Document ID: SEC-2005-0278-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2005-11-28T05:00Z

[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