[Federal Register: July 15, 2004 (Volume 69, Number 135)]
[Notices]
[Page 42476-42486]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jy04-109]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49995; File No. SR-CBOE-2004-28]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment
Nos. 1 and 2 thereto by the Chicago Board Options Exchange,
Incorporated, Relating to Enhanced Corporate Governance Requirements
for Listed Companies
July 9, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 6, 2004, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the CBOE. On June 24, 2004, and July 9, 2004, the CBOE filed Amendment
Nos. 1 \3\ and 2,\4\ respectively, to the proposed rule change. The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons and is
approving the proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from David Doherty, Attorney, Legal Division,
CBOE, to Ira Brandriss, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated June 23, 2004
(``Amendment No. 1''). The changes proposed in Amendment No. 1 have
been incorporated into the proposal as set forth below.
\4\ See letter from David Doherty, Attorney, Legal Division,
CBOE, to Cyndi N. Rodriguez, Special Counsel, Division, Commission,
dated July 9, 2004 (``Amendment No. 2''). Amendment No. 2 was a
technical amendment and is not subject to notice and comment.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to amend its non-option listing standards to
enhance the Exchange's corporate governance requirements applicable to
listed companies. The text of the proposed rule filing, as amended, is
set forth below. Additions are in italics; deletions are in brackets.
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *
Chapter XXXI
* * * * *
Approval of Securities for Original Listing
* * * * *
Rule 31.7 Securities of Foreign Issuers
(1) No change.
(2) The Exchange will consider the law, and generally accepted
commercial and business practice of the [applicant's] foreign issuer's
domicile in evaluating (A) the election and composition of its Board of
Directors, to the extent such law, and generally accepted commercial
and business practice with respect to the election and composition of
its Board of Directors is consistent with the federal securities laws,
including, but not limited to, Exchange Act Rule 10A-3 [of the
Securities Exchange Act of 1934, as amended], (B) shareholder approval
and quorum requirements for meetings, and (C) the issuance of quarterly
earnings statements. A foreign issuer that receives an exemption under
this Rule 31.7(2) shall disclose in its annual reports filed with the
Securities and Exchange Commission each requirement from which it is
exempted and describe the practice of the foreign issuer's domicile, if
any, followed by the issuer in lieu of such requirements. In addition,
a foreign issuer making its initial public offering or first United
States listing on the Exchange shall disclose any such exemptions in
its registration statement.
(3)-(5) No change.
* * * Interpretations and Policies
01. A foreign private issuer listed on the Exchange may obtain
exemptions from the corporate governance requirements described in Rule
31.7(2) that are consistent with the federal securities laws,
including, but not limited to, Exchange Act Rule 10A-3, if such
requirements would require the issuer to do anything contrary to the
law, and generally accepted commercial and business practice of the
foreign issuer's domicile. Issuers may request exemptions under this
rule by submitting a letter from their home country counsel briefly
describing the law, and generally accepted commercial and business
practice of the home country. In the interest of transparency, the rule
requires a foreign issuer to disclose the receipt of a corporate
governance exemption in the issuer's annual filings with the Securities
and Exchange Commission (typically Form 20-F or 40-F) and at the time
of the issuer's original listing in the United States, if that listing
is on the Exchange, in its registration statement (typically Form F-1,
20-F, or 40-F). The disclosure should include a brief statement of what
alternative measures, if any, the issuer has taken in lieu of the
corporate governance requirement(s) from which it was exempted. For
example, the issuer might state that it complies with the relevant
standards of its domicile.
* * * * *
Rule 31.9 Conflicts of Interest
Applicants will be asked to eliminate material conflicts of
interest between officers, directors or principal shareholders and the
applicant issuer prior to approval of the listing. Each issuer shall
conduct an appropriate review of all related party transactions for
potential conflict of interest situations on an ongoing basis and
[shall use] all such transactions must be approved by the company's
audit committee or [a comparable] another independent body of the board
of directors [to review potential conflicts of interest situations
where appropriate]. For purposes of this rule, the term ``related party
transaction'' shall refer to transactions required to be disclosed
pursuant to SEC Regulation S-K, Item 404.
* * * * *
Rule 31.10 Corporate Governance [Independent Directors]
[The Exchange requires an issuer to have at least two independent
directors. For purposes of this section, ``independent director'' shall
mean a person other than an officer or employee of the company or its
subsidiaries or any other individual having a relationship which, in
the opinion of the board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.]
[[Page 42477]]
(a) Composition of Board of Directors
(1) A majority of the board of directors of an issuer must be
comprised of independent directors. The company must disclose in its
annual proxy (or, if the issuer does not file a proxy, in its Form 10-K
or 20-F) those directors that the board of directors has determined to
be independent under Rule 31.10(h)(2). If an issuer fails to comply
with this requirement due to one vacancy, or one director ceases to be
independent due to circumstances beyond his or her reasonable control,
the issuer shall regain compliance with the requirement by the earlier
of its next annual shareholders meeting or one year from the occurrence
of the event that caused the failure to comply with this requirement.
An issuer relying on this provision shall provide notice to the
Exchange immediately upon learning of the event or circumstance that
caused the non-compliance.
(2) Independent directors must have regularly scheduled meetings at
which only independent directors are present (``executive sessions'').
(b) Audit Committee
[The issuer shall maintain an audit committee (i) composed of such
independent directors and (ii) that complies with the listing standards
set forth in Rule 10A-3 of the Securities Exchange Act of 1934, as
amended (``Exchange Act''). In addition to the listing standards
provided in Exchange Act Rule 10A-3 that relate to audit committee
responsibilities, audit committees for investment companies must
establish procedures for the confidential, anonymous submission of
concerns regarding questionable accounting or auditing matters by
employees of the investment adviser, administrator, principal
underwriter, or any other provider of accounting related services for
the investment company, as well as employees of the investment
company.]
(1) Audit Committee Composition
(A) Each issuer must have, and certify that it has and will
continue to have, an audit committee of at least three members, each of
whom must (i) be independent as defined in Rule 31.10(h)(2); (ii) meet
the criteria for independence set forth in Exchange Act Rule 10A-
3(b)(1) (subject to the exemptions provided in Rule 10A-3(c)); and
(iii) be able to read and understand fundamental financial statements,
including a company's balance sheet, income statement, and cash flow
statement. Additionally, each issuer must certify that it has, and will
continue to have, at least one member of the audit committee who is
financially sophisticated, in that he or she has past employment
experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or
background which results in the individual's financial sophistication,
including being or having been a chief executive officer, chief
financial officer or other senior officer with financial oversight
responsibilities.
(B) Notwithstanding Rule 31.10(b)(1)(A)(i), one director who: (i)
is not independent as defined in Rule 31.10(h)(2); (ii) meets the
criteria set forth in Section 10A(m)(3) of the Exchange Act and the
rules thereunder; and (iii) is not a current officer or employee or a
family member of such officer or employee, may be appointed to the
audit committee, if the board, under exceptional and limited
circumstances, determines that membership on the committee by the
individual is required by the best interests of the company and its
shareholders, and the board discloses, in the next annual proxy
statement subsequent to such determination (or, if the issuer does not
file a proxy, in its Form 10-K or 20-F), the nature of the relationship
and the reasons for that determination. A member appointed under this
exception may not serve longer than two years and may not chair the
audit committee.
(2) Audit Committee Responsibilities and Authority
The audit committee must have the specific audit committee
responsibilities and authority necessary to comply with Exchange Act
Rules 10A-3(b)(2)-(5) (subject to the exemptions provided in Rule 10A-
3(c)) concerning responsibilities relating to: (i) registered public
accounting firms; (ii) complaints relating to accounting, internal
accounting controls or auditing matters; (iii) authority to engage
advisors; and (iv) funding as determined by the audit committee. Audit
committees for investment companies must also establish procedures for
the confidential, anonymous submission of concerns regarding
questionable accounting or auditing matters by employees of the
investment adviser, administrator, principal underwriter, or any other
provider of accounting related services for the investment company, as
well as employees of the investment company.
(3) Audit Committee Charter
Each issuer must certify that it has adopted a formal written audit
committee charter and that the audit committee has reviewed and
reassessed the adequacy of the formal written charter on an annual
basis. The charter must specify:
(A) The scope of the audit committee's responsibilities, and how it
carries out those responsibilities, including structure, processes, and
membership requirements;
(B) The audit committee's responsibility for ensuring its receipt
from the outside auditors of a formal written statement delineating all
relationships between the auditor and the company, consistent with
Independence Standards Board Standard 1, and the audit committee's
responsibility for actively engaging in a dialogue with the auditor
with respect to any disclosed relationships or services that may impact
the objectivity and independence of the auditor and for taking, or
recommending that the full board take, appropriate action to oversee
the independence of the outside auditor;
(C) The committee's purpose of overseeing the accounting and
financial reporting processes of the issuer and the audits of the
financial statements of the issuer; and
(D) The specific audit committee responsibilities and authority set
forth in Rule 31.10(b)(2).
(4) Cure Periods
(A) If a member of the audit committee ceases to be independent in
accordance with the requirements of Exchange Act Rule 10A-3 and Rule
31.10(b)(1) for reasons outside the member's reasonable control, that
person, with written notice to the Exchange, may remain an audit
committee member of the listed issuer until the earlier of the next
annual shareholders meeting of the listed issuer or one year from the
occurrence of the event that caused the member to be no longer
independent. An issuer relying on this provision must provide notice to
the Exchange immediately upon learning of the event or circumstance
that caused the non-compliance.
(B) If an issuer fails to comply with the audit committee
composition requirement under Rule 31.10(b)(1)(A) due to one vacancy on
the audit committee, and the cure period in Rule 31.10(b)(4)(A) is not
otherwise being relied upon for another member, the issuer will have
until the earlier of the next annual shareholders meeting or one year
from the occurrence of the event that caused the failure to comply with
this requirement. An issuer relying on the provision must provide
notice to the Exchange immediately upon learning of the event or
circumstance that caused the non-compliance.
(c) Compensation of Officers
[[Page 42478]]
(1) Compensation of the chief executive officer of the company must
be determined, or recommended to the board for determination, either
by:
(A) A majority of the independent directors; or
(B) A compensation committee comprised solely of independent
directors.
The chief executive officer may not be present during voting or
deliberations.
(2) Compensation of all other executive officers must be
determined, or recommended to the board for determination, either by
(A) A majority of the independent directors; or
(B) A compensation committee comprised solely of independent
directors.
(3) Notwithstanding paragraphs (c)(1)(B) and (c)(2)(B) above, if
the compensation committee is comprised of at least three members, one
director, who is not independent as defined in Rule 31.10(h)(2) and is
not a current officer or employee or a family member of an officer or
employee, may be appointed to the compensation committee if the board,
under exceptional and limited circumstances, determines that such
individual's membership on the committee is required by the best
interests of the company and its shareholders, and the board discloses,
in the proxy statement for the next annual meeting subsequent to such
determination (or, if the issuer does not file a proxy, in its Form 10-
K or 20-F), the nature of the relationship and the reasons for the
determination. A member appointed under this exception may not serve
longer than two years.
(d) Nomination of Directors
(1) Director nominees must either be selected, or recommended for
the Board's selection, either by:
(A) A majority of the independent directors; or
(B) A nominations committee comprised solely of independent
directors.
(2) Each issuer must certify that it has adopted a formal written
charter or board resolution, as applicable, addressing the nominations
process and such related matters as may be required under the federal
securities laws.
(3) Notwithstanding subparagraph (d)(1)(B) above, if the
nominations committee is comprised of at least three members, one
director, who is not independent as defined in Rule 31.10(h)(2) and is
not a current officer or employee or a family member of an officer or
employee, may be appointed to the nominations committee if the board,
under exceptional and limited circumstances, determines that such
individual's membership on the committee is required by the best
interests of the company and its shareholders, and the board discloses,
in the proxy statement for the next annual meeting subsequent to such
determination (or, if the issuer does not file a proxy, in its Form 10-
K or 20-F), the nature of the relationship and the reasons for the
determination. A member appointed under this exception may not serve
longer than two years.
(4) Independent director oversight of director nominations shall
not apply in cases where the right to nominate a director legally
belongs to a third party. However, this does not relieve a company's
obligation to comply with the committee composition requirements set
forth in Rules 31.10(a)-(d).
(5) This Rule 31.10(d) is not applicable to a company if the
company is subject to a binding obligation that requires a director
nomination structure inconsistent with this rule and such obligation
pre-dates the approval date of this rule.
(e) Each issuer shall adopt a code of conduct applicable to all
directors, officers and employees, which shall be publicly available. A
code of conduct satisfying this rule must comply with the definition of
a ``code of ethics'' set out in Section 406(c) of the Sarbanes-Oxley
Act of 2002 (the ``Sarbanes-Oxley Act'') and any regulations
promulgated thereunder by the Securities and Exchange Commission. See
17 CFR 228.406 and 17 CFR 229.406. In addition, the code must provide
for an enforcement mechanism. Domestic issuers shall disclose code of
conduct waivers in a Form 8-K within five business days. Foreign
private issuers shall disclose such waivers either in a Form 6-K or in
the next Form 20-F.
(f) Exemptions
(1) Controlled Companies. A controlled company is exempt from the
requirements of Rules 31.10(a), (c) and (d), except that a controlled
company must comply with (i) the provision in subsection (a)(1) that
requires a company to disclose in its annual proxy (or, if the issuer
does not file a proxy, in its Form 10-K or 20-F) those directors that
the board of directors has determined to be independent under Rule
31.10(h)(2) and (ii) the requirements of subsection (a)(2), which
pertains to executive sessions of independent directors. For purposes
of this Rule 31.10, a controlled company is a company of which more
than 50% of the voting power is held by an individual, a group or
another company. A controlled company relying upon this exemption must
disclose in its annual meeting proxy statement (or, if the issuer does
not file a proxy, in its Form 10-K or 20-F) that it is a controlled
company and the basis for that determination.
(2) Registered Management Investment Companies. Management
investment companies registered under the Investment Company Act of
1940 are exempt from the requirements of Rules 31.10(a), (c), (d) and
(e). Such companies are otherwise required to comply with the remainder
of Rule 31.10, except that open-end management investment companies are
required to comply with Rule 31.10(b) only to the extent required by
Exchange Act Rule 10A-3. In addition, open-end management investment
companies must comply with the provision of Rule 31.10(b)(2) requiring
audit committees of investment companies to establish procedures for
the confidential, anonymous submission of concerns regarding
questionable accounting or auditing matters by employees of the
investment adviser, administrator, principal underwriter, or any other
provider of accounting related services for the investment company, as
well as employees of the investment company. This responsibility must
be addressed in the audit committee charter.
(3) Asset-backed Issuers and Other Passive Issuers. The following
are exempt from the requirements of Rules 31.10(a)-(e): (i) asset-
backed issuers and (ii) issuers that are organized as trusts or other
unincorporated associations that do not have a board of directors or
persons acting in a similar capacity and whose activities are limited
to passively owning or holding (as well as administering and
distributing amounts in respect of) securities, rights, collateral or
other assets on behalf of or for the benefit of the holders of the
listed securities.
(4) Cooperatives. Cooperative entities, such as agricultural
cooperatives, that are structured to comply with relevant state law and
federal tax law and that do not have a publicly traded class of common
stock are exempt from Rules 31.10(a), (c), (d) and (e). However, such
entities must comply with all federal securities laws, including
without limitation Exchange Act Section 10A(m) and Rule 10A-3
thereunder.
(5) Business Development Companies. Business development companies,
which are a type of closed-end management investment company defined in
Section 2(a)(48) of the Investment Company Act of 1940 that are not
registered under that Act, are subject to all corporate governance
requirements.
[[Page 42479]]
(g) Notifications. An issuer must provide the Exchange with prompt
notification after an executive officer of the issuer becomes aware of
any material noncompliance by the issuer with the requirements of Rule
31.10.
(h) Definitions
For purposes of Chapter XXXI, the following terms shall have the
respective meanings:
(1) ``Family member'' means a person's spouse, parents, children
and siblings, whether by blood, marriage or adoption, or anyone
residing in such person's home.
(2) ``Independent director'' means a person other than an officer
or employee of the company or its subsidiaries or any other individual
having a relationship, which, in the opinion of the company's board of
directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. The following persons
shall not be considered independent:
(A) A director who is, or at any time during the past three years
was, employed by the company or by any parent or subsidiary of the
company;
(B) A director who accepted or who has a family member who accepted
any payments from the company or any parent or subsidiary of the
company in excess of $60,000 during the current or any of the past
three fiscal years, other than the following:
(i) Compensation for board or board committee service;
(ii) Payments arising solely from investments in the company's
securities;
(iii) Compensation paid to a family member who is a non-executive
employee of the company or a parent or subsidiary of the company;
(iv) Benefits under a tax-qualified retirement plan, or non-
discretionary compensation; or
(v) Loans permitted under Exchange Act Section 13(k).
Provided, however, that audit committee members are subject to
additional, more stringent requirements under Exchange Act Rule 10A-3,
which requirements are incorporated by reference in the Exchange rules
pursuant to Rule 31.10(b).
(C) A director who is a family member of an individual who is, or
at any time during the past three years was, employed by the company or
by any parent or subsidiary of the company as an executive officer;
(D) A director who is, or has a family member who is, a partner in,
or a controlling shareholder or an executive officer of, any
organization to which the company made, or from which the company
received, payments for property or services in the current or any of
the past three fiscal years that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000, whichever is
more, other than the following:
(i) Payments arising solely from investments in the company's
securities; or
(ii) Payments under non-discretionary charitable contribution
matching programs;
(E) A director of the listed company who is, or has a family member
who is, employed as an executive officer of another entity where at any
time during the past three years any of the executive officers of the
listed company serve on the compensation committee of such other
entity;
(F) A director who is, or has a family member who is, a current
partner of the company's outside auditor, or was a partner or employee
of the company's outside auditor who worked on the company's audit at
any time during any of the past three years; or
(G) In the case of an investment company, in lieu of Rules
31.10(h)(2)(A)-(F), a director who is an ``interested person'' of the
company as defined in Section 2(a)(19) of the Investment Company Act of
1940, other than in his or her capacity as a member of the board of
directors or any board committee.
(i) Effective Dates/Transition
(1) In order to allow companies to make necessary adjustments in
the course of their regular annual meeting schedule, and consistent
with Exchange Act Rule 10A-3, Rules 31.10(a)-(d), (f) and (h) are
effective as set forth below. During the transition period between July
9, 2004 and the applicable effective date, listed companies must comply
with Rule 31.10 as in effect immediately prior to July 9, 2004 (see
Rule 31.10.10).
July 31, 2005 for foreign private issuers and small
business issuers (as defined in Exchange Act Rule 12b-2); and
For all other listed issuers, by the earlier of (1) the
listed issuer's first annual shareholders meeting after July 31, 2004;
or (2) October 31, 2004.
(2) In the case of an issuer with a staggered board, with the
exception of the audit committee requirements, the issuer will have
until its second annual meeting after January 15, 2004, but not later
than December 31, 2005, to implement all of the new requirements, if
the issuer would be required to change a director who would not
normally stand for election at an earlier annual meeting. Such issuers
must comply with the audit committee requirements pursuant to the
implementation schedule bulleted above.
(3) Issuers that will be listed in conjunction with their initial
public offering will be afforded exemptions from all board composition
requirements set forth in Rule 31.10 consistent with the exemptions
afforded in Exchange Act Rule 10A-3(b)(1)(iv)(A). That is, for each
committee that the company adopts, the company will be required to have
one independent member at the time of listing, a majority of
independent members within 90 days of listing, and all independent
members within one year. It should be noted, however, that investment
companies are not afforded these exemptions in Exchange Rule 10A-
3(b)(1)(iv)(A). Companies emerging from bankruptcy or which have ceased
to be controlled companies will be required to meet the majority
independent board requirement within one year. As provided under the
proposal, issuers may choose not to adopt a compensation or nomination
committee and could instead rely upon a majority of the independent
directors to discharge responsibilities under Exchange rules. These
issuers will be required to meet the majority independent board
requirement within one year of listing.
(4) Companies transferring from other markets with substantially
similar board composition requirements will be afforded the balance of
any grace period afforded by the other market. Companies transferring
from other listed markets that do not have a substantially similar
board composition requirements will be afforded one year from the date
of listing on the Exchange to comply with the Exchange's board
composition requirements. This transition period is not intended to
supplant any applicable requirements of Exchange Act Rule 10A-3.
(5) Proposed Rule 31.10(d), which pertains to nominating
committees, will not apply if the company is subject to a binding
obligation that requires a director nomination structure inconsistent
with Rule 31.10(d) and such obligation pre-dates the approval date of
Rule 31.10(d).
(6) Compliance with proposed Rule 31.10(e), which requires issuers
to adopt a code of conduct, will be required on July 31, 2004.
* * * Interpretations and Policies
.01 Definition of Independence. It is important for investors to
have confidence that individuals serving as independent directors do
not have a relationship with the listed company that would impair their
independence.
[[Page 42480]]
The board has a responsibility to make an affirmative determination
that no such relationships exist through the application of Rule
31.10(h)(2). Rule 31.10(h)(2) also sets forth certain relationships
that preclude a board finding of independence. These objective measures
provide transparency to investors and companies, facilitate uniform
application of the rules, and ease administration. Because the Exchange
does not believe that ownership of company stock by itself would
preclude a board finding of independence, it is not included in the
aforementioned objective factors. It should be noted that there are
additional, more stringent requirements that apply to directors serving
on audit committees pursuant to Rule 31.10(b).
The rule's reference to a ``parent or subsidiary'' is intended to
cover entities the issuer controls and consolidates with the issuer's
financial statements as filed with the Securities and Exchange
Commission (but not if the issuer reflects such entity solely as an
investment in its financial statements). The reference to executive
officer means those officers covered in Exchange Act Rule 16a-1(f). In
the context of the definition of family member under Rule 31.10(h)(1),
the reference to marriage is intended to capture relationships
specified in the rule (parents, children and siblings) that arise as a
result of marriage, such as ``in-law'' relationships.
The three year look-back periods referenced in Rules
31.10(h)(2)(A), (C), (E) and (F) commence on the date the relationship
ceases. For example, a director employed by the company is not
independent until three years after such employment terminates.
Rule 31.10(h)(2)(B) is generally intended to capture situations
where a payment is made directly to (or for the benefit of) the
director or a family member of the director. For example, consulting or
personal service contracts with a director or family member of the
director or political contributions to the campaign of a director or a
family member of the director would be captured under Rule
31.10(h)(2)(B).
Rule 31.10(h)(2)(D) is generally intended to capture payments to an
entity with which the director or family member of the director is
affiliated by serving as a partner, controlling shareholder or
executive officer of such entity. Under exceptional circumstances, such
as where a director has direct, significant business holdings, it may
be appropriate to apply the corporate measurements in Rule
31.10(h)(2)(D), rather than the individual measurements in Rule
31.10(h)(2)(B). Issuers should contact the Exchange if they wish to
apply the rule in this manner. The reference to a partner in Rule
31.10(h)(2)(D) is not intended to include limited partners. It should
be noted that the independence requirements of Rule 31.10(h)(2)(D) are
broader than Exchange Act Rule 10A-3(e)(8). Under Rule 31.10(h)(2)(D),
a director who is, or who has a family member who is, an executive
officer of a charitable organization may not be considered independent
if the company makes payments to the charity in excess of the greater
of 5% of the charity's revenues or $200,000. However, the Exchange
encourages companies to consider other situations where a director or
his or her family member and the company each have a relationship with
the same charity when assessing director independence.
For purposes of determining whether a lawyer is eligible to serve
on an audit committee, Exchange Act Rule 10A-3 generally provides that
any partner in a law firm that receives payments from the issuer is
ineligible to serve on that issuer's audit committee. In determining
whether a director may be considered independent for purposes other
than the audit committee, payments to a law firm would generally be
considered under Rule 31.10(h)(2)(D), which looks to whether the
payment exceeds the greater of 5% of the recipients gross revenues or
$200,000; however, if the firm is a sole proprietorship, Rule
31.10(h)(2)(B), which looks to whether the payment exceeds $60,000,
applies.
Rule 31.10(h)(2)(G) provides a different measure for independence
for investment companies in order to harmonize with the Investment
Company Act of 1940. In particular, in lieu of Rules 31.10(h)(2)(A)-
(F), a director who is an ``interested person'' of the company as
defined in Section 2(a)(19) of the Investment Company Act of 1940,
other than in his or her capacity as a member of the board of directors
or any board committee, would not be considered independent.
.02 Majority Independent Board. Independent directors play an
important role in assuring investor confidence. Through the exercise of
independent judgment, they act on behalf of investors to maximize
shareholder value in the companies they oversee and guard against
conflicts of interest. Requiring that the board be comprised of a
majority of independent directors empowers such directors to carry out
more effectively these responsibilities.
.03 Audit Committees.
Audit Committee Composition. Audit committees are required to have
a minimum of three members and be comprised only of independent
directors. In addition to satisfying the independent director
requirements under Rule 31.10(h)(2), audit committee members must meet
the criteria for independence set forth in Exchange Act Rule 10A-
3(b)(1) (subject to the exemptions provided in Exchange Act Rule 10A-
3(c)): They must not accept any consulting, advisory, or other
compensatory fee from the company other than for board service, and
they must not be an affiliated person of the company. It is recommended
that an issuer disclose in its annual proxy (or, if the issuer does not
file a proxy, in its Form 10-K or 20-F) if any director is deemed
independent but falls outside the safe harbor provisions of Exchange
Act Rule 10A-3(e)(1)(ii). A director who qualifies as an audit
committee financial expert under Item 401(h) of Registration S-K, Item
401(e) of Regulation S-B, or Item 3 of Form N-CSR (in the case of a
registered management investment company) is presumed to qualify as a
financially sophisticated audit committee member under Rule
31.10(b)(1)(A).
Audit Committee Responsibilities and Authority. Audit committees
must have the specific audit committee responsibilities and authority
necessary to comply with Exchange Act Rules 10A-3(b)(2)-(5) (subject to
the exemptions provided in Exchange Act Rule 10A-3(c)), concerning
responsibilities relating to registered public accounting firms;
complaints relating to accounting; internal accounting controls or
auditing matters; authority to engage advisors; and funding. Audit
committees for investment companies must also establish procedures for
the confidential, anonymous submission of concerns regarding
questionable accounting or auditing matters by employees of the
investment adviser, administrator, principal underwriter, or any other
provider of accounting related services for the investment company, as
well as employees of the investment company.
Audit Committee Charter. Each issuer is required to adopt a formal
written charter that specifies the scope of its responsibilities and
the means by which it carries out those responsibilities; the outside
auditor's accountability to the audit committee; and the audit
committee's responsibility to ensure the independence of the outside
auditor. Consistent with this, the charter must specify all audit
committee responsibilities set forth in Exchange
[[Page 42481]]
Act Rules 10A-3(b)(2)-(5). Exchange Act Rule 10A-3(b)(3)(ii) requires
that each audit committee must establish procedures for the
confidential, anonymous submission by employees of the listed issuer of
concerns regarding questionable accounting or auditing matters. The
rights and responsibilities as articulated in the audit committee
charter empower the audit committee and enhance its effectiveness in
carrying out its responsibilities. Rule 31.10(b)(2) imposes additional
requirements for investment company audit committees that must also be
set forth in audit committee charters for these issuers.
.04 Executive Sessions of Independent Directors. Regularly
scheduled executive sessions encourage and enhance communication among
independent directors. It is contemplated that executive sessions will
occur at least twice a year, and perhaps more frequently, in
conjunction with regularly scheduled board meetings.
.05 Independent Director Oversight of Executive Compensation.
Independent director oversight of executive officer compensation helps
assure that appropriate incentives are in place, consistent with the
board's responsibility to maximize shareholder value. The rule is
intended to provide flexibility for an issuer to choose an appropriate
board structure and to reduce resource burdens, while ensuring
independent director control of compensation decisions.
.06 Independent Director Oversight of Director Nominations.
Independent director oversight of nominations enhances investor
confidence in the selection of well-qualified director nominees, as
well as independent nominees as required by the rules. Rule 31.10(d) is
also intended to provide flexibility for a company to choose an
appropriate board structure to reduce resource burdens, while ensuring
that independent directors approve all nominations.
Rule 31.10(d) does not apply in cases where the right to nominate a
director legally belongs to a third party. For example, investors may
negotiate the right to nominate directors in connection with an
investment in the company, holders of preferred stock may be permitted
to nominate or appoint directors upon certain defaults, or the company
may be a party to a shareholders' agreement that allocates the right to
nominate some directors. Because the right to nominate directors in
these cases does not reside with the company, independent director
approval would not be required. This rule is not applicable if the
company is subject to a binding obligation that requires a director
nomination structure inconsistent with Rule 31.10(d) and such
obligation pre-dates the approval date of Rule 31.10(d).
.07 Code of Conduct Ethical behavior is required and expected of
every corporate director, officer and employee whether or not a formal
code of conduct exists. The requirement of a publicly available code of
conduct applicable to all directors, officers and employees of an
issuer is intended to demonstrate to investors that the board and
management of Exchange issuers have carefully considered the
requirement of ethical dealing and have put in place a system to ensure
that they become aware of and take prompt action against any
questionable behavior. For company personnel, a code of conduct with
enforcement provisions provides assurance that reporting of
questionable behavior is protected and encouraged, and fosters an
atmosphere of self-awareness and prudent conduct.
Rule 31.10(e) requires issuers to adopt a code of conduct complying
with the definition of a ``code of ethics'' under Section 406(c) of the
Sarbanes-Oxley Act and any regulations promulgated thereunder by the
Securities and Exchange Commission. Thus, the code must include such
standards as are reasonably necessary to promote the ethical handling
of conflicts of interest, full and fair disclosure, and compliance with
laws, rules and regulations, as specified by the Sarbanes-Oxley Act.
However, the code of conduct required by Rule 31.10(e) must apply to
all directors, officers and employees. Issuers can satisfy this
obligation by adopting one or more codes of conduct, such that all
directors, officers and employees are subject to a code that satisfies
the definition of a ``code of ethics.''
As the Sarbanes-Oxley Act recognizes, investors are harmed when the
real or perceived private interests of a director, officer or employee
is in conflict with the interests of the company, as when the
individual receives improper personal benefits as a result of his or
her position with the company, or when the individual has other duties,
responsibilities or obligations that run counter to his or her duty to
the company. Also, the disclosures an issuer makes to the Securities
and Exchange Commission are the essential source of information about
the company for regulators and investors--there can be no question
about the duty to make them fairly, accurately and timely. Finally,
illegal action must be dealt with swiftly and the violators reported to
the appropriate authorities. Each code of conduct must require that any
waiver of the code for executive officers or directors may be made only
by the board and must be promptly disclosed to shareholders, along with
the reasons for the waiver. This disclosure requirement provides
investors the comfort that waivers are not granted except where they
are truly necessary and warranted, and that they are limited and
qualified so as to protect the company to the greatest extent possible.
Consistent with applicable law, domestic issuers shall disclose such
waivers in a Form 8-K within five business days. Foreign private
issuers shall disclose such waivers either in a Form 6-K or in the next
Form 20-F.
Each code of conduct must also contain an enforcement mechanism
that ensures prompt and consistent enforcement of the code, protection
for persons reporting questionable behavior, clear and objective
standards for compliance, and a fair process by which to determine
violations.
.08 Exemptions. (a) Controlled Companies. This exemption recognizes
that majority shareholders, including parent companies, have the right
to select directors and control certain key decisions, such as
executive officer compensation, by virtue of their ownership rights. In
order for a group to exist for purposes of this rule, the shareholders
must have publicly filed a notice that they are acting as a group
(e.g., a Schedule 13D). A controlled company not relying upon this
exemption need not provide any special disclosures about its controlled
status. It should be emphasized that this controlled company exemption
does not extend to the audit committee requirements under Rule 31.10(b)
or the requirement for executive sessions of independent directors
under Rule 31.10(a)(2).
(b) Registered Management Investment Companies. Management
investment companies registered under the Investment Company Act of
1940 are already subject to a pervasive system of federal regulation in
certain areas of corporate governance covered by Rule 31.10. In light
of this, the Exchange exempts from Rules 31.10(a), (c), (d) and (e)
management investment companies registered under the Investment Company
Act of 1940.
(c) Asset-backed Issuers and Other Passive Issuers. Because of
their unique attributes, Rules 31.10(a)-(e) do not apply to asset-
backed issuers and issuers that are organized as trusts (including
trusts issuing UIT interests (including IPRs) and Trust Issued
Receipts, as those terms are defined in
[[Page 42482]]
Rule 1.1 and the Interpretations and Policies thereunder, provided that
such trusts meet the requirements of this Rule 31.10) or other
unincorporated associations that do not have a board of directors or
persons acting in a similar capacity and whose activities are limited
to passively owning or holding (as well as administering and
distributing amounts in respect of) securities, rights, collateral or
other assets on behalf of or for the benefit of the holders of the
listed securities.
(d) Cooperatives. Certain member-owned cooperatives that list their
preferred stock are required to have their common stock owned by their
members. Because of their unique structure and the fact that they do
not have a publicly traded class of common stock, such entities are
exempt from Rules 31.10(a), (c), (d) and (e).
.09 References to executive officers in Rule 31.10 mean those
officers covered in Exchange Act Rule 16a-1(f).
.10 The following is the text of Rule 31.10 as in effect
immediately prior to July 9, 2004.
Rule 31.10 Independent Directors
The Exchange requires an issuer to have at least two independent
directors. For purposes of this section, ``independent director'' shall
mean a person other than an officer or employee of the company or its
subsidiaries or any other individual having a relationship which, in
the opinion of the board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director. The issuer shall maintain an audit committee (i)
composed of such independent directors and (ii) that complies with the
listing standards set forth in Rule 10A-3 of the Securities Exchange
Act of 1934, as amended (``Exchange Act''). If a member of the audit
committee ceases to be independent in accordance with the requirements
of Exchange Act Rule 10A-3 for reasons outside the member's reasonable
control, that person, with written notice to the Exchange, may remain
an audit committee member of the listed issuer until the earlier of the
next annual shareholders meeting of the listed issuer or one year from
the occurrence of the event that caused the member to be no longer
independent.
* * * * *
Rule 31.60 Publication of Annual Report
(a) A listed company is required to publish and furnish to its
shareholders (or to holders of any other listed security when its
common stock is not listed on a national securities exchange) an annual
report containing audited financial statements of the company and its
subsidiaries. Six copies of the report must be filed with the Exchange.
(b) An issuer that receives an audit opinion that contains a going
concern qualification must make a public announcement through the news
media disclosing the receipt of such qualification. Prior to the
release of the public announcement, the issuer must provide the text of
the public announcement to the Regulatory Services Division of the
Exchange. The public announcement shall be provided to the Regulatory
Service Division and released to the media not later than seven
calendar days following the filing of such audit opinion in a public
filing with the Securities and Exchange Commission.
* * * * *
Rule 31.94 Suspension and Delisting Policies
A.-B. No change.
C. Application of Policies
(a)-(c) No change.
(d) Failure to comply with Listing Agreements--The securities of a
company failing (or for the transfer agent or registrar of which fails)
to comply with the Exchange rules in any material respect (e.g.,
failure to distribute annual reports when due, failure to report
interim earnings, failure to observe Exchange policies regarding timely
disclosure of important corporate developments, failure to solicit
proxies, issuance of additional shares of a listed class without prior
listing thereof, failure to obtain shareholder approval of corporate
action without prior listing thereof, failure to obtain shareholder
approval of corporate action where required by Exchange policies,
failure to comply with Exchange corporate governance listing
requirements, etc.) are subject to suspension from dealings and, unless
prompt corrective action is taken, removal from listing.
(e) Convertible Bonds--A debt security convertible into a listed
equity security will be reviewed when the underlying equity security is
delisted and will be delisted when the underlying equity security is no
longer subject to real-time trade reporting. In addition, if the common
stock is delisted for violation of any of the following Exchange rules
relating to corporate governance, the Exchange will also delist any
listed debt securities convertible into that common stock:
Rule 31.9--Conflicts of Interest
Rule 31.10--[Independent Directors] Corporate Governance
Rule 31.11--Common Voting Rights
Rule 31.12--Quorum
Rule 31.13--Preferred Voting Rights
Rule 31.14--Bondholders Remedies Upon Default
(f) No change.
D.-I. No change.
* * * * *
Rule 31.96 Notices to Exchange
A. No change.
B. Changes in Officers or Directors
A listed company is required to notify the Exchange promptly (and
confirm in writing) (i) of any changes of officers or directors, [and]
(ii) after an executive officer of the listed company becomes aware of
any material noncompliance by the listed company with the requirements
of Rules 31.7(2), 31.9, 31.10 and 31.60(b) and Exchange Act Rule 10A-3
[of the Securities Exchange Act of 1934, as amended], (iii) upon
learning of the event or circumstance that causes the listed company to
no longer comply with the board composition requirements set forth in
Rule 31.10(a)(1), and (iv) upon learning of the event or circumstance
that causes the listed company to rely on Rules 31.10(b)(4)(A) or (B).
C.-H. No change.
* * * * *
[Rule 31.97 Reserved for additional original listing standards.]
* * * * *
Forms for Listing
Form 1
Listing Agreement
-------------------- (the ``Company''), in consideration of the listing
of its securities, hereby agrees with the Chicago Board Options
Exchange, Incorporated (the ``Exchange''), that it will:
1. Promptly notify the Exchange of the following:
(a) changes in the general character or nature of its business, its
principal executive officers, directors (including any time a majority
of the Company's Board of Directors fails to be comprised of
independent directors), its independent public accountants, its
transfer agent or registrar and material noncompliance by the listed
company with the requirements of Rules 31.7(2), 31.9, 31.10 and
31.60(b) and Exchange Act Rule 10A-3 [of the Securities Exchange Act of
1934, as amended (``Exchange Act'')], after an executive officer
becomes aware of such noncompliance;
(b)-(k) No change.
2.-13. No change.
[[Page 42483]]
14. Comply with the corporate governance listing requirements set
forth in Rules 31.7(2), 31.9, 31.10 and 31.60(b), including the
maintenance [Maintain] of at least a majority of [two] independent
directors [(defined as directors who are not officers or beneficial
holders of 10% or more of the securities of the Company or affiliates
of such persons and who, in the view of the Company's Board of
Directors, are free of any relationship that would interfere with the
exercise of independent judgment)] on the Company's Board of Directors
and compliance with Exchange Act Rule 10A-3. No director shall be
qualified as independent unless the Company's Board of Directors
affirmatively determines that the director qualifies as an
``independent director'' pursuant to Rule 31.10(h)(2).
15.-27. No change.
28. Comply with Exchange rules, policies and procedures as in
effect and as they may be amended from time to time [and with the
requirements of Exchange Act Rule 10A-3].
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing a comprehensive package of corporate
governance reforms with respect to its non-option listing standards in
order to promote accountability, transparency, and integrity of
companies listing their non-option securities on the Exchange.\5\ The
proposal encompasses significant changes in the following areas based
on the corporate governance reforms of the National Association of
Securities Dealers, Inc. (``NASD'') through its subsidiary, The Nasdaq
Stock Market, Inc. (``Nasdaq''): \6\ board of directors composition and
independence standards; compensation of executive officers;
nominations; audit committees; and ethics and disclosure obligations.
The Commission has already approved the Exchange's proposed rule change
relating to shareholder approval requirements for equity compensation
plans.\7\
Independent Directors. Current CBOE Rule 31.10 requires an issuer
to have at least two independent directors and defines ``independent
director'' as ``a person other than an officer or employee of the
company or its subsidiaries or any other individual having a
relationship which, in the opinion of the board of directors, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.'' Other than these standards, the
Exchange rules contain no other criteria with respect to the definition
of ``independent director'' and to board composition requirements. The
Exchange proposes to replace current CBOE Rule 31.10 with new rules
because the Exchange believes that it is important for investors to
have confidence that individuals serving as independent directors do
not have a relationship with the listed company that would impair their
independence. In this regard, proposed CBOE Rule 31.10(h)(2) would
provide new standards with respect to the definition of ``independent
director,'' and proposed CBOE Rule 31.10(a) would set forth new
requirements for the composition of the board of directors.\8\ In
addition, through the application of CBOE Rule 31.10(h)(2), the
proposed rules would require the board to make an affirmative
determination that no such relationships exist. Proposed CBOE Rule
31.10(h)(2) also would preclude a board finding of independence with
respect to relationships between directors and certain individuals. The
Exchange believes that these objective measures would provide
transparency to investors and companies, facilitate uniform application
of the rules, and ease administration.
---------------------------------------------------------------------------
\5\ In File No. SR-CBOE-2003-31, the Exchange represented that
it would adopt additional listing policies and requirements
pertaining to issuer corporate governance. See Securities Exchange
Act Release No. 48838 (November 25, 2003), 68 FR 67708 (December 3,
2003). The Exchange states that this current proposed rule change
would serve to satisfy that representation.
\6\ See Securities Exchange Act Release No. 48745 (November 4,
2003), 68 FR 64154 (November 12, 2003) (approving changes to the
corporate governance listing standards of Nasdaq and the New York
Stock Exchange, Inc. (``NYSE'')).
\7\ See Securities Exchange Act Release No. 48737 (October 31,
2003), 68 FR 63150 (November 7, 2003) (SR-CBOE-2003-45).
\8\ See CBOE Rule 31.10(f), discussed below, regarding entities
excepted from these requirements.
---------------------------------------------------------------------------
The reference to a ``parent or subsidiary'' in proposed CBOE Rule
31.10(h)(2) would cover entities that the issuer controls and
consolidates with the issuer's financial statements as filed with the
Commission, but not if the issuer reflects such an entity solely as an
investment in its financial statements. In the context of the
definition of ``family member'' under proposed CBOE Rule 31.10(h)(1),
the reference to marriage would capture relationships specified in the
rule (parents, children, and siblings) that would arise as a result of
marriage, such as ``in-law'' relationships.
The three-year look-back periods referenced in proposed CBOE Rules
31.10(h)(2)(A), (C), (E) and (F) would commence on the date the
relationship ceases. Proposed CBOE Rule 31.10(h)(2)(B) would generally
capture situations where a payment is made directly to (or for the
benefit of) the director or a family member of the director. Proposed
CBOE Rule 31.10(h)(2)(D) would generally capture payments to an entity
which the director or family member of the director is affiliated by
serving as a partner, controlling shareholder or executive officer of
such entity. Under proposed CBOE Rule 31.10(h)(2)(D), a director who
is, or who has a family member who is, an executive officer of a
charitable organization would not be considered independent if the
company makes payments to the charity in excess of the greater of 5% of
the charity's revenues or $200,000. Proposed CBOE Rule 31.10(h)(2)(G)
would provide a different measure of independence for investment
companies, consistent with the Investment Company Act of 1940.
Independent Board and Board Committees. Proposed CBOE Rule 31.10(a)
would require independent directors to comprise a majority of a listed
issuer's board of directors,\9\ and thus play an important role in
assuring investor confidence. The Exchange believes that, through the
exercise of independent judgment, they would act on behalf of investors
to maximize shareholder value in the companies they oversee, and guard
against conflicts of interest. The Exchange believes that requiring
that the board be comprised of a majority of independent directors
would empower such directors to more effectively carry out these
responsibilities. The proposed rule change also would require regularly
[[Page 42484]]
convened executive sessions of independent directors.
---------------------------------------------------------------------------
\9\ Id.
---------------------------------------------------------------------------
Furthermore, proposed CBOE Rule 31.10(c) would require independent
director approval of executive officer compensation. The Exchange
believes that this oversight would help assure that appropriate
incentives are in place, consistent with the board's responsibility to
maximize shareholder value and comply with applicable law. Proposed
CBOE Rule 31.10(d) also would require independent director approval for
director nominations. The Exchange believes that independent director
oversight of nominations would enhance investor confidence in the
selection of well-qualified director nominees, as well as independent
nominees as required by the rules. The Exchange represents that these
proposed rules are intended to provide flexibility for a company to
choose an appropriate board structure and reduce resource burdens.
Under proposed CBOE Rule 31.10(f)(1), a controlled company would be
exempt from the requirements of proposed CBOE Rules 31.10(a), (c), and
(d), with the exception of proposed CBOE Rule 31.10(a)(1), which
requires a controlled company to disclose in its annual proxy (or, if
the issuer does not file a proxy, in its Form 10-K or 20-F) those
directors that the board of directors has determined to be independent
under Rule 31.10(h)(2), and proposed CBOE Rule 31.10(a)(2), which
pertains to executive sessions of independent directors.\10\ The rule
proposal would define a controlled company as a company of which more
than 50% of the voting power is held by an individual, a group or
another company. A controlled company relying upon this exemption would
be required to disclose in its annual meeting proxy statement (or, if
the issuer does not file a proxy, in its Form 10-K or 20-F) that it is
a controlled company and the basis for that determination.
---------------------------------------------------------------------------
\10\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
Audit Committee Requirements. Proposed CBOE Rule 31.10(b) would
restate the Exchange's current audit committee requirements, including
the requirement to comply with the listing standards set forth in Rule
10A-3 under the Act, as well as proposed terms that expand the current
requirements.\11\ Under the proposed rules, audit committees would be
required to have a minimum of three members, all of whom would be
required to satisfy the independence standards set forth in Rule 10A-
3(b)(1) under the Act (subject to applicable exemptions), and proposed
CBOE Rule 31.10(h)(2). The proposal also would specify that audit
committees must have the specific audit committee responsibilities and
authority necessary to comply with Rule 10A-3(b)(2)-(5) under the Act
(subject to applicable exemptions). Furthermore, the proposal would
require audit committee members to be able to read and understand
fundamental financial statements at the time they join the board.
---------------------------------------------------------------------------
\11\ See CBOE Rule 31.10(f), discussed below, regarding entities
excepted from these requirements.
---------------------------------------------------------------------------
The proposed rule change also would require audit committees to
adopt a charter that specifies all audit committee responsibilities
required by Rule 10A-3 under the Act. The proposal would require
investment company audit committees to establish procedures for the
confidential, anonymous submission of concerns regarding questionable
accounting or auditing matters by employees of the investment adviser,
administrator, principal underwriter, or any other provider of
accounting related services for the investment company, as well as
employees of the investment company.
Going Concern Qualification. Proposed CBOE Rule 31.60(b) would
require issuers to disclose in a press release the receipt of an audit
opinion with a going concern qualification. The Exchange states that,
ordinarily, the continuation of an entity as a going concern is assumed
in financial reporting in the absence of significant evidence to the
contrary. If an auditor concludes that substantial doubt exists about
the entity's ability to continue as a going concern for a reasonable
period of time, however, the auditor provides this conclusion through
an explanatory paragraph in the auditor's report. While the audit
opinion is available in the Form 10-K, the Exchange believes that
receipt of a going concern qualification is so material that it should
be brought to the attention of investors and potential investors
through a press release issued promptly after the filing of the Form
10-K.
Review of Related Party Transactions. The Exchange proposes to
expand its current conflict of interest rule set forth in CBOE Rule
31.9 by requiring the audit committee or another independent body of
the board of directors to approve, rather than merely review, related
party transactions. All directors that review and approve a related
party transaction must be independent as specified under Exchange
rules.
Code of Conduct. Proposed CBOE Rule 31.10(e) would require listed
companies to adopt and make publicly available a code of conduct
applicable to directors, officers, and employees that complies with the
definition of a ``code of ethics'' set forth in Section 406(c) of the
Sarbanes-Oxley Act of 2002 and any regulations promulgated by the
Commission thereunder, and to provide for an enforcement mechanism.\12\
Any waivers of the code for directors or executive officers would be
required to be approved by the board and be disclosed in a Form 8-K,
Form 6-K or Form 20-F. Domestic issuers would be required to disclose
such waivers in a Form 8-K within five business days. Foreign private
issuers would be required to disclose such waivers either in a Form 6-K
or in the next Form 20-F.
---------------------------------------------------------------------------
\12\ See id.
---------------------------------------------------------------------------
Exemptions. Current CBOE Rule 31.7(2) permits non-U.S. issuers
listed on the Exchange to obtain exemptions from the Exchange's
corporate governance standards if such rules would require the issuer
to do anything contrary to the laws and generally accepted commercial
and business practice of the issuer's domicile, to the extent such law
and generally accepted commercial and business practice is consistent
with federal securities laws. To make the current exemption process
more transparent, proposed CBOE Rule 31.7(2) would require a foreign
issuer to disclose the receipt of a corporate governance exemption from
the Exchange in its annual report for the year the exemption is granted
and on annual basis thereafter. Such disclosure would be required to be
made in the issuer's annual filing of its financial statements with the
Commission and the Exchange on Form 20-F, Form 40-F, or in certain
cases, Form 10-K.
Since management investment companies registered under the
Investment Company Act of 1940 are already subject to a pervasive
system of federal regulation, proposed CBOE Rule 31.10(f)(2) would
exempt management investment companies registered under the Investment
Company Act of 1940 from proposed CBOE Rules 31.10(a), (c), (d) and
(e). However, registered management investment companies would be
subject to all of the audit committee requirements set forth in CBOE
Rule 31.10(b), and open-end management investment companies would be
subject to certain provisions of CBOE Rule 31.10(b) audit committee
requirements.
In its audit committee rules under the Sarbanes-Oxley Act of 2002,
the Commission excluded asset-backed issuers from the new requirements,
and allowed markets to exclude from the requirements of Section 10A(m)
of the
[[Page 42485]]
Act and Rule 10A-3 thereunder certain ``issuers'' that are organized as
trusts or other unincorporated associations having certain
characteristics. Accordingly, proposed CBOE Rule 31.10(f)(3) would
exempt these entities from proposed CBOE Rules 31.10(a)-(e).
In light of their unique attributes, proposed CBOE Rule 31.10(f)(4)
would exempt from proposed CBOE Rules 31.10(a), (c), (d) and (e)
certain cooperative entities, such as agricultural cooperatives, that
are structured to comply with, among other things, relevant state law
and federal tax law and that do not have a publicly traded class of
common stock. However, these entities must comply with Section 10A(m)
of the Act and Rule 10A-3 thereunder.
Furthermore, CBOE proposes to clarify in proposed CBOE Rule
31.10(f)(5) that business development companies, which are a type of
closed-end management investment company defined in Section 2(a)(48) of
the Investment Company Act of 1940 that are not registered under that
Act, would be subject to all of the Exchange's corporate governance
requirements.\13\
---------------------------------------------------------------------------
\13\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
Implementation Periods. Consistent with Rule 10A-3 of the Act, CBOE
Rules 31.10(a)-(d), (f) and (h) would be effective as set forth below.
During the transition period between the date of approval of this
proposed rule change and the applicable effective date, listed
companies would be required to comply with CBOE Rule 31.10 as in effect
immediately prior to the date of approval of this rule filing.\14\
---------------------------------------------------------------------------
\14\ See proposed CBOE Rule 31.10.10.
---------------------------------------------------------------------------
July 31, 2005 for foreign private issuers and small
business issuers (as defined in Rule 12b-2 under the Act); and
For all other listed issuers, by the earlier of (1) the
listed issuer's first annual shareholders meeting after July 31, 2004;
or (2) October 31, 2004.
In the case of an issuer with a staggered board, with the exception
of the audit committee requirements, the issuer would have until its
second annual meeting after January 15, 2004, but not later than
December 31, 2005, to implement all of the new requirements, if the
issuer would be required to change a director who would not normally
stand for election at an earlier annual meeting. Such issuers would be
required to comply with the audit committee requirements pursuant to
the implementation schedule set forth above.
Issuers that will be listed in conjunction with their initial
public offering would be afforded exemptions from all board composition
requirements consistent with the exemptions afforded in Rule 10A-
3(b)(1)(iv)(A) under the Act. That is, for each committee that the
company adopts, the company would be required to have one independent
member at the time of listing, a majority of independent members within
90 days of listing, and all independent members within one year. It
should be noted, however, that investment companies would not be
afforded these exemptions in Rule 10A-3(b)(1)(iv)(A) under the Act.
Companies emerging from bankruptcy or which have ceased to be
controlled companies would be required to meet the majority independent
board requirement within one year. As provided under the proposal,
issuers could choose not to adopt a compensation or nomination
committee and could instead rely upon a majority of the independent
directors to discharge responsibilities under Exchange rules. These
issuers would be required to meet the majority independent board
requirement within one year of listing.
Companies transferring from other markets with substantially
similar board composition requirements would be afforded the balance of
any grace period afforded by the other market. Companies transferring
from other listed markets that do not have a substantially similar
board composition requirements would be afforded one year from the date
of listing on the Exchange to comply with the Exchange's board
composition requirements. This transition period is not intended to
supplant any applicable requirements of Rule 10A-3 under the Act.
Proposed CBOE Rule 31.10(d), which pertains to nominating
committees, would not apply if the company is subject to a binding
obligation that requires a director nomination structure inconsistent
with CBOE Rule 31.10(d) and such obligation pre-dates the approval date
of CBOE Rule 31.10(d).
Compliance with proposed CBOE Rule 31.10(e), which requires issuers
to adopt a code of conduct, would be required on July 31, 2004.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \15\ in general, and furthers the objectives of
Section 6(b)(5) \16\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and, in general, protect investors
and the public interest and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
Specifically, the proposed rule change is designed to increase investor
protection by promoting accountability, transparency, and integrity by
listed companies.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change will impose no burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2004-28 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CBOE-2004-28. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule
[[Page 42486]]
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of the CBOE. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CBOE-2004-28 and should be submitted on or before August
5, 2004.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\17\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \18\ in that
it is designed, among other things, to facilitate transactions in
securities, to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest, and does not permit unfair discrimination among
issuers.
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\17\ 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rule's impact on efficiency,
competition and capital formation. 15 U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(5).
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In the Commission's view, the proposed rule change will foster
greater transparency, accountability, and objectivity in the oversight
by, and decision-making processes of, the boards and key committees of
CBOE listed issuers. The proposal also will promote compliance with
high standards of conduct by the issuers' directors and management. The
Commission notes that the CBOE's proposal is similar to proposals of
other self-regulatory organizations (``SROs'') recently approved by the
Commission.
The CBOE has requested that the Commission grant accelerated
approval to the proposed rule change, as amended, so that the proposed
corporate governance listing standards can be quickly implemented. The
Commission believes that the revisions proposed by the Exchange
significantly align the corporate governance standards proposed for
companies listed on the CBOE with the standards approved by the
Commission for companies listed on other SROs.\19\ The Commission
believes it is appropriate to accelerate approval of the proposed rule
change so that the comprehensive set of strengthened corporate
governance standards for companies listed on the CBOE may be
implemented on generally the same timetable (with some modification of
certain deadlines) as that for similar standards adopted for issuers
listed on other SROs. The Commission therefore finds good cause,
consistent with Section 19(b)(2) of the Act,\20\ to approve the
proposed rule change, as amended, prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal
Register.
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\19\ See supra note 6.
\20\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change, as amended (SR-CBOE-2004-28)
be, and hereby is, approved on an accelerated basis.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Dated:
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16052 Filed 7-14-04; 8:45 am]
BILLING CODE 8010-01-P