[Federal Register: October 28, 2003 (Volume 68, Number 208)]
[Notices]
[Page 61500-61507]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc03-101]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48669; File No. SR-CHX-2003-19]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Stock Exchange, Incorporated To Amend Certain
Provisions of Its Rules Relating to the Governance of Issuers That List
Securities on the Exchange
October 21, 2003.
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 23, 2003, the Chicago Stock Exchange, Incorporated (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend certain provisions of its rules
relating to the governance of issuers that list securities on the CHX.
Specifically, the CHX seeks to amend its Tier I and Tier II listing
standards to enhance its requirements relating to the roles and
responsibilities of independent directors and independent board
committees, including audit committees, nominating committees and
compensation committees. The Exchange also seeks to amend its
maintenance standards to set out a process that would allow an issuer
an opportunity to cure a failure to meet the Exchange's maintenance
listing standards, including its governance-related standards. The text
of the proposed rule change is below.\3\ Text in brackets indicates
material to be deleted, and text in italics indicates material to be
added.
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\3\ The rule text as set forth herein includes several minor
technical revisions that the Exchange has committed to correct by
filing an amendment. Telephone conversation between Kathleen M.
Boege, Vice-President and Associate General Counsel, CHX, and Ira L.
Brandriss, Special Counsel, Division of Market Regulation
(``Division''), Commission, on October 10, 2003.
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* * * * *
Chicago Stock Exchange Rules
ARTICLE XXVIII
Listed Securities
* * * * *
Maintenance Standards Applicable to All Tier I Issues
RULE 17A. The Exchange reserves the right to delist the securities
of any corporation, subject to Securities and Exchange Commission
Rules, which engages in practices not in the public interest or whose
assets have been depleted to the extent that the company can no longer
operate as a going concern or whose securities have become so closely
held that it is no longer feasible to maintain a reasonable market in
the issue. Furthermore, the Exchange reserves the right to delist the
securities of any corporation which has drastically changed its
corporate structure and/or its type of operation. The Exchange may also
make an appraisal of, and determine on an individual basis, the
suitability for continued listing of an issue in the light of all
pertinent facts whenever it deems such action appropriate, even though
a security meets enumerated criteria (including, but not limited to,
continued listing on the NYSE, Amex or Nasdaq National Market). Many
factors may be considered in this connection, including, but not
limited to, abnormally low selling price or volume of trading, or
failure to comply with required corporate governance standards.
* * *Interpretations and Policies
If the Exchange identifies a Tier I issue as being below the
Exchange's maintenance listing requirements, the Exchange will notify
the issuer by letter of its determination and the reasons for that
determination. In this letter, the Exchange will provide the issuer
with an opportunity to provide the Exchange with a plan (the ``Plan'')
to cure the deficiency. Within 10 business days of the receipt of the
Exchange's letter, the issuer must contact the Exchange to confirm its
receipt of the letter and to report to the Exchange whether or not the
issuer intends to present a Plan. If the issuer notifies the Exchange
that it does not intend to present a Plan, the
[[Page 61501]]
Exchange will commence proceedings to suspend and/or delist the issue.
The issuer must present any Plan within 45 days after its receipt
of the Exchange's letter. The Plan must describe definitive action that
the issuer has taken, or is taking, that would bring it into conformity
with the Exchange's maintenance listing requirements within 18 months
of receipt of the letter, or within any shorter time period required by
the Exchange. (The Exchange will not approve any Plan, under which an
issuer is curing a deficiency under SEC Rule 10A-3, which extends
beyond the earlier of 12 months or the first annual shareholders'
meeting (for circumstances beyond the reasonable control of an issuer)
and 6 months (for other circumstances)). The Plan also must set
quarterly milestones against which the Exchange will evaluate its
progress. Exchange staff will evaluate the Plan and determine whether
the issuer has made a reasonable demonstration in the Plan of an
ability to come into compliance with the Exchange's maintenance listing
requirements. The Exchange will notify the issuer of its determination
within 45 days after receipt of the Plan. If the Exchange does not
accept the Plan, it will commence proceedings to suspend and/or delist
the issue.
If the Exchange accepts the Plan, the Exchange will review the
issuer on a quarterly basis to determine the issuer's progress under
the Plan. If the issuer fails to meet a material provision of the Plan
or one or more of its quarterly milestones, the Exchange will review
the facts and circumstances and determine whether to initiate
proceedings to suspend and/or delist the issue; provided however, that
if an issuer fails to meet a material provision of the Plan that
relates to compliance with its obligations under SEC Rule 10A-3, the
Exchange will immediately commence proceedings to suspend and/or delist
the issue. If, for circumstances that do not involve compliance with
SEC Rule 10A-3, the Exchange determines that continued listing is
warranted, the Exchange will continue to review the issuer's progress
under the Plan on at least a quarterly basis. If the issuer achieves
compliance with the Exchange's maintenance listing requirements before
the Plan expires under its terms, the Exchange may choose to consider
the Plan ended as of that earlier date.
If an issuer, within one year after the termination of a Plan, is
again determined to have failed to meet the Exchange's maintenance
listing requirements, the Exchange will review the facts and
circumstances (including whether the issuer has fallen into non-
compliance with the same standards at issue in its earlier Plan) and
will take appropriate action, which could include, but its not limited
to, shortening the time periods associated with the submission of any
new Plan or immediately commencing proceedings to suspend and/or delist
the issue.
These procedures do not prevent the Exchange from suspending
trading in an issue immediately, whenever it finds that it is necessary
to do so for the protection of investors.
* * * * *
Tier I Corporate Governance and Disclosure Standards
Corporate Governance
RULE 19. The following Rule 19 applies [only] to Tier I issuers:
(a) Board of Directors.
(1) General Rule. Each issuer shall maintain a board of directors
consisting of a majority of independent directors; however, each small
business issuer shall be required only to maintain a board of directors
consisting of at least 50% independent directors. Independent directors
must have regularly scheduled meetings at which only independent
directors are present.
(2) Exceptions. A controlled company is exempt from the
requirements of this paragraph (a).
(b) Audit Committee. Each issuer shall establish and maintain an
audit committee, of at least three persons, that meets the following
standards.
(1) Audit Committee Composition
(A) Each member of the audit committee: (i) Must be an independent
director as defined in subparagraph (o) below; (ii) must meet the
criteria for independence set forth in SEC Rule 10A-3; and (iii) must
be able to read and understand fundamental financial statements,
including a company's balance sheet, income statement and cash flow
statement.
(B) Exceptions.
(i) One director who is not independent, but who meets the criteria
set forth in SEC Rule 10A-3 and who is not a current officer or
employee (or an immediate family member of a current officer or
employee) may be appointed to the audit committee, if the issuer's
board under exceptional and limited circumstances, determines that
membership on the committee by the individual is required by the best
interests of the corporation and its shareholders, and the board
discloses, in the next annual proxy statement subsequent to such
determination, the nature of the relationship and the reasons for that
determination. A member appointed under this exception may not serve on
the audit committee for more than two years under this exception
(unless he or she ultimately satisfies the definition of an independent
director) and may not chair the audit committee.
(ii) If a member of an audit committee ceases to meet the
independence criteria set forth in SEC Rule 10A-3 for reasons outside
the person's reasonable control, that person may remain a member of the
committee until the earlier of the next annual shareholders' meeting or
one year from the occurrence of the event that caused the member to no
longer meet the independence criteria. The issuer must promptly notify
the Exchange if this circumstance occurs.
(iii) A small business issuer is only required to maintain an audit
committee of at least two (not three) independent directors, but is
otherwise required to comply with the provisions of this paragraph
(b)(1).
(2) Audit Committee Responsibilities and Authority. The audit
committee must have, at a minimum, (A) the responsibilities and
authority set forth in SEC Rule 10A-3; and (B) the obligation to
conduct an appropriate review of all related party transactions on an
ongoing basis and to review potential conflict of interest situations
where appropriate.
(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 committee's purpose--which, at a minimum, must be to:
(i) assist board oversight of (a) the integrity of the company's
financial statements, (b) the company's compliance with legal and
regulatory requirements, (c) the independent auditor's qualifications
and independence, and (d) the performance of the company's internal
auditors and independent auditors; and
(ii) prepare the required report to be included in the company's
annual proxy statement or, if the company does not file a proxy
statement, in the company's annual report; and
(B) the duties and responsibilities of the audit committee, which
must, at a minimum, include (i) all duties and responsibilities that
are set out in SEC Rule 10A-3 and section 303A(7)(c) and (d) of the
Sarbanes-Oxley Act; and (ii) the obligation to conduct an appropriate
review of all related party transactions on an ongoing basis and to
review
[[Page 61502]]
potential conflict of interest situations where appropriate.
(c) Nominating Committee
(1) General Rule. The nomination of the issuer's directors shall be
determined either by (A) a majority of the independent directors; or
(B) a nominating committee comprised solely of independent directors.
(2) Exceptions.
(A) If the nominating committee is comprised of at least three
persons, one director, who is not independent, but who is not a current
officer or employee (or an immediate family member of a current officer
or employee), may be appointed to the nominating committee if the
issuer's board, under exceptional and limited circumstances, determines
that such individual's membership on the committee is required by the
best interests of the company and its shareholders, and the board
discloses, in the next annual meeting proxy statement subsequent to
such determination, the nature of the relationship and the reasons for
the determination. A member appointed under this exception may not
serve longer than two years (unless he or she ultimately satisfies the
definition of an independent director).
(B) Alternatively, if the nominating committee is comprised of at
least three persons, and if the exception described in paragraph (c)(2)
above is not relied upon, one director who owns 20% of more of the
company's common stock or voting power outstanding, and is not
independent because that director is also an officer, may be appointed
to the nominating committee if the issuer's board determines that such
individual's membership on the committee is required by the best
interests of the company and its shareholders, and the board discloses,
in the next annual meeting proxy statement subsequent to such
determination, the nature of the relationship, and the reasons for the
determination.
(C) A controlled company is exempt from the requirements of this
paragraph (c).
(D) 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 those directors need not be subject to the
nominating committee process.
(d) Compensation Committee.
(1) Compensation of the issuer's chief executive officer shall be
determined either by (A) a majority of the independent directors
meeting in executive session or (B) a compensation committee comprised
solely of independent directors meeting in executive session.
(2) Compensation of all other officers, as that term is defined in
section 16 of the Act, shall be determined either by (A) a majority of
the issuer's independent directors or (B) a compensation committee
comprised solely of independent directors. The chief executive officer
may be present during deliberations regarding compensation of other
officers, but may not vote.
(3) Exceptions.
(A) If the compensation committee is comprised of at least three
persons, one director who is not independent and is not a current
officer or employee (or an immediate family member or a current officer
or employee), may be appointed to the compensation committee if the
issuer's board, under exceptional and limited circumstances, determines
that such individual's membership on the committee is required by the
best interests of the company and its shareholders, and the board
discloses, in the next annual meeting proxy statement subsequent to
such determination, the nature of the relationship and the reasons for
the determination. A member appointed under this exception may not
serve longer than two years (unless he or she ultimately satisfies the
definition of an independent director).
(B) A controlled company is exempt from the requirements of this
paragraph (d).
(e) Code of Business Conduct and Ethics. Each issuer shall adopt a
code of conduct and ethics applicable to all directors, officers and
employees that complies with the requirements of section 406(c) of the
Sarbanes-Oxley Act and the rules thereunder. Waivers of the code's
provisions for directors and executive officers must be approved by the
issuer's board of directors. The issuer must make this code publicly
available and must disclose, in its public filings, waivers of the code
for directors or executive officers.
(f) Governance-Related Certifications.
(1) Annual Certification. Each issuer's chief executive officer
annually must certify to the Exchange that he or she is not aware of
any violation by the issuer of the standards set out in paragraphs (a)
through (e) of this rule.
(2) Interim Certifications. Each issuer's chief executive officer
must promptly notify the Exchange after any executive officer of the
issuer becomes aware of any material non-compliance by the issuer with
the standards set out in paragraphs (a) through (e) of this rule.
[(a)] (g) Annual Reports. No change to text.
[(b)] (h) Quarterly Reports. No change to text.
[(c)] (i) Other Reports. No change to text.
[(d) Each listed company shall establish and maintain an Audit
Committee, a majority of the members of which shall be independent
directors, as defined below.]
[(e) Each listed company shall maintain a minimum of two
independent directors on its board of 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.]
[(f)] (j) Annual Meeting. No change to text.
[(g)] (k) Proxy Solicitations. No change to text.
[(h) Each issuer shall conduct an appropriate review of all related
party transactions on an ongoing basis and shall use the company's
audit committee or a comparable body for the review of potential
conflict of interest situations where appropriate.]
[(i)] (l) Stock Certificates. No change to text.
[(j)] (m) Shareholder Approval of Employee Stock Option Plans. No
change to text.
[(k)] (n) Stock Transfer Facilities. No change to text.
(o) Definitions. For purposes of this Article XXVIII, unless the
context requires otherwise:
(1) ``Controlled company'' means a company of which more than 50%
of the voting power is held by an individual, a group or another
company.
(2) ``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 any person who has
the same residence.
(3) ``Independent director'' means a person other than an officer
or employee of the issuer or its subsidiaries or any other individual
having a relationship, which, in the opinion of the issuer'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 during the past three years was, employed
by the
[[Page 61503]]
issuer or by any parent or subsidiary of the issuer;
(B) A director who accepts or who has an immediate family member
who accepts any payments from the issuer or any parent or subsidiary of
the issuer in excess of $60,000 during the current fiscal year or any
of the past three fiscal years, other than compensation for board
service, payments arising solely from investments in the issuer's
securities, compensation paid to an immediate family member who is an
employee of the issuer or a parent or subsidiary of the issuer (but not
if such person is an executive officer of the company or any parent or
subsidiary of the company), benefits under a tax-qualified retirement
plan, or non-discretionary compensation;
(C) A director who is an immediate family member of an individual
who is, or during the past three years was employed by the issuer or by
any parent or subsidiary of the issuer as an executive officer;
(D) A director who is a partner in, or a controlling shareholder or
an executive officer of, any organization to which the issuer made, or
from which the issuer received, payments (other than those arising
solely from investments in the company's securities) that exceed 5% of
the recipient's consolidated gross revenues for that year, or $200,000,
whichever is more, in the current fiscal year or any of the past three
fiscal years;
(E) A director of the issuer who is employed as an executive
officer of another entity where any of the executive officers of the
issuer serve on the compensation committee of such other entity, or if
such relationship existed during the past three years; or
(F) A director who is or was a partner or employee of the issuer's
outside auditor, and worked on the issuer's audit, during the past
three years.
(4) ``Sarbanes-Oxley Act'' means the Sarbanes-Oxley Act of 2002.
(5) ``Small business issuer'' means any issuer that meets the
definition of that term set out in SEC Rule 12b-2.
* * * Interpretations and Policies
.01 No change to text.
.02 Controlled Companies. If an issuer relies on a controlled
company exemption from the requirements of paragraphs 19(a), 19(c) or
19(d), above, it must disclose in its annual meeting proxy statement
that it is a controlled company and provide the basis for that
determination.
.03 General Exemptions from Governance Rules. The requirements of
this rule do not apply to the following entities, as described below:
(1) Limited partnerships and companies in bankruptcies are not
required to comply with sections (a), (c) and (d) above.
(2) Closed-end management companies are not required to comply with
any provision of this rule other than section (b) above and are only
required to comply with that provision to the extent required by SEC
Rule 10A-3.
(3) Passive business organizations (such as royalty trusts) or
derivatives and special purpose entities that are exempt from the
requirements of SEC Rule 10A-3 are not subject to any requirement under
this rule.
(4) Foreign issuers will be permitted to comply with their home
country practices with respect to corporate governance (and thus are
exempt from the requirements of sections (a)-(f), above), except to the
extent that SEC Rule 10A-3 requires compliance with specific audit
committee requirements.
(5) Issuers listing only preferred or debt securities on the
Exchange typically will not be required to adhere to the requirements
set out in sections (a)-(f) because they will be subject to the
multiple listing exception described in Interpretation .04, below. To
the extent required by SEC Rule 10A-3, these issuers will only be
required to comply with section (b) above.
.04 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 sections (a)-(d) above, 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
sections (a)-(d) above 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
sections (a)-(d) above if they are adopted by the New York Stock
Exchange, the American Stock Exchange or the National Association of
Securities Dealers (for the Nasdaq National Market or Small Cap Market)
or if they otherwise require, subject to exceptions approved by the
Commission, that the issuer maintain (1) a board of directors, a
majority of whom are independent directors (50% of whom are independent
directors, for a small business issuer); (2) an audit committee,
consisting of at least three persons (two persons, for a small business
issuer), all of whom are independent directors who meet the
requirements of SEC Rule 10A-3; (3) a written audit committee charter
that provides information about the committee's duties and
responsibilities; (4) a nominating committee or other body, a majority
of whom are independent directors; and (5) a compensation committee or
other body, a majority of whom are independent directors.
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
sections (a)-(d) above, 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 sections (a)-(d) above 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.
.05 Transition Periods and Compliance Dates. Sections (a)-(f) will
become effective pursuant to the following schedule:
(1) The audit committee requirements mandated by SEC Rule 10A-3
(and the exception set out in section (b)(1)(B)(ii) in this rule) will
become effective as set out in Rule 10A-3.
(2) The other requirements of sections (a)-(f) will become
effective two years after the date that they are approved by the
Commission. If an issuer has a board with staggered terms, and a change
is required with respect to a director whose term does not apply within
this two-year period, the issuer will have an additional year to comply
with the requirements of section (a).
(3) Except as otherwise required by SEC Rule 10A-3, an issuer
listing securities on the Exchange in connection with an initial public
offering or transferring from another marketplace that does not have
governance standards substantially similar to the standards set out in
sections (a)-(f), above, will be required to comply with sections (a)-
(f) within two years after listing on the Exchange. An issuer
transferring from a market that does have governance standards
substantially similar to those set out in sections (a)-(f) above must
comply with those provisions at the time that they list; provided,
however, that an issuer that transfers during another market's
transition period to new governance standards will be allowed to comply
with the Exchange's requirements
[[Page 61504]]
within any transition period that had been provided by the other
marketplace.
* * * * *
Tier II Corporate Governance, Disclosure, and Miscellaneous
Requirements
RULE 21. The following Rule 21 applies only to Tier II issuers:
(a) Each issuer shall comply with the governance requirements set
out in Rule 19 (a)-(f) of this Article and is subject to
Interpretations .02-.05 of that rule.
[(1) Each listed company shall establish and maintain an Audit
Committee, a majority of the members of which shall be independent
directors.]
[(2) Each listed company shall maintain a minimum of two
independent directors on its board of 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.]
([3]b) Stock Certificates. No change to text.
([4]c) Changes to Listing Standards. No change to text.
* * * * *
Tier II Maintenance Standards
RULE 22. (a) The Exchange reserves the right to delist the
securities of any corporation, subject to Securities and Exchange
Commission Rules, which engages in practices not in the public interest
or whose assets have been depleted to the extent that the company can
no longer operate as a going concern or whose securities have become so
closely held that it is no longer feasible to maintain a reasonable
market in the issue. Furthermore, the Exchange reserves the right to
delist the securities of any corporation which has drastically changed
its corporate structure and/or its type of operation. The Exchange may
also make an appraisal of, and determine on an individual basis, the
suitability for continued listing of an issue in the light of all
pertinent facts whenever it deems such action appropriate, even though
a security meets enumerated criteria (including, but not limited to,
continued listing on the NYSE, Amex or Nasdaq National Market). Many
factors may be considered in this connection, including, but not
limited to, abnormally low selling price or volume of trading, or
failure to comply with required corporate governance standards.
(b)-(d) No change to text.
* * * Interpretations and Policies
If the Exchange identifies a Tier II issue as being below the
Exchange's maintenance listing requirements, the Exchange will notify
the issuer by letter of its determination and the reasons for that
determination. In this letter, the Exchange will provide the issuer
with an opportunity to provide the Exchange with a plan (the ``Plan'')
to cure the deficiency. Within 10 business days of the receipt of the
Exchange's letter, the issuer must contact the Exchange to confirm its
receipt of the letter and to report to the Exchange whether or not the
issuer intends to present a Plan. If the issuer notifies the Exchange
that it does not intend to present a Plan, the Exchange will commence
proceedings to suspend and/or delist the issue.
The issuer must present any Plan within 45 days after its receipt
of the Exchange's letter. The Plan must describe definitive action that
the issuer has taken, or is taking, that would bring it into conformity
with the Exchange's maintenance listing requirements within 18 months
of receipt of the letter, or within any shorter time period required by
the Exchange. (The Exchange will not approve any Plan, under which an
issuer is curing a deficiency under SEC Rule 10A-3, which extends
beyond the earlier of 12 months or the first annual shareholders'
meeting (for circumstances beyond the reasonable control of an issuer)
and 6 months (for other circumstances)). The Plan also must set
quarterly milestones against which the Exchange will evaluate its
progress. Exchange staff will evaluate the Plan and determine whether
the issuer has made a reasonable demonstration in the Plan of an
ability to come into compliance with the Exchange's maintenance listing
requirements. The Exchange will notify the issuer of its determination
within 45 days after receipt of the Plan. If the Exchange does not
accept the Plan, it will commence proceedings to suspend and/or delist
the issue.
If the Exchange accepts the Plan, the Exchange will review the
issuer on a quarterly basis to determine the issuer's progress under
the Plan. If the issuer fails to meet a material provision of the Plan
or one or more of its quarterly milestones, the Exchange will review
the facts and circumstances and determine whether to initiate
proceedings to suspend and/or delist the issue; provided however, that
if an issuer fails to meet a material provision of the Plan that
relates to compliance with its obligations under SEC Rule 10A-3, the
Exchange will immediately commence proceedings to suspend and/or delist
the issue. If, for circumstances that do not involve compliance with
SEC Rule 10A-3, the Exchange determines that continued listing is
warranted, the Exchange will continue to review the issuer's progress
under the Plan on at least a quarterly basis. If the issuer achieves
compliance with the Exchange's maintenance listing requirements before
the Plan expires under its terms, the Exchange may choose to consider
the Plan ended as of that earlier date.
If an issuer, within one year after the termination of a Plan, is
again determined to have failed to meet the Exchange's maintenance
listing requirements, the Exchange will review the facts and
circumstances (including whether the issuer has fallen into non-
compliance with the same standards at issue in its earlier Plan) and
will take appropriate action, which could include, but its not limited
to, shortening the time periods associated with the submission of any
new Plan or immediately commencing proceedings to suspend and/or delist
the issue.
These procedures do not prevent the Exchange from suspending
trading in an issue immediately, whenever it finds that it is necessary
to do so for the protection of investors.
* * * * *
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 IV 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 CHX states that the purpose of the proposed rule change is to
amend certain provisions of its rules relating to the governance of
issuers that list securities on the Exchange. Specifically, the CHX
seeks to amend its listing standards to enhance its requirements
relating to the roles and responsibilities of independent directors and
independent board committees
[[Page 61505]]
(including audit committees, nominating committees and compensation
committees), which are set forth in CHX Article XXVIII, Rules 19 and 21
(collectively, the ``CHX Governance Standards''). The proposed
amendments to the CHX Governance Standards constitute a comprehensive
group of significant changes to the Exchange's listing standards and
are intended to enhance investor confidence by helping to ensure the
independence of corporate directors and strengthening corporate
governance practices. The Exchange believes that the additional
proposed changes to the Exchange's maintenance listing standards, which
are found in CHX Article XXVIII, Rules 17A and 22, will ensure
continued compliance with the CHX Governance Standards, while also
providing issuers an opportunity to cure failures to meet those (and
other) on-going requirements.\4\
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\4\ A few additional clerical changes are also made; these
changes re-number the paragraphs within affected rules and add new
headings for certain paragraphs.
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These changes to the CHX Governance Standards and to the CHX's
maintenance listing standards are designed to comply with the
provisions of Section 10A(m) under the Act \5\ and SEC Rule 10A-3
thereunder; \6\ they also include additional enhancements to the
Exchange's governance requirements for listed companies.\7\ In most
respects, the Exchange believes that proposed changes are substantially
similar to governance changes proposed by the National Association of
Securities Dealers, Inc. and the American Stock Exchange LLC.\8\ The
Exchange also states that a few of the proposed changes--particularly
those made to the CHX maintenance standards or incorporated within at
least one new definition--mirror existing rules or proposals of the New
York Stock Exchange, Inc. (``NYSE'').\9\
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\5\ 15 U.S.C. 78j-1(m).
\6\ 17 CFR 10A-3. The Commission notes that the CHX intends to
amend the proposed rule change to fully conform with SEC Rule 10A-3.
Telephone conversation between Kathleen M. Boege, Vice-President and
Associate General Counsel, CHX, and Ira L. Brandriss, Special
Counsel, Division, Commission, on October 10, 2003.
\7\ The Commission notes that the CHX will consider amendments
to the proposed rule change once the Commission approves proposals
on corporate governance matters filed by other exchanges. Telephone
conversation between Kathleen M. Boege, Vice-President and Associate
General Counsel, CHX, and Ira L. Brandriss, Special Counsel,
Division, Commission, on October 10, 2003.
\8\ See Securities Exchange Act Release No. 47516 (March 17,
2003), 68 FR 14451 (March 25, 2003) (SR-NASD-2002-141) and SR-Amex-
2003-65.
\9\ See Securities Exchange Act Release No. 47672 (April 11,
2003), 68 FR 19051 (April 17, 2003) (SR-NYSE-2002-33) and NYSE
Listed Company Manual Section 802.
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The CHX Governance Standards will apply to all companies listing
common stock on the Exchange, with particular exemptions for controlled
companies, limited partnerships, companies in bankruptcy, closed-end
management companies and foreign issuers. Under proposed Article
XXVIII, Rule 19, Interpretation and Policy .03, passive business
organizations (such as royalty trusts) will not be subject to these
standards, nor will the standards apply to derivatives or special
purpose securities, if those entities and securities are exempt from
the requirements of Rule 10A-3 under the Act.\10\ Under proposed
Article XXVIII, Rule 19, Interpretation and Policy .04, additional
exemptions will exist 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 similar governance-related requirements. The proposed CHX
Governance Standards will apply to companies that list securities under
Tier I or Tier II of the CHX's listing standards.
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\10\ 17 CFR 240.10A-3.
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Summarized below are the principal categories of change to the CHX
Governance Standards.
Definition of ``Independence''
The Exchange believes that it is critical for investors to have
confidence that an individual serving as an independent director does
not have any relationship with the issuer (or its officers) that would
impair the director's independence. Accordingly, in addition to the
existing CHX rule language, which generally precludes any relationship
that would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director, the proposed
amendments specifically identify six categories of persons who shall
not be considered independent under proposed CHX Article XXVIII, Rule
19(o)(3).
In general, persons who shall not be considered independent
include: (i) A director employed by the issuer or its parent or
subsidiary during the previous three years; (ii) a director who accepts
(or who has immediate family members who accept) any payments from the
issuer in excess of $60,000 during the current year or any of the past
three fiscal years (other than compensation for board service, payments
from investments in the issuer's securities, compensation to non-
executive family members, tax-qualified retirement benefits or non-
discretionary compensation); (iii) a director who is an immediate
family member of an individual who is, or who served during the
previous three years, as an executive officer of the issuer or its
parent or subsidiary; (iv) a director who is a principal (i.e., a
partner, controlling shareholder or executive officer) in any
organization that received payments from the issuer, or that made
payments to the issuer, exceeding 5% of the recipient's consolidated
gross revenues for the year or $200,000, whichever, is greater; (v) a
director who is an executive officer of another entity, if there is
compensation committee overlap between the issuer and such entity
currently or during the past three years; and (vi) a director who was a
partner or employee of the issuer's outside auditor, and worked on the
issuer's audit, during any of the past three years.
Under proposed CHX Article XXVIII, Rule 19(o)(2), the proposed
amendments define an immediate family member as a person's spouse,
parents, children, siblings, mothers and fathers-in-law, sons and
daughters-in-law, brothers and sisters-in-law and any person who has
the same residence as the director in question.
Independent Board and Board Committees
Through the exercise of independent judgment, independent directors
act on behalf of investors to maximize shareholder value and guard
against conflicts of interest. Accordingly, under proposed Article
XXVIII, Rule 19(a), the proposed amendments require most issuers to
maintain a majority of independent directors on their boards; small
business issuers will be required to have boards consisting of at least
50% independent directors. The proposed rule also requires regularly
convened executive sessions of the independent directors. The Exchange
states that regularly scheduled executive sessions will encourage and
enhance communication among independent directors. A controlled company
would be exempt from this requirement.\11\
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\11\ Under the definition in proposed in CHX Article XXVIII,
Rule 19(o)(1), a ``controlled company'' would mean a company of
which more than 50% of the voting power is held by an individual,
group or other company.
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Under proposed CHX Article XXVIII, Rule 19(c), the nomination of
the issuer's directors will be determined by independent directors.
Independent director oversight of the director nomination process
should enhance investor confidence in the selection of well-qualified
director nominees. This
[[Page 61506]]
rule would not apply in cases where the right to nominate a director
legally belongs to a third party.\12\
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\12\ The rule incorporates other limited exceptions that would
permit certain persons to serve on the nominating committee, if the
issuer's board determines that a person's membership on the
committee is required by the best interests of the company and its
shareholders and the board discloses the nature of the relationship
and the basis for its determination in the next annual meeting proxy
statement following that determination. An issuer's chief executive
officer would be permitted to participate in the deliberations
relating to the compensation of other officers, but would not be
allowed to vote.
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The proposal under proposed CHX Article XXVIII, Rule 19(d) also
contemplates independent director approval of the compensation of an
issuer's officers.\13\ The Exchange believes this oversight will help
ensure that appropriate executive incentives are in place, consistent
with the board's responsibility to maximize shareholder value.
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\13\ Controlled companies would be exempt from this requirement,
and a specific exception would exist to allow certain persons to
serve on the compensation committee in exceptional and limited
circumstances.
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Audit Committee Requirements
Under proposed CHX Article XXVIII, Rule 19(b), the proposed
amendments would expand existing CHX requirements relating to audit
committee composition and would include new requirements relating to
that committee's role and authority. With very limited exceptions set
forth in the proposed rule, each member of an issuer's audit committee:
(i) Must be an independent director; (ii) must meet the criteria for
independence set forth in SEC Rule 10A-3; and (iii) must be able to
read and understand fundamental financial statements, including a
company's balance sheet, income statement and cash flow statement.\14\
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\14\ Nothing in the rule exempts an issuer from the requirements
of section 10A(m) under the Act, 15 U.S.C. 78j-1(m), and Rule 10A-3
thereunder.
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The proposed amendment would require each issuer's audit committee
to have the responsibilities and authority set out in SEC Rule 10A-3
(and to act in accordance with those provisions) and to have a written
charter to specify the audit committee's minimum purposes, duties and
responsibilities, including those that are required by the SEC Rule and
by the Sarbanes-Oxley Act.\15\ The written charter must be reviewed,
and its adequacy must be reassessed on an annual basis by the audit
committee.
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\15\ Pub. L. 107-204, 116 Stat. 745 (2002).
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Code of Business Conduct and Ethics
Under the proposed rules, each issuer would be required to adopt a
code of conduct and ethics that applies to its directors, officers and
employees and that meets the requirements of section 406(c) of the
Sarbanes-Oxley Act. Under proposed CHX Article XXVIII, Rule 19(e),
waivers of the code for directors and officers would need to be
approved by the issuer's board of directors and be made publicly
available.
Governance-Related Certifications
Given the importance of the requirements set forth in the CHX
Governance Standards, the proposed amendments contain a requirement
that each issuer's chief executive officer certify, on an annual basis,
that he or she is not aware of any violation by the issuer of any
standard set forth in CHX Article XXVIII, Rules 19(a)-(e). Further,
under proposed CHX Article XXVIII, Rule 19(f), such chief executive
officer is required to promptly notify the Exchange if any executive
officer of the issuer becomes aware of any material non-compliance by
the issuer with those standards.
Changes to CHX Maintenance Standards
For both Tier I and Tier II issuers under proposed CHX Article
XVIII, Rules 17A and 22, the proposed amendments contemplate a process
whereby the Exchange would provide non-compliant issuers with notice
and an opportunity to cure the stated deficiency. These provisions
would apply to situations in which an issuer fails to meet governance-
related standards, as well as those in which an issuer fails to meet
other maintenance standards.
In general, the proposed rule amendments would require the Exchange
to notify a non-compliant issuer in writing of the Exchange's
determination and the reasons for such determination. The issuer would
then be required to respond within 10 business days to confirm its
receipt of the letter and to advise the Exchange whether or not the
issuer intends to submit a plan for curing the deficiency. Any plan
must describe definitive action that the issuer has taken or is taking
that would bring it into conformity with the Exchange's standards
within 18 months, or within any shorter period of time required by the
Exchange.\16\ The plan must be submitted within 45 days after receiving
the Exchange's determination of deficiency. If the Exchange accepts the
plan, the Exchange would assess the issuer's progress on a quarterly
basis. If the Exchange does not accept the plan, the Exchange would
initiate proceedings to suspend and/or delist the issue. While the plan
is in effect, the Exchange could initiate proceedings to suspend and/or
delist the issue if the issuer fails to meet a material provision of
the plan or fails to meet quarterly milestones.
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\16\ The proposed rule confirms that the Exchange would not
accept a plan that is designed to cure a deficiency under SEC Rule
10A-3 if the plan extends beyond the earlier of 12 months or the
first annual shareholders' meeting (for circumstances beyond the
reasonable control of an issuer) and 6 months (for other
circumstances).
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The foregoing procedures would not preclude the Exchange from
taking immediate action to suspend trading in an issue, if such action
is necessary for the protection of investors.
Application of Standards to Issuers With Dual or Multiple Listings
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 under proposed CHX Article
XVIII, Rule 19, Interpretation and Policy .04 that would exempt such
issuers from the CHX Governance Standards if the issuer is listed on a
national securities exchange or national securities association with
listing standards substantially similar to the CHX Corporate Governance
Standards. The proposed rule text contains specific criteria that must
be considered when determining whether another market's governance
standards are ``substantially similar.''
Schedule for Effectiveness of Proposed Rule Changes
The CHX anticipates that the proposed rule changes to CHX
Governance Standards will become effective in accordance with the
timetable set forth in proposed CHX Article XXVIII, Rule 19,
Interpretation and Policy .05. In general, following Commission
approval of the proposed rule changes: (i) The audit committee
requirements mandated by Rule 10A-3 under the Act (and the exception
set out in CHX Article XXVIII, Rule 19(b)(1)(B)(ii)) will become
effective as set out in Rule 10A-3 for all issuers; (ii) the other CHX
Governance Standards will become effective two years after they are
approved by the Commission, with a one-year ``grace period'' for
issuers with staggered term boards; and (iii) issuers listing on the
Exchange in connection with an initial public offering or transferring
from another marketplace with different governance standards will be
required to comply with CHX Governance Standards within
[[Page 61507]]
two years after listing on the CHX.\17\ Changes to CHX Maintenance
Standards will become effective upon Commission approval.
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\17\ An issuer transferring to the CHX from another market with
substantially similar governance standards must comply with such
governance standards at the time the issuer lists with the CHX, or
within any transition period that was provided by the other
marketplace.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \18\ in general, and furthers the
objectives of section 6(b)(5) of the Act \19\ in particular, because it
is designed 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.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe 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. The Exchange,
however, did notify its issuers of the types of proposed rule changes
that it was contemplating and has not received any objections to those
proposals. One issuer's verbal comments `` seeking flexibility in the
effective dates of, or the scope of the exceptions from, the proposals
for the new independence requirements `` have been incorporated into
the Exchange's rule proposal.
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 Exchange 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.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change, as amended, that
are filed with the Commission, and all written communications relating
to the proposed rule change, as amended, 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 Room.
Copies of such filing will also be available for inspection and copying
at the principal office of the CHX. All submissions should refer to
file number SR-CHX-2003-19 and should be submitted by November 18,
2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27135 Filed 10-27-03; 8:45 am]
BILLING CODE 8010-01-P