SEC Adopts New Rule on Listing Standards For Audit Committees Pursuant to the Sarbanes-Oxley Act

On April 1, 2003, the Securities and Exchange Commission ("SEC") adopted a new rule directing national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements mandated by Section 301 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). These requirements relate to: the independence of audit committee members; the audit committee’s responsibility to select and oversee the issuer’s independent auditor; procedures for handling complaints regarding the issuer’s accounting practices; the authority of the audit committee to engage advisers; and funding for the independent auditor and any outside advisers engaged by the audit committee. An issuer will be subject to these requirements through the listing rules adopted by the securities exchange or association on which its securities are listed. The listing rules implementing the criteria of the new SEC rule are required to be no less restrictive, but may be more restrictive, than the criteria adopted by the SEC. The SEC also amended its rules governing audit committee disclosure. See Release 33-8220, 34-47654 (April 9, 2003) (the "Release").

Each national securities exchange and national securities association must provide to the SEC its proposed listing rules or rule amendments that comply with the requirements of the new SEC rule by July 15, 2003 and have final listing rules or rule amendments approved by the SEC by December 1, 2003. The SEC has published for comment the proposed listing rule changes of The Nasdaq Stock Market ("Nasdaq") and the New York Stock Exchange ("NYSE") relating to corporate governance, including audit committees, which implement the requirements of the new rule. See Release No. 34-47516 (March 17, 2003) and Release No. 34-47672 (April 11, 2003), respectively.

Listed issuers must be in compliance with those final listing rules by the earlier of (a) their first annual shareholders meeting after January 15, 2004, or (b) October 31, 2004. The new audit committee disclosure requirements are applicable to both listed and non-listed issuers for periodic reports for periods ending on or after, and proxy statements relating to actions occurring on or after, the applicable compliance date referenced in the previous sentence.

The SEC’s rules were adopted pursuant to the rule-making directive of Section 301 of Sarbanes-Oxley which added Section 10A(m)(1) of the Securities Exchange Act of 1934 (the "Exchange Act"). The new requirements are generally implemented through new Rule 10A-3 under the Exchange Act, and amendments to Item 401 of Regulation S-K and Items 7 and 22 of Schedule 14A.

Listed Issuers. Rule 10A-3 specifies that each national securities exchange and national securities association will be prohibited from listing any security of an issuer that is not in compliance with the standards discussed below. There are currently nine national securities exchanges registered under the Exchange Act including the NYSE, the American Stock Exchange, the Chicago Board Options Exchange and several regional stock exchanges. The National Association of Securities Dealers ("NASD"), which operates Nasdaq, is the only national securities association registered with the SEC under the Exchange Act. National securities exchanges and national securities associations are self-regulatory organizations or "SROs." The SROs are required to conform their listing standards to the minimum criteria of the new rule and such listing standards require SEC approval. The SROs are not precluded by the new rule from adopting additional listing standards regarding audit committees, as long as they satisfy the minimum criteria of Rule 10A-3.

In contrast, the OTC Bulletin Board, the Pink Sheets and the Yellow Sheets are not SROs but rather quotation systems for the over-the-counter securities market that collect and distribute market-maker quotes to subscribers. These interdealer quotation systems do not maintain or impose listing standards, nor do they have a listing agreement or arrangement with the issuers whose securities are quoted through them. Because they are not SROs, they are not subject to Rule 10A-3. Accordingly, issuers whose securities are quoted on these interdealer quotation systems will not be subject to Rule 10A-3, unless their securities are also listed on a securities exchange or Nasdaq.

Listed Securities. Rule 10A-3 applies to any listed security, regardless of its type, including debt securities, derivative securities and other types of listed securities, including those of listed closed-end funds and exchange-traded funds registered as open-end investment companies. In other words, a listed security gives rise to audit committee requirements even if that security is not a voting equity security. The new rule contains certain exemptions related to listings of additional classes of securities by an issuer as well as securities futures products and standardized options cleared by a clearing agency registered or exempt from registration under the Exchange Act. Listings of additional classes of securities of an issuer are exempt from the listing requirements implementing the new rule at any time the issuer is subject to the listing requirements of an SRO as a result of the listing of a class of common equity or similar securities. The additional listings could be on the same market or on different markets. However, just as an SRO may adopt standards for audit committees that are stricter than those provided in the new rule, they also may apply their listing standards to classes of securities where the new rule would not require it. The multiple listing exemption also applies to listings of non-equity securities by certain direct or indirect subsidiaries that are consolidated or at least 50% beneficially owned by a parent company, if the parent company is subject to the requirements as a result of the listing of a class of its common equity securities. Inthe case of a parent company that is a foreign private issuer, the multiple listing exemption applies to the listings of non-equity securities by its U.S. subsidiaries even if the foreign parent is relying on one of the special exemptions for foreign private issuers (such as the Board of Auditors exemption described below).

Rule 10A-3 requires that each SRO’s listing standards impose requirements as to the independence of each member of the audit committee of listed issuers. As discussed in greater detail below, independence requires a board of directors’ determination as to the (a) absence of any payments of fees directly or indirectly to the audit committee member for consulting, advisory or other services and (b) lack of affiliate status, in each case other than in connection with the member’s role on the Board.

Section 3(a)(58) of the Exchange Act defines the audit committee as "[a] committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and if no such committee exists with respect to an issuer, the entire board of directors of the issuer." Consistent with the Exchange Act, audit committees are not required to be separately constituted under the new SEC rules. If the entire board constitutes the audit committee, the SRO rules to be adopted under Rule 10A-3 will apply to the issuer’s board as a whole. Rule 10A-3 relates only to requirements for audit committee membership. SROs have flexibility to adopt and administer additional requirements through the SRO rulemaking process conducted under SEC oversight and approval. The NYSE proposed listing rules do not include any additional independence criteria for audit committee membership other than their proposed general standards for independence although they do specify that an audit committee have a minimum of three directors meeting their criteria. The Nasdaq proposed listing rules, in addition to also specifying that the audit committee have a minimum of three directors meeting Nasdaq’s independence criteria and imposing general standards of independence, define a director that owns or controls, directly or indirectly, 20% or more of the listed issuer’s voting securities (or such lower threshold as may be established by the SEC) as an affiliate and therefore preclude such director from serving on the audit committee.

No Consulting, Advisory or Other Compensatory Fees. The first of two criteria for independence in Rule 10A-3 is that audit committee members of listed issuers are barred from directly or indirectly accepting any consulting, advisory or other compensatory fee from the issuer or any subsidiary thereof, other than in the member’s capacity as a member of the board of directors and any board committee. This prohibition will preclude payments to a member as an officer or employee of the issuer, as well as other compensatory payments. Rule 10A-3 provides that unless an SRO listing requirement states otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan for prior services with the listed issuer provided that such compensation is not contingent on continued service. Rule 10A-3 also does not contain a de minimis exception for these payments.

Payments to spouses, minor children or stepchildren or children or stepchildren sharing a home with the audit committee member constitute indirect acceptance of compensatory payments and are therefore prohibited. In addition, payments accepted by an entity in which an audit committee member has a specified relationship that provides accounting, consulting, legal, investment banking or financial advisory services (other than lending, stock brokerage and cash management services) to the listed issuer or any subsidiary preclude service as an audit committee member because those payments are indirect compensation. The specified relationships of the audit committee member in the service-providing entity include partner, member, officer such as a managing director occupying a comparable position, executive officer, or others occupying a similar position. Indirect acceptance does not exist where an audit committee member is a limited partner, a non-managing member or occupies a similar position with no active role in providing services to the entity.

The new rule applies the prohibitions only to current relationships with the audit committee member and related persons. They do not extend to a "look back" period before appointment to the audit committee, although the SEC acknowledges that the SROs will require such periods in their listing standards. The NYSE proposed listing rules provide for a five-year look back period which applies prospectively from the effective date of the listing standard. The effect of the NYSE’s prospective application is that the look back will not apply to any relationship that the director had prior to the effective date of the listing standard, except that an existing NYSE listing requirement which imposes a three-year look back with respect to an audit committee member’s employment relationship with the listed issuer or an affiliate will presumably continue to apply on a transitional basis. The Nasdaq proposed listing rules include a three-year look back period.

Not an Affiliate of the Issuer. The second criterion for independence in Rule 10A-3 is that an audit committee member may not be an affiliated person of the issuer or any subsidiary of the issuer apart from in his or her capacity as a member of the board and any board committee. The definitions of the terms "affiliate," "affiliated person," and "control" are consistent with definitions of these terms in Rule 12b-2 under the Exchange Act and Rule 144 under the Securities Act of 1933. Under the new rule, "affiliate" of, or a person "affiliated" with, a specified person, means "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified." "Control" means "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership ofvoting securities, by contract, or otherwise." The definition of "affiliated person" for non-investment companies requires a factual determination based on a consideration of all relevant facts and circumstances. For investment companies, "independence" is characterized as not being an "interested person" of the fund as defined in Section 2(a)(19) of the Investment Company Act of 1940 (the "1940 Act"). This definition of independence precludes conflicting relationships with the fund’s investment adviser and principal underwriter, not just with the fund itself.

Rule 10A-3 excludes from affiliate status a person who is not an executive officer or a shareholder beneficially owning 10% or more of any class of voting equity securities as calculated under Rule 13d-3. While SROs in their listing rules could establish an upper ownership limit that would preclude independence (such as the 20% ownership threshold under the Nasdaq proposed listing rules discussed above), the safe harbor in Rule 10A-3 does not contain such a limit. The safe harbor is designed to identify those that are not affiliates so as to provide comfort to those individuals or entities that no additional facts and circumstances analysis is necessary. Exceeding the 10% ownership threshold is not determinative of whether a particular person is an affiliate based on an evaluation of all facts and circumstances, whether for these purposes, Rule 144 or otherwise. A director who is not an executive officer but beneficially owns more than 10% of the issuer’s voting equity could be determined not to be an affiliate under a facts and circumstances analysis of control. The safe harbor does not in any way specify or imply that a certain level of share ownership automatically presumes that a person is an affiliate.

Rule 10A-3 also addresses when directors who have relationships with entities that are affiliates of the listed issuer will themselves be deemed affiliates of the listed issuer. Under Rule 10A-3, only executive officers, directors that are also employees of an affiliate, general partners and managing members of an affiliate will automatically be deemed to be affiliates of the listed issuer. Outside directors of an affiliate are excluded from the automatic designation as affiliates of the listed issuer. In addition, passive, non-control positions, such as limited partners, and those that do not have policy-making functions with an affiliate, are also not affiliates of the listed issuer.

Exemptions. Section 10A(m) of the Exchange Act provides that the SEC may exempt from the requirements of the independence criteria applicable to listed issuers particular relationships between audit committee members and listed issuers that the SEC determines to be appropriate in light of the circumstances. Pursuant to that authority, Rule 10A-3 provides that a newly public issuer is required to have at least one independent member on its audit committee at the effective date of an issuer’s initial listing, a majority of independent members within 90 days thereafter, and a fully independent committee within one year from the effective date of its listing.

In the context of overlapping boards of holding companies and subsidiaries or joint ventures, an audit committee member may sit on the board of directors of a listed issuer and the board of any affiliate so long as, except for being a director on each such board of directors, the member otherwise meets the independence requirements for each such entity, including the receipt of only ordinary-course compensation for serving as a member of the board of directors, audit committee or any other board committee of the listed issuer and each such entity.

Additional exemptions for foreign private issuers are described below. Other than these explicit exemptions in Rule 10A-3, the SEC has stated in the Release that it does not intend to grant case-by-case exemptions. However, it has exemptive authority under the new rule which the Release states the SEC will use to resolve conflicts in evolving standards of governance in U.S. or foreign law. As discussed below, reliance on any exemptions from the independence requirements must be disclosed.

The listing standards required by Rule 10A-3 must specify that the audit committee of a listed issuer is directly responsible for the appointment, compensation, retention and oversight of any auditor engaged (including resolution of disagreements between management and the auditor regarding financial reporting) and the independent auditor will have to report directly to the audit committee. Audit engagements are those engagements for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer. These oversight responsibilities include the authority to retain the outside auditor, which includes the power to terminate the outside auditor. For investment companies, the selection of auditors is subject to ratification by the full board pursuant to Section 32(a) of the 1940 Act. In addition, in connection with these oversight responsibilities, the audit committee must have ultimate authority to approve all audit engagement fees and terms. The new rule establishes minimum requirements for oversight of the listed issuer’s relationship with the auditor and does not preclude imposition of listing rules that require direct oversight by the audit committee of permissible non-audit services.

The audit services subject to oversight encompass the same services included in the "Audit Fees" category for purposes of an issuer’s disclosure of fees paid to its auditor as required by Item 9 of Schedule 14A and Item 16 of Form 10-K. This category includes services that normally would be provided by the auditor in connection with statutory and regulatory filings or engagements.

In addition to services necessary to perform an audit or review in accordance with Generally Accepted Auditing Standards ("GAAS"), this category also may include services that generally only the auditor reasonably can provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.

The listing standards required by Rule 10A-3 must specify that the audit committee shall establish procedures for the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters. Because the new rule does not specify detailed procedures that the audit committee must establish, the audit committee has the flexibility to develop procedures that will be most effective and appropriate. While the scope of the requirements generally includes addressing complaints received by a listed issuer regardless of source, procedures required for confidential, anonymous submission of concerns are limited to communications from employees of the issuer. However, the SEC encourages the SROs to consider the scope of the requirement for investment companies, given that such funds are serviced by employees of third parties.

The listing standards required by Rule 10A-3 must specify that the audit committee has the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties.

Rule 10A-3 also requires the listed issuer to provide for appropriate funding, as determined by the audit committee, for payment of compensation to the auditor for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed issuer and to any advisers employed by the audit committee. This funding requirement allows the audit committee to act in an oversight role with the auditor and is intended to avoid the conflict of the auditors being compensated by management. The new rule provides that, in addition to funding for advisers, the issuer must provide appropriate funding for ordinary administrative expenses of the audit committee that are necessary or appropriate in carrying out its duties.

The listing standards required by Rule 10A-3 must require a listed issuer to notify the SRO promptly after an executive officer of an issuer becomes aware of any material noncompliance with the requirements.

The listing standards required by Rule 10A-3 must also specify that the SRO shall establish appropriate procedures for an issuer to have an opportunity to cure any defects before the SRO prohibits the listing of or delists any security of an issuer. The SEC contemplates that existing continued listing or maintenance standards and delisting procedures of the SROs generally should suffice as procedures for an issuer to have an opportunity to cure any defects on an ongoing basis. These procedures already provide issuers with notice and opportunity for a hearing, an opportunity for an appeal and an opportunity to cure any defects before their securities are delisted. Although the new rule does not specify time periods for the cure process, the SEC acknowledges that the rules of each SRO will provide for definite procedures and time periods for compliance.

The new rule provides that SRO implementing rules may provide that if a member of an audit committee ceases to be independent for reasons outside the member’s reasonable control, that person, with notice by the issuer to the applicable SRO, may remain an audit committee member of the listed issuer until the earlier of the next annual meeting or one year from the occurrence of the event that caused the member to be no longer independent. Circumstances where an audit committee member ceases to be independent for reasons outside the member’s reasonable control include business combinations involving the listed issuer and entities in which the audit committee member has an existing consulting, advisory or compensatory relationship.

Disclosure Regarding Exemptions. Rule 10A-3 requires that issuers availing themselves of an exemption to the audit committee requirements must disclose their reliance on an exemption and their assessment of whether, and if so, how, such reliance will materially adversely affect the ability of their audit committee to act independently and to satisfy the other requirements of the new rule. Such disclosure is required to appear in, or be incorporated by reference into, the issuer’s annual reports. The disclosure also is required to appear in proxy statements or information statements of issuers subject to the proxy rules for shareholders’ meetings at which elections for directors are held. Unit investment trusts and issuers availing themselves of the multiple listing exemption are excluded from the disclosure requirements as to their reliance on an exemption.

Identification of the Audit Committee in Annual Reports. Rule 10A-3 requires in addition to the current disclosure requirements in the issuer’s proxy statement that disclosure of the members of the audit committee be included or incorporated by reference in the listed issuer’s annual report. Also, a listed issuer that has not separately designated an audit committee must disclose that the entire board of directors is acting as the issuer’s audit committee and whether each of the members of the board is independent and provide the specific disclosure under Schedule 14A as required for the audit committee members with respect to each of the members. Conforming changes have been reflected in Items 7 and 22 of Schedule 14A, which address audit committee disclosure by listed issuers and investment companies, respectively. In addition, non-listed issuers are required to disclose whether the members of their audit committees are independent under the listing standards of any exchange or Nasdaq that the issuer selects.

The Release includes some clarifications to the application of the previously released auditor independence rules as they applied to the audit committee requirements imposed by Rule 10A-3. With respect to the requirement that the issuer’s audit committee pre-approve audit and non-audit services provided to the issuer and its consolidated subsidiaries by the auditor, the Release states that the audit committee of the parent company that controls another entity within the consolidated group can perform the pre-approval function for the parent company and any consolidated subsidiaries both with respect to the consolidated financial statements and with respect to the financial statements of any consolidated subsidiary that also is an issuer. In those instances where such entities have their own audit committees, the relevant facts and circumstances surrounding the engagement or relationship should be evaluated to determine which entity’s audit committee is in the best position to review the impact of the service on the auditor’s independence. Whichever committee it is determined is appropriate to perform the pre-approval should be the committee with which the auditor communicates.

The SEC’s implementation directives and exemptions in the new rule to the SROs apply generally to listings by foreign private issuers in the same manner as domestic issuers. Accordingly, unlike the existing corporate governance listing standards of the NYSE, which historically afforded an exemption to foreign private issuers provided that differences between NYSE and home country corporate governance requirements were disclosed, the NYSE corporate governance proposals require foreign private issuers to comply with the Rule 10A-3 requirements and to have a minimum three-person audit committee meeting the independence criteria. In the Release, however, the SEC reiterated that it had the authority to respond to, and will remain sensitive to, the evolving standards of corporate governance throughout the world to address any new conflicts that may arise with foreign corporate governance rules and practices that cannot be anticipated at this time.

Deferred Effective Date. Rule 10A-3 provides an extended implementation date for foreign private issuers. Foreign private issuers must comply by July 31, 2005. Disclosure requirements are applicable for periodic reports for periods ending on or after, and proxy statements relating to actions occurring on or after, July 31, 2005.

Avoidance of Conflict with Local Governing Law. The instructions of Rule 10A-3 clarify that none of the audit committee requirements in the rule conflicts with or affects the application of any requirement or ability under an issuer’s governing law or documents or other home country legal or listing provisions that requires or permits shareholders to ultimately vote on, approve or ratify such requirements. If such responsibilities are vested with shareholders, and the issuer provides a recommendation or nomination regarding such matters to its shareholders, the audit committee of the issuer, or the issuer’s governing body performing similar functions, must be responsible for making the recommendation or nomination. Likewise, the instructions clarify that none of the audit committee requirements in the new rule conflicts with any legal or listing requirement in an issuer’s home jurisdiction that prohibits the full board of directors from delegating such responsibilities to the audit committee or limits the degree of such delegation. In those instances, the listed issuer could comply by granting the audit committee advisory and other powers with respect to the full Board. In addition, an instruction clarifies that the requirements in the rule do not conflict with any legal or listing requirement in an issuer’s home jurisdiction vesting such responsibilities with a government entity or tribunal. In those instances, the audit committee should be granted such responsibilities to the extent permitted by local law.

Dual Holding Companies. The audit committee members of a dual holding company foreign private issuer who serve on audit committees of both issuers or a joint audit committee could technically be considered affiliates, or persons who are not directors, because of the particular structural form of the dual holding companies. Where a listed issuer is one of two foreign private issuer dual holding companies, those companies may designate one audit committee for both companies so long as each member of the audit committee is a member of the board of directors of at least one of such dual holding companies. Second, dual holding companies will not be deemed to be affiliates of each other by virtue of their dual holding company arrangements with each other, including where directors of one dual holding company are also directors of the other dual holding company, or where directors of one or both dual holding companies are also directors of the businesses jointly controlled, directly or indirectly, by the dual holding companies (and in each case receive only ordinary-course compensation for serving as a member of the board of directors, audit committee or any other board committee of the dual holding companies or any entity that is jointly controlled, directly or indirectly, by the dual holding companies).

Employee Representation on the Audit Committee. Rule 10A-3 contains a limited exemption from the independence requirements where the issuer’s governing law or documents, an employee collective bargaining or similar agreement or other home country legal or listing requirements require that non-management employees, who would not be viewed as "independent" under the requirements of Rule 10A-3, serve on the supervisory board or audit committee so long as the employees are not executive officers, as defined by Exchange Act Rule 3b-7.

Two-Tier Board Systems. In the case of foreign private issuers with a two-tier board system, with one tier designated as the management board and the other tier designated as the supervisory or non-management board, the term "board of directors" means the supervisory or non-management board for purposes of the new rule. As such, the supervisory or non-management board can either form a separate audit committee or, if the entire supervisory or non-management board is independent within the provisions and excepions of the rule, the entire board can be designated as the audit committee.

Controlling Shareholder Representation. An audit committee member can be a representative of an affiliate of the foreign private issuer, if the "no compensatio n" prong of the independence requirements is satisfied, the member in question has only observer status on, and is not a voting member or the chair of, the audit committee, and the member in question is not an executive officer of the issuer.

Foreign Governments. Without regard to a foreign government’s shareholdings or rights, any audit committee member can be a representative of a foreign government or foreign governmental entity if the "no compensation" prong of the independence requirement is satisfied and the member in question is not an executive officer of the issuer. In addition, listed issuers that are foreign governments as defined in Exchange Act Rule 3b-4(a) are exempted from the new rule. 9

Boards of Auditors or Similar Bodies. The listing of securities of a foreign private issuer will be exempt from all of the audit committee requirements if the issuer meets the following requirements:

• The foreign private issuer has a Board of Auditors (or similar body), or has statutory auditors (collectively, a "Board of Auditors"), established and selected pursuant to home country legal or listing provisions expressly requiring or permitting such a board or similar body;
• The Board of Auditors is required to be either separate from the board of directors, or composed of one or more members of the board of directors and one or more members that are not also members of the board of directors;
• The Board of Auditors is not elected by management of the issuer and no executive officer of the issuer is a member of the Board of Auditors;
• Home country legal or listing provisions set forth or provide for standards for the independence of the Board of Auditors from the issuer or the management of the issuer;
• The Board of Auditors, in accordance with any applicable home country legal or listing requirements or the issuer’s governing documents, is responsible, to the extent permitted by law, for the appointment, retention and oversight of the work of any auditor engaged (including, to the extent permitted by law, the 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 issuer; and
• The remaining requirements in the rule, such as the complaint procedures requirement, advisers requirement and funding requirement, apply to the Board of Auditors, to the extent permitted by law.

Requests for Other Foreign Exemptions. Other than the exemptions discussed above, there will be no other ability for an SRO implementing the new rule to exempt or waive foreign issuers from these requirements.

Financial Experts. The Release amends the foreign private issuer audit committee financial expert disclosure provisions in Form 20-F and Form 40-F. If the foreign private issuer is a listed issuer, these amendments require disclosure as to whether the audit committee financial expert is independent as that term is defined by the SRO listing standards applicable to that issuer. If a foreign private issuer is not a listed issuer, it must choose one of the SRO definitions of audit committee member independence that have been approved by the SEC in determining whether its audit committee financial expert, if it has one, is independent. It must also disclose which definition was used. Also, the instructions to the audit committee financial expert disclosure provisions in Item 16A of Form 20-F have been revised to clarify that the term "audit committee" means the Board of Auditors or similar bodies or statutory auditors, if the issuer meets the criteria specified in Rule 10A-3 for the exemption for Board of Auditors or statutory auditors.

Audit Committee Disclosure. The Release requires foreign private issuers that file their annual reports on Form 40-F to identify the members of their audit committee in their annual reports. Foreign private issuers that file their annual reports on Form 20-F or Form 40-F must also disclose if the entire board of directors is acting as the audit committee.

Rule 10A-3 provides an extended implementation date for any small business issuer defined in Exchange Act Rule 12b-2 as a U.S. or Canadian issuer with less than $25 million in revenues and public float that is not an investment company. Small business issuers must comply by July 31, 2005. Disclosure requirements are applicable for periodic reports for periods ending on and after, and proxy statements relating to actions occurring on and after, July 31, 2005.

As asset-backed issuers do not have audit committees, they are excluded from these requirements. Specifically, SROs may exclude from the requirements of their implementation listing rules, issuers that are organized as trusts or other unincorporated associations that do not have a board of directors or persons acting in a similar capacity and whose activities are limited to passively owning or holding (as well as administering and distributing amounts in respect of) securities, rights, collateral or other assets on behalf of or for the benefit of the holders of the listed securities.

In connection with complying with these new rules, audit committees should consider the following:

Audit Committee Members. Although companies will ultimately be subject to rules as adopted by the SRO on which their equity securities are traded, or if no equity securities are listed, then the SRO on which their debt securities are listed, they need not wait until the final listing rules are adopted because whatever will be adopted will be at least as strict as the SEC rules. The listing rules changes proposed by the NYSE and Nasdaq, which have been revised to comply with the requirements of the new SEC rule, should be considered at this point and reviewed for any further revisions once approved for adoption by the SEC. A review of the current audit committee members should be performed as early as practicable to confirm whether the current members of the audit committee meet the independence criteria. The Board should initiate procedures for identifying competent prospective members to be nominated in connection with audit committee nominations for the 2004 proxy season. While SRO definitions of independence will govern compensation and nominating/corporate governance committee membership, issuers should be mindful that the failure of an audit committee member to be sufficiently "independent" for purposes of Rule 10A-3 may not automatically preclude his or her independence for Board purposes or other Board committee assignments.

Audit Committee Charters. Committee charters should be reviewed and revised to reflect the specific requirements of audit committees set forth in the new rule such as independence, handling complaints, retaining advisers and oversight obligations with respect to the auditor relationship. In reviewing such charters, moreover, companies should review the additional requirements for such charters under the recently proposed NYSE and Nasdaq corporate governance guidelines, as applicable. Boards of listed investment companies that also serve in parallel as boards of unlisted investment companies need to consider whether the charters and operating procedures of all such funds should conform to listed company rules or whether circumstances exist that make it advisable to maintain separate standards.

Complaint Procedures. Again, recognizing that issuers will ultimately be subject to the listing rules adopted by their SRO, the audit committee can begin to work with management to review existing procedures for communication and resolution of complaints and consider any necessary enhancements to comply with the guidelines of the new rule. For example, enhancements could include contracting with a third party to operate a complaint response hotline as well as appointing a designee of the audit committee to monitor inquiries received and management responses to complaints. These complaint procedures could be reflected in the issuer’s corporate governance or ethics policies contemplated by the NYSE and Nasdaq corporate governance proposals.

Additional Upcoming Changes for Audit Committees. Listed companies and their boards will need to monitor the NYSE and Nasdaq proposed corporate governance proposals, as applicable to them. Mayer, Brown, Row & Maw expects to provide additional client advisories as to these developments.