[Federal Register Volume 68, Number 235 (Monday, December 8, 2003)]
[Notices]
[Pages 68436-68440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30355]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48860; File No. SR-CHX-2003-19]


Self-Regulatory Organizations; Order Granting Partial Approval of 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1 Thereto by the Chicago Stock 
Exchange, Inc. Relating to Governance of Issuers on the CHX

December 1, 2003.

I. Introduction

    On July 28, 2003, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``SEC'' or ``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 certain provisions of 
its rules relating to the governance of issuers that list securities on 
the CHX.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change, among other things, would require each 
issuer listed on the CHX to establish an independent audit committee 
and to comply with the standards for audit committees mandated by 
Section 10A(m) of the Act \3\ and Rule 10A-3 thereunder.\4\ The 
proposal also would amend the CHX's Tier I and Tier II listing 
standards to enhance its requirements relating to the roles and 
responsibilities of independent directors and independent board 
committees, including audit committees, nominating committees and 
compensation committees. The proposal further includes amendments to 
the CHX's maintenance standards to set out a process that would allow 
an issuer an opportunity to cure a failure to meet the Exchange's 
maintenance listing standards, including its governance-related 
standards.
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    \3\ 15 U.S.C. 78j-1(m).
    \4\ 17 CFR 240.10A-3.
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    On October 28, 2003, the Commission published the proposed rule 
change for comment in the Federal Register.\5\ The Commission received 
no comments on the proposal. On November 24, 2003, the Exchange filed 
Amendment No. 1 to the proposal.\6\
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    \5\ See Securities Exchange Act Release No. 48669 (October 21, 
2003), 68 FR 61500 (October 28, 2003).
    \6\ See letter from Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated November 21, 2003 
(``Amendment No. 1''). In Amendment No. 1, the Exchange requested 
that the Commission grant approval at this time to: (a) the sections 
that relate to the Commission's Rule 10A-3 requirements for listed 
company audit committees; and (b) the sections that set out a 
process that would provide an issuer with a specific opportunity to 
cure any failure to meet the Exchange's maintenance standards, 
including its governance-related standards. In addition, the 
Exchange proposed in Amendment No. 1 an additional section of rule 
text in CHX Rule 19(b)(2) to expand, with respect to investment 
companies, the scope of the requirement that audit committees 
establish procedures for the confidential, anonymous submission of 
concerns regarding questionable accounting or auditing matters. In 
the amendment, CHX set forth the text of the proposed rule change 
for which it is seeking approval at this time, which is set forth in 
Section II. below.

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[[Page 68437]]

    Rule 10A-3 requires each national securities exchange and national 
securities association to have rules that comply with its requirements 
approved by the Commission no later than December 1, 2003. This Order 
approves the proposed rule change in part as set forth below, so that 
the CHX can comply with this deadline. This Order also provides notice 
of Amendment No. 1 and approves Amendment No. 1 on an accelerated 
basis. The Commission notes that the CHX is considering revisions to 
the portions of the proposed rule change that pertain to corporate 
governance standards other than the revisions to comply with Rule 10A-3 
requirements, particularly in light of rule changes by the New York 
Stock Exchange, Inc. and the National Association of Securities 
Dealers, Inc. that were recently approved by the Commission.\7\ This 
Order does not relate to those other proposed provisions except to the 
extent indicated below.
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    \7\ See Securities Exchange Act Release Nos. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (approval of, among other 
proposals, File Nos. SR-NYSE-2002-33 and SR-NASD-2002-141) (``NYSE/
NASD Corporate Governance Release''). Telephone call between Ellen 
Neely, Senior Vice President and General Counsel, CHX and Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, and other Commission staff, on November 18, 2003.
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II. Description of the Approved Changes

    The Commission is approving in this Order the portions of the 
proposed rule change that: (a) Implement Rule 10A-3; and (b) amend 
CHX's maintenance standards as set forth in the rule text that 
follows.\8\ The Commission also is approving an additional provision, 
included in the text set forth below, relating to complaint procedures 
of audit committees of investment companies. Rule 10A-3 requires audit 
committees to establish procedures for ``the confidential, anonymous 
submission by employees of the listed issuer of concerns regarding 
questionable accounting or auditing matters.'' \9\ The additional 
provision will require that audit committees of investment companies 
also establish procedures for the confidential, anonymous submission of 
such concerns 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.
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    \8\ The text set forth below also includes several minor changes 
to the text set forth in the Notice to reflect the fact that the 
Commission is approving portions of the proposed rule amendments.
    \9\ 17 CFR 240.10A-3(b)(3)(ii).
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    The following is the proposed rule text that the Commission is 
approving, as set forth by CHX in Amendment No. 1. Proposed new 
language is in italics; proposed deletions are in brackets.
Chicago Stock Exchange Rules
ARTICLE XXVIII
Listed Securities
* * * * *
* * * * *
Maintenance Standards Applicable to All Tier I Issues
    RULE 17A. The Exchange reserves the right to delist the securities 
of any corporation, subject to Securities and Exchange Commission 
Rules, which engages in practices not in the public interest or whose 
assets have been depleted to the extent that the company can no longer 
operate as a going concern or whose securities have become so closely 
held that it is no longer feasible to maintain a reasonable market in 
the issue. Furthermore, the Exchange reserves the right to delist the 
securities of any corporation which has drastically changed its 
corporate structure and/or its type of operation. The Exchange may also 
make an appraisal of, and determine on an individual basis, the 
suitability for continued listing of an issue in the light of all 
pertinent facts whenever it deems such action appropriate, even though 
a security meets enumerated criteria (including, but not limited to, 
continued listing on the NYSE, Amex or Nasdaq National Market). Many 
factors may be considered in this connection, including, but not 
limited to, abnormally low selling price or volume of trading, or 
failure to comply with required corporate governance standards.

* * * Interpretations and Policies

    If the Exchange identifies a Tier I issue as being below the 
Exchange's maintenance listing requirements, the Exchange will notify 
the issuer by letter of its determination and the reasons for that 
determination. In this letter, the Exchange will provide the issuer 
with an opportunity to provide the Exchange with a plan (the ``Plan'') 
to cure the deficiency. Within 10 business days of the receipt of the 
Exchange's letter, the issuer must contact the Exchange to confirm its 
receipt of the letter and to report to the Exchange whether or not the 
issuer intends to present a Plan. If the issuer notifies the Exchange 
that it does not intend to present a Plan, the Exchange will commence 
proceedings to suspend and/or delist the issue.
    The issuer must present any Plan within 45 days after its receipt 
of the Exchange's letter. The Plan must describe definitive action that 
the issuer has taken, or is taking, that would bring it into conformity 
with the Exchange's maintenance listing requirements within 18 months 
of receipt of the letter, or within any shorter time period required by 
the Exchange. (The Exchange will not approve any Plan, under which an 
issuer is curing a deficiency under SEC Rule 10A-3, which extends 
beyond the earlier of 12 months or the first annual shareholders' 
meeting (for circumstances beyond the reasonable control of an issuer) 
and 6 months (for other circumstances)). The Plan also must set 
quarterly milestones against which the Exchange will evaluate its 
progress. Exchange staff will evaluate the Plan and determine whether 
the issuer has made a reasonable demonstration in the Plan of an 
ability to come into compliance with the Exchange's maintenance listing 
requirements. The Exchange will notify the issuer of its determination 
within 45 days after receipt of the Plan. If the Exchange does not 
accept the Plan, it will commence proceedings to suspend and/or delist 
the issue.
    If the Exchange accepts the Plan, the Exchange will review the 
issuer on a quarterly basis to determine the issuer's progress under 
the Plan. If the issuer fails to meet a material provision of the Plan 
or one or more of its quarterly milestones, the Exchange will review 
the facts and circumstances and determine whether to initiate 
proceedings to suspend and/or delist the issue; provided however, that 
if an issuer fails to meet a material provision of the Plan that 
relates to compliance with its obligations under SEC Rule 10A-3, the 
Exchange will immediately commence proceedings to suspend and/or delist 
the issue. If, for circumstances that do not involve compliance with 
SEC Rule 10A-3, the Exchange determines that continued listing is 
warranted, the Exchange will continue to review the issuer's progress 
under the Plan on at

[[Page 68438]]

least a quarterly basis. If the issuer achieves compliance with the 
Exchange's maintenance listing requirements before the Plan expires 
under its terms, the Exchange may choose to consider the Plan ended as 
of that earlier date.
    If an issuer, within one year after the termination of a Plan, is 
again determined to have failed to meet the Exchange's maintenance 
listing requirements, the Exchange will review the facts and 
circumstances (including whether the issuer has fallen into non-
compliance with the same standards at issue in its earlier Plan) and 
will take appropriate action, which could include, but is not limited 
to, shortening the time periods associated with the submission of any 
new Plan or immediately commencing proceedings to suspend and/or delist 
the issue.
    These procedures do not prevent the Exchange from suspending 
trading in an issue immediately, whenever it finds that it is necessary 
to do so for the protection of investors.
* * * * *
Tier I Corporate Governance and Disclosure Standards Corporate 
Governance
    RULE 19. The following Rule 19 applies [only] to Tier I issuers:
    (a) Board of Directors.
    Each listed company shall maintain a minimum of two independent 
directors on its board of directors. For purposes of this section, 
``independent director'' shall mean a person other than an officer or 
employee of the company or its subsidiaries or any other individual 
having a relationship which, in the opinion of the board of directors, 
would interfere with the exercise of independent judgment in carrying 
out the responsibilities of a director.
    (b) Audit Committee.
    (1) Audit Committee Composition. Each listed company shall 
establish and maintain an Audit Committee, a majority of the members of 
which shall be independent directors, as defined in section (a) above. 
In addition to these criteria:
    (A) Each member of the audit committee must meet the criteria for 
independence set forth in SEC Rule 10A-3 (subject to the exemptions 
provided in that Rule);
    (B) Exceptions.
    If a member of an audit committee ceases to meet the independence 
criteria set forth in SEC Rule 10A-3 for reasons outside the person's 
reasonable control, that person may remain a member of the committee 
until the earlier of the next annual shareholders' meeting or one year 
from the occurrence of the event that caused the member to no longer 
meet the independence criteria. The issuer must promptly notify the 
Exchange if this circumstance occurs.
    (2) Audit Committee Responsibilities and Authority. The audit 
committee must have, at a minimum, (A) the responsibilities and 
authority set forth in SEC Rule 10A-3; and (B) the obligation to 
conduct an appropriate review of all related party transactions on an 
ongoing basis and to review potential conflict of interest situations 
where appropriate. 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.
    (3) Any issuer that is exempt from the provisions of SEC Rule 10A-3 
is not required to meet the requirements set out in sections (b)(1)(A) 
or (b)(2)(A) above and is not required to meet the additional 
requirements for audit committees for investment companies set out in 
the last sentence of section (b)(2).
    (c) Reserved.
    (d) Reserved.
    (e) Reserved.
    (f) Governance-Related Certifications.
    Each issuer's chief executive officer must promptly notify the 
Exchange after any executive officer of the issuer becomes aware of any 
material non-compliance by the issuer with applicable standards set out 
in paragraph (b) of this rule; provided, however, that any issuer that 
is exempt from the provisions of SEC Rule 10A-3 is not required to meet 
the requirements of this section (f).
    [(a)](g) Annual Reports. No change to text.
    [(b)](h) Quarterly Reports. No change to text.
    [(c)](i) Other Reports. No change to text.
    [(d) Each listed company shall establish and maintain an Audit 
Committee, a majority of the members of which shall be independent 
directors, as defined below.]
    [(e) Each listed company shall maintain a minimum of two 
independent directors on its board of directors. For purposes of this 
section, ``independent director'' shall mean a person other than an 
officer or employee of the company or its subsidiaries or any other 
individual having a relationship which, in the opinion of the board of 
directors, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director.]
    [(f)](j) Annual Meeting. No change to text.
    [(g)](k) Proxy Solicitations. No change to text.
    [(h) Each issuer shall conduct an appropriate review of all related 
party transactions on an ongoing basis and shall use the company's 
audit committee or a comparable body for the review of potential 
conflict of interest situations where appropriate.]
    [(i)](l) Stock Certificates. No change to text.
    [(j)](m) No change to text.
    [(k)](n) Stock Transfer Facilities. No change to text.
    (o) Reserved.
. . . Interpretations and Policies
    .01 No change to text.
    .02 Reserved.
    .03 Reserved.
    .04 Reserved.
    .05 Transition Periods and Compliance Dates. Sections (a)-(f) will 
become effective pursuant to the following schedule:
    The audit committee requirements mandated by SEC Rule 10A-3 (and 
the exception set out in section (b)(1)(B) in this rule) will become 
effective as set out in Rule 10A-3.
* * * * *
Tier II Corporate Governance, Disclosure, and Miscellaneous 
Requirements
    RULE 21. The following Rule 21 applies only to Tier II issuers:
    (a) Each issuer shall comply with the governance requirements set 
out in Rule 19 (a)-(f) of this Article and is subject to 
Interpretations .02-.05 of that rule.
    (b) No change to text.
    [(1) Each listed company shall establish and maintain an Audit 
Committee, a majority of the members of which shall be independent 
directors.]
    [(2) Each listed company shall maintain a minimum of two 
independent directors on its board of directors. For purposes of this 
section, ``independent director'' shall mean a person other than an 
officer or employee of the company or its subsidiaries or any other 
individual having a relationship which, in the opinion of the board of 
directors, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director.]
    ([d]c) Stock Certificates. No change to text.
    ([e]d) Changes to Listing Standards. No change to text.
* * * * *

[[Page 68439]]

Tier II Maintenance Standards
    RULE 22. (a) The Exchange reserves the right to delist the 
securities of any corporation, subject to Securities and Exchange 
Commission Rules, which engages in practices not in the public interest 
or whose assets have been depleted to the extent that the company can 
no longer operate as a going concern or whose securities have become so 
closely held that it is no longer feasible to maintain a reasonable 
market in the issue. Furthermore, the Exchange reserves the right to 
delist the securities of any corporation which has drastically changed 
its corporate structure and/or its type of operation. The Exchange may 
also make an appraisal of, and determine on an individual basis, the 
suitability for continued listing of an issue in the light of all 
pertinent facts whenever it deems such action appropriate, even though 
a security meets enumerated criteria (including, but not limited to, 
continued listing on the NYSE, Amex or Nasdaq National Market). Many 
factors may be considered in this connection, including, but not 
limited to, abnormally low selling price or volume of trading, or 
failure to comply with required corporate governance standards.
    (b)-(d)No change to text.

. . . Interpretations and Policies

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

III. Discussion

    After careful review, the Commission finds that the provisions of 
the proposed rule change which are amended by Amendment No. 1 and are 
set forth in Section II. above, are consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\10\ Specifically, the Commission finds 
that the proposal to require independent audit committees for listed 
companies is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the CHX's rules be designed to 
prevent fraudulent and manipulative acts and practices, and, in 
general, to protect investors and the public interest. Moreover, the 
Commission believes that the Exchange's proposal to add the new 
requirements concerning audit committees is appropriate and consonant 
with Section 10A(m) of the Act and Rule 10A-3 thereunder relating to 
audit committee standards for listed issuers.
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    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    Furthermore, the Commission finds good cause, consistent with 
Section 19(b)(2) of the Act,\12\ to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 1 contains a provision that responds to a recommendation 
by the Commission that self-regulatory organizations take into account, 
in adopting their rules, the fact that most services are rendered to an 
investment company by employees of third parties, such as the 
investment adviser, rather than by employees of the investment 
company.\13\ In Amendment No. 1, the Exchange also made several non-
substantive changes to the rule text to reflect the fact that the 
Commission is approving portions of the proposed amendments. The 
Commission believes that it is appropriate to accelerate approval of 
this amendment because it conforms the rule text to similar provisions 
approved by the Commission

[[Page 68440]]

for other self-regulatory organizations,\14\ and raises no new issues.
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ See Securities Act Release No. 8220, Securities Exchange 
Act Release No. 47654, and Investment Company Act Release No. 26001 
(April 9, 2003), 68 FR 18788 (April 16, 2003) (release adopting Rule 
10A-3).
    \14\ See NYSE/NASD Corporate Governance Release, supra n. 7.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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-CHX-2003-19 and should be 
submitted by December 29, 2003.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the portions of the proposed rule change (File No. SR-
CHX-2003-19) set forth above relating to compliance with Rule 10A-3 
under the Act, maintenance standards, and audit committee 
responsibilities and authority, be, and hereby are, approved, and that 
Amendment No. 1 be granted accelerated approval.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30355 Filed 12-5-03; 8:45 am]
BILLING CODE 8010-01-P