(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Rules on Listing Standards for Audit Committee Compliance Adopted

The SEC voted to adopt rules directing the 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 established by the Sarbanes-Oxley Act. The new rules and amendments implement the requirements of Section 10A(m)(1) of the Exchange Act, as added by Section 301 of the Sarbanes-Oxley Act.

Under the new rules, national securities exchanges and national securities associations will be prohibited from listing any security of an issuer that is not in compliance with the following requirements. Initially, each member of the audit committee of the issuer must be independent according to the specified criteria in Section 10A(m). The audit committee must also be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer, and the registered public accounting firm must report directly to the audit committee.

To satisfy the new rules requirements, an issuer's audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The audit committee must also have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties. The rule also specifies that the issuer must provide appropriate funding for the audit committee.

Audit committee members of listed issuers must be barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than in the member's capacity as a member of the board or any board committee. To qualify for listing, an audit committee member must also not be an affiliated person of the issuer or any subsidiary apart from capacity as a member of the board or any board committee.

The new rules will apply to both domestic and foreign listed issuers. The SEC stated that the rule contains several provisions applicable only to foreign private issuers that seek to address the special circumstances of particular foreign jurisdictions. These provisions include: 1) allowing non-management employees to serve as audit committee members, 2) allowing shareholders to select or ratify the selection of auditors, 3) allowing alternative structures such as boards of auditors to perform auditor oversight functions where such structures are provided for under local law, and 4) addressing the issue of foreign government shareholder representation on audit committees.

The new rules also will make several updates to the Commission's disclosure requirements. The SEC will now require updates to the audit committee financial expert disclosure requirements for foreign private issuers.

The Commission voted to establish two sets of implementation dates for listed issuers. Generally, listed issuers will be required to comply with the new listing rules by the date of their first annual shareholders meetings held after January 15, 2004. Compliance will be required in any event no later than October 31, 2004. Foreign private issuers and small business issuers will be required to comply by July 31, 2005.

¨ The adopting release will be published in a forthcoming REPORT.