Self-Regulatory Organizations; Order Approving Proposed Rule Change by National Association of Securities Dealers, Inc. to Apply Nasdaq's Recently Amended Independent Director and Audit Committee Listing Requirements to Limited Partnerships

I. Introduction

On May 26, 2000, the National Association of Securities Dealers, Inc. (“NASD”) through its wholly owned subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, a proposed rule change to apply Nasdaq's recently amended independent director and audit committee listing requirements to limited partnerships.

The proposed rule change was published in the Federal Register on June 27, 2000. No comments were received on the proposal. This order approves the proposed rule change.

II. Description of the Proposed Rule Change

A. Independent Director and Audit Committee Listing Requirements

In 1993, Nasdaq established corporate governance standards, including independent director and audit committee requirements, for limited partnerships that were similar to those for other issuers. Last year, the Commission approved amendments to the independent director and audit committee listing requirements for corporations quoted on Nasdaq. Nasdaq believes that although there are few limited partnerships currently quoted on Nasdaq, the new independent director and audit committee requirements should also be applied to limited partnerships in order to provide investors in limited partnerships with the same protections enjoyed by the shareholders of corporations. Therefore, Nasdaq proposes to extend the recent amendments to its independent director and audit committee listing standards for corporations to limited partnerships.

B. Implementation

In order to minimize disruption to existing limited partnership audit committees, to permit current audit committee members to serve out their terms, and to allow adequate time for the recruitment of the requisite members, Nasdaq proposes to provide limited partnerships eighteen months from the date of this approval to meet the audit committee structure and membership requirements. Additionally, Nasdaq proposes that limited partnerships listed on the effective date of the rule be provided with six months following the date of this approval order to adopt a formal written audit committee charter.

Further, Nasdaq proposes that limited partnerships that applied for listing prior to the effective date of the rule be able to qualify for listing under the listing standards in force at the time of their application, and receive the same grace period provided to current limited partnerships. Also, limited partnerships that transfer to Nasdaq from the American Stock Exchange LLC and the New York Stock Exchange, will be subject to, and afforded, the same grace periods they would have received under their previous market's implementation schedule.

III. Discussion

After careful review, 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 association, and in particular, the requirements of section 15A(b)(6) of the Act. The proposed rule change applies Nasdaq's recently amended independent director and audit committee listing requirements to limited partnerships. As noted above, the Commission approved those requirements on December 14, 1999.

The Commission believes it appropriate for Nasdaq to extend the recent amendments to its independent director and audit committee listing standards to limited partnerships, and that these standards should provide investors in limited partnerships the same protections as the shareholders of other issuers. As the Commission noted in its order with respect to the amendments approved on December 14, 1999, the proposed rule change will protect investors by improving the effectiveness of audit committees of limited partnerships listed on Nasdaq, and should enhance the reliability and credibility of their financial statements by making it more difficult for limited partnerships to inappropriately distort their true financial performance.

Specifically, the Commission notes 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. The Commission also believes that the proposal's resulting prohibition against employees serving on the audit committee is appropriate. The Commission further believes that the proposed rule change's application of requirements for the qualifications of audit committee members will enhance the effectiveness of the audit committee and help to ensure that audit committee members are able to adequately fulfill their responsibilities.

IV. Conclusion

For the foregoing reasons, the Commission finds that Nasdaq's proposal to apply its independent director and audit committee listing requirements to limited partnerships is consistent with the requirements of the Act and rules and regulations thereunder.

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-NASD-00-31) is approved.