[Federal Register Volume 69, Number 13 (Wednesday, January 21, 2004)]
[Notices]
[Pages 2954-2957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1162]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49060; File No. SR-NASD-2003-172]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 
Thereto by the National Association of Securities Dealers, Inc. 
Relating to Certain Technical and Clarifying Changes to NASD Rules 
4200, 4200A, 4350, and 4350A

January 12, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 25, 2003, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On December 
18, 2003, December 23, 2003, December 29, 2003, and January 9, 2004, 
Nasdaq submitted Amendment Nos. 1, 2, 3, and 4, respectively, to the 
proposed rule change.\3\ Nasdaq has filed the proposed rule change as a 
``non-controversial'' rule change under Rule 19b-4(f)(6) under the 
Act,\4\ which renders the proposal effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letters from Eleni Constantine, Associate General 
Counsel, Nasdaq, to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
December 17, 2003 (``Amendment No. 1''), December 22, 2003 
(``Amendment No. 2''), and December 22, 2003 (``Amendment No. 3''), 
and letter from John D. Nachmann, Senior Attorney, Nasdaq, to 
Katherine A. England, Assistant Director, Division, Commission, 
dated January 8, 2004 (``Amendment No. 4''). Amendment No. 1 made 
technical corrections to the original submission. Amendment No. 2 
included references to section 19(b)(3)(A) of the Act that had been 
omitted in the original filing and made a minor clarification. 
Amendment No. 3 restored Nasdaq's request, made in the original 
filing, for acceleration of the operative date of the proposed rule 
change. Amendment No. 4 deleted references to the manner in which 
foreign issuers must disclose any waivers of the issuer's code of 
conduct. Nasdaq noted its intention to file a proposed rule change 
that addresses this issue in the near future. The changes made by 
Amendment Nos. 1, 2, 3, and 4 are incorporated in this notice.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD through Nasdaq is proposing changes to NASD Rules 4200, 
4200A, 4350, and 4350A to make certain technical and clarifying 
amendments to these rules, including, for example, inserting the date 
of Commission approval, correcting errors in numbering of sections, and 
clarifying the deadline for disclosure of waivers of a company's code 
of conduct. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
Rule 4200 Definitions
* * * * *
IM--4200 Definition of Independence--Rule 4200(a)(15)
    It is important for investors to have confidence that individuals 
serving as independent directors do not have a relationship with the 
listed company that would impair their independence. The board has a 
responsibility to make an affirmative determination that no such 
relationships exist through the application of Rule 4200. Rule 4200 
also provides a list of certain relationships that preclude a board 
finding of

[[Page 2955]]

independence. These objective measures provide transparency to 
investors and companies, facilitate uniform application of the rules, 
and ease administration. Because Nasdaq does not believe that ownership 
of company stock by itself would preclude a board finding of 
independence, it is not included in the aforementioned objective 
factors. It should be noted that there are additional, more stringent 
requirements that apply to directors serving on audit committees, as 
specified in Rule 4350.
    The rule's reference to a ``parent or subsidiary'' is intended to 
cover entities the issuer controls and consolidates with the issuer's 
financial statements as filed with the U.S. Securities and Exchange 
Commission (but not if the issuer reflects such entity solely as an 
investment in its financial statements). The reference to executive 
officer means those officers covered in Rule 16a-1(f) under the Act. In 
the context of the definition of Family Member under Rule 4200(a)(14), 
the reference to marriage is intended to capture relationships 
specified in the rule (parents, children and siblings) that arise as a 
result of marriage, such as ``in-law'' relationships.
    The three year look-back periods referenced in paragraphs (A), (C), 
(E) and (F) of the rule commence on the date the relationship ceases. 
For example, a director employed by the company is not independent 
until three years after such employment terminates. Paragraph (B) of 
the rule 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. 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 paragraph (B) of the rule.
    Paragraph (D) of the rule 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, controlling shareholder or 
executive officer of such entity. Under exceptional circumstances, such 
as where a director has direct, significant business holdings, it may 
be appropriate to apply the corporate measurements in paragraph (D), 
rather than the individual measurements of paragraph (B). Issuers 
should contact Nasdaq if they wish to apply the rule in this manner. 
The reference to a partner in paragraph (D) is not intended to include 
limited partners. It should be noted that the independence requirements 
of paragraph (D) of the rule are broader than Rule 10A-3(e)(8) under 
the Act.
    Under paragraph (D), 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. However, Nasdaq encourages companies to consider other 
situations where a director or their Family Member and the company each 
have a relationship with the same charity when assessing director 
independence.
    For purposes of determining whether a lawyer is eligible to serve 
on an audit committee, Rule 10A-3 under the Act generally provides that 
any partner in a law firm that receives payments from the issuer is 
ineligible to serve on that issuer's audit committee. In determining 
whether a director may be considered independent for purposes other 
than the audit committee, payments to a law firm would generally be 
considered under Rule 4200(a)(15)(D), which looks to whether the 
payment exceeds the greater of 5% of the recipient's gross revenues or 
$200,000; however, if the firm is a sole proprietorship, Rule 
4200(a)(15)(B), which looks to whether the payment exceeds $60,000, 
applies.
    Paragraph (G) of the rule provides a different measurement for 
independence for investment companies in order to harmonize with the 
Investment Company Act of 1940. In particular, in lieu of paragraphs 
(A)-(F), a director who is an ``interested person'' of the company as 
defined in section 2(a)(19) of the Investment Company Act of 1940, 
other than in his or her capacity as a member of the board of directors 
or any board committee, would not be considered to be independent.
Rule 4200A. Definitions
* * * * *
    (a) For purposes of the Rule 4000 Series, unless the context 
requires otherwise:
    (14) No change.
Rule 4350. Qualitative Listing Requirements for Nasdaq National Market 
and Nasdaq SmallCap Market Issuers Except for Limited Partnerships
(a) Applicability
    (1) through (4) No change.
    (5) Effective Dates/Transition. 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, Rules 4200 
[4300] and 4350 are effective as set out in this subsection. During the 
transition period between [[insert date of approval by the Commission]] 
November 4, 2003 and the effective date of Rules 4200 and 4350, 
companies that have not brought themselves into compliance with these 
rules must continue to comply with Rules 4200A and 4350A, which consist 
of sunsetting sections of previously existing Rules 4200 and 4350.
    The provisions of Rule 4200(a) and Rule 4350(c), (d) and (m) 
regarding director independence, independent committees, and 
notification of noncompliance shall be implemented by the following 
dates:
    [sbull] July 31, 2005 for foreign private issuers and small 
business issuers (as defined in Rule 12b-2); and
    [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 shall have until their 
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 shall comply with the audit committee requirements 
pursuant to the implementation schedule bulleted above.
    Issuers that have listed or shall be listed in conjunction with 
their initial public offering shall be afforded exemptions from all 
board composition requirements consistent with the exemptions afforded 
in Rule 10A-3(b)(1)(iv)(A) under the Act. That is, for each committee 
that the company adopts, the company shall 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. It should 
be noted, however, that investment companies are not afforded these 
exemptions under Rule 10A-3. Issuers may choose not to adopt a 
compensation or nomination committee and may instead rely upon a 
majority of the independent directors to discharge responsibilities 
under the rules. These issuers shall be required to meet the majority 
independent board requirement within one year of listing.
    Companies transferring from other markets with a substantially 
similar requirement shall be afforded the balance of any grace period 
afforded by the other market. Companies

[[Page 2956]]

transferring from other listed markets that do not have a substantially 
similar requirement shall be afforded one year from the date of listing 
on Nasdaq. This transition period is not intended to supplant any 
applicable requirements of Rule 10A-3 under the Act.
    The limitations on corporate governance exemptions to foreign 
private issuers shall be effective July 31, 2005. However, the 
requirement that a foreign issuer disclose the receipt of a corporate 
governance exemption from Nasdaq shall be effective for new listings 
and filings made after January 1, 2004.
    Rule 4350(n), requiring issuers to adopt a code of conduct, shall 
be effective [[insert date six months after approval by the Commission 
]]May 4, 2003.
    Rule 4350(h), requiring audit committee approval of related party 
transactions, shall be effective January 15, 2004.
    The remainder of Rule 4350(a) and Rule 4350(b) are effective 
[[insert date of approval by the Commission ]] November 4, 2003.
    (b) through (l) No change.
(m) Notification of Material Noncompliance
    An issuer must provide Nasdaq with prompt notification after an 
executive officer of the corporation becomes aware of any material 
noncompliance by the issuer with the requirements of this Rule 4350.
(n) Code of Conduct
    Each issuer shall adopt a code of conduct applicable to all 
directors, officers and employees, which shall be publicly available. A 
code of conduct satisfying this rule must comply with the definition of 
a ``code of ethics'' set out in section 406(c) of the Sarbanes-Oxley 
Act of 2002 (``the Sarbanes-Oxley Act'') and any regulations 
promulgated thereunder by the Commission. See 17 CFR 228.406 and 17 CFR 
229.406. In addition, the code must provide for an enforcement 
mechanism. Any waivers of the code for directors or executive officers 
must be approved by the Board. Domestic issuers shall disclose [and 
must be disclosed] such waivers in a Form 8-K within five business 
days.
IM-4350-1 to IM-4350-5
    No change.
IM-4350-6: Applicability
    No change.
IM-4350-7: Code of Conduct
    Ethical behavior is required and expected of every corporate 
director, officer and employee whether or not a formal code of conduct 
exists. The requirement of a publicly available code of conduct 
applicable to all directors, officers 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. 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.
    Rule 4350[(m)](n) requires issuers to adopt a code of conduct 
complying with the definition of a ``code of ethics'' under section 
406(c) of the Sarbanes-Oxley Act of 2002 (``the Sarbanes-Oxley Act'') 
and any regulations promulgated thereunder by the Commission. See 17 
CFR 228.406 and 17 CFR 229.406. Thus, the code must include such 
standards as are reasonably necessary to promote the ethical handling 
of conflicts of interest, full and fair disclosure, and compliance with 
laws, rules and regulations, as specified by the Sarbanes-Oxley Act. 
However, the code of conduct required by Rule 4350[(m)](n) must apply 
to all directors, officers, and employees. Issuers can satisfy this 
obligation by adopting one or more codes of conduct, such that all 
directors, officers and employees are subject to a code that satisfies 
the definition of a ``code of ethics.''
    As the Sarbanes-Oxley Act recognizes, investors are harmed when the 
real or perceived private interest of a director, officer or employee 
is in conflict with the interests of the company, as when the 
individual receives improper personal benefits as a result of his or 
her position with the company, or when the individual has other duties, 
responsibilities or obligations that run counter to his or her duty to 
the company. Also, the disclosures an issuer makes to the Commission 
are the essential source of information about the company for 
regulators and investors--there can be no question about the duty to 
make them fairly, accurately and timely. Finally, illegal action must 
be dealt with swiftly and the violators reported to the appropriate 
authorities. Each code of conduct must require that any waiver of the 
code for executive officers or directors may be made only by the board 
and must be promptly disclosed to shareholders, along with the reasons 
for the waiver. This disclosure requirement provides investors the 
comfort that waivers are not granted except where they are truly 
necessary and warranted, and that they are limited and qualified so as 
to protect the company to the greatest extent possible. Consistent with 
applicable law, domestic issuers must disclose such waivers [disclosure 
must be made] in a Form 8-K within five business days.
    Each code of conduct must also contain 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.
Rule 4350A. Qualitative Listing Requirements for Nasdaq National Market 
and Nasdaq SmallCap Market Issuers Except for Limited Partnerships
    Rule 4350A(a), (c), (d) or (h) shall continue to apply to any 
company until Rule 4350(a), (c), (d) or (h), respectively, becomes 
effective for such company. The effective dates of Rule 4350(a), (c), 
(d) or (h) are set out in Rule 4350(a)(5).
    (a) No change.
(c) [(b)] Independent Directors
    Each issuer shall maintain a sufficient number of independent 
directors on its board of directors to satisfy the audit committee 
requirement set forth in Rule 4350(d)(2).
(d) [(c)] Audit Committee
(1) Audit Committee Charter
    No Change.
(2) Audit Committee Composition
    No Change.
    (h) No change.
* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 2957]]

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

1. Purpose
    On November 4, 2003, the Commission approved a number of rule 
changes to the corporate governance rules of Nasdaq and of the New York 
Stock Exchange.\5\ These rule changes constituted a major reform in the 
corporate governance rules of these two markets. In the aftermath of 
those rule changes, Nasdaq proposes technical amendments to the rules 
by, for example, inserting the date of Commission approval, correcting 
some errors in numbering sections, inserting missing headings for 
certain sections, and similar technical changes. In addition, Nasdaq 
seeks to clarify that the five-day window allowed by Rule 4350(n) to 
file disclosure of a code of conduct waiver in a Form 8-K means five 
business days.
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    \5\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\6\ in general and with 
section 15A(b)(6) of the Act,\7\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. Nasdaq believes that 
clarifying the new rules helps investors and issuers.
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    \6\ 15 U.S.C. 78o-3.
    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received.

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

    The proposed rule change has been filed by Nasdaq as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\8\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
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    Consequently, because the foregoing proposed rule change, as 
amended: (1) Does not significantly affect the protection of investors 
or the public interest, (2) does not impose any significant burden on 
competition, and (3) by its terms does not become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate, if consistent with the protection of investors and the 
public interest, provided that the self-regulatory organization has 
given the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as the Commission may 
designate, it has become effective pursuant to section 19(b)(3)(A) of 
the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii),\12\ a proposed ``non-
controversial'' rule change does not become operative for 30 days after 
the date of filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest. Nasdaq has requested that the Commission waive the five-day 
pre-notice requirement and the 30-day operative delay, to permit the 
NASD to implement the proposal immediately.
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    \12\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The revisions contained in the proposed rule change constitute either 
technical changes or minor revisions that, in the Commission's view, 
bring clarity to Nasdaq's new corporate governance listing standards. 
For these reasons, the Commission designates the proposed rule change, 
as amended, to be effective and operative upon filing with the 
Commission.\13\ The Commission also waives the five-business day pre-
filing requirement.
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    \13\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rules 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\14\
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    \14\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the period to commence on January 9, 2004, 
the date that the NASD filed Amendment No. 4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, as amended, including 
whether the proposed rule change 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. Comments may also be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. SR-NASD-2003-172 . This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, comments should be sent in hardcopy or by e-mail but not 
by both methods. 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to the File 
No. SR-NASD-2003-172 and should be submitted by February 11, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1162 Filed 1-20-04; 8:45 am]
BILLING CODE 8010-01-P