[Federal Register Volume 69, Number 136 (Friday, July 16, 2004)]
[Notices]
[Pages 42788-42800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16180]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49998; File No. SR-NSX-2004-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by National Stock Exchange Relating to Corporate 
Governance

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 June 17, 2004, National Stock Exchange (``NSX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. On June 29, 
2004, the Exchange filed Amendment No. 1 to the proposal.\3\ On July 9, 
2004, the Exchange filed Amendment No. 2 to the proposal.\4\ On July 9, 
2004, the Exchange filed Amendment No. 3 to the proposed rule 
change.\5\ 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240. 19b-4.
    \3\ See letter from Jennifer M. Lamie, Assistant General Counsel 
and Corporate Secretary, NSX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated June 28, 2004 
(``Amendment No.1''). In Amendment No. 1, the Exchange clarified the 
date on which the Exchange's Board of Trustees approved the proposed 
rule change and made technical changes to the proposed rule text. 
Amendment No. 1 replaced the original filing in its entirety.
    \4\ See letter from Jennifer M. Lamie, Assistant General Counsel 
and Corporate Secretary, NSX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated July 8, 2004 
(``Amendment No. 2''). The changes made by Amendment No. 2 are 
incorporated in the proposal as set forth below.
    \5\ See letter from Jennifer M. Lamie, Assistant General Counsel 
and Corporate Secretary, NSX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated July 9, 2004 
(``Amendment No. 3''). Amendment No. 3 was a technical amendment and 
is not subject to notice and comment.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt changes to its listings 
standards that are aimed to ensure the independence of directors of 
listed companies and to strengthen corporate governance practices of 
listed companies.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *

RULES OF NATIONAL STOCK EXCHANGE

* * * * *

CHAPTER XIII

Miscellaneous Provisions

* * * * *
Rule 13.6.

    (a) General Application. Companies listed on the Exchange must 
comply with certain standards regarding corporate governance as 
codified in this Rule 13.6. Consistent with requirements of the 
Sarbanes-Oxley Act of 2002, certain provisions of this Rule 13.6 are 
applicable to some listed companies but not to others.
    (1) Equity Listings. Rule 13.6 applies in full to all companies 
listing common equity securities, with the following exceptions:
    (a) Controlled Companies. A company of which more than 50% of the 
voting power is held by an individual, a group or another company need 
not comply with the requirements of Rule 13.6(d)(1), (4) or (5). A 
controlled company that chooses to take advantage of any or all of 
these exemptions must disclose that choice, that it is a controlled 
company and the basis for the determination in its annual proxy 
statement or, if the company does not file an annual proxy statement, 
in the company's annual report on Form 10-K filed with the Commission. 
Controlled companies must comply with the remaining provisions of Rule 
13.6.
    (b) Limited Partnerships and Companies in Bankruptcy. Due to their 
unique attributes, limited partnerships and companies in bankruptcy 
proceedings need not comply with the requirements of Rule 13.6(d)(1), 
(4) or (5). However, all limited partnerships (at the general partner 
level) and companies in bankruptcy proceedings must comply with the 
remaining provisions of Rule 13.6.
    (c) Closed-End and Open-End Funds. The Exchange considers that many 
of the significantly expanded standards and requirements provided for 
in Rule 13.6 to be unnecessary for closed-end and open-end management 
investment companies that are registered under the Investment Company 
Act of 1940, given the pervasive federal regulation applicable to them. 
However, registered closed-end funds must comply with the requirements 
of Rule 13.6(d)(6), (7)(a) and (c), and (12). Note, however, that in 
view of the common practice to utilize the same directors for boards in 
the same fund complex, closed-end funds will not be required to comply 
with the disclosure requirement in the second paragraph of the 
Interpretations and Policies to Rule 13.6(d)(7)(a) which calls for 
disclosure of the board's determination with respect to simultaneous 
service on more than three public company audit committees. However, 
the other provisions of that paragraph will apply.
    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 required to comply with all of the provisions of Rule 13.6 
applicable to domestic issuers other than Rule 13.6(d)(2) and (7)(b). 
For purposes of Rule 13.6(d)(1), (3), (4), (5), and (9), a director of 
a business development company shall be considered to be independent if 
he or she is not an ``interested person'' of the company, as defined in 
Section 2(a)(19) of the Investment Company Act of 1940.
    As required by Rule 10A-3 under the Act, open-end funds (which can 
be listed as Investment Company Units, more commonly known as Exchange 
Traded Funds or ETFs) are required to

[[Page 42789]]

comply with the requirements of Rule 13.6(d)(6) and (12)(b).
    Rule 10A-3(b)(3)(ii) under the Act 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. In view of the external 
management structure often employed by closed-end and open-end funds, 
the Exchange also requires the audit committees of such companies to 
establish such procedures for the confidential, anonymous submission by 
employees of the investment adviser, administrator, principal 
underwriter, or any other provider of accounting related services for 
the management investment company, as well as employees of the 
management investment company. This responsibility must be addressed in 
the audit committee charter.
    (d) Other Entities. Except as otherwise required by Rule 10A-3 
under the Act (for example, with respect to open-end funds), Rule 13.6 
does not apply to passive business organizations in the form of trusts 
(such as royalty trusts) or to derivatives and special purpose 
securities. To the extent that Rule 10A-3 applies to a passive business 
organization, listed derivative or special purpose security, such 
entities are required to comply with Rule 13.6(d)(6) and (12)(b).
    (e) Foreign Private Issuers. Listed companies that are foreign 
private issuers (as such term is defined in Rule 3b-4 under the Act) 
are permitted to follow home country practice in lieu of the provisions 
of this Rule 13.6, except that such companies are required to comply 
with the requirements of Rule 13.6(d)(6), (11) and (12)(b).
    (2) Preferred and Debt Listings. Rule 13.6 does not generally apply 
to companies listing only preferred or debt securities on the Exchange. 
To the extent required by Rule 10A-3 under the Act, all companies 
listing only preferred or debt securities on the Exchange are required 
to comply with the requirements of Rule 13.6(d)(6) and (12)(b).
    (3) Dual and Multiple Listings. At any time when an issuer has a 
class of securities that is listed on a national securities exchange or 
national securities association subject to requirements substantially 
similar to those set forth in this Rule 13.6, and that class of 
security has not been suspended from trading on that market, the issuer 
shall not be required to separately meet the requirements set forth in 
this Rule 13.6, except for the requirements of Rule 13(d)(6) and (7), 
below (audit committees) and with the notification requirements of Rule 
13.6(d)(12)(B), as it relates to their audit committees, with respect 
to that class of securities or any other class of securities. 
Governance requirements of other markets will be considered to be 
substantially similar to the requirements of this Rule 13.6 if they are 
adopted by the New York Stock Exchange (``NYSE'') or the National 
Association of Securities Dealers (for the Nasdaq National Market or 
SmallCap Market) or if they otherwise require, subject to exceptions 
approved by the Commission, that the issuer maintain (a) a board of 
directors, a majority of whom are independent directors (50% of whom 
are independent directors, for a small business issuer); (2) a 
nominating committee or other body, a majority of whom are independent 
directors; (3) a compensation committee or other body, a majority of 
whom are independent directors; and (4) a code of business conduct and 
ethics that complies with the definition of a ``code of ethics'' set 
out in Section 406(c) of the Sarbanes-Oxley Act and the rules 
thereunder (17 CFR 228.406 and 17 CFR 229.406).
    Similarly, when an issuer has a class of securities that is listed 
on a national securities exchange or national securities association 
subject to requirements substantially similar to those set forth in 
this Rule 13.6, and that class of security has not been suspended from 
trading on that market, a direct or indirect consolidated subsidiary of 
the issuer, or an at least 50% beneficially-owned subsidiary of the 
issuer, shall not be required to separately meet the requirements set 
forth in this Rule 13.6 with respect to any class of securities it 
issues, except classes of equity securities (other than non-
convertible, non-participating preferred securities) of such 
subsidiary.
    (b) Effective Dates/Transition Periods. Listed companies will have 
until the earlier of their first annual meeting after July 31, 2004, or 
December 31, 2004, to comply with the new standards contained in Rule 
13.6, although if a company with a classified board would be required 
(other than by virtue of a requirement under Rule 13.6(d)(6)) to change 
a director who would not normally stand for election in such annual 
meeting, the company may continue such director in office until the 
second annual meeting after such date, but no later than December 31, 
2005. In addition, foreign private issuers will have until July 31, 
2005, to comply with the new audit committee standards set out in Rule 
13.6(d)(6). As a general matter, the existing audit committee 
requirements provided for in Subsection 1.4 of Article IV of the 
Exchange By-Laws continue to apply to listed companies pending the 
transition to these new rules.
    Companies listing in conjunction with their initial public offering 
will be permitted to phase in their independent nomination and 
compensation committees on the same schedule as is permitted pursuant 
to Rule 10A-3 under the Act for audit committees, that is one 
independent member at the time of listing, a majority of independent 
members within 90 days of listing and fully independent committees 
within one year. It should be noted, however, that investment companies 
are not afforded these exemptions under Rule 10A-3 under the Act. 
Companies listing in conjunction with their initial public offering 
will be required to meet the majority independent board requirement 
within 12 months of listing. For purposes of Rule 13.6 other than Rule 
13.6(d)(6) and (12)(b), a company will be considered to be listing in 
conjunction with an initial public offering if, immediately prior to 
listing, it does not have a class of common stock registered under the 
Act. The Exchange will also permit companies that are emerging from 
bankruptcy or have ceased to be controlled companies within the meaning 
of Rule 13.6 to phase in independent nomination and compensation 
committees and majority independent boards on the same schedule as 
companies listing in conjunction with an initial public offering. 
However, for purposes of Rule 13.6(d)(6) and (12)(b), a company will be 
considered to be listing in conjunction with an initial public offering 
only if it meets the conditions of Rule 10A-3(b)(1) (iv) (a) under the 
Act, namely, that the company was not, immediately prior to the 
effective date of a registration statement, required to file reports 
with the Commission pursuant to Section 13(a) or 15(d) of the Act.
    Companies listing upon transfer from another market, or that are 
listing a security that is listed on another market or markets, have 12 
months from the date of transfer in which to comply with any 
requirement to the extent the market on which they were listed did not 
have the same requirement. To the extent the other market has a 
substantially similar requirement but also had a transition period from 
the effective date of that market's rule, which period had not yet 
expired, the company will have the same transition period as would have 
been available to it on the other market. This transition period for 
companies transferring from another market or that are dually or 
multiply listing securities will not apply

[[Page 42790]]

to the requirements of Rule 13.6(d)(6) unless a transition period is 
available pursuant to Rule 10A-3 under the Act.
    (c) References to Form 10-K. There are provisions in this Rule 13.6 
that call for disclosure in a company's Form 10-K under certain 
circumstances. If a company subject to such a provision is not a 
company required to file a Form 10-K, then the provision shall be 
interpreted to mean the annual periodic disclosure form that the 
company does file with the Commission. For example, for a closed-end 
fund, the appropriate form would be the annual Form N-CSR.
    (d) Listed Company Corporate Governance Requirements.
    (1) Listed companies must have a majority of independent directors. 
Interpretations and Policies: Effective boards of directors exercise 
independent judgment in carrying out their responsibilities. Requiring 
a majority of independent directors will increase the quality of board 
oversight and lessen the possibility of damaging conflicts of interest.
    (2) In order to tighten the definition of ``independent director'' 
for purposes of these standards:
    (a) No director qualifies as ``independent'' unless the board of 
directors affirmatively determines that the director has no material 
relationship with the listed company (either directly or as a partner, 
shareholder or officer of an organization that has a relationship with 
the company). Companies must disclose these determinations.
    Interpretations and Policies: It is not possible to anticipate, or 
explicitly to provide for, all circumstances that might signal 
potential conflicts of interest, or that might bear on the materiality 
of a director's relationship to a listed company (references to 
``company'' would include any parent or subsidiary in a consolidated 
group with the company). Accordingly, it is best that boards making 
``independence'' determinations broadly consider all relevant facts and 
circumstances. In particular, when assessing the materiality of a 
director's relationship with the company, the board should consider the 
issue not merely from the standpoint of the director, but also from 
that of persons or organizations with which the director has an 
affiliation. Material relationships can include commercial, industrial, 
banking, consulting, legal, accounting, charitable and familial 
relationships, among others. However, as the concern is independence 
from management, the Exchange does not view ownership of even a 
significant amount of stock, by itself, as a bar to an independence 
finding.
    The directors who have been determined to be independent must be 
disclosed in the company's annual proxy statement or, if the company 
does not file an annual proxy statement, in the company's annual report 
on Form 10-K filed with the Commission. The basis for a board 
determination that a relationship is not material must also be 
disclosed in the company's annual proxy statement or, if the company 
does not file an annual proxy statement, in the company's annual report 
on Form 10-K filed with the Commission. In this regard, a board may 
adopt and disclose categorical standards to assist it in making 
determinations of independence and may make a general disclosure if a 
director meets these standards. Any determination of independence for a 
director who does not meet these standards must be specifically 
explained. A company must disclose any standard it adopts. It may then 
make the general statement that the independent directors meet the 
standards set by the board without detailing particular aspects of the 
immaterial relationships between individual directors and the company. 
In the event that a director with a business or other relationship that 
does not fit within the disclosed standards is determined to be 
independent, a board must disclose the basis for its determination in 
the manner described above. This approach provides investors with an 
adequate means of assessing the quality of a board's independence and 
its independence determinations while avoiding excessive disclosure of 
immaterial relationships.
    (b) In addition:
    (i) A director who is an employee, or whose immediate family member 
is an executive officer, of the company is not independent until three 
years after the end of such employment relationship.
    Interpretations and Policies: Employment as an interim Chairman or 
CEO shall not disqualify a director from being considered independent 
following that employment.
    (ii) A director who receives, or whose immediate family member 
receives, more than $100,000 per year in direct compensation from the 
listed company, other than director and committee fees and pension or 
other forms of deferred compensation for prior service (provided such 
compensation is not contingent in any way on continued service), is not 
independent until three years after he or she ceases to receive more 
than $100,000 per year in such compensation.
    Interpretations and Policies: Compensation received by a director 
for former service as an interim Chairman or CEO need not be considered 
in determining independence under this test. Compensation received by 
an immediate family member for service as a non-executive employee of 
the listed company need not be considered in determining independence 
under this test.
    (iii) A director who is affiliated with or employed by, or whose 
immediate family member is affiliated with or employed in a 
professional capacity by, a present or former internal or external 
auditor of the company is not ``independent'' until three years after 
the end of the affiliation or the employment or auditing relationship.
    (iv) A director who is employed, or whose immediate family member 
is employed, as an executive officer of another company where any of 
the listed company's present executives serve on that company's 
compensation committee is not ``independent'' until three years after 
the end of such service or the employment relationship.
    (v) A director who is an executive officer or an employee, or whose 
immediate family member is an executive officer, of a company that 
makes payments to, or receives payments from, the listed company for 
property or services in an amount which, in any single fiscal year, 
exceeds the greater of (A) $200,000, (B) 5% of such other company's 
consolidated gross revenues, or (C), for companies whose securities are 
also listed on the NYSE, the amount permitted under NYSE rules, is not 
``independent'' until three years after falling below such threshold.
    Interpretations and Policies: In applying the test in Rule 
13.6(d)(2)(b)(v), both the payments and the consolidated gross revenues 
to be measured shall be those reported in the last completed fiscal 
year. The look-back provision for this test applies solely to the 
financial relationship between the listed company and the director or 
immediate family member's current employer; a listed company need not 
consider former employment of the director or immediate family member.
    Charitable organizations shall not be considered ``companies'' for 
purposes of Rule 13.6(d)(2)(b)(v), provided however that a listed 
company shall disclose in its annual proxy statement, or if the listed 
company does not file an annual proxy statement, in the company's 
annual report on Form 10-K filed with the Commission, any charitable 
contributions made by the listed company to any charitable organization 
in which a director serves as an executive officer if, within the 
preceding three years, contributions in any single

[[Page 42791]]

fiscal year exceeded the greater of (A) $200,000, (B) 5% of such 
charitable organization's consolidated gross revenues, or (C), for 
companies whose securities are also listed on the NYSE, the amount 
permitted under NYSE rules. Listed company boards are reminded of their 
obligations to consider the materiality of any such relationship in 
accordance with Rule 13.6(d)(2)(a) above.
    General Interpretations and Policies to Rule 13.6(d)(2)(b): An 
``immediate family member'' includes a person's spouse, parents, 
children, siblings, mothers and fathers-in-law, sons and daughters-in-
law, brothers and sisters-in-law, and anyone (other than domestic 
employees) who shares such person's home. When applying the look back 
provisions in Rule 13.6(d)(2)(b), listed companies need not consider 
individuals who are no longer immediate family members as a result of 
legal separation or divorce, or those who have died or become 
incapacitated. In addition, references to the ``company'' would include 
any parent or subsidiary in a consolidated group with the company.
    Transition Rule. Each of the above standards contains a three-year 
``look-back'' provision. In order to facilitate a smooth transition to 
the new independence standards, the Exchange will phase in the ``look-
back'' provisions by applying only a one-year look-back for the first 
year after adoption of these new standards. The three-year look-backs 
provided for in Rule 13.6(d)(2)(b) will begin to apply on from and 
after July 9, 2005.
    As an example, until July 8, 2005, a company need look back only 
one year when testing compensation under Rule 13.6(d)(2)(b)(ii). 
Beginning July 9, 2005, however, the company would need to look back 
the full three years provided in Rule 13.6(d)(2)(b)(ii).
    (3) To empower non-management directors to serve as a more 
effective check on management, the non-management directors of each 
company must meet at regularly scheduled executive sessions without 
management.
    Interpretations and Policies: To promote open discussion among the 
non-management directors, companies must schedule regular executive 
sessions in which those directors meet without management 
participation. ``Non-management'' directors are all those who are not 
company officers (as that term is defined in Rule 16a-a(f) under the 
Securities Act of 1933), and includes such directors who are not 
independent by virtue of a material relationship, former status or 
family membership, or for any other reason.
    Regular scheduling of such meetings is important not only to foster 
better communication among non-management directors, but also to 
prevent any negative inference from attaching to the calling of 
executive sessions. There need not be a single presiding director at 
all executive sessions of the non-management directors. If one director 
is chosen to preside at these meetings, his or her name must be 
disclosed in the company's annual proxy statement or, if the company 
does not file an annual proxy statement, in the company's annual report 
on Form 10-K filed with the Commission. Alternatively, a company may 
disclose the procedure by which a presiding director is selected for 
each executive session. For example, a company may wish to rotate the 
presiding position among the chairs of board committees.
    In order that interested parties may be able to make their concerns 
known to the non-management directors, a company must disclose a method 
for such parties to communicate directly with the presiding director or 
with the non-management directors as a group. Companies may, if they 
wish, utilize for this purpose the same procedures they have 
established to comply with the requirement of Rule 10A-3 (b)(3) under 
the Act, as applied to listed companies through Rule 13.6(d)(6).
    While this Rule 13.6(d)(3) refers to meetings of non-management 
directors, if that group includes directors who are not independent 
under this Rule 13.6, listed companies should at least once a year 
schedule an executive session including only independent directors.
    (4)(a) Listed companies must have a nominating/corporate governance 
committee composed entirely of independent directors.
    (b) The nominating/corporate governance committee must have a 
written charter that addresses:
    (i) the committee's purpose and responsibilities--which at minimum, 
must be to: Identify individuals qualified to become board members, 
consistent with criteria approved by the board, and to select, or to 
recommend that the board select, the director nominees for the next 
annual meeting of shareholders; develop and recommend to the board a 
set of corporate governance principles applicable to the corporation; 
and oversee the evaluation of the board and management; and
    (ii) an annual performance evaluation of the committee.
    Interpretations and Policies: A nominating/corporate governance 
committee is central to the effective functioning of the board. New 
director and board committee nominations are among a board's most 
important functions. Placing this responsibility in the hands of an 
independent nominating/corporate governance committee can enhance the 
independence and quality of nominees. The committee is also responsible 
for taking a leadership role in shaping the corporate governance of a 
corporation.
    If a company is legally required by contract or otherwise to 
provide third parties with the ability to nominate directors (for 
example, preferred stock rights to elect directors upon a dividend 
default, shareholder agreements, and management agreements), the 
selection and nomination of such directors need not be subject to the 
nominating committee process.
    The nominating/corporate governance committee charter should also 
address the following items: Committee member qualifications; committee 
member appointment and removal; committee structure and operations 
(including authority to delegate to subcommittees); and committee 
reporting to the board. In addition, the charter should give the 
nominating/corporate governance committee sole authority to retain and 
terminate any search firm to be used to identify director candidates, 
including sole authority to approve the search firm's fees and other 
retention terms.
    Boards may allocate the responsibilities of the nominating/
corporate governance committee to committees of their own denomination, 
provided that the committees are composed entirely of independent 
directors. Any such committee must have a published committee charter.
    (5) (a) Listed companies must have a compensation committee 
composed entirely of independent directors.
    (b) The compensation committee must have a written charter that 
addresses:
    (i) the committee's purpose and responsibilities--which at minimum 
must be to have direct responsibility to:
    (A) review and approve corporate goals and objectives relevant to 
CEO compensation, evaluate the CEO's performance in light of those 
goals and objectives, and, either as a committee or together with the 
other independent directors (as directed by the board), determine and 
approve the CEO's compensation level based on this evaluation; and
    (B) make recommendations to the board with respect to non-CEO 
compensation, incentive compensation plans and equity-based plans; and
    (C) produce a compensation committee report on executive 
compensation as required by the Commission to be included in the

[[Page 42792]]

company's annual proxy statement or annual report on Form 10-K filed 
with the Commission;
    (ii) an annual performance evaluation of the compensation 
committee.
    Interpretations and Policies: In determining the long-term 
incentive component of CEO compensation, the committee should consider 
the company's performance and relative shareholder return, the value of 
similar incentive awards to CEOs at comparable companies, and the 
awards given to the listed company's CEO in past years. To avoid 
confusion, note that the compensation committee is not precluded from 
approving awards (with or without ratification of the board) as may be 
required to comply with applicable tax laws.
    The compensation committee charter should also address the 
following items: Committee member qualifications; committee member 
appointment and removal; committee structure and operations (including 
authority to delegate to subcommittees); and committee reporting to the 
board.
    Additionally, if a compensation consultant is to assist in the 
evaluation of director, CEO or senior executive compensation, the 
compensation committee charter should give that committee sole 
authority to retain and terminate the consulting firm, including sole 
authority to approve the firm's fees and other retention terms.
    Boards may allocate the responsibilities of the compensation 
committee to committees of their own denomination, provided that the 
committees are composed entirely of independent directors. Any such 
committee must have a published committee charter.
    Nothing in this provision should be construed as precluding 
discussion of CEO compensation with the board generally, as it is not 
the intent of this standard to impair communication among members of 
the board.
    (6) Listed companies must have an audit committee that satisfies 
the requirements of Rule 10A-3 under the Act and Subsection 1.4 of 
Article IV of the Exchange By-Laws.
    Interpretations and Policies: The Exchange will apply the 
requirements of Rule 10A-3 in a manner consistent with the guidance 
provided by the Commission in Securities Exchange Act Release No. 34-
47654 (April 1, 2003). Without limiting the generality of the 
foregoing, as provided in Section 1.4(d) of Article IV of the Exchange 
By-Laws, the Exchange will provide companies the opportunity to cure 
defects provided in Rule 10A-3(a)(3) under the Act.
    (7) (a) In accordance with Subsection 1.4(a)(1) of Article IV of 
the Exchange By-Laws, the audit committee must have a minimum of three 
members.
    Interpretations and Policies: Each member of the audit committee 
must be financially literate, as such qualification is interpreted by 
the company's board in its business judgment, or must become 
financially literate within a reasonable period of time after his or 
her appointment to the audit committee. In addition, at least one 
member of the audit committee must have accounting or related financial 
management expertise, as the company's board interprets such 
qualification in its business judgment. While the Exchange does not 
require that a listed company's audit committee include a person who 
satisfies the definition of audit committee financial expert set out in 
Item 401(h) of Regulation S-K, a board may presume that such a person 
has accounting or related financial management expertise.
    Because of the audit committee's demanding role and 
responsibilities, and the time commitment attendant to committee 
membership, each prospective audit committee member should evaluate 
carefully the existing demands on his or her time before accepting this 
important assignment. Additionally, if an audit committee member 
simultaneously serves on the audit committees of more than three public 
companies, and the listed company does not limit the number of audit 
committees on which its audit committee members serve, then in each 
case, the board must determine that such simultaneous service would not 
impair the ability of such member to effectively serve on the listed 
company's audit committee and disclose such determination in the 
company's annual proxy statement or, if the company does not file an 
annual proxy statement, in the company's annual report on Form 10-K 
filed with the Commission.
    (b) In addition to any requirement of Rule 10A-3(b)(1) of the Act, 
all audit committee members must satisfy the requirements for 
independence set out in Rule 13.6(d)(2).
    (c) In accordance with Subsection 1.4(a)(2) of Article IV of the 
Exchange By-Laws, the audit committee must have a written charter. In 
addition to the requirements of Subsection 1.4(a)(2) of Article IV, the 
charter must address the following:
    (i) the committee's purpose--which, at minimum, must be to:
    (A) assist board oversight of (1) the integrity of the company's 
financial statements, (2) the company's compliance with legal and 
regulatory requirements, (3) the independent auditor's qualifications 
and independence and (4) the performance of the company's internal 
audit function and independent auditors; and
    (B) prepare an audit committee report as required by the Commission 
to be included in the company's annual proxy statement;
    (ii) an annual performance evaluation of the audit committee; and
    (iii) the duties and responsibilities of the audit committee--
which, at a minimum must include those set out in Rule 10A-3(b)(2), 
(3), (4) and (5) of the Act and in Subsection 1.4 of Article IV of the 
Exchange By-Laws, as well as include that the committee:
    (A) at least annually, obtain and review a report by the 
independent auditor describing: The firm's internal quality-control 
procedures; any material issues raised by the most recent internal 
quality-control review, or peer review, of the firm or by any inquiry 
or investigation by governmental or professional authorities, within 
the preceding five years, respecting one or more independent audits 
carried out by the firm, and any steps taken to deal with any such 
issues; and (to assess the auditor's independence) all relationships 
between the independent auditor and the company;
    Interpretations and Policies: After reviewing the foregoing report 
and the independent auditor's work throughout the year, the audit 
committee will be in a position to evaluate the auditor's 
qualifications, performance and independence. This evaluation should 
include the review and evaluation of the lead partner of the 
independent auditor. In making its evaluation, the audit committee 
should take into account the opinions of management and the company's 
internal auditors (or other personnel responsible for the internal 
audit function). In addition to assuring the regular rotation of the 
lead audit partner as required by law, the audit committee should 
further consider whether, in order to assure continuing auditor 
independence, there should be regular rotation of the audit firm 
itself. The audit committee should present its conclusions with respect 
to the independent auditor to the full board.
    (B) discuss the company's annual audited financial statements and 
quarterly financial statements with management and the independent 
auditor, including the company's disclosures under ``Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations''
    (C) discuss the company's earnings press releases, as well as 
financial information and earnings guidance

[[Page 42793]]

provided to analysts and rating agencies;
    Interpretations and Policies: The audit committee's responsibility 
to discuss earnings releases, as well as financial information and 
earnings guidance, may be done generally (i.e., discussion of the types 
of information to be disclosed and the type of presentation to be 
made). The audit committee need not discuss in advance each earnings 
release or each instance in which a company may provide earnings 
guidance.
    (D) discuss policies with respect to risk assessment and risk 
management;
    Interpretations and Policies: While it is the job of the CEO and 
senior management to assess and manage the company's exposure to risk, 
the audit committee must discuss guidelines and policies to govern the 
process by which this is handled. The audit committee should discuss 
the company's major financial risk exposures and the steps management 
has taken to monitor and control such exposures. The audit committee is 
not required to be the sole body responsible for risk assessment and 
management, but, as stated above, the committee must discuss guidelines 
and policies to govern the process by which risk assessment and 
management is undertaken. Many companies, particularly financial 
companies, manage and assess their risk through mechanisms other than 
the audit committee. The processes these companies have in place should 
be reviewed in a general manner by the audit committee, but they need 
not be replaced by the audit committee.
    (E) meet separately, periodically, with management, with internal 
auditors (or other personnel responsible for the internal audit 
function) and with independent auditors;
    Interpretations and Policies: To perform its oversight functions 
most effectively, the audit committee must have the benefit of separate 
sessions with management, the independent auditors and those 
responsible for the internal audit function. As noted herein, all 
listed companies must have an internal audit function. These separate 
sessions may be more productive than joint sessions in surfacing issues 
warranting committee attention.
    (F) review with the independent auditor any audit problems or 
difficulties and management's response;
    Interpretations and Policies: The audit committee must regularly 
review with the independent auditor any difficulties the auditor 
encountered in the course of the audit work, including any restrictions 
on the scope of the independent auditor's activities or on access to 
requested information, and any significant disagreements with 
management. Among the items the audit committee may want to review with 
the auditor are: Any accounting adjustments that were noted or proposed 
by the auditor but were ``passed'' (as immaterial or otherwise); any 
communications between the audit team and the audit firm's national 
office respecting auditing or accounting issues presented by the 
engagement; and any ``management'' or ``internal control'' letter 
issued, or proposed to be issued, by the audit firm to the company. The 
review should also include discussion of the responsibilities, budget 
and staffing of the company's internal audit function.
    (G) set clear hiring policies for employees or former employees of 
the independent auditors; and
    Interpretations and Policies: Employees or former employees of the 
independent auditor are often valuable additions to corporate 
management. Such individuals' familiarity with the business, and 
personal rapport with the employees, may be attractive qualities when 
filling a key opening. However, the audit committee should set hiring 
policies taking into account the pressures that may exist for auditors 
consciously or subconsciously seeking a job with the company they 
audit.
    (H) report regularly to the board of directors.
    Interpretations and Policies: The audit committee should review 
with the full board any issues that arise with respect to the quality 
or integrity of the company's financial statements, the company's 
compliance with legal or regulatory requirements, the performance and 
independence of the company's independent auditors, or the performance 
of the internal audit function. General Interpretations and Policies to 
Rule 13.6(d)(7)(c): While the fundamental responsibility for the 
company's financial statements and disclosures rests with management 
and the independent auditor, the audit committee must review: (A) major 
issues regarding accounting principles and financial statement 
presentations, including any significant changes in the company's 
selection or application of accounting principles, and major issues as 
to the adequacy of the company's internal controls and any special 
audit steps adopted in the light of material control deficiencies; (B) 
analyses prepared by management and/or the independent auditor setting 
forth significant financial reporting issues and judgments made in 
connection with the preparation of the financial statements, including 
analyses of the effects of alternative GAAP methods on the financial 
statements; (C) the effect of regulatory and accounting initiatives, as 
well as off-balance sheet structures, on the financial statements of 
the company; and (D) the type and presentation of information to be 
included in earnings press releases (paying particular attention to any 
use of ``pro forma,'' or ``adjusted'' non-GAAP, information), as well 
as review any financial information and earnings guidance provided to 
analysts and rating agencies.
    (d) Each listed company must have an internal audit function.
    Interpretations and Policies: Listed companies must maintain an 
internal audit function to provide management and the audit committee 
with ongoing assessments of the company's risk management process and 
system of internal control. A company may choose to outsource this 
function to a third-party service provider other than its independent 
auditor. General Interpretations and Policies to Rule 13.6(d)(7): To 
avoid any confusion, note that the audit committee functions specified 
in Rule 13.6(d)(7) are the sole responsibility of the audit committee 
and may not be allocated to a different committee.
    (8) Listed companies must satisfy the requirements for shareholder 
approval of equity compensation plans in accordance with Exchange Rule 
13.7.
    (9) Listed companies must adopt and disclose corporate governance 
guidelines.
    Interpretations and Policies: No single set of guidelines would be 
appropriate for every company, but certain key areas of universal 
importance include director qualifications and responsibilities, 
responsibilities of key board committees, and director compensation. 
Given the importance of corporate governance, each listed company's 
website must include its corporate governance guidelines and the 
charters of its most important committees (including at least the 
audit, and if applicable, compensation and nominating committees). Each 
company's annual report on Form 10-K filed with the Commission must 
state that the foregoing information is available on its website, and 
that the information is available in print to any shareholder who 
requests it. Making this information publicly available should promote 
better investor understanding of the company's policies and procedures, 
as well as more conscientious adherence to them by directors and 
management.

[[Page 42794]]

    The following subjects must be addressed in the corporate 
governance guidelines:
    (A) Director qualification standards. These standards should, at 
minimum, reflect the independence requirements set forth in Rule 
13.6(d)(1) and (2). Companies may also address other substantive 
qualification requirements, including policies limiting the number of 
boards on which a director may sit, and director tenure, retirement and 
succession.
    (B) Director responsibilities. These responsibilities should 
clearly articulate what is expected from a director, including basic 
duties and responsibilities with respect to attendance at board 
meetings and advance review of meeting materials.
    (C) Director access to management and, as necessary and 
appropriate, independent advisors.
    (D) Director compensation. Director compensation guidelines should 
include general principles for determining the form and amount of 
director compensation (and for reviewing those principles as 
appropriate). The board should be aware that questions as to directors' 
independence may be raised when directors' fees and emoluments exceed 
what is customary. Similar concerns may be raised when the company 
makes substantial charitable contributions to organizations in which a 
director is affiliated, or enters into consulting contracts with (or 
provides other indirect forms of compensation to) a director. The board 
should critically evaluate each of these matters when determining the 
form and amount of director compensation, and the independence of a 
director.
    (E) Director orientation and continuing education.
    (F) Management succession. Succession planning should include 
policies and principles for CEO selection and performance review, as 
well as policies regarding succession in the event of an emergency or 
the retirement of the CEO.
    (G) Annual performance evaluation of the board. The board should 
conduct a self-evaluation at least annually to determine whether it and 
its committees are functioning effectively.
    (10) Listed companies must adopt and disclose a code of business 
conduct and ethics for directors, officers and employees, and promptly 
disclose any waivers of the code for directors or executive officers.
    Interpretations and Policies: No code of business conduct and 
ethics can replace the thoughtful behavior of an ethical director, 
officer or employee. However, such a code can focus the board and 
management on areas of ethical risk, provide guidance to personnel to 
help them recognize and deal with ethical issues, provide mechanisms to 
report unethical conduct, and help to foster a culture of honesty and 
accountability.
    Each code of business conduct and ethics must require that any 
waiver of the code for executive officers or directors may be made only 
by the board or a board committee and must be promptly disclosed to 
shareholders. This disclosure requirement should inhibit casual and 
perhaps questionable waivers, and should help assure that, when 
warranted, a waiver is accompanied by appropriate controls designed to 
protect the company. It will also give shareholders the opportunity to 
evaluate the board's performance in granting waivers.
    Each code of business conduct and ethics must also contain 
compliance standards and procedures that will facilitate the effective 
operation of the code. These standards should ensure the prompt and 
consistent action against violations of the code. Each listed company's 
website must include its code of business conduct and ethics. Each 
company's annual report on Form 10-K filed with the Commission must 
state that the foregoing information is available on its website and 
that the information is available in print to any shareholder who 
requests it. Each company may determine its own policies, but all 
listed companies should address the most important topics, including 
the following:
    (A) Conflicts of interest. A ``conflict of interest'' occurs when 
an individual's private interest interferes in any way-or even appears 
to interfere-with the interests of the corporation as a whole. A 
conflict situation can arise when an employee, officer or director 
takes actions or has interests that may make it difficult to perform 
his or her company work objectively and effectively. Conflicts of 
interest also arise when an employee, officer or director, or a member 
of his or her family, receives improper personal benefits as a result 
of his or her position in the company. Loans to, or guarantees of 
obligations of, such persons are of special concern. The company should 
have a policy prohibiting such conflicts of interest, and providing a 
means for employees, officers and directors to communicate potential 
conflicts to the company.
    (B) Corporate opportunities. Employees, officers and directors 
should be prohibited from (a) taking for themselves personally 
opportunities that are discovered through the use of corporate 
property, information or position; (b) using corporate property, 
information or position for personal gain; and (c) competing with the 
company. Employees, officers and directors owe a duty to the company to 
advance its legitimate interests when the opportunity to do so arises.
    (C) Confidentially. Employees, officers and directors should 
maintain the confidentiality of information entrusted to them by the 
company or its customers, except when disclosure is authorized or 
legally mandated. Confidential information includes all non-public 
information that might be of use to competitors, or harmful to the 
company or its customers, if disclosed.
    (D) Fair dealing. Each employee, officer and director should 
endeavor to deal fairly with the company's customers, suppliers, 
competitors and employees. None should take unfair advantage of anyone 
through manipulation, concealment, abuse of privileged information, 
misrepresentation of material facts, or any other unfair-dealing 
practice. Companies may write their codes in a manner that does not 
alter existing legal rights and obligations of companies and their 
employees, such as ``at will'' employment arrangements.
    (E) Protection and proper use of company assets. All employees, 
officers and directors should protect the company's assets and ensure 
their efficient use. Theft, carelessness and waste have a direct impact 
on the company's profitability. All company assets should be used for 
legitimate business purposes.
    (F) Compliance with laws, rules and regulations (including insider 
trading laws). The company should proactively promote compliance with 
laws, rules and regulations, including insider-trading laws. Insider 
trading is both unethical and illegal, and should be dealt with 
decisively.
    (G) Encouraging the reporting of any illegal or unethical behavior. 
The company should proactively promote ethical behavior. The company 
should encourage employees to talk to supervisors, managers, or other 
appropriate personnel when in doubt about the best course of action in 
a particular situation. Additionally, employees should report 
violations of laws, rules, regulations or the code of business conduct 
to appropriate personnel. To encourage employees to report such 
violations, the company must ensure that employees know that the 
company will not allow retaliation for reports made in good faith.
    (11) Listed foreign private issuers must disclose any significant 
ways in

[[Page 42795]]

which their corporate governance practices differ from those followed 
by domestic companies under the Exchange's listing standards.
    Interpretations and Policies: Foreign private issuers must make 
their U.S. investors aware of the significant ways in which their home-
country practices differ from those followed by domestic companies 
under the Exchange's listing standards. However, foreign private 
issuers are not required to present a detailed, item-by-item analysis 
of these differences. Such a disclosure would be long and unnecessarily 
complicated. Moreover, this requirement is not intended to suggest that 
one country's corporate governance practices are better or more 
effective than another. The Exchange believes the U.S. shareholders 
should be aware of the significant ways that the governance of a listed 
foreign private issuer differs from that of a U.S. listed company. The 
Exchange underscores that what is required is a brief, general summary 
of the significant differences, not a cumbersome analysis.
    Listed foreign private issuers may provide this disclosure either 
on their website (provided it is in the English language and accessible 
from the United States) and/or in their annual report as distributed to 
shareholders in the United States (again, in the English language). If 
the disclosure is only made available on the website, the annual report 
shall so state and provide the web address at which the information may 
be obtained.
    (12) (a) Each listed company CEO must certify to the Exchange each 
year that he or she is not aware of any violation by the company of 
Exchange corporate governance listing standards.
    Interpretations and Policies: The CEO's annual certification to the 
Exchange that, as of the date of certification, he or she is unaware of 
any violation by the company of the Exchange's corporate governance 
listing standards will focus the CEO and senior management on the 
company's compliance with the listing standards. Both this 
certification to the Exchange, and any CEO/CFO certifications required 
to be filed with the Commission regarding the quality of the company's 
public disclosure must be disclosed in the company's annual report to 
shareholders or, if the company does not prepare an annual report to 
shareholders, in the companies annual report on Form 10-K filed with 
the Commission.
    (b) Each listed company CEO must promptly notify the Exchange in 
writing after any executive officer of the listed company becomes aware 
of any material non-compliance with any applicable provisions of this 
Rule 13.6.
    (13) The Exchange may issue a public reprimand letter to any listed 
company that violates an Exchange listing standard.
    Interpretations and Policies: Suspending trading in or delisting a 
company can be harmful to the very shareholders that the Exchange 
listing standards seek to protect; the Exchange must therefore use 
these measures sparingly and judiciously. For this reason it is 
appropriate for the Exchange to have the ability to apply a lesser 
sanction to deter companies from violating its corporate governance (or 
other) listing standards. Accordingly, the Exchange may issue a public 
reprimand letter to any listed company, regardless of type of security 
listed or country of incorporation, that it determines has violated an 
Exchange listing standard. For companies that repeatedly or flagrantly 
violate Exchange listing standards, suspension and delisting remain the 
ultimate penalties. For clarification, this lesser sanction is not 
intended for use in the case of companies that fall below the financial 
and other continued listing standards provided in Article IV of the 
Exchange By-Laws or that fail to comply with the audit committee 
standards set out in Subsection 1.4 of Article IV of the Exchange By-
Laws or Rule 13.6(d)(6). The process and procedures provided for in 
those provisions govern the treatment of companies falling below those 
standards.

Rule [13.6.]13.7. Shareholder Approval of Equity Compensation Plans

    No change to text.

[Rule 13.7. Additional Listing Standards Related to Audit Committees

    In addition to the requirements set forth in subsection 1.4 of 
Article IV of the By-laws, 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.]
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to enhance its listing standards in order 
to further the ability of honest and well-intentioned directors, 
officers, and employees of listed issuers to perform their functions 
effectively. NSX believes that the proposal will also allow 
shareholders to more easily and efficiently monitor the performance of 
companies and directors in order to reduce instances of lax and 
unethical behavior.
    Last year, the Commission approved changes to NSX's listing 
standards that were primarily designed to comply with the provisions of 
Section 10A(m) of the Act \6\ and Rule 10A-3 thereunder,\7\ and to 
incorporate requirements related to shareholder approval of equity 
compensation plans.\8\ The remaining provisions that the Exchange 
proposes, which are set out in this submission, include additional 
enhancements to the Exchange's governance requirements for listed 
companies. In most respects, the proposed changes are substantially 
similar to changes in governance requirements made by the New York 
Stock Exchange (``NYSE'').\9\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78j-1(m).
    \7\ 17 CFR 240.10A-3.
    \8\ See Securities Exchange Act Release Nos. 48832 (November 25, 
2003), 68 FR 67715 (December 3, 2003)(SR-CSE-2003-06) and 48738 
(October 31, 2003), 68 FR 63166 (November 7, 2003)(SR-CSE-2003-11).
    \9\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (approving changes to the 
corporate governance listing standards of the Nasdaq Stock Market, 
Inc. and the NYSE).
---------------------------------------------------------------------------

    The NSX governance standards would apply generally to companies 
listing securities on the Exchange, with particular exemptions for 
certain issuers \10\ as delineated below. Specific exemptions are 
included for dual and multiple listings, where the same or another 
class of security of the company is already listed on another national 
securities exchange or national securities association that has

[[Page 42796]]

substantially similar governance-related requirements.\11\
---------------------------------------------------------------------------

    \10\ See infra Section II.A.1.l.
    \11\ See NSX Rule 13.6(a)(3). Specifically, such company listing 
on another market would not be required to separately meet the NSX 
governance requirements, except certain requirements relating to 
audit committees. The NSX has represented that it will have 
surveillance procedures sufficient to allow the Exchange to confirm 
that an issuer relying on this provision is in compliance with the 
requirements of the other market.
---------------------------------------------------------------------------

    Summarized below are significant provisions of the proposal.
a. Independence of Majority of Board Members
    Proposed Rule 13.6(d)(1) \12\ of the Exchange Rules would require 
the board of directors of each listed company to consist of a majority 
of independent directors, whose names would be required to be 
disclosed.\13\ Pursuant to proposed Exchange Rule 13.6(d)(2), no 
director would qualify as ``independent'' unless the board 
affirmatively determines that the director has no material relationship 
with the company (either directly or as a partner, shareholder or 
officer of an organization that has a relationship with the company). 
The company would be required to disclose in its annual proxy statement 
or, if the company does not file an annual proxy statement, in the 
company's annual report on Form 10-K filed with the Commission, the 
directors who have been determined to be independent and the basis of 
such determination.\14\ In complying with this requirement, a board 
would be permitted to adopt and disclose standards to assist it in 
making determinations of independence, disclose those standards, and 
then make the general statement that the independent directors meet 
those standards.\15\
---------------------------------------------------------------------------

    \12\ Existing Exchange Rule 13.6 would be re-numbered to Rule 
13.7 and existing Exchange Rule 13.7 would be moved to paragraph 
(a)(1)(c) of proposed Exchange Rule 13.6.
    \13\ See NSX Rule 13.6(d)(1). See infra Section II.A.1.l. 
concerning entities that would be exempt from this requirement.
    \14\ NSX proposes that for all provisions of Proposed Exchange 
Rule 13.6 that call for disclosure in a company's Form 10-K, if a 
company subject to such a provision is not a company required to 
file a Form 10-K, then the provision would be interpreted to mean 
the annual periodic disclosure form that the company files with the 
Commission.
    \15\ See Proposed Exchange Rule 13.6(d)(2)(a).
---------------------------------------------------------------------------

b. Definition of Independent Director
    In addition, NSX proposes a definition of independent director that 
would require the following: First, a director who is an employee, or 
whose immediate family member is an executive officer, of the company 
would not be independent until three years after the end of such 
employment relationship.\16\ Employment as an interim Chairman or CEO 
would not disqualify a director from being considered independent 
following that employment.\17\ Second, a director who receives, or 
whose immediate family member receives, more than $100,000 per year in 
direct compensation from the listed company, except for certain 
permitted payments,\18\ would not be independent until three years 
after he or she ceases to receive more than $100,000 per year in such 
compensation.
---------------------------------------------------------------------------

    \16\ See Proposed Exchange Rule 13.6(d)(2)(b)(i).
    \17\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(2)(b)(i).
    \18\ Permitted payments would include director and committee 
fees and pension or other forms of deferred compensation for prior 
service, provided such compensation is not contingent in any way on 
continued service. See Proposed Exchange Rule 13.6(d)(2)(b)(ii). In 
addition, compensation received by a director for former service as 
an interim Chairman or CEO would not be required to be considered. 
See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(2)(b)(ii). Compensation received by an immediate family 
member for service as a non-executive employee of the listed company 
would also not be required to be considered. Id.
---------------------------------------------------------------------------

    Third, a director who is affiliated with or employed by, or whose 
immediate family member is affiliated with or employed in a 
professional capacity by, a present or former internal or external 
auditor of the company would not be independent until three years after 
the end of the affiliation or the employment or auditing 
relationship.\19\
---------------------------------------------------------------------------

    \19\ See Proposed Exchange Rule 13.6(d)(2)(b)(iii).
---------------------------------------------------------------------------

    Fourth, a director who is employed, or whose immediate family 
member is employed, as an executive officer of another company where 
any of the company's present executives serve on that company's 
compensation committee would not be independent until three years after 
the end of such service or the employment relationship.\20\
---------------------------------------------------------------------------

    \20\ See Proposed Exchange Rule 13.6(d)(2)(b)(iv).
---------------------------------------------------------------------------

    Fifth, a director who is an executive officer or an employee, or 
whose immediate family member is an executive officer, of a company 
that makes payments to, or receives payments from, the listed company 
for property or services in an amount which, in any single fiscal year, 
exceeds the greater of (a) $200,000, (b) 5% of such other company's 
consolidated gross revenues, or (c), for companies whose securities are 
listed on NSX and NYSE, the amount permitted under NYSE rules, would 
not be independent until three years after falling below such threshold 
(``Business Relationship Provision'').\21\ NSX proposes to clarify this 
proposal with respect to charitable organizations by adding a provision 
noting that charitable organizations would not be considered 
``companies'' for purposes of the Business Relationship Provision, 
provided that the listed company discloses in its annual proxy 
statement, or if the listed company does not file an annual proxy 
statement, in its annual report on Form 10-K filed with the Commission, 
any charitable contributions made by the listed company to any 
charitable organization in which a director serves as an executive 
officer if, within the preceding three years, such contributions in any 
single year exceeded the greater of $200,000 or 5% of the 
organization's consolidated gross revenues, or, for companies whose 
securities are also listed on the NYSE, the amount permitted under NYSE 
rules.\22\
---------------------------------------------------------------------------

    \21\ See Proposed Exchange Rule 13.6(d)(2)(b)(v). The NYSE 
Business Relationship Provision currently provides that a director 
that is an executive officer or an employee, or whose immediate 
family member is an executive officer, of a company that makes 
payments to, or receives payments from, the listed company for 
property or services in an amount which, in any single fiscal year, 
exceed the greater of $1 million, or 2% of such other company's 
consolidated gross revenues, would not be independent until three 
years after falling below such threshold. See NYSE section 
303A(b)(2)(v). See also Securities Exchange Act Release No. 48745, 
supra note , 68 FR at 64157.
    \22\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(2)(b)(v).
---------------------------------------------------------------------------

    NSX also proposes to add a provision explaining that both the 
payments and the consolidated gross revenues to be measured for the 
Business Relationship Provision would be those reported in the last 
completed fiscal year, and that the look-back provisions would apply 
solely to the financial relationship between the listed company and the 
director or immediate family member's current employer. A listed 
company would not need to consider former employment of the director or 
immediate family member.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    NSX proposes to define ``immediate family member'' to include 
person's spouse, parents, children, siblings, mothers- and fathers-in-
law, daughters- and sons-in-law, sisters- and brothers-in-law, and 
anyone (other than domestic employees) who shares such person's 
home.\24\ NSX also proposes that references to ``company'' include any

[[Page 42797]]

parent or subsidiary in a consolidated group with the company.\25\
---------------------------------------------------------------------------

    \24\ See General Interpretations and Policies to Proposed 
Exchange Rule 13.6(d)(2)(b). NSX proposes that when applying the 
look-back provisions in Rule 13.6(d)(2)(b), listed companies would 
not need to consider individuals who are no longer immediate family 
members as a result of legal separation or divorce, or those who 
have died or become incapacitated. Id.
    \25\ See General Interpretations and Policies to Proposed 
Exchange Rule 13.6(d)(2)(b).
---------------------------------------------------------------------------

    NSX further proposes to apply a one-year look-back for the first 
year after adoption of these new standards.\26\ The three-year look 
back would begin to apply from the date that is the first anniversary 
of Commission approval of the proposed rule change.\27\
---------------------------------------------------------------------------

    \26\ See Transition Rule to Proposed Exchange Rule 
13.6(d)(2)(b).
    \27\ Id.
---------------------------------------------------------------------------

c. Separate Meetings for Board Members
    NSX proposes to require the non-management directors of each NSX-
listed company to meet at regularly scheduled executive sessions 
without management.\28\ In addition, NSX proposes to require listed 
companies to disclose a method for interested parties to communicate 
directly with the presiding director of such executive sessions, or 
with the non-management directors as a group.\29\ Companies may use the 
same procedures they have established to comply with Rule 10A-3(b)(3) 
of the Act.\30\
---------------------------------------------------------------------------

    \28\ See Proposed Exchange Rule 13.6(d)(3).
    \29\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(3).
    \30\ Id. See also infra Section II.A.1.l concerning entities 
that would be exempt from these requirements.
---------------------------------------------------------------------------

d. Nominating/Corporate Governance Committee
    NSX proposes to require each listed company to have a nominating/
corporate governance committee composed entirely of independent 
directors.\31\ NSX also proposes such committee to have a written 
charter that addresses, among other items, the committee's purpose and 
responsibilities, and an annual performance evaluation of the 
nominating/corporate governance committee.\32\ NSX further proposes to 
clarify that the committee would be required to identify individuals 
qualified to become board members, consistent with the criteria 
approved by the board.\33\
---------------------------------------------------------------------------

    \31\ See Proposed Exchange Rule 13.6(d)(4)(a). See infra Section 
II.A.1.l. concerning controlled companies and other entities that 
would be exempt from this requirement.
    \32\ See Proposed Exchange Rule 13.6(d)(4)(b).
    \33\ Id.
---------------------------------------------------------------------------

e. Compensation Committee
    NSX proposes to require each listed company to have a compensation 
committee composed entirely of independent directors.\34\ NSX also 
proposes to require the compensation committee to have a written 
charter that addresses, among other items, the committee's purpose and 
responsibilities, and an annual performance evaluation of the 
compensation committee.\35\ The compensation committee also would be 
required to produce a compensation committee report on executive 
compensation, as required by Commission rules to be included in the 
company's annual proxy statement or annual report on Form 10-K filed 
with the Commission.\36\ Further, NSX proposes to (1) provide that 
either as a committee or together with the other independent directors 
(as directed by the board), the committee would determine and approve 
the CEO's compensation level based on the committee's evaluation of the 
CEO's performance; \37\ and (2) provide that discussion of CEO 
compensation with the board generally is not precluded.\38\
---------------------------------------------------------------------------

    \34\ See Proposed Exchange Rule 13.6(d)(5)(a). See infra Section 
II.A.1.l. concerning controlled companies and other entities that 
would be exempt from this requirement.
    \35\ Id.
    \36\ See Proposed Exchange Rule 13.6(d)(5)(b)(i)(C).
    \37\ See Proposed Exchange Rule 13.6(d)(5)(a).
    \38\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(5).
---------------------------------------------------------------------------

f. Audit Committee
i. Composition
    Article IV, Subsection 1.4 of the Exchange By-Laws sets forth 
provisions on audit committee requirements for listed companies. 
Currently, Subsection 1.4 requires each NSX-listed company to have a 
minimum three-person audit committee composed entirely of directors 
that meet the independence standards of Rule 10A-3.\39\ Subsection 1.4 
also requires that each member of the audit committee be financially 
literate and that at least one member have accounting or related 
financial management expertise.\40\ With respect to independence, 
proposed Exchange Rule 13.6(d)(7) would also require the members of the 
audit committee of each NSX-listed company to meet the independence 
standards set out in proposed paragraph (d)(2) of the Rule.\41\ With 
respect to accounting or related financial management expertise, 
proposed Exchange Rule 13.6(d)(7) would clarify that while the Exchange 
does not require that a listed company's audit committee include a 
person who satisfies the definition of audit committee financial expert 
set forth in Item 401(h) of Regulation S-K, a board may presume that 
such a person has accounting or related financial management 
experience.\42\
---------------------------------------------------------------------------

    \39\ See Article IV, Subsection 1.4(a) of the Exchange By-Laws.
    \40\ See Article IV, Subsection 1.4(a)(1) of the Exchange By-
Laws.
    \41\ See Proposed Exchange Rule 13.6(d)(7)(b). See also infra 
Section II.A.1.l concerning the applicability of certain of this 
requirement.
    \42\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(7)(a).
---------------------------------------------------------------------------

    If an audit committee member simultaneously serves on the audit 
committee of more than three public companies, and the listed company 
does not limit the number of audit committees on which its audit 
committee members serve, each board would be required to determine that 
such simultaneous service would not impair the ability of such member 
to effectively serve on the listed company's audit committee and to 
disclose such determination.\43\
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

ii. Audit Committee Charter and Responsibilities
    Exchange Rule 13.6(d)(7)(c) would expand on the provisions of 
Subsection 1.4(a)(2) of Article IV of the Exchange By-Laws and require 
the audit committee of each listed company to have a written charter 
that addresses: (i) The committee's purpose; (ii) an annual performance 
evaluation of the audit committee; and (iii) the duties and 
responsibilities of the audit committee (the ``Audit Committee Charter 
Provision''). The Audit Committee Charter Provision provides details as 
to the duties and responsibilities of the audit committee that would be 
required to be addressed. These would include, at a minimum, those set 
out in Rule 10A-3(b)(2), (3), (4) and (5),\44\ as well as the 
responsibility to annual obtain and review a report by the independent 
auditor; discuss the company's annual audited financial statement and 
quarterly financial statements with management and the independent 
auditor; discuss the company's earnings press releases, as well as 
financial information and earnings guidance provided to analysts and 
rating agencies; discuss policies with respect to risk assessment and 
risk management; meet separately, periodically, with management, with 
internal auditors (or other personnel responsible for the internal 
audit function), and with independent auditors; review with the 
independent auditors any audit problems or difficulties and 
management's response; set clear hiring policies for employees or 
former

[[Page 42798]]

employees of the independent auditors; and report regularly to the 
board.\45\
---------------------------------------------------------------------------

    \44\ See Proposed Exchange Rule 13.6(d)(7)(c).
    \45\ See Proposed Exchange Rule 13.6(d)(7)(c)(iii). See also 
infra Section II.A.1.l concerning the applicability of these 
requirements.
---------------------------------------------------------------------------

g. Internal Audit Functions
    Exchange Rule 13.6(d)(7)(d) would require each listed company to 
have an internal audit function.\46\
---------------------------------------------------------------------------

    \46\ See infra Section II.A.1.l concerning the applicability of 
this requirement.
---------------------------------------------------------------------------

h. Corporate Governance Guidelines
    Exchange Rule 13.6(d)(9) would require each listed company to adopt 
and disclose corporate governance guidelines.\47\ The following topics 
would be required to be addressed: Director qualification standards; 
director responsibilities; director access to management and, as 
necessary and appropriate, independent advisors; director compensation; 
director orientation and continuing education; management succession; 
and annul performance evaluation of the board.\48\ Each company's 
website would be required to include its corporate governance 
guidelines and the charters of its most important committees, and the 
availability of this information on the website or in print to 
shareholders would need to be referenced in the company's annual report 
on Form 10-K filed with the Commission.\49\
---------------------------------------------------------------------------

    \47\ See id.
    \48\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(9).
    \49\ Id.
---------------------------------------------------------------------------

i. Code of Business Conduct and Ethics
    Exchange Rule 13.6(d)(10) would require each listed company to 
adopt and disclose a code of business conduct and ethics for directors, 
officers, and employees, and to promptly disclose any waivers of the 
code for directors or executive officers.\50\ The interpretations and 
policies to this provision would set forth the most important topics 
that should be addressed, including conflicts of interest; corporate 
opportunities; confidentiality of information; fair dealing; protection 
and proper use of company assets; compliance with laws, rules, and 
regulations (including insider trading laws); and encouraging the 
reporting of any illegal or unethical behavior. Each code would be 
required to contain compliance standards and procedures to facilitate 
the effective operation of the code. Each listed company's website 
would be required to include its code of business conduct and ethics, 
and the availability of the code on the website or in print to 
shareholders would need to be referenced in the company's annual report 
on Form 10-K filed with the Commission.\51\
---------------------------------------------------------------------------

    \50\ See also infra Section II.A.1.l concerning applicability of 
this requirement.
    \51\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(10).
---------------------------------------------------------------------------

j. CEO Certification
    Exchange Rule 13.6(d)(12)(a) would require the CEO of each listed 
company to certify to NSX each year that he or she is not aware of any 
violation by the company of NSX's corporate governance listing 
standards.\52\ This certification would be required to be disclosed in 
the company's annual report or, if the company does not prepare an 
annual report to shareholders, in the company's annual report on Form 
10-K filed with the Commission.
---------------------------------------------------------------------------

    \52\ See also infra Section II.A.1.l concerning the 
applicability of these requirements.
---------------------------------------------------------------------------

    In addition, Exchange Rule 13.6(d)(12)(b) would require the CEO of 
each listed company to promptly notify the Exchange in writing after 
any executive officer of the listed company becomes aware of any 
material non-compliance with any applicable provisions of the new 
requirements.
k. Public Reprimand
    Exchange Rule 13.6(d)(13) would allow NSX to issue a public 
reprimand letter to any listed company that violates an NSX listing 
standard.\53\
---------------------------------------------------------------------------

    \53\ This lesser sanction is not intended for use in the case of 
companies that fail to comply with the requirements of Rule 10A-3. 
See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(13).
---------------------------------------------------------------------------

l. Exceptions to Corporate Governance Proposals
    NSX proposes to exempt any listed company of which more than 50% of 
the voting power is held by an individual, a group or other company 
(``controlled company'') from the requirements that its board have a 
majority of independent directors, and that the company have 
nominating/corporate governance and compensation committees composed 
entirely of independent directors. A company that chose to take 
advantage of any or all of these exemptions would be required to 
disclose the choice, that it is a controlled company, and the basis for 
the determination in its annual proxy statement or, if the company does 
not file an annual proxy statement, in the company's annual report on 
Form 10-K filed with the Commission.\54\ Limited partnerships and 
companies in bankruptcy proceedings also would be exempt from the 
requirements that the board have a majority of independent directors 
and that the issuer have nominating/corporate governance and 
compensation committees composed entirely of independent directors.\55\
---------------------------------------------------------------------------

    \54\ See Proposed Exchange Rule 13.6(a)(1)(a).
    \55\ See Proposed Exchange Rule 13.6(a)(1)(b).
---------------------------------------------------------------------------

    NSX considers many of the requirements of proposed Exchange Rule 
13.6 to be unnecessary for closed-end and open-end management 
investment companies that are registered under the Investment Company 
Act of 1940 (``Investment Company Act'') \56\, given the pervasive 
federal regulation applicable to them. However, NSX proposes that 
registered closed-end management investment companies (``closed-end 
funds'') would be required to: (1) Have a minimum three-member audit 
committee that satisfies the requirements of Rule 10A-3 and meets 
additional composition requirements of proposed Rule 13.6(d)(7)(a) and 
the requirements of Subsection 1.4 of Article IV of the Exchange By-
Laws; (2) comply with the requirements of the Audit Committee Charter 
Provision; and (3) comply with the certification and notification 
provisions regarding non-compliance.\57\ Closed-end funds would be 
excluded from the disclosure requirement related to an audit committee 
member's simultaneous service on more than three audit committees, but 
would be subject to the requirement for the board to determine that 
such simultaneous service would not impair the ability of such member 
to effectively serve on the listed company's audit committee.\58\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 80a-1 et seq.
    \57\ See Proposed Exchange Rule 13.6(a)(1)(c).
    \58\ Id.
---------------------------------------------------------------------------

    NSX also proposes to require business development companies, which 
are a type of closed-end management investment company defined in 
Section 2(a)(48) of the Investment Company Act \59\ that are not 
registered under that act, to comply with all of the provisions of 
Exchange Rule 13.6 applicable to domestic issuers, except that the 
directors of such companies, including audit committee members, would 
not be required to satisfy the independence requirements set forth in 
proposed Exchange Rule 13.6(d)(2) and (d)(7)(b).\60\ For purposes of 
proposed Exchange Rule 13.6(d)(1), (3), (4), (5), and (9), a director 
of a business development company would be considered to be independent 
if he or she is not an ``interested person'' of the company, as defined 
in section 2(a)(19) of the Investment Company Act.\61\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 80a-2(a)(48).
    \60\ See Proposed Exchange Rule 13.6(a)(1)(c).
    \61\ 15 U.S.C. 80a-2(a)(19).
---------------------------------------------------------------------------

    Open-end management investment companies (``open-end funds''), 
which can be listed as Investment Company

[[Page 42799]]

Units, and are more commonly known as Exchange Traded Funds or ETFs, 
would be required to: (1) Have an audit committee that satisfies the 
requirements of Rule 10A-3 and Subsection 1.4 of Article IV of the 
Exchange By-Laws, and (2) notify the Exchange in writing of any 
material non-compliance.\62\
---------------------------------------------------------------------------

    \62\ See Proposed Exchange Rule 13.6(a)(1)(c).
---------------------------------------------------------------------------

    In addition, NSX proposes also to require the audit committees of 
closed-end and open-end funds to establish procedures for the 
confidential, anonymous submission of concerns regarding questionable 
accounting or auditing matters by employees of the investment advisor, 
administrator, principal underwriter, or any other provider of 
accounting related services for the investment company, as well as 
employees of the investment company.\63\ This responsibility would be 
required to be addressed in the audit committee charter.\64\
---------------------------------------------------------------------------

    \63\ Id.
    \64\ Id.
---------------------------------------------------------------------------

    NSX proposes that, except as otherwise required by Rule 10A-3, the 
new requirements would also not apply to passive business organizations 
in the form of trusts (such as royalty trusts) or to derivatives and 
special purpose securities. To the extent that Rule 10A-3 applies to a 
passive business organization, listed derivative, or special purpose 
security, the requirement to have an audit committee that satisfies the 
requirements of Rule 10A-3, and the requirements to notify NSX in 
writing of any material non-compliance, also would apply.\65\
---------------------------------------------------------------------------

    \65\ See Proposed Exchange Rule 13.6(a)(1)(d).
---------------------------------------------------------------------------

    The new requirements generally would not apply to companies listing 
only preferred or debt securities on NSX. To the extent required to 
Rule 10A-3, however, all companies listing only preferred or debt 
securities on NSX would be required to: (1) Have an audit committee 
that satisfies the requirements of Rule 10A-3, and (2) notify the 
Exchange in writing of any material non-compliance.\66\
---------------------------------------------------------------------------

    \66\ See Proposed Exchange Rule 13.6(a)(2).
---------------------------------------------------------------------------

    Because the majority of the Exchange's issuers have securities that 
are also listed on one or more other markets, the Exchange has included 
a provision in its proposed rule amendments that would exempt such 
issuers from certain of NSX's governance standards if the issuer is 
listed on a national securities exchange or national securities 
association with listing standards substantially similar to the NSX 
governance standards. Specifically, such company listing on another 
market would not be required to separately meet the NSX governance 
requirements.\67\ The proposed rule text contains specific criteria 
that would be required to be considered when determining whether 
another market's governance standards are ``substantially similar.''
---------------------------------------------------------------------------

    \67\ The exemption would not apply to the Exchange's 
requirements relating to audit committees or to an issuer's 
obligation to notify the Exhcnage if there is material non-
compliance with the audit committee requirements. See Proposed 
Exchange Rule 13.6(a)(3). See also supra note 11.
---------------------------------------------------------------------------

m. Applications to Foreign Private Issuers
    Exchange Rule 13.6 would permit NSX-listed companies that are 
foreign private issuers, such as that term is defined in Rule 3b-4 of 
the Act,\68\ to follow home country practice in lieu of the new 
requirements, except that such companies would be required to: (1) Have 
an audit committee that satisfies the requirements of Rule 10A-3; (2) 
notify NSX in writing after any executive officer becomes aware of any 
non-compliance with any applicable provision; and (3) provide a brief, 
general summary of the significant ways in which its governance 
practices differ from those followed by domestic companies under NSX 
listing standards.\69\ Listed foreign private issuers would be 
permitted to provide this disclosure either on their website (provided 
it is in the English language and accessible from the United States) 
and/or in their annual report as distributed to shareholders in the 
United States.\70\ If the disclosure is made available only on the 
website, the annual report would be required to state this and provide 
the web address at which the information may be obtained.\71\
---------------------------------------------------------------------------

    \68\ 17 CFR 240.3b-4.
    \69\ See Proposed Exchange Rule 13.6(a)(1)(e) and (d)(11).
    \70\ See Interpretations and Policies to Proposed Exchange Rule 
13.6(d)(11).
    \71\ Id.
---------------------------------------------------------------------------

n. Proposed Implementation of New Provisions
    Pursuant to the proposed schedule, listed companies would have 
until the earlier of their first annual meeting after July 31, 2004, or 
December 31, 2004 to comply with the new standards. However, if a 
company with a classified board is required to change a director who 
would not normally stand for election in an annual meeting, the company 
would be permitted to continue such director in office until the second 
annual meeting after such date, but no later than December 31, 2005. 
Nothwithstanding the foregoing, foreign private issuers would have 
until July 31, 2005 to comply with any Rule 10A-3 audit committee 
requirements.\72\
---------------------------------------------------------------------------

    \72\ See Proposed Exchange Rule 13.6(b).
---------------------------------------------------------------------------

    Companies listing in conjunction with their initial public offering 
\73\ would be required to have one independent member at the time of 
listing, a majority of independent members within 90 days of listing, 
and fully independent committees within one year. They would be 
required to meet the majority of independent board requirement within 
12 months of listing.\74\
---------------------------------------------------------------------------

    \74\ Id.
    \73\ For purposes of proposed Exchange Rule 13.6, a company 
would be considered to be listing in conjunction with an initial 
public offering if, immediately prior to listing, it does not have a 
class of common stock registered under the Act. NSX also proposes to 
permit companies that are emerging from bankruptcy or have ceased to 
be controlled companies within the meaning of proposed Exchange Rule 
13.6 to phase in independent nomination and compensation committees 
and majority independent boards on the same schedule as companies 
listing in conjunction with an initial public offering. However, for 
purposes of the requirement that a company have an audit committee 
that complies with the requirements of Rule 10A-3, and the 
requirement that a company notify the Exchange in writing of any 
material non-compliance, a company will be considered to be listing 
in conjunction with an initial public offering only if it meets the 
conditions of Rule 10A-3(b)(1)(iv)(A). Investment companies are not 
subject to this exemption under Rule 10A-3(b)(1)(iv)(A), however. 
See Proposed Exchange Rule 13.6(b).
---------------------------------------------------------------------------

    Companies listing upon transfer from another market, or that are 
listing a security on the Exchange that will remain listed on another 
market or markets, would have 12 months from the date of transfer in 
which to comply with any requirement to the extent that the market on 
which they had/have been listed does not have the same requirement. To 
the extent that the other market has a substantially similar 
requirement but also had a transition period from the effective date of 
that market's rule, which period had not yet expired, the company would 
have the same transition period as would have been available to it on 
the other market. This transition period for companies transferring 
from other markets or that are dually or multiply listing securities 
would not apply to the audit committee requirements of Rule 10A-3 
unless a transition period is available under Rule 10A-3.\75\
---------------------------------------------------------------------------

    \75\ Id.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act \76\ in general and furthers the 
objectives of Section 6(b)(5) \77\ in particular in that it

[[Page 42800]]

is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, generally, in that it protects investors 
and the public interest.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78f(b).
    \77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not beleive that the proposed rule change will 
impose any inappropriate burden on competition.

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 in connection with 
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-NSX-2004-10 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-NSX-2004-10. 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 
NSX. 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-NSX-
2004-10 and should be submitted on or before August 6, 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.\78\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with section 6(b)(5) of the Act 
\79\ 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.
---------------------------------------------------------------------------

    \78\ 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).
    \79\ 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 
NSX-listed issuers. The proposal also will promote compliance with high 
standards of conduct by the issuers' directors and management. The 
Commission notes that the NSX's proposal is similar to proposals of 
other self-regulatory organizations (``SROs'') recently approved by the 
Commission.\80\
---------------------------------------------------------------------------

    \80\ 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 NYSE).
---------------------------------------------------------------------------

    The NSX has requested that the Commission grant accelerated 
approval to the proposed rule change. The Commission believes that the 
proposed rule change will significantly align the corporate governance 
standards proposed for companies listed on the NSX 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 NSX 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,\81\ 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.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\82\ that the proposed rule change (SR-NSX-2004-10), as amended, is 
hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\83\
---------------------------------------------------------------------------

    \83\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16180 Filed 7-15-04; 8:45 am]
BILLING CODE 8010-01-P