[Federal Register Volume 68, Number 235 (Monday, December 8, 2003)]
[Notices]
[Pages 68432-68434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30354]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48863; File No. SR-Amex-2003-65]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the American Stock Exchange LLC and Notice of 
Filing and Order Granting Accelerated Approval of Amendment No. 2 
Relating To Enhanced Corporate Governance Requirements Applicable to 
Listed Companies

December 1, 2003.

I. Introduction

    On June 23, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend sections 101, 110, 120, 121, 401, 402, 
610 and 1009 of the Amex Company Guide, and adopt new sections 801 
through 808 of the Amex Company Guide to enhance the corporate 
governance requirements applicable to listed companies. The proposed 
rule change, among other things, would require each issuer listed on 
the Amex to comply with the standards for audit committees mandated by 
section 10A(m) of the Act \3\ and Rule 10A-3 thereunder.\4\ The 
proposed rule change also includes provisions relating to board 
independence and independent committees, codes of conduct, and other 
corporate governance issues. On September 9, 2003, the Exchange filed 
Amendment No. 1 to the proposed rule change.\5\ On October 31, 2003, 
the Commission published the proposed rule change, as modified by 
Amendment No. 1, for comment in the Federal Register.\6\ The Commission 
received one comment letter on the proposal.\7\ On December 1, 2003, 
the Exchange filed Amendment No. 2 to the proposal.\8\ This Order 
approves the proposed rule change, provides notice of Amendment No. 2, 
and approves Amendment No. 2 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78j-1(m).
    \4\ 17 CFR 240.10A-3.
    \5\ See Letter from Claudia Crowley, Vice President, Listing 
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division 
of Market Regulation, Commission, dated September 5, 2003 
(``Amendment No. 1'').
    \6\ See Securities Exchange Act Release No. 48706 (October 27, 
2003), 68 FR 62109 (October 31, 2003) (``Notice'').
    \7\ Letter from Dorothy M. Donohue, Associate Counsel, 
Investment Company Institute, to Jonathan G. Katz, Secretary, 
Commission, dated November 21, 2003 (``ICI Letter''). The ICI Letter 
supported the Exchange's proposal and, in particular, noted that 
provisions of the Amex proposal are analogous to rules of the New 
York Stock Exchange and The Nasdaq Stock Market, which were recently 
approved by the Commission. See infra note and accompanying text.
    \8\ See Letter from Claudia Crowley, Vice President, Listing 
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division 
of Market Regulation, Commission, dated November 26, 2003 
(``Amendment No. 2''). Amendment No. 2 supersedes and replaces the 
original proposal and Amendment No. 1 in their entirety. The most 
significant changes to the proposed rule change that are contained 
in Amendment No. 2 are summarized in section II. below.
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II. Description of Amended Proposal

    The proposed rule change, as amended, consists of comprehensive 
enhancements to the corporate governance requirements applicable to 
companies listed on the Amex. Some of these changes respond to Rule 
10A-3, which requires each national securities

[[Page 68433]]

exchange and national securities association to have rules that comply 
with its requirements approved by the Commission no later than December 
1, 2003. Other proposed changes relate to board of director composition 
and independence standards, audit committee composition and authority, 
compensation and nominating committees, and ethics and disclosure 
obligations, as discussed in detail in the Notice. The Amex's rule 
amendments will allow some leeway for small business filers. Under the 
proposed rule change, small business filers will be subject to the new 
corporate governance requirements, except that they will only be 
required to have a board of directors comprised of at least 50% 
independent directors and an audit committee of at least two 
independent directors.\9\ Such issuers will, of course, be required to 
comply with Rule 10A-3.\10\
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    \9\ Companies that are not small business filers will be 
required under the proposed rule change to have a board of directors 
comprised of a majority of independent directors and an audit 
committee of at least three independent directors.
    \10\ In addition, the Amex proposal includes provisions that 
would prohibit a listed company from appointing or permitting an 
Exchange employee or Floor Member to serve on its board of 
directors, place certain restrictions on the division of a listed 
company's board of directors into classes, and include other small 
variations from the corporate governance provisions of other SROs.
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    In Amendment No. 2, Amex revised various aspects of its proposal, 
in a manner that conforms many of its provisions with corporate 
governance rules of other self-regulatory organizations (``SROs''), 
which were recently approved by the Commission.\11\ The specific 
proposed revisions included in Amendment No. 2 would:
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    \11\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (approval of 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) (``NYSE/NASD Corporate 
Governance Release'').
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    [sbull] Substantially conform the compliance dates and transition 
periods to those mandated for audit committees by Rule 10A-3 under the 
Act and adopted by other marketplaces;\12\
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    \12\ The deadline for compliance with the audit committee 
requirements of Rule 10A-3 is the earlier of January 15, 2004, or 
October 31, 2004, (other than for foreign private issuers and small 
business issuers). The revisions to Amex rules regarding changes to 
board and committee composition and structure will become effective 
by the earlier of the issuer's first annual meeting after March 15, 
2004, or October 31, 2004, (other than for foreign private issuers 
and small business issuers). Foreign private issuers and small 
business issuers must be in compliance with the Rule 10A-3 audit 
committee requirements and the new board and committee composition 
and structure provisions by July 31, 2005.
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    [sbull] Provide phase-in periods with respect to certain 
requirements for companies that list in conjunction with an initial 
public offering, are emerging from bankruptcy, cease to be controlled 
companies, have staggered boards, or are transferring from other 
markets;
    [sbull] Expand certain of 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 charitable match programs and 
loans permitted under Section 13(k) of the Securities Exchange Act from 
the definition of payments that would preclude a finding of 
independence;
    [sbull] Exclude prior employment as an interim Chairman or Chief 
Executive Officer (``CEO''), as well as compensation received for such 
former service, from the relationships and payments that would preclude 
a finding of independence;
    [sbull] Specify that business payments from or to an organization 
that a director (or an immediate family member) is a partner in, 
controlling shareholder of, or executive officer of, that would 
preclude a finding of independence (whether to or from the listed 
company) are tested against the consolidated gross revenues of the 
director's organization;
    [sbull] Expand the scope of the relationships with the company's 
outside auditor that preclude a finding of independence;
    [sbull] Apply a three year ``look-back'' to all relationships that 
would preclude a finding of director independence, but revise such 
``look-back'' periods so that the independence tests applicable to 
independent directors who are not members of the audit committee, and 
certain ``look-back'' periods for independent directors who are members 
of the audit committee, would be only one year for the first year 
following Commission approval of the enhanced corporate governance 
requirements;
    [sbull] Clarify that a director who qualifies as an audit committee 
financial expert pursuant to Commission rules is presumed to qualify as 
a financially sophisticated audit committee member under Amex rules, 
and conform the Amex rules to those adopted by other markets;
    [sbull] Clarify the application of the corporate governance 
requirements to investment companies;
    [sbull] Provide a different measure of independence for investment 
companies that is consistent with the Investment Company Act of 
1940;\13\
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    \13\ 15 U.S.C. 80a-1 et seq.
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    [sbull] Clarify that audit committees of listed companies must 
adopt a formal audit committee charter that addresses the audit 
committee's responsibilities, including those required by Rule 10A-3;
    [sbull] Require 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] Codify that audit committees of listed companies must meet 
on at least a quarterly basis;
    [sbull] Clarify that independent nominating and compensation 
committees may either take action or recommend that the board take 
action;
    [sbull] Clarify that the new requirements relating to nominating 
decisions 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 new rule;
    [sbull] Require a nominating committee charter or board resolution 
addressing the nominations process;
    [sbull] Remove a provision that would have permitted one director 
holding 20% or more of the company's stock who is not independent as a 
result of being an officer of the company to serve on the nominations 
committee;
    [sbull] Add a requirement that listed companies must notify the 
Exchange of any material non-compliance with the enhanced corporate 
governance requirements;
    [sbull] Specify that the CEO of a listed company may not be present 
during voting or deliberations on his or her compensation, and state 
that compensation for all other officers must be determined, or 
recommended to the Board for determination, either by the compensation 
committee or a majority of the independent directors on the company's 
board of directors;
    [sbull] Specify that a listed company's required code of conduct 
and ethics must be publicly available, and any waivers of the code for 
directors and executive officers must be disclosed within five days in 
a Commission Form 8-K; and
    [sbull] Provide that the compensation committee or a majority of 
independent directors is not precluded from approving awards either 
with or without board ratification, as may be required to comply with 
applicable tax and state corporate laws.

[[Page 68434]]

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with the requirements of section 6(b) of the 
Act.\14\ Specifically, the Commission finds that the proposed rule 
change is consistent with section 6(b)(5) of the Act,\15\ 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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    \14\ 15 U.S.C. 78(b). In approving the proposed rule change, as 
amended, the Commission has considered its impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78(b)(5).
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    In the Commission's view, the proposed rule change will foster 
greater transparency, accountability, and objectivity in the oversight 
by, and decision-making processes of, the boards and key committees of 
Amex listed issuers. The proposal also will promote compliance with 
high standards of conduct by the issuers' directors and management. The 
Commission notes that the Amex has amended its proposal to harmonize it 
in many areas with rule changes recently approved by the Commission for 
the New York Stock Exchange, Inc. and the National Association of 
Securities Dealers, Inc.
    In addition, in the Commission's view, the proposed rule change is 
consonant with Rule 10A-3, which requires that the rules of a national 
securities exchange 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 9(b) or (c) of Rule 10A-3. In this regard, 
the proposed rule change will promote independent and objective review 
and oversight of an Amex-listed issuer's financial reporting practices.
    The Commission believes that the provisions that the Amex has 
included to accommodate small business filers by requiring them to have 
50%, rather than a majority, of their boards comprised of independent 
directors, and by requiring them to have two, rather than three, 
members on their audit committees, are reasonable.
    The Commission also believes that the provision added by Amex to 
prohibit a listed company from appointing or permitting an employee or 
Floor Member of the Exchange to serve on its board is reasonable and 
appropriate, as is the provision placing certain limits on the division 
of a listed company's board of directors into classes.
    The Commission notes that other provisions proposed by Amex vary 
somewhat from corporate governance rules recently approved by the 
Commission for other SROs. For example, with respect to the proposed 
three-year ``look back'' periods that would apply to relationships that 
preclude a finding of director independence, certain ``look-back'' 
periods would cover only one year for the first year following 
Commission approval of the requirements, while other ``look-back'' 
periods would cover three years following Commission approval of the 
requirements. Amex also would require each company listed on the 
Exchange to adopt either a formal written charter or board resolution, 
as applicable, that addresses the nominations process. Amex also has 
included a provision to explicitly require an audit committee to meet 
on a quarterly basis. The Commission believes that these provisions are 
reasonable.
    Furthermore, the Commission finds good cause, consistent with 
section 19(b)(2) of the Act,\16\ to approve Amendment No. 2 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission notes that most of the changes proposed in Amendment No. 2 
correspond to similar provisions approved by the Commission for other 
self-regulatory organizations,\17\ and raise no new issues. With 
respect to changes proposed in Amendment No. 2 that are unique with 
respect to Amex, the Commission believes that these provisions are 
reasonable and that accelerating their approval will enable Amex to put 
into place its complete set of corporate governance standards for 
listed companies in time for the 2004 proxy season for the large 
majority of its listed companies. In addition, the Amex 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.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ See NYSE/NASD Corporate Governance Release, supra n. 11.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of 
the submission, all subsequent amendments, all written statements with 
respect to the proposed rule change 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 filings will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Amex-2003-65 and should be 
submitted by December 29, 2003.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\18\, that Amendment No. 2 be granted accelerated approval and that the 
proposed rule change (File No. SR-Amex-2003-65), as amended, be, and 
hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30354 Filed 12-05-03; 8:45 am]
BILLING CODE 8010-01-P