[Federal Register Volume 69, Number 169 (Wednesday, September 1, 2004)]
[Notices]
[Pages 53478-53480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1985]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50267; File No. SR-NASD-2004-105]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, and Amendment No. 1 Thereto, by National Association of 
Securities Dealers, Inc. To Amend Rule 4350(n) and IM-4350-7 To Provide 
Time Frames for Foreign Issuers and Foreign Private Issuers To Disclose 
Certain Code of Conduct Waivers

August 26, 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 July 8, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On August 23, 
2004, Nasdaq filed an Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary M. Dunbar, Vice President and General 
Counsel, Nasdaq, to Katherine England, Assistant Director, Division 
of Market Regulation, Commission, dated August 20, 2004 (``Amendment 
No. 1''). In Amendment No. 1, Nasdaq replaced the original filing in 
its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to change NASD Rule 4350 and related interpretative 
material to make a clarifying amendment to that rule relating to 
foreign issuers. Nasdaq will implement the proposed rule change 
immediately upon approval by the Commission. The text of the proposed 
rule change is below. Proposed new language is in italics; proposed 
deletions are in brackets.\4\
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    \4\ Changes are marked to the rule text that appears in the 
electronic NASD manual found at http://www.nasd.com. No pending or 
approved rule filings would affect the text of these rules.
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* * * * *

Rule 4350. Qualitative Listing Requirements for Nasdaq National Market 
and Nasdaq SmallCap Market Issuers Except for Limited Partnerships

    (a)-(m) No Change.
    (n) Code of Conduct.
    Each issuer shall adopt a code of conduct applicable to all 
directors, officers and employees, which shall be publicly available. A 
code of conduct satisfying this rule must comply with the definition of 
a ``code of ethics'' set out in Section 406(c) of the Sarbanes--Oxley 
Act of 2002 (``the Sarbanes-Oxley Act'') and any regulations 
promulgated thereunder by the Commission. See 17 C.F.R. 228.406 and 17 
C.F.R. 229.406. In addition, the code must provide for an enforcement 
mechanism. Any waivers of the code for directors or executive officers 
must be approved by the Board. [Domestic issuers] Issuers, other than 
foreign private issuers, shall disclose such waivers in a Form 8-K 
within five business days. Foreign private issuers shall disclose such 
waivers either in a Form 6-K or in the next Form 20-F or 40-F.
* * * * *

IM-4350-1 through IM-4350-6

    No Change.

IM-4350-7: Code of Conduct

    Ethical behavior is required and expected of every corporate 
director, officer and employee whether or not a formal code of conduct 
exists. The requirement of a publicly available code of conduct 
applicable to all directors, officers and employees of an issuer is 
intended to demonstrate to investors that the board and management of 
Nasdaq issuers have carefully considered the requirement of ethical 
dealing and have put in place a system to ensure that they become aware 
of and take prompt action against any

[[Page 53479]]

questionable behavior. For company personnel, a code of conduct with 
enforcement provisions provides assurance that reporting of 
questionable behavior is protected and encouraged, and fosters an 
atmosphere of self-awareness and prudent conduct.
    Rule 4350(n) requires issuers to adopt a code of conduct complying 
with the definition of a ``code of ethics'' under Section 406(c) of the 
Sarbanes-Oxley Act of 2002 (``the Sarbanes-Oxley Act'') and any 
regulations promulgated thereunder by the Commission. See 17 CFR 
228.406 and 17 CFR 229.406. Thus, the code must include such standards 
as are reasonably necessary to promote the ethical handling of 
conflicts of interest, full and fair disclosure, and compliance with 
laws, rules and regulations, as specified by the Sarbanes-Oxley Act. 
However, the code of conduct required by Rule 4350(n) must apply to all 
directors, officers, and employees. Issuers can satisfy this obligation 
by adopting one or more codes of conduct, such that all directors, 
officers and employees are subject to a code that satisfies the 
definition of a ``code of ethics.''
    As the Sarbanes-Oxley Act recognizes, investors are harmed when the 
real or perceived private interest of a director, officer or employee 
is in conflict with the interests of the company, as when the 
individual receives improper personal benefits as a result of his or 
her position with the company, or when the individual has other duties, 
responsibilities or obligations that run counter to his or her duty to 
the company. Also, the disclosures an issuer makes to the Commission 
are the essential source of information about the company for 
regulators and investors--there can be no question about the duty to 
make them fairly, accurately and timely. Finally, illegal action must 
be dealt with swiftly and the violators reported to the appropriate 
authorities. Each code of conduct must require that any waiver of the 
code for executive officers or directors may be made only by the board 
and must be [promptly] disclosed to shareholders, along with the 
reasons for the waiver. [This disclosure requirement provides investors 
the comfort that waivers are not granted except where they are truly 
necessary and warranted, and that they are limited and qualified so as 
to protect the company to the greatest extent possible.] [Consistent 
with applicable law, domestic] All issuers, other than foreign private 
issuers, must disclose such waivers in a Form 8-K within five business 
days. Foreign private issuers must disclose such waivers either in a 
Form 6-K or in the next Form 20-F or 40-F. This disclosure requirement 
provides investors the comfort that waivers are not granted except 
where they are truly necessary and warranted, and that they are limited 
and qualified so as to protect the company and its shareholders to the 
greatest extent possible.
    Each code of conduct must also contain an enforcement mechanism 
that ensures prompt and consistent enforcement of the code, protection 
for persons reporting questionable behavior, clear and objective 
standards for compliance, and a fair process by which to determine 
violations.
* * * * *

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

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

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

1. Purpose
    Nasdaq rules currently require all issuers to adopt a code of 
conduct applicable to all directors, officers, and employees of the 
issuer and that such code require that any waivers of the code for 
directors or executive officers must be approved by the Board and 
promptly disclosed to shareholders, along with the reasons for the 
waiver. These rules require that domestic issuers make such disclosure 
in a Form 8-K within five business days. Nasdaq now proposes to clarify 
the time frame in which non-U.S. issuers must make such disclosure. 
Specifically, foreign issuers, other than foreign private issuers, will 
be required to make disclosure in the same manner as domestic issuers. 
Foreign private issuers will be required to make the disclosure either 
on the issuer's next Form 20-F or 40-F, or on a Form 6-K. This 
disclosure method and timing is consistent with that required by the 
Commission for waivers to a code of ethics for senior financial 
officers and the principal executive officer.\5\ As the Commission 
noted in approving those rules, this differing treatment reflects the 
fact that foreign private issuers do not have any specific interim or 
current disclosure requirements mandated by the Commission.
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    \5\ See Securities Act Release No. 8177, 68 FR 5110 (Jan. 31, 
2003) (adopting new Item 16B to Form 20-F and paragraph (9) to 
General Instruction B of Form 40-F).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\6\ in general and with 
Section 15A(b)(6) of the Act,\7\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. Clarifying the timing of 
disclosure regarding code of conduct waivers by foreign issuers and 
foreign private issuers will serve to protect investors and the public 
interest.
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    \6\ 15 U.S.C. 78o-3.
    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 53480]]

IV. 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-NASD-2004-105 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-NASD-2004-105. 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 
NASD. 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-
NASD-2004-105 and should be submitted on or before September 22, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E4-1985 Filed 8-31-04; 8:45 am]
BILLING CODE 8010-01-P