by the best 
interests of the company and its shareholders, and the board discloses, 
in the next annual meeting proxy statement subsequent to such 
determination (of, if the issuer does not file a proxy, in its Form 10-
K or 20-F), the nature of the relationship and the reasons for the 
determination.\142\ A member appointed under such exception would not 
be permitted to serve longer than two years.
---------------------------------------------------------------------------

    \142\ See NASD Rule 4350(c)(4)(C). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to 
delete another exception that it had previously proposed, which 
would have permitted an appointment to the nominating committee, 
under specified circumstances, of a non-independent director who 
owns 20% or more of a company's voting stock.
---------------------------------------------------------------------------

    Further, Nasdaq proposes to require each issuer to certify that it 
has adopted a formal written charter or board resolution, as 
applicable, addressing the nominations process and such related matters 
as may be required under the federal securities laws.\143\ Nasdaq also 
proposes that the Nasdaq Director Nomination Provision would not apply 
in cases where either the right to nominate a director legally belongs 
to a third party,\144\ or the company is subject to a binding 
obligation that requires a director nomination structure inconsistent 
with this provision and such obligation pre-dates the date the 
provision is approved.\145\
---------------------------------------------------------------------------

    \143\ See NASD Rule 4350(c)(4)(B) and Amendment No. 3 to the 
Independent Director Proposal.
    \144\ Nasdaq proposes to add a sentence to explain that this 
provision does not relieve a company's obligation to comply with the 
committee composition requirements under Rule 4350(c) and (d). See 
Amendment No. 3 to the Independent Director Proposal, supra note 12, 
and NASD Rule 4350(c)(4)(D).
    \145\ See Amendment No. 3 to the Independent Director Proposal, 
supra note 12 and NASD Rule 4350(c)(4)(E).
---------------------------------------------------------------------------

5. Controlled Companies Exempt
    Nasdaq proposes generally to exempt any Controlled Company from the 
requirement to have a majority of independent directors and from the 
compensation and nomination committee requirements discussed above. 
However, the independent directors would still be required to have 
regularly scheduled meetings at which only independent directors are 
present.\146\ A Controlled Company would be defined as a company of 
which more than 50% of the voting power is held by an individual, a 
group, or another company. A company relying upon the exemption would 
be required to disclose in its annual proxy statement (or, if the 
issuer does not file a proxy, in its Form 10-K or 20-F) that it is a 
Controlled Company and the basis for that determination. To determine 
whether a group exists for purposes of this exception, the shareholders 
must have publicly filed a notice that they are acting as a group 
(e.g., a Schedule 13D).\147\
---------------------------------------------------------------------------

    \146\ See NASD Rule 4350(c)(5). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to 
clarify that the exemption does not apply to executive sessions of 
independent directors.
    \147\ See IM-4350-4--Controlled Company Exception.
---------------------------------------------------------------------------

6. Audit Committee Charter and Responsibilities
    NASD Rule 4350(d) would retain the requirement that each issuer 
adopt a formal written audit committee charter, and the proposed 
amendment to the rule would require the charter to specify the 
committee's purpose of overseeing the accounting and financial 
reporting processes and the audits of the financial statements of the 
issuer.\148\ The written charter also would be required to include 
specific audit committee responsibilities and authority, as set forth 
in the proposed amendment to Rule 4350(d)(3).\149\ Nasdaq also proposes 
to state in Interpretive Material to Rule 4350(d) that the written 
charter set forth the scope of the audit committee's responsibilities 
and the means by which the committee carries out those 
responsibilities; the outside auditor's accountability to the 
committee; and the committee's responsibility to ensure the 
independence of the outside auditors.\150\
---------------------------------------------------------------------------

    \148\ See NASD Rule 4350(d)(1). NASD Rule 4350(d) would retain 
various provisions of the current rule, including, for example, the 
requirements that an audit committee have a written charter and that 
it be comprised of at least three independent directors who meet 
certain financial literacy requirements.
    \149\ NASD Rule 4350(d)(3) would require the audit committee to 
have the specific audit committee responsibilities and authority 
necessary to comply with Rule 10A-3(b)(2), (3), (4) and (5) (subject 
to the exemptions provided in Rule 10A-3(c)), concerning 
responsibilities relating to: (i) Registered public accounting 
firms, (ii) complaints relating to accounting, internal accounting 
controls or auditing matters, (iii) authority to engage advisors, 
and (iv) funding as determined by the audit committee. In Amendment 
No. 3 to the Independent Director Proposal, supra note 12, Nasdaq 
proposes to clarify that audit committees for investment companies 
must also establish procedures for the confidential, anonymous 
submission of concerns regarding questionable accounting or auditing 
matters by employees of the investment adviser, administrator, 
principal underwriter, or any other provider of accounting related 
services for the investment company, as well as employees of the 
investment company.
    \150\ See IM-4350-4--Board Independence and Independent 
Committees--Audit Committees--Rule 4350(d)--Audit Committee Charter.
---------------------------------------------------------------------------

7. Audit Committee Composition
    NASD Rule 4350(d) would retain the requirement that each listed 
issuer have an audit committee composed of at least three members.\151\ 
However, under the proposed requirements, each audit committee member 
would be required to: (1) Be independent, as defined under NASD Rule 
4200; (2) meet the criteria for independence set forth in Rule 10A-3 
(subject to the exceptions provided in Rule 10A-3(c)); and (3) not have 
participated in the preparation of the financial statements of the 
company or any current subsidiary of the company at any time during the 
past three years, in addition to satisfying the current requirement 
that the member be able to read and understand fundamental financial 
statements, including a company's balance sheet, income statement, and 
cash flow statement (``Nasdaq Audit Committee Provision'').\152\
---------------------------------------------------------------------------

    \151\ See NASD Rule 4350(d)(2). See also supra note.
    \152\ See NASD Rule 4350(d)(2)(A)(i)-(iv). In Amendment No. 3 to 
the Independent Director Proposal, supra note 12, Nasdaq proposes 
to: (1) Add a cross-reference to Rule 10A-3; and (2) add the third 
requirement noted above.
---------------------------------------------------------------------------

    One director who is not independent as defined in NASD Rule 4200 
and meets the criteria set forth in section 10A(m)(3) of the Exchange 
Act \153\ and the rules thereunder, and is not a current officer or 
employee of the company or a Family Member of such person, may be 
appointed to the audit 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

[[Page 64164]]

its shareholders, and the board discloses, in the next annual proxy 
statement subsequent to such determination (or, if the issuer does not 
file a proxy, in its Form 10-K or 20-F), the nature of the relationship 
and the reasons for that determination. A member appointed under this 
exception would not be permitted to serve longer than two years and 
would not be permitted to chair the audit committee.\154\ Nasdaq 
proposes to add to Interpretive Material the recommendation that an 
issuer disclose in its annual proxy (or, if the issuer does not file a 
proxy, in its Form 10-K or 20-F) if any director is deemed independent 
but falls outside the safe harbor provisions of Rule 10A-
3(e)(1)(ii).\155\
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 78j-1(m).
    \154\ See NASD Rule 4350(d)(2)(B). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to 
delete a previously proposed provision that would have permitted 
membership on the audit committee, under certain circumstances, of a 
director who owns or controls a specified percentage of the issuer's 
voting securities.
    \155\ See Amendment No. 3 to the Independent Director Proposal, 
supra note 12. Among other criteria, section 10A(m) of the Exchange 
Act and Rule 10A-3 thereunder provide that a member of an audit 
committee of an issuer is not considered ``independent'' if the 
member is an ``affiliated person'' of the issuer or a subsidiary. An 
``affiliated person'' includes, among other things, a person who 
``controls'' the issuer. The safe harbor of Rule 10A-3(e)(1)(ii) 
provides that a person who is not an executive officer of the issuer 
and is not the beneficial owner, directly or indirectly, of 10% or 
more of any class of voting equity securities of the issuer is 
deemed not to control the issuer for purposes of determining 
affiliation. However, a person who exceeds the 10% beneficial 
ownership is not presumptively deemed to control the issuer, and 
thus could still be deemed independent under the particular facts 
and circumstances. See Rule 10A-3(e)(1)(ii)(B).
---------------------------------------------------------------------------

    In addition, Nasdaq will retain the requirement that at least one 
member of the audit committee have 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 being 
or having been a chief executive officer, chief financial officer or 
other senior officer with financial oversight responsibilities.\156\
---------------------------------------------------------------------------

    \156\ See NASD Rule 4350(d)(2)(A). In Amendment No. 3 to the 
Independent Director Proposal, supra note 12, Nasdaq proposes to 
clarify in Interpretive Material that a director who qualifies as an 
audit committee financial expert under Item 401(h) of Regulation S- 
-K or Item 401(e) of Regulation S-B is presumed to qualify as a 
financially sophisticated audit committee member.
---------------------------------------------------------------------------

    Nasdaq proposes to delete from the Interpretive Material the 
discussion relating to determining whether a person is an affiliate 
solely by virtue of stock ownership.\157\
---------------------------------------------------------------------------

    \157\ See Amendment No. 3 to the Independent Director Proposal, 
supra note 12.
---------------------------------------------------------------------------

8. Cure Periods
    Nasdaq proposes to add a cure period provision, as follows: (1) If 
a listed issuer fails to comply with the audit committee composition 
requirements under Rule 10A-3 and NASD Rule 4350(d)(2), because an 
audit committee member ceases to be independent for reasons outside the 
member's reasonable control, the audit committee member could remain on 
the committee until the earlier of the issuer's next annual 
shareholders meeting or one year from the occurrence of the event that 
caused the failure to comply with the requirements; and (2) if an 
issuer fails to comply with the audit committee composition 
requirements due to one vacancy on the audit committee, and the 
aforementioned cure period is not otherwise being relied upon for 
another audit committee member, the issuer would have until the earlier 
of the next annual shareholders meeting or one year from the occurrence 
of the event that caused the failure to comply with this 
requirement.\158\ An issuer relying on either of these provisions would 
be required to provide notice to Nasdaq immediately upon learning of 
the event or circumstance that caused the non-compliance.
---------------------------------------------------------------------------

    \158\ See NASD Rule 4350(d)(4)(A) and (B).
---------------------------------------------------------------------------

9. Notification of Noncompliance
    Nasdaq proposes to require that an issuer provide Nasdaq with 
prompt notification after an executive officer of the issuer becomes 
aware of any material noncompliance by the issuer with the requirements 
of NASD Rule 4350.\159\
---------------------------------------------------------------------------

    \159\ See NASD Rule 4350(m), which was added by Amendment No. 3 
to the Independent Director Proposal, supra note 12.
---------------------------------------------------------------------------

10. Code of Business Conduct and Ethics
    In the Nasdaq Code of Conduct Proposal, as amended,\160\ Nasdaq 
proposes NASD Rule 4350(n) and related Interpretive Material, which 
would require each listed company to adopt a code of conduct applicable 
to all directors, officers and employees, and to make such code 
publicly available. The code of conduct would be required to comply 
with the definition of a ``code of ethics'' set forth in Section 406(c) 
of the Sarbanes-Oxley Act and any regulations thereunder. In addition, 
the code must provide for an enforcement mechanism that ensures prompt 
and consistent enforcement of the code, protection for persons 
reporting questionable behavior, clear and objective standards for 
compliance, and a fair process by which to determine violations. 
Moreover, any waivers of the code for directors or executive officers 
must be approved by the board and disclosed in a Form 8-K within five 
days.
---------------------------------------------------------------------------

    \160\ See the Nasdaq Code of Conduct Proposal, as amended, supra 
notes 25 and 28.
---------------------------------------------------------------------------

    In the Interpretive Material, Nasdaq proposes that the requirement 
of a publicly available code of conduct applicable to all directors, 
officer and employees of an issuer is intended to demonstrate to 
investors that the board and management of Nasdaq issuers have 
carefully considered the requirement of ethical dealing and have put in 
place a system to ensure that they become aware of and take prompt 
action against any questionable behavior. Nasdaq states that, for 
company personnel, a code of conduct with enforcement provisions 
provides assurance that reporting of questionable behavior is protected 
and encouraged, and fosters an atmosphere of self-awareness and prudent 
conduct.
11. Public Announcement of Audit Opinions With Going Concern 
Qualifications
    In the Nasdaq Going Concern Proposal,\161\ Nasdaq proposes to amend 
NASD Rule 4350(b) to require each Nasdaq-listed company that receives 
an audit opinion that contains a going concern qualification to make a 
public announcement through the news media disclosing the receipt of 
such qualification. Under the proposal, the issuer, prior to the 
release of the public announcement, would be required to provide the 
text of the public announcement to the StockWatch section of Nasdaq's 
MarketWatch Department. The public announcement must be provided to 
Nasdaq StockWatch and released to the media not later than seven 
calendar days following the filing of the audit opinion in a public 
filing with the Commission.\162\
---------------------------------------------------------------------------

    \161\ See the Nasdaq Going Concern Proposal.
    \162\ See NASD Rule 4350(b)(1)(B).
---------------------------------------------------------------------------

12. Related Party Transactions
    In the Nasdaq Related Party Transactions Proposal, as amended,\163\ 
Nasdaq proposes to amend NASD Rule 4350(h) to specify that each issuer 
shall conduct an appropriate review of all related party transactions 
for potential conflict of interest situations on an ongoing basis and 
all such transactions would have to be approved by the listed

[[Page 64165]]

company's audit committee or another independent body of the board of 
directors. For purposes of the rule, ``related party transactions'' 
would refer to transactions required to be disclosed pursuant to 
Commission Regulation S-K, Item 404.\164\ Nasdaq proposes that the 
Related Party Transactions Proposal become operative on January 15, 
2004.\165\
---------------------------------------------------------------------------

    \163\ See the Nasdaq Related Party Transactions Proposal, as 
amended, supra notes 16, 18, and 19.
    \164\ See NASD Rule 4350(h).
    \165\ See Amendment No. 3 to the Nasdaq Related Party 
Transactions Proposal, supra note 19.
---------------------------------------------------------------------------

13. Application to Foreign Issuers and Certain Other Issuers
    NASD Rule 4350 currently provides that foreign issuers are not 
required to do any act that is contrary to a law, rule or regulation of 
any public authority exercising jurisdiction over such issuer or that 
is contrary to generally accepted business practices in the issuer's 
country of domicile. Currently, Nasdaq may provide exemptions from the 
requirements of NASD Rule 4350 as may be necessary or appropriate to 
carry out this intent. In the Nasdaq Issuer Applicability Proposal, as 
amended,\166\ Nasdaq proposes to amend this rule and add Interpretive 
Material to clarify that the authority to grant exemptions from the 
corporate governance standards applies only to foreign private issuers 
and does not apply to the extent that such exemption would be contrary 
to the federal securities laws, including, without limitation, section 
10A(m) of the Exchange Act and Rule 10A-3 thereunder. Nasdaq also 
proposes to provide that a foreign issuer that receives an exemption 
from NASD Rule 4350 would be required to disclose in its annual reports 
filed with the Commission each requirement from which it is exempted 
and describe the home country practice, if any, followed by the issuer 
in lieu of these requirements. In addition, a foreign issuer making its 
initial public offering or first U.S. listing on Nasdaq would be 
required to disclose any such exemptions in their registration 
statement.
---------------------------------------------------------------------------

    \166\ See supra notes 22 to 24.
---------------------------------------------------------------------------

    In addition, Nasdaq proposes that management investment companies 
(including business development companies) would be subject to all of 
the requirements of NASD Rule 4350, except that management investment 
companies registered under the Investment Company Act would be exempt 
from the requirements of NASD Rule 4350(c) and (n), which pertain to 
board and key committee independence requirements and codes of 
conduct.\167\ Nasdaq proposed these exemptions in light of the fact 
that registered management investment companies are already subject to 
a pervasive system of federal regulation.
---------------------------------------------------------------------------

    \167\ Id.
---------------------------------------------------------------------------

    Finally, Nasdaq proposes that cooperative entities, such as 
agricultural cooperatives that are structured to comply with relevant 
state law and federal tax law and that do not have a publicly traded 
class of common stock would be exempt from NASD Rule 4350(c); however, 
such entities would be required to comply with all federal securities 
laws, including, without limitation, section 10A(m) of the Exchange Act 
and Rule 10A-3 thereunder.\168\
---------------------------------------------------------------------------

    \168\ Id.
---------------------------------------------------------------------------

    Nasdaq proposes that asset-backed issuers and other passive 
issuers,\169\ such as unit investment trusts, would be exempt from NASD 
Rule 4350(c) and (n), which pertain to board and key committee 
independence requirements and codes of conduct, and the audit committee 
requirements of NASD Rule 4350(d).\170\ Nasdaq noted that these 
revisions are commensurate with provisions contained in Rule 10A-3.
---------------------------------------------------------------------------

    \169\ These are issuers that are organized as trusts or other 
unincorporated associations that do not have a board of directors or 
persons acting in a similar capacity and whose activities 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.
    \170\ See Amendment Nos. 2 and 3 to the Nasdaq Issuer 
Applicability Proposal.
---------------------------------------------------------------------------

14. Proposed Implementation of New Requirements
    In Amendment No. 3 to the Nasdaq Issuer Applicability 
Proposal,\171\ Nasdaq proposed to set out in NASD Rule 4350(a)(5) the 
proposed dates by which listed companies would be required to comply 
with the rule changes to NASD Rules 4200 and 4350 that are the subject 
of this Order. In order to allow companies to make necessary 
adjustments in the course of their regular annual meeting schedule, and 
consistent with Exchange Act Rule 10A-3, the rule would establish the 
deadlines for compliance listed below. During the transition period 
between the date of approval of the rule filing by the Commission and 
the deadline indicated for each rule change, companies that have not 
brought themselves into compliance with the new rules would be required 
to comply with the previously existing rules, as applicable.\172\
---------------------------------------------------------------------------

    \171\ See supra note 24.
    \172\ To make the application of the rules easier to understand, 
Nasdaq also proposed in Amendment No. 3 to the Nasdaq Issuer 
Applicability Proposal to adopt Rules 4200A and 4350A, which would 
set forth the sections of existing Rules 4200 and 4350 that will 
continue to be applicable until the deadlines for compliance with 
the proposed changes.
---------------------------------------------------------------------------

    Companies would be required to be in compliance with the new rules 
by the following dates:
    The provisions of Rule 4200(a) and Rule 4350(c), (d) and (m) 
regarding director independence, independent committees, and 
notification of noncompliance would be required to be implemented by:
    [sbull] July 31, 2005 for foreign private issuers \173\ and small 
business issuers (as defined in Rule 12b-2 \174\); and
---------------------------------------------------------------------------

    \173\ See Section II.C.13., supra for a discussion of the 
treatment of foreign private issuers under the Nasdaq proposals.
    \174\ 17 CFR 240.12b-2.
---------------------------------------------------------------------------

    [sbull] For all other listed issuers, by the earlier of: (1) The 
listed issuer's first annual shareholders meeting after January 15, 
2004; or (2) October 31, 2004.
    In the case of an issuer with a staggered board, with the exception 
of the audit committee requirements, the issuer would have until its 
second annual meeting after January 15, 2004, but not later than 
December 31, 2005, to implement all new requirements relating to board 
composition, if the issuer would be required to change a director who 
would not normally stand for election at an earlier annual meeting. 
Such issuers would be required to comply with the audit committee 
requirements pursuant to the implementation schedule noted above.
    Issuers that have listed or will be listed in conjunction with 
their initial public offering would be afforded exemptions from all 
board composition requirements consistent with the exemptions afforded 
in Rule 10A-3(b)(1)(iv)(A). That is, for each committee that the 
company adopts, the company would be required to have one independent 
member at the time of listing, a majority of independent members within 
90 days of listing, and all independent members within one year. The 
rule would note, however, that investment companies are not afforded 
the exemptions in Rule 10A-3(b)(1)(iv)(A). Issuers could choose not to 
adopt a compensation or nomination committee and could instead rely 
upon a majority of the independent directors to discharge 
responsibilities under the rules. These issuers would be required to 
meet the majority independent board requirement within one year of 
listing.
    Companies transferring from other markets with a substantially 
similar requirement would be afforded the

[[Page 64166]]

balance of any grace period afforded by the other market. Companies 
transferring from other listed markets that do not have a substantially 
similar requirement would be afforded one year from the date of listing 
on Nasdaq. The rule would stipulate that this transition period is not 
intended to supplant any applicable requirements of Rule 10A-3 under 
the Exchange Act.
    Compliance with the limitations on corporate governance exemptions 
to foreign private issuers would be required by July 31, 2005. However, 
the requirement that a foreign issuer disclose the receipt of a 
corporate governance exemption from Nasdaq would apply to new listings 
and filings made after January 1, 2004.
    Compliance with proposed Rule 4350(n), requiring issuers to adopt a 
code of conduct,\175\ would be required six months after approval by 
the Commission. Proposed Rule 4350(h), requiring audit committee 
approval of related party transactions, would be operative January 15, 
2004. The remainder of Proposed Rules 4350(a) and 4350(b) would be 
effective upon approval by the Commission.
---------------------------------------------------------------------------

    \175\ See Section III.C.10. supra for a discussion of the Code 
of Conduct Proposal.
---------------------------------------------------------------------------

III. Summary of Comments on NYSE and Nasdaq Proposals

    The Commission received a total of 90 comment letters on the NYSE 
and Nasdaq proposals.\176\ Many of the commenters expressed their 
support for the goals of the proposals.\177\ While some commenters 
praised specific provisions of the proposals,\178\ other commenters 
argued that specific provisions of the proposals were too restrictive 
or too lenient.\179\ Many commenters believed that certain aspects of 
the proposals needed clarification.\180\ The commenters generally 
addressed issues falling into one or more of the categories discussed 
below.
---------------------------------------------------------------------------

    \176\ Of the comment letters received, 63 related to the NYSE 
Corporate Governance Proposal, 19 related to the Nasdaq Independent 
Director Proposal, five related to both the NYSE Corporate 
Governance Proposal and the Nasdaq Independent Director Proposal, 
two related to the Nasdaq Code of Conduct Proposal, and one related 
to the Nasdaq Issuer Applicability Proposal. The public files for 
the NYSE and Nasdaq proposals are located at the Commission's Public 
Reference Room, 450 Fifth Street, NW., Washington, DC 20549-0102. 
The public files for the rule proposals contain all comment letters 
on the proposals. A list of commenters on the NYSE and Nasdaq 
proposals (along with the citations to the letters referenced in 
this order), is included as Exhibit A to this order. The summary of 
comments contained in this section and the list of commenters 
contained in Exhibit A to this Order reflect comments received as of 
October 13, 2003.
    \177\ See Independent Community Bankers NYSE Letter, TIAA-CREF 
NYSE Letter, Herman E-mail, American Bankers Association NYSE 
Letter, Walden NYSE Letter, Railways Pension NYSE Letter, Social 
Investment NYSE Letter, Ethical Funds NYSE Letter, Ursuline Sisters 
NYSE Letter, Barclays NYSE Letter, SIO NYSE Letter, Council on 
Foundations NYSE Letter, Committee on Securities Regulation NYSE 
Letter, Intel Nasdaq Letter, Committee on Securities Regulation 
Nasdaq Letter, Paul Weiss Nasdaq Letter, National Venture Nasdaq 
Letter, and Qualcomm Nasdaq Letter.
    \178\ See American Bankers Association NYSE Letter, Walden NYSE 
Letter, Ursuline Sisters NYSE Letter, Barclays NYSE Letter, SIO NYSE 
Letter, America's Community Bankers NYSE Letter, America's Community 
Bankers Nasdaq Letter, Committee on Securities Regulation NYSE 
Letter, National Venture NYSE Letter, Investment Company Institute 
NYSE Letter, American Bankers Association Nasdaq Letter, Council on 
Foundations Nasdaq Letter, Committee on Securities Regulation Nasdaq 
Letter, National Venture Nasdaq Letter, Investment Company Institute 
Nasdaq Letter, and TI-USA Nasdaq Letter.
    \179\ See Council on Foundations NYSE Letter, Independent 
Community Bankers NYSE Letter, American Bankers Association NYSE 
Letter, Wachtell NYSE Memo, General Motors NYSE Letter, New York 
State Bar NYSE Letter, Wells Fargo NYSE Letter, Anadarko NYSE 
Letter, Winston & Strawn NYSE Letter, CNF NYSE Letter, Aetna NYSE 
Letter, Dow Lohnes NYSE Letter, Ameren NYSE Letter, Visteon NYSE 
Letter, Exxon NYSE Letter, Morrison Cohen NYSE Letter, Mirant NYSE 
Letter, American Society of Corporate Secretaries NYSE Letter, 
Computer Sciences NYSE Letter, Rockwell NYSE Letter, America's 
Community Bankers NYSE Letter, National Venture NYSE Letter, Peoples 
Energy NYSE Letter, Lorsch NYSE Letter, International Paper NYSE 
Letter, Agilent NYSE Letter, America's Community Bankers Nasdaq 
Letter, Whitney Nasdaq Letter, People's Energy Nasdaq Letter, 
America's Community Bankers Nasdaq Letter, Independent Community 
Bankers Nasdaq Letter, Kreider Nasdaq Letter, Committee on 
Securities Regulation Nasdaq Letter, Fulton Nasdaq Letter, and 
National Venture Nasdaq Letter (too restrictive), Herman E-mail, 
Eisenberg NYSE Letter, Mercer Delta NYSE Letter, TI-USA Nasdaq 
Letter, and Kolber Nasdaq E-mail (too lenient).
    \180\ See LeBoeuf NYSE Letter, New York State Bar NYSE Letter, 
America's Community Bankers NYSE Letter, Aetna NYSE Letter, Exxon 
NYSE Letter, Agilent NYSE Letter, Perkins Coie NYSE Letter, Mirant 
NYSE Letter, Computer Sciences NSYE Letter, Winston & Strawn NYSE 
Letter, General Motors NYSE Letter, Council on Foundations NYSE 
Letter, Committee on Federal Regulation on Securities Letter, New 
York City Bar NYSE Letter, Rutledge NYSE Letter, Intel Nasdaq 
Letter, America's Community Bankers Nasdaq Letter, Cenex Harvest 
Nasdaq Letter, People's Energy Nasdaq Letter, Paul Weiss Nasdaq 
Letter, and Committee on Securities Regulation Nasdaq Letter.
---------------------------------------------------------------------------

A. Independence of Majority of Board Members

General
    Many commenters supported the proposals by NYSE and Nasdaq to 
require each listed company to have a majority of independent directors 
on its board,\181\ to tighten the definition of independent 
director,\182\ and to require the board to affirmatively determine that 
directors are independent.\183\ There were some who disagreed, however. 
One commenter argued, in general, that boards should not be required to 
have a majority of independent directors.\184\ With respect to NYSE's 
proposal to tighten the definition of independent director, one 
commenter expressed disapproval for what it described as an ``expanding 
list of defined relationships.'' \185\ With respect to Nasdaq's 
proposal to tighten the definition of independent director, another 
commenter stated its concern that the proposed standards would lead to 
smaller boards or to boards composed of individuals that might not have 
the best or most valuable experience.\186\
---------------------------------------------------------------------------

    \181\ See Independent Community Bankers NYSE Letter, Hermann E-
mail, American Bankers Association NYSE Letter, Walden NYSE Letter, 
Railways Pension NYSE Letter, Social Investment NYSE Letter, Ethical 
Funds NYSE Letter, Ursuline Sisters NYSE Letter, Barclays NYSE 
Letter, SIO NYSE Letter, TIAA-CREF NYSE Letter, American Bankers 
Association Nasdaq Letter, and Independent Community Bankers Nasdaq 
Letter.
    \182\ See TIAA-CREF NYSE Letter, Railways Pension NYSE Letter, 
Barclays NYSE Letter, and SIO NYSE Letter.
    \183\ See American Bankers Association NYSE Letter, TIAA-CREF 
NYSE Letter, and American Bankers Association Nasdaq Letter.
    \184\ See Johnsson E-Mail.
    \185\ See KPMG NYSE Letter.
    \186\ See America's Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

    With respect to the NYSE proposal regarding the manner in which 
boards may disclose determinations of independence, one commenter 
stated its belief that permitting boards to adopt categorical standards 
of independence and to disclose generally that directors meet these 
standards would ensure that privacy is maintained concerning the 
specifics of private financial matters.\187\ Another commenter 
requested that, with respect to the barrier to independence of 
individuals having specified affiliations with ``organizations'' having 
a material relationship with the company, the NYSE clarify what 
``organization'' means.\188\ With respect to Nasdaq's proposed 
definition of independence, one commenter requested that Nasdaq clarify 
that ``employee'' does not include independent contractors and 
employees of other goods and service providers.
---------------------------------------------------------------------------

    \187\ See American Bankers Association NYSE Letter.
    \188\ See New York State Bar NYSE Letter.
---------------------------------------------------------------------------

Proposals Regarding Prohibited Compensation for Independent Directors

    With respect to the kinds of compensation received by a director or 
family member that would preclude a finding of independence, one 
commenter described the NYSE Direct Compensation Provision as a

[[Page 64167]]

``reasonable approach,'\189\ while another commenter thought the 
proposal was too rigid because it would disqualify employees who were 
paid more than $100,000 and did not have significant decision-making 
authority.\190\ Some commenters requested clarification of this 
proposal. For example, one of these commenters asked whether 
``compensation'' had a similar meaning to that given by the Commission 
in Rule 10A-3,\191\ and whether any of the following could be excluded: 
gains from investments in securities and dividends,\192\ restricted 
stock received by directors as part of their compensation for service 
as directors,\193\ payments from banking transactions in the ordinary 
course of business,\194\ and deferred compensation.\195\ One commenter 
expressed its preference for the NYSE Direct Compensation Provision 
over the Nasdaq Payments Provision because the Nasdaq Payments 
Provision excluded individuals who received ``payments,'' which the 
commenter believed was too broad.\196\ One commenter argued that either 
the $100,000 threshold of the NYSE Direct Compensation Provision should 
be increased for larger companies, or the board should have the 
discretion to establish the appropriate threshold.\197\ With respect to 
the Nasdaq Payments Provision, one commenter argued that an indication 
of non-independence based on the threshold amounts of payments received 
should be a rebuttable presumption as in the NYSE Direct Compensation 
Provision, rather than a bright line test.\198\ Commenters advocated 
that the following should be excluded from these amounts: indirect 
payments, such as payments to related organizations,\199\ payments from 
banking or brokerage transactions in the ordinary course of 
business,\200\ other items excluded from disclosure per Commission 
rules such as Item 404 of Form S-K,\201\ and compensation for service 
on board committees.\202\ In contrast, one commenter stated that 
director's fees should be the only compensation an independent director 
could receive from the company.\203\ In addition, one commenter stated 
its belief that the three-year look back should not apply to the Nasdaq 
Payments Provision because the board would already be required to 
consider previous employment in making an affirmative determination of 
director independence.\204\ One commenter expressed its strong support 
for the exception in the NYSE Direct Compensation Provision for 
compensation received by a director for former service as an interim 
Chairman or CEO, and recommended that Nasdaq include this exception in 
its proposal.\205\
---------------------------------------------------------------------------

    \189\ See America's Community Bankers NYSE Letter.
    \190\ See GM NYSE Letter.
    \191\ See America's Community Bankers NYSE Letter.
    \192\ See Aetna NYSE Letter.
    \193\ See Exxon NYSE Letter.
    \194\ See America's Community Bankers NYSE Letter.
    \195\ See New York State Bar NYSE Letter.
    \196\ See American Bankers Association NYSE Letter.
    \197\ See Wells Fargo NYSE Letter.
    \198\ See Committee on Securities Regulation Nasdaq Letter.
    \199\ See ABC Nasdaq Letter.
    \200\ See America's Community Bankers Nasdaq Letter, American 
Bankers Association Nasdaq Letter, Whitney Nasdaq Letter, and 
People's Bank Nasdaq Letter.
    \201\ See Whitney Nasdaq Letter.
    \202\ See People's Bank Nasdaq Letter.
    \203\ See TI-USA Nasdaq Letter.
    \204\ See America's Community Bankers Nasdaq Letter.
    \205\ See Arrow Electronics Letter.
---------------------------------------------------------------------------

    Business Relationship Provisions
    One commenter supported the NYSE Business Relationship Provision 
and represented that members of its corporate governance task force 
(which consists of representatives from both large and small, public 
and non-public banking organizations) were confident that the majority 
of directors sitting on the boards of banking organizations impacted by 
these listing standards would be able to satisfy this requirement.\206\ 
Other commenters argued that the NYSE Business Relationship Provision 
would be difficult to implement and would not, in many cases, be the 
most accurate measure of the materiality of a business 
relationship.\207\ Likewise, commenters argued that NYSE's threshold of 
2% was too low,\208\ the proposal was not appropriate for smaller 
companies,\209\ the proposal was ambiguous,\210\ and that the existence 
of a commercial relationship should give rise only to a rebuttable 
presumption of lack of independence.\211\ Commenters were also 
concerned about the application of the proposal to family members.\212\ 
In addition, commenters argued that the proposal should not apply to 
the following: Executive officers or employees of a company making the 
payments who seek to be independent directors of the company that is on 
the receiving end of the payments,\213\ certain loans,\214\ non-
executive employees,\215\ disqualification due to consolidation 
accounting principles,\216\ and gross revenues received in certain 
competitively bid and public utility transactions.\217\
---------------------------------------------------------------------------

    \206\ See American Bankers Association NYSE Letter.
    \207\ See Mirant NYSE Letter, Winston and Strawn NYSFE Letter, 
CNF NYSE Letter, America's Community Bankers NYSE Letter, and New 
York State Bar NYSE Letter.
    \208\ See Anadarko NYSE Letter.
    \209\ See Agilent NYSE Letter.
    \210\ See Perkins Coie NYSE Letter and Winston & Strawn NYSE 
Letter.
    \211\ See Anadarko NYSE Letter, Aetna NYSE Letter, and Ameren 
NYSE Letter.
    \212\ See Aetna NYSE Letter, Visteon NYSE Letter, and Mirant 
NYSE Letter.
    \213\ See CNF NYSE Letter.
    \214\ See Aetna NYSE Letter.
    \215\ Id.
    \216\ See Dow, Lohnes NYSE Letter.
    \217\ See Ameren NYSE Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq Business Relationship Provision, one 
commenter recommended defining ``controlling shareholder.''\218\
---------------------------------------------------------------------------

    \218\ See America's Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

Interlocking Directorate Provisions
    Two commenters supported the NYSE and Nasdaq Interlocking 
Directorate Provisions.\219\ One commenter does not believe that the 
look-back provisions of the NYSE and Nasdaq Interlocking Directorate 
Provisions should apply because independence would seem to be 
compromised only if the listed company's executives had the current 
ability to participate in determining the director's compensation as an 
executive officer of the other entity.\220\ The commenter suggests that 
if the NYSE and Nasdaq look-back provisions are applied, then the 
service of the listed company's executive, and the employment of the 
listed company's director, at the other company should be required to 
have occurred at the same time during that five-year period.\221\
---------------------------------------------------------------------------

    \219\ See Council on Foundations Nasdaq Letter and American 
Bankers Association NYSE Letter.
    \220\ See America's Community Bankers Nasdaq Letter and 
America's Community Bankers NYSE Letter.
    \221\ Id.
---------------------------------------------------------------------------

Relationships of a Director with the Company's Auditors
    With respect to the NYSE's proposal concerning relationships with 
an auditor, one commenter did not believe that the NYSE had 
sufficiently explained why a director's affiliation with a company's 
auditor would compromise the director's independence.\222\ In addition, 
several commenters argued that applying the proposals to family members 
would be too burdensome, given the small number of accounting firms 
that provide audit services to large publicly traded companies, and 
would be difficult to monitor. These commenters suggested

[[Page 64168]]

limiting the scope of the proposal.\223\ Furthermore, commenters 
requested clarification of the terms ``external auditors,''\224\ 
``internal auditors,''\225\ ``affiliated with,''\226\ and 
``executives.''\227\ One commenter supported this proposal.\228\
---------------------------------------------------------------------------

    \222\ See Computer Sciences NYSE Letter.
    \223\ See Aetna NYSE Letter, Exxon NYSE Letter, Wells Fargo NYSE 
Letter, Morrison Cohen NYSE Letter, and New York State Bar NYSE 
Letter.
    \224\ See Mirant NYSE Letter, America's Community Bankers NYSE 
Letter, and Computer Sciences NYSE Letter.
    \225\ See America's Community Bankers NYSE Letter.
    \226\ Id.
    \227\ See Aetna NYSE Letter.
    \228\ See American Bankers Association NYSE Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq proposal on the same topic, one 
commenter suggested limiting the scope of the proposal by excluding 
from its prohibition partners or employees that provide only a minimal 
amount of work on the company's audit or who are brought in to assist 
on technical or industry-specific issues.\229\
---------------------------------------------------------------------------

    \229\ See America's Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

Definition of Family Member
    In general, many commenters criticized the proposed NYSE and Nasdaq 
definitions of family members for being too broad and impractical to 
apply.\230\ One commenter expressed its preference for NYSE's proposed 
definition,\231\ and another commenter stated that NYSE's proposed 
definition is reasonable.\232\
---------------------------------------------------------------------------

    \230\ See Intel Nasdaq Letter, People's Bank Nasdaq Letter, 
America's Community Bankers Nasdaq Letter, American Bankers 
Association Nasdaq Letter, Independent Community Bankers Nasdaq 
Letter, Kreider Nasdaq Letter, Mirant NYSE Letter, American Society 
of Corporate Secretaries NYSE Letter, America's Community Bankers 
NYSE Letter, Winston & Strawn NYSE Letter, Computer Sciences NYSE 
Letter, Aetna NYSE Letter, Exxon NYSE Letter, Wells Fargo NYSE 
Letter, New York State Bar NYSE Letter, and Rockwell NYSE Letter.
    \231\ See American Bankers Association Nasdaq Letter.
    \232\ See America's Community Bankers NYSE Letter.
---------------------------------------------------------------------------

Look-Back Periods and Their Phase-In
    With respect to the look-back periods proposed by the NYSE and 
Nasdaq to disqualify former employees, auditor personnel, interlocking 
directors and their families, as applicable, for a specified time, two 
commenters argued that no look-back periods were necessary.\233\ One of 
these commenters recommended that Nasdaq clarify that the look-back 
would apply to any time within the three-year period, not the entire 
three-year period.\234\ Two commenters \235\ approved of NYSE's 
proposal to phase-in the look-back periods but, along with other 
commenters,\236\ argued that a five-year look-back period would be too 
long. Some commenters argued that Nasdaq's look-back provisions should 
be phased-in as in the NYSE's proposal.\237\
---------------------------------------------------------------------------

    \233\ See America's Community Bankers Nasdaq Letter and 
Independent Community Bankers Nasdaq Letter.
    \234\ See America's Community Bankers Nasdaq Letter.
    \235\ See America's Community Bankers NYSE Letter and American 
Bankers Association NYSE Letter.
    \236\ See National Venture NYSE Letter and Independent Community 
Bankers NSYE Letter.
    \237\ See American Bankers Association Nasdaq Letter, Committee 
on Securities Regulation Nasdaq Letter, Whitney Nasdaq Letter, and 
Independent Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

Affiliates
    With respect to how NYSE proposes to define independent directors, 
two commenters asked, absent other disqualifying factors, if a director 
that sits on the board of a company's affiliate could be an independent 
director with respect to that company.\238\
---------------------------------------------------------------------------

    \238\ See Cleary NYSE Letter and LeBoeuf NYSE Letter.
---------------------------------------------------------------------------

Application to Investment Companies
    With respect to how Nasdaq proposes to define independent director, 
one commenter stated that whether a director of an investment company 
is independent should be determined exclusively under the provisions of 
section 2(a)(19) of the Investment Company Act.\239\
---------------------------------------------------------------------------

    \239\ See Investment Company Institute Nasdaq Letter.
---------------------------------------------------------------------------

Banks and Banking Transactions
    Several commenters stated their concern about the impact of both 
the NYSE and Nasdaq proposals on small community banks and the 
disqualification of otherwise independent directors due to ordinary 
course of business banking transactions.\240\ These commenters 
recommended that Nasdaq and NYSE amend their proposals accordingly. 
However, one of these commenters expressed its support for the NYSE 
proposal and represented that members of its corporate governance task 
force (which consists of representatives from both large and 
small,public and non-public banking organizations) were confident that 
the majority of directors sitting on the boards of banking 
organizations impacted by these listing standards would be able to 
satisfy the proposed requirements.\241\
---------------------------------------------------------------------------

    \240\ See Independent Community Bankers NYSE Letter, American 
Bankers Association NYSE Letter, Wachtell NYSE Letter, America's 
Community Bankers NYSE Letter, Whitney Nasdaq Letter, American 
Bankers Association Nasdaq Letter, America's Community Bankers 
Nasdaq Letter, and Independent Community Bankers Nasdaq Letter.
    \241\ See American Bankers Association NYSE Letter.
---------------------------------------------------------------------------

Charities
    One commenter argued that both companies and the charities they 
support would benefit from a bright line uniform rule that would apply 
to all charitable contributions without regard to the market on which a 
company is traded. The commenter stated its belief that Nasdaq's 
Business Relationship Provision would be a reasonable standard for 
assessing the effect of charitable contributions on a director's 
independence, and expressed its concern that NYSE-listed companies 
would be more likely to discontinue giving to charities than to expend 
the time and effort necessary to craft the categorical standards that 
would be needed under the NYSE proposal.\242\
---------------------------------------------------------------------------

    \242\ See Council on Foundations Nasdaq Letter and Council on 
Foundations NYSE Letter.
---------------------------------------------------------------------------

Other Comments on Independence Proposals
    Some commenters recommended strengthening the independence 
standards. For example, two commenters recommended that a former CEO 
should never be eligible to serve as an independent director.\243\ One 
of these commenters argued that the board should be reqluired to take 
into account a director's relationship with senior management and other 
directors in making a determination of independence.\244\ Another 
commenter recommended barring investment institutions from having board 
seats in companies they have investments in.\245\ Three commenters 
recommended adding considerations such as ethnic and gender diversity 
of the board to the discussion of independence.\246\
---------------------------------------------------------------------------

    \243\ See TIAA-CREF NYSE Letter and Coleman NYSE Letter.
    \244\ See TIAA-CREF NYSE Letter.
    \245\ See Hermann E-mail. Social Investment NYSE Letter, Ethical 
Funds NYSE Letter, and Calvert NYSE Letter.
    \246\ See Social Investment NYSE Letter, Ethical Funds NYSE 
Letter, and Calvert NYSE Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq proposal, one commenter suggested 
defining ``executive officer''--which appear in the Nasdaq Payments 
Provision, the Nasdaq Family of Executive Officer Provision, and the 
Nasdaq Business Relationship Provision--as defined in Rule 16a-1(f) of 
the Exchange Act, to prevent these proposals from disqualifying 
employees who have no policy-making role at the corporate level.\247\ 
The same commenter also recommended clarifying the maning of

[[Page 64169]]

``subsidiary,'' which appears in the Nasdaq Employee Provision, the 
Nasdaq Payments Provision, and the Nasdaq Family of Executive Officer 
Provision.
---------------------------------------------------------------------------

    \247\ See Intel Nasdaq Letter.
---------------------------------------------------------------------------

    One commenter expressed its strong support for the position taken 
by both the NYSE and Nasdaq not to disqualify independent directors for 
ownership of even a significant amount of stock.\248\
---------------------------------------------------------------------------

    \248\ See National Venture Nasdaq Letter and National Venture 
NYSE Letter.
---------------------------------------------------------------------------

    Two commenters recommended that NYSE and Nasdaq apply a more 
lenient independence standard to smaller companies.\249\
---------------------------------------------------------------------------

    \249\ See Independent Community Bankers NYSE Letter, Independent 
Community Bankers Nasdaq Letter, and America's Community Bankers 
Nasdaq Letter.
---------------------------------------------------------------------------

    With respect to the NYSE proposal, one commenter recommended that 
NYSE adopt the provision permitted by Rule 10A-3 that would allow a 
listed issuer to have one audit committee member that ceases to be 
independent for reasons outside the member's reasonable control for a 
limited amount of time, and to extend such provision to all independent 
directors and the other non-Rule 10A-3 independence requirements.\250\ 
Another commenter recommended adding a provision relating to 
appropriate procedures for a company to cure any defects in its 
compliance with the proposed new independence standards.\251\
---------------------------------------------------------------------------

    \250\ See Cleary NYSE Letter.
    \251\ See Financial Services Agency NYSE Letter.
---------------------------------------------------------------------------

B. Separate Meetings for Independent Directors

    Several commenters were in favor of the NYSE proposal to require 
separate executive sessions for non-management directors.\252\ One 
commenter stated that it regarded this requirement as among the most 
important in improving the independence of the board.\253\ Another 
commenter criticized the proposal because it believes that it could 
lead to decisions being made without critical information available to 
management, and could raise liability issues for the non-management 
directors under state law if their decisions are determined to be 
harmful to the company or not in its best interest.\254\ The commenter 
suggested that the NYSE encourage these meetings, but not make them 
mandatory, so that each company could determine if the sessions would 
be productive. A third commenter stated its belief that requiring 
executive sessions would have a divisive effect within boards of listed 
companies and would deprive directors of guidance by management.\255\ 
Another commenter argued that independent directors, not non-management 
directors, should be required to attend executive sessions, and that an 
independent director should be required to preside over the executive 
sessions.\256\
---------------------------------------------------------------------------

    \252\ See TIAA-CREF NYSE Letter, Walden NYSE Letter, Social 
Investment NYSE Letter, Ethical Funds NYSE Letter, Barclays NYSE 
Letter, and SIO NYSE Letter.
    \253\ See TIAA-CREF NYSE Letter.
    \254\ See America's Community Bankers NYSE Letter.
    \255\ See Independent Community Bankers NYSE Letter.
    \256\ See Eisenberg NYSE Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq proposal to require separate sessions 
for independent directors, one commenter stated its view that such a 
requirement could be burdensome, and recommended requiring regular 
meetings of non-management directors.\257\ Another commenter 
recommended that Nasdaq clarify what would be expected to occur at 
these meetings.\258\
---------------------------------------------------------------------------

    \257\ See People's Bank Nasdaq Letter.
    \258\ See America's Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

C. Communications with Independent Directors

    Commenters recommended that NYSE clarify its proposal that 
interested parties should have the ability to freely communicate with a 
company's non-management directors with respect to the identity of 
``interested parties;'' \259\ how they should communicate with 
independent directors; \260\ what topics would be appropriate to direct 
to independent directors, instead of the entire board; \261\ and 
whether management could be involved in screening communications and in 
reviewing and responding to concerns.\262\ Another commenter 
recommended limiting the proposal to employees.\263\ With respect to 
the Nasdaq proposal, one commenter advocated that companies ensure that 
employees know that they would not be retaliated against for reports 
made in good faith.\264\
---------------------------------------------------------------------------

    \259\ See Committee on Securities Regulation NYSE Letter.
    \260\ See America's Community Bankers NYSE Letter, Winston & 
Strawn NYSE Letter, Kerr-McGee NYSE Letter, Agilent NYSE Letter, and 
Committee on Securities Regulation NYSE Letter.
    \261\ See Winston & Strawn NYSE Letter.
    \262\ See Kerr-McGee NYSE Letter, Agilent NYSE Letter, and JP 
Financial NYSE Letter.
    \263\ See Agilent NYSE Letter.
    \264\ See America's Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

D. Compensation of Officers

    Many commenters disapproved of the NYSE Compensation Committee 
Provision because the compensation committee would be given the sole 
authority to determine CEO compensation.\265\ Commenters argued that 
the full board should have a role in making CEO compensation 
decisions,\266\ or that all independent directors should have a role in 
making CEO compensation decisions, perhaps even by deciding how CEO 
compensation decisions would be made.\267\ One commenter stated that 
the board should be permitted to allocate this responsibility to other 
committees or other groups of directors, as long as all members are 
independent, and that the compensation committee should be permitted to 
make a recommendation to be approved by all of the independent 
directors.\268\ Another commenter recommended that the NYSE make clear 
that the compensation committee could be given the discretion to make 
other decisions.\269\ Other commenters supported the proposal.\270\ One 
commenter provided recommendations for how the compensation committee 
should evaluate CEO performance.\271\
---------------------------------------------------------------------------

    \265\ See Business Roundtable NYSE Letter, American Society of 
Corporate Secretaries NYSE Letter, International Paper NYSE Letter, 
Lorsch NYSE Letter, Computer Sciences NYSE Letter, Peoples Energy 
NYSE Letter, and Pfizer NYSE Letter.
    \266\ See Computer Sciences NYSE Letter, Pfizer NYSE Letter, and 
International Paper NYSE Letter.
    \267\ See Business Roundtable NYSE Letter, Lorsch NYSE Letter, 
and Peoples Energy NYSE Letter.
    \268\ See Business Roundtable NYSE Letter.
    \269\ See Wells Fargo NYSE Letter.
    \270\ See TIAA-CREF NYSE Letter, Walden NYSE Letter, Social 
Investment NYSE Letter, and Ethical Funds NYSE Letter.
    \271\ See MVC Associates NYSE E-mail.
---------------------------------------------------------------------------

    With respect to the Nasdaq Compensation of Executives Provision, 
one commenter argued that it would not be necessary or appropriate to 
apply this proposal to investment companies.\272\ With respect to both 
the NYSE Compensation Committee Provision and the Nasdaq Compensation 
of Executives Provision, two commenters asked how other compensation 
would be determined.\273\
---------------------------------------------------------------------------

    \272\ See Investment Company Institute Nasdaq Letter.
    \273\ See KPMG NYSE Letter and America's Community Bankers 
Nasdaq Letter.
---------------------------------------------------------------------------

E. Nomination of Directors

    Several commenters supported the NYSE Nominating/Corporate 
Governance Committee Provision,\274\ and one commenter supported the 
exception that provides that nominating committee approval is not 
required where the right to nominate a director

[[Page 64170]]

legally belongs to a third party.\275\ However, one commenter argued 
that the NYSE should permit director nomination responsibilities to be 
allocated to other committees or other groups of directors so long as 
all members are independent.\276\
---------------------------------------------------------------------------

    \274\ See TIAA-CREF NYSE Letter, Walden NYSE Letter, Social 
Investment NYSE Letter, Ethical Funds NYSE Letter, and Ursuline 
Sisters NYSE Letter.
    \275\ See National Venture NYSE Letter.
    \276\ See American Society of Corporate Secretaries NYSE Letter.
---------------------------------------------------------------------------

    With respect to the role of board committees generally, one 
commenter recommended that the proposed listing standards explicitly 
recognize the oversight role and the responsibilities of the board of 
directors as a whole.\277\
---------------------------------------------------------------------------

    \277\ See Securities Committee NYSE Letter.
---------------------------------------------------------------------------

    While one commenter supported the Nasdaq Director Nomination 
Provision,\278\ another commenter believed that the full board should 
be involved in the director nomination process, because otherwise all 
the independent directors may be friends and may not be independent in 
thought from one another.\279\ One commenter recommended clarifying 
that the proposal's exception for cases where the right to nominate a 
director legally belongs to a third party includes arrangements other 
than contractual arrangements.\280\ Another commenter recommended 
changing the 20% shareholder exception that had been included in 
Nasdaq's original proposal by deleting the phrase, ``and is not 
independent as defined in Rule 4200 because that director is also an 
officer.'' \281\ In addition, another commenter argued that the 
proposal should not apply to investment companies whose independent 
directors are nominated by independent directors.\282\
---------------------------------------------------------------------------

    \278\ See National Venture Nasdaq Letter.
    \279\ See Kolber Nasdaq Letter.
    \280\ See Cenex Harvest Nasdaq Letter.
    \281\ See Kreider Nasdaq Letter.
    \282\ See Investment Company Institute Nasdaq Letter.
---------------------------------------------------------------------------

F. Controlled Company Exemption

    While one commenter supported both the NYSE and Nasdaq proposals to 
exempt controlled companies from some of the independent director 
requirements,\283\ two commenters did not support the NYSE 
proposal.\284\ One of these commenters argued that it would 
disenfranchise minority shareholders,\285\ and the other commenter 
argued that the exemption should apply only where the measure of 
``control'' is both voting and economic control, because corporations 
with two-tier classes of voting stock, where the minority economic 
interests exercise voting control because of supermajority voting 
rights, are particularly subject to the potential for abuse.\286\ With 
respect to the Nasdaq proposal, one commenter recommended adding 
language to make clear that controlled companies choosing not to rely 
on the exemption need not include any special disclosures about their 
controlled status.\287\
---------------------------------------------------------------------------

    \283\ See National Venture NYSE Letter and National Venture 
Nasdaq Letter.
    \284\ See International Corporate Governance NYSE Letter and 
Cascade NYSE Letter.
    \285\ See International Corporate Governance NYSE Letter.
    \286\ See Cascade NYSE Letter.
    \287\ See People's Bank Nasdaq Letter.
---------------------------------------------------------------------------

G. Audit Committee Charter

    In general, several commenters supported increasing the authority 
and responsibility of the audit committee.\288\ However, one commenter 
argued that final authority over audit committee issues should rest 
with all the independent directors.\289\ With respect to the NYSE Audit 
Committee Charter Provision, several commenters were concerned with the 
extent of the audit committee's proposed new responsibilities.\290\ For 
example, one of these commenters argued that the audit committee should 
be permitted to delegate non-financial risk management activities to 
other committees so long as such committee reports to the audit 
committee.\291\ Another commenter argued that the audit committee 
should not be responsible for legal and regulatory compliance, and that 
investing a single committee with an overload of functions may dilute 
resources of the committee that should be available to its accounting 
and financial oversight role.\292\ A third commenter argued that there 
were too many items for the audit committee to discuss and that the 
audit committee needs the flexibility to set its agenda to focus on the 
company's most significant financial reporting and corporate governance 
issues.\293\ One of the commenters also argued that financial 
statements are the representations and responsibility of management, 
not the audit committee.\294\
---------------------------------------------------------------------------

    \288\ See TIAA-CREF NYSE Letter, National Association of State 
Treasurers NYSE Letter, Railways Pension NYSE Letter, Barclays NYSE 
Letter, and SIO NYSE Letter.
    \289\ See Computer Sciences NYSE Letter.
    \290\ See American Society of Corporate Secretaries NYSE Letter, 
KPMG NYSE Letter, and Computer Sciences NYSE Letter.
    \291\ See American Society of Corporate Secretaries NYSE Letter.
    \292\ See KPMG NYSE Letter.
    \293\ See Computer Sciences NYSE Letter.
    \294\ See KPMG NYSE Letter.
---------------------------------------------------------------------------

    Further, one commenter requested clarification of whether advance 
discussion of quarterly financial statements would be required and, if 
so, argued that the audit committee should be permitted to decide 
whether this requirement should apply to the earnings release or the 
quarterly financial statements.\295\ Another commenter recommended 
excluding investment companies from the proposed requirement that audit 
committee members discuss earnings press releases as well as financial 
information and earnings guidance provided to analysts and rating 
agencies.\296\
---------------------------------------------------------------------------

    \295\ See Wells Fargo NYSE Letter.
    \296\ See Investment Company Institute NYSE Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq Audit Committee Charter Provision, the 
same commenter supported the proposed requirements regarding 
complaints, particularly their flexibility; and favored the proposal to 
grant the audit committee the authority to engage and fund outside 
advisors.\297\ However, the commenter also argued that the Nasdaq 
proposal should be revised to make clear that each Nasdaq-listed 
company would be required to provide appropriate funding to the audit 
committee.\298\ Another commenter argued that the Nasdaq proposal 
should be revised to require audit committee charters to state that one 
of the audit committee's purposes must be to assist the board in 
oversight of the company's compliance with laws and regulations, which 
would be consistent with the NYSE Audit Committee Charter 
Provision.\299\
---------------------------------------------------------------------------

    \297\ See Investment Company Institute Nasdaq Letter.
    \298\ Id.
    \299\ See TI-USA Nasdaq Letter.
---------------------------------------------------------------------------

    Several commenters, writing before the NYSE and Nasdaq filed 
amendments to the proposals, pointed out that the NYSE and Nasdaq Audit 
Committee Charter Provisions should be revised so that the 
responsibilities required of the audit committee would comply with the 
requirements of Rule 10A-3.\300\
---------------------------------------------------------------------------

    \300\ See Committee on Securities Regulation NYSE Letter, New 
York State Bar NYSE Letter, Financial Services Agency NYSE Letter, 
and Investment Company Institute Nasdaq Letter.
---------------------------------------------------------------------------

H. Audit Committee Independence

    With respect to the NYSE proposal on audit committee independence, 
two commenters supported the proposal to require an independent audit 
committee.\301\ However, several commenters were concerned about the 
interplay between the proposal and the requirements of Rule 10A-3. For 
example, one commenter argued that the proposal should incorporate the 
various exceptions and accommodations

[[Page 64171]]

codified in Rule 10A-3.\302\ Another commenter recommended clarifying 
whether the Commission's Rule 10A-3 definition of impermissible 
compensation should be applied.\303\ A third commenter asked: (1) Which 
definition of ``immediate family member'' should be used; (2) whether 
NYSE intends to apply a five-year look-back; (3) whether NYSE intends 
to consider payments made in any period prior to board service; and (4) 
whether NYSE intends to consider whether payments are made to a family 
member or to a firm providing advisory or professional services to the 
listed company with which a director is or was associated in the 
capacities referred to in Rule 10A-3(e)(8).\304\
---------------------------------------------------------------------------

    \301\ See Social Investment NYSE Letter and Ethical Funds NYSE 
Letter.
    \302\ See Cleary NYSE Letter.
    \303\ See America's Community Bankers NYSE Letter.
    \304\ See Committee on Federal Regulation of Securities Letter.
---------------------------------------------------------------------------

    Another commenter requested that NYSE determine that banking 
transactions in the ordinary course of business between banks and their 
directors and their affiliated companies would not constitute a 
material relationship that would impair an audit committee member's 
independence.\305\
---------------------------------------------------------------------------

    \305\ See Independent Community Bankers NYSE Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq proposal on audit committee 
independence, one commenter disapproved of the application of a three-
year look back, and was concerned that this provision would deprive a 
company of a high-quality audit committee member who has an 
appreciation for the operational aspect of the business.\306\ The 
commenter argued that no look-back was necessary because directors have 
a legal duty to act independently of previous allegiances. Although the 
commenter opposed any look-back, it commented that shortening the look-
back to one year would significantly mitigate the adverse effect.
---------------------------------------------------------------------------

    \306\ See National Venture Nasdaq Letter.
---------------------------------------------------------------------------

    Two commenters approved of the provisions in Nasdaq's original 
proposal to include a bright line test that would bar directors who own 
or control 20% or more of a company's stock.\307\ One commenter 
requested further clarification of this provision.\308\ Another 
commenter argued that directors who own more than 20% of a company's 
stock are the directors who are most independent of management because 
they have a stake in the firm apart from the compensation they receive 
as directors, and often there is no indicia whatsoever of control.\309\ 
The same commenter argued that the proposed standard could be highly 
disruptive, expensive and counterproductive.\310\
---------------------------------------------------------------------------

    \307\ See National Venture Nasdaq Letter and Paul Weiss Nasdaq 
Letter.
    \308\ See America's Community Bankers Nasdaq Letter.
    \309\ See Wachtel Nasdaq Letter.
    \310\ Id.
---------------------------------------------------------------------------

    Other commenters requested clarification of who Nasdaq would 
consider to be an affiliate.\311\ For example, one of these commenters 
requested more guidance as to what factors ought to be considered in 
determining whether an individual is an affiliate.\312\ Another 
commenter asked whether a director could serve on both the board of a 
holding company and the board of a subsidiary of the holding 
company.\313\ Two other commenters expressed concern about the effect 
of banking relationships.\314\
---------------------------------------------------------------------------

    \311\ See Paul Weiss Nasdaq Letter, America's Community Bankers 
Nasdaq Letter, American Bankers Association Nasdaq Letter, and 
Investment Company Institute Nasdaq Letter.
    \312\ See Paul Weiss Nasdaq Letter.
    \313\ See America's Community Bankers Nasdaq Letter.
    \314\ See American Bankers Association Nasdaq Letter and 
Independent Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

    Although one commenter supported Nasdaq's proposal to allow certain 
leniencies in exceptional and limited circumstances, it argued that a 
company should not be required to disclose its use of these exceptions 
in a proxy because that would discourage use of the exceptions. The 
commenter stated that, instead, a company should be required to 
disclose its use of these exceptions in a report to Nasdaq.\315\ 
Another commenter stated that it would be helpful for Nasdaq to clarify 
the relationship between the Nasdaq proposal and the requirements of 
Rule 10A-3, such as whether the same definition of family member and 
application of a look-back applies to both.\316\
---------------------------------------------------------------------------

    \315\ See Paul Weiss Nasdaq Letter.
    \316\ See Committee on Securities Regulation Nasdaq Letter.
---------------------------------------------------------------------------

    One commenter requested clarification of the relationship between 
current Nasdaq rules addressing audit committees and the Nasdaq Audit 
Committee Provision.\317\
---------------------------------------------------------------------------

    \317\ See America's Community Bankers NYSE Letter.
---------------------------------------------------------------------------

I. Financial Background of Audit Committee Members

    With respect to the NYSE and Nasdaq proposals on the requisite 
background of audit committee members, two commenters recommended 
harmonizing the two proposals.\318\ One of these commenters recommended 
modifying the NYSE proposal to require audit committee members to be 
financially literate at the time they join the audit committee.\319\ 
The other commenter recommended modifying the Nasdaq proposal to 
provide that an individual who satisfies the Commission's definition of 
an audit committee financial expert would be qualified to be an audit 
committee member.\320\
---------------------------------------------------------------------------

    \318\ See Investment Company Institute NYSE Letter, Investment 
Company Institute Nasdaq Letter, and Committee on Securities 
Regulation Nasdaq Letter.
    \319\ See Investment Company Institute NYSE Letter.
    \320\ See Committee on Securities Regulation Nasdaq Letter.
---------------------------------------------------------------------------

    With respect to the NYSE and Nasdaq proposals to require at least 
one member of the audit committee to have accounting or related 
financial management expertise, one commenter requested confirmation 
that past and current employment as a venture capitalist would allow a 
director to meet this requirement on a per se basis.\321\ The commenter 
also recommended that the NYSE make clear that ``accounting or related 
financial management experience'' does not require any particular 
background, certification or education.\322\
---------------------------------------------------------------------------

    \321\ See National Venture NYSE and Nasdaq Letters.
    \322\ See National Venture NYSE Letter.
---------------------------------------------------------------------------

J. NYSE Audit Committee Member Simultaneous Service Provision

    With respect to the NYSE proposal limiting the permissibility of 
simultaneous service on more than three audit committees, one commenter 
recommended moving this proposal to a different section of the NYSE 
proposal because it does not relate to independence.\323\ Another 
commenter questioned whether the proposed requirement would be 
mandatory because it appears in the commentary, and argued that because 
it is difficult to generalize about which directors are likely to have 
adequate time to carry out the duties of the committee, it should apply 
only to directors who are currently functioning in active senior 
executive roles of listed companies.\324\ A third commenter strongly 
recommended that in application of the proposed requirement to 
investment companies, a ``fund complex'' should be treated as one 
company because: (1) It is common practice in the investment company 
industry for the same directors to serve on the audit committee of one 
or more funds in a complex; (2) an investment company's financial

[[Page 64172]]

statements are less complicated and therefore audit committee oversight 
requires less time; and (3) all funds in a fund complex typically rely 
on the same accounting system and are subject to the same internal 
controls and policies.\325\
---------------------------------------------------------------------------

    \323\ See American Society of Corporate Secretaries NYSE Letter.
    \324\ See GM NYSE Letter.
    \325\ See Investment Company Institute NYSE Letter.
---------------------------------------------------------------------------

K. Internal Audit Function

    With respect to the NYSE proposal to require an internal audit 
function at all listed companies, one commenter recommended evaluating 
whether this requirement would be identical to the requirements of Rule 
10A-3. \326\ If the rules were not identical, the commenter recommended 
delaying the imposition of additional requirements until those required 
by federal law have been adopted and implemented, and their efficacy 
evaluated after a reasonable amount of time.\327\ Two commenters argued 
that investment companies should be excluded from the internal audit 
requirement.\328\ A third commenter strongly recommended that Nasdaq 
implement the same requirement.\329\
---------------------------------------------------------------------------

    \326\ See Committee on Securities Regulation NYSE Letter.
    \327\ Id.
    \328\ See Investment Company Institute NYSE Letter and Sullivan 
& Cromwell NYSE Letter.
    \329\ See TI-USA Nasdaq Letter.
---------------------------------------------------------------------------

L. NYSE Corporate Governance Guidelines

    With respect to the NYSE proposal relating to corporate governance 
guidelines, one commenter strongly supported the proposal, particularly 
the concept of requiring director orientation for new directors and 
continuing education for all directors.\330\ Two other commenters also 
supported requiring director orientation.\331\ Another commenter 
strongly supported requiring annual evaluations by the board,\332\ and 
one commenter supported requiring board and committee assessments.\333\ 
Two of the commenters also recommended that evidentiary protection be 
provided in connection with any evaluations or assessments made by the 
board or its committees.\334\
---------------------------------------------------------------------------

    \330\ See TIAA-CREF NYSE Letter.
    \331\ See Walden NYSE Letter and Ursuline Sisters NYSE Letter.
    \332\ See Mercer Delta NYSE Letter.
    \333\ See Boardroom Consultants NSYE Letter.
    \334\ See Mercer Delta NYSE Letter and Boardroom Consultants 
NYSE Letter.
---------------------------------------------------------------------------

    While two other commenters supported requiring corporate governance 
guidelines, they argued that such guidelines should promote ethical 
guidelines for conducting core business, and that director orientation 
should include social and environmental risk management, as well as 
training on corporate social responsibility.\335\
---------------------------------------------------------------------------

    \335\ See Social Investment NYSE Letter and Ethical Funds NYSE 
Letter.
---------------------------------------------------------------------------

    Another commenter stated that the reference to charitable 
contributions in the proposed commentary to the guideline topic 
relating to director compensation was too vague. \336\ This commenter 
recommended deleting the reference in its entirety or revising it to 
cover only the situation in which a director is permitted, as a perk of 
his or her position, to recommend a corporate gift to a favorite 
charity.\337\
---------------------------------------------------------------------------

    \336\ See Council on Foundations NYSE Letter.
    \337\ Id.
---------------------------------------------------------------------------

M. Code of Business Conduct and Ethics

    With respect to the NYSE proposal regarding codes of business 
conduct and ethics, one commenter supported the proposal and stated 
that it will help companies manage conflicts of interest.\338\ Five 
other commenters also supported the proposal,\339\ but four of these 
commenters argued that it should deal with a broader scope of issues 
including environmental and social practices.\340\ Two of these 
commenters promoted the Global Reporting Initiative, which provides a 
uniform disclosure policy and extends the reach of corporate social 
responsibility to economically, environmentally and socially 
sustainable business practices.\341\ In addition, one commenter 
recommended that the NYSE require that CEOs endorse the codes with 
their signatures.\342\
---------------------------------------------------------------------------

    \338\ See TIAA-CREF NYSE Letter.
    \339\ See Barclays NYSE Letter, Walden NYSE Letter, Social 
Investment NYSE Letter, Ursuline Sisters NYSE Letter, and SIO NYSE 
Letter.
    \340\ See Walden NYSE Letter, Social Investment NYSE Letter, 
Ursuline Sisters NYSE Letter, and SIO NYSE Letter.
    \341\ See Walden NYSE Letter, and SIO NYSE Letter.
    \342\ See Social Investment NYSE Letter.
---------------------------------------------------------------------------

    One commenter supported the proposal to require companies to 
disclose waivers.\343\ Another commenter argued that the NYSE should 
require companies to disclose only a waiver of material terms of their 
codes because requiring disclosure of any waivers would be too 
burdensome and would discourage companies from adopting comprehensive 
codes.\344\ With respect to the Nasdaq Code of Conduct Proposal, one 
commenter supported the proposal, but recommended that Nasdaq require 
its listed companies to publish a summary of the compliance processes 
in place to support the code.\345\ Another commenter also supported the 
proposal, but recommended that Nasdaq limit the proposed disclosure 
requirement to waivers of material terms of the code, because requiring 
disclosure of any waivers would be too burdensome and would discourage 
companies from adopting comprehensive codes.\346\ The commenter also 
stated that the proposal should address ``implicit waivers,'' which 
would occur when a company fails to take action against a violation of 
the code. The commenter also recommended that Nasdaq permit waivers to 
be approved either by the board or a committee of the board to give 
listed companies the flexibility to place the oversight of a company's 
code of conduct within the jurisdiction of a particular committee if 
that structure would be more effective and appropriate.
---------------------------------------------------------------------------

    \343\ See Railways Pension NYSE Letter.
    \344\ See America's Community Bankers NYSE Letter.
    \345\ See TIAA-CREF Nasdaq Letter.
    \346\ See America's Community Bankers Nasdaq Letter.
---------------------------------------------------------------------------

    Another commenter recommended that Nasdaq modify its proposal to 
provide that investment companies that are already subject to code of 
ethics and other requirements pursuant to rules under the Investment 
Company Act would be deemed to satisfy any new Nasdaq requirements 
regarding codes of conduct.\347\ The commenter argued that this 
modification would be consistent with Nasdaq's intentions and the NYSE 
proposal.
---------------------------------------------------------------------------

    \347\ See ICI 2002-139 Letter.
---------------------------------------------------------------------------

N. Noncompliance

    One commenter urged the NYSE and Nasdaq to modify their proposals 
to permit transitional periods of noncompliance, distinct from any 
similar procedures for other listing standards.\348\
---------------------------------------------------------------------------

    \348\ See Committee on Federal Regulation of Securities Letter.
---------------------------------------------------------------------------

O. CEO Certification

    Several commenters supported the NYSE proposal to require a 
company's CEO to certify annually that he or she is not aware of any 
violation of the Exchange's corporate governance rules.\349\ One of 
these commenters claimed that requiring CEO certification has caused 
many companies to engage in better due diligence about their financial 
statements.\350\ Other commenters disapproved of the proposal.\351\ One 
of the commenters opposing the proposal argued that

[[Page 64173]]

requiring CEO certification is too high of a standard given the myriad 
of rules and standards facing listed companies, and recommended 
requiring a representation from the CEO, rather than a 
certification.\352\ The other commenter argued that the NYSE proposal 
should be modified to require notification of material noncompliance 
with the new standards by the company, and not the CEO in his or her 
individual capacity, for the following reasons: (1) Certification could 
still be made if the CEO was unavailable or unwilling to make the 
certification; (2) the proposal adds an element of personal liability 
to the CEO that the commenter believes is unduly burdensome and is not 
contemplated by Rule 10A-3, which only applies to non-compliance with 
audit-related matters; and (3) the requirement is more onerous and 
time-consuming than the annual certification requirement.\353\ The 
commenter also recommended that the NYSE make clear that the event that 
triggers the reporting requirement would not create a private cause of 
action against the company or the CEO.
---------------------------------------------------------------------------

    \349\ See TIAA-CREF NYSE Letter, Walden NYSE Letter, Railways 
Pension NYSE Letter, Ursuline Sisters NYSE Letter, and Barclays NYSE 
Letter.
    \350\ See TIAA-CREF NYSE Letter.
    \351\ See Computer Sciences NYSE Letter and Agilent NYSE Letter.
    \352\ See Computer Sciences NYSE Letter.
    \353\ See Agilent NYSE Letter.
---------------------------------------------------------------------------

    One commenter recommended that the proposal be modified to provide 
that the CEO certify that he or she is not aware of any ``material and 
ongoing'' violations, and that the NYSE should clarify what is not 
material or ongoing.\354\
---------------------------------------------------------------------------

    \354\ See Committee on Securities Regulation NYSE Letter.
---------------------------------------------------------------------------

    Another commenter asked whether a company would be required to 
include a full text of these certifications, or a statement that the 
certifications have been made in its annual report.\355\
---------------------------------------------------------------------------

    \355\ See Ogden Newell NYSE Letter.
---------------------------------------------------------------------------

P. NYSE Public Reprimand Provision

    Two commenters supported the NYSE proposal to permit the Exchange 
to issue public reprimand letters to non-compliant companies.\356\ One 
commenter recommended that the NYSE specify that any new NYSE corporate 
governance rules should not create a private right of action for non-
compliance.\357\ Another commenter recommended that the NYSE research 
and revise this proposal separately from the remainder of the corporate 
governance reforms.\358\ The commenter also stated that a provision for 
due process prior to issuance of a reprimand letter would be necessary 
for fact checking and an opportunity to remedy the company's non-
compliance.\359\
---------------------------------------------------------------------------

    \356\ See TIAA-CREF NYSE Letter and Barclays NYSE Letter.
    \357\ See Committee on Securities Regulation NYSE Letter.
    \358\ See Computer Sciences NYSE Letter.
    \359\ Id.
---------------------------------------------------------------------------

Q. Other Exemptions

    One commenter strongly concurred with NYSE's exemption for closed-
end funds.\360\ Another commenter approved of the NYSE exemption for 
companies in bankruptcy and urged Nasdaq to adopt a similar 
exemption.\361\
---------------------------------------------------------------------------

    \360\ See Investment Company Institute NYSE Letter.
    \361\ See Committee on Federal Regulation of Securities Letter.
---------------------------------------------------------------------------

R. Application of Rules to Foreign Private Issuers

    Several commenters supported the NYSE proposal regarding private 
foreign issuers.\362\ A few commenters recommended that the NYSE modify 
the proposal to clarify that foreign issuers would be permitted to take 
advantage of the accommodations for foreign issuers set forth in Rule 
10A-3.\363\
---------------------------------------------------------------------------

    \362\ See Committee on Securities Regulation NYSE Letter, TIAA-
CREF NYSE Letter, and Walden NYSE Letter.
    \363\ See Cleary NYSE Letter and Financial Services Agency NYSE 
Letter.
---------------------------------------------------------------------------

    With respect to the Nasdaq proposal regarding foreign private 
issuers, one commenter argued that, consistent with the NYSE proposal, 
the Nasdaq proposal should be amended to: (1) Automatically exempt 
foreign private issuers from the proposed corporate governance 
requirements (except for Rule 10A-3 requirements); (2) synchronize its 
effective date with Rule 10A-3 requirements; and (3) require disclosure 
of exemptions and alternative measures in a company's first annual 
report covering the fiscal year ending on or after July 31, 2005.\364\
---------------------------------------------------------------------------

    \364\ See S&C 2002-138 Letter.
---------------------------------------------------------------------------

S. Implementation Schedule

    With respect to the NYSE's proposed implementation schedule, one 
commenter criticized what it viewed as a long delay in implementation 
of the new requirements.\365\ Another commenter recommended 
coordinating the effective dates and transition periods with Rule 10A-3 
requirements.\366\
---------------------------------------------------------------------------

    \365\ See Eisenberg NYSE Letter.
    \366\ See Computer Sciences NYSE Letter.
---------------------------------------------------------------------------

    With respect to Nasdaq's proposed implementation schedule for its 
Independent Director Proposal, one commenter recommended that Nasdaq 
adopt transition periods for compliance for newly-listed companies 
similar to the transition periods outlined in the NYSE proposal.\367\ 
Two commenters recommended that Nasdaq adopt transition periods for 
compliance for companies with classified boards similar to the 
transition periods outlined in the NYSE proposal.\368\ Another 
commenter recommended granting small business issuers additional time 
to come into compliance.\369\
---------------------------------------------------------------------------

    \367\ See Committee on Securities Regulation Nasdaq Letter.
    \368\ See Committee on Securities Regulation Nasdaq Letter and 
Whitney Nasdaq Letter.
    \369\ See National Venture Nasdaq Letter.
---------------------------------------------------------------------------

IV. Amendments to NYSE and Nasdaq Proposals

    The discussion in Sections II.B. and C. above reflects revisions 
proposed in the amendments to the NYSE and Nasdaq proposals that were 
submitted by the NYSE and Nasdaq following publication of the NYSE 
Notice and the Nasdaq Notice. The discussion below summarizes those 
revisions.
    In Amendment No. 2 to its Corporate Governance Proposal, the NYSE 
proposed revisions in a number of areas. The proposed revisions in 
Amendment No. 2 would:
    [sbull] Conform the compliance dates and transition periods with 
those mandated for audit committees by Rule 10A-3 under the Exchange 
Act;
    [sbull] Provide phase-in periods with respect to certain 
requirements for companies listing in conjunction with an initial 
public offering, companies emerging from bankruptcy, and companies that 
ceased to be Controlled Companies;
    [sbull] Revise the ``look-back'' periods so that the independence 
tests would have a one year look-back during the first year after 
Commission approval of the new standards, with the full look-back 
period becoming applicable after the end of that first year, and would 
shorten the periods from five years to three years;
    [sbull] Clarify that when applying look-back provisions to family 
members, listed companies need not consider individuals who are no 
longer family members due to separation or divorce, or individuals who 
have died or become incapacitated;
    [sbull] Indicate that references to ``company'' would include any 
parent or subsidiary in a consolidated group with the company;
    [sbull] Clarify the NYSE Employee Provision to provide that a 
director who is an employee, or whose immediate family member is an 
executive officer, of the company would not be considered independent 
until three years after the end of such employment relationship;
    [sbull] Provide that employment as an interim Chairman or CEO would 
not

[[Page 64174]]

disqualify a director from being considered independent following that 
employment;
    [sbull] Revise the NYSE Direct Compensation Provision to be a 
bright-line test, rather than a rebuttable presumption and clarify that 
immediate family member compensation would need only to be considered 
if the family member is an executive officer of the listed company;
    [sbull] Revise the NYSE Business Relationship Provision to test all 
payments (whether to or from the listed company) against the 
consolidated gross revenues of the director's company, rather than also 
testing them against the listed company;
    [sbull] Apply the look-back period in the NYSE Business 
Relationship Provision only to the financial relationship between the 
listed company and the current employer of the director, and not 
require the listed company to consider former employment of the 
director or family member;
    [sbull] Clarify in the Commentary to the NYSE Business Relationship 
Provision that listed companies must disclose contributions to a 
charity of which a director serves as an executive officer, if the 
contributions satisfy the proposal's threshold test;
    [sbull] Recommend that listed companies should hold an executive 
session limited solely to independent directors at least once a year;
    [sbull] Revise the NYSE Compensation Committee Provision to clarify 
that all independent directors may be involved in approving the CEO's 
compensation and that the board in general is not precluded from 
discussing CEO compensation;
    [sbull] Restructure the audit committee provisions to clearly 
define the audit committee requirements applicable to listed companies 
pursuant to Rule 10A-3;
    [sbull] Exclude closed-end funds from specified provisions of 
section 303A, in recognition of the additional regulation to which 
closed-end funds are subject under the Investment Company Act;
    [sbull] Require open-end funds to comply with the requirements of 
section 303A(6), which implement Rule 10A-3 under the Exchange Act;
    [sbull] Require business development companies to comply with all 
of the provisions of section 303A applicable to domestic issuers, but 
use the ``interested person'' standard under section 2(a)(19) of the 
Investment Company Act for purposes of determining director 
independence; and
    [sbull] Require the audit committees of open-end and closed-end 
funds to establish procedures for the confidential, anonymous 
submission of concerns regarding questionable accounting or auditing 
matters by employees of the investment adviser, administrator, 
principal underwriter, or any other provider of accounting related 
services for the fund, as well as employees of the fund.
    In Amendment No. 3 to its Corporate Governance Proposal, NYSE 
proposed to require that the audit committee charter of a closed-end or 
open-end fund address the responsibility of the audit committee to 
establish procedures for the confidential, anonymous submission by 
employees of concerns regarding questionable accounting or auditing 
matters, but not to require the procedures to be set forth in the 
charter, as would have been required by Amendment No. 2.
    In Amendment No. 3 to the Nasdaq Independent Director Proposal, 
Nasdaq proposed revisions to various aspects of its proposal. The 
proposed revisions in Amendment No. 3 would:
    [sbull] Narrow the definition of ``Family Member;'
    [sbull] Expand the relationships that would preclude a finding of 
independence to apply not only to directors, but also to family members 
of directors;
    [sbull] Exclude non-discretionary charity match programs from the 
definition of payments that would preclude a finding of independence;
    [sbull] Exclude from the Nasdaq Payments Provision loans permitted 
under section 13(k) of the Exchange Act;
    [sbull] Expand the scope of the relationships with the company's 
outside auditor that preclude a finding of independence;
    [sbull] Amend the Interpretive Material associated with the 
definition of independence to provide clarification regarding 
applicability of the rule, particularly with respect to directors 
associated with law firms, and with respect to the meaning of the term 
``executive officer;'
    [sbull] Retain bright-line tests for determining whether a director 
is independent;
    [sbull] Retain the same standards for both large and smaller 
companies;
    [sbull] Add a requirement that issuers identify in their proxy 
those directors that the board has determined to be independent;
    [sbull] Clarify that independent committees may either take action 
or recommend that the board take action;
    [sbull] Clarify that the new requirements relating to nominations 
committees would not apply in cases where the right to nominate a 
director legally belongs to a third party, or the company is already 
subject to a legally binding obligation that requires a director 
nomination structure inconsistent with the rule;
    [sbull] Add a requirement for a nominations committee charter;
    [sbull] Add a requirement that Controlled Companies be subject to 
the independent director executive session requirement;
    [sbull] Remove a provision that would have allowed one director 
holding 20% or more of the company's stock to serve on the nominations 
committee although the director would not be independent because that 
director is also a company officer;
    [sbull] Conform the proposals relating to audit committees to Rule 
10A-3;
    [sbull] Clarify that directors who have participated in the 
preparation of the financial statements of the company during the past 
three years cannot serve on the audit committee;
    [sbull] Add cure periods with respect to the audit committee and 
majority independent board requirements that are generally consistent 
with the cure periods in Rule 10A-3, but extend to board vacancies as 
well as circumstances where a director ceases to be independent for 
reasons outside the director's control;
    [sbull] Provide a different measure of independence for investment 
companies, consistent with the Investment Company Act;
    [sbull] Expand NASD Rule 4350(d)(3) and its Interpretive Material 
to provide that audit committees of investment companies must establish 
procedures for the confidential, anonymous submission of concerns 
regarding questionable accounting or auditing matters by employees of 
the investment adviser, administrator, principal underwriter, or any 
other provider of accounting related services for the investment 
company, as well as employees of the investment company;
    [sbull] Clarify that a director who qualifies as an audit committee 
financial expert under Item 401(h) of Regulation S-K or Item 401(e) of 
Regulation S-B is presumed to qualify as a financially sophisticated 
audit committee member under NASD Rule 4350(d)(2)(A); and
    [sbull] Add a requirement that issuers must notify Nasdaq of any 
material non-compliance with NASD Rule 4350.
    In amendments to the Nasdaq Issuer Applicability Proposal, Nasdaq 
proposed revisions in a number of areas, including in response to 
public comments or suggestions from Commission staff. The proposed 
revisions would:
    [sbull] Clarify the applicability of the rules to foreign issuers;

[[Page 64175]]

    [sbull] Clarify that: (1) Investment companies (including business 
development companies) are subject to all the requirements of NASD Rule 
4350, except that registered management investment companies are exempt 
from the requirements of NASD Rule 4350(c); (2) asset-backed issuers 
and certain other passive issuers are exempt from the requirements of 
NASD Rule 4350(c) and (d); and (3) certain cooperative entities are 
exempt from NASD Rule 4350(c); but that each of these entities must 
comply with all federal securities laws, including Rule 10A-3;
    [sbull] Set forth the dates by which issuers would be required to 
come into compliance with the proposed rule changes that are the 
subject of this Order;
    [sbull] Add new Rules 4200A and 4350A to incorporate the sections 
of Rules 4200 and 4350 that would continue to apply until the proposed 
rule changes become operative; and
    [sbull] Exempt registered management investment companies, asset-
backed issuers, and unit investment trusts from the requirement of 
proposed subsection (n) of NASD Rule 4350 regarding codes of conduct.
    In addition, Nasdaq amended its Code of Conduct Proposal to clarify 
that any waivers of a company's code of conduct for directors or 
executive officers would be required to be disclosed in a Form 8-K 
within five days.\370\
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    \370\ See also supra notes 14, 18-19, 22-24, 28.
---------------------------------------------------------------------------

V. Discussion

    After careful review, the Commission finds that the NYSE Corporate 
Governance Proposal, as amended, is consistent with the Exchange Act 
and the rules and regulations promulgated thereunder applicable to a 
national securities exchange and, in particular, with the requirements 
of section 6(b) of the Exchange Act.\371\ Specifically, the Commission 
finds that the NYSE Corporate Governance Proposal, as amended, is 
consistent with section 6(b)(5) of the Exchange Act \372\ in that it is 
designed, among other things, to facilitate transactions in securities; 
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 a national market 
system; and in general, to protect investors and the public interest, 
and does not permit unfair discrimination among issuers.
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    \371\ 15 U.S.C. 78f(b). In approving the NYSE Corporate 
Governance Proposal, the Commission has considered the proposed 
rules' impact on efficiency, competition and capital formation. 15 
U.S.C. 78c(f).
    \372\ 15 U.S.C. 78f(b)(5).
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    After careful review, the Commission finds that the Nasdaq 
Independent Director Proposal, as amended; the Nasdaq Going Concern 
Proposal; the Nasdaq Related Party Transactions Proposal, as amended; 
the Nasdaq Issuer Applicability Proposal, as amended; and the Nasdaq 
Code of Conduct Proposal, as amended, are consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities association.\373\ The 
Commission finds that these Nasdaq proposed rule changes, as amended, 
are consistent with provisions of section 15A of the Exchange Act,\374\ 
in general, and with section 15A(b)(6) of the Exchange Act,\375\ in 
particular, in that they are designed, among other things, to 
facilitate transactions in securities; 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 a national market system; and in general, 
to protect investors and the public interest, and do not permit unfair 
discrimination among issuers.
---------------------------------------------------------------------------

    \373\ In approving the Nasdaq Independent Director Proposal, the 
Nasdaq Going Concern Proposal, the Nasdaq Related Party Transactions 
Proposal, the Nasdaq Issuer Applicability Proposal, and the Nasdaq 
Code of Conduct Proposal the Commission has considered the proposed 
rules' impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \374\ 15 U.S.C. 78o-3.
    \375\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Recent corporate scandals have shaken investor confidence in the 
securities markets because of breaches of trust, failures of 
responsibility, breakdowns in governance, and lack of candid 
disclosure. These developments led to the enactment of the Sarbanes-
Oxley Act, which, among other things, directed the Commission to 
undertake rulemaking in a number of areas, including mandatory listing 
standards to be adopted by self-regulatory organizations (``SROs'') 
concerning the composition and function of listed issuers'' audit 
committees. One of the main goals of the Sarbanes-Oxley Act is to 
improve investor confidence in the financial integrity of listed 
issuers, which in turn will promote confidence in the markets for 
listed issuers' securities.
    Through their corporate governance listing standards, the SROs play 
an important role in assuring that their listed issuers establish good 
governance practices and maintain effective oversight of the 
reliability of corporate financial information. A few years ago, 
several exchanges and Nasdaq implemented rules to strengthen the 
effectiveness of their listed companies' audit committees; these rules 
were adopted in response to the recommendations of the Blue Ribbon 
Committee.\376\ More recently, at the urging of the Commission's 
Chairman at the time, the exchanges and Nasdaq undertook a review of 
their corporate governance listing standards with the objective of 
strengthening their rules. In April of this year, in response to a 
directive of the Sarbanes-Oxley Act, the Commission adopted Rule 10A-3 
under the Exchange Act. Rule 10A-3 requires the rules of the national 
securities exchanges or national securities associations to prohibit 
the initial or continued listing of any security of an issuer that is 
not in compliance with the rule's requirements regarding issuer audit 
committees. As a result of Commission and Congressional initiatives, 
the NYSE and Nasdaq proposed rule changes that are intended to assure 
that a listed issuer's board of directors and key committees are 
comprised in a manner that is designed to provide an objective 
oversight role and that directors and management adhere to high 
standards of conduct. In addition, the proposals are intended to 
strengthen the independence of audit committees, including by 
establishing rules designed to assure listed issuers' compliance with 
the requirements of Rule 10A-3.
---------------------------------------------------------------------------

    \376\ See supra note.
---------------------------------------------------------------------------

    In the Commission's view, the NYSE and Nasdaq proposals that are 
the subject of this Order will foster greater transparency, 
accountability and objectivity in the oversight by, and decision-making 
processes of, the boards and key committees of listed issuers. The NYSE 
and Nasdaq proposals also will promote compliance with high standards 
of conduct by the issuers' directors and management. In addition, in 
the Commission's view, the NYSE Corporate Governance Proposal and the 
Nasdaq Independent Director Proposal satisfy the mandate of Rule 10A-3, 
which requires that the rules of a national securities exchange or 
national securities association 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 Rule 10A-3. In 
this regard, the NYSE Corporate Governance Proposal and the Nasdaq 
Independent Director Proposal will promote independent and objective 
review and oversight of an issuer's financial reporting practices.

[[Page 64176]]

    The Commission has long encouraged exchanges to adopt and 
strengthen their corporate governance listing standards in order to, 
among other things, enhance investor confidence in the securities 
markets. The Commission believes that, with these proposals, NYSE and 
Nasdaq have made significant strides in strengthening their corporate 
governance listing standards. The Commission notes that many commenters 
generally supported the NYSE's and Nasdaq's initiatives, although some 
commenters offered suggestions to clarify, improve, or reconcile 
various provisions of the proposals. Accordingly, NYSE and Nasdaq 
amended their proposals to respond to specific issues raised by the 
commenters; and to harmonize their respective rule proposals in certain 
areas. The Commission discusses below significant aspects of the NYSE 
and Nasdaq corporate governance proposals.

Definition of ``Independent Director'' and Composition of Board of 
Directors

    Both NYSE and Nasdaq propose to require listed issuers to have a 
majority of independent directors on their boards; require the boards 
of listed issuers to make an affirmative determination of independence 
and provide information to investors about their determinations; and 
identify certain relationships that automatically preclude a board 
finding of independence.
    A number of commenters supported these rule amendments, although a 
few commenters voiced their objections. The Commission believes that 
requiring boards to have a majority of independent directors should 
increase the likelihood that boards will make decisions in the best 
interests of shareholders. The Commission further believes that 
requiring boards to make an affirmative determination of independence, 
and to disclose these determinations, will increase the accountability 
of boards to shareholders and give shareholders the ability to evaluate 
the quality of a board's independence and its independence 
determinations.
    The Commission also believes that, by tightening the definition of 
``independent director,'' the NYSE and Nasdaq rule revisions 
appropriately prohibit many relationships that otherwise could impair 
the independence of directors, such as employment, business, financial, 
and family relationships. The Commission believes that the listing 
standards as proposed by the NYSE and Nasdaq provide objective and 
clear guidance for evaluating a director's independence. Accordingly, 
these new listing standards will establish criteria for independence 
that can be consistently and fairly applied by companies. The 
Commission also notes that, in addition to incorporating specific 
factors that preclude a director from being considered independent, the 
NYSE and Nasdaq provisions require a board to further exercise 
appropriate discretion to identify any additional material relationship 
that the director may have with the listed issuer that could interfere 
with the director's ability to exercise independent judgment.
    The Commission also believes that requiring an issuer to disclose 
in its annual proxy (or annual report on Form 10-K for an issuer that 
does not file a proxy) its determination regarding those directors it 
has deemed to be independent will provide greater transparency to the 
governance process. In addition, the Commission believes it is 
appropriate for NYSE to require that non-management directors meet at 
regularly scheduled executive sessions, and for Nasdaq to impose a 
similar requirement with respect to independent directors meeting in 
regularly-scheduled executive sessions.
    The Commission notes that the NYSE and Nasdaq amended their 
proposals regarding the independence of directors to respond to 
concerns or suggestions raised by the commenters or to harmonize more 
closely various provisions of their proposals to reduce the possibility 
of differing regulatory treatment. In this regard, the NYSE tightened 
the definition of ``independent director'' to state that an employee of 
the company (or an individual whose immediate family member is an 
executive officer) is not independent until a specified period after 
the end of such employment relationship, which is similar to a 
provision that was proposed by Nasdaq. The NYSE also revised language 
of the NYSE Business Relationship Proposal by adding language to 
indicate that the term ``company'' included parents and subsidiaries. 
As a result of these changes, the NYSE and Nasdaq provisions are more 
closely aligned.
    In addition, the NYSE revised its provision regarding a director or 
immediate family member's receipt of $100,000 in direct compensation 
from a rebuttable presumption to a bright-line test, which aligns this 
provision more closely with the test proposed by Nasdaq. The NYSE also 
amended the length of its look-back periods from five years to three 
years and revised the phase-in of its look-back proposal so that the 
full three-year look-back period would be implemented one year after 
the Commission's approval of the proposed rule change. As a result of 
the revisions to the look-back periods, the NYSE narrowed differences 
in how the NYSE and Nasdaq rules would be applied. Similar to Nasdaq's 
proposal, the NYSE added a presumption of financial expertise for 
directors who satisfy the definition of audit committee financial 
expert set out in Item 401(h) of Regulation S-K.
    The Commission notes that Nasdaq also has revised the Nasdaq 
Independent Director Proposal to take into account the concerns or 
suggestions of commenters and to bring its proposal into greater 
harmony with the NYSE Corporate Governance Proposal. In response to 
commenters' concerns about the clarity of the Nasdaq Independent 
Director Proposal, Nasdaq set forth more clearly how the terms 
``subsidiary,'' and ``executive officer'' would be defined; indicated 
that the three-year look-back would apply to relationships that existed 
at any time within the three-year period; and noted that an independent 
director who serves on the boards of both a holding company and a 
subsidiary would not be considered an affiliate of either entity merely 
as a result of such service. Nasdaq also revised the Nasdaq Independent 
Director Proposal to provide that loans permitted by section 13(k) of 
the Exchange Act and compensation for service on board committees were 
permissible payments. Nasdaq also has extended certain prohibitions to 
the family members of directors under the amended definition. For 
example, a director would not be considered independent if a family 
member of a director is a controlling shareholder or executive officer 
of any organization to which the company made or from which the company 
received, payments for property or services in the current or any of 
the past three fiscal years that exceed 5% of the recipient's 
consolidated gross revenues for that year or $200,000, whichever is 
more. In addition, Nasdaq expanded the scope of relationships with the 
company's outside auditor that would preclude a finding of 
independence. A director would not be considered independent if he or 
she is a partner of the company's outside audit firm or if one of his 
or her family members is a partner of the outside audit firm. Finally, 
Nasdaq narrowed the definition of ``Family Member'' and required the 
issuer to disclose those directors that it has determined to be 
independent; both of these changes conform the Nasdaq and NYSE 
proposals more closely.

[[Page 64177]]

Nomination of Directors

    The NYSE Corporate Governance Proposal requires each issuer to have 
a nominating committee that is comprised entirely of independent 
directors, while the Nasdaq Independent Director Proposal would require 
the issuer's director nominees to be selected or recommended for the 
board's selection by a majority of the independent directors or by a 
nominating committee comprised solely of independent directors. In 
addition, the NYSE proposal requires that the nominating committee have 
a written charter that addresses the committee's purpose and 
responsibilities and an annual performance evaluation of the committee; 
the Nasdaq proposal requires each issuer to certify that it has adopted 
a formal written charter or a board resolution addressing the 
nominations process and such related matters as may be required under 
the Federal securities laws. With Nasdaq's addition of the written 
charter requirement, the NYSE and Nasdaq nominating committee proposals 
are more closely aligned. The commenters who provided their views on 
independent nominating committees generally supported the NYSE and 
Nasdaq proposals, although a few of them suggested revisions.
    The Commission believes that directors that are independent of 
management are more likely to support the nomination of qualified, 
independent directors, and that a written document governing the 
nominating committee is beneficial in that it would describe the 
process used to identify board candidates and the criteria for 
selecting or recommending those candidates. Therefore, the Commission 
believes that the NYSE and Nasdaq nominating committee provisions are 
appropriate. In the Commission's view, the NYSE and Nasdaq proposals 
relating to the definition of ``independent director'' are a reasonable 
approach to enable a listed issuer to ascertain whether an individual 
is truly independent of the issuer. Moreover, the NYSE and Nasdaq 
proposals requiring a majority of the board to be independent should 
help to serve shareholders' interests by assuring that key decisions 
are considered by a board comprised of a majority of individuals 
without relationships to the issuer that otherwise could impair their 
judgment.

Compensation of Officers

    The NYSE Compensation Committee Provision requires each issuer to 
have a compensation committee composed entirely of independent 
directors that, either as a committee or together with the other 
independent directors, determines and approves the CEO's compensation, 
and that makes recommendations to the board with respect to non-CEO 
compensation. The committee is required to have a written charter 
addressing the committee's purpose and responsibilities. The Nasdaq 
Compensation of Executives Provision requires the compensation of the 
CEO and other executive officers of an issuer to be determined or 
recommended to the board for determination either by a majority of 
independent directors or by a compensation committee comprised solely 
of independent directors. The Nasdaq proposal stipulates that the CEO 
may not be present during voting or deliberations on the CEO's 
compensation. In addition, if the committee has at least three members, 
the Nasdaq proposal permits one director who is not independent and is 
not a current officer or employee or Family Member of such person to be 
appointed to the committee for a limited term if the board, under 
exceptional and limited circumstances, determines that such 
individual's membership is required and discloses the nature of the 
relationship and the reasons for the determination.
    A number of commenters disapproved of the NYSE's original proposal 
because it would have given the compensation committee the sole 
authority to determine CEO compensation. The Commission notes that, in 
response to these comments, NYSE revised its proposal to state that the 
committee's responsibility is to determine and approve the CEO's 
compensation level either as a committee or together with the other 
independent directors, and made clear that the revised provision does 
not preclude discussion of CEO compensation with the board generally. 
Nasdaq also amended its proposal to clarify that an issuer has the 
flexibility to empower a compensation committee either to take action 
itself or to recommend that the board take action.
    The Commission believes that directors that are independent of 
management are more likely to evaluate the performance of the CEO and 
other officers impartially and to award compensation on an objective 
basis. The Commission believes that the new standards that NYSE and 
Nasdaq have proposed with respect to how listed companies determine the 
compensation of their officers are appropriate.

Audit Committee and Compliance With Rule 10A-3

    Both NYSE and Nasdaq proposed to strengthen their listing 
requirements regarding audit committees. Both require listed issuers to 
comply with the standards set forth in Rule 10A-3, and both elected to 
adopt the cure period provided in Rule 10A-3(a)(3) for audit committee 
members who cease to be independent for reasons outside their 
reasonable control. Both NYSE and Nasdaq retain the requirement that 
listed issuers have an audit committee that is comprised of at least 
three directors. Moreover, audit committee members are required to meet 
the NYSE's or Nasdaq's respective definitions of independence in 
addition to the independence requirements of Rule 10A-3. The NYSE 
proposal also requires a special board determination and disclosure in 
certain instances if an audit committee member simultaneously serves on 
the audit committee of more than three public companies. The Nasdaq 
proposal includes a limited exceptional and limited circumstances 
exception for its non-Rule 10A-3 independence standards and a cure 
period for certain audit committee vacancies.
    Both the NYSE and Nasdaq proposals retain the current provisions 
that require each member of the audit committee to meet financial 
literacy requirements and that at least one audit committee member have 
increased financial sophistication. Regarding the latter requirement, 
both proposals provide that a director who qualifies as an audit 
committee financial expert under Commission rules is presumed to 
qualify for the increased sophistication requirements.
    The NYSE and Nasdaq proposals retain the requirement that the audit 
committee have a written charter that addresses the committee's purpose 
and responsibilities, and add that the audit committee's 
responsibilities under Rule 10A-3 must be included. In addition, the 
NYSE proposal requires that the audit committee charter address an 
annual performance evaluation of the audit committee.
    As with the NYSE and Nasdaq general independence proposals, a 
number of commenters supported these rule amendments, while a few 
voiced their concerns. Several commenters, writing before the NYSE and 
Nasdaq filed amendments to the proposals, requested that the audit 
committee proposals be reconciled with Rule 10A-3. Others requested 
clarification of the proposals.
    In the Commission's view, an audit committee comprised of 
independent

[[Page 64178]]

directors is better situated to assess objectively the quality of the 
issuer's financial disclosure and the adequacy of internal controls 
than a committee that includes members who are affiliated with 
management. By increasing the independence and competence of audit 
committees, the amendments are designed to further greater 
accountability and to improve the quality of financial disclosure and 
oversight of the financial reporting process. The Commission believes 
that vigilant and informed oversight by a strong, effective and 
independent audit committee should help to counterbalance pressures to 
misreport results and will impose increased discipline on the process 
of preparing financial information. Improved oversight may help detect 
fraudulent financial reporting earlier and perhaps thus deter it or 
minimize its effects. All of these benefits should promote increased 
market efficiency due to improved information and investor confidence 
in the reliability of a company's financial disclosure and system of 
internal controls.
    The Commission notes that the NYSE and Nasdaq proposals enhance 
audit committee independence by implementing the criteria for 
independence enumerated in Rule 10A-3. In addition, the NYSE and Nasdaq 
amendments regarding the definition of ``independent director'' 
restrict additional relationships not specified in Rule 10A-3 and 
contain look-back periods to create a comprehensive overall standard 
for audit committee member independence. As the Commission noted in its 
release adopting Rule 10A-3,\377\ it expected that the definition of 
independence contained in Rule 10A-3 would build and rely on the 
enhanced independence definitions that SROs adopt through rulemaking 
conducted under Commission oversight to significantly improve existing 
standards of independence for audit committee members and thereby help 
assure strong, independent audit committees.
---------------------------------------------------------------------------

    \377\ Securities Act Release No. 8220 (April 9, 2003), 68 FR 
18788 (April 16, 2003).
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to 
specify the enhanced audit committee responsibilities in their formal 
written charters, and to delineate how the committee carries out those 
responsibilities, will help to assure that the audit committee, 
management, investors, and the company's auditors recognize the 
function of the audit committee and the relationship among the parties. 
Moreover, the NYSE and Nasdaq proposals explicitly require the audit 
committee to have the duties and responsibilities specified in Rule 
10A-3, including direct responsibility for the appointment, 
compensation, retention and oversight of the company's outside auditor; 
the ability to engage outside advisors; the ability to obtain funding 
for the audit committee and its outside advisors; and the 
responsibility to establish procedures for the receipt, retention and 
treatment of complaints regarding accounting, internal accounting 
controls or auditing matters, including procedures for the 
confidential, anonymous submission of employee complaints.
    The Commission notes that these heightened standards complement 
existing listing standards adopted by NYSE and Nasdaq as a result of 
the Blue Ribbon Committee's report and retained under the new 
proposals. The existing standards include the requirement that each 
issuer have an audit committee composed of at least three independent 
directors who are able to read and understand financial statements, 
thus helping to ensure that the committee as a whole is financially 
literate. Moreover, one member of the audit committee is required to 
have additional financial expertise or sophistication, thus further 
enhancing the effectiveness of the audit committee in carrying out its 
financial oversight responsibilities.
    The Commission notes that the NYSE and Nasdaq amended their 
proposals regarding audit committees to respond to concerns raised by 
commenters or to adopt commenters' suggestions. In addition, the NYSE 
and Nasdaq made a number of revisions to their proposals to conform 
their original proposals, which were submitted before Commission 
approval of Rule 10A-3, to the requirements in Rule 10A-3 as adopted by 
the Commission. Several of the commenters' concerns regarding the 
original proposals, such as those relating to the prohibition on 
``affiliate'' status for audit committee members, were addressed in the 
Commission's adoption of Rule 10A-3 and the conforming amendments 
submitted by NYSE and Nasdaq. In addition, in this regard, Nasdaq 
removed a provision in its original proposal that would have permitted 
directors who own or control less than 20% of a company's stock to be 
audit committee members. The NYSE and Nasdaq also added various 
clarifications in their rules in response to comment. For example, both 
proposals state that a person who satisfies the Commission's definition 
of an audit committee financial expert is presumed to have requisite 
financial expertise. In addition, the NYSE and Nasdaq made changes to 
their proposals to address the rules' application to investment 
companies.
    The Commission believes that the NYSE and Nasdaq proposals 
regarding audit committees are appropriate and are consistent with 
section 10A(m) \378\ of the Exchange Act and Rule 10A-3 
thereunder.\379\
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    \378\ 15 U.S.C. 78j-1(m).
    \379\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Code of Conduct

    Both the NYSE and Nasdaq proposed to require listed issuers to 
adopt and make publicly available a code of conduct with enforcement 
provisions applicable to all directors, officer, and employees, and to 
require any waivers of the code for directors or executive offers to be 
disclosed. A number of commenters supported these rule amendments, 
although a few commenters provided suggestions for improving the 
proposals. The Commission believes that requiring listed issuers to 
adopt a code of conduct should help to foster the ethical behavior of 
directors, officers, and employees because directors, officer and 
employees will know the standards of conduct expected of them in 
ethically fulfilling the responsibilities of their positions and will 
be made fully cognizant that their actions will be monitored. The 
Commission also believes that requiring the code of conduct and any 
waivers of the code for directors and executive officers to be 
disclosed will provide shareholders the opportunity to evaluate the 
quality of a company's code and the ability to scrutinize significant 
waivers of its provisions.

Applicability to Registered Management Investment Companies, Certain 
Other Entities, and Foreign Private Issuers

    Both the NYSE and Nasdaq proposed to exempt management investment 
companies that are registered under the Investment Company Act from the 
new requirements relating to board independence and the role of 
independent directors in nomination and compensation decisions. The 
Commission believes that this exemption is reasonable, because the 
Investment Company Act already assigns important duties of investment 
company governance, such as approval of the investment advisory 
contract, to independent directors. Further, many of the Commission's 
exemptive rules under the Investment Company Act require investment 
companies relying on those rules to have a majority of independent 
directors, and require

[[Page 64179]]

those independent directors to select and nominate other independent 
directors.
    The Commission also notes that registered management investment 
companies will still be required to comply with the new rules relating 
to audit committees, consistent with Rule 10A-3. In addition, business 
development companies will be required to comply with all of the new 
requirements under both proposals, but will be required to use the 
``interested person'' standard under the Investment Company Act for 
purposes of determining director independence.
    Both NYSE and Nasdaq further proposed to exempt asset-backed 
issuers and other passive issuers from the new requirements relating to 
board independence and independent director role in nomination and 
compensation decisions, as well as from the new requirements relating 
to audit committees. The Commission believes that such an exemption is 
reasonable, and notes that such entities are exempt from the 
requirements of Rule 10A-3.
    The Commission further believes that other proposed provisions 
relating to limited partnerships, companies in bankruptcy, and 
cooperative entities are reasonable, given the specific characteristics 
of these entities. The Commission notes that these provisions have been 
designed for consistency with Rule 10A-3.
    The NYSE proposal would permit foreign private issuers to follow 
home country practice in lieu of the provisions of the new rules, 
except that such issuers would be required to comply with the 
requirements relating to audit committees and notification of non-
compliance mandated by Rule 10A-3. In addition, foreign private issuers 
would be required to disclose significant ways in which their corporate 
governance practices differ from the standards that NYSE requires of 
domestic companies. The Nasdaq Issuer Applicability Proposal clarifies 
that Nasdaq's existing authority under its rules to provide exemptions 
from its corporate governance standards as necessary so that a foreign 
private issuer is not required to do any act that is contrary to home 
country laws or business practices does not apply to the extent that it 
would be contrary to the requirements of Rule 10A-3. Nasdaq would also 
require a foreign private issuer to disclose each domestic requirement 
from which it is exempted, and to describe the home country practice, 
if any, followed by the issuer in lieu of domestic requirements. The 
Commission believes that granting exemptions to foreign private issuers 
in deference to their home country practices--so long as they comply 
with Rule 10A-3 requirements--is appropriate, and believes that the 
disclosure requirement will help investors determine whether they are 
satisfied with the alternate standards.

Nasdaq Going Concern Proposal

    Nasdaq proposed to require each listed company that receives an 
audit opinion that contains a going concern qualification to make a 
public announcement of such event. No commenters offered their views on 
this proposal. The Commission believes this requirement will help to 
bring to the attention of investors and potential investors the receipt 
of a going concern qualification by a company, which the Commission 
believes is important information for shareholders.

Nasdaq Related Party Transactions Proposal

    Nasdaq proposed to strengthen its current rule addressing the 
review of related party transactions to provide that all such 
transactions would not only need to be reviewed for potential conflict 
of interest situations on an ongoing basis, but that all such 
transactions would also have to be approved by the listed company's 
audit committee or another independent body of the board of directors. 
No comments were received on this proposal. The Commission believes 
that requiring an independent body of the board of directors to approve 
all related party transactions should help to protect investors because 
directors not related to management should be less likely to approve of 
related party transactions that could be detrimental to the interests 
of shareholders.

Implementation Dates and Transition Periods

    The Commission notes that both NYSE and Nasdaq have amended the 
compliance dates and the transition periods associated with the new 
standards relating to director independence, board committees, and 
notification of non-compliance so that the periods are consistent with 
the transition period for Rule 10A-3. The Commission believes that this 
revision will provide for ease of implementation. Accordingly, 
companies will be expected to begin complying with these new listing 
standards as of the earlier of their first annual meeting after January 
15, 2004 or October 31, 2004, except as otherwise provided in the case 
of foreign private issuers, small business issuers, and initial public 
offerings consistent with Rule 10A-3.\380\ The Commission further 
believes that the proposed provisions relating to companies 
transferring their listing from one market to another are reasonable 
and appropriate.
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    \380\ The Nasdaq Going Concern Proposal, however, is effective 
immediately upon adoption, and issuers will be required to comply 
with the Nasdaq Code of Conduct Proposal six months from the date of 
Commission approval. In addition, foreign issuers will be required 
to disclose receipt of a corporate governance exemption from Nasdaq 
for new filings and listings made after January 1, 2004.
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VI. Accelerated Approval of NYSE Amendment Nos. 2 and 3, Amendment Nos. 
2, 3, 4, and 5 to the Nasdaq Independent Director Proposal, Amendment 
Nos. 2 and 3 to the Nasdaq Related Party Proposal, Amendment Nos. 1, 2, 
and 3 to the Nasdaq Issuer Applicability Proposal, and Amendment No. 2 
to the Nasdaq Code of Conduct Proposal

    The Commission finds good cause for approving NYSE Amendment Nos. 2 
and 3, Amendment Nos. 2, 3, 4 and 5 to the Nasdaq Independent Director 
Proposal, Amendment Nos. 2 and 3 to the Nasdaq Related Party Proposal, 
Amendment Nos. 1, 2, and 3 to the Nasdaq Issuer Applicability Proposal, 
and Amendment No. 2 to the Nasdaq Code of Conduct Proposal prior to the 
thirtieth day after the amendments are published for comment in the 
Federal Register pursuant to section 19(b)(2) of the Exchange Act.
    The Commission believes that NYSE Amendment Nos. 2 and 3, Amendment 
Nos. 2, 3, 4, and 5 to the Nasdaq Independent Director Proposal, and 
Amendment Nos. 2 and 3 to the Nasdaq Issuer Applicability Proposal 
address many concerns raised in the comment letters. Other changes 
provide more guidance regarding certain provisions that needed further 
clarification or were added to bring greater harmony to the NYSE and 
Nasdaq proposals. As discussed above, the Commission believes that 
these proposed rule changes, as amended, are reasonable and appropriate 
and serve the interests of the investing public. The Commission further 
believes that accelerating the approval of these amendments will enable 
NYSE and Nasdaq to put into place a complete and comprehensive set of 
corporate governance standards for listed companies in time for the 
2004 proxy season. In addition, the NYSE and Nasdaq provisions relating 
to audit committees respond to the mandate of Rule 10A-3, which 
requires SROs to have such rules in place by December 1, 2003.

[[Page 64180]]

    In Amendment No. 2 to the Nasdaq Related Party Proposal, Nasdaq 
proposes to restore language that was deleted in the original proposal 
that clarifies that an issuer's review of all related party 
transactions must be for potential conflict of interest 
situations.\381\ The Commission believes that these changes clarify the 
application of the proposal, and do not raise any new issues. In 
Amendment No. 3 to the Nasdaq Related Party Proposal, Nasdaq proposes 
that the Related Party Proposal become effective on January 15, 2004, 
in order to minimize disruption to existing issuer audit 
committees.\382\ The Commission believes that this change will ease 
implementation of the rule.
---------------------------------------------------------------------------

    \381\ See Amendment No. 2 to the Nasdaq Related Party Proposal.
    \382\ See Amendment No. 3 to the Nasdaq Related Party Proposal.
---------------------------------------------------------------------------

    In Amendment No. 2 to the Nasdaq Code of Conduct Proposal, Nasdaq 
proposes to renumber the paragraph in NASD Rule 4350(n) containing its 
provisions, add a cross-reference to the definition of a code of ethics 
promulgated under the Sarbanes-Oxley Act, and to require any waivers of 
a code of conduct to be disclosed in a Form 8-K within five days.\383\ 
The Commission believes that the amendment clarifies the application of 
the proposal, provides a specific manner in which the disclosure 
requirement must be fulfilled, and does not raise any new issues.
---------------------------------------------------------------------------

    \383\ See Amendment No. 2 to the Nasdaq Code of Conduct 
Proposal.
---------------------------------------------------------------------------

    The Commission therefore believes that accelerated approval of NYSE 
Amendment Nos. 2 and 3, Amendment Nos. 2, 3, 4, and 5 to the Nasdaq 
Independent Director Proposal, Amendment Nos. 2 and 3 to the Nasdaq 
Related Party Proposal, Amendment Nos. 1, 2, and 3 to the Nasdaq Issuer 
Applicability Proposal, and Amendment No. 2 to the Nasdaq Code of 
Conduct Proposal is appropriate. Based on the above, the Commission 
finds, consistent with sections 6(b)(5) \384\ and 19(b) \385\ of the 
Exchange Act, that good cause exists to accelerate approval of NYSE 
Amendment Nos. 2 and 3; and, consistent with sections 15A(b)(6) \386\ 
and 19(b) of the Exchange Act, that good cause exists to accelerate 
approval of Amendment Nos. 2, 3, 4, and 5 to the Nasdaq Independent 
Director Proposal, Amendment Nos. 2 and 3 to the Nasdaq Related Party 
Proposal, Amendment Nos. 1, 2, and 3 to the Nasdaq Issuer Applicability 
Proposal, and Amendment No. 2 to the Nasdaq Code of Conduct Proposal.
---------------------------------------------------------------------------

    \384\ 15 U.S.C. 78f(b)(5).
    \385\ 15 U.S.C. 78s(b).
    \386\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

VII. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning NYSE Amendment Nos. 2 and 3, Amendment Nos. 2, 3, 
4, and 5 to the Nasdaq Independent Director Proposal, Amendment Nos. 2 
and 3 to the Nasdaq Related Party Proposal, Amendment Nos. 1, 2, and 3 
to the Nasdaq Issuer Applicability Proposal, and Amendment No. 2 to the 
Nasdaq Code of Conduct Proposal, including whether these amendments are 
consistent with the Exchange Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change 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 offices of the 
NYSE and Nasdaq. All submissions should refer to File No. SR-NYSE-2002-
33, SR-NASD 2002-141, SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-
138 and SR-NASD-2002-139, and should be submitted by December 3, 2003.

VIII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, SR-NYSE-2002-33, as amended, is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with section 6(b)(5) 
of the Exchange Act \387\; and that the proposed rule changes, SR-NASD 
2002-141, as amended; SR-NASD-2002-77; SR-NASD-2002-80, as amended; SR-
NASD-2002-138, as amended; and SR-NASD-2002-139, as amended, are 
consistent with the Exchange Act and the rules and regulations 
thereunder applicable to a national securities association, and, in 
particular, with section 15A(b)(6) of the Exchange Act.\388\
---------------------------------------------------------------------------

    \387\ 15 U.S.C. 78f(b)(5).
    \388\ 15 U.S.C. 78o-3(6).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\389\ that the proposed rule changes, SR-NYSE-2002-33, as 
amended; SR-NASD 2002-141, as amended; SR-NASD-2002-77; SR-NASD-2002-
80, as amended; SR-NASD-2002-138, as amended; and SR-NASD-2002-139, as 
amended, are approved.
---------------------------------------------------------------------------

    \389\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\390\
---------------------------------------------------------------------------

    \390\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.

Exhibit A

Comment Letters Relating to SR-NYSE-2002-33, the NYSE Corporate 
Governance Proposal

    1. Letter from Timothy J. Adams, General Counsel, Labor Ready, 
Inc., to Jonathan G. Katz, Office of the Secretary, Commission, 
dated August 22, 2002 (``Labor Ready NYSE Letter'').
    2. Letter from Timothy Smith, Senior Vice President, Walden 
Asset Management, to Mr. Harvey Pitt, Chairman, Commission, dated 
August 23, 2002 (``Walden NYSE Letter'').
    3. Letter from Frank Curtis, Special Projects Officer, Railways 
Pension Trustee Company Limited, to Mr. H Pitt, Chairman, 
Commission, dated July 31, 2002 (``Railways Pension NYSE Letter'').
    4. Letter from Timothy H. Smith, President, and Alisa Gravitz, 
Vice President, Social Investment Forum, to Mr. Harvey L. Pitt, 
Commission, dated August 6, 2002 (``Social Investment NYSE 
Letter'').
    5. Letter from Douglas H. Philipsen, Chairman, President and 
Chief Executive Officer, Independent Bank Corp., to Mr. Hardwick 
Simmons, Chairman and Chief Executive Officer, Nasdaq, dated August 
26, 2002 (``Independent Bank Corp NYSE Letter'').
    7. Letter from Thomas F. Ray, Brookstreet Securities, to Mr. 
Harvey L. Pitt, Chairman, Commission, dated September 10, 2002 
(``Brookstreet Securities NYSE Letter'').
    8. Letter from Valerie Heinonen, o.s.u., Consultant, Corporate 
Social Responsibility, Ursuline Sisters of Tildonk `` U.S. Province, 
to Harvey Pitt, Chair, Commission, dated August 27, 2002 (``Ursuline 
Sisters NYSE Letter'').
    9. Letter from David M. Dobkin, CFP, First Affirmative Financial 
Network, Cambridge Investment Research, Inc. to Mr. Harvey L. Pitt, 
Chairman, Commission, dated September 6, 2002 (``Dobkin NYSE 
Letter'').
    10. Letter from Robert Walker, Vice President, SRI Policy and 
Research, Ethical Funds Inc., to Mr. Harvey L. Pitt, Chairman, Ms. 
Cynthia A. Glassman, Commissioner, Mr. Harvey J. Goldschmid, 
Commissioner, Mr. Roel C. Campos, Commissioner, Mr. Paul S. Atkins, 
Commissioner, Commission, dated September 6, 2002 (``Ethical Funds 
NYSE Letter'').
    11. Letter from Alastair Ross Goobey, Chairman of the Board, 
International

[[Page 64181]]

Corporate Governance Network, to Mr. Harvey Pitt, Chairman, 
Commission, dated August 16, 2002 (``International Corporate 
Governance NYSE Letter'').
    12. Letter from Sarah A.B. Teslik, Executive Director, Council 
of Institutional Investors, to Harvey L. Pitt, Chairman, Commission, 
dated August 1, 2002 (``Council of Institutional Investors NYSE 
Letter'').
    13. Letter from Linda Selbach, Barclays Global Investors, to Mr. 
James Cochrane, Senior Vice President, Strategy and Planning, NYSE, 
dated July 18, 2002 (``Barclays NYSE Letter'').
    14. E-mail from Walter J. Coleman, dated May 2, 2003 (``Coleman 
NYSE E-mail'').
    15. Letter from David A. Nadler, Ph.D., Mercer Delta Consulting, 
to Mr. Jonathan Katz, Secretary, Commission, dated November 20, 2002 
(``Mercer Delta NYSE Letter'').
    16. Letter from Roger M. Kenny, Managing Partner, Boardroom 
Consultants, to Mr. Jonathan Katz, Secretary, Commission, dated 
December 6, 2002 (``Boardroom Consultants NYSE Letter'').
    17. Letter from Robert H. Cohen, Esq., Morrison Cohen Singer & 
Weinstein, LLP, to Commission, Attention Jonathan Katz, Secretary, 
dated December 17, 2002 (``Morrison Cohen NYSE Letter'').
    18. Memo from Wachtell, Lipton, Rosen & Katz, Financial 
Institutions Developments, Solving The Proposed Director 
Independence Standards for Bank Holding Company Directors, by Edward 
D. Herlihy, Craig M. Wasserman, Richard K. Kim, Lawrence S. Makow, 
and Nicholas G. Demmo, dated February 10, 2003 (``Wachtell NYSE 
Memo'').
    19. Letter from Jay W. Lorsch, to Ms. Janice O'Neill, Vice 
President, Corporate Governance, NYSE, dated May 5, 2003 (``Lorsch 
NYSE Letter'').
    20. Letter from Leon J. Level, Chief Financial Officer, Computer 
Sciences Corporation, to Jonathan G. Katz, Secretary, Commission, 
dated May 5, 2003 (``Computer Sciences NYSE Letter'').
    21. Letter from Eberhard G. H. Schmoller, Senior Vice President 
and General Counsel, CNF Inc., to Jonathan G. Katz, Secretary, 
Commission, dated May 5, 2003 (``CNF NYSE Letter'').
    22. Letter from William J. Casazza, Vice President, Deputy 
General Counsel and Corporate Secretary, Aetna, to Jonathan G. Katz, 
dated May 6, 2003 (``Aetna NYSE Letter'').
    23. Letter from Stuart A. Sheldon, Dow, Lohnes & Albertson, 
PLLC, to Jonathan G. Katz, Secretary, Commission, dated May 7, 2003 
(``Dow Lohnes NYSE Letter'').
    24. Letter from Thomas E. Rutledge, Ogden Newell & Welch PLLC, 
to Jonathan G. Katz, Secretary, Commission, dated May 1, 2003 
(``Ogden Newell NYSE Letter'').
    25. Letter from Brian Krolicki, President, National Association 
of State Treasurers, to Jonathan G. Katz, Secretary, Commission, 
dated May 2, 2003 (``National Association of State Treasurers NYSE 
Letter'').
    26. Letter from Evelyn Cruz Sroufe, Perkins Coie LLP, to 
Jonathan G. Katz, Secretary, Commission, dated May 5, 2003 
(``Perkins Coie NYSE Letter'').
    27. Letter from C.W. Mueller, Chairman and CEO, Ameren 
Corporation, to Jonathan G. Katz, Secretary, Commission, dated May 
5, 2003 (``Ameren NYSE Letter'').
    28. Letter from Naohiko Matsuo, Director for International 
Financial Markets, Financial Services Agency, Government of Japan, 
to Jonathan G. Katz, Secretary, Commission, dated May 8, 2003 
(``Financial Services Agency NYSE Letter'').
    29. Letter from Craig S. Tyle, General Counsel, Investment 
Company Institute, to Jonathan G. Katz, Secretary, Commission, dated 
May 8, 2003 (``Investment Company Institute NYSE Letter'').
    30. Letter from Stacy L. Fox, Senior Vice President, General 
Counsel and Secretary, Visteon Corporation, to Jonathan G. Katz, 
Secretary, Commission, dated May 6, 2003 (``Visteon NYSE Letter'').
    31. Letter from Simon B. Halfin, Counsel, Peoples Energy 
Corporation, to Jonathan G. Katz, Secretary, Commission, dated May 
7, 2003 (``Peoples Energy NYSE Letter'').
    32. Letter from Patrick T. Mulva, Vice President, Investor 
Relations and Secretary, Exxon Mobil Corporation, to Jonathan G. 
Katz, Secretary, Commission, dated May 7, 2003 (``Exxon NYSE 
Letter'').
    33. Letter from Robert S. Singley, Vice President and Assistant 
Secretary, Wells Fargo & Company, to Secretary, Commission, dated 
May 7, 2003 (``Wells Fargo NYSE Letter'').
    34. Letter from Ned Barnholt, Chairman, President and CEO, 
Agilent Technologies, to Secretary, Commission, dated May 7, 2003 
(``Agilent NYSE Letter'').
    35. Letter from Peter C. Clapman, Senior Vice President and 
Chief Counsel, Corporate Governance, TIAA-CREF, to Jonathan G. Katz, 
Secretary, Commission, dated May 6, 2003 (``TIAA-CREF NYSE 
Letter'').
    36. Letter from Charlotte M. Bahin, Senior Vice President, 
Regulatory Affairs, America's Community Bankers, to Jonathan G. 
Katz. Secretary, Commission, dated May 8, 2003 (``America's 
Community Bankers NYSE Letter'').
    37. Letter from Janne G. Gallagher, Vice President General 
Counsel, Council on Foundations, to Jonathan G. Katz, Secretary, 
Commission, dated May 8, 2003 (``Council on Foundations NYSE 
Letter'').
    38. Letter from Gregory E. Lau, Executive Director Global 
Compensation and Corporate Governance, General Motors Corporation, 
to Secretary, Commission, dated May 8, 2003 (``General Motors NYSE 
Letter'').
    39. Letter from Gerald S. Backman, Chairman of the Committee, 
New York State Bar Association, Business Law Section, Committee on 
Securities Regulation, to Commission, dated May 8, 2003 (``New York 
State Bar NYSE Letter'').
    40. Letter from Mark G. Heesen, President, National Venture 
Capital Association, to Jonathan G. Katz, Secretary, Commission, 
dated May 8, 2003 (``National Venture NYSE Letter'').
    41. Letter from KPMG LLP, to Jonathan G. Katz, Secretary, 
Commission, dated May 8, 2003 (``KPMG NYSE Letter'').
    42. Letter from Winston & Strawn, to Jonathan G. Katz, 
Secretary, Commission, dated May 7, 2003 (``Winston & Strawn NYSE 
Letter'').
    43. Letter from Gregory F. Pilcher, Senior Vice President, 
General Counsel and Corporate Secretary, Kerr-McGee Corporation, to 
Secretary, Commission, dated May 7, 2003 (``Kerr-McGee NYSE 
Letter'').
    44. Letter from C.R. Cloutier, Chairman, Independent Community 
Bankers of America, to Jonathan G. Katz, Secretary, Commission, 
dated May 8, 2003 (``Independent Community Bankers NYSE Letter'').
    45. Letter from James P. Melican, Executive Vice President, 
International Paper Company, to Jonathan G. Katz, Secretary, 
Commission, dated May 8, 2003 (``International Paper NYSE Letter'').
    46. Letter from LeBoeuf, Lamb Greene & MacRae, L.L.P., to 
Jonathan G. Katz, Secretary, Commission, dated May 8, 2003 
(``LeBoeuf NYSE Letter'').
    47. Letter from Suzanne Suter, Vice President, Corporate 
Secretary and Chief Governance Officer, Anadarko Petroleum 
Corporation, to Jonathan G. Katz, Secretary, Commission, dated May 
8, 2003 (``Anadarko NYSE Letter'').
    48. Letter from Cleary, Gottlieb, Steen & Hamilton, to Jonathan 
G. Katz, Secretary, Commission, dated May 16, 2003 (``Cleary NYSE 
Letter'').
    49. Letter from Kathleen M. Gibson, Chairman, Taskforce on 
Corporate Accountability, American Society of Corporate Secretaries, 
to Jonathan Katz, Secretary, Commission, dated May 10, 2003 
(``American Society of Corporate Secretaries NYSE Letter'').
    50. Letter from Charles M. Nathan, Committee on Securities 
Regulation of the Association of the Bar of the City of New York, to 
Secretary, Commission, dated May 9, 2003 (``Committee on Securities 
Regulation NYSE Letter'').
    51. Letter from Elizabeth B. Chandler, Vice President, Assistant 
General Counsel and Corporate Secretary, Mirant Corporation, to 
Jonathan G. Katz, Secretary, Commission, dated May 15, 2003 
(``Mirant NYSE Letter'').
    52. Letter from Franklin D. Raines, Chairman and CEO, Fannie 
Mae, Chairman--Corporate Governance Task Force, The Business 
Roundtable, to Jonathan G. Katz, Secretary, Commission, dated May 
15, 2003 (``Business Roundtable NYSE Letter'').
    53. Letter from William J. Calise, Jr., Rockwell Automation, 
Inc., to Mr. Jonathan G. Katz, Secretary, Commission, dated May 21, 
2003 (``Rockwell NYSE Letter'').
    54. Letter from Melvin A. Eisenberg, Koret Professor of Law, 
University of California School of Law (Boalt Law), to Secretary, 
Commission, dated June 16, 2003, (``Eisenberg NYSE Letter'').
    55. Letter from Sarah A. Miller, American Bankers Association, 
to Jonathan G. Katz, Secretary, Commission, dated June 27, 2003 
(``American Bankers Association NYSE Letter'').
    56. Letter from Deborah S. Lamb, Chair, U.S. Advocacy Committee 
of the Association for Investment Management and Research and Linda 
L. Rittenhouse, Staff, AIMR Advocacy, Association for Investment 
Management and Research, to Mr. Jonathan G. Katz, Secretary, 
Commission, dated July 2, 2003 (``AIMR Advocacy Letter'').
    57. Letter from Eugene Ellman, Executive Director, Social 
Investment Organization, to

[[Page 64182]]

Mr. Harvey L. Pitt, Chairman, Commission, dated September 13, 2002 
(``SIO NYSE Letter'').
    58. E-mail from Tore U. Johnsson, to [email protected] dated 
August 23, 2002 (``Johnsson E-mail'').
    59. E-mail from [email protected] dated September 4, 
2003 (``MVC Associates NYSE E-mail'').
    60. Letter from Sullivan & Cromwell, to Mr. Jonathan G. Katz, 
Secretary, Commission, dated September 23, 2003 (``Sullivan & 
Cromwell NYSE Letter'').
    61. Letter form Henry A. McKinnell, Chairman of the Board and 
Chief Executive Officer, Pfizer Inc., to Mr. Richard Grasso, 
Chairman, NYSE, dated May 30, 2003 (``Pfizer NYSE Letter'').
    62. Letter from Barbara J. Krumsiek, President and CEO, Calvert 
Group, Ltd., to Mr. Richard A. Grasso, Chairman and Chief Executive 
Officer, NYSE, dated May 20, 2003 (``Calvert Letter'').
    63. Letter from Bob Reed, JP Financial, to Janice (``Bob Reed 
Letter'').

Comment Letters Relating to SR-NASD-2002-141, the Nasdaq 
Independent Director Proposal

    1. Letter from D. Scott Huggins, Senior Vice President and Chief 
Auditor, Fulton Financial Corporation, to Jonathan G. Katz, 
Secretary, Commission, dated April 1, 2003 (``Fulton Nasdaq 
Letter'').
    2. Letter from Joseph S. Schwertz Jr., Corporate Secretary, 
Whitney Holding Company, to Jonathan G. Katz, Secretary, Commission, 
dated April 14, 2003 (``Whitney Nasdaq Letter'').
    3. Letter from Janne G. Gallagher, Acting General Counsel, 
Council on Foundations, to Jonathan G. Katz, Secretary, Commission, 
dated April 15, 2003 (``Council on Foundations Nasdaq Letter'').
    4. Letter from Cary Klafter, Vice President, Legal and 
Government Affairs, Intel Corporation, to Margaret H. McFarland, 
Deputy Secretary, Commission, dated April 11, 2003 (``Intel Nasdaq 
Letter'').
    5. Letter from Susan D. Stanley, First Vice President and 
Corporate Secretary, People's Bank, to Jonathan G. Katz, Secretary, 
Commission, dated April 15, 2003 (``People's Bank Nasdaq Letter'').
    6. Letter from Charlotte M. Bahin, Director of Regulatory 
Affairs, Senior Regulatory Counsel, America's Community Bankers, to 
Jonathan G. Katz. Secretary, Commission, dated April 22, 2003 
(``America's Community Bankers Nasdaq Letter'').
    7. Letter from Sarah A. Miller, Director, Center for Securities, 
Trust and Investments, American Bankers Association, to Jonathan G. 
Katz, Secretary, Commission, dated April 16, 2003 (``American 
Bankers Association Nasdaq Letter'').
    8. Letter from Craig S. Tyle, General Counsel, Investment 
Company Institute, to Jonathan G. Katz, Secretary, Commission, dated 
April 15, 2003 (``Investment Company Institute Nasdaq Letter'').
    9. Letter from David A. Kastelic, Senior Vice President and 
General Counsel, Cenex Harvest States Cooperatives, to Jonathan G. 
Katz, Secretary, Commission, dated April 21, 2003 (``Cenex Harvest 
Nasdaq Letter'').
    10. Letter from Charles M. Nathan, Committee on Securities 
Regulation of the Association of the Bar of the City of New York, to 
Secretary, Commission, dated April 25, 2003 (``Committee on 
Securities Regulation Nasdaq Letter'').
    11. Letter from C.R. Cloutier, Chairman, Independent Community 
Bankers of America, to Jonathan G. Katz, Secretary, Commission, 
dated May 6, 2003 (``Independent Community Bankers Nasdaq Letter'').
    12. Letter from Douglas A. Cifu, Paul, Weiss, Rifiand, Wharton & 
Garrison LLP, to Jonathan G. Katz, Secretary, Commission, dated May 
14, 2003 (``Paul Weiss Nasdaq Letter'').
    13. Letter from Mark G. Heesen, President, National Venture 
Capital Association, to Jonathan G. Katz, Secretary, Commission, 
dated April 16, 2003 (``National Venture Nasdaq Letter'').
    14. Letter from Fritz Heimann, Chairman, and Thomas L. Milan, 
Director, Transparency International-USA, to Mr. Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated May 28, 2003 
(``TI-USA Nasdaq Letter'').
    15. Letter from Bonnie K. Wachtel, CEO, Wachtel & Co., Inc., to 
Jonathan G. Katz, Secretary, Commission, dated June 16, 2003 
(``Wachtel Nasdaq Letter'').
    16. Letter from Irwin M. Jacobs, Chairman and CEO, QUALCOMM, to 
Secretary, Commission, dated August 22, 2002 (``Qualcomm Nasdaq 
Letter'').
    17. E-mail from Tore U. Johnsson, to [email protected] dated 
August 23, 2002 (``Johnsson Nasdaq E-mail'').
    18. E-mail from George Kolber to [email protected], dated 
July 1, 2003 (``Kolber Nasdaq E-mail'').
    19. Letter from Gary P. Kreider, Keating, Muething & Klekamp, 
PLL, to Secretary, Commission, dated July 1, 2003 (``Kreider Nasdaq 
Letter'').

Comment Letters Relating to Both SR-NYSE-2002-33 and SR-NASD-2002-
141

    1. Letter from Stanley Keller, Chair, Committee on Federal 
Regulation of Securities, Robert Todd Lang, Chair, Task Force on 
Listing Standards, Committee on Federal Regulation of Securities, 
American Bar Association, Business Law Section, to Commission, dated 
June 2, 2003 (``Committee on Federal Regulation of Securities 
Letter'').
    2. E-mail from Peter Herman dated June 3, 2003 (``Herman E-
mail'').
    3. E-mail from [email protected] to [email protected], 
dated June 12, 2003 (``Hobgood E-mail'').
    4. Letter from Mark R. Beatty, General Counsel, Cascade 
Investment, to The Honorable Jonathan G. Katz, Secretary, 
Commission, dated July 3, 2003 (``Cascade Investment Letter'').
    5. Letter from Peter S. Brown, Senior Vice President and General 
Counsel, Arrow Electronics, Inc., to Ms. Janice O'Neill, Vice 
President of Corporate Compliance, NYSE, dated August 28, 2003 
(``Arrow Electronics Letter'').

Comment Letters Relating to SR-NASD-2002-139, the Nasdaq Code of 
Conduct Proposal

    1. Letter from Dorothy M. Donohue, Associate Counsel, Investment 
Company Institute, to Mr. Jonathan G. Katz, Secretary, Commission, 
dated July 30, 2003 (``ICI 2002-139 Letter'').
    2. Letter from Charlotte M. Bahin, Senior Vice President, 
Regulatory Affairs, America's Community Bankers, to Jonathan G. 
Katz, Secretary, Commission, dated July 31, 2003 (``ACB 2002-139 
Letter'').

Comment Letters Relating to SR-NASD-2002-138, the Nasdaq Issuer 
Applicability Proposal

    1. Letter from Sullivan & Cromwell LLP, to Mr. Jonathan G. Katz, 
Secretary, Commission, dated July 31, 2003 (``S&C 2002-138 
Letter'').

[FR Doc. 03-28187 Filed 11-10-03; 8:45 am]
BILLING CODE 8010-01-P