[Federal Register Volume 69, Number 126 (Thursday, July 1, 2004)]
[Notices]
[Pages 39989-39993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14899]



[[Page 39989]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49911; File No. SR-CHX-2003-19]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago Stock 
Exchange, Inc. Relating to Governance of Issuers on the Exchange

June 24, 2004.

I. Introduction

    On July 28, 2003, the Chicago Stock Exchange, Inc. (``CHX'' 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 certain provisions of its rules relating 
to the governance of issuers that list securities on the CHX. The 
proposed rule change was published for comment in the Federal Register 
on October 28, 2003.\3\ On November 24, 2003, the Exchange filed 
Amendment No. 1 to the proposal.\4\ On December 1, 2003, the Commission 
partially approved the proposal, granted accelerated approval to 
Amendment No. 1, and solicited comments from interested persons on 
Amendment No. 1.\5\ Specifically, the Commission approved the portions 
of the proposed rule change that implemented the requirements of Rule 
10A-3 under the Act relating to audit committees of listed issuers; \6\ 
amended CHX's listing maintenance standards; and added a provision 
relating to complaint procedures of audit committees of investment 
companies. The Commission received no comments on the proposal and 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48669 (October 21, 
2003), 68 FR 61500.
    \4\ See letter from Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
November 21, 2003 (``Amendment No. 1'').
    \5\ Securities Exchange Act Release No. 48860 (December 1, 
2003), 68 FR 68436 (December 8, 2003) (``Partial Approval Order'').
    \6\ 17 CFR 240.10A-3.
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    On April 8, 2004, the CHX filed Amendment No. 2 to the proposed 
rule change.\7\ On June 21, 2004, the CHX filed Amendment No. 3 to the 
proposed rule change.\8\ In Amendment Nos. 2 and 3, the CHX proposed 
additional enhancements to the proposal and revisions to a number of 
its provisions that were not approved in the Partial Approval Order. 
The substantive changes to the proposal made by Amendment Nos. 2 and 3 
are summarized below. This Order approves the proposed rule change in 
its entirety, as amended; grants accelerated approval to Amendment Nos. 
2 and 3; and solicits comments from interested persons on Amendment 
Nos. 2 and 3.
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    \7\ See letter from Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated April 7, 2004 (``Amendment No. 2'').
    \8\ See letter from Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated June 18, 2004 (``Amendment No. 3'').
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II. Description of the Proposal

    In addition to the provisions of the proposed rule change that were 
approved in the Partial Approval Order, including those implementing 
the requirements of Rule 10A-3 under the Act, the CHX proposes further 
enhancements to the governance of issuers that list securities on the 
Exchange, which are set forth in CHX Article XXVIII, Rules 19 and 21 
(collectively, the ``CHX Governance Standards''). Specifically, the CHX 
seeks to amend its Tier I and Tier II listing standards to enhance the 
Exchange's requirements relating to the roles and responsibilities of 
independent directors; expand its existing provisions and add new 
requirements relating to independent board committees (including audit 
committees, nominating committees and compensation committees); and 
require the adoption by each listed issuer of a code of ethics 
applicable to directors, officers, and employees.
    The Exchange believes that in most respects the proposed changes 
are substantially similar to rule changes relating to governance 
standards adopted, with Commission approval, by the National 
Association of Securities Dealers, Inc. (``NASD'') through its 
subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''), and by the 
American Stock Exchange LLC (``Amex'').\9\ A few of the proposed 
changes mirror similar rule changes adopted, with Commission approval, 
by the NYSE.\10\ Summarized below are the principal categories of 
change to the CHX Governance Standards:
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    \9\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (approving changes to the 
corporate governance listing standards of Nasdaq and the New York 
Stock Exchange, Inc. (``NYSE'')) and Securities Exchange Act Release 
No. 48863 (December 1, 2003), 68 FR 68432 (December 8, 2003) 
(approving changes to the corporate governance listing standards of 
the Amex).
    \10\ See Securities Exchange Act Release No. 48745, supra.
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Definition of ``Independence''

    Several existing and proposed rules of the Exchange require that 
specified roles and responsibilities in the governance of listed 
issuers be assigned to independent directors. Existing CHX rule 
language defines ``independent director'' in a manner that generally 
precludes any relationship that would interfere with the exercise of 
independent judgment in carrying out the responsibilities of a 
director. The proposed rule change would add that the board has the 
responsibility to make an affirmative determination that no such 
relationship exists.\11\ In addition, the proposed amendments would 
specifically identify six categories of persons who could not be 
considered independent.
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    \11\ See CHX Article XXVIII, proposed Rule 19(p)(3), as revised 
by Amendment No. 2.
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    In general, persons who would not be considered independent would 
include: (i) A director employed by the issuer or its parent or 
subsidiary during the previous three years; (ii) a director who 
accepted (or who has a immediate family member who accepted) any 
payments from the issuer in excess of $60,000 during the current year 
or any of the past three fiscal years (other than compensation for 
board or board committee service, payments arising solely from 
investments in the issuer's securities, compensation paid to an 
immediate family member who is an employee but not an executive 
officer, benefits under a tax-qualified retirement plan, non-
discretionary compensation, or loans permitted by Section 13(k) of the 
Act); \12\ (iii) a director who is an immediate family member of an 
individual who is, or who served at any time during the previous three 
years, as an executive officer of the issuer or its parent or 
subsidiary; (iv) a director who is (or has an immediate family member 
who is) a partner, controlling shareholder, or executive officer in any 
organization that received payments from the issuer, or that made 
payments to the issuer, for property or services \13\ exceeding 5% of 
the recipient's consolidated gross revenues for the year or $200,000, 
whichever is greater; \14\ (v) a director who is (or who has an 
immediate family member who is)

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employed as an executive officer of another entity, where, at any time 
\15\ during the past three years, any of the executive officers of the 
issuer serve on the compensation committee of the other entity; and 
(vi) a director who is (or who has an immediate family member who is) a 
current partner of the issuer's outside auditor or who was a partner or 
employee of the issuer's outside auditor, who worked on the issuer's 
audit at any time during the past three years.\16\ A separate CHX rule 
would apply to investment companies.\17\ The proposed amendments would 
also define an immediate family member as a person's spouse, parents, 
children, siblings, mothers and fathers-in-law, sons and daughters-in-
law, brothers and sisters-in-law, and any person who has the same 
residence as the director in question.\18\
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    \12\ The exceptions for compensation for board committee service 
and for loans permitted by Section 13(k) were added by Amendment No. 
2.
    \13\ See Amendment No. 2.
    \14\ The proposed rule would provide exceptions for payments 
arising solely from investments in the issuer's securities and, as 
revised by Amendment No. 2, for payments under non-discretionary 
charitable contribution matching programs.
    \15\ See Amendment No. 2.
    \16\ See Amendment No. 2.
    \17\ See CHX Article XXVIII, proposed Rule 19(p)(3)(G), which 
was added by Amendment No. 2. In the case of an investment company, 
in lieu of paragraphs (A)-(F) of proposed CHX Rule 19(p)(3), 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 independent under the 
proposed rule.
    \18\ See CHX Article XXVIII, proposed Rule 19(p)(2).
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Independent Board and Board Committees

    The proposed amendments would require most issuers to maintain a 
majority of independent directors on their boards, and small business 
issuers would be required to have boards consisting of at least 50% 
independent directors.\19\ However, a controlled company would be 
exempt from these requirements.\20\ Other temporary exceptions would 
apply where a single director ceases to be independent due to 
circumstances outside the person's reasonable control or where an 
issuer fails to meet the independence standard due to a single vacancy 
on the board.\21\ The proposed rule would also require regularly 
convened executive sessions of the independent directors.\22\
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    \19\ See CHX Article XXVIII, proposed Rule 19(a).
    \20\ See CHX Article XXVIII, proposed Rule 19(a)(3)(A). Under 
the definition proposed in CHX Article XXVIII, Rule 19(p)(1), a 
``controlled company'' would mean a company of which more than 50% 
of the voting power is held by an individual, group, or other 
company. See also infra notes 39-41 and accompanying text regarding 
other entities that would be exempt from these requirements.
    \21\ See CHX Article XXVIII, proposed Rule 19(a)(3)(B).
    \22\ A controlled company would be subject to this requirement. 
See Amendment No. 3.
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    Under the proposal, nomination of the issuer's directors would be 
determined, or recommended for board determination, by either a 
majority of independent directors or a nominating committee comprised 
solely of independent directors.\23\ Furthermore, each issuer would be 
required to adopt a formal written charter or board resolution, as 
applicable, addressing the nominations process and any related matters 
as may be required under the federal securities laws.\24\ The 
nominating process set forth in the rule would not need to be followed 
in cases where the right to nominate a director legally belongs to a 
third party.\25\
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    \23\ See CHX Article XXVIII, proposed Rule 19(c). See Amendment 
No. 2, which added the phrase, ``or recommended for board 
determination.''
    \24\ See CHX Article XXVIII, proposed Rule 19(c)(2), which was 
added by Amendment No. 2.
    \25\ Controlled companies and certain other entities would be 
exempt from these requirements. See infra notes 39-41 and 
accompanying text. In addition, the rule would incorporate an 
exception that would permit certain persons to serve on the 
nominating committee if the issuer's board, under exceptional and 
limited circumstances, determines that a person's membership on the 
committee is required by the best interests of the company and its 
shareholders and the board discloses the nature of the relationship 
and the basis for its determination in the next annual meeting proxy 
statement or other applicable annual disclosure filed with the 
Commission following that determination. A nominating committee 
member appointed under these circumstances could not serve longer 
than two years, unless he or she ultimately satisfies the definition 
of an independent director. See CHX Article XXVIII, proposed Rule 
19(c)(3).
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    The proposal would also require that the compensation of the 
issuer's chief executive officer (``CEO'') and other officers be 
determined or recommended to the board for determination by a majority 
of independent directors or by a compensation committee comprised 
solely of independent directors.\26\ An issuer's CEO would not be 
permitted to be present during voting or deliberations regarding his or 
her own compensation.\27\
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    \26\ See CHX Article XXVIII, proposed Rule 19(d). See also 
Amendment No. 2, which added the phrase, ``or recommended to the 
board for determination,'' and made other revisions. Controlled 
companies and certain other entities would be exempt from these 
requirements. See infra notes 39-41 and accompanying text. Also, a 
specific exception would exist to allow certain persons to serve on 
the compensation committee in exceptional and limited circumstances, 
similar to the exception regarding nominating committees discussed 
at supra note 25. See CHX Article XXVIII, proposed Rule 19(d)(3).
    \27\ See proposed CHX Article XXVIII, proposed Rule 19(d)(1), as 
revised by Amendment No. 2. The CEO would be permitted to 
participate in the deliberations relating to the compensation of 
other officers, but would not be allowed to vote. See CHX Article 
XXVIII, proposed Rules 19(d)(2).
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Audit Committee Requirements

    The proposed amendments would expand existing CHX requirements 
relating to audit committee composition and would include new 
requirements relating to that committee's role and authority.\28\ Under 
the proposal, each listed issuer would be required to establish and 
maintain an audit committee of at least three members (two members for 
small business issuers).
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    \28\ See CHX Article XXVIII, proposed Rule 19(b). See infra 
notes 39-41 and accompanying text regarding the applicability to 
certain issuers of the proposed rules discussed in this section.
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    Each audit committee member would continue to be required to meet 
the requirements of Rule 10A-3, as set forth in provisions of the 
proposed rule change that were approved in the Partial Approval 
Order.\29\ In addition, subject to limited exceptions, each member of 
an issuer's audit committee would be required: (i) To be an independent 
director as defined by the proposed new CHX provisions discussed above; 
(ii) not to have participated, at any time during the past three years, 
in the preparation of the financial statements of the issuer or any 
current subsidiary of the issuer; and (iii) to be able to read and 
understand fundamental financial statements, including a company's 
balance sheet, income statement and cash flow statement.\30\ At least 
one member of the audit committee would be required to have accounting 
or related financial management expertise, as the issuer's board of 
directors interprets that qualification in its business judgment.\31\
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    \29\ See CHX Article XXVIII, proposed Rule 19(b)(1).
    \30\ Id. Item (ii) was added by Amendment No. 2.
    \31\ See CHX Article XXVIII, proposed Rule 19(b)(1)(B), added by 
Amendment No. 2. A director who qualifies as a financial expert 
under Item 401(h) of Regulation S-K or Item 401(e) of Regulation S-B 
(or any successor provisions to those items) would be presumed to 
have accounting or related financial management expertise.
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    The proposed amendment also would require each issuer's audit 
committee to certify that it has adopted a formal written charter that 
specifies certain minimum purposes, duties, and responsibilities of the 
committee, including those that are required by Rule 10A-3. Under the 
proposal, the audit committee would be required to review and reassess 
the written charter on an annual basis.\32\
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    \32\ See CHX Article XXVIII, proposed Rule 19(b)(3).
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    Audit committees for investment companies additionally would be 
required 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

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any other provider of accounting related services for the investment 
company, as well as employees of the investment company. This 
responsibility would be required to be addressed in the audit 
committee's charter.

Approval of Related Party Transactions

    The rules, as amended, would require that each issuer conduct an 
appropriate review of all related party transactions on an ongoing 
basis and review potential conflict of interest situations where 
appropriate. Issuers would be permitted to use the company's audit 
committee or another independent body of the board of directors for 
this review.\33\
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    \33\ A provision in the portion of the proposed rule change 
approved in the Partial Approval Order required the audit committee 
to conduct a review of all related party transactions and to review 
potential conflict of interest situations where appropriate. The 
Exchange modified this provision in Amendment No. 2 to permit such 
review to be conducted by another independent body of the board of 
directors. The provision, as amended, would appear as new paragraph 
(o) and be removed from the audit committee section of CHX Rule 19. 
See also infra notes 39-41 and accompanying text.
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Code of Business Conduct and Ethics

    Under the proposed rules, each issuer would be required to adopt a 
code of conduct and ethics that applies to its directors, officers, and 
employees.\34\ The code would be required to comply with the 
definitions of Section 406(c) of the Sarbanes-Oxley Act and the rules 
thereunder and would be required to provide for an enforcement 
mechanism that meets specific requirements.\35\ Waivers of the code for 
directors and officers would need to be approved by the issuer's board 
of directors and be made publicly available.\36\ In addition, the code 
itself would be required to be made publicly available.\37\
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    \34\ See infra notes 39-41 and accompanying text regarding 
entities that would be exempt from this requirement.
    \35\ The enforcement mechanism, added as a requirement by 
Amendment No. 2, would be required to be designed to ensure prompt 
and consistent enforcement of the code, protections for persons 
reporting questionable behavior, clear standards for compliance, and 
a fair process by which to determine violations.
    \36\ For most issuers, waivers would need to be disclosed to 
shareholders in a Form 8-K within five business days. Foreign 
private issuers would be required to disclose waivers in a Form 6-K 
or in the next Form 20-F. See Amendment No. 2.
    \37\ See CHX Article XXVIII, proposed Rule 19(e).
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Governance-Related Certifications

    The proposed amendments would contain a requirement that each 
issuer's CEO certify, on an annual basis, that he or she is not aware 
of any violation by the issuer of any standard set forth in CHX Article 
XXVIII, Rules 19(a)-(e). Furthermore, such CEO would be required to 
promptly notify the Exchange if any executive officer of the issuer 
becomes aware of any material non-compliance by the issuer with those 
standards.\38\
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    \38\ See CHX Article XXVIII, proposed Rule 19(f). See also infra 
notes 39-41 and accompanying text.
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Applicability

    The CHX Governance Standards would apply to all companies listing 
securities on the Exchange, with particular exemptions for controlled 
companies, limited partnerships, companies in bankruptcy, management 
investment companies, and foreign issuers.\39\ Passive business 
organizations (such as royalty trusts) would not be subject to these 
standards, nor would the standards apply to derivatives or special 
purpose securities, if those entities are exempt from the requirements 
of Rule 10A-3 under the Act.\40\ Furthermore, under the proposal, 
foreign issuers would be permitted to comply with their home country 
practices with respect to corporate governance, except to the extent 
that Rule 10A-3 requires compliance with specific audit committee 
requirements.\41\ As further discussed below, to the extent consistent 
with Rule 10A-3, additional specific exemptions would exist for dual 
and multiple listings, where the same or another class of security of 
the company is already listed on another national securities exchange 
or national securities association that has similar governance-related 
requirements.\42\ As already noted, the proposed CHX Governance 
Standards would apply to companies that list securities under Tier I or 
Tier II of the CHX's listing standards.
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    \39\ See CHX Article XXVIII, Rule 19, proposed Interpretations 
and Policies .02 and .03. In Amendment No. 2, the CHX revised these 
proposed exemptions to make them consistent with those approved for 
other self-regulatory organizations (``SROs''). Under the revised 
proposal, for example, closed-end management investment companies 
that are registered under the Investment Company Act of 1940 would 
not be required to comply with sections (a) through (f) of CHX Rule 
19, except that these issuers would be required to meet the 
requirements of Rule 10A-3 under the Act and other specified audit 
committee standards and to notify the Exchange of non-compliance 
with the applicable requirements, among other provisions. See CHX 
Article XXVIII, Rule 19, proposed Interpretation and Policy 
.03(2)(A). Similarly, open-end funds would not be required to comply 
with sections (a) through (f) of CHX Rule 19, except that they would 
be required to comply with the audit committee requirements of Rule 
10A-3 under the Act and to establish complaint procedures for 
employees of third-party service providers and address these 
procedures in the audit committee charter. See CHX Article XXVIII, 
Rule 19, proposed Interpretation and Policy .03(2)(C). The Exchange 
believes that registered management investment companies are already 
subject to significant regulation, and, as a result, should not be 
required to adhere to all of the proposed governance standards. 
However, the Exchange believes that they should be required to meet 
specified requirements. Furthermore, business development companies, 
which are a type of closed-end management investment company defined 
in Section 2(a)(48) of the Investment Company Act of 1940 that are 
not registered under that Act, would be required to comply with all 
of the provisions of CHX Rule 19.
    \40\ See CHX Article XXVIII, Rule 19, proposed Interpretation 
and Policy .03(3).
    \41\ Foreign issuers would be required to provide English 
language disclosure of any significant ways in which their corporate 
governance practices differ from those required for domestic issuers 
under CHX Rule 19. This disclosure could be provided either on the 
issuer's website or in the annual report distributed to shareholders 
in the U.S. If the disclosure is made only on an issuer's website, 
the issuer would be required to note that fact in its annual report 
and provide the web address at which the disclosure may be reviewed. 
See CHX Article XXVIII, Rule 19, proposed Interpretation and Policy 
.03(4), added by Amendment No. 2.
    \42\ See CHX Article XXVIII, Rule 19, proposed Interpretation 
and Policy .04.
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Application of Standards to Issuers With Dual or Multiple Listings

    The proposed rule change would further provide that, if an issuer 
is listed on a national securities exchange or national securities 
association with listing standards substantially similar to the CHX 
Governance Standards, the issuer would not be required to separately 
meet the CHX Governance Standards.\43\ The proposed rule text would 
contain specific criteria that must be considered when determining 
whether another market's governance standards are ``substantially 
similar.'' \44\
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    \43\ See CHX Article XVIII, Rule 19, proposed Interpretation and 
Policy .04. The Exchange has represented that it will have 
surveillance procedures sufficient to confirm that an issuer relying 
on this provision is in compliance with the governance standards of 
the other listing market. Consistent with Rule 10A-3 under the Act, 
the exemption would not apply to the Exchange's requirements 
relating to audit committees or to an issuer's obligations to notify 
the Exchange if there is material non-compliance with the audit 
committee requirements.
    \44\ In Amendment No. 2, the CHX added that, among these 
criteria, the listing standards of the other market must include a 
code of business conduct and ethics that complies with the 
definition of a ``code of ethics'' set out in Section 406(c) of the 
Sarbanes-Oxley Act and the rules thereunder. See CHX Article XVIII, 
Rule 19, proposed Interpretation and Policy .04.
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Schedule for Effectiveness of Proposed Rule Changes

    The CHX proposes that the proposed rule changes to CHX Governance 
Standards that are the subject of this Order become effective in 
accordance with the timetable set forth in CHX Article XXVIII, Rule 19, 
proposed Interpretation and Policy .05, as amended by Amendment No. 
2.\45\ In

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general, following Commission approval of the proposed rule changes, 
these new governance standards would become effective on the earlier of 
the issuer's first annual shareholders meeting after July 1, 2004 or 
January 31, 2005. Foreign private issuers and small business issuers 
would have until July 31, 2005 to comply. If an issuer, however, has a 
board with staggered terms, and a change is required with respect to a 
director whose term does not expire within these periods, the issuer 
would have until its second annual meeting after the date specified 
above, but not later than December 31, 2005, to comply with the 
requirements of section (a) regarding boards of directors. Issuers 
listing on the Exchange in connection with an initial public offering 
would be required to comply with the CHX Governance Standards within 
time frames generally consistent with the exemptions in Rule 10A-3 
under the Act.\46\ Issuers transferring from another marketplace with 
substantially different governance standards generally would be 
required to comply with CHX Governance Standards within one year after 
listing on the CHX.\47\
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    \45\ The audit committee requirements approved in the Partial 
Approval Order, as mandated by Rule 10A-3 under the Act, become 
effective as set forth in Rule 10A-3.
    \46\ Specifically, for each applicable committee that the issuer 
establishes (such as a nominating committee or compensation 
committee), the issuer 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. These issuers would be required to meet the majority 
independent board requirement (50% for small business issuers) 
within one year after listing on the Exchange. It should be noted, 
however, that investment companies are not afforded these exemptions 
under Rule 10A-3.
    \47\ An issuer transferring to the CHX from another market with 
substantially similar governance standards would be required to 
comply with such governance standards at the time the issuer lists 
with the CHX, or within any transition period that was provided by 
the other marketplace.
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Summary of Revisions Made by Amendment Nos. 2 and 3

    Summarized below are the significant revisions of the proposal made 
by Amendment Nos. 2 and 3, most of which have already been noted in the 
discussion above. Amendment No. 2 revised the proposal to:
     Require a listed issuer's board to make an affirmative 
determination of a director's independence, and require the issuer to 
disclose the directors who have been determined to be independent; \48\
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    \48\ See supra note 11.
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     Exclude compensation for board committee service or a loan 
permitted by Section 13(k) of the Act from payments that would preclude 
a finding that a director is independent; \49\
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    \49\ See supra note 12.
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     Exclude non-discretionary charitable contribution matching 
programs from payments that would preclude a finding that a director is 
independent; \50\
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    \50\ See supra note 14.
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     Include certain employment or partnership relationships of 
immediate family members with an issuer's outside auditor that would 
preclude a finding that a director is independent, and clarify the 
eligibility of former partners of an auditor who did not work on the 
audit; \51\
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    \51\ See supra note 16.
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     Add a definition of independent director for registered 
management investment companies; \52\
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    \52\ See supra note 17.
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     Include a requirement that each issuer adopt a formal 
written charter or board resolution, as applicable, addressing the 
nominations process and related matters; \53\
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    \53\ See supra note 24.
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     Preclude a director holding 20% or more of an issuer's 
stock from serving on the nominating committee despite being an officer 
of the issuer; \54\
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    \54\ The proposal initially included a provision that would have 
permitted such a director to serve on the nominating committee under 
certain limited circumstances, despite his or her failure to meet 
the independence standard.
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     Require each member of an issuer's audit committee not to 
have participated, in the past three years, in the preparation of the 
financial statements of the issuer or any current subsidiary, and 
require at least one member of the committee to have financial 
expertise; \55\
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    \55\ See supra notes 30 and 31.
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     Permit an issuer to use the company's audit committee or 
another independent body of the board of directors for the review of 
related party transactions; \56\
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    \56\ See supra note 33.
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     Require an issuer's code of ethics to provide for an 
enforcement mechanism that meets specific requirements and clarify the 
disclosure obligations of the issuer with respect to waivers of the 
code; \57\
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    \57\ See supra notes 35-36.
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     Require foreign issuers to provide English language 
disclosure of significant ways in which their corporate governance 
practices differ from those required for domestic issuers; \58\
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    \58\ See supra note 41.
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     Establish a revised schedule for the proposed rules to 
take effect, as discussed above; \59\ and
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    \59\ See supra notes 45-47 and accompanying text.
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     Set forth in a separate provision the governance 
requirements that are applicable to listed issuers until the provisions 
of the proposed rule change become effective.\60\
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    \60\ See proposed Interpretation .05(5) to CHX Article XXVIII, 
Rule 19.
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    Amendment No. 2 further made additional clarifications to the 
definition of independent director \61\ and to the roles of nominating 
and compensation committees; \62\ revised the provisions concerning the 
applicability of the CHX Governance Standards to management investment 
companies; \63\ and revised the provisions concerning the listing 
criteria for issuers of securities that are dually listed on the CHX 
and other markets, as discussed above.\64\ In general, Amendment No. 2 
incorporated a number of textual revisions to clarify the need of 
issuers to comply with the requirements of Rule 10A-3 under the Act, 
and included alternative methods for issuers that do not file annual 
proxies to make disclosures required under the rules.\65\ Amendment No. 
3 revised the proposal to require the independent directors of a 
controlled company to have regularly scheduled meetings at which only 
independent directors are present.\66\
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    \61\ See supra notes 13, 15, and 16.
    \62\ See supra notes 23 and 26.
    \63\ See supra note 39.
    \64\ See supra notes 43-44 and accompanying text.
    \65\ In Amendment No. 2, the CHX also made changes of a 
technical, non-substantive nature to some of the text approved in 
the Partial Approval Order.
    \66\ See supra note 22.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\67\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act \68\ 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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    \67\ 15 U.S.C. 78f(b). 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).
    \68\ 15 U.S.C. 78f(b)(5).
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    In the Commission's view, the proposed rule change, as amended, 
will foster greater transparency,

[[Page 39993]]

accountability, and objectivity in the oversight by, and decision-
making processes of, the boards and key committees of CHX listed 
issuers. The proposal, as amended, also will promote compliance with 
high standards of conduct by the issuers' directors and management. The 
Commission notes that the CHX has amended its proposal to significantly 
harmonize it with rule changes recently approved by the Commission for 
the NYSE, NASD, and the Amex.\69\ The Commission also believes that the 
proposed rule change, as amended, is consistent with Rule 10A-3 under 
the Act.\70\
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    \69\ See supra note 9.
    \70\ See Partial Approval Order, supra note 5.
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    The CHX has requested that the Commission grant accelerated 
approval to the changes in Amendment Nos. 2 and 3. The Commission 
believes that the revisions proposed in Amendment Nos. 2 and 3 
significantly align the corporate governance standards proposed for 
companies listed on the CHX with the standards approved by the 
Commission for companies listed on other SROs.\71\ The Commission 
believes it is appropriate to accelerate approval of these amendments 
so that the comprehensive set of strengthened corporate governance 
standards for companies listed on the CHX may be implemented on 
generally the same timetable (with some modification of certain 
deadlines) as that for similar standards adopted for issuers listed on 
other SROs. The Commission therefore finds good cause, consistent with 
Section 19(b)(2) of the Act,\72\ to approve Amendment Nos. 2 and 3 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register.
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    \71\ See supra note 9.
    \72\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether 
Amendment Nos. 2 and 3 are consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CHX-2003-19 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CHX-2003-19. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
CHX. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-CHX-
2003-19 and should be submitted on or before July 22, 2004.

V. Conclusion

    For the foregoing reasons, 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.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that the proposed rule change (SR-CHX-2003-19), as amended, 
be, and hereby is, approved, and that Amendment Nos. 2 and 3 to the 
proposed rule change be, and hereby are, approved on an accelerated 
basis.
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    \73\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\74\
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    \74\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14899 Filed 6-30-04; 8:45 am]
BILLING CODE 8010-01-P