Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. Relating to Corporate Governance Standards for Listed Companies, 22739-22745 [E5-2082]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 83 (Monday, May 2, 2005)]
[Notices]
[Pages 22739-22745]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2082]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51601; File No. SR-PCX-2005-38]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Pacific Exchange, Inc. Relating to Corporate Governance Standards 
for Listed Companies

April 22, 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 April 18, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and II below, which 
Items have been prepared by PCX. PCX submitted Amendment No. 1 to the 
proposal on April 21, 2005.\3\ The Exchange filed this proposal 
pursuant to section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(6) 
thereunder,\5\ which renders the proposal effective upon filing with 
the Commission. The Commission is publishing this notice to solicit

[[Page 22740]]

comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 made a minor clarifying change to the 
proposal.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 5 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX, through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE''), is proposing to amend PCXE Rules 5.3(k) and 5.3(m) to adopt 
new corporate governance standards for PCX listed companies. The text 
of the proposed rule change, as amended, is set forth below. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *

Rules of the PCX Equities, Inc.

* * * * *
Rule 5
* * * * *
Listings--Corporate Governance and Disclosure Policies
    Rule 5.3-5.3(j)--No Change.
    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 listed domestic issuer of which more than 50% of the voting 
power is held by an individual, a group or another company, a limited 
partnership and any company in bankruptcy 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, limited partnerships and any company in bankruptcy 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 identify which directors are independent and disclose 
the basis for that [these] determination[s]. The identity of the 
independent directors and t[T]he basis for a board determination that a 
relationship is not material must be disclosed in the company's annual 
proxy statement (or, if the issuer does not file a proxy, in its Form 
10-K, 20-F or N-CSR). 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 or has been within the last three years, an 
employee of the listed company [or former employee], or whose immediate 
family member is or has been within the last three years an executive 
officer of the listed company [whose employment ended within the past 
three years]. Employment as an interim Chairman or CEO or other 
executive officer shall not disqualify a director from being considered 
independent following that employment. For purposes of this rule the 
term executive officer shall have the same meaning as ``officer'' as 
set forth in Rule 16a-1(f) under the Securities and Exchange Act of 
1934.
    (B)(i) A director or a director who has an immediate family member 
who is a current partner of a firm that is the company's internal or 
external auditor;[,]
    (ii) A director who is a current employee of such a firm;
    (iii) A director who has an immediate family member who is a 
current employee of such a firm and who participates in the firm's 
audit, assurance or tax compliance (but not tax planning) practice; or
    (iv) A director or a director who has an immediate family member 
who was within the last three years (but is no longer) a partner or 
employee of such a firm and personally worked on the listed company's 
audit within that time [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 or a director who has an immediate family member who 
is, or in the past three years has been, part of an interlocking 
directorate in which an executive officer of the listed company serves 
or served on the compensation committee of another company that 
concurrently employs or employed the director.
    (D) Reserved. [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, brothers and sisters-in-law, and anyone (other 
than employees) who shares such person's home.]
    (E) A director who is an executive officer or an employee, or whose 
immediate family member is an executive officer, of a company that 
makes payments to, or receives payments from, the listed company for 
property or services in an amount which, in any single fiscal year, 
exceeds the greater of $200,000 or 5% of such other company's 
consolidated gross revenues, is not ``independent'' until three years 
after falling below such threshold. For purposes of this rule, 
[charitable] contributions to tax exempt organizations shall not be 
considered ``[companies] payments'', provided however that a listed 
company shall disclose in its annual proxy statement, or if the listed 
company does not file an annual proxy statement, in the company's 
annual report on Form 10-K filed with the SEC, any [charitable] such 
contributions made by the listed company to any [charitable] tax exempt 
organization in which any independent director serves as an executive 
officer if, within the preceding three years, contributions in any 
single fiscal year from the listed company to the organization exceeded 
the greater of $200,000 or 5% of such [charitable] tax exempt 
organization's consolidated gross revenues. At any time, however, when 
an issuer has a class of securities that is listed on and meets the 
requirements of a similar rule of [a national securities exchange or 
national securities association other than the Corporation and is 
subject to requirements substantially similar to those set forth in 
this section 5.3(k)(1)(E)] the New York Stock Exchange or the National 
Association of Securities Dealers (for the Nasdaq National Market or 
Small Cap Market), the issuer shall not be required to separately meet 
the requirements set forth in this section 5.3(k)(1)(E). [above. 
Governance requirements of other markets will be considered to be 
substantially similar to the requirements above if they are adopted by 
the New York Stock Exchange or the National Association of Securities 
Dealers (for the Nasdaq National Market or Small Cap Market).]
    (F) A director who receive[s]d, or whose immediate family member is 
an

[[Page 22741]]

executive [employee] officer who receive[s]d, during any twelve-month 
period within the last three years, more than $100,000 [per year] in 
direct compensation from the listed company, other than director and 
committee fees and pension or other forms of deferred compensation for 
prior service (provided such compensation is not contingent in any way 
on continued service). [Such director shall not be independent until 
three years after he or she ceases to receive more than $100,000 per 
year in such compensation.] Compensation received by a director for 
former service as an interim Chairman or CEO or other executive officer 
need not be considered in determining independence under this test. For 
purposes of this rule the term executive officer shall have the same 
meaning as ``officer'' as set forth in Rule 16a-1(f) under the 
Securities and Exchange Act of 1934.
    (G) In the case of an investment company, in lieu of paragraphs 
(A)-(F), a director who is an ``interested person'' of the company as 
defined in section 2(a)(19) of the Investment Company Act of 1940, 
other than in his or her capacity as a member of the board of directors 
or any board committee.
    (H) As used throughout this rule, the term ``immediate family 
member'' includes a person's spouse, parents, children, siblings, 
mothers-in-law and fathers-in-law, sons and daughters-in-law, brothers 
and sisters-in-law, and anyone (other than employees) who shares such 
person's home.

Transition Rule: Each of the above standards contains a three-year 
``look back'' provision. In order to facilitate a smooth transition to 
the new independence standards, the Corporation will phase in the 
``look back'' provision by applying only a one-year look back for the 
first year after adoption of these new standards. The three year look 
back will begin to apply only from and after June 4, 2005.

Due to this proposed tightening of the independence test and to avoid a 
sudden change to the status of a current director, companies will have 
until their first annual meeting after June 30, 2005 to replace a 
director who was independent under the prior test but who is not 
independent under the current test.
    (2) Regularly Scheduled Non-Management Directors Executive 
Sessions. The non-management directors of each listed company must meet 
at regularly scheduled executive sessions without management. Non-
management directors are all those who are not [company] executive 
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] A 
non-management director must preside over each executive session of the 
non-management directors, although the same director is not required to 
preside at all executive sessions of the non-management directors. If 
one director is chosen to preside at all of these meetings, his or her 
name must be disclosed in the listed company's annual proxy statement, 
or if the company does not file an annual proxy statement, in the 
company's annual report on Form 10-K filed with the SEC. Alternatively, 
if the same individual is not the presiding director at every meeting, 
a listed company [may] must 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 listed company must disclose a method for such 
parties to communicate directly with the presiding director or with the 
non-management directors as a group. Such disclosure must be made in 
the listed company's annual proxy statement or, if the company does not 
file an annual proxy statement, in the company's annual report on Form 
10-K filed with the SEC. If the non-management directors include 
directors who are not independent, then the company should at least 
once a year schedule an executive session including only independent 
directors.
    (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 director who is 
not independent may not be a current officer or employee or immediate 
family member of an officer or employee. Such individual may be 
appointed to the Nominating/Corporate Governance Committee if the 
board, under exceptional and limited circumstances, determines that 
such individual's membership on the committee is required by the best 
interests of the company and its shareholders, and the board discloses, 
in the proxy statement for the next annual meeting subsequent to such 
determination (or, if the issuer does not file a proxy, in its Form 10-
K or 20-F), the nature of the relationship and the reasons for the 
determination. The member appointed under this exception may not serve 
for longer than two years. 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] guidelines 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, limited partnerships 
and any company in bankruptcy 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

[[Page 22742]]

the committee need not be an independent director. The director who is 
not independent may not be a current officer or employee or immediate 
family member of an officer or employee. Such individual may be 
appointed to the Compensation Committee if the board, under exceptional 
and limited circumstances, determines that such individual's membership 
on the committee is required by the best interests of the company and 
its shareholders, and the board discloses, in the proxy statement for 
the next annual meeting subsequent to such determination (or, if the 
issuer does not file a proxy, in its Form 10-K or 20-F), the nature of 
the relationship and the reasons for the determination. The member 
appointed under this exception may not serve for longer than two years. 
The committee must have a written charter that addresses:
    (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 
officer compensation for inclusion in the listed company's proxy 
statement (or, if the issuer does not file a proxy, in its Form 10-K or 
20-F), 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, either as a committee or together with the 
other independent directors (as directed by the board), determine and 
approve [set] the CEO's compensation level based on this evaluation.
    (ii) Make recommendations to the board with respect to non-CEO 
executive officer compensation, and incentive-compensation [plans] and 
equity-based plans that are subject to board approval.
    (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, limited partnerships and any company in 
bankruptcy 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)(A) 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 a 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.
    (v) Audit committees for investment companies must also establish 
procedures for the confidential, anonymous submission of concerns 
regarding questionable accounting or audit matters by employees of the 
investment advisor, administrator, principal underwriter, or any other 
provider of accounting related services for the investment company, as 
well as employees of the investment company. This responsibility must 
be addressed in the audit committee charter.
    (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 listed 
company's financial statements, (2) the listed company's compliance 
with legal and regulatory requirements, (3) the independent auditor's 
qualifications and independence, and (4) the performance of the listed 
company's internal audit function and independent auditors.
    (b) Prepare the report that SEC rules require be included in the 
listed company's annual proxy statement (or, if the issuer does not 
file a proxy, in its Form 10-K, 20-F or N-CSR).
    (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 listed company.

[[Page 22743]]

    (c) Meet to review and d[D]iscuss the listed company's annual 
audited financial statements and quarterly financial statements with 
management and the independent auditor, including reviewing the 
company's specific 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 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 shall 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.
    Beginning June 30, 2005 the company must submit the written 
affirmation no later than 30 calendar days after the company's annual 
meeting. If the company's annual meeting. If the company's 2005 annual 
meeting occurs prior to June 30, 2005, the company must submit a 
written affirmation for the year 2005 no later than December 31, 2005.

    5.3(k)(5)(E)-5.3(l)--No Change.
    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, qualifying the 
certification to the extent necessary. The certification filed with the 
Corporation, including any qualifications to that certification, 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. 
Beginning June 30, 2005 the company must submit the certification to 
the Corporation no later than 30 calendar days after the company's 
annual meeting. If the company's 2005 annual meeting occurs prior to 
June 30, 2005, the company must submit the certification for the year 
2005 no later than December 31, 2005.
    Each listed company's CEO must promptly notify the Corporation 
after any executive officer of the listed company becomes aware of any 
material non-compliance with any applicable provision of section 5.3.
    Each listed company must submit an executed written affirmation 
annually to the Corporation. Beginning June 30, 2005 the company must 
submit the written affirmation no later than 30 calendar days after the 
company's annual meeting. If the company's 2005 annual meeting occurs 
prior to June 30, 2005, the company must submit a written affirmation 
for the year 2005 no later than December 31, 2005. In addition, each 
listed company must submit an interim Written Affirmation each time a 
change in the membership occurs of the board or any of the committees 
subject to Rule 5.3(k).
    Rule 5.3(n)-(o)--No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PCX 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. PCX 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
    PCXE Rules 5.3(k)-5.3(o) set forth the Exchange's corporate 
governance requirements applicable to listed companies. Exchange staff 
has received numerous phone call and email requests for clarification 
and interpretations of these standards. Based on PCX experience in 
working with listed companies and their legal counsel on issues and 
questions related to Rules 5.3(k)-5.3(o), the Exchange has noted

[[Page 22744]]

several Rules that need clarification. The following outlines the 
amendments proposed to be made to the PCXE Corporate Governance 
Requirements.
    Independence Definition: The Exchange proposes to amend Rule 
5.3(k)(1) to clarify that companies are required to identify which of 
their directors are deemed independent. The Exchange has been of the 
opinion that the existing language strongly implied that obligation, 
but believes it is appropriate to make the language explicit to remove 
any ambiguity.
    The Exchange proposes to amend Rule 5.3(k)(1)(A) to add a 
definition of the term executive officer. The Exchange also proposes to 
make minor cleanup changes throughout Rule 5.3(k) to provide 
consistency when utilizing this term. The Exchange also proposes to add 
clarifying language to indicate that service as an interim Chairman, 
CEO or other executive officer will not trigger the look-back 
provision.
    The Exchange proposes to amend Rule 5.3(k)(1)(B), which currently 
precludes independence where a director or family member of such 
director is employed by or affiliated with a present or former auditor. 
The proposed rule revises the standard so that it will cover any 
director or immediate family member of such director who is a current 
partner of the audit firm, any director who is a current employee of 
the audit firm, any immediate family member who is a current employee 
of the audit firm participating in the firm's audit, assurance or tax 
compliance (but not tax planning) practice, and any former partner or 
employee of the audit firm or an immediate family member who personally 
worked on the listed company's audit during the past three years.\6\
---------------------------------------------------------------------------

    \6\ Clarified pursuant to a telephone conversation between 
Steven Matlin, Senior Counsel, PCX, and A. Michael Pierson, 
Attorney, Division of Market Regulation, Commission (April 21, 
2005).
---------------------------------------------------------------------------

    The Exchange proposes to revise Rule 5.3(k)(1)(C) to clarify that 
independence is not satisfied when a director or a director who has an 
immediate family member who is, or in the past three years has been, 
part of an interlocking directorate in which an executive officer of 
the listed company serves or served on the compensation committee of 
another company that concurrently employs or employed the director.
    The Exchange proposes to eliminate Rule 5.3(k)(1)(D) and move the 
definition of immediate family member to Rule 5.3(k)(1)(H). PCX 
believes this would help clarify that the definition of immediate 
family member applies uniformly throughout the rules on corporate 
governance.
    The Exchange proposes to revise Rule 5.3(k)(1)(E) to clarify the 
treatment of contributions under this test. The language as originally 
adopted referred to ``charitable organizations.'' PCX believes that it 
has become clear through discussions with listed company 
representatives that a company can have business relationships with a 
charitable organization and there is no reason why payments related to 
such business relationships should not be covered by this test. What 
the Exchange intends to distinguish and to cover with disclosure under 
this test, are ``contributions'' made to a charitable or tax exempt 
organization. In addition, the Exchange is tightening its exemption for 
compliance from this rule if the issuer has a class of securities 
listed on another national securities exchange that has a similar 
standard. The Exchange proposes only to exempt issuers who have a class 
of securities listed on the New York Stock Exchange or Nasdaq from 
having to separately meet the requirements of Rule 5.3(k)(1)(E).
    The Exchange proposes to amend PCXE Rule 5.3(k)(1)(F) which 
precludes independence where a director or family member receives more 
than $100,000 in direct compensation. PCX believes the wording 
suggested that under certain circumstances the look-back period might 
be as long as four years. The revised formulation will make clear that 
the period should not be read to be longer than 36 months.
    As a result of the proposed changes to Rule 5.3(k)(1), there is a 
category of person that would not have been impacted by existing Rule 
5.3(k)(1) that will be precluded from independence under the revised 
standards, namely a director with a family member who is a current 
partner of the audit firm. Under the existing standards, such a family 
member did not impact the director's independence if the family member 
did not act in a ``professional capacity'' at the audit firm. Under the 
revised standards, any family member who is a current partner of the 
audit firm will preclude the director from being considered 
independent. To avoid suddenly changing the status of a current 
director, the Exchange will give companies until their first annual 
meeting after June 30, 2005 to replace a director who was independent 
under our existing rule but not under the revised rule.
    Regularly Schedule Non-Management Directors Executive Sessions: The 
Exchange is proposing a clarifying change to Rule 5.3(k)(2) to require 
a non-management director to preside over each executive session of the 
non-management directors, but to allow for different directors to 
preside over all such meetings. The Exchange also proposes to add 
clarifying language to specify that the disclosure must be in the 
annual proxy statement (or if the company does not file a proxy 
statement, then in the Form 10-K), in order to be consistent with the 
other disclosure requirements of the PCXE Rules.
    Requirements of the Compensation Committees: The Exchange proposes 
to amend Rule 5.3(k)(4)(B) to make clear that the board has the ability 
to delegate its authority to approve non-CEO executive officer 
compensation to the compensation committee. In addition, the Exchange 
is proposing clarifying language to indicate that non-CEO compensation 
on which the compensation committee should focus is that of the 
executive officers.
    Duties of the Audit Committee: The Exchange proposes to amend Rule 
5.3(k)(5)(B)(ii)(C) to clarify that the audit committee must meet to 
review and discuss the company's financial statements and must review 
the company's specific Management's Discussion and Analysis 
disclosures. In addition the Exchange is proposing that the written 
affirmation required by Rule 5.3(k)(5)(D) be submitted to the Exchange 
within 30 calendar days after the company's annual meeting.\7\
---------------------------------------------------------------------------

    \7\ An exception is provided if the company's annual meeting 
occurs prior to June 30, 2005, similar to the exception provided for 
CEO certifications, as described below.
---------------------------------------------------------------------------

    CEO Certification: The Exchange proposes to amend the language of 
Rule 5.3(m) to clarify that any qualifications to the annual CEO 
certification must be specified and disclosed. Beginning June 30, 2005 
the company must submit the certification to the Corporation no later 
than 30 calendar days after the company's annual meeting. If the 
company's 2005 annual meeting occurs prior to June 30, 2005, the 
company must submit the certification for the year 2005 no later than 
December 31, 2005.\8\ In addition the Exchange is proposing a 
requirement that companies submit annual and interim written 
affirmations. The annual affirmation must be submitted to the Exchange 
no later than 30 calendar days after the company's annual meeting. An 
interim written affirmation must be submitted each time a change in the 
membership occurs to the board or any of the committees subject to Rule 
5.3(k).
---------------------------------------------------------------------------

    \8\ See supra note 6.

---------------------------------------------------------------------------

[[Page 22745]]

2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\9\ in general, and furthers 
the objectives of section 6(b)(5) of the Act,\10\ in particular, in 
that it is designed to facilitate transactions in securities, to 
promote just and equitable principles of trade, to foster competition 
and to protect investors and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    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

    The proposed rule change, as amended, has been designated by PCX as 
a ``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of 
the Act \11\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    The foregoing proposed rule change, as amended: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate, if consistent with the protection of investors and the 
public interest. Furthermore, the PCX gave the Commission written 
notice of its intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change. 
Consequently, the proposed rule change, as amended, has become 
effective pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, as amended, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\15\
---------------------------------------------------------------------------

    \15\ See 15 U.S.C. 78s(b)(3)(C). For purposes of calculation the 
60-day abrogation period, the Commission considers the period to 
commence on April 22, 2005, the date the PCX filed Amendment No. 1.
---------------------------------------------------------------------------

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 (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-PCX-2005-38 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.

All submissions should refer to File Number SR-PCX-2005-38. 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 (https://www.sec.gov/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 Section, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such 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-PCX-2005-38 and should be 
submitted on or before May 23, 2005.
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2082 Filed 4-29-05; 8:45 am]
BILLING CODE 8010-01-P