[Federal Register: October 31, 2003 (Volume 68, Number 211)]
[Notices]
[Page 62146-62157]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc03-112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48700; File No. SR-PCX-2003-35]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. To
Amend Its Corporate Governance and Disclosure Policies
October 24, 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 14, 2003, the Pacific Exchange, Inc. (``PCX'' 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. On
October 14, 2003, the Exchange filed an amendment to the proposal.\3\
The Commission is publishing this notice to solicit comments on the
proposed rule
[[Page 62147]]
change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Steven B. Matlin, Senior Counsel, PCX, to
Nancy J. Sanow, Assistant Director, Division of Market Regulation,
Commission, dated October 8, 2003 (``Amendment No.1''). In Amendment
No.1, the Exchange made changes to proposed rule text in PCX Rule
5.3(k)(5)(B)(ii)(a).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, through its wholly owned subsidiary, PCX Equities,
Inc. (``PCXE''), is proposing to amend its Corporate Governance and
Disclosure Policies. The Exchange states that these changes are aimed
at helping to restore investor confidence by strengthening listed
companies' corporate governance practices.\4\ The text of the proposed
rule change, as amended, is set forth below.\5\ Text in brackets
indicates material to be deleted, and text in italics indicates
material to be added.\6\
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\4\ The Commission notes that the PCX will consider amendments
to the proposed rule change once the Commission approves proposals
on corporate governance matters filed by other exchanges. Telephone
conversation between Steven B. Matlin, Senior Counsel, PCX, and Ira
L. Brandriss, Special Counsel, Division of Market Regulation
(``Division''), Commission, on October 23, 2003.
\5\ 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 Steven B.
Matlin, Senior Counsel, PCX, and Ira L. Brandriss, Special Counsel,
Division, Commission, on October 23, 2003.
\6\ The Commission notes that the PCX listing rules provide
standards for the listing of two different tiers of securities, to
which the proposed rule change makes reference. As stated in PCX
Rule 5.2(b): ``A listing under the Tier I designation generally
signifies that the company has achieved maturity and high status in
its industry in terms of assets, earnings, and shareholder interest,
and acceptance. The Tier II designation is limited, except for
specific circumstances as discussed [earlier in the provision], to
the listing of common stock, preferred stock, bonds and debentures,
and warrants. A listing under the Tier II designation generally
signifies that the company has limited commercial operations, lower
capitalization, and lacks a demonstrated earnings history.''
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* * * * *
PCX Equities, Inc.
Rule 5
Listings
Rules 5.1-5.2-No change.
Section 3. Corporate Governance and Disclosure Policies
Corporate Governance and Disclosure Policies
Rule 5.3 The Corporation shall require that specific corporate
governance and disclosure policies be established by domestic issuers
of any equity security listed pursuant to Rule 5.2. Issuers of
securities under the Tier I designation must comply with the provisions
of Rules 5.3(c)-(o). Issuers of securities under the Tier II
designation must comply with the provisions of Rules 5.3(a)-(i)(4) and
5.3(k)(5). Issuers of any security that is listed pursuant to the Rules
of the Corporation must comply with the provisions of Rule 5.3(k)(5).
[The Corporation, however, will not require an issuer of such security
under the Tier II designations to comply with the provisions for an
audit committee as set forth in this Rule 5.3(b).]
Rule 5.3(a)--No change.
Independent Directors [/Audit Committee]
Rule 5.3(b). Independent Directors [/Audit Committee]
The Corporation shall require that each listed domestic issuer have
at least two independent directors on its board of directors. [Such
issuer shall maintain an audit committee. All audit committee members
shall be independent directors that satisfy the audit committee
requirement set forth below.
[(1) Audit Committee Charter. The board of directors must adopt and
approve a formal written charter for the audit committee. The audit
committee must review and reassess the adequacy of the formal written
charter on an annual basis. The charter must specify the following:
[(i) The scope of the audit committee's responsibilities and how it
carries out those responsibilities, including structure, processes, and
membership requirements;
[(ii) That the outside auditor is ultimately accountable to the
board of directors and the audit committee of the company, that the
audit committee and board of directors have the ultimate authority and
responsibility to select, evaluate, and, where appropriate, replace the
outside auditor (or to nominate the outside auditor to be proposed for
shareholder approval in any proxy statement); and
[(iii) That the audit committee is responsible for ensuring that
the outside auditor submits on a periodic basis to the audit committee
a formal written statement delineating all relationships between the
auditor and the company and that the audit committee is responsible for
actively engaging in a dialogue with the outside auditor with respect
to any disclosed relationships or services that may impact the
objectivity and independence of the outside auditor and for
recommending that the board of directors take appropriate action in
response to the outside auditors' report to satisfy itself of the
outside auditors' independence.
[(2) Composition/Expertise Requirement of Audit Committee Members.
[(i) Each audit committee will consist of at least three
independent directors, all of whom have no relationship to the company
that may interfere with the exercise of their independence from
management and the company (``Independent'');
[(ii) Each member of the audit committee must be financially
literate, as such qualification is interpreted by the company's board
of directors in its business judgment, or must become financially
literate within a reasonable period of time after his or her
appointment to the audit committee; and
[(iii) At least one member of the audit committee must have
accounting or related financial management expertise, as the Board of
Directors interprets such qualification in its business judgment.
[(3) Independence Requirement of Audit Committee Members. In
addition to the definition of Independent provided in 5.3(b)(2)(i), the
following restrictions shall apply to every audit committee member:
[(i) Employees. A director who is an employee (including non-
employee executive officers) of the company or any of its affiliates
may not serve on the audit committee until three years following the
termination of his or her employment. In the event the employment
relationship is with a former parent or predecessor of the company, the
director could serve on the audit committee after three years following
the termination of the relationship between the company and the former
parent or predecessor. ``Affiliate'' includes a subsidiary, sibling
company, predecessor, parent company, or former parent company.
[(ii) Business Relationship. A director (a) who is a partner,
controlling shareholder, or executive officer of an organization that
has a business relationship with the company, or (b) who has a direct
business relationship with the company (e.g., a consultant) may serve
on the audit committee only if the company's board of directors
determines in its business judgment that the relationship does not
interfere with the director's exercise of independent judgment. In
making a determination regarding the independence of a director
pursuant to this paragraph, the board of directors should consider,
among other things, the materiality of the relationship to the company,
to the director, and, if applicable, to the organization with which the
director is affiliated.
[``Business relationships'' can include commercial, industrial,
banking, consulting, legal, accounting and other relationships. A
director can have this relationship directly with the company, or the
director can be a partner, officer
[[Page 62148]]
or employee of an organization that has such a relationship. The
director may serve on the audit committee without the above-referenced
board of directors' determination after three years following the
termination of, as applicable, either (a) the relationship between the
organization with which the director is affiliated and the company, (b)
the relationship between the director and his or her partnership
status, shareholder interest or executive officer position, or (c) the
direct business relationship between the director and the company.
[(iii) Cross Compensation Committee Link. A director who is
employed as an executive of another corporation where any of the
company's executives serves on that corporation's compensation
committee may not serve on the audit committee.
[(iv) Immediate Family. A director who is an Immediate Family
member of an individual who is an executive officer of the company or
any of its affiliates cannot serve on the audit committee until three
years following the termination of such employment relationship.
``Immediate Family'' includes a person's spouse, parents, children,
siblings, mothers-in-law and fathers-in-law, sons and daughters-in-law,
and anyone (other than employees) who shares such person's home.
[(v) Notwithstanding the requirements of subparagraphs (3)(i) and
(3)(iv), one director who is no longer an employee or who is an
Immediate Family member of a former executive officer of the company or
its affiliates, but is not considered independent pursuant to these
provisions due to the three-year restriction period, may be appointed,
under exceptional and limited circumstances, to the audit committee if
the company's board of directors determines in its business judgment
that membership on the committee by the individual is required by the
best interests of the corporation and its shareholders, and the company
discloses, in the next annual proxy statement subsequent to such
determination, the nature of the relationship and the reasons for that
determination.
[(4) Written Affirmation. As part of the initial listing process,
and with respect to any subsequent changes to the composition of the
audit committee, and otherwise approximately once each year, each
company should provide the Exchange written confirmation regarding:
[(i) any determination that the company's board of directors has
made regarding the independence of directors pursuant to any of the
subparagraphs above;
[(ii) the financial literacy of the audit committee member;
[(iii) the determination that at least one of the audit committee
members has accounting or related financial management expertise; and
[(iv) the annual review and reassessment of the adequacy of the
audit committee charter.
[(5) ``Officer'' has the meaning specified in Rule 16a-1(f) under
the Securities Exchange Act of 1934, or any successor rule.
[(6) Initial Public Offering. Companies listing in conjunction with
their initial public offering (including spin-offs and carve outs) will
be required to have two qualified audit committee members in place
within three months of listing and a third qualified member in place
within twelve months of listing.]
Rules 5.3(c)-(i)(4)--No change.
Rule 5.3(j) Corporate Governance Guidelines/Code of Conduct
(1) Corporate Governance Guidelines. Listed companies must adopt
and disclose corporate governance guidelines. Each listed company's Web
site must include its corporate governance guidelines, the charters of
its most important committees (including at least the audit,
compensation and nominating committees) and the company's code of
business conduct and ethics. Each company's annual report must state
that the foregoing information is available on its Web site, and that
the information is available in print to any shareholder who requests
it. The following subjects must be addressed in the corporate
governance guidelines:
(A) Director qualification standards. These standards should, at
minimum, reflect the independence requirements set forth in subsection
(k) below. Companies may also address other substantive qualification
requirements, including policies limiting the number of boards on which
a director may sit, and director tenure, retirement and succession.
(B) Director responsibilities. These responsibilities should
clearly articulate what is expected from a director, including basic
duties and responsibilities with respect to attendance at board
meetings and advance review of meeting materials.
(C) Director access to management and, as necessary and
appropriate, independent advisors.
(D) Director compensation. These guidelines should include general
principles for determining the form and amount of director compensation
(and for reviewing those principles, as appropriate).
(E) Director orientation and continuing education.
(F) Management succession. Succession planning should include
policies and principles for CEO selection and performance review, as
well as policies regarding succession in the event of an emergency or
the retirement of the CEO.
(G) Annual performance evaluation of the board. The board should
conduct a self-evaluation at least annually to determine whether it and
its committees are functioning effectively.
(2) Code of Business Conduct and Ethics. Listed companies must
adopt and disclose a code of business conduct and ethics for directors,
officers and employees, and promptly disclose any waivers of the code
for directors or executive officers. The code of business conduct and
ethics must require that any waiver of the code for executive officers
or directors may be made only by the board or a board committee and
must be promptly disclosed to shareholders. The code of business
conduct and ethics must also contain compliance standards and
procedures that will facilitate the effective operation of the code.
All codes should address the following topics:
(A) Conflicts of interest. A conflict of interest occurs when an
individual's private interest interferes in any way, or even appears to
interfere, with the interests of the corporation as a whole.
(B) Corporate opportunities. Employees, officers and directors
should be prohibited from (1) taking for themselves opportunities that
are discovered through the use of corporate property, information or
position; (2) using corporate property, information, or position for
personal gain; and (3) competing with the company.
(C) Confidentiality. Employees, officers and directors should
maintain the confidentiality of information entrusted to them by the
company or its customers, except when disclosure is authorized or
legally mandated. Confidential information includes all non-public
information that might be of use to competitors, or harmful to the
company or its customers, if disclosed.
(D) Fair dealing. Each employee, officer and director should
endeavor to deal fairly with the company's customers, suppliers,
competitors and employees. None should take unfair advantage of anyone
through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts, or any other unfair dealing
practices.
[[Page 62149]]
(E) Protection and proper use of company assets. All employees,
officers and directors should protect the company's assets and ensure
their efficient use.
(F) Compliance with laws, rules and regulations. The company should
proactively promote compliance with laws, rules and regulations,
including insider trading laws.
(G) Encouraging the reporting of any illegal or unethical behavior
to appropriate personnel. The company should proactively promote
ethical behavior. The company must ensure that employees know that the
company will not allow retaliation for reports made in good faith.
Independent Directors/Board Committees
Rule 5.3(k) Independent Directors/Board Committees
The Corporation shall require that each listed domestic issuer have
a majority of independent directors on its board of directors, except
that a domestic issuer of which more than 50% of the voting power is
held by an individual, a group or another company need not have a
majority of independent directors on its board or have nominating/
corporate governance and compensation committees composed of
independent directors as set forth in Rule 5.3(k). However, all such
controlled companies must have at least a minimum three person audit
committee and otherwise comply with the audit committee requirements
provided for in this Rule 5.3(k)(5).
(1) Independent Directors. For purposes of this Rule 5.3(k), no
director qualifies as independent unless the board of directors
affirmatively determines that the director has no material relationship
with the listed company, either directly or as a partner, shareholder
or officer of an organization that has a relationship with the company.
Companies must disclose these determinations. The basis for a board
determination that a relationship is not material must be disclosed in
the company's annual proxy statement. A board may adopt and disclose
categorical standards to assist it in making determinations of
independence and may make a general disclosure if a director meets
these standards. Any determination of independence for a director who
does not meet these standards must be specifically explained. A company
must disclose any standard it adopts. In the event that a director with
a business or other relationship that does not fit within the disclosed
standards is determined to be independent, a board must disclose the
basis for its determination.
In addition, the following directors do not qualify as independent
directors:
(A) A director who is a former employee of the listed company whose
employment ended within the past five years.
(B) A director who is, or in the past three years has been,
affiliated with or employed by a (present or former) auditor of the
company (or of an affiliate). Such director cannot be independent until
three years after the end of either the affiliation or the auditing
relationship.
(C) A director who is, or in the past five years has been, part of
an interlocking directorate in which an executive officer of the listed
company serves on the compensation committee of another company that
concurrently employs the director.
(D) A director with an immediate family member in any the foregoing
categories. Immediate family includes a person's spouse, parents,
children, siblings, mothers-in-law and fathers-in-law, sons and
daughters-in-law, and anyone (other than employees) who shares such
person's home.
(2) Regularly Scheduled Non-Management Directors Executive
Sessions. The non-management directors of each company must meet at
regularly scheduled executive sessions without management. Non-
management directors are all those who are not company officers, and
includes such directors who are not independent by virtue of a material
relationship, former status or family membership, or for any other
reason. There need not be a single presiding director at all executive
sessions of the non-management directors. If one director is chosen to
preside at these meetings, his or her name must be disclosed in the
annual proxy statement. Alternatively, a company may disclose the
procedure by which a presiding director is selected for each executive
session. In order that interested parties may be able to make their
concerns known to the non-management directors, a company must disclose
a method for such parties to communicate directly with the presiding
director or with the non-management directors as a group.
(3) Nominating/Corporate Governance Committee. Listed companies
must have a Nominating Committee/Corporate Governance Committee
composed entirely of independent directors, except that if such
committee is made up of three or more individuals, then one member of
the committee need not be an independent director. The committee must
have a written charter that addresses:
(A) The committee's purpose, which at a minimum, must be to:
identify individuals qualified to become board members, and to select,
or to recommend that the board select, the director nominees for the
next annual meeting of shareholders; and develop and recommend to the
board a set of corporate governance principles applicable to the
company.
(B) The committee's goals and responsibilities, which must reflect,
at a minimum, the board's criteria for selecting new directors, and
oversight of the evaluation of the board and management.
(C) An annual performance evaluation of the committee.
(D) Committee member qualifications, committee member appointment
and removal, committee structure and operations (including authority to
delegate to subcommittees), and committee reporting to the board.
(E) The committee's authority to retain and terminate any search
firm to be used to identify director candidates, including the sole
authority to approve the search firm's fees and other retention terms.
If a company is required by contract or otherwise to provide third
parties with the ability to nominate directors (for example, preferred
stock rights to elect directors upon a dividend default, shareholder
agreements, and management agreements), the selection and nomination of
such directors need not be subject to the nominating committee process.
Boards may allocate the responsibilities of the nominating/
corporate governance committee and the compensation committee to
committees of their own denomination, provided that the committees are
composed entirely of independent directors, except that if such
committee is made up of three or more individuals, then one member of
the committee need not be an independent director. Any such committee
must have a published committee charter.
Controlled companies need not comply with the requirements of this
provision.
(4) Compensation Committee. Listed companies must have a
compensation committee composed entirely of independent directors,
except that if such committee is made up of three or more individuals,
then one member of the committee need not be an independent director.
The committee must have a written charter that addresses:
[[Page 62150]]
(A) The committee's purpose which, at a minimum, must be to
discharge the board's responsibilities relating to compensation of the
company's executives, and to produce an annual report on executive
compensation for inclusion in the company's proxy statement, in
accordance with applicable rules and regulations.
(B) The committee's duties and responsibilities, which, at a
minimum, must be to:
(i) Review and approve corporate goals and objectives relevant to
CEO compensation, evaluate the CEO's performance in light of those
goals and objectives, and set the CEO's compensation level based on
this evaluation.
(ii) Make recommendations to the board with respect to incentive-
compensation plans and equity-based plans.
(C) An annual performance evaluation of the compensation committee.
(D) Committee member qualifications, committee member appointment
and removal, committee structure and operations (including authority to
delegate to subcommittees), and committee reporting to the board.
(E) The committee's authority to retain and terminate a consultant
to assist in the evaluation of a director, CEO or senior executive
compensation. The Committee shall have the sole authority to approve
the consultant's fees and other retention terms.
Controlled companies need not comply with the requirements of this
provision.
(5) Audit Committee.
(A) General Provisions.
(i) Each listed company must have an audit committee as defined by
Section 3(a)(58) of the Securities and Exchange Act of 1934. The audit
committee must be composed entirely of independent directors. The audit
committee must comply with all the rules and procedures set forth in
Rule10A-3 of the Securities and Exchange Act of 1934. If a member of
the audit committee ceases to be independent for reasons outside the
member's reasonable control, that person, with notice by the issuer to
the Corporation, may remain an audit committee member of the listed
issuer until the earlier of the next annual meeting or special meeting
of the listed issuer or one year from the occurrence of the event that
caused the member to be no longer independent. Should an individual who
ceases to be independent for reasons outside the member's reasonable
control remain a member of the audit committee after the time permitted
by this Rule 5.3(k)(5)(A)(i), then the Corporation shall remove the
issuer's securities from listing pursuant to the procedures set forth
in Rule 5.5(m).
(ii) Listed issuers, other than foreign private issuers and small
business issuers (as defined in Rule 12b-2 of the Securities and
Exchange Act of 1934), must be in compliance with this Rule 5.3(k)(5)
by the earlier of their first annual shareholders meeting after January
15, 2004, or October 31, 2004. Foreign private issuers and small
business issuers must be in compliance with this Rule 5.3(k)(5) by July
31, 2005.
(iii) If an executive officer of a listed issuer becomes aware of
any material noncompliance by the listed issuer with the requirements
of this Rule 5.3(k)(5), the listed issuer must promptly notify the
Corporation of such noncompliance.
(iv) To be eligible for continued listing, a listed issuer must
comply with all of the requirements set forth in this Rule 5.3(k)(5).
Except as provided for in Rule 5.3(k)(5)(A)(i), should a listed issuer
fail to comply with any of the requirements set forth in this Rule
5.3(k)(5) for a period of six (6) consecutive months, then the
Corporation shall remove the issuer's securities from listing pursuant
to the procedures set forth in Rule 5.5(m). A listed issuer who is not
in compliance with the requirements of Rule 5.3(k)(5) must provide the
Corporation with plan of remediation within 15 days after notifying the
Corporation of such noncompliance. The listed issuer must provide the
Corporation with written monthly updates on the progress of the plan of
remediation.
(B) Written Charter. The audit committee must have a written
charter that addresses:
(i) The committee's purpose which, at a minimum, must be to:
(a) Assist board oversight of (1) the integrity of the company's
financial statements, (2) the company's compliance with legal and
regulatory requirements, (3) the independent auditor's qualifications
and independence, and (4) the performance of the company's internal
audit function and independent auditors.
(b) Prepare the report that SEC rules require be included in the
company's annual proxy statement.
(ii) The duties and responsibilities of the audit committee, which,
at a minimum, must be to:
(a) Be directly responsible for the appointment, compensation,
retention, and oversight of the work of any registered public
accounting firm engaged (including resolution of disagreements between
management and the auditor regarding financial reporting) for the
purpose of preparing or issuing an audit report or performing other
audit, review or attest services for the listed issuer, and each such
registered public accounting firm must report directly to the audit
committee.
(b) At least annually, obtain and review a report by the
independent auditor describing the firm's internal quality control
procedures; any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities, within
the preceding five years, respecting one or more independent audits
carried out by the firm, and any steps taken to deal with any such
issues; and (to assess the auditor's independence) all relationships
between the independent auditor and the company.
(c) Discuss the annual audited financial statements and quarterly
financial statements with management and the independent auditor,
including the company's disclosure under ``Management Discussion and
Analysis of Financial Condition and Results of Operations.''
(d) Discuss earnings press releases, as well as financial
information and earnings guidance provided to analysts and rating
agencies.
(e) Engage independent counsel and other advisers, as it determines
necessary to carry out its duties.
(f) Discuss policies with respect to risk assessment and risk
management.
(g) Meet separately, periodically, with management, with internal
auditors (or other personnel responsible for the internal audit
function) and with independent auditors.
(h) Review with the independent auditor any audit problems or
difficulties and management's response.
(i) Set clear policies for hiring employees or former employees of
the independent auditors.
(j) Report regularly to the board of directors.
(k) Review major issues regarding accounting principles and
financial statement presentations; including any significant changes in
the company's selection or application of accounting principles, and
major issues as to the adequacy of the company's internal controls and
any special audit steps adopted in light of material control
deficiencies.
(l) Review analyses prepared by management and/or the independent
auditor setting forth significant financial reporting issues and
judgments made in connection with the preparation of the financial
statements, including analyses
[[Page 62151]]
of the effects of alternative GAAP methods on the financial statements.
(m) Review the effect of regulatory and accounting initiatives, as
well as off-balance sheet structures, on the financial statements of
the company.
(n) Review earnings press releases (paying particular attention to
any use of ``pro forma,'' or ``adjusted'' non-GAAP, information), as
well as financial information and earnings guidance provided to
analysts and rating agencies.
(o) Establish procedures for: (1) the receipt, retention, and
treatment of complaints received by the issuer regarding accounting,
internal accounting controls, or auditing matters and (2) the
confidential, anonymous submission by employees of the issuer of
concerns regarding questionable accounting, internal accounting
controls or auditing matters.
(iii) An annual performance evaluation of the audit committee.
(C) Composition/Expertise Requirement of Audit Committee Members.
(i) Each audit committee will consist of at least three independent
directors, as defined in Rule 5.3(k)(1).
(ii) Each member of the audit committee must be financially
literate, as such qualification is interpreted by the company's board
of directors in its business judgment, or must become financially
literate within a reasonable period of time after his or her
appointment to the audit committee.
(iii) At least one member of the audit committee must have
accounting or related financial management expertise, as the board of
directors interprets such qualification in its business judgment.
(D) Written Affirmation. As part of the initial listing process,
and with respect to any subsequent changes to the composition of the
audit committee, and otherwise approximately once each year, each
company should provide the Exchange written confirmation regarding:
(i) Any determination that the company's board of directors has
made regarding the independence of directors.
(ii) The financial literacy of the audit committee member.
(iii) The determination that at least one of the audit committee
members has accounting or related financial management expertise.
(iv) The annual review and reassessment of the adequacy of the
audit committee charter.
(6) Internal Audit Function. Each listed company must have an
internal audit function. This does not necessarily mean that a company
must establish a separate internal audit department or dedicate
employees to the task on a full-time basis. It is sufficient for the
company to have in place an appropriate control process for reviewing
and approving its internal transactions and accounting. A company may
outsource this function to a firm other than its independent auditors.
Rule 5.3(l). Reserved
CEO Certification
Rule 5.3(m). CEO Certification
Each listed company CEO must certify to the Corporation each year
that he or she is not aware of any violation by the company of the
Corporation's corporate governance listing standards. The certification
filed with the Corporation, as well as the CEO/CFO certifications
required to be filed with the SEC regarding the quality of the
company's public disclosure, must be disclosed in the listed company's
annual report to shareholders.
Listed Foreign Private Issuers
Rule 5.3(n). Listed Foreign Private Issuers
Listed foreign private issuers must disclose any significant ways
in which their corporate governance practices differ from those
followed by domestic companies under the Corporation's listing
standards. Listed foreign private issuers must comply with the
provisions of Rule 5.3(k)(5). Listed foreign private issuers may
provide this disclosure either on their Web site (provided it is in the
English language and accessible from the United States) and/or in their
annual report as distributed to shareholders in the United States
(again, in the English language). If the disclosure is only made
available on the Web site, the annual report shall so state and provide
the web address at which the information may be obtained.
Deadline for Compliance
Rule 5.3(o). Deadline for Compliance
Tier I listed issuers, other than Tier I foreign private issuers
and Tier I small business issuers (as defined in Rule 12b-2 of the
Securities and Exchange Act of 1934), must be in compliance with all
applicable sections of Rule 5.3 by the earlier of (1) their first
annual shareholders meeting after January 15, 2004, or (2) October 31,
2004. Tier I foreign private issuers and Tier I small business issuers
must be in compliance with all applicable sections of Rule 5.3 by July
31, 2005.
Section 4. Suspension, Public Reprimand or Issuer Withdrawal from
Listing
] 7957E Suspension/Public Reprimand
Rule 5.4(a). The Corporation [Board of Directors] may suspend
dealings in or institute proceedings to remove any security from listed
or unlisted trading privileges. The Corporation may issue a public
reprimand letter to any listed company that violates a Corporation
listing standard. The Corporation shall remove any security from listed
or unlisted trading privileges if the listed company violates any
provisions of Rule 5.3(k)(5).
Rule 5.4(b)--No change.
Section 5. Maintenance Requirements and Delisting Procedures
] 7957G Maintenance Requirements and Delisting Procedures
Rule 5.5(a). The Corporation does not rate or evaluate any security
dealt in on the Corporation. In making a determination concerning
listing and delisting it acts normally upon information furnished it by
the issuer, and it does not verify this information from independent
sources or gather independent information about the issuers whose
securities are dealt in on the Corporation.
As a matter of policy, when a listed company fails to meet any of
the listing maintenance requirements and has more than one class of
securities listed, the Corporation will give consideration to delisting
all such classes. However, the Corporation may continue the listing of
one class of securities regardless of its decision to delist another
class, except for failure to comply with Rule 5.3(k)(5) in which case
all such classes shall be delisted. The securities of a company will be
subject to suspension and/or withdrawal from listing and registration
as a listed issue if the Corporation finds that a listed company fails
to meet the maintenance requirements as set forth in this Rule 5.5, or
fails to comply with the Corporation's listing policies or agreements.
Commentary:
.01 When the issuer fails to meet any provision of the applicable
maintenance requirements of this Rule 5.5, the Exchange shall determine
whether to suspend dealings in the security and/or request the issuer
to take action to remedy any identified deficiency. Should the issuer
fail to correct any deficiency, the Exchange shall take action to
delist the security.
.02 Securities listed under the Tier I designation will not be
granted waivers from the Corporation's maintenance
[[Page 62152]]
requirements. Any security that no longer meets the Tier I maintenance
requirements, but meets the Tier II maintenance requirements, will be
reclassified as a Tier II security. The Corporation, however, may grant
a waiver for the continued listing of any security in cases where the
security remains listed on either the NYSE, Amex, or Nasdaq National
Market; provided, however, that the Corporation determines that there
is a reasonable basis for a waiver. In such cases, the security will be
included under the Tier II designation.
.03 Any security approved by the Board of Directors for listing
prior to July 22, 1994 must meet one of the following:
(a) To qualify for inclusion under the Tier I designation, a
security must meet the applicable initial listing requirements as set
forth in Rule 5.2 (including any index product listed pursuant to Rule
8); however, a security listed on either the NYSE, Amex, or Nasdaq
National Market may be designated as a Tier I security so long as it
meets the applicable Tier I maintenance requirements in this Rule 5.5;
or
(b) Any security not meeting the applicable maintenance
requirements must do so within six months of July 22, 1994. Until such
time, the former standards will be applied and the security will be
designated as a Tier II security.
Rule 5.5(b)--(l)--No change.
] 7957T Delisting Procedures
Rule 5.5(m). Whenever the Corporation determines that it is
appropriate to either suspend dealings in and/or remove securities from
listing pursuant to Rule 5.3 or [this] Rule 5.5, except for other than
routine reasons (e.g., redemptions, maturities, etc.) or violations of
Rule 5.3(k)(5) in which case the Corporation shall initiate delisting a
listed company's securities, it will follow, insofar as practicable,
the following procedures:
(1) The Corporation shall notify the issuer in writing describing
the basis on which the Corporation is considering the delisting of the
company's security. Such notice shall be sent by certified mail and
shall include the time and place of a meeting to be held by the
Corporation to hear any reasons why the issuer believes its security
should not be delisted. Generally, the issuer will be notified at least
three (3) weeks prior to the meeting and will be requested to submit a
written response.
(2) If, after such meeting, the Corporation determines that the
security should be delisted, the Corporation shall notify the issuer by
telephone (if possible, the same day of the meeting) and in writing of
the delisting decision and the basis thereof. The written notice will
also inform the issuer that it may appeal the decision to the Board of
Directors and request a hearing.
(3) Concurrent with the Corporation's decision to delist the
issuer's security, the Corporation will prepare a press announcement,
which will be disseminated to the Market Makers and the investing
public no later than the opening of trading the business day following
the Corporation's decision (the Securities Qualification Department
will also distribute the information to the ETP Holders). Accordingly,
the suspension of trading in the issuer's security will become
effective at the opening of business on the day following the
Corporation's decision.
(4) If the issuer requests an appeal hearing, it must file its
request along with (i) a $2,500 delisting appeal fee and (ii) an answer
to the causes specified by the Corporation with the Secretary of the
Corporation no later than five (5) business days following service of
notice of the proposed delisting. If the issuer does not request a
hearing within the specified period of time, or it does not submit the
$2,500 fee to the Corporation in the form and manner prescribed, the
Corporation will submit an application to the Securities and Exchange
Commission to strike the security from list of companies listed on the
Corporation. The Corporation will furnish a copy of such application to
the issuer in accordance with Section 12 of the Securities Exchange Act
of 1934 and the Rules promulgated there under.
(5) If a request for a hearing is made and the requirements of Rule
5.5(m)(4) are met within the time specified, the issuer will be
entitled to an appeal hearing and the Corporation will provide the
issuer at least fifteen (15) business days notice of the time and place
of the hearing.
(6) The hearing shall be held before the Board Appeals Committee
appointed by the Board of Directors for such purpose. Only those
members of the Board Appeals Committee who attend the hearing may vote
with respect to any decisions the Committee may make.
(7) Any documents or other written material the issuer wishes to
consider should be submitted to the appropriate office of the
Corporation at least five (5) business days prior to the date of the
hearing.
(8) At the hearing, the issuer must prove its case by presenting
testimony, evidence, and argument to the Board Appeals Committee. The
form and manner in which the actual hearing will be conducted will be
established by the Board Appeals Committee so as to assure the orderly
conduct of the proceeding. At the hearing, the Board Appeals Committee
may require the issuer to furnish additional written information that
has come to its attention.
(9) After the conclusion of the proceeding, the Board Appeals
Committee shall make its decision. The decision of the Board Appeals
Committee shall be in writing with one copy served upon the issuer and
the second copy filed with the Secretary of the Corporation. Such
decision shall be final and conclusive. If the decision is that the
security of the issuer is to be removed from listing, an application
shall be submitted by the Corporation to the Securities and Exchange
Commission to strike the security from listing and registration, and a
copy of such application shall be provided to the issuer in accordance
with Section 12 of the Securities Exchange Act of 1934 and the Rules
promulgated there under. If the decision is that the security should
not be removed from listing, the issuer shall receive a notice to that
effect from the Corporation.
* * * * *
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
In light of the recent failures of a number of significant
companies due to the lack of diligence, ethics and controls, the PCXE
chose to review its corporate governance and disclosure policies. In
September 2002, the PCXE Board of Directors formed a subcommittee to
review the PCXE's current corporate governance and disclosure
standards. The goal of the subcommittee was to enhance the
accountability, integrity, and
[[Page 62153]]
transparency of the Exchange's listed companies.
In addition to reviewing the PCXE's corporate governance and
disclosure policies, the subcommittee also reviewed the changes
mandated by the Sarbanes-Oxley Act of 2002. In a release effective
April 25, 2003, the Commission directed all national securities
exchanges and national securities associations to prohibit the listing
of any security of an issuer that is not in compliance with the audit
committee requirements mandated by the Sarbanes-Oxley Act of 2002.\7\
These requirements relate to the independence of audit committee
members, the audit committee's responsibility to select and oversee the
issuer's independent accountant, procedures for handling complaints
regarding the issuer's accounting practices, the authority of the audit
committee to engage advisors, and funding for the independent auditor
and any outside advisors engaged by the audit committee.
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\7\ See Securities Act Release No. 8220, Securities Exchange Act
Release No. 47654, and Investment Company Act Release No. 26001
(April 9, 2003), 68 FR 18788 (April 16, 2003).
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The Exchange represents that the proposed new corporate governance
and disclosure policies are designed to further the ability of honest
and well-intentioned directors, officers, and employees to perform
their functions effectively. The resulting proposal would also allow
shareholders to more easily and efficiently monitor the performance of
companies and directors in order to reduce the instances of lax and
unethical behavior.
The proposals for new corporate governance and disclosure policies
would be codified in PCXE Rule 5.3. The new standards in PCXE Rule 5.3
would apply to listed companies designated as Tier I issuers except for
the new provisions on audit committees that are mandated by the
Sarbanes-Oxley Act of 2002.\8\ These provisions, which are contained in
Rule 5.3(k)(5), would apply to all PCX listed securities.
---------------------------------------------------------------------------
\8\ See PCXE Rule 5.3(k)(5).
---------------------------------------------------------------------------
Listed issuers, other than foreign private issuers and small
business issuers, would have to be in compliance with Rule 5.3(k)(5) by
the earlier of: (1) their first annual shareholders meeting after
January 15, 2004, or (2) October 31, 2004. Foreign private issuers and
small business issuers that are listed would have to be in compliance
with the new listing rules by July 31, 2005.
Tier I listed issuers, other than Tier I foreign private issuers
and Tier I small business issuers (as defined in Rule 12b-2 of the Act
\9\), would have to be in compliance with all applicable sections of
Rule 5.3 by the earlier of: (1) their first annual shareholders meeting
after January 15, 2004, or (2) October 31, 2004. Tier I foreign private
issuers and Tier I small business issuers would have to be in
compliance with all applicable sections of Rule 5.3 by July 31, 2005.
The following are proposed requirements that would become
incorporated in the PCXE's corporate governance and disclosure
policies.
(1) Listed companies must adopt and disclose corporate governance
guidelines.
Listed companies would be required to adopt and disclose corporate
governance guidelines. Each listed company's Web site would be required
to include its corporate governance guidelines, the charters of its
most important committees (including at least the audit, compensation
and nominating committees), and the company's code of business conduct
and ethics. Each company's annual report would have to state that the
foregoing information is available on its Web site, and that the
information is available in print to any shareholder who requests it.
The following subjects would have to be addressed in the corporate
governance guidelines:
[sbull] Director qualification standards. These standards should,
at minimum, reflect the independence requirements set forth in proposed
subsection 5.3(k). Companies may also address other substantive
qualification requirements including policies limiting the number of
boards on which a director may sit and director tenure, retirement, and
succession.
[sbull] Director responsibilities. These responsibilities should
clearly articulate what is expected from a director, including basic
duties and responsibilities with respect to attendance at board
meetings and advance review of meeting materials.
[sbull] Director access. Directors must be given access to
management and, as necessary and appropriate, independent advisors.
[sbull] Director compensation. These guidelines should include
general principles for determining the form and amount of director
compensation (and for reviewing those principles, as appropriate).
[sbull] Director orientation. The company must provide an
orientation and continuing education for its directors.
[sbull] Management succession. Succession planning should include
policies and principles for CEO selection and performance review, as
well as policies regarding succession in the event of an emergency or
the retirement of the CEO.
[sbull] Annual performance evaluation of the board. The board
should conduct a self-evaluation at least annually to determine whether
it and its committees are functioning effectively.
(2) Code of Business Conduct.
Listed companies would have to adopt and disclose a code of
business conduct and ethics for directors, officers, and employees, and
promptly disclose any waivers of the code for directors or executive
officers. The code of business conduct and ethics would have to require
that any waiver of the code for executive officers or directors may be
made only by the board or a board committee and would have to be
promptly disclosed to shareholders. The code of business conduct and
ethics would also have to contain compliance standards and procedures
that would facilitate the effective operation of the code.
All codes should address the following topics:
[sbull] Conflicts of interest. A conflict of interest occurs when
an individual's private interest interferes in any way, or even appears
to interfere, with the interests of the corporation as a whole.
[sbull] Corporate opportunities. Employees, officers and directors
should be prohibited from: (i) Taking for themselves opportunities that
are discovered through the use of corporate property, information, or
position; (ii) using corporate property, information, or position for
personal gain; and (iii) competing with the company.
[sbull] Confidentiality. Employees, officers, and directors should
maintain the confidentiality of information entrusted to them by the
company or its customers, except when disclosure is authorized or
legally mandated. Confidential information includes all non-public
information that might be of use to competitors, or harmful to the
company or its customers, if disclosed.
[sbull] Fair dealing. Each employee, officer, and director should
endeavor to deal fairly with the company's customers, suppliers,
competitors, and employees. None should take unfair advantage of anyone
through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts, or any other unfair dealing
practices.
[sbull] Protection and proper use of company assets. All employees,
officers, and directors should protect the company's assets and ensure
their efficient use.
[sbull] Compliance with laws, rules and regulations. The company
should proactively promote compliance with
[[Page 62154]]
laws, rules, and regulations, including insider trading laws.
[sbull] Encouraging the reporting of any illegal or unethical
behavior to appropriate personnel. The company should proactively
promote ethical behavior. The company must ensure that employees know
that the company will not allow retaliation for reports made in good
faith.
(3) Listed companies must have a majority of independent directors.
Each domestic issuer would be required to have a majority of
independent directors on its board of directors, except that a domestic
issuer of which more than 50% of the voting power is held by an
individual, a group, or another company would not need to have a
majority of independent directors on its board or have nominating/
corporate governance and compensation committees composed of
independent directors. However, all such controlled companies would be
required to have at least a minimum three-person audit committee and
otherwise comply with the audit committee requirements.
(4) In order to tighten the definition of ``independent director''
for purposes of these standards:
(a) No director would qualify as independent unless the board of
directors affirmatively determines that the director has no material
relationship with the listed company, either directly or as a partner,
shareholder, or officer of an organization that has a relationship with
the company. Companies would have to disclose these determinations.
The basis for a board determination that a relationship is not
material would have to be disclosed in the company's annual proxy
statement. A board could adopt and disclose categorical standards to
assist it in making determinations of independence, and could make a
general disclosure if a director meets these standards. Any
determination of independence for a director who does not meet these
standards would have to be specifically explained. A company would be
required to disclose any standard it adopts. In the event that a
director with a business or other relationship that does not fit within
the disclosed standards is determined to be independent, a board would
be required to disclose the basis for its determination.
(b) In addition, the following directors would not qualify as
independent directors:
(i) A director who is a former employee of the listed company whose
employment ended within the past five years.
(ii) A director who is, or in the past three years has been,
affiliated with or employed by a (present or former) auditor of the
company (or of an affiliate). Such director could not be independent
until three years after the end of either the affiliation or the
auditing relationship.
(iii) A director who is, or in the past five years has been, part
of an interlocking directorate in which an executive officer of the
listed company serves on the compensation committee of another company
that concurrently employs the director.
(iv) A director with an immediate family member in any of the
foregoing categories. Immediate family includes a person's spouse,
parents, children, siblings, mothers-in-law and fathers-in-law, sons
and daughters-in-law, and anyone (other than employees) who shares such
person's home.
(5) Regularly Scheduled Executive Sessions without Management.
In order to empower non-management directors to serve as a more
effective check on management, non-management directors of each company
would have to meet at regularly scheduled executive sessions without
management. Non-management directors are all those who are not company
officers, and include such directors who are not independent by virtue
of a material relationship, former status or family membership, or for
any other reason. There would not need to be a single presiding
director at all executive sessions of the non-management directors. If
one director is chosen to preside at these meetings, his or her name
would have to be disclosed in the annual proxy statement.
Alternatively, a company could disclose the procedure by which a
presiding director is selected for each executive session. In order
that interested parties may be able to make their concerns known to the
non-management directors, a company would be required to disclose a
method for such parties to communicate directly with the presiding
director or with the non-management directors as a group.
(6) Nominating/Corporate Governance Committee.
Listed companies would be required to have a Nominating Committee/
Corporate Governance Committee composed entirely of independent
directors, except that if such committee is made up of three or more
individuals, then one member of the committee would not need to be an
independent director.
The committee would be required to have a written charter that
addresses:
[sbull] The committee's purpose, which, at a minimum, would be
required to be: to identify individuals qualified to become board
members, and to select, or to recommend that the board select, the
director nominees for the next annual meeting of shareholders; and to
develop and to recommend to the board a set of corporate governance
principles applicable to the company.
[sbull] The committee's goals and responsibilities, which would be
required to reflect, at a minimum, the board's criteria for selecting
new directors, and oversight of the evaluation of the board and
management.
[sbull] An annual performance evaluation of the committee.
[sbull] Committee member qualifications, committee member
appointment and removal, committee structure and operations (including
authority to delegate to subcommittees), and committee reporting to the
board.
[sbull] The committee's authority to retain and terminate any
search firm to be used to identify director candidates, including sole
authority to approve the search firm's fees and other retention terms.
If a company is required by contract or otherwise to provide third
parties with the ability to nominate directors (for example, preferred
stock rights to elect directors upon a dividend default, shareholder
agreements, and management agreements), the selection and nomination of
such directors would not need to be subject to the nominating committee
process.
Boards could allocate the responsibilities of the nominating/
corporate governance committee and the compensation committee to
committees of their own denomination, provided that the committees are
composed entirely of independent directors, except that if such
committee is made up of three or more individuals, then one member of
the committee would not need to be an independent director. Any such
committee would be required to have a published committee charter.
Controlled companies would not need to comply with the requirements
of this provision.
(7) Compensation Committee.
Listed companies would be required to have a compensation committee
composed entirely of independent directors, except that if such
committee is made up of three or more individuals, then one member of
the committee would not need to be an independent director.
The committee would be required to have a written charter that
addresses:
[sbull] The committee's purpose which, at a minimum, would be
required to be: to discharge the board's responsibilities relating to
compensation of the
[[Page 62155]]
company's executives, and to produce an annual report on executive
compensation for inclusion in the company's proxy statement, in
accordance with applicable rules and regulations.
[sbull] The committee's duties and responsibilities, which, at a
minimum, would be required to be to:
(i) Review and approve corporate goals and objectives relevant to
CEO compensation, evaluate the CEO's performance in light of those
goals and objectives, and set the CEO's compensation level based on
this evaluation.
(ii) Make recommendations to the board with respect to incentive-
compensation plans and equity-based plans.
[sbull] An annual performance evaluation of the compensation
committee.
[sbull] Committee member qualifications, committee member
appointment and removal, committee structure and operations (including
authority to delegate to subcommittees), and committee reporting to the
board.
[sbull] The committee's authority to retain and terminate a
consultant to assist in the evaluation of a director, CEO or senior
executive compensation. The Committee would need to have the sole
authority to approve the consultant's fees and other retention terms.
Controlled companies would not need to comply with the requirements
of this provision.
(8) Audit Committee.
Each listed company would be required to have an audit committee as
defined by Section 3(a)(58) of the Act.\10\ The audit committee would
have to be composed entirely of independent directors. The audit
committee would be required to comply with all the rules and procedures
set forth in Rule 10A-3 of the Act.\11\ If a member of the audit
committee ceases to be independent for reasons outside the member's
reasonable control, that person, with notice by the issuer to the
Exchange, could remain an audit committee member of the listed issuer
until the earlier of the next annual or special meeting of the listed
issuer or one year from the occurrence of the event that caused the
member to be no longer independent. Should an individual who ceases to
be independent for reasons outside the member's reasonable control
remain a member of the audit committee after the time permitted, then
the Exchange would be required to remove the issuer's securities from
listing.
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\10\ 15 U.S.C. 78c(a)(58).
\11\ 17 CFR 240.10A-3.
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Listed issuers, other than foreign private issuers and small
business issuers (as defined in Rule 12b-2 of the Act\12\), would have
to be in compliance with Rule 5.3(k)(5) by the earlier of their first
annual shareholders meeting after January 15, 2004, or October 31,
2004. Foreign private issuers and small business issuers would have to
be in compliance with Rule 5.3(k)(5) by July 31, 2005.
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\12\ 17 CFR 240.12b-2.
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If an executive officer of a listed issuer becomes aware of any
material noncompliance by the listed issuer with the audit committee
requirements, the listed issuer would be required to promptly notify
the Exchange of such noncompliance.
To be eligible for continued listing, a listed issuer would have to
comply with all of the audit committee requirements. Except for the
situation where an audit committee member ceases to be independent for
reasons outside the member's reasonable control, should a listed issuer
fail to comply with any of the audit committee requirements for a
period of 6 consecutive months, then the Exchange would be required to
remove the issuer's securities from listing. A listed issuer who is not
in compliance with the requirements of Rule 5.3(k)(5) would have to
provide the Corporation with a plan of remediation within 15 days after
notifying the Corporation of such noncompliance. The listed issuer
would have to provide the Corporation with written monthly updates on
the progress of the plan of remediation.
The audit committee would be required to have a written charter
that addresses:
[sbull] The committee's purpose, which, at a minimum, would be
required to 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
audit function and independent auditors.
(ii) Prepare the report that SEC rules require be included in the
company's annual proxy statement.
[sbull] The duties and responsibilities of the audit committee,
which, at a minimum, would be required to be to:
(i) Be directly responsible for the appointment, compensation,
retention, and oversight of the work of any registered public
accounting firm engaged (including resolution of disagreements between
management and the auditor regarding financial reporting) for the
purpose of preparing or issuing an audit report or performing other
audit, review or attest services for the listed issuer, and each such
registered public accounting firm must report directly to the audit
committee.
(ii) At least annually, obtain and review a report by the
independent auditor describing the firm's internal quality control
procedures; any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities, within
the preceding five years, respecting one or more independent audits
carried out by the firm, and any steps taken to deal with any such
issues; and (to assess the auditor's independence) all relationships
between the independent auditor and the company.
(iii) Discuss the annual audited financial statements and quarterly
financial statements with management and the independent auditor,
including the company's disclosure under ``Management Discussion and
Analysis of Financial Condition and Results of Operations.''
(iv) Discuss earnings press releases, as well as financial
information and earnings guidance provided to analysts and rating
agencies.
(v) Engage independent counsel and other advisers, as it determines
necessary to carry out its duties.
(vi) Discuss policies with respect to risk assessment and risk
management.
(vii) Meet separately, periodically, with management, with internal
auditors (or other personnel responsible for the internal audit
function), and with independent auditors.
(viii) Review with the independent auditor any audit problems or
difficulties and management's response.
(ix) Set clear policies for hiring employees or former employees of
the independent auditors.
(x) Report regularly to the board of directors.
(xi) Review major issues regarding accounting principles and
financial statement presentations, including any significant changes in
the company's selection or application of accounting principles, and
major issues as to the adequacy of the company's internal controls and
any special audit steps adopted in light of material control
deficiencies.
(xii) Review analyses prepared by management and/or the independent
auditor setting forth significant financial reporting issues and
judgments made in connection with the preparation of the financial
statements, including analyses
[[Page 62156]]
of the effects of alternative GAAP methods on the financial statements.
(xiii) Review the effect of regulatory and accounting initiatives,
as well as off-balance sheet structures, on the financial statements of
the company.
(xiv) Review earnings press releases (paying particular attention
to any use of ``pro forma,'' or ``adjusted'' non-GAAP, information), as
well as financial information and earnings guidance provided to
analysts and rating agencies.
(xv) Establish procedures for: (a) The receipt, retention, and
treatment of complaints received by the issuer regarding accounting,
internal accounting controls, or auditing matters, and (b) the
confidential, anonymous submission by employees of the issuer of
concerns regarding questionable accounting, internal accounting
controls or auditing matters.
[sbull] An annual performance evaluation of the audit committee.
The composition of the Audit Committee would be required to be as
follows:
(i) Each audit committee would be required to consist of at least
three independent directors.
(ii) Each member of the audit committee would be required to be
financially literate, as such qualification is interpreted by the
company's board of directors in its business judgment, or become
financially literate within a reasonable period of time after his or
her appointment to the audit committee.
(iii) At least one member of the audit committee would be required
to have accounting or related financial management expertise, as the
board of directors interprets such qualification in its business
judgment.
[sbull] As part of the initial listing process, and with respect to
any subsequent changes to the composition of the audit committee, and
otherwise approximately once each year, each company should provide the
Exchange written confirmation regarding:
(i) Any determination that the company's board of directors has
made regarding the independence of directors.
(ii) The financial literacy of the audit committee member.
(iii) The determination that at least one of the audit committee
members has accounting or related financial management expertise.
(iv) The annual review and reassessment of the adequacy of the
audit committee charter.
(9) Internal Audit Function.
Each listed company would be required to have an internal audit
function. This does not necessarily mean that a company would be
required to establish a separate internal audit department or dedicate
employees to the task on a full-time basis. The Exchange states that it
would be sufficient for the company to have in place an appropriate
control process for reviewing and approving its internal transactions
and accounting. A company could outsource this function to a firm other
than its independent auditors.
(10) CEO Certification.
Each listed company CEO would have to certify to the Exchange each
year that he or she is not aware of any violation by the company of the
Exchange's corporate governance listing standards. The certification
filed with the Exchange, as well as the CEO/CFO certifications required
to be filed with the SEC regarding the quality of the company's public
disclosure, would have to be disclosed in the listed company's annual
report to shareholders.
(11) Listed Foreign Private Issuers.
Listed foreign private issuers would have to disclose any
significant ways in which their corporate governance practices differ
from those followed by domestic companies under the Exchange's listing
standards. Listed foreign private issuers would be required to comply
with the provisions of Rule 5.3(k)(5). Listed foreign private issuers
could provide this disclosure either on their web site (provided it is
in the English language and accessible from the United States) and/or
in their annual report as distributed to shareholders in the United
States (in the English language). If the disclosure is only made
available on the web site, the annual report would be required to so
state and provide the web address at which the information may be
obtained.
(12) Deadline for Compliance.
Tier I listed issuers, other than Tier I foreign private issuers
and Tier I small business issuers (as defined in Rule 12b-2 of the
Act\13\), would have to be in compliance with all applicable sections
of Rule 5.3 by the earlier of their first annual shareholders meeting
after January 15, 2004 or October 31, 2004. Tier I foreign private
issuers and Tier I small business issuers would have to be in
compliance with all applicable sections of Rule 5.3 by July 31, 2005.
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\13\ 17 CFR 240.12b-2.
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(13) Suspension/Public Reprimand.
Under the proposed rule change, the Exchange could suspend dealings
in or institute proceedings to remove any security from listed or
unlisted trading privileges. The Exchange could issue a public
reprimand letter to any listed company that violates an Exchange
listing standard. The Corporation would be required to remove any
security from listed or unlisted trading privileges if the listed
company violates any provisions of Rule 5.3(k)(5).
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \14\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \15\ in particular, because it
is designed 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, in general, to protect investors and the public interest.
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\14\ 15 U.S.C. 78f(b).
\15\ 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 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
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the 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, as amended, 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
[[Page 62157]]
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
PCX. All submissions should refer to file number SR-PCX-2003-35 and
should be submitted by November 21, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27409 Filed 10-30-03; 8:45 am]
BILLING CODE 8010-01-P