Status of Other SROs

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The American, Pacific (now NYSE ACRA), Philadelphia, Boston, Chicago, Chicago Board of Options, and Cincinnati (now National) Stock Exchanges all submitted proposed revisions to listing rules to comply with Rule 10A-3 to the Commission for approval, all of which with some revisions were approved by the Commission shortly before the deadline of December 1, 2003 for compliance with Rule 10A-3. The rules of the CBOE are limited to the listing of non-option securities and did little more than require that the listed company have two independent directors and have an audit committee consisting of independent directors “that complies with the listing standards set forth in Rule 10A-3.” The Exchange represented that it will subsequently submit additional corporate governance rules following the model of the NYSE and Nasdaq.[1] The CBOE amended the proposed rules in some minor respects and the Commission approved them, noting that the exchange “intends to file an additional rule proposal relating to other corporate governance listing standards.”[2] The Commission on July 9, 2004 granted accelerated approval to further amendments providing enhanced corporate governance requirements for companies listing on the CBOE.[3] The Cincinnati Stock Exchange, which changed its name to National Stock Exchange,[4] proposed rules requiring listed companies to have an audit committee of at least three directors that conforms with Rule 10A-3 of the Act. The members of the audit committee must be financially literate or become such within a reasonable period of time and at least one member should have accounting or related financial management expertise. The Exchange represented that it intends in the future to submit additional corporate governance rules.[5] The Commission approved with some minor revisions the rules submitted by the National Stock Exchange, noting that the exchange “intends to file an additional rule proposal relating to other corporate governance listing standards.”[6] On July 9, 2004 the Commission granted accelerated approval to further amendments bringing the corporate governance standards of the National Stock Exchange in close conformity to the standards  of the NYSE and Nasdaq.[7] The Boston Stock Exchange proposed revisions to the listing rules that in effect incorporated Rule 10A-3 by either repeating or paraphrasing the language of the Rule as its listing standard relating to audit committees. The proposed rules include no provisions going beyond Rule 10A-3.[8] The Commission approved with some minor revisions the rules submitted by the Boston Stock Exchange, noting that the exchange “intends to file an additional rule proposal relating to other corporate governance listing standards.”[9] On July 1, 2004, the Commission granted accelerated approval to amendments of the Boston Stock Exchange Rules intended to harmonize them with the rules of the NYSE and Nasdaq.[10]

The Philadelphia Stock Exchange, like the Boston Stock Exchange in this respect, incorporated the language of Rule 10A-3 as an aspect of its audit committee listing standard. The Philadelphia Exchange, however, also required that for a director to be deemed independent that s/he must meet the four three-year blue ribbon committee look-back categories (see § 3:2) relating to employment by the issuer, business relationship with the issuer, cross-compensation committee links, and immediate family relationships to the issuer. The members of the audit committee must be financially literate or become such within a reasonable period of time and at least one member should have accounting or related financial management expertise.[11] The Commission approved with some minor revisions the rules submitted by the Philadelphia Stock Exchange, noting that the exchange “intends to file an additional rule proposal relating to other corporate governance listing standards.”[12] The addition rule proposals were forthcoming and on June 17, 2004 the Commission granted them accelerated approval, noting the amended rule “largely harmonizes” it with those of the NYSE and Nasdaq.[13]

The revisions to the listing rules of the American Stock Exchange (AMEX)[14] relating to audit committees followed closely those of Nasdaq, including look back provisions, although they did not include some of the nuances incorporated in the final revisions to the Nasdaq Rules . Amex submitted a number of further revisions that “revised various aspects of its proposal, in a manner that conforms many of its provisions with corporate governance rules of other self-regulatory organizations (‘SROs’), which were recently approved by the Commission.” The Commission noted that there were a limited number of differences from the other (NYSE and Nasdaq) rules it had approved, but did not regard them as material and approved the rules as amended in their entirety. The Commission also approved provisions relating to small business issuers, which allow them to have 50 percent of the members of their board rather than a majority meeting the requirements of an independent director and only requiring two members of the audit committee to meet the independence requirements that go beyond Rule 10A-3.[15]

The Chicago Stock Exchange rules require listed companies to have an audit committee of at least three members all of whom must be able to meet the criteria set forth in Rule 10A-3. In addition, to be independent they must meet three-year look-back requirements similar to those of Nasdaq. See § 3:14. The committee as a minimum must have the authority and responsibility set forth in Rule 10A-3 and the members must be able to read and understand financial statements. The rules also require a nominating and compensation committee meeting standards set forth in the rules.[16] The Commission approved the rules submitted by the Chicago Stock Exchange as they pertain to compliance with Rule 10A-3 with some minor revisions. The Commission noted that the exchange “is considering revisions to the portions of the proposed rule change that pertain to corporate governance standards other than the revisions to comply with Rule 10A-3 requirements, particularly in light of rule changes by the New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. that were recently approved by the Commission.” The Commission for the most part did not approve the proposed rule changes that went beyond Rule 10A-3; apparently, waiting for further revisions before doing so.[17] The Chicago Stock Exchange submitted further revisions and on June 24, 2004 the Commission granted accelerated approval t the revisions, noting the revisions “significantly align the corporate governance standards proposed for companies listed on the CHX with the standards approved by the Commission for companies listed on other SROs [NYSE and Nasdaq].”[18]

The Pacific Stock Exchange Rules require the audit committee to be independent in accordance with Rule 10A-3 and also to meet the blue ribbon committee look-back requirements including five years as to an employee or former employee of the issuer.[19] See § 3:2. The audit committee must have the authority and responsibility required by Rule 10A-3. See § 3:15. The rules to some extent appear to have been modeled on those of the NYSE in terms of requiring a majority of independent directors on the board, regular executive sessions of non-management directors, nominating/corporate governance committee, and compensation committee. See § 3:17. The Commission approved the proposed rule changes with some minor revisions to the extent necessary to bring them in compliance with Rule 10A-3. As in the case of the Chicago Stock Exchange, the Commission for the most part initially did not approve the proposed rule changes that went beyond Rule 10A-3; apparently, waiting for further revisions before doing so. The Release noted that the exchange “is considering revisions to the portions of the proposed rule change that pertain to corporate governance standards other than the revisions to comply with Rule 10A-3 requirements, particularly in light of rule changes by the New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. that were recently approved by the Commission.”[20] On May 4, 2004, the Pacific Exchange filed further substantive amendments to its corporate governance rules as Amendment No. 3, and on June 3 filed Amendment No. 4 clarifying certain aspects of the Rule. On June 4, 2004, the Commission granted accelerated approval to the amendments.[21] The amended Rule requires domestic issuers other than controlled companies to have a majority of independent directors on its board of directors. The Rule adopts a definition of independent director that has a 3 year look back and follows closely that of the New York Stock Exchange. The Rule requires non-management directors to meet at regularly scheduled executive sessions without management. Listed companies also are required to have nominating/corporate governance and compensation committees composed exclusively of independent directors with an override provision permitting under certain limited circumstances one member who is not independent. The provisions relating to the audit committee were expanded to require that the members meet the strengthened definition of independent director, each member be financially literate or become financially literate within a reasonable period of time, and in other enumerated respects. A number of other corporate governance provisions are included as part of the revised Rules. 

To sum-up, all of the Exchange not only have met the requirements of Rule 10A-3 with respect to audit committees, but all have substantially conformed with the enhanced corporate governance provisions established by the NYSE and Nasdaq, although there are some variations in that regard. The Commission now includes on its website[22] for each SRO the proposed rule changes submitted by SROs when published for comment. The Commission, however, does not make generally available proposed rule changes filed with the Commission by an SRO until it is ready to publish them for comment, which may be some time after the proposed rule change has been filed. The Commission has proposed a rule that would require each SRO to file proposed rule changes electronically and publish on the SRO’s website proposed rule changes filed with the Commission no later than the next business day after the filing.[23] Some commenters have suggested that the Commission should make proposed rule changes filed by SROs available on the Commission’s website when filed; hopefully, the Commission will do so in lieu of or in addition to the requirement that they be posted on the website of the SRO. The proposed rules also would require SROs to “post and maintain a current and complete version of its rules on its website.”[24]

The Adopting Release notes “the OTC Bulletin Board (OTCBB), the Pink Sheets and the Yellow Sheets are not affected by Exchange Act Rule 10A-3, and therefore issuers whose securities are quoted on these inter-dealer quotation systems similarly will not be affected, unless their securities also are listed on an exchange or Nasdaq.”[25] Although not referred to in the Adopting Release, Nasdaq has applied to become a national securities exchange[26] and presumably the NASD rules that presently govern Nasdaq will be carried over and will be consistent with Rule 10A-3. There was some indication that the OTC Bulletin Board in connection with the transformation of Nasdaq into a national securities exchange may become a segment of the Nasdaq stock market with separate listing standards.[27] The Commission after three years has yet to act on Nasdaq’s application and it is not clear what the status of the OTCBB will be when and if Nasdaq becomes a national securities exchange.