[Federal Register: November 28, 2005 (Volume 70, Number 227)]
[Notices]
[Page 71360-71362]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28no05-106]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52777; File No. SR-Phlx-2004-37]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto
to Increase the Size of the Audit Committee
November 16, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 20, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On
October 20, 2005, the Exchange filed Amendment No. 1 to the proposed
rule change.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule 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\ In Amendment No. 1, the Exchange revised the proposed rule
text to add a definition of ``independent director'' and to make
certain technical changes, and also revised the purpose section to
reflect these changes and to enhance the description of the proposal
generally.
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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 the Phlx By-Laws, Article X,
Sections 10-9(a)-(b) to: (i) Allow the Board of Governors the ability
to increase the size of the Audit Committee beyond its current three
persons to a maximum of five persons, and (ii) to require the members
of the Audit Committee to be independent directors. Additionally, the
proposed amendment to the Phlx By-Laws incorporates enhanced Audit
Committee responsibilities. The text of the proposed rule change, as
amended, is below. Proposed deletions are bracketed; proposed
insertions are in italics.
* * * * *
PHLX BY-LAWS
Article 10, Sec. 10-9, Audit Committee
SEC. 10-9.
(a) The Audit Committee shall consist of at least three (3)
members, the exact number to be determined from time to time by the
Board of Governors. [who] All members shall [all] be [public]
[independent non-industry Governors who have no material business
relationship with the Exchange. A majority of the members, but not less
than three (3) members shall be public Governors] independent directors
who have no material relationship with the Exchange. [Audit Committee
members shall not serve in a management capacity with the Exchange or
any affiliate thereof and must be free of any other relationships that,
by decision of the Board of Governors, would interfere with the
exercise of independent judgment.] The term ``independent director''
will be defined as a director who has no material relationship with the
Exchange or any affiliate of the Exchange, any Member of the Exchange
or any affiliate of such Member, or any issuer of securities that are
listed or traded on the Exchange or a facility of the Exchange. The
term ``material relationship'' will be defined as a relationship,
whether compensatory or otherwise, that reasonably could affect the
independent judgment or decision-making of the director.
(b) The Audit Committee shall have responsibility for dealings with
the Exchange's [independent public accountants including] external
auditors, which includes: (i) [making recommendations to the Board of
Governors as to] sole responsibility for the appointment, retention and
[dismissal of such public accountants] replacement of such auditors;
(ii) direct oversight over such auditors; (iii) review, at least
annually, of the qualification and performance of such auditors;
[reviewing the scope of their services and fees; (iii) reviewing the
audit plan;] (iv) direct authority to resolve disagreements between
management and such auditors regarding financial reporting [reviewing
internal controls]; (v) responsibility to ensure the rotation of the
lead and concurrent auditors every five years and certain other
auditors every seven years, with time out periods; (vi) evaluation of
the independence of external auditors, including ensuring that, other
than deferred tax and compliance services, external auditors do not
engage in certain non-audit services, as identified in the Audit
Committee Charter, when they conduct audits for the Exchange, and
approval of non-audit services where appropriate; (vii) [reviewing]
review of the ``management letter'' and reply thereto; and (viii)
[having] the ability to meet with [the public accountants] external
auditors without Exchange officers or employees.
The Audit Committee shall have responsibility for the Exchange's
Internal Audit Department, which shall report to the Audit Committee.
Such responsibility will include review of policies and procedures for
and significant reports produced by the Internal Audit Department.
The Audit Committee shall review any legal matters that may
materially impact the Exchange's financial statements and all
examination, inspection or other reports made by any regulatory agency
with regulatory oversight for the Exchange and the Exchange's responses
thereto.
The Audit Committee shall review, at least annually, compliance
with the Exchange's Code of Conduct with the assistance of the General
Counsel's office.
The Audit Committee shall have the authority to conduct special
reviews of any alleged improper conduct with respect to Exchange
related activity, operations, finance or regulation.
The Audit Committee shall establish procedures for the receipt,
retention, and treatment of complaints received by the Exchange
regarding accounting, internal accounting controls, or other auditing
matters and confidential anonymous submissions by Exchange employees
regarding questionable accounting practices.
The Audit Committee may select and engage its own [counsel,
consultants, accountants or other experts] advisor(s) to assist [in
such reviews] it in carrying out its duties.
The Audit Committee shall determine the appropriate amount of
funding to be
[[Page 71361]]
provided by the Exchange for the purpose of paying: (i) Compensation to
external auditors retained by the Audit Committee to prepare or issue
an audit report; (ii) compensation to adviser(s) employed by the Audit
Committee that it determines are necessary to carry out its duties; and
(iii) ordinary administrative expenses of the Audit Committee that are
necessary or appropriate to carry out its duties in respect of external
auditors.
The Audit Committee shall have the authority to compel to appear
and/or provide documents or other information, by members, member
organizations, associated persons of member organizations, members of
the Board of Governors, committee members, Exchange officers or
Exchange employees.
(c) The Audit Committee shall meet at least once every calendar
quarter.
* * * * *
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, as
amended, and discussed any comments it received on the proposal. 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 purpose of the proposed rule change, as amended, is to
strengthen the composition and charter of the Exchange's Audit
Committee by increasing the pool of candidates eligible to serve, which
may bring additional expertise to the Committee, as well as codifying
more of the Audit Committee's responsibilities. The Exchange believes
that expanding the size of its Audit Committee to permit (but not
mandate) additional Committee members should be beneficial, because
additional persons should bring new and different expertise and
experience to Committee workings. The Exchange further believes that by
setting higher standards with the independence requirement, it will
promote independent decision-making by the Audit Committee. The term
``independent director'' would be defined as a director who has no
material relationship with the Exchange or any affiliate of the
Exchange, any member of the Exchange or any affiliate of such member,
or any issuer of securities that are listed or traded on the Exchange
or a facility of the Exchange.\4\ The term ``material relationship''
would be defined as a relationship, whether compensatory or otherwise,
that reasonably could affect the independent judgment or decision-
making of the director.\5\
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\4\ In submitting this proposal, the Exchange has cited to the
Commission's proposed rules for ``independent directors'' of self-
regulatory organizations and certain other aspects of the
Commission's self-regulatory organization governance proposal. See
Securities Exchange Act Release No. 50699 (November 18, 2004), 69 FR
71126 (December 8, 2004) (proposing Commission rules relating to the
governance of self-regulatory organizations, among other things)
(``SRO Governance Proposal''), Proposed Rules 6a-5(c)(2) and 15Aa-
3(c)(2).
\5\ See SRO Governance Proposal, Proposed Rules 6a-5(b)(13) and
15Aa-3(b)(14) (proposed definition of ``material relationship'').
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The proposal would require the Exchange's Board of Governors' to
determine whether each Audit Committee member is independent upon that
director's nomination and thereafter no less frequently than annually
and as often as necessary in light of the director's circumstances.\6\
The proposal would also give the Exchange's Board of Governors the
opportunity from time to time to adjust the number of members of the
Exchange's Audit Committee.
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\6\ See SRO Governance Proposal, Proposed Rules 6a-5(c)(2) and
15Aa-3(c)(2) (proposed schedule of independence determinations by
Board).
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The Exchange believes that the codification of the Committee's
responsibilities with greater specificity is also appropriate. The
proposal incorporates into the Phlx By-Laws enhanced Audit Committee
responsibilities that are primarily adopted from the Sarbanes-Oxley Act
of 2002.\7\ The Exchange also proposes to remove the phrase
``independent public accountants'' from Section 10-9(b) of Article X of
the Phlx By-Laws and replace it with the phrase ``external auditors''
to broaden the scope of the audit committee's oversight.
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\7\ While the Sarbanes-Oxley Act of 2002 does not by its terms
apply to the Exchange, the Exchange has embraced applicable concepts
on a voluntary compliance basis.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \8\ in general, and furthers the objectives of Section
6(b)(5) of the Act \9\ in particular, in that it is designed to protect
investors and the public interest.
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\8\ 15 U.S.C. 78f(b).
\9\ 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, as
amended, 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
No written comments were either solicited or 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 the 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. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2004-37 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-Phlx-2004-37. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/
[[Page 71362]]
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of the
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2004-37 and should be submitted on or before
December 19, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6561 Filed 11-25-05; 8:45 am]
BILLING CODE 8010-01-P