[Federal Register Volume 69, Number 131 (Friday, July 9, 2004)]
[Notices]
[Pages 41555-41563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15586]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49955; File No. SR-BSE-2004-23]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. to Amend Chapter XXVII, Section 10 of the Rules of 
the Board of Governors By Adding Requirements Concerning Corporate 
Governance Standards of Exchange-Listed Companies

July 1, 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 June 4, 2004, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the BSE. 
On June 30, 2004, the BSE filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons and is approving 
the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from John Boese, Vice President, Legal and 
Compliance, BSE, to Nancy Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated June 30, 2004 
(``Amendment No. 1''). Amendment No. 1 was a technical amendment and 
is not subject to notice and comment.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE proposes to amend Chapter XXVII, Listed Securities, Section 
10, Corporate Governance, of the Rules of the Board of Governors of the 
Boston Stock Exchange (``BSE Rules'') by adding requirements relating 
to the corporate governance of Exchange-listed companies. The text of 
the proposed rule filing is set forth below. Additions are in italics; 
deletions are in brackets.
* * * * *

Chapter XXVII--Listed Securities--Requirements

    Sec. 1-9. no change
    Sec. 10. Corporate Governance
A. no change
    [B. (Reserved for Future Rules Relating to Corporate Governance 
Standards)]

B.1. Definitions

    (a) For purposes of this Section 10.B., unless the context requires 
otherwise:
    (1) ``Family Member'' means a person's spouse, parents, children 
and siblings, whether by blood, marriage or adoption, or anyone 
residing in such person's home.
    (2) ``Independent director'' means 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 company's board of 
directors, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director. The following persons 
shall not be considered independent:
    (A) a director who is, or at any time during the past three years 
was, employed by the company or by any parent or subsidiary of the 
company;
    (B) a director who accepted or who has a Family Member who accepted 
any payments from the company or any parent or subsidiary of the 
company in excess of $60,000 during the current or any of the past 
three fiscal years, other than the following:
    (i) compensation for board or board committee service;
    (ii) payments arising solely from investments in the company's 
securities;
    (iii) compensation paid to a Family Member who is a non-executive 
employee of the company or a parent or subsidiary of the company;
    (iv) benefits under a tax-qualified retirement plan, or non-
discretionary compensation; or
    (v) loans permitted under Section 13(k) of the Act. Provided, 
however, that audit committee members are subject to additional, more 
stringent requirements under paragraph 2(c) of this Section 10.B.
    (C) a director who is a Family Member of an individual who is, or 
at any time during the past three years was, employed by the company or 
by any parent or subsidiary of the company as an executive officer;
    (D) a director who is, or has a Family Member who is, a partner in, 
or a controlling shareholder or an executive officer of, any 
organization to which the company made, or from which the company 
received, payments for property or services in the current or any of 
the past three fiscal years that exceed 5% of the recipient's 
consolidated gross revenues for that year, or $200,000 ($1 million if 
the listed company is also listed on the New York Stock Exchange), 
whichever is more, other than the following:
    (i) payments arising solely from investments in the company's 
securities; or
    (ii) payments under non-discretionary charitable contribution 
matching programs.
    (E) a director of the listed company who is, or has a Family Member 
who is, employed as an executive officer of another entity where at any 
time during the past three years any of the executive officers of the 
listed company serve on the compensation committee of such other 
entity; or
    (F) a director who is, or has a Family Member who is, a current 
partner of the company's outside auditor, or was a partner or employee 
of the company's outside auditor who worked on the company's audit at 
any time during any of the past three years.
    (G) In the case of an investment company, 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.

Interpretive Material

    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 Section 10.B.1. Section 
10.B.1. also provides a list of certain relationships that preclude a 
board finding of independence. These objective measures provide 
transparency to investors and companies, facilitate uniform application 
of the rules, and ease administration. Because the Exchange 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

[[Page 41556]]

there are additional, more stringent requirements that apply to 
directors serving on audit committees, as specified in Section 10.B.2 
(c).
    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 Section 
10.B.1(a)(1), 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 the Exchange 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, the Exchange 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 Section 10.B.1(a)(2)(D), which looks to whether the 
payment exceeds the greater of 5% of the recipients gross revenues or 
$200,000; however, if the firm is a sole proprietorship, Section 
10.B.1(a)(2)(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.
    2. Qualitative Listing Requirements for all Exchange Listed 
Securities.
    The Exchange shall review the issuer's past corporate governance 
activities. This review may include activities taking place while the 
issuer is listed on the Exchange or an exchange that imposes corporate 
governance requirements, as well as activities taking place after a 
formerly listed issuer is no longer listed on the BSE or an exchange 
that imposes corporate governance requirements. Based on such review, 
the BSE may take any appropriate action, including placing of 
restrictions on or additional requirements for listing, or the denial 
of listing of a security if the Exchange determines that there have 
been violations or evasions of such corporate governance standards. 
Such determinations shall be made on a case-by-case basis as necessary 
to protect investors and the public interest.
    (a) Applicability.
    (1) Foreign Private Issuers. The Exchange shall have the ability to 
provide exemptions from this Section 10.B. to a foreign private issuer 
when provisions of this Section are contrary to a law, rule or 
regulation of any public authority exercising jurisdiction over such 
issuer or contrary to generally accepted business practices in the 
issuer's country of domicile, except to the extent that such exemptions 
would be contrary to the federal securities laws, including without 
limitation those rules required by Section 10A(m) of the Act and Rule 
10A-3 thereunder. A foreign issuer that receives an exemption under 
this subsection shall disclose in its annual reports filed with the 
Commission each requirement from which it is exempted and describe the 
home country practice, if any, followed by the issuer in lieu of such 
requirements. In addition, a foreign issuer making its initial public 
offering or first U.S. listing on the BSE shall disclose any such 
exemptions in its registration statement.
    (2) Management Investment Companies. Management investment 
companies (including business development companies) are subject to all 
the requirements of this Section 10.B., except that management 
investment companies registered under the Investment Company Act of 
1940 are exempt from the requirements of Section 10.B.2. (b) and (f).
    (3) Asset-backed Issuers and Other Passive Issuers. The following 
are exempt from the requirements of Section 10.B.2(b), (c) and (f): (a) 
asset-backed issuers; and (b) issuers, such as unit investment trusts, 
that are organized as trusts or other unincorporated associations that 
do not have a board of directors or persons acting in a similar 
capacity and whose activities are limited to passively owning or 
holding (as well as administering and distributing amounts in respect 
of) securities, rights, collateral or other assets on behalf of or for 
the benefit of the holders of the listed securities.
    (4) Cooperatives. Cooperative entities, such as agricultural 
cooperatives, that are structured to comply with relevant state law and 
federal tax law and that do not have a publicly traded class of common 
stock are exempt from Section 10. B. 2 (b). However, such entities must 
comply with all federal securities laws, including without limitation 
those rules required by Section 10A(m) of the Act and Rule 10A-3 
thereunder.
    (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, the requirements 
of this Section 10.B. are effective as set out in this subsection. 
During the transition period between the date of Commission approval of 
this Section 10.B and the effective date of Section 10.B.,

[[Page 41557]]

companies that have not brought themselves into compliance with Section 
10.B. must continue to comply with Section 10.A.
    The provisions of Section 10.B.1 and Section 10.B.2(b), (c) and (e) 
regarding director independence, independent committees, and 
notification of noncompliance shall be implemented by the following 
dates:
    July 31, 2005 for foreign private issuers and small business 
issuers (as defined in Rule 12b-2); and
    For all other listed issuers, by the earlier of: (1) the listed 
issuer's first annual shareholders meeting after July 31, 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 transferring from other listed 
markets that do not have a substantially similar requirement shall be 
afforded one year from the date of listing on the Exchange. 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 the Exchange shall be effective for new 
listings and filings made after July 31, 2004.
    Section 10.B.2(f), requiring issuers to adopt a code of conduct, 
shall be effective July 31, 2004.
    Section 10.B.2(d), requiring audit committee approval of related 
party transactions, shall be effective July 31, 2004.
    The remainder of Section 10.B.2(a) is effective July 31, 2004.

(b) Independent Directors

    (1) A majority of the board of directors must be comprised of 
independent directors as defined in this Section 10 (subject to the 
exception set forth in paragraph (g) with respect to small business 
issuers). The company must disclose in its annual proxy (or, if the 
issuer does not file a proxy, in its Form 10-K or 20-F) those directors 
that the board of directors has determined to be independent. If an 
issuer fails to comply with this requirement due to one vacancy, or one 
director ceases to be independent due to circumstances beyond their 
reasonable control, the issuer shall regain compliance with the 
requirement by the earlier of its next annual shareholders meeting or 
one year from the occurrence of the event that caused the failure to 
comply with this requirement. An issuer relying on this provision shall 
provide notice to the Exchange immediately upon learning of the event 
or circumstance that caused the non-compliance.
    (2) Independent directors must have regularly scheduled meetings at 
which only independent directors are present (``executive sessions'').
    (3) Compensation of Officers.
    (A) Compensation of the chief executive officer of the company must 
be determined, or recommended to the Board for determination, either 
by:
    (i) a majority of the independent directors, or
    (ii) a compensation committee comprised solely of independent 
directors.
    The chief executive officer may not be present during voting or 
deliberations.
    (B) Compensation of all other executive officers must be 
determined, or recommended to the Board for determination, either by:
    (i) a majority of the independent directors, or
    (ii) a compensation committee comprised solely of independent 
directors.
    (C) Notwithstanding paragraphs (3)(A)(ii) and (3)(B)(ii) above, if 
the compensation committee is comprised of at least three members, one 
director who is not independent and is not a current officer or 
employee or a Family Member of an officer or employee, may be appointed 
to the compensation committee if the board, under exceptional and 
limited circumstances, determines that such individual's membership on 
the committee is required by the best interests of the company and its 
shareholders, and the board discloses, in the proxy statement for the 
next annual meeting subsequent to such determination (or, if the issuer 
does not file a proxy, in its Form 10-K or 20-F), the nature of the 
relationship and the reasons for the determination. A member appointed 
under this exception may not serve longer than two years.
    (4) Nomination of Directors.
    (A) Director nominees must either be selected, or recommended for 
the Board's selection, either by:
    (i) a majority of the independent directors, or
    (ii) a nominations committee comprised solely of independent 
directors.
    (B) Each issuer must certify that it has adopted a formal written 
charter or board resolution, as applicable, addressing the nominations 
process and such related matters as may be required under the federal 
securities laws.
    (C) Notwithstanding paragraph (4)(A)(ii) above, if the nominations 
committee is comprised of at least three members, one director, who is 
not independent and is not a current officer or employee or a Family 
Member of an officer or employee, may be appointed to the nominations 
committee if the board, under exceptional and limited circumstances, 
determines that such individual's membership on the committee is 
required by the best interests of the company and its shareholders, and 
the board discloses, in the proxy statement for next annual meeting 
subsequent to such determination (or, if the issuer does not file a 
proxy, in its Form 10-K or 20-F), the nature of the relationship and 
the reasons for the determination. A member appointed under this 
exception may not serve longer than two years.
    (D) Independent director oversight of director nominations shall 
not apply in cases where the right to nominate a director legally 
belongs to a third party. However, this does not relieve a company's 
obligation to comply with

[[Page 41558]]

the committee composition requirements under Section 10.B.2 (b) and 
(c).
    (E) This Section 10.B.2 (b)(4) is not applicable to a company if 
the company is subject to a binding obligation that requires a director 
nomination structure inconsistent with this rule and such obligation 
pre-dates the approval date of this rule.
    (5) A Controlled Company is exempt from the requirements of this 
Section 10.B.2 (b), except for the requirements of subsection (b)(2) 
which pertain to executive sessions of independent directors. A 
Controlled Company is a company of which more than 50% of the voting 
power is held by an individual, a group or another company. A 
Controlled Company relying upon this exemption must disclose in its 
annual meeting proxy statement (or, if the issuer does not file a 
proxy, in its Form 10-K or 20-F) that it is a Controlled Company and 
the basis for that determination.

(c) Audit Committee

(1) Audit Committee Charter

    Each issuer must certify that it has adopted a formal written audit 
committee charter and that the audit committee has reviewed and 
reassessed the adequacy of the formal written charter on an annual 
basis. The charter must specify:
    (A) the scope of the audit committee's responsibilities, and how it 
carries out those responsibilities, including structure, processes, and 
membership requirements;
    (B) the audit committee's responsibility for ensuring its receipt 
from the outside auditors of a formal written statement delineating all 
relationships between the auditor and the company, consistent with 
Independence Standards Board Standard 1, and the audit committee's 
responsibility for actively engaging in a dialogue with the auditor 
with respect to any disclosed relationships or services that may impact 
the objectivity and independence of the auditor and for taking, or 
recommending that the full board take, appropriate action to oversee 
the independence of the outside auditor; and
    (C) the committee's purpose of overseeing the accounting and 
financial reporting processes of the issuer and the audits of the 
financial statements of the issuer;
    (D) the specific audit committee responsibilities and authority set 
forth in Section 10.B.2(c)(3).

(2) Audit Committee Composition

    (A) Each issuer must have, and certify that it has and will 
continue to have, an audit committee of at least three members (subject 
to the exception set forth in paragraph (g) with respect to small 
business issuers), each of whom must: (i) Be independent; (ii) meet the 
criteria for independence set forth in Rule 10A-3(b)(1) under the Act 
(subject to the exemptions provided in Rule 10A-3(c)); (iii) not have 
participated in the preparation of the financial statements of the 
company or any current subsidiary of the company at any time during the 
past three years; and (iv) be able to read and understand fundamental 
financial statements, including a company's balance sheet, income 
statement, and cash flow statement. Additionally, each issuer must 
certify that it has, and will continue to have, at least one member of 
the audit committee who has past employment experience in finance or 
accounting, requisite professional certification in accounting, or any 
other comparable experience or background which results in the 
individual's financial sophistication, including being or having been a 
chief executive officer, chief financial officer or other senior 
officer with financial oversight responsibilities.
    (B) Notwithstanding paragraph (2)(A)(i), one director who: (i) Is 
not independent; (ii) meets the criteria set forth in Section 10A(m)(3) 
under the Act and the rules thereunder; and (iii) is not a current 
officer or employee or a Family Member of such officer or employee, may 
be appointed to the audit committee, if the board, under exceptional 
and limited circumstances, determines that membership on the committee 
by the individual is required by the best interests of the company and 
its shareholders, and the board discloses, in the next annual proxy 
statement subsequent to such determination (or, if the issuer does not 
file a proxy, in its Form 10-K or 20-F), the nature of the relationship 
and the reasons for that determination. A member appointed under this 
exception may not serve longer than two years and may not chair the 
audit committee.

(3) Audit Committee Responsibilities and Authority

    The audit committee must have the specific audit committee 
responsibilities and authority necessary to comply with Rule 10A-
3(b)(2), (3), (4) and (5) under the Act (subject to the exemptions 
provided in Rule 10A-3(c)), concerning responsibilities relating to: 
(i) Registered public accounting firms, (ii) complaints relating to 
accounting, internal accounting controls or auditing matters, (iii) 
authority to engage advisors, and (iv) funding as determined by the 
audit committee. 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.

(4) Cure Periods

    (A) If an issuer fails to comply with the audit committee 
composition requirement under Rule 10A-3(b)(1) under the Act and 
Section 10.B.2 (c)(2) because an audit committee member ceases to be 
independent for reasons outside the member's reasonable control, the 
audit committee member may remain on the audit committee until the 
earlier of its next annual shareholders meeting or one year from the 
occurrence of the event that caused the failure to comply with this 
requirement. An issuer relying on this provision must provide notice to 
the Exchange immediately upon learning of the event or circumstance 
that caused the non-compliance.
    (B) If an issuer fails to comply with the audit committee 
composition requirement under Section 10.B.2 (c)(2)(A) due to one 
vacancy on the audit committee, and the cure period in paragraph (A) is 
not otherwise being relied upon for another member, the issuer will 
have until the earlier of the next annual shareholders meeting or one 
year from the occurrence of the event that caused the failure to comply 
with this requirement. An issuer relying on this provision must provide 
notice to the Exchange immediately upon learning of the event or 
circumstance that caused the non-compliance.

(d) Conflicts of Interest

    Each issuer shall conduct an appropriate review of all related 
party transactions for potential conflict of interest situations on an 
ongoing basis and all such transactions must be approved by the 
company's audit committee or another independent body of the board of 
directors. For purposes of this rule, the term ``related party 
transaction'' shall refer to transactions required to be disclosed 
pursuant to SEC Regulation S-K, Item 404.

[[Page 41559]]

(e) Notification of Material Noncompliance

    An issuer must provide the Exchange with prompt notification after 
an executive officer of the issuer becomes aware of any material 
noncompliance by the issuer with the requirements of Section 10.B.2.

(f) 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 such 
waivers in a Form 8-K within five business days. Foreign private 
issuers shall disclose such waivers either in a Form 6-K or in the next 
Form 20-F.
    (g) Small Business Issuers `` Small business issuers (as defined in 
Rule 12b[dash]2 under the Securities Exchange Act of 1934) are subject 
to all requirements specified in this Section, except that such issuers 
are only required to maintain a Board of Directors comprised of at 
least 50% independent directors, and an Audit Committee of at least two 
members, comprised solely of independent directors who also meet the 
requirements of Rule 10A-3 under the Securities Exchange Act of 1934.
* * * * *

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

    In its filing with the Commission, the Exchange 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 III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.\4\
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    \4\ The Commission has revised and clarified some aspects of 
these statements with the Exchange's consent. Telephone conversation 
between John Boese, Vice President, Legal and Compliance, BSE, and 
Ira Brandriss, Assistant Director, Division, Commission, on June 23, 
2004.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The BSE proposes to amend Chapter XXVII, Listed Securities, Section 
10, Corporate Governance, of the BSE Rules by adding requirements 
relating to the corporate governance of Exchange-listed companies. 
Under the proposal, a majority of the directors on the board of a BSE-
listed company would be required to be independent directors,\5\ 
defined in the proposed rule as ``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 company's board of 
directors, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director.'' The Exchange also 
proposes to require each listed company to disclose in its annual proxy 
(or, if the issuer does not file a proxy, in its Form 10-K or 20-F) 
those directors that the board has determined to be independent.
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    \5\ See infra note and accompanying text regarding small 
business issuers. See also proposed BSE Rule 10.B.2(a) regarding 
entities excepted from these requirements.
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    Within the proposed rule, the Exchange proposes to provide a list 
of relationships that would preclude a board finding of independence. 
First, a director who is, or at any time during the past three years 
was, employed by the company or by any parent or subsidiary of the 
company, would not be deemed independent. Second, a director who 
accepts or has a family member (as defined within the proposed rule) 
who accepts any payments from the company, or any parent or subsidiary 
of the company, in excess of $60,000 during the current fiscal year or 
any of the past three fiscal years, other than certain permitted 
payments, would not be deemed independent. Permitted payments would 
include compensation for board or board committee service; payments 
arising solely from investments in the company's securities; 
compensation paid to a family member who is a non-executive employee of 
the company or a parent or subsidiary of the company; benefits under a 
tax-qualified retirement plan, or non-discretionary compensation; and 
loans permitted under Section 13(k) of the Act.
    Furthermore, the proposed rule would set forth that a director who 
is a family member of an individual who is, or at any time during the 
past three years was, employed by the company or by any parent or 
subsidiary of the company as an executive officer, would not be deemed 
independent. Also, a director who is, or has a family member who is, a 
partner in, or a controlling shareholder or an executive officer of, 
any organization to which the company made, or from which the company 
received, payments for property or services in the current or any of 
the past three fiscal years that exceed 5% of the recipient's 
consolidated gross revenues for that year, or $200,000 ($1 million if 
the listed company is also listed on the New York Stock Exchange), 
whichever is more, other than certain permitted payments, would not be 
deemed independent. Permitted payments would include payments arising 
solely from investments in the company's securities, and payments under 
non-discretionary charitable contribution matching programs.
    Moreover, a director of the listed company who is, or has a family 
member who is, employed as an executive officer of another entity where 
at any time during the past three years any of the executive officers 
of the listed company served on the compensation committee of such 
other entity, would not be deemed independent. Also, a director who is, 
or has a family member who is, a current partner of the company's 
outside auditor, or was a partner or employee of the company's outside 
auditor, and worked on the company's audit, at any time during the past 
three years, would not be deemed independent. Finally, the Exchange 
proposes that, in the case of an investment company, a director would 
not be considered independent if the director is an ``interested 
person'' of the company as defined in Section 2(a)(19) of the 
Investment Company Act, other than in his or her capacity as a member 
of the board of directors or any board committee. This provision would 
be in lieu of the other tests for independence specified in the rule.
    The Exchange further proposes to require the compensation of the 
chief executive officer of a listed company to be determined or 
recommended to the board for determination either by a majority of the 
independent directors, or by a compensation committee comprised solely 
of independent directors.\6\ In addition, the compensation of all other 
officers would be required to be determined or recommended to the board 
for determination either by a majority of the independent directors, or 
a

[[Page 41560]]

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

    \6\ See proposed BSE Rule 10.B.2(a) regarding entities excepted 
from the requirements relating to compensation.
---------------------------------------------------------------------------

    The Exchange also proposes to require director nominees to either 
be selected or recommended for the board's selection either by a 
majority of independent directors, or by a nominations committee 
comprised solely of independent directors.\7\ If the nominations 
committee is comprised of at least three members, one director, who is 
not independent and is not a current officer or employee or a family 
member of such person, would be permitted to be appointed to the 
committee if the board, under exceptional and limited circumstances, 
determines that such individual's membership on the committee is 
required by the best interests of the company and its shareholders, and 
the board discloses, in the next annual meeting proxy statement 
subsequent to such determination (or, if the issuer does not file a 
proxy, in its Form 10-K or 20-F), the nature of the relationship and 
the reasons for the determination. A member appointed under such 
exception would not be permitted to serve longer than two years.
---------------------------------------------------------------------------

    \7\ See id. regarding entities that would be excepted from the 
requirements relating to nominations.
---------------------------------------------------------------------------

    Further, the Exchange proposes to require each issuer to certify 
that it has adopted a formal written charter or board resolution, as 
applicable, addressing the nominations process and such related matters 
as may be required under the federal securities laws. The BSE also 
proposes that the nomination provision would not apply in cases where 
either the right to nominate a director legally belongs to a third 
party, or the company is subject to a binding obligation that requires 
a director nomination structure inconsistent with this provision, and 
such obligation pre-dates the date the provision is approved.
    Moreover, the Exchange proposes generally to exempt controlled 
companies from the requirement to have a majority of independent 
directors and from the compensation and nomination committee 
requirements discussed above. However, the independent directors would 
still be required to have regularly scheduled meetings at which only 
independent directors are present. A controlled company would be 
defined as a company of which more than 50% of the voting power is held 
by an individual, a group, or another company. A company relying upon 
the exemption would be required to disclose in its annual proxy 
statement (or, if the issuer does not file a proxy, in its Form 10-K or 
20-F) that it is a controlled company and the basis for that 
determination.
    In its proposed rules, the BSE would retain the requirement, set 
forth in Chapter XXVII, Section 10.A of the BSE Rules, to establish an 
independent audit committee that complies with the standards required 
by Rule 10A-3 under the Act. The proposal would further require each 
issuer to certify that it has adopted a formal audit committee charter 
with specified responsibilities and authority, and that the audit 
committee has reviewed and reassessed the adequacy of the charter on an 
annual basis. The proposal also would require that each listed issuer 
have, and certify that it has, an audit committee composed of at least 
three members,\8\ each of whom would be required to: (1) Be independent 
as defined in the BSE's rules; (2) meet the criteria for independence 
set forth in Rule 10A-3 under the Act (subject to the exceptions 
provided in Rule 10A-3(c)); and (3) not have participated in the 
preparation of the financial statements of the company or any current 
subsidiary of the company at any time during the past three years, in 
addition to satisfying a requirement that the member be able to read 
and understand fundamental financial statements, including a company's 
balance sheet, income statement, and cash flow statement. In addition, 
the Exchange would require that at least one member of the audit 
committee have past employment experience in finance or accounting, 
requisite professional certification in accounting, or any other 
comparable experience or background which results in the individual's 
financial sophistication, including being or having been a chief 
executive officer, chief financial officer or other senior officer with 
financial oversight responsibilities.
---------------------------------------------------------------------------

    \8\ See infra note, regarding small business issuers.
---------------------------------------------------------------------------

    One director who is not independent and meets the criteria set 
forth in Section 10A(m)(3) of the Act and the rules thereunder, and is 
not a current officer or employee of the company or a family member of 
such person, would be able to be appointed to the audit committee if 
the board, under exceptional and limited circumstances, determines that 
membership on the committee by the individual is required by the best 
interests of the company and its shareholders, and the board discloses, 
in the next annual proxy statement subsequent to such determination 
(or, if the issuer does not file a proxy, in its Form 10-K or 20-F), 
the nature of the relationship and the reasons for that determination. 
A member appointed under this exception would not be permitted to serve 
longer than two years and would not be permitted to chair the audit 
committee.
    Furthermore, the BSE proposes to add a cure period provision, as 
follows: (1) if a listed issuer fails to comply with the audit 
committee composition requirement under Rule 10A-3 under the Act and 
the BSE Rule 10.B.2(c)(2) because an audit committee member ceases to 
be independent for reasons outside the member's reasonable control, the 
audit committee member could remain on the committee until the earlier 
of the issuer's next annual shareholders meeting or one year from the 
occurrence of the event that caused the failure to comply with the 
requirement; and (2) if an issuer fails to comply with the audit 
committee composition requirement of BSE Rule 10.B.2(c)(2)(A) due to 
one vacancy on the audit committee, and the aforementioned cure period 
is not otherwise being relied upon for another audit committee member, 
the issuer would have until the earlier of the next annual shareholders 
meeting or one year from the occurrence of the event that caused the 
failure to comply with this requirement. An issuer relying on either of 
these provisions would be required to provide notice to the Exchange 
immediately upon learning of the event or circumstance that caused the 
non-compliance.
    The proposal would also include, among the specified 
responsibilities of audit committees, a requirement that audit 
committees of investment companies must establish procedures for the 
confidential, anonymous submission of concerns regarding questionable 
accounting or auditing matters by employees of the investment adviser, 
administrator, principal underwriter, or any other provider of

[[Page 41561]]

accounting related services for the investment company, as well as 
employees of the investment company.
    The Exchange further proposes to require that an issuer provide the 
Exchange with prompt notification after an executive officer of the 
issuer becomes aware of any material noncompliance by the issuer with 
the requirements of the BSE Rules relating to corporate governance.
    The Exchange also proposes to require each listed company to adopt 
a code of conduct applicable to all directors, officers, and employees, 
and to make such code publicly available.\9\ The code of conduct would 
be required to comply with the definition of a ``code of ethics'' set 
forth in Section 406(c) of the Sarbanes-Oxley Act and any regulations 
thereunder. In addition, the code would have to provide for an 
enforcement mechanism, which the Exchange states, would need to ensure 
prompt and consistent enforcement of the code, protection for persons 
reporting questionable behavior, clear and objective standards for 
compliance, and a fair process by which to determine violations. 
Moreover, any waivers of the code for directors or executive officers 
would have to be approved by the board and disclosed in a Form 8-K 
within five days for domestic issuers, or in a Form 6-K or the next 
Form 20-F for foreign private issuers.
---------------------------------------------------------------------------

    \9\ See proposed BSE Rule 10.B.2(a) regarding entities excepted 
from these requirements.
---------------------------------------------------------------------------

    Furthermore, the BSE proposes to specify that each issuer shall 
conduct an appropriate review of all related party transactions for 
potential conflict of interest situations on an ongoing basis. All such 
transactions would be required to be approved by the listed company's 
audit committee or another independent body of the board of directors. 
For purposes of the rule, ``related party transactions'' would refer to 
transactions required to be disclosed pursuant to SEC Regulation S-K, 
Item 404.
    The proposal would also provide that small business issuers are 
subject to all the proposed new requirements, except that such issuers 
would only be required to maintain a board of directors comprised of at 
least 50% independent directors, and an audit committee of at least two 
members, comprised solely of independent directors who also meet the 
requirements of Rule 10A-3 under the Act.\10\
---------------------------------------------------------------------------

    \10\ See proposed BSE Rule 10.B.2(g).
---------------------------------------------------------------------------

    The BSE also proposes to provide that the Exchange would have the 
ability to grant exemptions to a foreign private issuer from the 
corporate governance standards when the provisions of these standards 
are contrary to a law, rule, or regulation of any public authority 
exercising jurisdiction over such issuer or are contrary to generally 
accepted business practices in the issuer's country of domicile, except 
to the extent that such exemptions would be contrary to the federal 
securities laws, including Section 10A(m) of the Act and Rule 10A-3 
thereunder. The BSE also proposes to provide that a foreign issuer that 
receives an exemption from any of the corporate governance requirements 
would be required to disclose in its annual reports filed with the 
Commission each requirement from which it is exempted and to describe 
the home country practice, if any, followed by the issuer in lieu of 
these requirements. In addition, a foreign issuer making its initial 
public offering or first U.S. listing on the BSE would be required to 
disclose any such exemptions in its registration statement.
    In addition, the Exchange proposes that management investment 
companies (including business development companies) would be subject 
to all of the requirements of the BSE Rules, except that management 
investment companies registered under the Investment Company Act would 
be exempt from the requirements which pertain to the number of 
independent directors on the board and the requirement that they meet 
in executive sessions, the role of independent directors in determining 
compensation of officers and nomination of directors, and codes of 
conduct. The Exchange proposes these exemptions in light of the fact 
that registered management investment companies are already subject to 
a pervasive system of federal regulation.
    Finally, the Exchange proposes that cooperative entities, such as 
agricultural cooperatives that are structured to comply with relevant 
state law and federal tax law and that do not have a publicly traded 
class of common stock, would be exempt from the requirements of the BSE 
Rules regarding the number of independent directors on the board and 
the role of independent directors in determining compensation of 
officers and nomination of directors. However, such entities would be 
required to comply with all federal securities laws, including Section 
10A(m) of the Act and Rule 10A-3 thereunder.
    The Exchange proposes to establish the deadlines for compliance as 
listed below. During the transition period between the date of approval 
of the rule filing by the Commission and the deadline indicated for 
each rule change, companies that have not brought themselves into 
compliance with the new rules would be required to comply with the 
previously existing rules, as applicable.
    Companies would be required to be in compliance with the new rules 
by the following dates:
    The provisions regarding director independence, independent 
committees, and notification of noncompliance would be required to be 
implemented by July 31, 2005, for foreign private issuers and small 
business issuers; and for all other listed issuers, by the earlier of: 
(1) The listed issuer's first annual shareholders meeting after July 
31, 2004; or (2) October 31, 2004.
    In the case of an issuer with a staggered board, with the exception 
of the audit committee requirements, the issuer would have until its 
second annual meeting after January 15, 2004, but not later than 
December 31, 2005, to implement all new requirements relating to board 
composition, if the issuer would be required to change a director who 
would not normally stand for election at an earlier annual meeting. 
Such issuers would be required to comply with the audit committee 
requirements pursuant to the implementation schedule noted above.
    Issuers that have listed or will be listed in conjunction with 
their initial public offering would be afforded exemptions from all 
board composition requirements consistent with the exemptions afforded 
in Rule 10A-3(b)(1)(iv)(A) under the Act. That is, for each committee 
that the company adopts, the company would be required to have one 
independent member at the time of listing, a majority of independent 
members within 90 days of listing, and all independent members within 
one year. However, the rule would note that investment companies would 
not be afforded the aforementioned exemptions in Rule 10A-3 of the Act. 
Issuers could choose not to adopt a compensation or nomination 
committee and could instead rely upon a majority of the independent 
directors to discharge responsibilities under the rules. These issuers 
would be required to meet the majority independent board requirement 
within one year of listing.
    Companies transferring from other markets with a substantially 
similar requirement would be afforded the balance of any grace period 
afforded by the other market. Companies transferring from other listed 
markets that do not have a substantially similar requirement would be 
afforded one year from the date of listing on the Exchange. The rule 
would stipulate that this

[[Page 41562]]

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 would be effective by July 31, 2005. However, the 
requirement that a foreign issuer disclose the receipt of a corporate 
governance exemption from the Exchange would apply to new listings and 
filings made after July 31, 2004.
    Compliance with the rules requiring issuers to adopt a code of 
conduct would be effective by July 31, 2004. The rules requiring audit 
committee approval of related party transactions would be effective on 
July 31, 2004. The remainder of the proposed rules would be effective 
on July 31, 2004.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \11\ in general, and furthers the objectives of 
Section 6(b)(5)\12\ in particular, in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, and, in general, 
protect investors and the public interest.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is 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); or
     Send an e-mail to [email protected]. Please include 
File Number SR-BSE-2004-23 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-BSE-2004-23. 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). 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 
BSE. 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-BSE-
2004-23 and should be submitted on or before July 30, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \14\ 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.
---------------------------------------------------------------------------

    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In the Commission's view, the proposed rule change will foster 
greater transparency, accountability, and objectivity in the oversight 
by, and decision-making processes of, the boards and key committees of 
BSE-listed issuers. The proposal also will promote compliance with high 
standards of conduct by the issuers' directors and management. The 
Commission notes that the BSE has designed its proposal to harmonize it 
with rule changes recently approved by the Commission for other self-
regulatory organizations (``SROs'').\15\
---------------------------------------------------------------------------

    \15\ See, e.g., Securities Exchange Act Release No. 48745 
(November 4, 2003), 68 FR 64154 (November 12, 2003) (approving 
changes to the corporate governance listing standards of the Nasdaq 
Stock Market, Inc. and the New York Stock Exchange, Inc.).
---------------------------------------------------------------------------

    The BSE has requested that the Commission grant accelerated 
approval to the proposed rule change. The Commission believes that the 
revisions proposed by the Exchange will significantly align the 
corporate governance standards proposed for companies listed on the BSE 
with the standards approved by the Commission for companies listed on 
other SROs. The Commission believes it is appropriate to accelerate 
approval of the proposed rule change so that the comprehensive set of 
strengthened corporate governance standards for companies listed on the 
BSE 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,\16\ to 
approve the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change 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,\17\ that the proposed rule change (SR-BSE-2004-23) be, and hereby 
is, approved on an accelerated basis.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2).


[[Page 41563]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15586 Filed 7-8-04; 8:45 am]
BILLING CODE 8010-01-P