

[Federal Register: March 2, 2006 (Volume 71, Number 41)]
[Notices]               
[Page 10741-10742]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02mr06-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53356; File No. SR-Phlx-2004-37]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 Thereto and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 3 Relating to Its Audit Committee

February 23, 2006.

I. Introduction

    On May 20, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 to amend the audit committee provisions of the 
Phlx By-Laws.\3\ On October 20, 2005, the Exchange filed Amendment No. 
1 to the proposed rule change.\4\ The Exchange has proposed: (i) To 
allow the Exchange's Board of Governors (``Board'') to increase the 
size of its audit committee (``Audit Committee'') up to a number to be 
determined by its Board from time to time; (ii) to require the members 
of the Audit Committee to be ``Independent Governors;'' and (iii) to 
modify and enhance the responsibilities of the Audit Committee.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Phlx By-Laws Article X, Sections 10-9(a)-(b).
    \4\ In Amendment No. 1, the Exchange added a definition of 
``independent director'' and made technical changes to the proposed 
rule text, and revised the filing's purpose section to reflect the 
addition of the definition of ``independent director.''
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    The proposed rule change, as amended, was published for comment in 
the Federal Register on November 28, 2005.\5\ The Commission received 
no comments on the proposal. The Exchange filed Amendment No. 2 to the 
proposed rule change on February 10, 2006, and submitted its 
notification of withdrawal of Amendment No. 2 on February 14, 2006. On 
February 15, 2006, the Exchange filed Amendment No. 3 to the proposed 
rule change.\6\ This order approves the proposed rule change as 
modified by Amendment No. 1. Simultaneously, the Commission provides 
notice of filing of, and grants accelerated approval to, Amendment No. 
3.
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    \5\ See Securities Exchange Act Release No. 52777 (November 16, 
2005), 70 FR 71360.
    \6\ In Amendment No. 3, the Exchange replaced the term 
``independent director'' in the proposed rule text with 
``Independent Governor,'' deleted references to a maximum five 
person Audit Committee in the description of the proposal, and made 
clarifying corrections to the proposed rule text.
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II. Description

    The Exchange proposes to amend the Phlx By-Laws, Article X, Section 
10-9 to: (i) Permit, but not mandate, the Board to increase the size of 
the Audit Committee; (ii) require all Audit Committee members to be 
``Independent Governors'' as defined under the proposal; and (iii) 
modify and enhance the responsibilities of the Audit Committee. 
Currently, the Audit Committee is required to consist of three members. 
The Exchange proposes to require that the Audit Committee be composed 
of at least three members, and to have the Board establish the exact 
size of the Audit Committee from time to time.
    The Exchange also proposes to require all Audit Committee members 
to be ``Independent Governors.'' The Exchange proposes to define 
``Independent Governor'' as a member of the Board 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.\7\ The proposal would define the term ``material 
relationship'' as a relationship, whether compensatory or otherwise, 
that reasonably could affect the independent judgment or decision-
making of the Governor. The Exchange has represented that the Board 
would determine whether each Audit Committee member is an Independent 
Governor upon that Governor's nomination to the Audit Committee and 
thereafter no less frequently than annually and as often as necessary 
in light of the Governor's circumstances.
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    \7\ The Exchange has cited to the Commission's proposed 
rulemaking on the fair administration and governance of self-
regulatory organizations for its proposed definitions of 
``Independent Governor'' and ``material relationship.'' See 
Securities Exchange Act Release No. 50699 (November 18, 2004), 69 FR 
71126 (December 8, 2004) (``SRO Governance Proposal'').
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    The Exchange also proposes to incorporate into the Phlx's By-Laws 
enhanced Audit Committee duties and responsibilities, including: (i) 
Sole responsibility for appointing, retaining, and replacing its 
external auditors; (ii) direct oversight over such auditors; (iii) 
reviewing at least annually the qualification and performance of such 
auditors; (iv) direct authority to resolve disagreements between 
management and such auditors regarding financial reporting; (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 when they conduct audits for the Exchange and approval 
of non-audit services where appropriate; (vii) establishing 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; and (viii) 
determining the appropriate amount of funding to be provided by the 
Exchange for the purpose of paying compensation to external auditors to 
prepare or issue an audit report, compensation to advisers to the Audit 
Committee necessary for it to carry out its duties, and ordinary 
administrative expenses of the Audit Committee.
    The Exchange also proposes to remove the phrase ``independent 
public accountants'' from Article X, Section

[[Page 10742]]

10-9(b) of the Phlx By-Laws and replace it with the phrase ``external 
auditors,'' which would broaden the scope of the Audit Committee's 
oversight.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a self-regulatory 
organization.\8\ In particular, the Commission believes that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act \9\ in that it is designed to perfect the mechanism of a free 
and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \8\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change would require 
every member of the Audit Committee to be an ``Independent Governor,'' 
as such term is defined in the proposal, and also would require the 
Exchange's Board to determine the independence of such Governor upon 
his or her nomination to the Audit Committee and thereafter no less 
frequently than annually and as often as necessary in light of the 
Governor's circumstances. The Commission believes that the Exchange's 
proposed definition of Independent Governor is designed to provide 
parameters for ensuring that disinterested, objective Governors serve 
on the Audit Committee.\10\ Moreover, the definition of Independent 
Governor and the requirement that the Exchange periodically assess the 
independence of Audit Committee members should help enhance the 
independence and integrity of the Audit Committee. The Commission also 
believes that the Phlx's proposed revisions to the Audit Committee's 
functions should help strengthen the Audit Committee's oversight of the 
Exchange's audit matters.
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    \10\ The Commission notes that the SRO Governance Proposal also 
proposed specific circumstances that would preclude a determination 
that a director is independent, which the Exchange has not 
incorporated in this proposal. The Commission notes, however, that 
the Exchange would be required to conform its definition of 
``Independent Governor,'' as well as any other related rules, to any 
rules that the Commission may adopt in the future with respect to 
the governance of national securities exchanges and the independence 
of their directors.
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    The Commission finds good cause for approving proposed Amendment 
No. 3 before the 30th day after the date of publication of notice of 
filing hereof in the Federal Register. Phlx filed Amendment No. 3 to 
replace the term ``independent director'' in the proposed rule text 
with the term ``Independent Governor,'' to delete references in the 
description section of the proposal to an increase in the size of the 
Audit Committee to a maximum of five persons, and to make clarifying 
changes and corrections to the proposed rule's text. The Commission 
believes that the proposed changes in Amendment No. 3 clarify the 
composition of the Audit Committee and make minor, clarifying 
corrections to the proposal's rule text, but raise no new issues of 
regulatory concern. For these reasons, the Commission finds good cause 
for accelerating approval of Amendment No. 3.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 3 
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 Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

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/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 such 
filing also will be available for inspection and copying at the 
principal office of Phlx. 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 March 23, 2006.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-Phlx-2004-37), as 
amended by Amendment No. 1, be, and it hereby is, approved, and that 
Amendment No. 3 to the proposed rule change be, and hereby is, approved 
on an accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-2961 Filed 3-1-06; 8:45 am]

BILLING CODE 8010-01-P
