[Federal Register Volume 69, Number 135 (Thursday, July 15, 2004)]
[Notices]
[Pages 42476-42486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16052]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49995; File No. SR-CBOE-2004-28]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 thereto by the Chicago Board Options Exchange, 
Incorporated, Relating to Enhanced Corporate Governance Requirements 
for Listed Companies

July 9, 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 May 6, 2004, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the CBOE. On June 24, 2004, and July 9, 2004, the CBOE filed Amendment 
Nos. 1 \3\ and 2,\4\ respectively, to the proposed rule change. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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 David Doherty, Attorney, Legal Division, 
CBOE, to Ira Brandriss, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated June 23, 2004 
(``Amendment No. 1''). The changes proposed in Amendment No. 1 have 
been incorporated into the proposal as set forth below.
    \4\ See letter from David Doherty, Attorney, Legal Division, 
CBOE, to Cyndi N. Rodriguez, Special Counsel, Division, Commission, 
dated July 9, 2004 (``Amendment No. 2''). Amendment No. 2 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 CBOE proposes to amend its non-option listing standards to 
enhance the Exchange's corporate governance requirements applicable to 
listed companies. The text of the proposed rule filing, as amended, is 
set forth below. Additions are in italics; deletions are in brackets.
* * * * *

Chicago Board Options Exchange, Incorporated

Rules
* * * * *

Chapter XXXI

* * * * *

Approval of Securities for Original Listing

* * * * *

Rule 31.7 Securities of Foreign Issuers

    (1) No change.
    (2) The Exchange will consider the law, and generally accepted 
commercial and business practice of the [applicant's] foreign issuer's 
domicile in evaluating (A) the election and composition of its Board of 
Directors, to the extent such law, and generally accepted commercial 
and business practice with respect to the election and composition of 
its Board of Directors is consistent with the federal securities laws, 
including, but not limited to, Exchange Act Rule 10A-3 [of the 
Securities Exchange Act of 1934, as amended], (B) shareholder approval 
and quorum requirements for meetings, and (C) the issuance of quarterly 
earnings statements. A foreign issuer that receives an exemption under 
this Rule 31.7(2) shall disclose in its annual reports filed with the 
Securities and Exchange Commission each requirement from which it is 
exempted and describe the practice of the foreign issuer's domicile, if 
any, followed by the issuer in lieu of such requirements. In addition, 
a foreign issuer making its initial public offering or first United 
States listing on the Exchange shall disclose any such exemptions in 
its registration statement.
    (3)-(5) No change.

* * * Interpretations and Policies

    01. A foreign private issuer listed on the Exchange may obtain 
exemptions from the corporate governance requirements described in Rule 
31.7(2) that are consistent with the federal securities laws, 
including, but not limited to, Exchange Act Rule 10A-3, if such 
requirements would require the issuer to do anything contrary to the 
law, and generally accepted commercial and business practice of the 
foreign issuer's domicile. Issuers may request exemptions under this 
rule by submitting a letter from their home country counsel briefly 
describing the law, and generally accepted commercial and business 
practice of the home country. In the interest of transparency, the rule 
requires a foreign issuer to disclose the receipt of a corporate 
governance exemption in the issuer's annual filings with the Securities 
and Exchange Commission (typically Form 20-F or 40-F) and at the time 
of the issuer's original listing in the United States, if that listing 
is on the Exchange, in its registration statement (typically Form F-1, 
20-F, or 40-F). The disclosure should include a brief statement of what 
alternative measures, if any, the issuer has taken in lieu of the 
corporate governance requirement(s) from which it was exempted. For 
example, the issuer might state that it complies with the relevant 
standards of its domicile.
* * * * *

Rule 31.9 Conflicts of Interest

    Applicants will be asked to eliminate material conflicts of 
interest between officers, directors or principal shareholders and the 
applicant issuer prior to approval of the listing. Each issuer shall 
conduct an appropriate review of all related party transactions for 
potential conflict of interest situations on an ongoing basis and 
[shall use] all such transactions must be approved by the company's 
audit committee or [a comparable] another independent body of the board 
of directors [to review potential conflicts of interest situations 
where appropriate]. 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.
* * * * *

Rule 31.10 Corporate Governance [Independent Directors]

[The Exchange requires an issuer to have at least two independent 
directors. For purposes of this section, ``independent director'' shall 
mean a person other than an officer or employee of the company or its 
subsidiaries or any other individual having a relationship which, in 
the opinion of the board of directors, would interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director.]


[[Page 42477]]


    (a) Composition of Board of Directors
    (1) A majority of the board of directors of an issuer must be 
comprised of independent directors. 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 under Rule 31.10(h)(2). If an issuer fails to comply 
with this requirement due to one vacancy, or one director ceases to be 
independent due to circumstances beyond his or her 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'').
    (b) Audit Committee
[The issuer shall maintain an audit committee (i) composed of such 
independent directors and (ii) that complies with the listing standards 
set forth in Rule 10A-3 of the Securities Exchange Act of 1934, as 
amended (``Exchange Act''). In addition to the listing standards 
provided in Exchange Act Rule 10A-3 that relate to audit committee 
responsibilities, audit committees for investment companies must 
establish procedures for the confidential, anonymous submission of 
concerns regarding questionable accounting or auditing matters by 
employees of the investment adviser, administrator, principal 
underwriter, or any other provider of accounting related services for 
the investment company, as well as employees of the investment 
company.]

    (1) 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, each of 
whom must (i) be independent as defined in Rule 31.10(h)(2); (ii) meet 
the criteria for independence set forth in Exchange Act Rule 10A-
3(b)(1) (subject to the exemptions provided in Rule 10A-3(c)); and 
(iii) 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 is 
financially sophisticated, in that he or she 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 Rule 31.10(b)(1)(A)(i), one director who: (i) 
is not independent as defined in Rule 31.10(h)(2); (ii) meets the 
criteria set forth in Section 10A(m)(3) of the Exchange 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.
    (2) Audit Committee Responsibilities and Authority
    The audit committee must have the specific audit committee 
responsibilities and authority necessary to comply with Exchange Act 
Rules 10A-3(b)(2)-(5) (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.
    (3) 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;
    (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; and
    (D) The specific audit committee responsibilities and authority set 
forth in Rule 31.10(b)(2).
    (4) Cure Periods
    (A) If a member of the audit committee ceases to be independent in 
accordance with the requirements of Exchange Act Rule 10A-3 and Rule 
31.10(b)(1) for reasons outside the member's reasonable control, that 
person, with written notice to the Exchange, may remain an audit 
committee member of the listed issuer until the earlier of the next 
annual shareholders meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent. 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 Rule 31.10(b)(1)(A) due to one vacancy on 
the audit committee, and the cure period in Rule 31.10(b)(4)(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 the provision must provide 
notice to the Exchange immediately upon learning of the event or 
circumstance that caused the non-compliance.
    (c) Compensation of Officers

[[Page 42478]]

    (1) Compensation of the chief executive officer of the company must 
be determined, or recommended to the board for determination, either 
by:
    (A) A majority of the independent directors; or
    (B) A compensation committee comprised solely of independent 
directors.
    The chief executive officer may not be present during voting or 
deliberations.
    (2) Compensation of all other executive officers must be 
determined, or recommended to the board for determination, either by
    (A) A majority of the independent directors; or
    (B) A compensation committee comprised solely of independent 
directors.
    (3) Notwithstanding paragraphs (c)(1)(B) and (c)(2)(B) above, if 
the compensation committee is comprised of at least three members, one 
director, who is not independent as defined in Rule 31.10(h)(2) 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.
    (d) Nomination of Directors
    (1) Director nominees must either be selected, or recommended for 
the Board's selection, either by:
    (A) A majority of the independent directors; or
    (B) A nominations committee comprised solely of independent 
directors.
    (2) 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.
    (3) Notwithstanding subparagraph (d)(1)(B) above, if the 
nominations committee is comprised of at least three members, one 
director, who is not independent as defined in Rule 31.10(h)(2) 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 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) 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 the committee composition requirements set 
forth in Rules 31.10(a)-(d).
    (5) This Rule 31.10(d) 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.
    (e) 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 Securities and Exchange Commission. See 
17 CFR 228.406 and 17 CFR 229.406. In addition, the code must provide 
for an enforcement mechanism. Domestic issuers shall disclose code of 
conduct 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.
    (f) Exemptions
    (1) Controlled Companies. A controlled company is exempt from the 
requirements of Rules 31.10(a), (c) and (d), except that a controlled 
company must comply with (i) the provision in subsection (a)(1) that 
requires a 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 of directors has determined to be independent under Rule 
31.10(h)(2) and (ii) the requirements of subsection (a)(2), which 
pertains to executive sessions of independent directors. For purposes 
of this Rule 31.10, 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.
    (2) Registered Management Investment Companies. Management 
investment companies registered under the Investment Company Act of 
1940 are exempt from the requirements of Rules 31.10(a), (c), (d) and 
(e). Such companies are otherwise required to comply with the remainder 
of Rule 31.10, except that open-end management investment companies are 
required to comply with Rule 31.10(b) only to the extent required by 
Exchange Act Rule 10A-3. In addition, open-end management investment 
companies must comply with the provision of Rule 31.10(b)(2) requiring 
audit committees of investment companies 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 any other 
provider of accounting related services for the investment company, as 
well as employees of the investment company. This responsibility must 
be addressed in the audit committee charter.
    (3) Asset-backed Issuers and Other Passive Issuers. The following 
are exempt from the requirements of Rules 31.10(a)-(e): (i) asset-
backed issuers and (ii) issuers 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 Rules 31.10(a), (c), (d) and (e). However, such 
entities must comply with all federal securities laws, including 
without limitation Exchange Act Section 10A(m) and Rule 10A-3 
thereunder.
    (5) Business Development Companies. 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, are subject to all corporate governance 
requirements.

[[Page 42479]]

    (g) Notifications. 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 Rule 
31.10.
    (h) Definitions
    For purposes of Chapter XXXI, the following terms shall have the 
respective meanings:
    (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 Exchange Act Section 13(k).
    Provided, however, that audit committee members are subject to 
additional, more stringent requirements under Exchange Act Rule 10A-3, 
which requirements are incorporated by reference in the Exchange rules 
pursuant to Rule 31.10(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, 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;
    (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; or
    (G) In the case of an investment company, in lieu of Rules 
31.10(h)(2)(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.
    (i) Effective Dates/Transition
    (1) In order to allow companies to make necessary adjustments in 
the course of their regular annual meeting schedule, and consistent 
with Exchange Act Rule 10A-3, Rules 31.10(a)-(d), (f) and (h) are 
effective as set forth below. During the transition period between July 
9, 2004 and the applicable effective date, listed companies must comply 
with Rule 31.10 as in effect immediately prior to July 9, 2004 (see 
Rule 31.10.10).
     July 31, 2005 for foreign private issuers and small 
business issuers (as defined in Exchange Act 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.
    (2) In the case of an issuer with a staggered board, with the 
exception of the audit committee requirements, the issuer will have 
until its second annual meeting after January 15, 2004, but not later 
than December 31, 2005, to implement all of the new requirements, if 
the issuer would be required to change a director who would not 
normally stand for election at an earlier annual meeting. Such issuers 
must comply with the audit committee requirements pursuant to the 
implementation schedule bulleted above.
    (3) Issuers that will be listed in conjunction with their initial 
public offering will be afforded exemptions from all board composition 
requirements set forth in Rule 31.10 consistent with the exemptions 
afforded in Exchange Act Rule 10A-3(b)(1)(iv)(A). That is, for each 
committee that the company adopts, the company will 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. It should be noted, however, that investment 
companies are not afforded these exemptions in Exchange Rule 10A-
3(b)(1)(iv)(A). Companies emerging from bankruptcy or which have ceased 
to be controlled companies will be required to meet the majority 
independent board requirement within one year. As provided under the 
proposal, issuers may choose not to adopt a compensation or nomination 
committee and could instead rely upon a majority of the independent 
directors to discharge responsibilities under Exchange rules. These 
issuers will be required to meet the majority independent board 
requirement within one year of listing.
    (4) Companies transferring from other markets with substantially 
similar board composition requirements will 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 
board composition requirements will be afforded one year from the date 
of listing on the Exchange to comply with the Exchange's board 
composition requirements. This transition period is not intended to 
supplant any applicable requirements of Exchange Act Rule 10A-3.
    (5) Proposed Rule 31.10(d), which pertains to nominating 
committees, will not apply if the company is subject to a binding 
obligation that requires a director nomination structure inconsistent 
with Rule 31.10(d) and such obligation pre-dates the approval date of 
Rule 31.10(d).
    (6) Compliance with proposed Rule 31.10(e), which requires issuers 
to adopt a code of conduct, will be required on July 31, 2004.

* * * Interpretations and Policies

    .01 Definition of Independence. 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.

[[Page 42480]]

The board has a responsibility to make an affirmative determination 
that no such relationships exist through the application of Rule 
31.10(h)(2). Rule 31.10(h)(2) also sets forth 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 there are 
additional, more stringent requirements that apply to directors serving 
on audit committees pursuant to Rule 31.10(b).
    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 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 Exchange Act Rule 16a-1(f). In 
the context of the definition of family member under Rule 31.10(h)(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 Rules 
31.10(h)(2)(A), (C), (E) and (F) 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.
    Rule 31.10(h)(2)(B) 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 captured under Rule 
31.10(h)(2)(B).
    Rule 31.10(h)(2)(D) 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 Rule 
31.10(h)(2)(D), rather than the individual measurements in Rule 
31.10(h)(2)(B). Issuers should contact the Exchange if they wish to 
apply the rule in this manner. The reference to a partner in Rule 
31.10(h)(2)(D) is not intended to include limited partners. It should 
be noted that the independence requirements of Rule 31.10(h)(2)(D) are 
broader than Exchange Act Rule 10A-3(e)(8). Under Rule 31.10(h)(2)(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 5% of the charity's revenues or $200,000. However, the Exchange 
encourages companies to consider other situations where a director or 
his or her 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, Exchange Act Rule 10A-3 generally provides that 
any partner in a law firm that receives payments from the issuer is 
ineligible to serve on that issuer's audit committee. In determining 
whether a director may be considered independent for purposes other 
than the audit committee, payments to a law firm would generally be 
considered under Rule 31.10(h)(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, Rule 
31.10(h)(2)(B), which looks to whether the payment exceeds $60,000, 
applies.
    Rule 31.10(h)(2)(G) provides a different measure for independence 
for investment companies in order to harmonize with the Investment 
Company Act of 1940. In particular, in lieu of Rules 31.10(h)(2)(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 independent.
    .02 Majority Independent Board. Independent directors play an 
important role in assuring investor confidence. Through the exercise of 
independent judgment, they act on behalf of investors to maximize 
shareholder value in the companies they oversee and guard against 
conflicts of interest. Requiring that the board be comprised of a 
majority of independent directors empowers such directors to carry out 
more effectively these responsibilities.
    .03 Audit Committees.
    Audit Committee Composition. Audit committees are required to have 
a minimum of three members and be comprised only of independent 
directors. In addition to satisfying the independent director 
requirements under Rule 31.10(h)(2), audit committee members must meet 
the criteria for independence set forth in Exchange Act Rule 10A-
3(b)(1) (subject to the exemptions provided in Exchange Act Rule 10A-
3(c)): They must not accept any consulting, advisory, or other 
compensatory fee from the company other than for board service, and 
they must not be an affiliated person of the company. It is recommended 
that an issuer disclose in its annual proxy (or, if the issuer does not 
file a proxy, in its Form 10-K or 20-F) if any director is deemed 
independent but falls outside the safe harbor provisions of Exchange 
Act Rule 10A-3(e)(1)(ii). A director who qualifies as an audit 
committee financial expert under Item 401(h) of Registration S-K, Item 
401(e) of Regulation S-B, or Item 3 of Form N-CSR (in the case of a 
registered management investment company) is presumed to qualify as a 
financially sophisticated audit committee member under Rule 
31.10(b)(1)(A).
    Audit Committee Responsibilities and Authority. Audit committees 
must have the specific audit committee responsibilities and authority 
necessary to comply with Exchange Act Rules 10A-3(b)(2)-(5) (subject to 
the exemptions provided in Exchange Act Rule 10A-3(c)), concerning 
responsibilities relating to registered public accounting firms; 
complaints relating to accounting; internal accounting controls or 
auditing matters; authority to engage advisors; and funding. 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.
    Audit Committee Charter. Each issuer is required to adopt a formal 
written charter that specifies the scope of its responsibilities and 
the means by which it carries out those responsibilities; the outside 
auditor's accountability to the audit committee; and the audit 
committee's responsibility to ensure the independence of the outside 
auditor. Consistent with this, the charter must specify all audit 
committee responsibilities set forth in Exchange

[[Page 42481]]

Act Rules 10A-3(b)(2)-(5). Exchange Act Rule 10A-3(b)(3)(ii) requires 
that each audit committee must establish procedures for the 
confidential, anonymous submission by employees of the listed issuer of 
concerns regarding questionable accounting or auditing matters. The 
rights and responsibilities as articulated in the audit committee 
charter empower the audit committee and enhance its effectiveness in 
carrying out its responsibilities. Rule 31.10(b)(2) imposes additional 
requirements for investment company audit committees that must also be 
set forth in audit committee charters for these issuers.
    .04 Executive Sessions of Independent Directors. Regularly 
scheduled executive sessions encourage and enhance communication among 
independent directors. It is contemplated that executive sessions will 
occur at least twice a year, and perhaps more frequently, in 
conjunction with regularly scheduled board meetings.
    .05 Independent Director Oversight of Executive Compensation. 
Independent director oversight of executive officer compensation helps 
assure that appropriate incentives are in place, consistent with the 
board's responsibility to maximize shareholder value. The rule is 
intended to provide flexibility for an issuer to choose an appropriate 
board structure and to reduce resource burdens, while ensuring 
independent director control of compensation decisions.
    .06 Independent Director Oversight of Director Nominations. 
Independent director oversight of nominations enhances investor 
confidence in the selection of well-qualified director nominees, as 
well as independent nominees as required by the rules. Rule 31.10(d) is 
also intended to provide flexibility for a company to choose an 
appropriate board structure to reduce resource burdens, while ensuring 
that independent directors approve all nominations.
    Rule 31.10(d) does not apply in cases where the right to nominate a 
director legally belongs to a third party. For example, investors may 
negotiate the right to nominate directors in connection with an 
investment in the company, holders of preferred stock may be permitted 
to nominate or appoint directors upon certain defaults, or the company 
may be a party to a shareholders' agreement that allocates the right to 
nominate some directors. Because the right to nominate directors in 
these cases does not reside with the company, independent director 
approval would not be required. This rule is not applicable if the 
company is subject to a binding obligation that requires a director 
nomination structure inconsistent with Rule 31.10(d) and such 
obligation pre-dates the approval date of Rule 31.10(d).
    .07 Code of Conduct Ethical behavior is required and expected of 
every corporate director, officer and employee whether or not a formal 
code of conduct exists. The requirement of a publicly available code of 
conduct applicable to all directors, officers and employees of an 
issuer is intended to demonstrate to investors that the board and 
management of Exchange issuers have carefully considered the 
requirement of ethical dealing and have put in place a system to ensure 
that they become aware of and take prompt action against any 
questionable behavior. For company personnel, a code of conduct with 
enforcement provisions provides assurance that reporting of 
questionable behavior is protected and encouraged, and fosters an 
atmosphere of self-awareness and prudent conduct.
    Rule 31.10(e) requires issuers to adopt a code of conduct complying 
with the definition of a ``code of ethics'' under Section 406(c) of the 
Sarbanes-Oxley Act and any regulations promulgated thereunder by the 
Securities and Exchange Commission. Thus, the code must include such 
standards as are reasonably necessary to promote the ethical handling 
of conflicts of interest, full and fair disclosure, and compliance with 
laws, rules and regulations, as specified by the Sarbanes-Oxley Act. 
However, the code of conduct required by Rule 31.10(e) must apply to 
all directors, officers and employees. Issuers can satisfy this 
obligation by adopting one or more codes of conduct, such that all 
directors, officers and employees are subject to a code that satisfies 
the definition of a ``code of ethics.''
    As the Sarbanes-Oxley Act recognizes, investors are harmed when the 
real or perceived private interests of a director, officer or employee 
is in conflict with the interests of the company, as when the 
individual receives improper personal benefits as a result of his or 
her position with the company, or when the individual has other duties, 
responsibilities or obligations that run counter to his or her duty to 
the company. Also, the disclosures an issuer makes to the Securities 
and Exchange Commission are the essential source of information about 
the company for regulators and investors--there can be no question 
about the duty to make them fairly, accurately and timely. Finally, 
illegal action must be dealt with swiftly and the violators reported to 
the appropriate authorities. Each code of conduct must require that any 
waiver of the code for executive officers or directors may be made only 
by the board and must be promptly disclosed to shareholders, along with 
the reasons for the waiver. This disclosure requirement provides 
investors the comfort that waivers are not granted except where they 
are truly necessary and warranted, and that they are limited and 
qualified so as to protect the company to the greatest extent possible. 
Consistent with applicable law, domestic issuers 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.
    Each code of conduct must also contain an enforcement mechanism 
that ensures prompt and consistent enforcement of the code, protection 
for persons reporting questionable behavior, clear and objective 
standards for compliance, and a fair process by which to determine 
violations.
    .08 Exemptions. (a) Controlled Companies. This exemption recognizes 
that majority shareholders, including parent companies, have the right 
to select directors and control certain key decisions, such as 
executive officer compensation, by virtue of their ownership rights. In 
order for a group to exist for purposes of this rule, the shareholders 
must have publicly filed a notice that they are acting as a group 
(e.g., a Schedule 13D). A controlled company not relying upon this 
exemption need not provide any special disclosures about its controlled 
status. It should be emphasized that this controlled company exemption 
does not extend to the audit committee requirements under Rule 31.10(b) 
or the requirement for executive sessions of independent directors 
under Rule 31.10(a)(2).
    (b) Registered Management Investment Companies. Management 
investment companies registered under the Investment Company Act of 
1940 are already subject to a pervasive system of federal regulation in 
certain areas of corporate governance covered by Rule 31.10. In light 
of this, the Exchange exempts from Rules 31.10(a), (c), (d) and (e) 
management investment companies registered under the Investment Company 
Act of 1940.
    (c) Asset-backed Issuers and Other Passive Issuers. Because of 
their unique attributes, Rules 31.10(a)-(e) do not apply to asset-
backed issuers and issuers that are organized as trusts (including 
trusts issuing UIT interests (including IPRs) and Trust Issued 
Receipts, as those terms are defined in

[[Page 42482]]

Rule 1.1 and the Interpretations and Policies thereunder, provided that 
such trusts meet the requirements of this Rule 31.10) 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.
    (d) Cooperatives. Certain member-owned cooperatives that list their 
preferred stock are required to have their common stock owned by their 
members. Because of their unique structure and the fact that they do 
not have a publicly traded class of common stock, such entities are 
exempt from Rules 31.10(a), (c), (d) and (e).
    .09 References to executive officers in Rule 31.10 mean those 
officers covered in Exchange Act Rule 16a-1(f).
    .10 The following is the text of Rule 31.10 as in effect 
immediately prior to July 9, 2004.

Rule 31.10 Independent Directors

    The Exchange requires an issuer to have at least two independent 
directors. For purposes of this section, ``independent director'' shall 
mean a person other than an officer or employee of the company or its 
subsidiaries or any other individual having a relationship which, in 
the opinion of the board of directors, would interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director. The issuer shall maintain an audit committee (i) 
composed of such independent directors and (ii) that complies with the 
listing standards set forth in Rule 10A-3 of the Securities Exchange 
Act of 1934, as amended (``Exchange Act''). If a member of the audit 
committee ceases to be independent in accordance with the requirements 
of Exchange Act Rule 10A-3 for reasons outside the member's reasonable 
control, that person, with written notice to the Exchange, may remain 
an audit committee member of the listed issuer until the earlier of the 
next annual shareholders meeting of the listed issuer or one year from 
the occurrence of the event that caused the member to be no longer 
independent.
* * * * *

Rule 31.60 Publication of Annual Report

    (a) A listed company is required to publish and furnish to its 
shareholders (or to holders of any other listed security when its 
common stock is not listed on a national securities exchange) an annual 
report containing audited financial statements of the company and its 
subsidiaries. Six copies of the report must be filed with the Exchange.
    (b) An issuer that receives an audit opinion that contains a going 
concern qualification must make a public announcement through the news 
media disclosing the receipt of such qualification. Prior to the 
release of the public announcement, the issuer must provide the text of 
the public announcement to the Regulatory Services Division of the 
Exchange. The public announcement shall be provided to the Regulatory 
Service Division and released to the media not later than seven 
calendar days following the filing of such audit opinion in a public 
filing with the Securities and Exchange Commission.
* * * * *

Rule 31.94 Suspension and Delisting Policies

    A.-B. No change.
    C. Application of Policies
    (a)-(c) No change.
    (d) Failure to comply with Listing Agreements--The securities of a 
company failing (or for the transfer agent or registrar of which fails) 
to comply with the Exchange rules in any material respect (e.g., 
failure to distribute annual reports when due, failure to report 
interim earnings, failure to observe Exchange policies regarding timely 
disclosure of important corporate developments, failure to solicit 
proxies, issuance of additional shares of a listed class without prior 
listing thereof, failure to obtain shareholder approval of corporate 
action without prior listing thereof, failure to obtain shareholder 
approval of corporate action where required by Exchange policies, 
failure to comply with Exchange corporate governance listing 
requirements, etc.) are subject to suspension from dealings and, unless 
prompt corrective action is taken, removal from listing.
    (e) Convertible Bonds--A debt security convertible into a listed 
equity security will be reviewed when the underlying equity security is 
delisted and will be delisted when the underlying equity security is no 
longer subject to real-time trade reporting. In addition, if the common 
stock is delisted for violation of any of the following Exchange rules 
relating to corporate governance, the Exchange will also delist any 
listed debt securities convertible into that common stock:

Rule 31.9--Conflicts of Interest
Rule 31.10--[Independent Directors] Corporate Governance
Rule 31.11--Common Voting Rights
Rule 31.12--Quorum
Rule 31.13--Preferred Voting Rights
Rule 31.14--Bondholders Remedies Upon Default

    (f) No change.
    D.-I. No change.
* * * * *

Rule 31.96 Notices to Exchange

    A. No change.
    B. Changes in Officers or Directors
    A listed company is required to notify the Exchange promptly (and 
confirm in writing) (i) of any changes of officers or directors, [and] 
(ii) after an executive officer of the listed company becomes aware of 
any material noncompliance by the listed company with the requirements 
of Rules 31.7(2), 31.9, 31.10 and 31.60(b) and Exchange Act Rule 10A-3 
[of the Securities Exchange Act of 1934, as amended], (iii) upon 
learning of the event or circumstance that causes the listed company to 
no longer comply with the board composition requirements set forth in 
Rule 31.10(a)(1), and (iv) upon learning of the event or circumstance 
that causes the listed company to rely on Rules 31.10(b)(4)(A) or (B).
    C.-H. No change.
* * * * *

[Rule 31.97 Reserved for additional original listing standards.]

* * * * *

Forms for Listing

Form 1

Listing Agreement

-------------------- (the ``Company''), in consideration of the listing 
of its securities, hereby agrees with the Chicago Board Options 
Exchange, Incorporated (the ``Exchange''), that it will:
    1. Promptly notify the Exchange of the following:
    (a) changes in the general character or nature of its business, its 
principal executive officers, directors (including any time a majority 
of the Company's Board of Directors fails to be comprised of 
independent directors), its independent public accountants, its 
transfer agent or registrar and material noncompliance by the listed 
company with the requirements of Rules 31.7(2), 31.9, 31.10 and 
31.60(b) and Exchange Act Rule 10A-3 [of the Securities Exchange Act of 
1934, as amended (``Exchange Act'')], after an executive officer 
becomes aware of such noncompliance;
    (b)-(k) No change.
    2.-13. No change.

[[Page 42483]]

    14. Comply with the corporate governance listing requirements set 
forth in Rules 31.7(2), 31.9, 31.10 and 31.60(b), including the 
maintenance [Maintain] of at least a majority of [two] independent 
directors [(defined as directors who are not officers or beneficial 
holders of 10% or more of the securities of the Company or affiliates 
of such persons and who, in the view of the Company's Board of 
Directors, are free of any relationship that would interfere with the 
exercise of independent judgment)] on the Company's Board of Directors 
and compliance with Exchange Act Rule 10A-3. No director shall be 
qualified as independent unless the Company's Board of Directors 
affirmatively determines that the director qualifies as an 
``independent director'' pursuant to Rule 31.10(h)(2).
    15.-27. No change.
    28. Comply with Exchange rules, policies and procedures as in 
effect and as they may be amended from time to time [and with the 
requirements of Exchange Act Rule 10A-3].
* * * * *

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.

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

1. Purpose
    The Exchange is proposing a comprehensive package of corporate 
governance reforms with respect to its non-option listing standards in 
order to promote accountability, transparency, and integrity of 
companies listing their non-option securities on the Exchange.\5\ The 
proposal encompasses significant changes in the following areas based 
on the corporate governance reforms of the National Association of 
Securities Dealers, Inc. (``NASD'') through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''): \6\ board of directors composition and 
independence standards; compensation of executive officers; 
nominations; audit committees; and ethics and disclosure obligations. 
The Commission has already approved the Exchange's proposed rule change 
relating to shareholder approval requirements for equity compensation 
plans.\7\
    Independent Directors. Current CBOE Rule 31.10 requires an issuer 
to have at least two independent directors and defines ``independent 
director'' 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 board of directors, would 
interfere with the exercise of independent judgment in carrying out the 
responsibilities of a director.'' Other than these standards, the 
Exchange rules contain no other criteria with respect to the definition 
of ``independent director'' and to board composition requirements. The 
Exchange proposes to replace current CBOE Rule 31.10 with new rules 
because the Exchange believes that 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. In this regard, proposed CBOE Rule 31.10(h)(2) would 
provide new standards with respect to the definition of ``independent 
director,'' and proposed CBOE Rule 31.10(a) would set forth new 
requirements for the composition of the board of directors.\8\ In 
addition, through the application of CBOE Rule 31.10(h)(2), the 
proposed rules would require the board to make an affirmative 
determination that no such relationships exist. Proposed CBOE Rule 
31.10(h)(2) also would preclude a board finding of independence with 
respect to relationships between directors and certain individuals. The 
Exchange believes that these objective measures would provide 
transparency to investors and companies, facilitate uniform application 
of the rules, and ease administration.
---------------------------------------------------------------------------

    \5\ In File No. SR-CBOE-2003-31, the Exchange represented that 
it would adopt additional listing policies and requirements 
pertaining to issuer corporate governance. See Securities Exchange 
Act Release No. 48838 (November 25, 2003), 68 FR 67708 (December 3, 
2003). The Exchange states that this current proposed rule change 
would serve to satisfy that representation.
    \6\ 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'')).
    \7\ See Securities Exchange Act Release No. 48737 (October 31, 
2003), 68 FR 63150 (November 7, 2003) (SR-CBOE-2003-45).
    \8\ See CBOE Rule 31.10(f), discussed below, regarding entities 
excepted from these requirements.
---------------------------------------------------------------------------

    The reference to a ``parent or subsidiary'' in proposed CBOE Rule 
31.10(h)(2) would cover entities that the issuer controls and 
consolidates with the issuer's financial statements as filed with the 
Commission, but not if the issuer reflects such an entity solely as an 
investment in its financial statements. In the context of the 
definition of ``family member'' under proposed CBOE Rule 31.10(h)(1), 
the reference to marriage would capture relationships specified in the 
rule (parents, children, and siblings) that would arise as a result of 
marriage, such as ``in-law'' relationships.
    The three-year look-back periods referenced in proposed CBOE Rules 
31.10(h)(2)(A), (C), (E) and (F) would commence on the date the 
relationship ceases. Proposed CBOE Rule 31.10(h)(2)(B) would generally 
capture situations where a payment is made directly to (or for the 
benefit of) the director or a family member of the director. Proposed 
CBOE Rule 31.10(h)(2)(D) would generally capture payments to an entity 
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 proposed CBOE Rule 31.10(h)(2)(D), a director who 
is, or who has a family member who is, an executive officer of a 
charitable organization would not be considered independent if the 
company makes payments to the charity in excess of the greater of 5% of 
the charity's revenues or $200,000. Proposed CBOE Rule 31.10(h)(2)(G) 
would provide a different measure of independence for investment 
companies, consistent with the Investment Company Act of 1940.
    Independent Board and Board Committees. Proposed CBOE Rule 31.10(a) 
would require independent directors to comprise a majority of a listed 
issuer's board of directors,\9\ and thus play an important role in 
assuring investor confidence. The Exchange believes that, through the 
exercise of independent judgment, they would act on behalf of investors 
to maximize shareholder value in the companies they oversee, and guard 
against conflicts of interest. The Exchange believes that requiring 
that the board be comprised of a majority of independent directors 
would empower such directors to more effectively carry out these 
responsibilities. The proposed rule change also would require regularly

[[Page 42484]]

convened executive sessions of independent directors.
---------------------------------------------------------------------------

    \9\ Id.
---------------------------------------------------------------------------

    Furthermore, proposed CBOE Rule 31.10(c) would require independent 
director approval of executive officer compensation. The Exchange 
believes that this oversight would help assure that appropriate 
incentives are in place, consistent with the board's responsibility to 
maximize shareholder value and comply with applicable law. Proposed 
CBOE Rule 31.10(d) also would require independent director approval for 
director nominations. The Exchange believes that independent director 
oversight of nominations would enhance investor confidence in the 
selection of well-qualified director nominees, as well as independent 
nominees as required by the rules. The Exchange represents that these 
proposed rules are intended to provide flexibility for a company to 
choose an appropriate board structure and reduce resource burdens.
    Under proposed CBOE Rule 31.10(f)(1), a controlled company would be 
exempt from the requirements of proposed CBOE Rules 31.10(a), (c), and 
(d), with the exception of proposed CBOE Rule 31.10(a)(1), which 
requires a controlled 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 of directors has determined to be independent 
under Rule 31.10(h)(2), and proposed CBOE Rule 31.10(a)(2), which 
pertains to executive sessions of independent directors.\10\ The rule 
proposal would define a controlled company as 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 would 
be required to 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.
---------------------------------------------------------------------------

    \10\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    Audit Committee Requirements. Proposed CBOE Rule 31.10(b) would 
restate the Exchange's current audit committee requirements, including 
the requirement to comply with the listing standards set forth in Rule 
10A-3 under the Act, as well as proposed terms that expand the current 
requirements.\11\ Under the proposed rules, audit committees would be 
required to have a minimum of three members, all of whom would be 
required to satisfy the independence standards set forth in Rule 10A-
3(b)(1) under the Act (subject to applicable exemptions), and proposed 
CBOE Rule 31.10(h)(2). The proposal also would specify that audit 
committees must have the specific audit committee responsibilities and 
authority necessary to comply with Rule 10A-3(b)(2)-(5) under the Act 
(subject to applicable exemptions). Furthermore, the proposal would 
require audit committee members to be able to read and understand 
fundamental financial statements at the time they join the board.
---------------------------------------------------------------------------

    \11\ See CBOE Rule 31.10(f), discussed below, regarding entities 
excepted from these requirements.
---------------------------------------------------------------------------

    The proposed rule change also would require audit committees to 
adopt a charter that specifies all audit committee responsibilities 
required by Rule 10A-3 under the Act. The proposal would require 
investment company audit committees 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 any other provider of 
accounting related services for the investment company, as well as 
employees of the investment company.
    Going Concern Qualification. Proposed CBOE Rule 31.60(b) would 
require issuers to disclose in a press release the receipt of an audit 
opinion with a going concern qualification. The Exchange states that, 
ordinarily, the continuation of an entity as a going concern is assumed 
in financial reporting in the absence of significant evidence to the 
contrary. If an auditor concludes that substantial doubt exists about 
the entity's ability to continue as a going concern for a reasonable 
period of time, however, the auditor provides this conclusion through 
an explanatory paragraph in the auditor's report. While the audit 
opinion is available in the Form 10-K, the Exchange believes that 
receipt of a going concern qualification is so material that it should 
be brought to the attention of investors and potential investors 
through a press release issued promptly after the filing of the Form 
10-K.
    Review of Related Party Transactions. The Exchange proposes to 
expand its current conflict of interest rule set forth in CBOE Rule 
31.9 by requiring the audit committee or another independent body of 
the board of directors to approve, rather than merely review, related 
party transactions. All directors that review and approve a related 
party transaction must be independent as specified under Exchange 
rules.
    Code of Conduct. Proposed CBOE Rule 31.10(e) would require listed 
companies to adopt and make publicly available a code of conduct 
applicable to directors, officers, and employees that complies with the 
definition of a ``code of ethics'' set forth in Section 406(c) of the 
Sarbanes-Oxley Act of 2002 and any regulations promulgated by the 
Commission thereunder, and to provide for an enforcement mechanism.\12\ 
Any waivers of the code for directors or executive officers would be 
required to be approved by the board and be disclosed in a Form 8-K, 
Form 6-K or Form 20-F. Domestic issuers would be required to disclose 
such waivers in a Form 8-K within five business days. Foreign private 
issuers would be required to disclose such waivers either in a Form 6-K 
or in the next Form 20-F.
---------------------------------------------------------------------------

    \12\ See id.
---------------------------------------------------------------------------

    Exemptions. Current CBOE Rule 31.7(2) permits non-U.S. issuers 
listed on the Exchange to obtain exemptions from the Exchange's 
corporate governance standards if such rules would require the issuer 
to do anything contrary to the laws and generally accepted commercial 
and business practice of the issuer's domicile, to the extent such law 
and generally accepted commercial and business practice is consistent 
with federal securities laws. To make the current exemption process 
more transparent, proposed CBOE Rule 31.7(2) would require a foreign 
issuer to disclose the receipt of a corporate governance exemption from 
the Exchange in its annual report for the year the exemption is granted 
and on annual basis thereafter. Such disclosure would be required to be 
made in the issuer's annual filing of its financial statements with the 
Commission and the Exchange on Form 20-F, Form 40-F, or in certain 
cases, Form 10-K.
    Since management investment companies registered under the 
Investment Company Act of 1940 are already subject to a pervasive 
system of federal regulation, proposed CBOE Rule 31.10(f)(2) would 
exempt management investment companies registered under the Investment 
Company Act of 1940 from proposed CBOE Rules 31.10(a), (c), (d) and 
(e). However, registered management investment companies would be 
subject to all of the audit committee requirements set forth in CBOE 
Rule 31.10(b), and open-end management investment companies would be 
subject to certain provisions of CBOE Rule 31.10(b) audit committee 
requirements.
    In its audit committee rules under the Sarbanes-Oxley Act of 2002, 
the Commission excluded asset-backed issuers from the new requirements, 
and allowed markets to exclude from the requirements of Section 10A(m) 
of the

[[Page 42485]]

Act and Rule 10A-3 thereunder certain ``issuers'' that are organized as 
trusts or other unincorporated associations having certain 
characteristics. Accordingly, proposed CBOE Rule 31.10(f)(3) would 
exempt these entities from proposed CBOE Rules 31.10(a)-(e).
    In light of their unique attributes, proposed CBOE Rule 31.10(f)(4) 
would exempt from proposed CBOE Rules 31.10(a), (c), (d) and (e) 
certain cooperative entities, such as agricultural cooperatives, that 
are structured to comply with, among other things, relevant state law 
and federal tax law and that do not have a publicly traded class of 
common stock. However, these entities must comply with Section 10A(m) 
of the Act and Rule 10A-3 thereunder.
    Furthermore, CBOE proposes to clarify in proposed CBOE Rule 
31.10(f)(5) that 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 subject to all of the Exchange's corporate governance 
requirements.\13\
---------------------------------------------------------------------------

    \13\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    Implementation Periods. Consistent with Rule 10A-3 of the Act, CBOE 
Rules 31.10(a)-(d), (f) and (h) would be effective as set forth below. 
During the transition period between the date of approval of this 
proposed rule change and the applicable effective date, listed 
companies would be required to comply with CBOE Rule 31.10 as in effect 
immediately prior to the date of approval of this rule filing.\14\
---------------------------------------------------------------------------

    \14\ See proposed CBOE Rule 31.10.10.
---------------------------------------------------------------------------

     July 31, 2005 for foreign private issuers and small 
business issuers (as defined in Rule 12b-2 under the Act); 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 of the new requirements, 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 set forth above.
    Issuers that 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. It 
should be noted, however, that investment companies would not be 
afforded these exemptions in Rule 10A-3(b)(1)(iv)(A) under the Act. 
Companies emerging from bankruptcy or which have ceased to be 
controlled companies would be required to meet the majority independent 
board requirement within one year. As provided under the proposal, 
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 Exchange rules. These 
issuers would be required to meet the majority independent board 
requirement within one year of listing.
    Companies transferring from other markets with substantially 
similar board composition requirements 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 
board composition requirements would be afforded one year from the date 
of listing on the Exchange to comply with the Exchange's board 
composition requirements. This transition period is not intended to 
supplant any applicable requirements of Rule 10A-3 under the Act.
    Proposed CBOE Rule 31.10(d), which pertains to nominating 
committees, would not apply if the company is subject to a binding 
obligation that requires a director nomination structure inconsistent 
with CBOE Rule 31.10(d) and such obligation pre-dates the approval date 
of CBOE Rule 31.10(d).
    Compliance with proposed CBOE Rule 31.10(e), which requires issuers 
to adopt a code of conduct, would be required on July 31, 2004.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \15\ in general, and furthers the objectives of 
Section 6(b)(5) \16\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, 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 and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. 
Specifically, the proposed rule change is designed to increase investor 
protection by promoting accountability, transparency, and integrity by 
listed companies.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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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-CBOE-2004-28 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-CBOE-2004-28. 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

[[Page 42486]]

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 CBOE. 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-CBOE-2004-28 and should be submitted on or before August 
5, 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.\17\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \18\ 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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    \17\ 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).
    \18\ 15 U.S.C. 78f(b)(5).
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    In the Commission's view, the proposed rule change will foster 
greater transparency, accountability, and objectivity in the oversight 
by, and decision-making processes of, the boards and key committees of 
CBOE listed issuers. The proposal also will promote compliance with 
high standards of conduct by the issuers' directors and management. The 
Commission notes that the CBOE's proposal is similar to proposals of 
other self-regulatory organizations (``SROs'') recently approved by the 
Commission.
    The CBOE has requested that the Commission grant accelerated 
approval to the proposed rule change, as amended, so that the proposed 
corporate governance listing standards can be quickly implemented. The 
Commission believes that the revisions proposed by the Exchange 
significantly align the corporate governance standards proposed for 
companies listed on the CBOE with the standards approved by the 
Commission for companies listed on other SROs.\19\ 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 CBOE 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,\20\ to approve the 
proposed rule change, as amended, prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register.
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    \19\ See supra note 6.
    \20\ 15 U.S.C. 78s(b)(2).
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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,\21\ that the proposed rule change, as amended (SR-CBOE-2004-28) 
be, and hereby is, approved on an accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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    Dated:
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16052 Filed 7-14-04; 8:45 am]
BILLING CODE 8010-01-P