Self-Regulatory Organizations; Order Approving Proposed Rule Change by the American Stock Exchange LLC Amending the Exchange's Audit Committee Requirements and Notice of Filing and Order Granting Accelerated Approval of Amendments No. 1 and No. 2 Thereto

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42232; File No. SR-Amex-99-38]

Self-Regulatory Organizations; Order Approving Proposed Rule

Change by the American Stock Exchange LLC Amending the Exchange's Audit

Committee Requirements and Notice of Filing and Order Granting

Accelerated Approval of Amendments No. 1 and No. 2 Thereto

December 14, 1999.

I. Introduction

On September 20, 1999, the American Stock Exchange LLC (``Amex'' or

``Exchange'') submitted to the Securities 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 Exchange's audit

committee requirements.

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

\2\ 17 CFR 240. 19b-4.

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The Federal Register published the proposed rule change for comment

on October 13, 1999.\3\ In response, the Commission received 12 comment

letters.\4\ On November 15, 1999 and December 9, 1999, the Exchange

submitted Amendments No. 1 \5\ and No. 2,\6\ respectively, to the

proposed rule change. This order approves the proposed rule change and

grants accelerated approval to Amendments No. 1 and No. 2. The

Commission is also soliciting comment on Amendments No. 1 and No. 2 to

the proposed rule change.

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\3\ Securities Exchange Act Release No. 41981 (Oct. 6, 1999), 64

FR 55505. The Nasdaq Stock Market, Inc. and The New York Stock

Exchange, Inc. have proposed rule changes relating to audit

committees. See Securities Exchange Act Release No. 41982 (Oct. 6,

1999), 64 FR 55510 (Oct. 13, 1999) (``Nasdaq Proposal''), and

Securities Exchange Act Release No. 41980 (Oct. 6, 1999), 64 FR

55514 (Oct. 13, 1999) (``NYSE Proposal'').

\4\ Most commenters favored the proposed rule change but

recommended certain modifications to the proposed rules. The comment

letters are discussed in Section III of this order.

\5\ Letter from Robert E. Aber, Senior Vice President and

General Counsel, Nasdaq-Amex Market Group, to Richard Strasser,

Assistant Director, Division of Market Regulation (``Division''),

Commission, dated November 12, 1999 (``Amendment No. 1''). The

Exchange submitted Amendment No. 1 to require issuers listed as of

the effective date of Commission approval of the proposed rule

change to adopt a formal written audit committee charter within six

months of the effective date of the proposed rule change. As

originally filed, the proposed rule change required issuers to adopt

the required charter within eighteen months of the effective date of

the proposed rule change. Amendment No. 1 also states that issuers

that applied for listing prior to the effective date of the proposed

rule change would qualify for listing under the listing standards in

force at the time of their application, and receive the same grace

periods provided to currently listed issuers.

\6\ Letter from Sara Nelson Bloom, Associate General Counsel,

Nasdaq-Amex Market Group, to Richard Strasser, Assistant Director,

Division, Commission, dated December 8, 1999 (``Amendment No. 2'').

The Exchange submitted Amendment No. 2 to revise proposed Section

121B(a)(ii) of the Amex Company Guide to provide that the audit

committee is required to oversee the independence of the outside

auditor, rather than ensure the independence of the outside auditor.

Amendment No. 2 also revises the Exchange's definition of immediate

family found in Section 121A(c) to include sons-in-law and

daughters-in-law. Finally, Amendment No. 2 corrects a technical

error in proposed Section 121B(b)(ii) by replacing a reference to

Rule 4200 with a reference to Section 121A.

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II. Description of the Proposed Rule Change

A. Background

In February 1999, the Blue Ribbon Committee on Improving the

Effectiveness of Corporate Audit Committees (``Blue Ribbon Committee'')

issued a report containing recommendations aimed at strengthening the

independence of the audit committee; making the audit committee more

effective; and addressing mechanisms for accountability among the audit

committee, the outside auditors, and management.\7\ In response to the

Blue Ribbon Committee's recommendations, the Exchange proposes to amend

its listing standards regarding audit committee requirements. The

proposed changes cover three general areas: (1) The definition of

independence; (2) the structure and membership of the audit committee;

and (3) the audit committee charter.

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\7\ Report and Recommendations of the Blue Ribbon Committee on

Improving the Effectiveness of Corporate Audit Committees (1999). A

copy of this Report can be found on-line at www.nasdaqnews.com.

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The text of the proposed rule change, as amended by Amendments No.

1 and No. 2, is as follows. Language deleted by Amendments No. 1 and

No. 2 is in brackets. Language added by Amendments No. 1 and No. 2 is

in italics.

[[Page 71519]]

Section 121. INDEPENDENT DIRECTORS AND AUDIT COMMITTEE

A. Independent Directors:

The Exchange requires that domestic listed companies have a

sufficient number of independent directors to satisfy the audit

committee requirement set forth below. Independent directors are not

officers of the company and are, in the view of the company's board of

directors, free of any relationship that would interfere with the

exercise of independent judgment. The following persons shall not be

considered independent:

(a) A director who is employed by the corporation or any of its

affiliates for the current year or any of the past three years;

(b) A director who accepts any compensation from the corporation or

any of its affiliates in excess of $60,000 during the previous fiscal

year, other than compensation for board service, benefits under a tax-

qualified retirement plan, or non-discretionary compensation;

(c) A director who is a member of the immediate family of an

individual who is, or has been in any of the past three years, employed

by the corporation or any of its affiliates as an executive officer.

Immediate family includes a person's spouse, parents, children,

siblings, mother-in-law, father-in-law, brother-in-law, sister-in-law,

son-in-law, daughter-in-law, and anyone who resides in such person's

home;

(d) A director who is a partner in, or a controlling shareholder or

an executive officer of, any for-profit business organization to which

the corporation made, or from which the corporation received, payments

(other than those arising solely from investments in the corporation's

securities) that exceed 5% of the corporation's or business

organization's consolidated gross revenues for that year, or $200,000,

whichever is more, in any of the past three years;

(e) A director who is employed as an executive of another entity

where any of the company's executives serve on that entity's

compensation committee.

B. Audit Committee:

(a) Charter

Each Issuer must certify that it has adopted a formal written audit

committee charter and that the Audit Committee has reviewed and

reassessed the adequacy of the formal written charter on an annual

basis. The charter must specify the following:

(i) the scope of audit committee's responsibilities, and how it

carries out those responsibilities, including structure, processes, and

membership requirements;

(ii) the audit committee's responsibility for ensuring its receipt

from the outside auditors of a formal written statement delineating all

relationships between the auditor and the company, consistent with

Independence Standards Board Standard 1, and the audit committee's

responsibility for actively engaging in a dialogue with the auditor

with respect to any disclosed relationships or services that may impact

the objectivity and independence of the auditor and for taking, or

recommending that the full board take, appropriate action to [ensure]

oversee the independence of the outside auditor; and

(iii) the outside auditor's ultimate accountability to the board of

directors and the audit committee, as representatives of shareholders,

and these shareholder representatives' 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).

(b) Composition

(i) Each issuer must have, and certify that it has and will

continue to have, an audit committee of at least three members,

comprised solely of independent directors, each of whom is able to read

and understand fundamental financial statements, including a company's

balance sheet, income statement, and cash flow statement or will become

able to do so within a reasonable period of time after his or her

appointment to the audit committee. Additionally, each issuer must

certify that it has, and will continue to have, at least one member of

the audit committee that has past employment experience in finance or

accounting, requisite professional certification in accounting, or any

other comparable experience or background which results in the

individual's financial sophistication, including being or having been a

chief executive officer, chief financial officer or other senior

officer with financial oversight responsibilities.

(ii) Notwithstanding paragraph (i), one director who is not

independent as defined in [Rule 4200] Season 121A, and is not a current

employee or an immediate family member of such employee, may be

appointed to the audit committee, if the board, under exceptional and

limited circumstances, determines that membership on the committee by

the individual is required by the best interests of the corporation and

its shareholders, and the board discloses, in the next annual proxy

statement subsequent to such determination, the nature of the

relationship and the reasons for that determination.

(iii) Exception for Small Business Filers--Paragraphs (b)(i) and

(b)(ii) do not apply to issuers that file reports under SEC Regulation

S-B. Such issuers must establish and maintain an Audit Committee of at

least two members, a majority of the members of which shall be

independent directors.

B. Independence

The Exchange proposes to narrow its current definition of

``independent director'' by specifying five new relationships that

could repair a director's independent judgment as a result of

financial, familial, or other material ties to management or the

corporation. The proposed definition will apply to all directors, not

just those serving on audit committees. Under the proposed rule change,

directors with any of the following five relationships will not be

considered independent: (1) Employment by the corporation or any of its

affiliates for the current year or any of the past three years; (2)

acceptance of any compensation from the corporation or any of its

affiliates in excess of $60,000 during the previous fiscal year, other

than compensation for board service, benefits under a tax-qualified

retirement plan, or non-discretionary compensation; (3) member of the

immediate family of an individual who is, or has been in any of the

past three years, employed by the corporation or any of its affiliates

as an executive officer; (4) partnership in, or a controlling

shareholder or an executive officer, or any for-profit business

organization to which the corporation made, or from which the

corporation received, payments (other than those arising solely from

investments in the corporation's securities) that exceed five percent

of the corporation's or business organization's consolidated gross

revenues for that year, or $200,000, whichever is more, in any of the

past three years; or (5) employment as an executive of another entity

where any of the company's executives serve on that entity's

compensation committee.

C. Structure and Membership of the Audit Committee

The Exchange also proposes to change the structure and membership

qualifications of the audit committee. Specifically, the Exchange

proposes to change the required composition of the audit committee from

at least two to at

[[Page 71520]]

least three members. Furthermore, the audit committee must be comprised

solely of independent directors rather than a majority of independent

directors. The Exchange is conscious of the fact that, in exceptional

circumstances, issuers may appropriately conclude that it would be in

the best interests of the corporation for a non-independent director to

serve on the audit committee. In such exceptional and limited

circumstances, a non-independent director can serve on the audit

committee, provided that the board determines that it is required by

the best interests of the corporation and its shareholders, and the

board discloses its reasons for the determination in the next annual

proxy statement. Due to the nature of this exception, however, a

corporation could have no more than one non-independent director

serving on its audit committee. Also, current employees or officers, or

their immediate family members, may not serve on the audit committee

under this exception.

As a result of the audit committee's responsibility for a

corporation's accounting and financial reporting, the Exchange believes

that audit committee members should have a basic understanding of

financial statements. Therefore, the proposed rule change requires each

member of the audit committee to be able to read and understand

fundamental financial statements, including a company's balance sheet,

income statement, and cash flow statement, or become able to do so

within a reasonable period of time after his or her appointment to the

audit committee. Furthermore, in order to further enhance the

effectiveness of the audit committee, at least one member of the audit

committee must have past employment experience in finance or

accounting, requisite professional certification in accounting, or any

other comparable experience or background that results in the

individuals' financial sophistication, including being or having been a

chief executive officer, chief financial officer, or other senior

officer with financial oversight responsibilities.

The Exchange is sensitive to the potential burden that the proposed

changes to the audit committee composition requirements may place on

small companies. Therefore, the Exchange proposes to exempt those

corporations that file under SEC Regulation S-B from these proposed

changes (``Small Business Filers'').\8\ Small Business Filers will be

held to the existing Exchange requirements with respect to audit

committee composition, that is, they must maintain an audit committee

of at least two members, a majority of whom are independent.

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\8\ Small Business Filer is defined by Regulation S-B as an

issuer that: (i) has revenue of less than $25,000,000; (ii) is a

U.S. or Canadian issuer; and (iii) if a majority owned subsidiary,

the parent corporation is a small business issuer. 17 CFR

228.10(a)(1).

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D. Charter

The Exchange believes that a written charter will help the audit

committee as well as management and the corporation's auditors

recognize the function of the audit committee and the relationship

among these parties. The proposed rule change requires each issuer to

adopt a formal written charter. This charter must specify the scope of

the audit committee's responsibilities, and how the committee carriers

out those responsibilities, including structure, processes, and

membership requirements. In addition, the charter must specify the

audit committee's responsibility for ensuring its receipt from the

outside auditors of a formal written statement delineating all

relationships between the auditor and the company, consistent with

Independence Standards Board Standard 1.\9\ The charter must specify

the audit committee's responsibility for actively engaging in a

dialogue with the auditor with respect to any disclosed relationships

or services that may impact the objectivity and independence of the

auditor and for taking, or recommending that the full board take,

appropriate action to oversee the independence of the outside auditor.

Finally, it must specify the outside auditor's ultimate accountability

to the board of directors and the audit committee, as representatives

of shareholders, and these shareholder representatives' ultimate

authority and responsibility to select, evaluate, and, where

appropriate, replace the outside auditor (or to nominate an outside for

shareholder approval in any proxy statement). The proposed rule change

requires issuers to review their charter on an annual basis.

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\9\ Independence Standard No. 1, Independence Discussions with

Audit Committees (January 1999), which can be found on-line at

www.cpaindependence.org.

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E. Implementation

In order to minimize disruption to existing issuer audit

committees, to permit current audit committee members to serve out

their terms, and to allow adequate time to recruit the requisite

members, the Exchange proposes to provide its issuers listed as of the

effective date of the proposed rule change eighteen months after the

proposed rule change is approved by the Commission to meet the audit

committee structure and membership requirements.

Additionally, the Exchange proposes that issuers listed as of the

effective date of the rule change be provided six months following the

date of Commission approval of the proposed rule change to adopt a

formal written audit committee charter as required by proposed Section

121(B)(a) of the Amex Company Guide.\10\

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\10\ See Amendment No. 1, supra n.5.

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Further, for issuers that applied for listing prior to the

effective date of the proposed rule change, the Exchange proposes that

they be able to qualify for listing under the listing standards in

force at the time of their application, and to receive the same grace

periods provided to currently listed issuers, as described above. Also,

in order to avoid prejudicing issuers that transfer to the Exchange

from Nasdaq and the New York Stock Exchange, the Exchange proposes that

these issuers be afforded the same grace periods they would have

received under their previous market's implementation schedule.

III. Comments

As of December 9, 1999, the Commission received 12 comment letters

on the proposed rule change.\11\ In general, the commenters favored the

proposed rule change but recommended certain modifications. One

commenter stated that it does not support the new rules.\12\

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\11\ See letters from: Ernst & Young LLP (``E&Y'') dated

November 1, 1999; Dorsey & Whitney LLP (``Dorsey'') (on behalf of

nine closed-end investment management companies whose stock is

listed on the Exchange) dated October 28, 1999; Deloitte & Touche

LLP (``Deloitte'') dated November 3, 1999; Council of Institutional

Investors (``CII'') dated November 8, 1999; Brian T. Borders on

behalf of the National Venture Capital Association (``NVCA'') dated

November 12, 1999; Investment Company Institute (``ICI'') dated

November 3, 1999; American Federation of Labor and Congress of

Industrial Organizations (``AFL-CIO'') dated November 29, 1999;

Mayer, Brown & Platt on behalf of Morgan Stanley Dean Witter

(``MSDW'') dated November 29, 1999; Association of Publicly Traded

Companies (``APTC'') dated December 6, 1999; Robert A. Profusek

(``Profusek'') dated December 3, 1999; Stanley Keller and Richard

Rowe (``Keller and Rowe'') dated December 7, 1999; and The Committee

on Securities Regulation of the Business Law Section of the New York

State Bar Association (``NYSBA'') dated December 1, 1999.

\12\ APTC Letter at 2.

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In particular, the CII supports the new requirements, but stated

that the proposed override provision, which allows a company's board to

include a non-independent director on the audit committee is not

appropriate because companies should not have a problem

[[Page 71521]]

finding financially literate, truly independent directors.\13\ In

addition, the AFL-CIO stated that the restriction period for former

employees, or relatives of former employees, should be five years

instead of three years.\14\ The AFL-CIO also stated that the $60,000

threshold to disqualify a candidate because of a significant

relationship is not stringent enough.\15\ Another commenter, on the

other hand, stated that a quantitative test is too inflexible.\16\

Keller and Rowe stated that former non-executive employment should be

treated as a significant business relationship.\17\ Keller and Rowe

also stated that consultants who receive from the company more than a

de minimis amount of compensation should be treated as employees, while

consultants who do not should be treated as having a business

relationship with the company.\18\ According to this comment letter,

the company's board should be permitted to determine that the

compensation does not impair the director's objectivity. Keller and

Rowe also objected to the financial expertise requirement and stated

that no director will want to be designated the financial expert

because of the added exposure to liability.\19\

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\13\ CII Letter, at 2; see also AFL-CIO Letter at 2.

\14\ AFL-CIO Letter at 2.

\15\ Id.

\16\ Profusek Letter at 2. In addition, Keller and Rowe stated

that this provision might preclude a number of highly qualified

candidates from serving on audit committees. Keller and Rowe Letter

at 3.

\17\Keller and Rowe Letter at 2.

\18\Id. at 3.

\19\ Id.; see also NYSBA Letter at 6.

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Deloitte stated that requiring a company's board or audit committee

to ``ensure'' the independence of the outside auditor goes beyond what

can reasonably be expected of the board and the audit committee in

their oversight role.\20\ Deloitte suggested that the Exchange replace

the word ``ensure'' with ``monitor'' or ``actively oversee.''\21\ E&Y

supported the proposed rule change, but stated that the Exchange should

not exempt Small Business Filers from the financial literacy and

expertise requirements and also should expand its definition of

immediate family member to include sons-in-law and daughters-in-

law.\22\ NYSBA stated that the company's board should be required to

adopt the audit committee charter, rather than the audit committee

adopting the charter subject to board approval.\23\ NYSBA also opposed

requiring the audit committee to evaluate and reassess the adequacy of

the audit committee on an annual basis because there is no standard to

measure the adequacy of the charter.\24\

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\20\ Deloitte Letter, at 1.

\21\ Id. at 2.

\22\ E&Y Letter at 4.

\23\ NYSBA Letter at 2.

\24\ Id. at 4-5.

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APTC stated that the proposed rule change will be counter

productive to the goal of better audit committees.\25\ In addition,

APTC stated that the proposed rule chnage will disadvantage smaller

companies more than larger companies, but concluded that it is

appropriate to apply the proposed change to all companies, regardless

of size.\26\ Moreover, APTC is opposed to the proposal's financial

literacy requirement.\27\ APTC believes that the financial literacy

requirement may deprive audit committees of the service of individuals

with ``exceptional character and/or operation experience.''\28\ The

commenter suggested that the Exchange replace this requirement with a

requirement that the committee as a whole possess a certain level of

financial acumen.\29\

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\25\ APTC Letter at 2.

\26\ Id. at 3.

\27\ Id. at 4-5.

\28\ Id.

\29\ Id. at 5.

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In addition, the NVCA stated that the proposed rule change should

exclude venture capital investors from the independence

qualifications.\30\ The NVCA also stated that the proposed rule change

should give companies that have just completed an initial public

offering eighteen months to comply with the new requirements and that

the exemption for Small Business Filers should be expanded to apply to

companies with less than $50 million in revenue.\31\

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\30\ NVCA Letter at 5.

\31\ Id. at 4.

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Finally, three commenters stated that the proposed rule change

should not apply to closed-end investment companies.\32\ ICI and MSDW

noted that closed-end investment companies are adequately regulated

under the 1940 Act.\33\ These two commenters also stated that the

potential abuses that the proposed rule change is designed to address

do not exist with respect to closed-end investment funds, because the

assets of closed-end funds consist exclusively of investment securities

and thus there is no opportunity to ``manage'' earnings or results

through the selective application of accounting policies.\34\

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\32\ ICI Letter at 2; MSDW Letter at 1; Keller and Rowe letter

at 5. In addition, Keller and Rowe stated that the proposed rule

change should exempt all investment companies because their audit

committee members are already required not to be ``interested

persons'' as that term is defined in Section 2(a)(9) of the

Investment company Act of 1940 (``1940 Act''). Moreover, Dorsey

supported the application of the proposed rule change to investment

companies. Dorsey Letter at 3.

\33\ ICI Letter at 3-4; MSDW Letter at 2.

\34\ ICI Letter at 3; MSDW letter at 1. ICI and MSDW also noted

that the independent accountants of investment funds are selected by

the independent directors of the fund.

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IV. 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,\35\ and, in

particular, the requirements of Section 6(b)(5) of the Act.\36\ The

Commission believes that the proposed rule change will protect

investors by improving the effectiveness of audit committees of

companies listed on the Exchange. The Commission also believes that the

new requirements will enhance the reliability and credibility of

financial statements of companies to inappropriately distort their true

financial performance. Further, the Commission also notes that the

Exchange is amending its own listing standards, which is a function

within the Exchange's discretion, as long as those changes are

consistent with the Act.

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\35\ In approving the proposal, the Commission has considered

its impact on efficiency, competition, and capital formation. 15

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

\36\ 15 U.S.C. 78f(b)(5).

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Specifically, the Commission believes that the proposed definition

of independence will promote the quality 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. For

these reasons, the Commission believes that the proposal's prohibition

against employees serving on the audit committee is appropriate and

that the Exchange should not be required to distinguish between

executive and non-executive employees.\37\

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\37\ See Keller and Rowe Letter at 2.

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The Commission also believes that the proposed provision that

permits a company to appoint one director to its audit committee who is

not independent, 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

[[Page 71522]]

circumstances. The Commission believes that the requirement that the

company disclose in its next proxy statement the nature of the

director's relationship to the issuer and the board's reasons for

determining the appointment was in the best interests of the

corporation will adequately guard against abuse of the proposed

exception to the independence requirement. Moreover, the Commission

believes that the $60,000 threshold to determine if a potential audit

committee director has a significant business relationship with the

company is a reasonable measure to balance the company's need to

recruit audit committee members with the independence requirement.\38\

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\38\ The Commission does not believe that the Exchange should

require its listed companies to adopt a separate provision on

consultants. See Keller and Rowe Letter at 3.

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The Commission does not believe that venture capital investors

should be excluded from the Exchange's definition of independence. The

Commission does not view the proposed rule change as posing an undue

hardship on venture capital firms or companies listed on the Amex. The

Commission notes that the proposed rule change will only prohibit

venture capital investors from sitting on a company's audit committee

if the investor does not fall within the Exchange's definition of

independent. The proposed rule change will not prohibit previously

eligible investors from serving on the company's board. The Commission

also notes that a venture capital investor that is not considered

independent may serve on the company's audit committee, if the board

determines it is in the best interests of the corporation and its

shareholders and the company discloses its reasons for the

determination and the nature of the director's relationship to the

company in its next annual proxy statement.

In addition, the Commission believes that requiring 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 the function of the audit committee and the

relationship among the parties. Moreover, the Commission believes that

requiring the charter to specify that the audit committee is

responsible for taking, or recommending that the company's full board

take, appropriate action to oversee the independence of the outside

auditor will make it more likely that companies will select objective,

unbiased auditors.

The Commission believes that the proposed rule change's

compositional requirement that each issuer have an audit committee

composed of 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.\39\ Moreover, the

Commission considers that requiring one member of the audit committee

to have past employment experience in finance or accounting, requisite

professional certification in accounting, or any other comparable

experience or background that indicates the individual's financial

sophistication, will further enhance the effectiveness of the audit

committee in carrying out its financial oversight responsibilities. In

addition, the Commission does not believe that companies will

experience undue difficulty recruiting an audit committee member that

satisfies the financial expertise requirements. Moreover, the

Commission believes that the proposed rule change appropriately exempts

Small Business Filers from the proposed composition requirements

because these companies may experience more difficulty meeting these

enhanced requirements. The Commission notes that these companies will

remain subject to existing Exchange rules on audit committees, which

require an audit committee to have at least two members, a majority of

whom are independent.

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\39\ See APTC Letter at 5.

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Moreover, the Commission has concluded that the Exchange's decision

to include investment companies in the proposed rule change is

warranted. While the Commission recognizes that the opportunity for

some types of financial reporting abuses may be limited by the nature

of fund assets,\40\ it believes that audit committee do play an

important role in overseeing the financial reporting process for

investment companies.

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\40\ See Keller and Rowe Letter at 5; ICI Letter at 3; MSDW

Letter at 1.

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The Commission finds good cause for approving Amendments No. 1 and

No. 2 to the proposed rule change prior to the thirtieth day after

publication in the Federal Register. The Commission notes that

Amendment No. 1 revises the implementation time periods for the

proposed rule change solely to provide greater clarity to issuers and

to investors. The Commission believes that Amendment No. 1 will enable

issuers to determine when they must comply with the new requirements

and will enable investors to determine when to rely on the protections

afforded by the proposed rule change. The Commission notes that

Amendment No. 2 simply clarifies that the audit committee is required

to oversee, rather than ensure, the independence of the company's

outside auditors; makes a technical correction to section 121A; and

expands the Exchange's definition of ``immediate family.'' The

Commission believes that accelerated approval will allow the Exchange

to simultaneously make all relevant modifications to the Amex Company

Guide and will avoid potential confusion. Accordingly, the Commission

finds good cause to accelerate approval of Amendments No. 1 and No. 2

to the proposed rule change, consistent with sections 6(b)(5) \41\ and

19(b) \42\ of the Act.

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\41\ 15 U.S.C. 78f(b)(5).

\42\ 15 U.S.C. 78s(b).

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V. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing, including whether the proposed rule

change is consistent with the Act. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.

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 Co9mmission and any persons, 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 will also be

available for inspection and copying at the principal office of the

Amex. All submissions should refer to the File No. SR-Amex-99-38 and

should be submitted by January 11, 2000

VI. Conclusion

For the foregoing reasons, the Commission finds that the Exchange's

proposal to amend its audit committee requirements is consistent with

the requirements of the Act and the rule and regulations thereunder.

[[Page 71523]]

It is therefore ordered, pursuant to section 19(b)(2) of the

Act,\43\ that the amendment proposed rule change (SR-Amex-99-38) is

approved.

\43\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\44\

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\44\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-33051 Filed 12-20-99; 8:45 am]

BILLING CODE 8010-01-M