Federal Register / Vol. 66, No. 32 / Thursday, February 15, 2001 / Notices 10545

6Securities Exchange Act Release No. 43769

(December 22, 2000) (SR–NASD–00–73), 66 FR 826

(January 4, 2001). 7 15 U.S.C. 78o–3. 8 15 U.S.C. 78o–3(b)(5). 9 Id.

10 In approving this rule, the Commission notes

that it has also considered the proposed rule’s

impact on efficiency, competition, and capital

formation. 15 U.S.C. 78c(f).

11Telephone conversation between Mary Dunbar,

Vice President, Nasdaq, and Geoffrey Pemble,

Attorney, Division of Market Regulation,

Commission, on February 7, 2001.

12Securities Exchange Act Release No. 43769

(December 22, 2000) (SR–NASD–00–73), 66 FR 826

(January 4, 2001).

13Securities Exchange Act Release No. 43814

(January 8, 2001) (SR–NASAD–00–79), 66 FR 3630

(January 16, 2001).

14 15 U.S.C. 78s(b).

15 15 U.S.C. 78s(b)(2).

16 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Letter dated November 20, 2000 from Cindy L.

Sink, Senior Attorney, PCX, to Nancy Sanow,

Assistant Director, Division of Market Regulation,

Commission (‘‘Amendment No. 1’’). Amendment

No. 1 specifies an implementation plan for the

proposed rule change.

4Securities Exchange Act Release No. 43641

(Nov. 29, 2000), 64 FR 55514.

5See Securities Exchange Act Release Nos. 42231

(Dec. 14, 1999), 64 FR 71523 (Dec. 21, 1999)

(approving SR–NASD–99–48); 42232 (Dec. 14,

1999), 64 FR 71518 (Dec. 21, 1999) (approving SR–

AMEX–99–38); 42233 (Dec. 14, 1999), 64 FR 71529

(Dec. 21, 1999) (approving SR–NYSE–99–39).

NASD–00–73.6 The Subscriber Bulletin

also announced that the increased cost

of the expanded bandwidth ($375 per

month per circuit) would be passed on

to Nasdaq subscribers beginning

December 1, 2000. Nasdaq absorbed all

of increased costs for the month of

November 2000.

Because the original filing relating to

NASD members was made under

section 19(b)(3)(A)(ii), which makes the

rule change immediately effective upon

filing with the Commission, the fee

increase became effective as of

December 13, 2000. In this filing,

Nasdaq seeks to recover the costs

associated with the expanded

bandwidth for the period of December

1–12, 2000, as announced in the

Subscriber Bulletin.

III. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission has reviewed the

Nasdaq’s proposed rule change and

finds, for he reasons set forth below,

that the proposal is consistent with the

requirements of section 15A of the Act 7

and the rules and regulations

thereunder applicable to a national

securities exchange. Specifically, the

Commission believes the proposal is

consistent with sections 15A(b)(5) of the

Act.8 Section 15A(b)(5) requires that the

rules of a registered securities

association provide for the equitable

allocation of reasonable dues, fees and

other charges among members and

issuers and other persons using any

facility or system which the association

operates or controls. The fee increases

proposed by Nasdaq would pass on the

costs associated with increasing the

capacity of EWN II to users of the

Nasdaq Workstation II service.

The Commission believes that

Nasdaq’s proposal to increase NASD

members’ fees relating to the EWN II for

the period December 1–12, 2000 is a fair

means of recovering the costs associated

with increasing the bandwidth of the

EWN II. The Commission finds that the

proposal is consistent with section

15A(b)(5) 9 insofar as the new fees

reflect the additional cost that Nasdaq is

incurring as a result of the expanded

bandwidth. The Commission believes

that such fee increases, necessitated by

recent system volume increases, are a

reasonable means by which Nasdaq

intends to ensure adequate capacity of

its EWN II system and thus, protect the

ongoing integrity of the Nasdaq

market.10

Nasdaq has requested that the

Commission approve this proposed rule

change on an accelerated basis.11 The

original EWN II fee increases for

members were effective upon filing with

the Commission on December 13, 2000,

and have been subject to a full notice

and comment period,12 and that this

current proposal imposing the same fees

for the period of December 1–12, 2000,

has been subject to a full notice and

comment period.13 No comments were

received on either filing. Thus, the

proposed rule change concerns issues

that previously have been the subject to

a full comment period pursuant to

section 19(b) of the Act.14 For these

reasons, the Commission believes

accelerated approval of the proposal is

appropriate. Accordingly, the

Commission finds good cause for

approving the proposed rule change

(SR–NASD–00–79) prior to the thirtieth

day after the date of publication of

notice thereof in the Federal Register.

IV. Conclusion

It is therefore Ordered, pursuant to

section 19(b)(2) of the Act,15 that the

proposed rule change (SR–NASD–00–

79) is approved.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–3804 Filed 2–14–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43941; File No. SR–PCX–

00–40]

Self-Regulatory Organizations; Order

Approving a Proposed Rule Change by

the Pacific Exchange, Inc. Relating to

Audit Committee Requirements for

Listed Companies

I. Introduction

On October 23, 2000, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’),

through its wholly-owned subsidiary,

PCX Equities, Inc. (‘‘PCXE’’), submitted

to the Secreties and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’),

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a

proposed rule change amending the

PCXE’s audit committee requirements.

PCXE filed Amendment No. 1 to the

proposed rule change on November 22,

2000.3 The Federal Register published

the proposed rule change for comment

on December 7, 2000.4 The Commission

received no comments on the proposal.

This order approves the proposed rule

change.

II. Description of the Proposed Rule

Change

PCXE proposes to modify PCXE Rule

5.3(b), regarding audit committee

requirements for listed domestic issuers,

to conform to recommendations made

by the Blue Ribbon Committee on

Improving Effectiveness of Corporate

Audit Committees and rule changes

adopted by other self-regulatory

organizations (‘‘SROs’’).5 The proposed

rule change specifies four requirements

for qualified audit committees, defines

certain terms for purposes of the

proposed audit committee requirements,

and sets forth requirements for

companies listing on PCXE in

conjunction with an initial public

offering.

First, proposed rule 5.3(b)(1) requires

the board of directors of companies

listed on PCXE to adopt and approve a

10546 Federal Register / Vol. 66, No. 32 / Thursday, February 15, 2001 / Notices

6 17 CFR 240.16a–(f).

formal written charter for the audit

committee. The audit committee must

review and reassess the adequacy of the

formal written charter on annual basis.

The charter must specify: (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, and 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); (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; (iv) 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 (v) that the audit committee is

responsible for recommending that the

board of directors take appropriate

action in response to the outside

auditor’s report to satisfy itself of the

outside auditor’s independence.

Second, proposed Rule 5.3(b)(2) sets

forth the composition and expertise

requirements of audit committee

members. The proposal requires: (i)

Each audit committee to 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 to be financially

literate, as such qualification is

interpreted by the company’s board of

directors in its business judgment, or to

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 to have accounting or related

financial management expertise, as the

board of directors interprets such

qualification in its business judgment.

Third, proposed Rule 5.3(b)(3)

provides the independence

requirements of audit committee

members. In addition to the definition

of Independent provided in Rule

5.3(b)(2)(i), the following restrictions

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; 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 provision, 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 or employee of an

organization that has such a

relationship. The director may serve on

the audit committee without the abovereferenced board of director’s

determination after three years

following the termination of, as

applicable: (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-inlaw, and anyone (other than employees)

who shares such person’s home.

(v) Notwithstanding the requirements

of subparagraphs (3)(i) and (30(iv) of

Rule 5.3(b), 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.

Fourth, proposed Rule 5.3(b)(4) sets

forth an ongoing written affirmation

requirement. The proposal provides that

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 must 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

members; (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.

Proposed Rule 5.3(b)(5) defines

‘‘Officer’’ to have the meaning specified

in Rule 16a–1(f) under the Act,6 or any

successor rule. Moreover, proposed Rule

5.3(b)(6) provides that 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

Federal Register / Vol. 66, No. 32 / Thursday, February 15, 2001 / Notices 10547

7See Amendment No. 1 supra note 3.

8 In approving the proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation, 15 U.S.C. 78c(f).

9 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires the

rules of an exchange to be designed to prevent

fraudulent and manipulative acts and practices, to

promote just and equitable principles of trade, to

foster cooperation and coordination with persons

engaged in facilitating transactions in securities, to

remove impediments to and perfect the mechanism

of a free and open market and a national market

system, and, in general, to protect investors and the

public interest.

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

a third qualified member in place

within twelve months of listing.

Finally, PCXE proposes to implement

a transition period in order to provide

its issuers with sufficient time to come

into compliance with the proposed rule

change.7 Specifically, PCXE proposes:

(i) to ‘‘grandfather’’ all public company

audit committee members qualified

under current PCX rules until they are

re-elected or replaced; and (ii) give

companies eighteen months from the

date of Commission approval of this

rule filing to recruit the requisite

members for their audit committees.

Issuers listed on PCXE as of the effective

date of the proposed rule change will

have six months to adopt a formal

written audit committee charter.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange.8 In particular, the

Commission finds that the proposed

rule change furthers the objectives of

Section 6(b)(5) of the Act,9 in that 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.

The Commission believes that the

proposed rule change will protect

investors by improving the effectiveness

of audit committee of companeis listed

on PCXE. The Commission also believes

that the new requirements will enhance

the quality and reliability of financial

statements of companies listed on PCXE

by making it more difficult for

companies to inappropriately distort

their true financial performance. These

new provisions should help to assure

that investors have quality and reliable

financial information regarding PCXE

listed issuers, including for investors

who decide to buy or sell the securities

of these issuers in secondary market

transactions.

Specifically, the Commission believes

that the proposed definition of

independence will promote the

objectivity and reliability of a

company’s financial statements. The

Commission believes that directors

without financial, familial, or other

material personal ties to management

will be more likely to objectively

evaluate the propriety of management’s

accounting, internal control, and

financial reporting practices. In

addition, the Commission considers that

the proposed provision permitting a

company to appoint one nonindependent director to its audit

committee, if the board determines that

membership on the committee by the

individual is required by the best

interests of the corporation and its

shareholders, adequately balances the

need for objective, independent

directors with the company’s need for

flexibility in exceptional and unusual

circumstances. The Commission

believes that the proposal’s requirement

that the company disclose in its next

annual proxy statement the nature of the

relationship and the board’s reasons for

determining that the appointment was

in the best interests of the corporation

will adequately guard against abuse of

the proposed exception to the

independence requirement.

In addition, the Commission believes

that requiring boards of directors of

listed companies to adopt formal

written charters specifying the audit

committee’s responsibilities, and how it

carries out those responsibilities, will

help the audit committee, management,

investors, and the company’s auditors

recognize, and understand the function

of the audit committee and the

relationship among the parties.

Moreover, the Commission believes that

the proposal’s requirement that

companies provide yearly written

confirmation regarding the

independence, financial literacy, and

financial expertise of directors, as well

as the adequacy of the audit committee

charter, will help the Exchange to

ensure that listed companies are

complying with the proposed rule

change.

The Commission believes that the

proposed rule change’s requirement that

each issuer have an audit committee

composed on three independent

directors who are able to read and

understand fundamental financial

statements, will enhance the

effectiveness of the audit committee and

help to ensure that audit committee

members are able to adequately fulfill

their responsibilities. The Commission

believes that requiring each audit

committee member to satisfy this

standard will help to ensure that the

committee as a whole is financially

literate. Moreover, the Commission

believes that requiring one member of

the audit committee to have accounting

or related financial management

expertise will further enhance the

effectiveness of the audit committee in

carrying out its financial oversight

responsibilities.

Finally, the Commission believes that

the proposed transition period will

enable issuers to determine when they

must comply with the new requirements

and will enable investors to determine

when the protections afforded by the

proposed rule change will be

operational.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the proposal to

amend PCXE’s audit committee

requirements is consistent with the

requirements of the Act and the rules

and regulations thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,10that the

proposed rule change (SR–PC–00–40) is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–3803 Filed 2–14–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43939; File No. SR–Phlx–

01–05]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Relating to the Prohibition Against OffFloor Members Functioning as Market

Makers.

February 7, 2001.

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 January

17, 2001, the Philadelphia Stock

Exchange, Inc. (‘‘Phlx’’ 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.