Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change, as Modified by Amendments Nos. 1 and 2, To Establish Listing Standards for Issuers' Compensation Committees, 63370-63380 [2012-25407]
Download as PDF
<![CDATA[
63370
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2012–111 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
tkelley on DSK3SPTVN1PROD with NOTICES
All submissions should refer to File
Number SR–NASDAQ–2012–111. This
file number should be included on the
subject line if email 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 (https://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 Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices of the
Exchange. 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–
NASDAQ–2012–111, and should be
submitted on or before November 6,
2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–25334 Filed 10–15–12; 8:45 am]
BILLING CODE 8011–01–P
9 17
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
[Release No. 34–68033; File No. SR–CHX–
2012–13]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing of Proposed Rule Change, as
Modified by Amendments Nos. 1 and 2,
To Establish Listing Standards for
Issuers’ Compensation Committees
October 10, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–4 2 thereunder,
notice is hereby given that on
September 26, 2012, the Chicago Stock
Exchange, Inc. (‘‘CHX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which filing was amended
and replaced in its entirety by
Amendment No. 2 thereto on October
10, 2012, which Items have been
prepared by the Exchange.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
Article 22, Rule 2 (Admittance to
Listing), Rule 4 (Removal of Securities)
and Rule 19 (Corporate Governance) to
comport with Section 10(C) of the
Exchange Act 4 and Rule 10C–1 5
thereunder that directs the Exchange to
establish listing standards, among other
things, that require each member of a
listed issuer’s compensation committee
to be an independent member of its
board of directors and relating to
compensation committees and their use
of compensation consultants,
independent legal counsel and other
advisers (collectively, ‘‘compensation
advisers’’). The text of this proposed
rule change is available on the
Exchange’s Web site at (www.chx.com)
and in the Commission’s Public
Reference Room.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Commission notes that Amendment No. 1
was submitted on October 2, 2012 to indicate that
the Board of Directors had approved the proposal.
4 15 U.S.C. 78j–3.
5 17 CFR 240.10C–1.
2 17
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
CHX included statements concerning
the purpose of and basis for the
proposed rule changes and discussed
any comments it received regarding the
proposal. The text of these statements
may be examined at the places specified
in Item IV below. The CHX has prepared
summaries, set forth in sections A, B
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This Amendment No. 2 to SR–CHX–
2012–13 (the ‘‘filing’’) amends and
replaces in its entirety the Filing as
originally submitted on September 26,
2012. Amendment No. 2 corrects several
technical errors under this Rule 19b–4
form, Exhibit 1 and Exhibit 5. Moreover,
substantive amendments were made to
the Exhibit 5 and corresponding
amendments were also made to this
Exhibit 1 and 19b–4 form. Item 2 of this
19b–4 filing has been amended to
indicate that this proposal was
approved by the Exchange’s Board of
Directors on September 27, 2012.6
Proposed Rule 19(d)(1) was amended to
require issuers to have a compensation
committee composed entirely of
independent directors, subject to the
general independence requirements of
proposed Rule 19(p)(3)(A) and
additional specific requirements for
compensation committees under
proposed Rule 19(p)(3)(B). Moreover,
proposed Rule 19(d)(1) was amended to
define ‘‘compensation committee’’ as
independent directors functioning
within either formal committees of the
board of directors or a non-committee
group. Proposed Rule 19(d)(2) was
amended to include a charter
requirement for compensation
committees and removes the definition
of ‘‘compensation committee’’ and
‘‘functional equivalent,’’ which has been
restated under proposed Rule
19(d)(1)(A)–(C). The exceptions under
proposed Rule 19(d)(5)(B) were
amended to be numerically consistent
with proposed paragraph .03 of the
Interpretations and Policies of Rule 19.
Proposed Rule 19(d)(5)(B)(iii) was
amended to narrow the scope of the
passive business organizations
6 The Commission notes that this change was
filed as Amendment No. 1. See supra note 3.
E:\FR\FM\16OCN1.SGM
16OCN1
tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
exemption. Proposed Rule
19(d)(5)(B)(iv) was amended to include
a phase-in period for foreign issuers
who no longer qualify as such. Proposed
Rule 19(d)(5)(C) was amended to solely
refer to the smaller reporting companies
exemption and includes a phase-in
period for issuers that no longer qualify
as such. Proposed Rule 19(p)(3) was
amended to reorganize the bright line
tests for independent directors and to
allow the inclusion of proposed
paragraph (B), which outlines additional
independent director requirements
specific to compensation committee
membership. Proposed Rule 19(p)(5)
was amended to make the terms ‘‘small
business issuer’’ and ‘‘smaller reporting
company’’ interchangeable for the
purposes of CHX rules. Proposed
paragraph .03 of the Interpretations and
Policies of Rule 19 was amended to
remove a listed exemption for small
business issuers. Finally, proposed
paragraph .05(6) of the Interpretations
and Policies of Rule 19 outlines an
amended transition period for
compliance with the proposed listing
standards.
The Exchange proposes to amend
Article 22, Rule 2 (Admittance to
Listing), Rule 4 (Removal of Securities)
and Rule 19 (Corporate Governance) to
comport with Section 10(C) of the
Exchange Act 7 and Rule 10C–1 8
thereunder, which directs the Exchange
to establish listing standards that
require each member of a listed issuer’s
compensation committee to be an
independent member of its board of
directors and listing standards relating
to compensation committees and their
use of compensation advisers.
The Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010
(‘‘Dodd-Frank Act’’) established Section
10C of the Exchange Act, which
directed the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
to require national securities exchanges
and associations to prohibit the listing
of any equity security of an issuer that
is not in compliance with Section 10C’s
compensation committee and
compensation adviser requirements.9
Specifically, section 10C(a)(1) of the
Exchange Act required the Commission
to adopt rules directing the exchanges to
establish listing standards that require
each member of a listed issuer’s
compensation committee to be a
member of the board of directors and to
be ‘‘independent.’’ 10 Moreover, Section
note 4.
note 5.
9 15 U.S.C. 78j–3.
10 15 U.S.C. 78j–3(a).
10C(a)(4) 11 of the Exchange Act
required the Commission to permit the
exchanges to exempt particular
relationships from the independence
requirements, as each exchange
determines is appropriate, taking into
consideration the size of an issuer and
any other relevant factors and section
10C(f)(3) 12 required the Commission to
permit the exchanges to exempt
categories of issuers from the
requirements of section 10C, as each
exchange determines is appropriate,
taking into consideration of the impact
of section 10C on smaller reporting
issuers. In addition, Section 10C(f) 13 of
the Exchange Act required the
Commission to adopt rules directing the
exchanges to establish listing standards
that provide for requirements relating to
compensation committees and
compensation consultants, independent
legal counsel and other advisers
(collectively, ‘‘compensation advisers’’),
as set forth in paragraphs (b)–(e) of
Section 10C. Finally, Section 10C(c)(2)
required each issuer to disclose in any
proxy or consent solicitation material
for an annual meeting of shareholders
(or a special meeting in lieu of the
annual meeting), in accordance with
Commission regulations, whether the
issuer’s compensation committee
retained or obtained the advice of a
compensation consultant; whether the
work of the compensation consultant
has raised any conflict of interest; and,
if so, the nature of the conflict and how
the conflict is being addressed.14
On June 27, 2012, the Commission
promulgated Exchange Act Rule 10C–1
to implement the compensation
committee listing requirements of
Sections 10C of the Exchange Act. As
such, the Exchange now proposes to
amend its rules to comport with the new
requirements.
Proposed Amendments to CHX Article
22
The Exchange proposes to amend
portions of Article 22, Rule 2
(Admittance to Listing), Rule 4
(Removal of Securities) and Rule 19
(Corporate Governance) to establish
listing standards that require each
member of a listed issuer’s
compensation committee to be an
‘‘independent’’ member of its board of
directors, to adopt standards relating to
compensation committees’ authority to
use compensation advisers and to
clarify the consequences to issuers for
failure to comply with these proposed
7 Supra
11 15
8 Supra
12 15
VerDate Mar<15>2010
16:06 Oct 15, 2012
U.S.C. 78j–3(a)(4).
U.S.C. 78j–3(f)(3)(A).
13 15 U.S.C. 78j–3(f).
14 15 U.S.C. 78j–3(c)(2).
Jkt 229001
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
63371
amendments. It is important to note that
virtually all of the proposed
amendments are in Rule 19(d), which
currently outlines all of the listing
standards with respect to issuers’
compensation committees.
Proposed Rule 2 and Rule 4(a)
Proposed Rule 2 provides that the
Exchange’s Board of Governors may list
securities once the requirements of
Article 22 are met and upon terms,
conditions and payment of fees as the
Exchange’s board of directors may from
time to time prescribe. In doing so,
proposed Rule 2 adopts much of the
current Rule 2, while only clarifying
that the Board of Governors may only
admit securities ‘‘once the requirements
of this Article are met.’’ Also, proposed
Rule 4(a) provides that securities may be
removed from the list, with notice, by
either the issuer or the Exchange, for
any reason, including an issuer’s failure
to comply with the listing standards of
this Article 22. In doing so, proposed
Rule 4(a) adopts much of the current
Rule 4(a), while inserting language that
states that securities may be delisted by
either the issuer or the Exchange and
clarifies that securities may be removed
for any reason, including an issuer’s
failure to comply with the requirements
of this Article, which includes proposed
Rule 19(d). Current Rule 4(b)–(g)
establish the procedures under which a
security may be delisted, to which the
Exchange proposes no amendments.
As such, proposed Rule 2 and Rule 4,
considered in conjunction with current
Article 22, Rule 1 15, comport with
Exchange Act Rule 10C–1(a)(1) that
requires the Exchange to ‘‘prohibit the
initial and continued listing of any
equity security of an issuer that is not
in compliance with the requirements of
any portion of paragraph (b) or (c) of
this section.’’ That is, the purpose of
these proposed amendments is to clarify
the potential consequences of an
issuer’s failure to comply with CHX
Article 22, which includes the proposed
compensation committee listing
standards.
Proposed Rule 19(d)(1) and 19(p)(3)
Proposed Rule 19(d)(1) 16 states that
an issuers must have a ‘‘compensation
15 CHX Article 22, Rule 1 states, in pertinent part,
that ‘‘the requirements, set forth in this Article,
must be met in order for the Exchange to entertain
an application for listing.’’
16 In order to implement proposed Rule 19(d)(1),
the Exchange proposes to delete current Rule
19(d)(1), which outlines how the compensation of
a chief executive officer is to be determined and
current Rule 19(d)(2), which outlines how a the
compensation of other officers are to be determined,
Continued
E:\FR\FM\16OCN1.SGM
16OCN1
63372
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
committee’’ composed entirely of
‘‘independent directors,’’ as defined
under proposed Rule 19(p)(3) and that
also meet the additional independence
requirements specific to compensation
committees, under proposed Rule
19(p)(3)(B). The proposed rule
continues to define ‘‘compensation
committee’’ as: (A) a committee of the
board of directors that is designated as
the compensation committee; (B) in the
absence of a committee of the board of
directors that is designated as the
compensation committee, a committee
of the board of directors performing
functions typically performed by a
compensation committee, including
oversight of the executive
compensation, even if it is not
designated as the compensation
committee or also performs other
functions; or (C) in the absence of one
of the aforementioned committees, the
members of the board of directors who
oversee executive compensation matters
on behalf of the board of directors, who
together must comprise a majority of the
board’s independent directors.
In turn, proposed Rule 19(p)(3)
defines ‘‘independent director’’ as a
person who is a member of the issuer’s
board of directors, other than an officer
or employee of the issuer or its
subsidiaries or any other individual
having a relationship, which, in the
opinion of the issuer’s board of
directors, would interfere with the
exercise of independent judgment in
carrying out the responsibilities of an
independent director and places the
affirmative duty of making such a
determination on the board of directors.
Furthermore, proposed Rule 19(p)(3)(A)
provides that a director may not be
deemed to be independent if such
director has a relationship with the
issuer which violates any one of seven
‘‘bright line’’ tests.17 Proposed Rule
and restate those rules with amendments, as
proposed Rule 19(d)(4), which is discussed below.
17Proposed Rule 19(p)(3)(A)(i)–(vii) virtually
adopts current Rule 19(p)(3)(A)–(G) and provides
that the following persons shall not be considered
independent: (i) A director who is, or during the
past three years, was employed by the issuer or its
parent or subsidiary; (ii) a director or an
immediately family member of a director who had
accepted payments from the issuer or its parent or
subsidiary in excess of $120,000 in the current
fiscal year or any of the past three fiscal years, with
exceptions for payments received for services to the
board, payments arising from investments in the
issuer’s securities, compensation paid to an
immediate family member who is an employee, but
not an executive officer, of the issuer, benefits
under a tax-qualified retirement plan, nondiscretionary compensation or loans permitted
under Section 13(k) of the Exchange Act; (iii) a
director who is an immediate family member of an
individual who is, or at any time during the past
three years was, employed by the issuer or by any
parent or subsidiary of the issuer as an executive
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
19(p)(3)(B) establishes additional
independent director requirements
specific to compensation committees
that states that in affirmatively
determining the independence of any
director who will serve on the
compensation committee of the issuer’s
board of directors, the board must
consider all factors specifically relevant
to determining whether a director has a
relationship to the issuer which is
material to that director’s ability to be
independent from management in
connection with the duties of a
compensation committee member,
including, but not limited to, two
factors. First, (i) the board must consider
the source of compensation of such
director, including any consulting,
advisory or other compensatory fee paid
by the issuer to such director. Proposed
subparagraph (i) explains that this factor
requires that when considering the
sources of a director’s compensation,
the board should consider whether the
director receives compensation from
any person or entity that would impair
her ability to make independent
judgments about the issuer’s executive
compensation. Second, (ii) the board
must consider whether such director is
affiliated with the issuer, a subsidiary of
the issuer or an affiliate of a subsidiary
of the issuer. The proposed
subparagraph (ii) explains that this
factor requires that when considering
such affiliate relationships in
determining her independence for
purposes of compensation committee
service, the board should consider
whether the affiliate relationship places
the director under the direct or indirect
control of the issuer or its senior
management, or creates a direct
officer; (iv) a director who is, or has an immediate
family member who is, a partner in, or a controlling
shareholder or an executive officer of, any
organization to which the issuer made, or from
which the issuer received, payments for property or
services, in the current or any of the past three
fiscal years, that exceed 5% of the recipient’s
consolidated gross revenues for that year, or
$200,000, whichever is more, other than payments
arising solely from investments in the issuer’s
securities or payments under non-discretionary
charitable contribution matching programs; (v) a
director of the issuer who is, or has an immediate
family member who is, employed as an executive
officer of another entity where, at any time during
the past three years, any of the executive officers
of the issuer served on the compensation committee
of such other entity; (vi) A director who is, or has
an immediate family member who is, a current
partner of the issuer’s outside auditor, or who has
a partner or employee of the issuer’s outside auditor
who worked on the issuer’s audit at any time during
the past three years; (vii) In the case of an
investment company, in lieu of paragraphs (i)–(vi),
a director who is an ‘‘interested person’’ of the
company as defined in section 2(a)(19) of the
Investment Company Act of 1940, other than in his
or her capacity as a member of the board of
directors or any board committee.
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
relationship between the director and
members of senior management, in each
case of a nature that would impair her
ability to make independent judgments
about the issuer’s executive
compensation.
As such, proposed Rule 19(d)(1) and
Rule 19(p)(3) comport with the
requirements of Exchange Act Rule
10C–1(b)(1)(i) and (ii). Initially, as
mandated by Exchange Act Rule 10C–
1(b)(1)(i), which states, ‘‘each member of
a compensation committee must be a
member of the board of directors of the
listed issuer, and must otherwise be
independent,’’ proposed Rule 19(d)(1)
requires members of an issuer’s
compensation committee be
‘‘independent directors’’ and, in turn,
proposed Rule 19(p)(3) defines a
‘‘director,’’ in relevant part, as a ‘‘person
who is member of the issuer’s board of
directors.’’ Additionally, the Exchange
proposes to require issuers to have a
compensation committee, similar to
Section 303A.05 of the NYSE Listed
Company Manual.18 The Exchange
submits that its proposed definition of
‘‘compensation committee,’’ which
adopts Exchange Act Rule 10C–1(c)(2) 19
almost verbatim, does not require
issuers to do anything more than what
they are already required to do, which
is to have either ‘‘a majority of the
independent directors or a
compensation committee comprised
solely of independent directors’’
determine or recommend executive
compensation.20
Moreover, proposed Rule 19(p)(3)
comports with Exchange Act Rule 10C–
1(b)(1)(ii). Specifically, Exchange Act
Rule 10C–1(b)(1)(ii)(A) requires the
Exchange to consider ‘‘the source of
compensation of a member of the board
of directors of an issuer, including any
consulting, advisory or other
compensatory fee paid by the issuer to
such a member of the board of
directors,’’ whereas Exchange Act Rule
10C–1(b)(1)(ii)(B) requires the Exchange
to consider ‘‘whether a member of the
board of directors of an issuer is
affiliated with the issuer,21 a subsidiary
of the issuer or an affiliate of a
subsidiary of the issuer.’’ The Exchange
18 Section 303A.05 of the NYSE Listed Company
Manual states, ‘‘listed companies must have a
compensation committee composed entirely of
independent directors.’’
19 17 CFR 240.10C–1(c)(2).
20 CHX Article 22, Rule 19(d)(1) and Rule
19(d)(2).
21 The Exchange understands ‘‘affiliated with
issuer’’ to have a similar meaning as ‘‘affiliated with
a specified person’’ defined under Exchange Act
Rule 12b–2 [17 CFR 240.12b02 [sic] as ‘‘a person
that directly, or indirectly through one more
intermediaries, controls, or is controlled by, or is
under common control with, the person specified.’’
E:\FR\FM\16OCN1.SGM
16OCN1
tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
submits that Exchange Act Rule 10C–
1(b)(1)(ii) is largely already addressed
via proposed Rule 19(p)(3)(A)(i)–(vii) 22
and is fully incorporated through
proposed Rule 19(p)(3)(B).
Proposed Rule 19(p)(3)(A)(i)
precludes from being considered
independent a director who currently is
or was, during the past three years,
employed by the issuer or parent or
subsidiary of the issuer. This preclusion
is based, in part, on Exchange Act Rule
16b–3(b)(3)(i),23 which excludes from
the definition of a ‘‘non-employee
director’’ a director who is an officer of
the issuer or a parent or subsidiary of
the issuer, or otherwise currently
employed by the issuer or a parent or
subsidiary of the issuer. The Exchange
submits that a director who is or was an
executive officer or employee of the
issuer should not be considered
independent due to the nature of the
professional relationships that are
formed in an employment setting and
the consequences therefrom. For
example, a director who is employed by
the issuer may have her employee
compensation (i.e. salary, bonuses, etc.
* * *) affected by her actions as a
member of the compensation
committee. Moreover, a director who
recently ended her employment with
the issuer may still maintain personal
relationships with executive officers
that may compromise independent
judgment. Consequently, the look-back
provision is necessary, because the
nature of such personal relationships
may remain unchanged for sometime
after the director ceased being employed
by the issuer.
Proposed Rule 19(p)(3)(A)(ii)
precludes from being considered
independent a director who had or an
immediate family member of the
director who had accepted payments
from the issuer or parent or subsidiary
of the issuer in excess of $120,000 in the
current fiscal year or any of the past
three fiscal years, excluding (1)
compensation for board or board
committee service; (2) payments arising
solely from investments in the issuer’s
securities; (3) compensation paid to an
immediate family member who is a nonexecutive employee of the issuer or a
parent or subsidiary of the issuer; (4)
benefits under a tax-qualified retirement
plan; (5) non-discretionary
compensation; or (6) loans permitted
under Section 13(k) of the Act. The only
difference between proposed Rule
22 As
mentioned above, supra note 16, proposed
Rule 19(p)(3)(A)(i)–(vii) virtually mirrors current
Rule 19(p)(3)(A)–(G), but for a few minor
substantive amendments, that are discussed below.
23 17 CFR 240.16b–3(b)(3)(i).
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
19(p)(3)(A)(ii) and current Rule
19(p)(3)(B) is the proposal to increase
the cap amount from $60,000 to
$120,000, so as to remain in lockstep
with other exchanges, such as BATS 24
and disclosure guidelines under Item
404(a) of Regulation S–K,25 both of
which set threshold amounts at
$120,000.
Similar to subparagraph (i), proposed
subparagraph (ii) is also based in part on
Exchange Act Rule 16b–3(b)(3)(i), which
excludes from the definition of ‘‘nonemployee director,’’ a director who
receives compensation, either directly
or indirectly, from the issuer or a parent
or subsidiary of the issuer for services
rendered as a consultant or in any
capacity other than as a director, except
for an amount that does not exceed
$120,000, pursuant to Item 404(a) of
Regulation S–K.26 The Exchange
acknowledges that a director who meets
the definition of a ‘‘non-employee
director’’ is not necessarily
‘‘independent.’’ However, the Exchange
submits that a cap of $120,000 on
affected payments are adequately high
to allow a director or immediate family
member to receive payments for
permissible services to the issuer, while
sufficiently low as to not preclude
director independence. Moreover, a cap
on such payments is preferable to an
absolute rule that precludes director
independence for any payments made.
This is because the category of services
contemplated by this subparagraph (ii),
such as consulting services, are
inherently independent from the
ordinary business function of the issuer,
in contrast to payments received in the
context of employment. Given these
considerations, the Exchange submits
that payments that arise from
independent permissible services
should not per se disqualify a director
from being considered independent.
24 BATS Rule 14.10(c)(1)(B) states, in pertinent
part, that an ‘‘‘independent director’ means a
person other than an Executive Officer or employee
of the Company or any other individual having a
relationship which, in the opinion of the
Company’s board of directors, would interfere with
the exercise of independent judgment in carrying
out the responsibilities of a director’’ and paragraph
(c)(1)(B)(ii) precludes from being considered
independent ‘‘a director who accepted or who has
a Family Member who accepted any compensation
from the Company in excess of $120,000 during any
period of twelve consecutive months within the
three years preceding the determination of
independence.’’
25 17 CFR 229.404.
26 Item 404(a) of Regulation S–K [17 CFR 229.404]
mandates disclosure requirements for transactions
exceeding $120,000 in which the registrant was a
participant and in which any ‘‘related person’’ has
a direct or indirect material interest. In the context
of Item 404(a), a ‘‘related person’’ includes any
director of the registrant.
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
63373
Moreover, due to the intimate nature
of the relationship between a director
and an immediate family member,27 the
Exchange submits that immediate
family members of a director that fall
under the purview of subparagraph (ii)
should also preclude such a director
from being considered independent. For
the same reason, the Exchange has also
included a director’s relationship to
such immediate family members within
the purview of paragraphs (iii)–(vi).
With respect to the six categories of
payments that excluded [sic] from the
cap requirement of this subparagraph
(B), the Exchange submits that such
exceptions are appropriate because
those payments are nondiscretionary
and/or predetermined payments. As
such, these payments are immaterial to
a director’s ability to be independent,
where it is unlikely that these payments
could be unilaterally altered by any
executive officer, at least without the
knowledge of the board of directors.
Proposed Rule 19(p)(3)(A)(iii)
precludes a director who is an
immediate family member of an
individual who currently is or was,
during the past three years, employed as
an executive officer of the issuer or
parent or subsidiary of the issuer. Given
the intimate nature of the relationship
between immediate family members, the
Exchange submits that where a
director’s immediate family member is
an executive officer of the issuer, the
director is per se not independent. This
is because the nature of the personal
relationship between the director and
immediate family member who is an
executive officer will likely compromise
independent judgment, especially in the
context of determining the
compensation of the immediate family
member. It is important to note that
although this paragraph does not
include immediate family members who
are non-executive employees of the
issuer, Rule 19(p)(3) still allows for a
board of directors to nonetheless find
that such a relationship would preclude
a director from being independent.
However, the Exchange submits that
establishing an absolute rule would be
inappropriate and that an issuer’s
boards of directors is better equipped to
assess such relationships on a case by
case basis.
Proposed Rule 19(p)(3)(A)(iv)
precludes from being independent a
director who is or has an immediate
family member who is a partner in or a
27 Pursuant to CHX Rule 19(p)(2), an ‘‘immediate
family member’’ includes a person’s spouse,
parents, children, siblings, mothers and fathers-inlaw, sons and daughters-in-law, brothers and
sisters-in-law and any person who has the same
residence.
E:\FR\FM\16OCN1.SGM
16OCN1
tkelley on DSK3SPTVN1PROD with NOTICES
63374
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
controlling shareholder or an executive
officer of any organization to which the
issuer made or from which received
payments for property or services, in the
current or any of the past three fiscal
years, that exceed 5% of the recipient’s
consolidated gross revenues for that
year, or $200,000, whichever is more,
excluding payments arising (1) solely
from investments in the issuer’s
securities or (2) payment under nondiscretionary charitable contribution
matching programs. The purpose of this
rule is to scrutinize directors who
benefit from their business activities
with the issuer when determining their
ability to exercise independent
judgment. Similar to subparagraph (ii),
the Exchange submits that placing a cap
on value of property or services received
or given is preferable to a rule that
precludes director independence for any
such activity. This is because the nature
of corporate governance is as such that
directors are frequently affiliated with
multiple corporate entities in the same
or related fields and inevitably, these
various entities deal with each other in
the ordinary course of their respective
businesses. Thus, the Exchange submits
that so long as such activities do not
exceed 5% of the payment recipient’s
consolidated gross revenues for that
year or $200,000, whichever is more, the
activity is ordinary enough so as to not
preclude director independence. In
addition, the exclusions to this
paragraph are necessary so as to exclude
categories of payments that are nondiscretionary and pre-determined,
therefore immaterial to the
independence assessment.
Proposed Rule 19(p)(3)(A)(v)
precludes from being independent a
director who is or has an immediate
family member who is employed as an
executive officer of another entity
where, at any time during the past three
years, any of the executive officers of
the issuer served on the compensation
committee of the other entity. The
Exchange submits that a director cannot
be independent where the director is
charged with determining the
compensation of an executive, who in
turn, is charged with determining the
director’s compensation in her capacity
as an executive officer of the other
entity. This scenario is obviously
improper, as it may open the door to,
among other things, undue influence
and breaches of fiduciary duty.
Certainly, a director subjected to such
forces would not be able to exercise
independent judgment. Also, given the
personal nature of family relationships,
directors who have immediate family
members who are employed as
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
executive officers by the aforementioned
other entity should also be disqualified
from being considered independent.
Proposed Rule 19(p)(3)(A)(vi)
precludes from being independent a
director (1) who is or has an immediate
family member who is a current partner
of the issuer’s outside auditor or (2) who
was a partner or employee of the
issuer’s outside auditor who worked on
the issuer’s audit at any time during the
past three years. The primary purpose of
this subparagraph is to prevent a
director, who has or had a direct
association with the issuer’s outside
auditor, from being placed on the
issuer’s audit committee.
Proposed Rule 19(p)(3)(A)(vii) applies
to investment companies in lieu of
subparagraphs (i)–(vi) and precludes
from being independent a director who
is an ‘‘interested person,’’ as that term
is defined under section 2(a)(19) of the
Investment Company Act of 1940
(‘‘Investment Company Act’’).28 The
Exchange proposes to maintain the
exemption of open-ended and closedended investment companies, as those
terms are defined under section 4 and
5(a) of the Investment Company Act,29
from the compensation committee
requirements of this proposed Rule
19(d). The exemptions are discussed in
detail below through proposed Rule
19(d)(5)(B)(ii).
Moreover, proposed Rule 19(p)(3)(B)
comports with Exchange Act Rule 10C–
1(b)(ii) by requiring an issuer’s board of
directors to consider all factors
specifically relevant to determining
whether a director has a relationship to
the issuer which is material to that
director’s ability to be independent from
management in connection with the
duties of a compensation committee
member, including, but not limited to,
the two factors explicitly enumerated in
Rule 10C–1(b)(ii). When considering the
sources of a director’s compensation in
determining her independence for
purposes of compensation committee
service, proposed Rule 19(p)(3)(B)(i)
states the board should consider
whether the director receives
compensation from any person or entity
that would impair her ability to make
independent judgments about the
issuer’s executive compensation.
Similarly, when considering any
28 15
USCS [sic] 80a–2(a)(19).
to Section 4 and 5(a)(1) of the
Investment Company Act [15 USCS [sic] 80a–4 and
80a–5(a)(1)], an ‘‘open-end company’’ means a
management company, other than a unit investment
trust or face-amount certificate company, which is
offering for sale or has outstanding any redeemable
security of which it is the issuer. Pursuant to
section 5(a)(2) [15 USCS 80a–5(a)], a ‘‘closed-end
company’’ means any management company other
than an open-end company.
29 Pursuant
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
affiliate relationship a director has with
the issuer, a subsidiary of the issuer, or
an affiliate of a subsidiary of the issuer,
in determining her independence for
purposes of compensation committee
service, the proposed Rule
19(p)(3)(B)(ii) provides that the board
should consider whether the affiliate
relationship places the director under
the direct or indirect control of the
issuer or its senior management, or
creates a direct relationship between the
director and members of senior
management, in each case of a nature
that would impair her ability to make
independent judgments about the
issuer’s executive compensation.
However, the Exchange does not
propose to adopt any specific numerical
tests with respect to the factors specified
in proposed Rule 19(p)(3)(B) or to adopt
a requirement to consider any other
specific factors. In particular, the
Exchange does not intend to adopt an
absolute prohibition on a board making
an affirmative finding that a director is
independent solely on the basis that the
director or any of the director’s affiliates
are shareholders owning more than
some specified percentage of the issuer.
In the adopting release for Rule 10C–1
(‘‘adopting release’’),30 the SEC
recognized that the exchange might
determine that not all affiliate
relationships would adversely affect a
director’s ability to be independent from
management.31 Consistent with the
view of commentators on the SEC’s
rules as originally proposed, the
Exchange believes that, rather than
adversely affecting a director’s ability to
be independent from management as a
compensation committee member, share
ownership in the issuer aligns the
director’s interest with those of
unaffiliated shareholders, as their stock
ownership gives then the same
economic interest in ensuring that the
issuer’s executive compensation is not
excessive.
In sum, the Exchange believes that its
existing ‘‘bright line’’ independence
standards as set forth in proposed Rule
19(p)(3)(A) and the additional
independence requirement as set forth
in proposed Rule 19(p)(3)(B) are
sufficiently broad to encompass the
types of relationships which would
generally be material to a director’s
independence for compensation
committee service. In addition, there is
language in current Rule 19(p)(3),
adopted in proposed Rule 19(p)(3) that
already requires the board to consider
30 See Listing Standards for Compensation
Committees, Release No. 33–9330 (June 27, 2012)
[17 CFR Parts 229 and 240].
31 See Adopting Release at 24.
E:\FR\FM\16OCN1.SGM
16OCN1
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
any other material relationships
between the director and the issuer or
its management that are not subject of
‘‘bright line’’ tests in proposed Rule
19(p)(3)(A). The Exchange believes that
these requirements with respect to
general director independence, when
combined with the additional
requirements of proposed Rule
19(p)(3)(B), represent an appropriate
standard for compensation committee
independence that is consistent with the
requirements of Exchange Act Rule
10C–1.
tkelley on DSK3SPTVN1PROD with NOTICES
Proposed Rule 19(d)(2)
Proposed Rule 19(d)(2) establishes a
formal written charter or board
resolution requirement for all issuers,
with respect to compensation
committees. Specifically, the proposed
rule states that each issuer must adopt
a formal written charter or board
resolution, as applicable, addressing at
minimum (A) the scope of the
compensation committee’s
responsibilities and how it carries out
those responsibilities, including
structure, process and membership
requirements; (B) the compensation
committee’s responsibility for
determining or recommending to the
board for determination, the
compensation of the chief executive
officer and all other officers of the issuer
as set forth in proposed Rule 19(d)(3);
and (C) the specific compensation
committee responsibilities and authority
set forth in proposed Rule 19(d)(4).
The Exchange submits that requiring
issuers to adopt such a charter or board
resolution is necessary to facilitate
compliance with the proposed
amendments to the compensation
committee listing standards. Moreover,
the proposed rule is consistent with
other CHX corporate governance rules
requiring a written charter or board
resolution 32 and is also modeled on
proposed NASDAQ Rule 5065(d)(1).33
32 Proposed Rule 19(d)(3) is modeled on CHX
Article 22, Rule 19(c)(2), which requires each issuer
to adopt a formal written charter or board
resolution, as applicable, addressing the
nominations process and any related matters as may
be required under federal securities law.
33 Proposed NASDAQ Rule 5605(d)(1) states,
‘‘each Company must certify that it has adopted a
formal written compensation committee charter and
that the compensation committee will review and
reassess the adequacy of the formal written charter
on an annual basis. The charter must specify: (A)
The scope of the compensation committee’s
responsibilities, and how it carries out those
responsibilities, including structure, process and
membership requirements; (B) the compensation
committee’s responsibility for determining or
recommending to the board for determination, the
compensation of the chief executive officer and all
other Executive Officers of the Company; (C) that
the chief executive officer may not be present
during voting or deliberations on his or her
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
Proposed Rule 19(d)(3)
Proposed Rule 19(d)(3) is a
consolidated restatement of current Rule
19(d)(1) and 19(d)(2). In doing so,
current Rule 19(d)(3)(A) has been
deleted and restated as proposed Rule
19(d)(5)(A)(i), with some syntax
amendments to improve logical flow
and organization and current Rule
19(d)(3)(B) has been deleted and
restated under proposed Rule
19(d)(5)(B)(i). Specifically, proposed
Rule 19(d)(3) states that the function of
a compensation committee or functional
equivalent is to determine or
recommend to the issuer’s board of
directors for determination the
compensation of issuer’s chief executive
officer and other officers. It continues
that the chief executive officer shall not
be present during the deliberations
regarding her own compensation, but
that the chief executive officer may be
present during deliberations regarding
compensation of other officers, but may
not vote. Aside from syntax, the only
difference between this proposed rule
and current Rule 19(d)(1) and Rule
19(d)(2) is that the proposed rule omits
the portions of the current rules that
mention that compensation of executive
officers shall be determined or
recommended to the board ‘‘either by
(A) a majority of the issuer’s
independent directors or (B) a
compensation committee comprised
solely of independent directors.’’ 34 The
reason for this omission is that
‘‘compensation committee’’ and
‘‘majority of the issuer’s independent
directors’’ have been combined and
defined under proposed Rule 19(d)(1) as
‘‘compensation committee.’’ The
Exchange submits that this
organizational amendment is necessary
for the logical flow of the proposed Rule
19(d).
Proposed Rule 19(d)(4)
Proposed Rule 19(d)(4)(A)–(E)
outlines listing standards mandated
compensation; and (D) the specific compensation
committee responsibilities and authority set forth in
Rule 5605(d)(3).’’
34 Currently, CHX Article 22, Rule 19(d)(1) states
‘‘compensation of the issuer’s chief executive
officer shall be determined, or recommended to the
board for determination, either by (A) a majority of
the independent directors or (B) a compensation
committee comprised solely of independent
directors. The chief executive officer may not be
present during voting or deliberations’’ and Rule
19(d)(2) states ‘‘compensation of the issuer’s other
officers, as that term is defined in Section 16 of the
Act, shall be determined, or recommended to the
board for determination, either by (A) a majority of
the issuer’s independent directors or (B) a
compensation committee comprised solely of
independent directors. The chief executive officer
may be present during deliberations regarding
compensation of other officers, but may not vote.’’
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
63375
under Exchange Act Rule 10C–1(b)(2),
concerning the authority of
compensation committees to retain
compensation consultants, outside legal
counsel and other advisers (collectively
‘‘compensation advisers’’).
Specifically, pursuant to Exchange
Act Rule 10C–1(b)(2)(i), proposed
subparagraph (A) provides that a
compensation committee may, in its
sole discretion, retain or obtain the
advice of a compensation consultant,
independent legal counsel or other
adviser. Also, pursuant to Exchange Act
Rule 10C–1(c)(2)(iii), proposed
subparagraph (A) continues by stating
that it shall not apply to issuers that do
not maintain a formal committee of the
board of directors for determining
executive compensation. The reason
behind this exclusion is that since an
action by independent directors acting
outside of a formal committee structure
would generally be considered action by
the full board of directors, it is
unnecessary to apply this requirement
to directors acting outside of a formal
committee structure, as they retain all
the powers of the board of directors in
making executive compensation
determinations.35
Also, pursuant to Exchange Act Rule
10C–1(b)(2)(ii), proposed subparagraph
(B) provides that the compensation
committee shall be directly responsible
for the appointment, compensation and
oversight of the work of any
compensation consultant, independent
legal counsel and other adviser retained
by the compensation committee.
Furthermore, pursuant to Exchange Act
Rule 10C–1(b)(2)(iii), proposed
subparagraph (C) states that nothing in
this proposed Rule 19(d)(3) shall be
construed to require the compensation
committee to implement or act
consistently with the advice or
recommendations of the compensation
consultant, independent legal counsel
or other adviser nor to affect the ability
or obligation of a compensation
committee to exercise its own judgment
in fulfillment of its duties.
Moreover, pursuant to Exchange Act
Rule 10C–1(b)(3), proposed
subparagraph (D) states that an issuer
that maintains a compensation
committee shall provide for appropriate
funding, as determined by the
compensation committee, for payment
of reasonable compensation to a
compensation consultant, independent
legal counsel or any other adviser
retained by the compensation
committee. Similar to proposed
35 See Listing Standards for Compensation
Committees, Release No. 33–9330 (June 27, 2012)
[17 CFR Parts 229 and 240], at p. 12.
E:\FR\FM\16OCN1.SGM
16OCN1
63376
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
subparagraph (A), pursuant to Exchange
Act Rule 10C–1(c)(2)(iii), proposed
subparagraph (D) continues by stating
that it shall not apply to issuers that do
not maintain a formal committee of the
board of directors, pursuant to Exchange
Act Rule 10C–1(c)(2)(iii).36
Finally, pursuant to Exchange Act
Rule 10C–1(b)(4), proposed
subparagraph (E) states that the
compensation committee may select a
compensation consultant, legal counsel
or other adviser, other than in-house
legal counsel, only after taking into
consideration the following six factors:
(i) The provision of other services to the
issuer by the person that employs the
compensation consultant, legal counsel
or other adviser; (ii) the amount of fees
received from the issuer by the person
that employs the compensation
consultant, legal counsel or other
adviser, as a percentage of the total
revenue of the person that employs the
compensation consultant, legal counsel
or other adviser; (iii) the policies and
procedures of the person that employs
the compensation consultant, legal
counsel or other adviser that are
designed to prevent conflicts of interest;
(iv) any business or personal
relationship of the compensation
consultant, legal counsel or other
adviser with a member of the
compensation committee; (v) any stock
of the issuer owned by the
compensation consultant, legal counsel
or other adviser; and (vi) any business
or personal relationship of the
compensation consultant, legal counsel,
or other adviser or the person
employing the adviser with an executive
officer of the issuer. The Exchange
agrees with the Commission that these
six factors, when considered together,
are competitively neutral, as they will
require compensation committees and
functional equivalents to consider a
variety of factors that may bear upon the
likelihood that a compensation adviser
can provide independent advice to the
compensation committee, but will not
prohibit committees from choosing any
particular adviser or type of adviser.37
Therefore, the Exchange proposes to add
no further requirements or factors to be
considered under this subparagraph (E).
Proposed Rule 19(d)(5), Rule 19(p)(5)
and Paragraph .03 of the Interpretations
and Policies of Rule 19
Proposed Rule 19(d)(5) outlines
exceptions to the listing standards of
this proposed Rule 19(d), pursuant to
36 Id.
37 See Listing Standards for Compensation
Committees, Release No. 33–9330 (June 27, 2012)
[17 CFR Parts 229 and 240], at p. 40.
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
Exchange Act Rule 10C–1(b)(1)(iii),
which exempts specified categories of
issuers and gives the Exchange
discretion to exempt certain director
relationships from the requirements of
Rule 10C–1(b)(1) and Rule 10C–1(b)(5),
which gives the Exchange discretion to
exempt from the requirements of
Exchange Act Rule 10C–1 any category
of issuer, after considering relevant
factors. In establishing these
exemptions, proposed Rule 19(d)(5)
distinguishes between (A) temporary
exemptions, (B) general exemptions and
a (C) limited exemption for smaller
reporting companies.
Proposed Rule 19(d)(5) lists the
temporary exemptions from proposed
Rule 19(d). Proposed Rule 19(d)(5)(A)(i)
is a restatement of current Rule 19(d)(3),
which allows an issuer, under
exceptional and limited circumstances,
to temporarily appoint a nonindependent director to its
compensation or functional equivalent
one director who is not independent, for
a term that shall not exceed two years
from the date of appointment (unless
the director becomes independent prior
to the end of the two year period), if (1)
the compensation committee or
functional equivalent is comprised of at
least three persons, including the
proposed non-independent director; (2)
the non-independent director is not a
current officer or employee nor is an
immediate family member of a current
officer or employee; and (3) the issuer’s
board of directors determines that (a)
the membership of the non-independent
director on the compensation committee
or functional equivalent is required by
the best interests of the company and its
shareholders and (b) the board
discloses, in the proxy statement for the
next annual meeting subsequent to such
determination (or, if the issuer does not
file a proxy, in its Form 10–K or 20–F),
the nature of the relationship and the
reasons for the determination.
The purpose of this exemption is to
allow issuers to efficiently deal with
unforeseen and exceptional
circumstances, so as to ensure the
smooth function of its compensation
committee or functional equivalent.
While doing so, the exemption clearly
establishes guidelines to minimize the
risk of abuse by requiring that the nonindependent director’s appointment be
temporary, that such a director will not
be an employee of the issuer and that
such a director’s appointment is made
clear to the shareholders via a proxy
statement or Form 10–K or 20F.
Furthermore, the Exchange submits that
it would not be in the public interest to
burden issuers confronted with
unforeseen and exceptional
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
circumstances, especially where
inaction by a compensation committee
may result in a loss of executive talent
to the detriment of shareholders. It is
important to note that the same
temporary exemption, with some
differences for context, can be found in
CHX Article 22, Rule 19(b)(1)(C)(i) 38
and given the similarities between that
rule for audit committees and this
proposed rule for compensation
committees, the Exchange submits that
this exemption is wholly appropriate
and necessary.
In addition, proposed Rule
19(d)(5)(A)(ii) outlines an opportunity
to cure defects, almost precisely as
stated in Exchange Act Rule 10C–1(a)(3)
and current CHX Article 22, Rule
19(b)(1)(C)(ii).39 Specifically, it states
that if a member of an issuer’s
compensation committee or functional
equivalent ceases to be an independent
director for reasons outside the
member’s reasonable control, that
member, with prompt notice by the
issuer to the Exchange, may remain a
member of the compensation committee
or functional equivalent until the earlier
of the next annual shareholders meeting
of the issuer or one year from the
occurrence of the event that caused the
member to be no longer an independent
director.
Proposed Rule 19(d)(5)(B)(i)–(viii) list
the general exemptions from proposed
Rule 19(d). All of the exemptions listed
under this subparagraph are (1) specific
38 CHX Article 22, Rule 19(b) governs listing
standards for ‘‘audit committees’’ and Rule
19(b)(1)(C)(i) states ‘‘one director who is not
independent as required by section (b)(1)(A)(i)
above, but who meets the criteria set forth in SEC
Rule 10A–3 and who is not a current officer or
employee (or an immediate family member of a
current officer or employee) may be appointed to
the audit committee, if the issuer’s 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 proxy statement for the next
annual meeting subsequent to such determination
(or, if the issuer does not file a proxy, in its Form
10–K, 20–F or other applicable annual disclosure
filed with the SEC), the nature of the relationship
and the reasons for that determination. A member
appointed under this exception may not serve on
the audit committee for more than two years under
this exception (unless he or she ultimately satisfies
the definition of an independent director) and may
not chair the audit committee.’’
39 CHX Article 22, Rule 19(b) governs listing
standards for ‘‘audit committees’’ and Rule
19(b)(1)(C)(ii) and Rule 19(b)(1)(C)(ii) states ‘‘if a
member of an audit committee ceases to meet the
independence criteria set forth in SEC Rule 10A–
3 for reasons outside the person’s reasonable
control, that person may remain a member of the
committee until the earlier of the next annual
shareholders’ meeting or one year from the
occurrence of the event that caused the member to
no longer meet the independence criteria. The
issuer must promptly notify the Exchange if this
circumstance occurs.’’
E:\FR\FM\16OCN1.SGM
16OCN1
tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
exemptions required under Exchange
Act Rule 10C–1(b)(5); (2) proposed
expansions of specific exemptions listed
under Exchange Act Rule 10C–
1(b)(1)(iii); or (3) exemptions already in
effect under CHX Rules and proposed
pursuant to Exchange Act Rule 10C–
1(b)(5)(i). Some of the proposed
exemptions fall under one or more of
these categories and each exemption
will discussed in this context.
Proposed subparagraph (i) exempts
limited partnerships and companies in
bankruptcies from the requirements of
proposed Rule 19(d). Such issuers are
already exempt from the current
compensation committee requirements
under paragraph .03(1) of the
Interpretations and Policies of Rule
19.40 Although Exchange Act Rule 10C–
1(b)(1)(iii)(A)(1) and (2) already
mandate that such companies be exempt
from the independence requirements,
subparagraph (ii) proposes to expand
that exemption to all requirements
under Exchange Act Rule 10C–1,
pursuant to the Exchange’s authority
granted under Exchange Act Rule 10C–
1(b)(5)(i). A ‘‘limited partnership’’ is
defined as a form of business ownership
and association consisting of one or
more general partners who are fully
liable for the debts and obligations of
the partnership and one or more limited
partners whose liability is limited to the
amount invested.41 As such, limited
partnerships are already exempt from
the current compensation committee
requirements because the ownership/
management structure of limited
partnerships renders the independent
director requirements inapplicable. The
Exchange submits that this same
reasoning renders the compensation
adviser requirements unnecessary as
well. With respect to companies in
bankruptcy, the purpose behind this
exemption is to not overburden issuers
that are struggling to emerge from
bankruptcy. That is, it would not be in
public interest to burden such
companies with additional listing
standards where such companies are
subject to a host of bankruptcy
requirements that will fundamentally
impact its survival. Given these
considerations, the Exchange submits
that it would be wholly appropriate to
exempt limited partnerships and
companies in bankruptcy from all of the
requirements of proposed Rule 19(d).
Proposed subparagraph (ii) exempts
from the requirements of proposed Rule
40 Paragraph .03(1) of the Interpretations and
Policies of Rule 19 states that ‘‘limited partnerships
and companies in bankruptcies are not required to
comply with sections (a), (c) and (d) above.’’
41 See Unif. Ltd. P’ship Act sections 102, 303 and
404 (2001).
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
19(d) ‘‘closed-end and open-end
management companies’’ registered
under the Investment Company Act,42
as already stated in CHX rules as
paragraph .03(2) of the Interpretations
and Policies of Rule 19.43 Although
Exchange Act Rule 10C–1(b)(1)(iii)(A)(3)
only exempts open-end management
investment companies from the
independence requirement of the Rule
10C–1(b), the Exchange proposes to
expand that exemption, pursuant to
Rule 10C–1(b)(5)(i) to include both
open-end and closed-end management
investment companies and to apply the
exemption to all the requirements of
Rule 10C–1. The Exchange submits that
since registered investment companies
are already subject to the requirements
of the Investment Company Act,
including, in particular, requirements
concerning potential conflicts of interest
related to investment adviser
compensation,44 requiring such
companies to comport with the
requirements of this proposed Rule
19(d) would be duplicative and
unnecessary.
Proposed subparagraph (iii) exempts
from the requirements of proposed Rule
19(d) passive business organizations,
such as royalty trusts, or derivatives and
42 Supra
note 29.
.03(2) of the Interpretations and
Policies of Rule 19 entitled, ‘‘Closed-End and OpenEnd Management Companies’’ states, ‘‘(A) Closedend management companies that are registered
under the Investment Company Act of 1940 are not
required to comply with sections (a) through (f) of
this Rule; except that closed-end funds must (i)
maintain an audit committee of at least three
persons; and (ii) comply with the provisions of SEC
Rule 10A–3 and the provisions of paragraphs
(b)(1)(A)(iv), (b)(1)(B), (b)(2), (b)(3) and (f), above,
subject to applicable exceptions. Additionally,
these issuers must establish procedures for the
confidential, anonymous submission of concerns
regarding questionable accounting or auditing
matters by employees of the investment adviser,
administrator, principal underwriter, or any other
provider of accounting related services for the
investment company, as well as employees of the
investment company. (B) Business development
companies, which are a type of closed-end
management investment company defined in
Section 2(a)(48) of the Investment Company Act of
1940 that are not registered under that Act, are
required to comply with all of the provisions of this
Rule. (C) Open-end funds (including open-end
funds that can be listed or traded as investment
company units) are not required to comply with the
provisions of sections (a) through (f) of this Rule;
except that these funds must comply with the
provisions of sections (b) and (f)(2), above, to the
extent required by SEC Rule 10A–3. Additionally,
these issuers must establish procedures for the
confidential, anonymous submission of concerns
regarding questionable accounting or auditing
matters by employees of the investment adviser,
administrator, principal underwriter, or any other
provider of accounting related services for the
investment company, as well as employees of the
investment company and must address this
responsibility in the audit committee charter.’’
44 15 USCS 80a–2, 15 USCS 80a–3, 15 USCS 80a–
15, 15 USCS 80a–17, 15 USCS 80a–35 [sic].
43 Paragraph
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
63377
special purpose entities, pursuant to the
Exchange’s discretion to exempt certain
categories of issuers under Exchange
Act Rule 10C–1(b)(5)(iii). Such issuers
are already exempt from the current
compensation committee requirements
under paragraph .03(3) of the
Interpretations and Policies of Rule
19.45 The reasoning behind exempting
passive business organizations, such as
royalty trusts, is that such entities are
structured fundamentally different from
conventional equities issuers. For
instance, in the case of royalty trusts,
such entities do not have employees and
virtually all profits earned are
distributed to shareholders. As such,
these entities have no need for
compensation committees. Moreover,
special purpose entities are frequently
utilized to securitize receivables, such
as loans. Similar to the reasoning
behind exempting clearing agencies 46
that issue futures products and
standardized options, purchasers of
securities issued by such special
purpose entities do not make an
investment decision based on the issuer,
but rather, the underlying security. As a
result, information about the special
purpose entities, its officers and
directors and its financial statements is
much less relevant to investors in these
securities than information about the
underlying security.
Proposed subparagraph (iv) exempts
from the requirements of proposed Rule
19(d) any ‘‘foreign private issuer’’ that
discloses in its annual report the
reasons that it does not have an
independent compensation committee,
subject to the additional requirements of
paragraph .03(4) of the Interpretations
and Policies of Rule 19.47 Moreover,
45 Paragraph .03(3) of the Interpretations and
Policies of Rule 19 states, ‘‘passive business
organizations (such as royalty trusts) or derivatives
and special purpose entities that are exempt from
the requirements of SEC Rule 10A–3 are not subject
to any requirement under sections (a) through (f) of
this rule. To the extent that Rule 10A–3 applies to
a passive business organization, derivative or
special purpose security, such entities are required
to comply with the provisions of paragraphs (b) and
(f)(2) above, to the extent required by SEC Rule
10A–3.’’
46 See Listing Standards for Compensation
Committees, Release No. 33–9330 (June 27, 2012)
[17 CFR Parts 229 and 240], at p. 51.
47 Paragraph .03(4) of the Interpretations and
Policies of Rule 19 states, ‘‘foreign issuers will be
permitted to comply with their home country
practices with respect to corporate governance (and
thus are exempt from the requirements of sections
(a)–(f), above), except to the extent that SEC Rule
10A–3 requires compliance with specific audit
committee requirements in sections (b) and (f)(2)
above. Foreign issuers must provide English
language disclosure of any significant ways in
which their corporate governance practices differ
from those required for domestic issuers under this
Rule 19. This disclosure may be provided either on
E:\FR\FM\16OCN1.SGM
Continued
16OCN1
63378
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
subparagraph (v) adopts the definition
of ‘‘foreign private issuer’’ as stated
under Exchange Act Rule 3b–4.48
Pursuant to Exchange Act Rule 10C–
1(b)(4)(ii), the Exchange proposes to
expand the Exchange Act Rule 10C–
1(b)(1)(iii)(A)(4) exemption of foreign
private issuers from only the
independence requirements to all
requirements under Rule 10C–1. This is
because foreign private issuers are
already subject to corporate regulations
of their respective home countries and
requiring such issuers to comport with
Exchange Act Rule 10C–1 would be
cumulative, if not contradictory. In
addition, the Exchange further proposes
include a phase-in provision, nearly
identical to proposed Section 303A.00
(Compliance Dates/A Company Ceases
to Qualify as a Foreign Private Issuer) of
the NYSE Listing Company Manual,49
which requires compliance with the
proposed compensation committee rules
within six months of the date on which
it failed to qualify as a foreign private
issuer.
Proposed subparagraph (v) exempts
from the requirements of proposed Rule
19(d) issuers listing only preferred or
debt securities on the Exchange that are
subject to the multiple listing exception
described in paragraph .04 of the
Interpretations and Policies of Rule 19,
pursuant to the Exchange’s discretion to
exempt certain categories of issuers
under Exchange Act Rule 10C–
1(b)(5)(iii). Such issuers are already
exempt from the current compensation
committee requirements under
paragraph .03(5) of the Interpretations
the issuer’s Web site or in the annual report
distributed to shareholders in the U.S. If the
disclosure is made only on an issuer’s Web site, the
issuer must note that fact in its annual report and
provide the Web address at which the disclosure
may be reviewed.’’
48 Exchange Act Rule 3b–4(c) [17 CFR 240.3b–
4(c)] defines ‘‘foreign private issuer’’ as ‘‘any foreign
issuer other than a foreign government, except for
an issuer that has more than 50% of its outstanding
voting securities held of record by U.S. residents
and any of the following: A majority of its officers
and directors are citizens or residents of the United
States, more than 50% of its assets are located in
the United States, or its business is principally
administered in the United States.’’
49 Section 303A.00 (Compliance Dates/A
Company Ceases to Qualify as a Foreign Private
Issuer) of the NYSE Listing Company Manual states,
in pertinent part, ‘‘to the extent a foreign private
issuer ceases to qualify as such under SEC rules (so
that is required to file on domestic forms with the
SEC), such company is required to comply with
Section 303A domestic company requirements as
follows: [* * *] The company must have fully
independent nominating and compensation
committees as required by Sections 303A.04 and
303A.05, if applicable, within six months of the
Foreign Private Issuer Determination Date.’’ The
Commission notes that a portion of this language is
proposed in NYSE–2012–049.
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
and Policies of Rule 19.50 The reasoning
behind this exemption is that issuers of
preferred or debt securities are already
subject to the requirements of the rules
of the exchange on which they are
primarily listed. As such, this proposed
exemption prevents such issuers from
having to comport with multiple sets of
rules. Moreover, holders of listed
preferred stock have significantly
greater protections with respect to their
rights to receive dividends and a
liquidation preference upon dissolution
of the issuer. In addition, investors
typically regard preferred stocks as a
fixed income investment comparable to
debt securities. Furthermore, debt
securities are not equity securities, as
they do not impart an ownership
interest to the holder of such securities.
Given these considerations, preferred
and debt securities fall outside the
scope of Exchange Act Rule 10C–1(a)(1)
and should be generally exempt.
Proposed subparagraph (vi) exempts
controlled companies from the
requirements of proposed Rule 19(d), as
mandated by Exchange Act Rule 10C–
1(b)(5)(ii), with certain additional
requirements.51 Such issuers are already
exempt from the current compensation
committee requirements under current
Rule 19(d)(3)(B).52 Under Rule 19(p)(1),
a ‘‘controlled company’’ is defined as a
company in which an individual, group
or another company, holds more than 50
percent of the voting power. This
definition is consistent with Exchange
Act Rule 10C–1(c)(3), which defines a
‘‘controlled company’’ as an issuer that
is listed on a national securities
exchange or by national securities
association and of which more than 50
percent of the voting power for the
election of directors is held by an
individual, a group or another company.
The Exchange further proposes to
include this exemption under paragraph
.03 of the Interpretations and Policies of
Rule 19, as proposed paragraph .03(6).
50 Paragraph .03(5) of the Interpretations of
Policies of Rule 19 states, ‘‘issuers listing only
preferred or debt securities on the Exchange
typically will not be required to adhere to the
requirements set out in sections (a)–(f) because they
will be subject to the multiple listing exception
described in Interpretation .04, below. To the extent
required by SEC Rule 10A–3, these issuers will only
be required to comply with sections (b) and (f)(2)
above.’’
51 Pursuant to CHX paragraph .02 of the
Interpretations and Policies of Rule 19, controlled
companies that rely on this exemption are required
to disclose in its annual proxy (or Form 10–K, 20–
F, or other applicable annual disclosure filed with
the SEC) that it is a controlled company and the
basis for that determination.
52 Current Rule 19(d)(3)(B) states, ‘‘controlled
company is exempt from the requirements of this
paragraph (d).’’
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
Proposed subparagraph (vii) exempts
from the requirements of proposed Rule
19(d) clearing agencies that are
registered pursuant to Section 17A of
the Exchange Act or that are exempt
from the registration requirements of
section 17A(b)(7)(A) of the Exchange
Act that clear and list a security futures
product or standardized option,
pursuant to Exchange Act Rule 10C–
1(b)(5)(iii) and (b)(5)(iv). The Exchange
further proposes to include this
exemption under paragraph .03 of the
Interpretations and Policies of Rule 19,
as proposed paragraph .03(7).
Moreover, proposed Rule 19(d)(5)(C)
establishes a limited exemption for
smaller reporting companies to
proposed Rule 19(d) and proposed Rule
19(p)(5) merely states that the terms
‘‘small business issuer’’ and ‘‘smaller
reporting company’’ means any issuer
that meets the definition of ‘‘smaller
reporting company’’ set out in SEC Rule
12b–2. Specifically, the limited
exemption narrows the scope of the
general exemption under Exchange Act
Rule 10C–1(b)(5)(ii) and exempts
smaller reporting companies only from
the compensation adviser requirements
of proposed Rule 19(d)(4) and the
additional independent director
requirements specific to compensation
committees of proposed Rule
19(p)(3)(B). This is because under
current CHX rules, small business
issuers are already subject to
independent director requirements for
its compensation committees and, as
such, the Exchange submits that
requiring such issuers to continue to
comply with similar proposed rules is
not overly burdensome. Moreover, the
proposed rule includes a phase-in
provision similar to proposed Rule
19(d)(5)(B)(iv) for foreign private issuers
and proposed Section 303A.00
(Compliance Dates/A Company Ceases
to Qualify as a Smaller Reporting
Company) of the NYSE Listing
Company Manual,53 which states that if
the smaller reporting company ceases to
qualify as such under SEC rules, it is
required to (i) meet the additional
53 Section 303A.00 (Compliance Dates/A
Company Ceases to Qualify as a Smaller Reporting
Company) states, in pertinent part, ‘‘under SEC
Rule 12b–2, a company tests its status as a smaller
reporting company on an annual basis at the end
of its most recently completed second fiscal quarter
[* * *] To the extent a smaller reporting company
ceases to qualify as such under SEC rules, it is
required, if applicable, to: (1) Have a compensation
committee of which all of the members meet the
independence standards of Section 303A.02(a)(ii)
within six months of the Smaller Reporting
Company Determination Date; and (II) comply with
Section 303A.05(c)(iv) as of the Smaller Reporting
Company Determination Date.’’ The Commission
notes that this is language proposed in NYSE–2012–
049.
E:\FR\FM\16OCN1.SGM
16OCN1
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
independent director requirements of
proposed Rule 19(p)(3)(B) within six
months of the date on which the issuer
failed to qualify as a smaller reporting
company and (ii) comply with the
compensation adviser requirements of
proposed Rule 19(d)(4) as of the date on
which the issuer failed to qualify as a
smaller reporting company.
Proposed Paragraph .05 of the
Interpretations and Policies
Pursuant to the exemptive authority
provided to the exchanges under
Exchange Act Rule 10C–1(b)(1)(iii), the
Exchange proposes to amend paragraph
.05 (Transition Periods and Compliance
Dates) of the Interpretations and Policies
of Rule 19 to establish a transition
period for issuers to conform to the
requirements of proposed Rule 19, as
proposed paragraph .05(6). Specifically,
proposed paragraph .05(6) establishes
that proposed Rule 19(d), Rule 19(p)(3),
Rule 19(p)(5) and paragraphs .03 and .05
of the Interpretations and Policies of
Rule 19 (which are all of the provisions
that have been amended under this
proposed rule filing) will become
immediately operative upon approval
by the SEC. However, issuers shall have
until the earlier of its first annual
shareholders meeting after January 15,
2014 or October 31, 2014 to comply
with the compensation committee
charter requirements of proposed Rule
19(d)(2), the compensation adviser
requirements of proposed Rule 19(d)(4)
and the additional independent director
requirements of proposed Rule
19(p)(3)(B). That is, the amendments
that do not require issuers to do
anything in addition to what they are
already required to do, under current
rules, will become operative
immediately upon approval and the
amendments that place additional
requirements on the issuers will be
subject to the longer transition period.
This proposed transition period is
similar to proposed Section 303A.00
(Transition Periods for Compensation
Committee Requirements) of the NYSE
Listed Company Manual, which
provides that listed companies will have
until the earlier of their first annual
meeting after January 15, 2014 or
October 31, 2004, to comply with the
new standards with respect to
compensation committees. The only
difference between the NYSE proposed
transition period and this proposed
paragraph .05(6) is that the NYSE
proposes to maintain current rule
language operative through June 30,
2013, whereas the Exchange proposes to
make amended rule language that does
not substantively change the current
compensation committee listing
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
standards immediately operative.
However, the Exchange submits that
both approaches are practically similar
and the differences are based on how
CHX rules are organized.
2. Statutory Basis
The proposed rule change in relation
to the Exchange’s compensation
committee requirements and the
proposed compensation committee
consultant independence requirements
are consistent with the requirements of
Rule 10C–1, with respect to the
adoption by national securities
exchange of compensation committee
listing standards. Moreover, the
proposed rule changes are consistent
with Section 6(b) of the Act 54 in
general, and furthers the objectives of
Section 6(b)(5) 55 in particular, in that it
is designed to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transaction in securities, to remove
impediments and perfect the
mechanisms of a free and open market,
and, in general, to protect investors and
the public interest. Specifically, the
Exchange believes that the proposed
rule change supports the objective of the
Exchange Act by providing
harmonization between CHX Rules and
rules of all other organization subject to
the requirements of Exchange Act Rule
10C–1, which would result in less
burdensome and more efficient
regulatory compliance. Moreover, the
Exchange submits that the proposed
amendments to its compensation
committee listing standards are
consistent with the protection of
investors and the public interest in that
they strengthen the independence
requirements for compensation
committee membership, provide
additional authority to compensation
committees and require compensation
committees to consider the
independence of compensation
consultants.
Furthermore, the Exchange submits
that the exemptions from the proposed
requirements that it is granting to
limited partnerships and companies in
bankruptcies, management companies
registered under the Investment
Company Act of 1940, passive business
organizations or derivatives and special
purpose entities that are exempt from
the requirements of Exchange Act 10A–
3, foreign private issuers, issuer’s listing
only preferred or debt securities,
controlled companies and clearing
agencies that clear and list securities
54 15
55 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00092
Fmt 4703
Sfmt 4703
63379
futures products or standardized
options are consistent with Section 10C
and Rule 10C–1 for the reasons stated
above in the ‘‘Purpose’’ section.
Specifically, Rule 10C–1(b)(5)(ii)
explicitly exempts smaller reporting
companies and foreign private issuers
will comply with their home country
law and, if they avail themselves of the
exemption, will be required to disclose
that fact under existing Exchange listing
requirements. Moreover, the Exchange
submits it is an appropriate use of its
exemptive authority under Rule 10C–
1(b)(5)(i), and that it is not unfairly
discriminatory under Section 6(b)(5) of
the Act, to provide general exemptions
under the proposed rules to issuers
whose only listed class of equity
securities on the Exchange is a preferred
stock, as holders of listed preferred
stock have significantly greater
protections with respect to their rights
to receive dividends and a liquidation
preference upon dissolution of the
issuer, and preferred stocks are typically
regarded by investors as a fixed income
investment comparable to debt
securities, the issuers of which are
exempt from compliance with Rule
10C–1. In addition, the Exchange
submits that it is an appropriate use of
its exemptive authority under Rule 10C–
1(b)(5)(i) and that is not unfairly
discriminatory under Section 6(b)(5) of
the Exchange Act, to provide general
exemptions under the proposed rules
for all of the other categories of issuers
that are not currently subject to the
Exchange’s compensation committee
requirement, for the structural reasons
discussed in the ‘‘Purpose’’ section and
because it would be a significant and
unnecessarily burdensome alteration in
their governance structures to require
them to comply with the proposed new
requirements.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
E:\FR\FM\16OCN1.SGM
16OCN1
63380
Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
as the Commission may designated up
to 90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. 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.
Comments may be submitted by any of
the following methods:
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CHX–
2012–13, and should be submitted on or
before November 6, 2012.
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.56
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–25407 Filed 10–15–12; 8:45 am]
BILLING CODE 8011–01–P
RiverFront Strategic Income Fund
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68030; File No. SR–
NYSEArca–2012–88]
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CHX–2012–13 on the
subject line.
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change to List and
Trade Shares of the RiverFront
Strategic Income Fund under NYSE
Arca Equities Rule 8.600
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CHX–2012–13. This file
number should be included on the
subject line if email 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 (https://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 Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
On August 10, 2012, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 list and trade shares
(‘‘Shares’’) of the RiverFront Strategic
Income Fund (‘‘Fund’’) under NYSE
Arca Equities Rule 8.600. The proposed
rule change was published for comment
in the Federal Register on August 28,
2012.3 The Commission received no
comments on the proposal. This order
grants approval of the proposed rule
change.
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
Fund will be managed by WisdomTree
Asset Management, Inc. (‘‘WisdomTree’’
or the ‘‘Adviser’’). RiverFront
Investment Group, LLC (‘‘RiverFront’’)
is the investment sub-adviser for the
Fund (the ‘‘Sub-Adviser’’). The
Exchange represents that, while the
Adviser is not affiliated with a brokerdealer, the Sub-Adviser is affiliated with
a broker-dealer and has implemented a
fire wall with respect to its brokerdealer affiliate regarding access to
information concerning the composition
and/or changes to the portfolio.5
October 10, 2012.
I. Introduction
II. Description of the Proposed Rule
Change
The Exchange proposes to list and
trade the Shares of the Fund pursuant
to NYSE Arca Equities Rule 8.600,
which governs the listing and trading of
Managed Fund Shares on the Exchange.
The Shares will be offered by ALPS ETF
Trust (‘‘Trust’’), a statutory trust
organized under the laws of the State of
Delaware and registered with the
Commission as an open-end
management investment company.4 The
56 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 67715
(August 22, 2012), 77 FR 52083 (‘‘Notice’’).
4 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). On February
1 15
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
The investment objective of the Fund
is to seek total return with an emphasis
on income as the source of that total
return by investing in a global portfolio
of fixed income securities of various
maturities, ratings and currency
denominations. The Fund intends to
utilize various investment strategies in a
broad array of fixed income sectors. The
Fund will allocate its investments based
upon the analysis of the Sub-Adviser of
the pertinent economic and market
conditions, as well as yield, maturity
and currency considerations.
The Fund may purchase fixed income
securities issued by U.S. or foreign
corporations 6 or financial institutions,
including debt securities of all types
and maturities, convertible securities
and preferred stocks. The Fund also
may purchase securities issued or
guaranteed by the U.S. Government or
foreign governments (including foreign
states, provinces and municipalities) or
their agencies and instrumentalities or
issued or guaranteed by international
organizations designated or supported
23, 2012, the Trust filed with the Commission an
amendment to its registration statement on Form N–
1A under the Securities Act of 1933 (‘‘Securities
Act’’) and under the 1940 Act relating to the Fund
(File Nos. 333–148826 and 811–22175)
(‘‘Registration Statement’’). In addition, the
Commission has issued an order granting certain
exemptive relief to the Trust under the 1940 Act.
See Investment Company Act Release No. 28471
(October 27, 2008) (File No. 812–13458).
5 See Commentary .06 to NYSE Arca Equities
Rule 8.600. The Exchange represents that in the
event (a) the Adviser or Sub-Adviser becomes
newly affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser becomes affiliated with a
broker-dealer, it will implement a fire wall with
respect to such broker-dealer regarding access to
information concerning the composition and/or
changes to the portfolio and will be subject to
procedures designed to prevent the use and
dissemination of material, non-public information
regarding such portfolio.
6 The Fund will invest only in securities that the
Adviser or Sub-Adviser deems to be sufficiently
liquid. While foreign corporate debt generally must
have $200 million or more par amount outstanding
and significant par value traded to be considered as
an eligible investment, at least 80% of issues of
foreign corporate debt held by the Fund will have
$200 million or more par amount outstanding.
E:\FR\FM\16OCN1.SGM
16OCN1
]]>Agencies
[Federal Register Volume 77, Number 200 (Tuesday, October 16, 2012)]
[Notices]
[Pages 63370-63380]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25407]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68033; File No. SR-CHX-2012-13]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change, as Modified by Amendments
Nos. 1 and 2, To Establish Listing Standards for Issuers' Compensation
Committees
October 10, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on September 26, 2012, the Chicago Stock Exchange, Inc. (``CHX''
or the ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which filing was amended and replaced in its entirety by
Amendment No. 2 thereto on October 10, 2012, which Items have been
prepared by the Exchange.\3\ The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission notes that Amendment No. 1 was submitted on
October 2, 2012 to indicate that the Board of Directors had approved
the proposal.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend Article 22, Rule 2 (Admittance to
Listing), Rule 4 (Removal of Securities) and Rule 19 (Corporate
Governance) to comport with Section 10(C) of the Exchange Act \4\ and
Rule 10C-1 \5\ thereunder that directs the Exchange to establish
listing standards, among other things, that require each member of a
listed issuer's compensation committee to be an independent member of
its board of directors and relating to compensation committees and
their use of compensation consultants, independent legal counsel and
other advisers (collectively, ``compensation advisers''). The text of
this proposed rule change is available on the Exchange's Web site at
(www.chx.com) and in the Commission's Public Reference Room.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78j-3.
\5\ 17 CFR 240.10C-1.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the CHX included statements
concerning the purpose of and basis for the proposed rule changes and
discussed any comments it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. The CHX has prepared summaries, set forth in sections A, B and C
below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 2 to SR-CHX-2012-13 (the ``filing'') amends and
replaces in its entirety the Filing as originally submitted on
September 26, 2012. Amendment No. 2 corrects several technical errors
under this Rule 19b-4 form, Exhibit 1 and Exhibit 5. Moreover,
substantive amendments were made to the Exhibit 5 and corresponding
amendments were also made to this Exhibit 1 and 19b-4 form. Item 2 of
this 19b-4 filing has been amended to indicate that this proposal was
approved by the Exchange's Board of Directors on September 27, 2012.\6\
Proposed Rule 19(d)(1) was amended to require issuers to have a
compensation committee composed entirely of independent directors,
subject to the general independence requirements of proposed Rule
19(p)(3)(A) and additional specific requirements for compensation
committees under proposed Rule 19(p)(3)(B). Moreover, proposed Rule
19(d)(1) was amended to define ``compensation committee'' as
independent directors functioning within either formal committees of
the board of directors or a non-committee group. Proposed Rule 19(d)(2)
was amended to include a charter requirement for compensation
committees and removes the definition of ``compensation committee'' and
``functional equivalent,'' which has been restated under proposed Rule
19(d)(1)(A)-(C). The exceptions under proposed Rule 19(d)(5)(B) were
amended to be numerically consistent with proposed paragraph .03 of the
Interpretations and Policies of Rule 19. Proposed Rule 19(d)(5)(B)(iii)
was amended to narrow the scope of the passive business organizations
[[Page 63371]]
exemption. Proposed Rule 19(d)(5)(B)(iv) was amended to include a
phase-in period for foreign issuers who no longer qualify as such.
Proposed Rule 19(d)(5)(C) was amended to solely refer to the smaller
reporting companies exemption and includes a phase-in period for
issuers that no longer qualify as such. Proposed Rule 19(p)(3) was
amended to reorganize the bright line tests for independent directors
and to allow the inclusion of proposed paragraph (B), which outlines
additional independent director requirements specific to compensation
committee membership. Proposed Rule 19(p)(5) was amended to make the
terms ``small business issuer'' and ``smaller reporting company''
interchangeable for the purposes of CHX rules. Proposed paragraph .03
of the Interpretations and Policies of Rule 19 was amended to remove a
listed exemption for small business issuers. Finally, proposed
paragraph .05(6) of the Interpretations and Policies of Rule 19
outlines an amended transition period for compliance with the proposed
listing standards.
---------------------------------------------------------------------------
\6\ The Commission notes that this change was filed as Amendment
No. 1. See supra note 3.
---------------------------------------------------------------------------
The Exchange proposes to amend Article 22, Rule 2 (Admittance to
Listing), Rule 4 (Removal of Securities) and Rule 19 (Corporate
Governance) to comport with Section 10(C) of the Exchange Act \7\ and
Rule 10C-1 \8\ thereunder, which directs the Exchange to establish
listing standards that require each member of a listed issuer's
compensation committee to be an independent member of its board of
directors and listing standards relating to compensation committees and
their use of compensation advisers.
---------------------------------------------------------------------------
\7\ Supra note 4.
\8\ Supra note 5.
---------------------------------------------------------------------------
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (``Dodd-Frank Act'') established Section 10C of the Exchange Act,
which directed the Securities and Exchange Commission (``Commission''
or ``SEC'') to require national securities exchanges and associations
to prohibit the listing of any equity security of an issuer that is not
in compliance with Section 10C's compensation committee and
compensation adviser requirements.\9\ Specifically, section 10C(a)(1)
of the Exchange Act required the Commission to adopt rules directing
the exchanges to establish listing standards that require each member
of a listed issuer's compensation committee to be a member of the board
of directors and to be ``independent.'' \10\ Moreover, Section
10C(a)(4) \11\ of the Exchange Act required the Commission to permit
the exchanges to exempt particular relationships from the independence
requirements, as each exchange determines is appropriate, taking into
consideration the size of an issuer and any other relevant factors and
section 10C(f)(3) \12\ required the Commission to permit the exchanges
to exempt categories of issuers from the requirements of section 10C,
as each exchange determines is appropriate, taking into consideration
of the impact of section 10C on smaller reporting issuers. In addition,
Section 10C(f) \13\ of the Exchange Act required the Commission to
adopt rules directing the exchanges to establish listing standards that
provide for requirements relating to compensation committees and
compensation consultants, independent legal counsel and other advisers
(collectively, ``compensation advisers''), as set forth in paragraphs
(b)-(e) of Section 10C. Finally, Section 10C(c)(2) required each issuer
to disclose in any proxy or consent solicitation material for an annual
meeting of shareholders (or a special meeting in lieu of the annual
meeting), in accordance with Commission regulations, whether the
issuer's compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed.\14\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78j-3.
\10\ 15 U.S.C. 78j-3(a).
\11\ 15 U.S.C. 78j-3(a)(4).
\12\ 15 U.S.C. 78j-3(f)(3)(A).
\13\ 15 U.S.C. 78j-3(f).
\14\ 15 U.S.C. 78j-3(c)(2).
---------------------------------------------------------------------------
On June 27, 2012, the Commission promulgated Exchange Act Rule 10C-
1 to implement the compensation committee listing requirements of
Sections 10C of the Exchange Act. As such, the Exchange now proposes to
amend its rules to comport with the new requirements.
Proposed Amendments to CHX Article 22
The Exchange proposes to amend portions of Article 22, Rule 2
(Admittance to Listing), Rule 4 (Removal of Securities) and Rule 19
(Corporate Governance) to establish listing standards that require each
member of a listed issuer's compensation committee to be an
``independent'' member of its board of directors, to adopt standards
relating to compensation committees' authority to use compensation
advisers and to clarify the consequences to issuers for failure to
comply with these proposed amendments. It is important to note that
virtually all of the proposed amendments are in Rule 19(d), which
currently outlines all of the listing standards with respect to
issuers' compensation committees.
Proposed Rule 2 and Rule 4(a)
Proposed Rule 2 provides that the Exchange's Board of Governors may
list securities once the requirements of Article 22 are met and upon
terms, conditions and payment of fees as the Exchange's board of
directors may from time to time prescribe. In doing so, proposed Rule 2
adopts much of the current Rule 2, while only clarifying that the Board
of Governors may only admit securities ``once the requirements of this
Article are met.'' Also, proposed Rule 4(a) provides that securities
may be removed from the list, with notice, by either the issuer or the
Exchange, for any reason, including an issuer's failure to comply with
the listing standards of this Article 22. In doing so, proposed Rule
4(a) adopts much of the current Rule 4(a), while inserting language
that states that securities may be delisted by either the issuer or the
Exchange and clarifies that securities may be removed for any reason,
including an issuer's failure to comply with the requirements of this
Article, which includes proposed Rule 19(d). Current Rule 4(b)-(g)
establish the procedures under which a security may be delisted, to
which the Exchange proposes no amendments.
As such, proposed Rule 2 and Rule 4, considered in conjunction with
current Article 22, Rule 1 \15\, comport with Exchange Act Rule 10C-
1(a)(1) that requires the Exchange to ``prohibit the initial and
continued listing of any equity security of an issuer that is not in
compliance with the requirements of any portion of paragraph (b) or (c)
of this section.'' That is, the purpose of these proposed amendments is
to clarify the potential consequences of an issuer's failure to comply
with CHX Article 22, which includes the proposed compensation committee
listing standards.
---------------------------------------------------------------------------
\15\ CHX Article 22, Rule 1 states, in pertinent part, that
``the requirements, set forth in this Article, must be met in order
for the Exchange to entertain an application for listing.''
---------------------------------------------------------------------------
Proposed Rule 19(d)(1) and 19(p)(3)
Proposed Rule 19(d)(1) \16\ states that an issuers must have a
``compensation
[[Page 63372]]
committee'' composed entirely of ``independent directors,'' as defined
under proposed Rule 19(p)(3) and that also meet the additional
independence requirements specific to compensation committees, under
proposed Rule 19(p)(3)(B). The proposed rule continues to define
``compensation committee'' as: (A) a committee of the board of
directors that is designated as the compensation committee; (B) in the
absence of a committee of the board of directors that is designated as
the compensation committee, a committee of the board of directors
performing functions typically performed by a compensation committee,
including oversight of the executive compensation, even if it is not
designated as the compensation committee or also performs other
functions; or (C) in the absence of one of the aforementioned
committees, the members of the board of directors who oversee executive
compensation matters on behalf of the board of directors, who together
must comprise a majority of the board's independent directors.
---------------------------------------------------------------------------
\16\ In order to implement proposed Rule 19(d)(1), the Exchange
proposes to delete current Rule 19(d)(1), which outlines how the
compensation of a chief executive officer is to be determined and
current Rule 19(d)(2), which outlines how a the compensation of
other officers are to be determined, and restate those rules with
amendments, as proposed Rule 19(d)(4), which is discussed below.
---------------------------------------------------------------------------
In turn, proposed Rule 19(p)(3) defines ``independent director'' as
a person who is a member of the issuer's board of directors, other than
an officer or employee of the issuer or its subsidiaries or any other
individual having a relationship, which, in the opinion of the issuer's
board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of an independent
director and places the affirmative duty of making such a determination
on the board of directors. Furthermore, proposed Rule 19(p)(3)(A)
provides that a director may not be deemed to be independent if such
director has a relationship with the issuer which violates any one of
seven ``bright line'' tests.\17\ Proposed Rule 19(p)(3)(B) establishes
additional independent director requirements specific to compensation
committees that states that in affirmatively determining the
independence of any director who will serve on the compensation
committee of the issuer's board of directors, the board must consider
all factors specifically relevant to determining whether a director has
a relationship to the issuer which is material to that director's
ability to be independent from management in connection with the duties
of a compensation committee member, including, but not limited to, two
factors. First, (i) the board must consider the source of compensation
of such director, including any consulting, advisory or other
compensatory fee paid by the issuer to such director. Proposed
subparagraph (i) explains that this factor requires that when
considering the sources of a director's compensation, the board should
consider whether the director receives compensation from any person or
entity that would impair her ability to make independent judgments
about the issuer's executive compensation. Second, (ii) the board must
consider whether such director is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the issuer.
The proposed subparagraph (ii) explains that this factor requires that
when considering such affiliate relationships in determining her
independence for purposes of compensation committee service, the board
should consider whether the affiliate relationship places the director
under the direct or indirect control of the issuer or its senior
management, or creates a direct relationship between the director and
members of senior management, in each case of a nature that would
impair her ability to make independent judgments about the issuer's
executive compensation.
---------------------------------------------------------------------------
\17\Proposed Rule 19(p)(3)(A)(i)-(vii) virtually adopts current
Rule 19(p)(3)(A)-(G) and provides that the following persons shall
not be considered independent: (i) A director who is, or during the
past three years, was employed by the issuer or its parent or
subsidiary; (ii) a director or an immediately family member of a
director who had accepted payments from the issuer or its parent or
subsidiary in excess of $120,000 in the current fiscal year or any
of the past three fiscal years, with exceptions for payments
received for services to the board, payments arising from
investments in the issuer's securities, compensation paid to an
immediate family member who is an employee, but not an executive
officer, of the issuer, benefits under a tax-qualified retirement
plan, non-discretionary compensation or loans permitted under
Section 13(k) of the Exchange Act; (iii) a director who is an
immediate family member of an individual who is, or at any time
during the past three years was, employed by the issuer or by any
parent or subsidiary of the issuer as an executive officer; (iv) a
director who is, or has an immediate family member who is, a partner
in, or a controlling shareholder or an executive officer of, any
organization to which the issuer made, or from which the issuer
received, payments for property or services, in the current or any
of the past three fiscal years, that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000, whichever is
more, other than payments arising solely from investments in the
issuer's securities or payments under non-discretionary charitable
contribution matching programs; (v) a director of the issuer who is,
or has an immediate family member who is, employed as an executive
officer of another entity where, at any time during the past three
years, any of the executive officers of the issuer served on the
compensation committee of such other entity; (vi) A director who is,
or has an immediate family member who is, a current partner of the
issuer's outside auditor, or who has a partner or employee of the
issuer's outside auditor who worked on the issuer's audit at any
time during the past three years; (vii) In the case of an investment
company, in lieu of paragraphs (i)-(vi), a director who is an
``interested person'' of the company as defined in section 2(a)(19)
of the Investment Company Act of 1940, other than in his or her
capacity as a member of the board of directors or any board
committee.
---------------------------------------------------------------------------
As such, proposed Rule 19(d)(1) and Rule 19(p)(3) comport with the
requirements of Exchange Act Rule 10C-1(b)(1)(i) and (ii). Initially,
as mandated by Exchange Act Rule 10C-1(b)(1)(i), which states, ``each
member of a compensation committee must be a member of the board of
directors of the listed issuer, and must otherwise be independent,''
proposed Rule 19(d)(1) requires members of an issuer's compensation
committee be ``independent directors'' and, in turn, proposed Rule
19(p)(3) defines a ``director,'' in relevant part, as a ``person who is
member of the issuer's board of directors.'' Additionally, the Exchange
proposes to require issuers to have a compensation committee, similar
to Section 303A.05 of the NYSE Listed Company Manual.\18\ The Exchange
submits that its proposed definition of ``compensation committee,''
which adopts Exchange Act Rule 10C-1(c)(2) \19\ almost verbatim, does
not require issuers to do anything more than what they are already
required to do, which is to have either ``a majority of the independent
directors or a compensation committee comprised solely of independent
directors'' determine or recommend executive compensation.\20\
---------------------------------------------------------------------------
\18\ Section 303A.05 of the NYSE Listed Company Manual states,
``listed companies must have a compensation committee composed
entirely of independent directors.''
\19\ 17 CFR 240.10C-1(c)(2).
\20\ CHX Article 22, Rule 19(d)(1) and Rule 19(d)(2).
---------------------------------------------------------------------------
Moreover, proposed Rule 19(p)(3) comports with Exchange Act Rule
10C-1(b)(1)(ii). Specifically, Exchange Act Rule 10C-1(b)(1)(ii)(A)
requires the Exchange to consider ``the source of compensation of a
member of the board of directors of an issuer, including any
consulting, advisory or other compensatory fee paid by the issuer to
such a member of the board of directors,'' whereas Exchange Act Rule
10C-1(b)(1)(ii)(B) requires the Exchange to consider ``whether a member
of the board of directors of an issuer is affiliated with the
issuer,\21\ a subsidiary of the issuer or an affiliate of a subsidiary
of the issuer.'' The Exchange
[[Page 63373]]
submits that Exchange Act Rule 10C-1(b)(1)(ii) is largely already
addressed via proposed Rule 19(p)(3)(A)(i)-(vii) \22\ and is fully
incorporated through proposed Rule 19(p)(3)(B).
---------------------------------------------------------------------------
\21\ The Exchange understands ``affiliated with issuer'' to have
a similar meaning as ``affiliated with a specified person'' defined
under Exchange Act Rule 12b-2 [17 CFR 240.12b02 [sic] as ``a person
that directly, or indirectly through one more intermediaries,
controls, or is controlled by, or is under common control with, the
person specified.''
\22\ As mentioned above, supra note 16, proposed Rule
19(p)(3)(A)(i)-(vii) virtually mirrors current Rule 19(p)(3)(A)-(G),
but for a few minor substantive amendments, that are discussed
below.
---------------------------------------------------------------------------
Proposed Rule 19(p)(3)(A)(i) precludes from being considered
independent a director who currently is or was, during the past three
years, employed by the issuer or parent or subsidiary of the issuer.
This preclusion is based, in part, on Exchange Act Rule 16b-
3(b)(3)(i),\23\ which excludes from the definition of a ``non-employee
director'' a director who is an officer of the issuer or a parent or
subsidiary of the issuer, or otherwise currently employed by the issuer
or a parent or subsidiary of the issuer. The Exchange submits that a
director who is or was an executive officer or employee of the issuer
should not be considered independent due to the nature of the
professional relationships that are formed in an employment setting and
the consequences therefrom. For example, a director who is employed by
the issuer may have her employee compensation (i.e. salary, bonuses,
etc. * * *) affected by her actions as a member of the compensation
committee. Moreover, a director who recently ended her employment with
the issuer may still maintain personal relationships with executive
officers that may compromise independent judgment. Consequently, the
look-back provision is necessary, because the nature of such personal
relationships may remain unchanged for sometime after the director
ceased being employed by the issuer.
---------------------------------------------------------------------------
\23\ 17 CFR 240.16b-3(b)(3)(i).
---------------------------------------------------------------------------
Proposed Rule 19(p)(3)(A)(ii) precludes from being considered
independent a director who had or an immediate family member of the
director who had accepted payments from the issuer or parent or
subsidiary of the issuer in excess of $120,000 in the current fiscal
year or any of the past three fiscal years, excluding (1) compensation
for board or board committee service; (2) payments arising solely from
investments in the issuer's securities; (3) compensation paid to an
immediate family member who is a non-executive employee of the issuer
or a parent or subsidiary of the issuer; (4) benefits under a tax-
qualified retirement plan; (5) non-discretionary compensation; or (6)
loans permitted under Section 13(k) of the Act. The only difference
between proposed Rule 19(p)(3)(A)(ii) and current Rule 19(p)(3)(B) is
the proposal to increase the cap amount from $60,000 to $120,000, so as
to remain in lockstep with other exchanges, such as BATS \24\ and
disclosure guidelines under Item 404(a) of Regulation S-K,\25\ both of
which set threshold amounts at $120,000.
---------------------------------------------------------------------------
\24\ BATS Rule 14.10(c)(1)(B) states, in pertinent part, that an
```independent director' means a person other than an Executive
Officer or employee of the Company or any other individual having a
relationship which, in the opinion of the Company's board of
directors, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director'' and paragraph
(c)(1)(B)(ii) precludes from being considered independent ``a
director who accepted or who has a Family Member who accepted any
compensation from the Company in excess of $120,000 during any
period of twelve consecutive months within the three years preceding
the determination of independence.''
\25\ 17 CFR 229.404.
---------------------------------------------------------------------------
Similar to subparagraph (i), proposed subparagraph (ii) is also
based in part on Exchange Act Rule 16b-3(b)(3)(i), which excludes from
the definition of ``non-employee director,'' a director who receives
compensation, either directly or indirectly, from the issuer or a
parent or subsidiary of the issuer for services rendered as a
consultant or in any capacity other than as a director, except for an
amount that does not exceed $120,000, pursuant to Item 404(a) of
Regulation S-K.\26\ The Exchange acknowledges that a director who meets
the definition of a ``non-employee director'' is not necessarily
``independent.'' However, the Exchange submits that a cap of $120,000
on affected payments are adequately high to allow a director or
immediate family member to receive payments for permissible services to
the issuer, while sufficiently low as to not preclude director
independence. Moreover, a cap on such payments is preferable to an
absolute rule that precludes director independence for any payments
made. This is because the category of services contemplated by this
subparagraph (ii), such as consulting services, are inherently
independent from the ordinary business function of the issuer, in
contrast to payments received in the context of employment. Given these
considerations, the Exchange submits that payments that arise from
independent permissible services should not per se disqualify a
director from being considered independent.
---------------------------------------------------------------------------
\26\ Item 404(a) of Regulation S-K [17 CFR 229.404] mandates
disclosure requirements for transactions exceeding $120,000 in which
the registrant was a participant and in which any ``related person''
has a direct or indirect material interest. In the context of Item
404(a), a ``related person'' includes any director of the
registrant.
---------------------------------------------------------------------------
Moreover, due to the intimate nature of the relationship between a
director and an immediate family member,\27\ the Exchange submits that
immediate family members of a director that fall under the purview of
subparagraph (ii) should also preclude such a director from being
considered independent. For the same reason, the Exchange has also
included a director's relationship to such immediate family members
within the purview of paragraphs (iii)-(vi). With respect to the six
categories of payments that excluded [sic] from the cap requirement of
this subparagraph (B), the Exchange submits that such exceptions are
appropriate because those payments are nondiscretionary and/or
predetermined payments. As such, these payments are immaterial to a
director's ability to be independent, where it is unlikely that these
payments could be unilaterally altered by any executive officer, at
least without the knowledge of the board of directors.
---------------------------------------------------------------------------
\27\ Pursuant to CHX Rule 19(p)(2), an ``immediate family
member'' includes a person's spouse, parents, children, siblings,
mothers and fathers-in-law, sons and daughters-in-law, brothers and
sisters-in-law and any person who has the same residence.
---------------------------------------------------------------------------
Proposed Rule 19(p)(3)(A)(iii) precludes a director who is an
immediate family member of an individual who currently is or was,
during the past three years, employed as an executive officer of the
issuer or parent or subsidiary of the issuer. Given the intimate nature
of the relationship between immediate family members, the Exchange
submits that where a director's immediate family member is an executive
officer of the issuer, the director is per se not independent. This is
because the nature of the personal relationship between the director
and immediate family member who is an executive officer will likely
compromise independent judgment, especially in the context of
determining the compensation of the immediate family member. It is
important to note that although this paragraph does not include
immediate family members who are non-executive employees of the issuer,
Rule 19(p)(3) still allows for a board of directors to nonetheless find
that such a relationship would preclude a director from being
independent. However, the Exchange submits that establishing an
absolute rule would be inappropriate and that an issuer's boards of
directors is better equipped to assess such relationships on a case by
case basis.
Proposed Rule 19(p)(3)(A)(iv) precludes from being independent a
director who is or has an immediate family member who is a partner in
or a
[[Page 63374]]
controlling shareholder or an executive officer of any organization to
which the issuer made or from which received payments for property or
services, in the current or any of the past three fiscal years, that
exceed 5% of the recipient's consolidated gross revenues for that year,
or $200,000, whichever is more, excluding payments arising (1) solely
from investments in the issuer's securities or (2) payment under non-
discretionary charitable contribution matching programs. The purpose of
this rule is to scrutinize directors who benefit from their business
activities with the issuer when determining their ability to exercise
independent judgment. Similar to subparagraph (ii), the Exchange
submits that placing a cap on value of property or services received or
given is preferable to a rule that precludes director independence for
any such activity. This is because the nature of corporate governance
is as such that directors are frequently affiliated with multiple
corporate entities in the same or related fields and inevitably, these
various entities deal with each other in the ordinary course of their
respective businesses. Thus, the Exchange submits that so long as such
activities do not exceed 5% of the payment recipient's consolidated
gross revenues for that year or $200,000, whichever is more, the
activity is ordinary enough so as to not preclude director
independence. In addition, the exclusions to this paragraph are
necessary so as to exclude categories of payments that are non-
discretionary and pre-determined, therefore immaterial to the
independence assessment.
Proposed Rule 19(p)(3)(A)(v) precludes from being independent a
director who is or has an immediate family member who is employed as an
executive officer of another entity where, at any time during the past
three years, any of the executive officers of the issuer served on the
compensation committee of the other entity. The Exchange submits that a
director cannot be independent where the director is charged with
determining the compensation of an executive, who in turn, is charged
with determining the director's compensation in her capacity as an
executive officer of the other entity. This scenario is obviously
improper, as it may open the door to, among other things, undue
influence and breaches of fiduciary duty. Certainly, a director
subjected to such forces would not be able to exercise independent
judgment. Also, given the personal nature of family relationships,
directors who have immediate family members who are employed as
executive officers by the aforementioned other entity should also be
disqualified from being considered independent.
Proposed Rule 19(p)(3)(A)(vi) precludes from being independent a
director (1) who is or has an immediate family member who is a current
partner of the issuer's outside auditor or (2) who was a partner or
employee of the issuer's outside auditor who worked on the issuer's
audit at any time during the past three years. The primary purpose of
this subparagraph is to prevent a director, who has or had a direct
association with the issuer's outside auditor, from being placed on the
issuer's audit committee.
Proposed Rule 19(p)(3)(A)(vii) applies to investment companies in
lieu of subparagraphs (i)-(vi) and precludes from being independent a
director who is an ``interested person,'' as that term is defined under
section 2(a)(19) of the Investment Company Act of 1940 (``Investment
Company Act'').\28\ The Exchange proposes to maintain the exemption of
open-ended and closed-ended investment companies, as those terms are
defined under section 4 and 5(a) of the Investment Company Act,\29\
from the compensation committee requirements of this proposed Rule
19(d). The exemptions are discussed in detail below through proposed
Rule 19(d)(5)(B)(ii).
---------------------------------------------------------------------------
\28\ 15 USCS [sic] 80a-2(a)(19).
\29\ Pursuant to Section 4 and 5(a)(1) of the Investment Company
Act [15 USCS [sic] 80a-4 and 80a-5(a)(1)], an ``open-end company''
means a management company, other than a unit investment trust or
face-amount certificate company, which is offering for sale or has
outstanding any redeemable security of which it is the issuer.
Pursuant to section 5(a)(2) [15 USCS 80a-5(a)], a ``closed-end
company'' means any management company other than an open-end
company.
---------------------------------------------------------------------------
Moreover, proposed Rule 19(p)(3)(B) comports with Exchange Act Rule
10C-1(b)(ii) by requiring an issuer's board of directors to consider
all factors specifically relevant to determining whether a director has
a relationship to the issuer which is material to that director's
ability to be independent from management in connection with the duties
of a compensation committee member, including, but not limited to, the
two factors explicitly enumerated in Rule 10C-1(b)(ii). When
considering the sources of a director's compensation in determining her
independence for purposes of compensation committee service, proposed
Rule 19(p)(3)(B)(i) states the board should consider whether the
director receives compensation from any person or entity that would
impair her ability to make independent judgments about the issuer's
executive compensation. Similarly, when considering any affiliate
relationship a director has with the issuer, a subsidiary of the
issuer, or an affiliate of a subsidiary of the issuer, in determining
her independence for purposes of compensation committee service, the
proposed Rule 19(p)(3)(B)(ii) provides that the board should consider
whether the affiliate relationship places the director under the direct
or indirect control of the issuer or its senior management, or creates
a direct relationship between the director and members of senior
management, in each case of a nature that would impair her ability to
make independent judgments about the issuer's executive compensation.
However, the Exchange does not propose to adopt any specific
numerical tests with respect to the factors specified in proposed Rule
19(p)(3)(B) or to adopt a requirement to consider any other specific
factors. In particular, the Exchange does not intend to adopt an
absolute prohibition on a board making an affirmative finding that a
director is independent solely on the basis that the director or any of
the director's affiliates are shareholders owning more than some
specified percentage of the issuer. In the adopting release for Rule
10C-1 (``adopting release''),\30\ the SEC recognized that the exchange
might determine that not all affiliate relationships would adversely
affect a director's ability to be independent from management.\31\
Consistent with the view of commentators on the SEC's rules as
originally proposed, the Exchange believes that, rather than adversely
affecting a director's ability to be independent from management as a
compensation committee member, share ownership in the issuer aligns the
director's interest with those of unaffiliated shareholders, as their
stock ownership gives then the same economic interest in ensuring that
the issuer's executive compensation is not excessive.
---------------------------------------------------------------------------
\30\ See Listing Standards for Compensation Committees, Release
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240].
\31\ See Adopting Release at 24.
---------------------------------------------------------------------------
In sum, the Exchange believes that its existing ``bright line''
independence standards as set forth in proposed Rule 19(p)(3)(A) and
the additional independence requirement as set forth in proposed Rule
19(p)(3)(B) are sufficiently broad to encompass the types of
relationships which would generally be material to a director's
independence for compensation committee service. In addition, there is
language in current Rule 19(p)(3), adopted in proposed Rule 19(p)(3)
that already requires the board to consider
[[Page 63375]]
any other material relationships between the director and the issuer or
its management that are not subject of ``bright line'' tests in
proposed Rule 19(p)(3)(A). The Exchange believes that these
requirements with respect to general director independence, when
combined with the additional requirements of proposed Rule 19(p)(3)(B),
represent an appropriate standard for compensation committee
independence that is consistent with the requirements of Exchange Act
Rule 10C-1.
Proposed Rule 19(d)(2)
Proposed Rule 19(d)(2) establishes a formal written charter or
board resolution requirement for all issuers, with respect to
compensation committees. Specifically, the proposed rule states that
each issuer must adopt a formal written charter or board resolution, as
applicable, addressing at minimum (A) the scope of the compensation
committee's responsibilities and how it carries out those
responsibilities, including structure, process and membership
requirements; (B) the compensation committee's responsibility for
determining or recommending to the board for determination, the
compensation of the chief executive officer and all other officers of
the issuer as set forth in proposed Rule 19(d)(3); and (C) the specific
compensation committee responsibilities and authority set forth in
proposed Rule 19(d)(4).
The Exchange submits that requiring issuers to adopt such a charter
or board resolution is necessary to facilitate compliance with the
proposed amendments to the compensation committee listing standards.
Moreover, the proposed rule is consistent with other CHX corporate
governance rules requiring a written charter or board resolution \32\
and is also modeled on proposed NASDAQ Rule 5065(d)(1).\33\
---------------------------------------------------------------------------
\32\ Proposed Rule 19(d)(3) is modeled on CHX Article 22, Rule
19(c)(2), which requires each issuer to adopt a formal written
charter or board resolution, as applicable, addressing the
nominations process and any related matters as may be required under
federal securities law.
\33\ Proposed NASDAQ Rule 5605(d)(1) states, ``each Company must
certify that it has adopted a formal written compensation committee
charter and that the compensation committee will review and reassess
the adequacy of the formal written charter on an annual basis. The
charter must specify: (A) The scope of the compensation committee's
responsibilities, and how it carries out those responsibilities,
including structure, process and membership requirements; (B) the
compensation committee's responsibility for determining or
recommending to the board for determination, the compensation of the
chief executive officer and all other Executive Officers of the
Company; (C) that the chief executive officer may not be present
during voting or deliberations on his or her compensation; and (D)
the specific compensation committee responsibilities and authority
set forth in Rule 5605(d)(3).''
---------------------------------------------------------------------------
Proposed Rule 19(d)(3)
Proposed Rule 19(d)(3) is a consolidated restatement of current
Rule 19(d)(1) and 19(d)(2). In doing so, current Rule 19(d)(3)(A) has
been deleted and restated as proposed Rule 19(d)(5)(A)(i), with some
syntax amendments to improve logical flow and organization and current
Rule 19(d)(3)(B) has been deleted and restated under proposed Rule
19(d)(5)(B)(i). Specifically, proposed Rule 19(d)(3) states that the
function of a compensation committee or functional equivalent is to
determine or recommend to the issuer's board of directors for
determination the compensation of issuer's chief executive officer and
other officers. It continues that the chief executive officer shall not
be present during the deliberations regarding her own compensation, but
that the chief executive officer may be present during deliberations
regarding compensation of other officers, but may not vote. Aside from
syntax, the only difference between this proposed rule and current Rule
19(d)(1) and Rule 19(d)(2) is that the proposed rule omits the portions
of the current rules that mention that compensation of executive
officers shall be determined or recommended to the board ``either by
(A) a majority of the issuer's independent directors or (B) a
compensation committee comprised solely of independent directors.''
\34\ The reason for this omission is that ``compensation committee''
and ``majority of the issuer's independent directors'' have been
combined and defined under proposed Rule 19(d)(1) as ``compensation
committee.'' The Exchange submits that this organizational amendment is
necessary for the logical flow of the proposed Rule 19(d).
---------------------------------------------------------------------------
\34\ Currently, CHX Article 22, Rule 19(d)(1) states
``compensation of the issuer's chief executive officer shall be
determined, or recommended to the board for determination, either by
(A) a majority of the independent directors or (B) a compensation
committee comprised solely of independent directors. The chief
executive officer may not be present during voting or
deliberations'' and Rule 19(d)(2) states ``compensation of the
issuer's other officers, as that term is defined in Section 16 of
the Act, shall be determined, or recommended to the board for
determination, either by (A) a majority of the issuer's independent
directors or (B) a compensation committee comprised solely of
independent directors. The chief executive officer may be present
during deliberations regarding compensation of other officers, but
may not vote.''
---------------------------------------------------------------------------
Proposed Rule 19(d)(4)
Proposed Rule 19(d)(4)(A)-(E) outlines listing standards mandated
under Exchange Act Rule 10C-1(b)(2), concerning the authority of
compensation committees to retain compensation consultants, outside
legal counsel and other advisers (collectively ``compensation
advisers'').
Specifically, pursuant to Exchange Act Rule 10C-1(b)(2)(i),
proposed subparagraph (A) provides that a compensation committee may,
in its sole discretion, retain or obtain the advice of a compensation
consultant, independent legal counsel or other adviser. Also, pursuant
to Exchange Act Rule 10C-1(c)(2)(iii), proposed subparagraph (A)
continues by stating that it shall not apply to issuers that do not
maintain a formal committee of the board of directors for determining
executive compensation. The reason behind this exclusion is that since
an action by independent directors acting outside of a formal committee
structure would generally be considered action by the full board of
directors, it is unnecessary to apply this requirement to directors
acting outside of a formal committee structure, as they retain all the
powers of the board of directors in making executive compensation
determinations.\35\
---------------------------------------------------------------------------
\35\ See Listing Standards for Compensation Committees, Release
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240], at p. 12.
---------------------------------------------------------------------------
Also, pursuant to Exchange Act Rule 10C-1(b)(2)(ii), proposed
subparagraph (B) provides that the compensation committee shall be
directly responsible for the appointment, compensation and oversight of
the work of any compensation consultant, independent legal counsel and
other adviser retained by the compensation committee. Furthermore,
pursuant to Exchange Act Rule 10C-1(b)(2)(iii), proposed subparagraph
(C) states that nothing in this proposed Rule 19(d)(3) shall be
construed to require the compensation committee to implement or act
consistently with the advice or recommendations of the compensation
consultant, independent legal counsel or other adviser nor to affect
the ability or obligation of a compensation committee to exercise its
own judgment in fulfillment of its duties.
Moreover, pursuant to Exchange Act Rule 10C-1(b)(3), proposed
subparagraph (D) states that an issuer that maintains a compensation
committee shall provide for appropriate funding, as determined by the
compensation committee, for payment of reasonable compensation to a
compensation consultant, independent legal counsel or any other adviser
retained by the compensation committee. Similar to proposed
[[Page 63376]]
subparagraph (A), pursuant to Exchange Act Rule 10C-1(c)(2)(iii),
proposed subparagraph (D) continues by stating that it shall not apply
to issuers that do not maintain a formal committee of the board of
directors, pursuant to Exchange Act Rule 10C-1(c)(2)(iii).\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
Finally, pursuant to Exchange Act Rule 10C-1(b)(4), proposed
subparagraph (E) states that the compensation committee may select a
compensation consultant, legal counsel or other adviser, other than in-
house legal counsel, only after taking into consideration the following
six factors: (i) The provision of other services to the issuer by the
person that employs the compensation consultant, legal counsel or other
adviser; (ii) the amount of fees received from the issuer by the person
that employs the compensation consultant, legal counsel or other
adviser, as a percentage of the total revenue of the person that
employs the compensation consultant, legal counsel or other adviser;
(iii) the policies and procedures of the person that employs the
compensation consultant, legal counsel or other adviser that are
designed to prevent conflicts of interest; (iv) any business or
personal relationship of the compensation consultant, legal counsel or
other adviser with a member of the compensation committee; (v) any
stock of the issuer owned by the compensation consultant, legal counsel
or other adviser; and (vi) any business or personal relationship of the
compensation consultant, legal counsel, or other adviser or the person
employing the adviser with an executive officer of the issuer. The
Exchange agrees with the Commission that these six factors, when
considered together, are competitively neutral, as they will require
compensation committees and functional equivalents to consider a
variety of factors that may bear upon the likelihood that a
compensation adviser can provide independent advice to the compensation
committee, but will not prohibit committees from choosing any
particular adviser or type of adviser.\37\ Therefore, the Exchange
proposes to add no further requirements or factors to be considered
under this subparagraph (E).
---------------------------------------------------------------------------
\37\ See Listing Standards for Compensation Committees, Release
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240], at p. 40.
---------------------------------------------------------------------------
Proposed Rule 19(d)(5), Rule 19(p)(5) and Paragraph .03 of the
Interpretations and Policies of Rule 19
Proposed Rule 19(d)(5) outlines exceptions to the listing standards
of this proposed Rule 19(d), pursuant to Exchange Act Rule 10C-
1(b)(1)(iii), which exempts specified categories of issuers and gives
the Exchange discretion to exempt certain director relationships from
the requirements of Rule 10C-1(b)(1) and Rule 10C-1(b)(5), which gives
the Exchange discretion to exempt from the requirements of Exchange Act
Rule 10C-1 any category of issuer, after considering relevant factors.
In establishing these exemptions, proposed Rule 19(d)(5) distinguishes
between (A) temporary exemptions, (B) general exemptions and a (C)
limited exemption for smaller reporting companies.
Proposed Rule 19(d)(5) lists the temporary exemptions from proposed
Rule 19(d). Proposed Rule 19(d)(5)(A)(i) is a restatement of current
Rule 19(d)(3), which allows an issuer, under exceptional and limited
circumstances, to temporarily appoint a non-independent director to its
compensation or functional equivalent one director who is not
independent, for a term that shall not exceed two years from the date
of appointment (unless the director becomes independent prior to the
end of the two year period), if (1) the compensation committee or
functional equivalent is comprised of at least three persons, including
the proposed non-independent director; (2) the non-independent director
is not a current officer or employee nor is an immediate family member
of a current officer or employee; and (3) the issuer's board of
directors determines that (a) the membership of the non-independent
director on the compensation committee or functional equivalent is
required by the best interests of the company and its shareholders and
(b) the board discloses, in the proxy statement for the next annual
meeting subsequent to such determination (or, if the issuer does not
file a proxy, in its Form 10-K or 20-F), the nature of the relationship
and the reasons for the determination.
The purpose of this exemption is to allow issuers to efficiently
deal with unforeseen and exceptional circumstances, so as to ensure the
smooth function of its compensation committee or functional equivalent.
While doing so, the exemption clearly establishes guidelines to
minimize the risk of abuse by requiring that the non-independent
director's appointment be temporary, that such a director will not be
an employee of the issuer and that such a director's appointment is
made clear to the shareholders via a proxy statement or Form 10-K or
20F. Furthermore, the Exchange submits that it would not be in the
public interest to burden issuers confronted with unforeseen and
exceptional circumstances, especially where inaction by a compensation
committee may result in a loss of executive talent to the detriment of
shareholders. It is important to note that the same temporary
exemption, with some differences for context, can be found in CHX
Article 22, Rule 19(b)(1)(C)(i) \38\ and given the similarities between
that rule for audit committees and this proposed rule for compensation
committees, the Exchange submits that this exemption is wholly
appropriate and necessary.
---------------------------------------------------------------------------
\38\ CHX Article 22, Rule 19(b) governs listing standards for
``audit committees'' and Rule 19(b)(1)(C)(i) states ``one director
who is not independent as required by section (b)(1)(A)(i) above,
but who meets the criteria set forth in SEC Rule 10A-3 and who is
not a current officer or employee (or an immediate family member of
a current officer or employee) may be appointed to the audit
committee, if the issuer's 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 proxy statement
for the next annual meeting subsequent to such determination (or, if
the issuer does not file a proxy, in its Form 10-K, 20-F or other
applicable annual disclosure filed with the SEC), the nature of the
relationship and the reasons for that determination. A member
appointed under this exception may not serve on the audit committee
for more than two years under this exception (unless he or she
ultimately satisfies the definition of an independent director) and
may not chair the audit committee.''
---------------------------------------------------------------------------
In addition, proposed Rule 19(d)(5)(A)(ii) outlines an opportunity
to cure defects, almost precisely as stated in Exchange Act Rule 10C-
1(a)(3) and current CHX Article 22, Rule 19(b)(1)(C)(ii).\39\
Specifically, it states that if a member of an issuer's compensation
committee or functional equivalent ceases to be an independent director
for reasons outside the member's reasonable control, that member, with
prompt notice by the issuer to the Exchange, may remain a member of the
compensation committee or functional equivalent until the earlier of
the next annual shareholders meeting of the issuer or one year from the
occurrence of the event that caused the member to be no longer an
independent director.
---------------------------------------------------------------------------
\39\ CHX Article 22, Rule 19(b) governs listing standards for
``audit committees'' and Rule 19(b)(1)(C)(ii) and Rule
19(b)(1)(C)(ii) states ``if a member of an audit committee ceases to
meet the independence criteria set forth in SEC Rule 10A-3 for
reasons outside the person's reasonable control, that person may
remain a member of the committee until the earlier of the next
annual shareholders' meeting or one year from the occurrence of the
event that caused the member to no longer meet the independence
criteria. The issuer must promptly notify the Exchange if this
circumstance occurs.''
---------------------------------------------------------------------------
Proposed Rule 19(d)(5)(B)(i)-(viii) list the general exemptions
from proposed Rule 19(d). All of the exemptions listed under this
subparagraph are (1) specific
[[Page 63377]]
exemptions required under Exchange Act Rule 10C-1(b)(5); (2) proposed
expansions of specific exemptions listed under Exchange Act Rule 10C-
1(b)(1)(iii); or (3) exemptions already in effect under CHX Rules and
proposed pursuant to Exchange Act Rule 10C-1(b)(5)(i). Some of the
proposed exemptions fall under one or more of these categories and each
exemption will discussed in this context.
Proposed subparagraph (i) exempts limited partnerships and
companies in bankruptcies from the requirements of proposed Rule 19(d).
Such issuers are already exempt from the current compensation committee
requirements under paragraph .03(1) of the Interpretations and Policies
of Rule 19.\40\ Although Exchange Act Rule 10C-1(b)(1)(iii)(A)(1) and
(2) already mandate that such companies be exempt from the independence
requirements, subparagraph (ii) proposes to expand that exemption to
all requirements under Exchange Act Rule 10C-1, pursuant to the
Exchange's authority granted under Exchange Act Rule 10C-1(b)(5)(i). A
``limited partnership'' is defined as a form of business ownership and
association consisting of one or more general partners who are fully
liable for the debts and obligations of the partnership and one or more
limited partners whose liability is limited to the amount invested.\41\
As such, limited partnerships are already exempt from the current
compensation committee requirements because the ownership/management
structure of limited partnerships renders the independent director
requirements inapplicable. The Exchange submits that this same
reasoning renders the compensation adviser requirements unnecessary as
well. With respect to companies in bankruptcy, the purpose behind this
exemption is to not overburden issuers that are struggling to emerge
from bankruptcy. That is, it would not be in public interest to burden
such companies with additional listing standards where such companies
are subject to a host of bankruptcy requirements that will
fundamentally impact its survival. Given these considerations, the
Exchange submits that it would be wholly appropriate to exempt limited
partnerships and companies in bankruptcy from all of the requirements
of proposed Rule 19(d).
---------------------------------------------------------------------------
\40\ Paragraph .03(1) of the Interpretations and Policies of
Rule 19 states that ``limited partnerships and companies in
bankruptcies are not required to comply with sections (a), (c) and
(d) above.''
\41\ See Unif. Ltd. P'ship Act sections 102, 303 and 404 (2001).
---------------------------------------------------------------------------
Proposed subparagraph (ii) exempts from the requirements of
proposed Rule 19(d) ``closed-end and open-end management companies''
registered under the Investment Company Act,\42\ as already stated in
CHX rules as paragraph .03(2) of the Interpretations and Policies of
Rule 19.\43\ Although Exchange Act Rule 10C-1(b)(1)(iii)(A)(3) only
exempts open-end management investment companies from the independence
requirement of the Rule 10C-1(b), the Exchange proposes to expand that
exemption, pursuant to Rule 10C-1(b)(5)(i) to include both open-end and
closed-end management investment companies and to apply the exemption
to all the requirements of Rule 10C-1. The Exchange submits that since
registered investment companies are already subject to the requirements
of the Investment Company Act, including, in particular, requirements
concerning potential conflicts of interest related to investment
adviser compensation,\44\ requiring such companies to comport with the
requirements of this proposed Rule 19(d) would be duplicative and
unnecessary.
---------------------------------------------------------------------------
\42\ Supra note 29.
\43\ Paragraph .03(2) of the Interpretations and Policies of
Rule 19 entitled, ``Closed-End and Open-End Management Companies''
states, ``(A) Closed-end management companies that are registered
under the Investment Company Act of 1940 are not required to comply
with sections (a) through (f) of this Rule; except that closed-end
funds must (i) maintain an audit committee of at least three
persons; and (ii) comply with the provisions of SEC Rule 10A-3 and
the provisions of paragraphs (b)(1)(A)(iv), (b)(1)(B), (b)(2),
(b)(3) and (f), above, subject to applicable exceptions.
Additionally, these issuers must establish procedures for the
confidential, anonymous submission of concerns regarding
questionable accounting or auditing matters by employees of the
investment adviser, administrator, principal underwriter, or any
other provider of accounting related services for the investment
company, as well as employees of the investment company. (B)
Business development companies, which are a type of closed-end
management investment company defined in Section 2(a)(48) of the
Investment Company Act of 1940 that are not registered under that
Act, are required to comply with all of the provisions of this Rule.
(C) Open-end funds (including open-end funds that can be listed or
traded as investment company units) are not required to comply with
the provisions of sections (a) through (f) of this Rule; except that
these funds must comply with the provisions of sections (b) and
(f)(2), above, to the extent required by SEC Rule 10A-3.
Additionally, these issuers must establish procedures for the
confidential, anonymous submission of concerns regarding
questionable accounting or auditing matters by employees of the
investment adviser, administrator, principal underwriter, or any
other provider of accounting related services for the investment
company, as well as employees of the investment company and must
address this responsibility in the audit committee charter.''
\44\ 15 USCS 80a-2, 15 USCS 80a-3, 15 USCS 80a-15, 15 USCS 80a-
17, 15 USCS 80a-35 [sic].
---------------------------------------------------------------------------
Proposed subparagraph (iii) exempts from the requirements of
proposed Rule 19(d) passive business organizations, such as royalty
trusts, or derivatives and special purpose entities, pursuant to the
Exchange's discretion to exempt certain categories of issuers under
Exchange Act Rule 10C-1(b)(5)(iii). Such issuers are already exempt
from the current compensation committee requirements under paragraph
.03(3) of the Interpretations and Policies of Rule 19.\45\ The
reasoning behind exempting passive business organizations, such as
royalty trusts, is that such entities are structured fundamentally
different from conventional equities issuers. For instance, in the case
of royalty trusts, such entities do not have employees and virtually
all profits earned are distributed to shareholders. As such, these
entities have no need for compensation committees. Moreover, special
purpose entities are frequently utilized to securitize receivables,
such as loans. Similar to the reasoning behind exempting clearing
agencies \46\ that issue futures products and standardized options,
purchasers of securities issued by such special purpose entities do not
make an investment decision based on the issuer, but rather, the
underlying security. As a result, information about the special purpose
entities, its officers and directors and its financial statements is
much less relevant to investors in these securities than information
about the underlying security.
---------------------------------------------------------------------------
\45\ Paragraph .03(3) of the Interpretations and Policies of
Rule 19 states, ``passive business organizations (such as royalty
trusts) or derivatives and special purpose entities that are exempt
from the requirements of SEC Rule 10A-3 are not subject to any
requirement under sections (a) through (f) of this rule. To the
extent that Rule 10A-3 applies to a passive business organization,
derivative or special purpose security, such entities are required
to comply with the provisions of paragraphs (b) and (f)(2) above, to
the extent required by SEC Rule 10A-3.''
\46\ See Listing Standards for Compensation Committees, Release
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240], at p. 51.
---------------------------------------------------------------------------
Proposed subparagraph (iv) exempts from the requirements of
proposed Rule 19(d) any ``foreign private issuer'' that discloses in
its annual report the reasons that it does not have an independent
compensation committee, subject to the additional requirements of
paragraph .03(4) of the Interpretations and Policies of Rule 19.\47\
Moreover,
[[Page 63378]]
subparagraph (v) adopts the definition of ``foreign private issuer'' as
stated under Exchange Act Rule 3b-4.\48\ Pursuant to Exchange Act Rule
10C-1(b)(4)(ii), the Exchange proposes to expand the Exchange Act Rule
10C-1(b)(1)(iii)(A)(4) exemption of foreign private issuers from only
the independence requirements to all requirements under Rule 10C-1.
This is because foreign private issuers are already subject to
corporate regulations of their respective home countries and requiring
such issuers to comport with Exchange Act Rule 10C-1 would be
cumulative, if not contradictory. In addition, the Exchange further
proposes include a phase-in provision, nearly identical to proposed
Section 303A.00 (Compliance Dates/A Company Ceases to Qualify as a
Foreign Private Issuer) of the NYSE Listing Company Manual,\49\ which
requires compliance with the proposed compensation committee rules
within six months of the date on which it failed to qualify as a
foreign private issuer.
---------------------------------------------------------------------------
\47\ Paragraph .03(4) of the Interpretations and Policies of
Rule 19 states, ``foreign issuers will be permitted to comply with
their home country practices with respect to corporate governance
(and thus are exempt from the requirements of sections (a)-(f),
above), except to the extent that SEC Rule 10A-3 requires compliance
with specific audit committee requirements in sections (b) and
(f)(2) above. Foreign issuers must provide English language
disclosure of any significant ways in which their corporate
governance practices differ from those required for domestic issuers
under this Rule 19. This disclosure may be provided either on the
issuer's Web site or in the annual report distributed to
shareholders in the U.S. If the disclosure is made only on an
issuer's Web site, the issuer must note that fact in its annual
report and provide the Web address at which the disclosure may be
reviewed.''
\48\ Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)] defines
``foreign private issuer'' as ``any foreign issuer other than a
foreign government, except for an issuer that has more than 50% of
its outstanding voting securities held of record by U.S. residents
and any of the following: A majority of its officers and directors
are citizens or residents of the United States, more than 50% of its
assets are located in the United States, or its business is
principally administered in the United States.''
\49\ Section 303A.00 (Compliance Dates/A Company Ceases to
Qualify as a Foreign Private Issuer) of the NYSE Listing Company
Manual states, in pertinent part, ``to the extent a foreign private
issuer ceases to qualify as such under SEC rules (so that is
required to file on domestic forms with the SEC), such company is
required to comply with Section 303A domestic company requirements
as follows: [* * *] The company must have fully independent
nominating and compensation committees as required by Sections
303A.04 and 303A.05, if applicable, within six months of the Foreign
Private Issuer Determination Date.'' The Commission notes that a
portion of this language is proposed in NYSE-2012-049.
---------------------------------------------------------------------------
Proposed subparagraph (v) exempts from the requirements of proposed
Rule 19(d) issuers listing only preferred or debt securities on the
Exchange that are subject to the multiple listing exception described
in paragraph .04 of the Interpretations and Policies of Rule 19,
pursuant to the Exchange's discretion to exempt certain categories of
issuers under Exchange Act Rule 10C-1(b)(5)(iii). Such issuers are
already exempt from the current compensation committee requirements
under paragraph .03(5) of the Interpretations and Policies of Rule
19.\50\ The reasoning behind this exemption is that issuers of
preferred or debt securities are already subject to the requirements of
the rules of the exchange on which they are primarily listed. As such,
this proposed exemption prevents such issuers from having to comport
with multiple sets of rules. Moreover, holders of listed preferred
stock have significantly greater protections with respect to their
rights to receive dividends and a liquidation preference upon
dissolution of the issuer. In addition, investors typically regard
preferred stocks as a fixed income investment comparable to debt
securities. Furthermore, debt securities are not equity securities, as
they do not impart an ownership interest to the holder of such
securities. Given these considerations, preferred and debt securities
fall outside the scope of Exchange Act Rule 10C-1(a)(1) and should be
generally exempt.
---------------------------------------------------------------------------
\50\ Paragraph .03(5) of the Interpretations of Policies of Rule
19 states, ``issuers listing only preferred or debt securities on
the Exchange typically will not be required to adhere to the
requirements set out in sections (a)-(f) because they will be
subject to the multiple listing exception described in
Interpretation .04, below. To the extent required by SEC Rule 10A-3,
these issuers will only be required to comply with sections (b) and
(f)(2) above.''
---------------------------------------------------------------------------
Proposed subparagraph (vi) exempts controlled companies from the
requirements of proposed Rule 19(d), as mandated by Exchange Act Rule
10C-1(b)(5)(ii), with certain additional requirements.\51\ Such issuers
are already exempt from the current compensation committee requirements
under current Rule 19(d)(3)(B).\52\ Under Rule 19(p)(1), a ``controlled
company'' is defined as a company in which an individual, group or
another company, holds more than 50 percent of the voting power. This
definition is consistent with Exchange Act Rule 10C-1(c)(3), which
defines a ``controlled company'' as an issuer that is listed on a
national securities exchange or by national securities association and
of which more than 50 percent of the voting power for the election of
directors is held by an individual, a group or another company. The
Exchange further proposes to include this exemption under paragraph .03
of the Interpretations and Policies of Rule 19, as proposed paragraph
.03(6).
---------------------------------------------------------------------------
\51\ Pursuant to CHX paragraph .02 of the Interpretations and
Policies of Rule 19, controlled companies that rely on this
exemption are required to disclose in its annual proxy (or Form 10-
K, 20-F, or other applicable annual disclosure filed with the SEC)
that it is a controlled company and the basis for that
determination.
\52\ Current Rule 19(d)(3)(B) states, ``controlled company is
exempt from the requirements of this paragraph (d).''
---------------------------------------------------------------------------
Proposed subparagraph (vii) exempts from the requirements of
proposed Rule 19(d) clearing agencies that are registered pursuant to
Section 17A of the Exchange Act or that are exempt from the
registration requirements of section 17A(b)(7)(A) of the Exchange Act
that clear and list a security futures product or standardized option,
pursuant to Exchange Act Rule 10C-1(b)(5)(iii) and (b)(5)(iv). The
Exchange further proposes to include this exemption under paragraph .03
of the Interpretations and Policies of Rule 19, as proposed paragraph
.03(7).
Moreover, proposed Rule 19(d)(5)(C) establishes a limited exemption
for smaller reporting companies to proposed Rule 19(d) and proposed
Rule 19(p)(5) merely states that the terms ``small business issuer''
and ``smaller reporting company'' means any issuer that meets the
definition of ``smaller reporting company'' set out in SEC Rule 12b-2.
Specifically, the limited exemption narrows the scope of the general
exemption under Exchange Act Rule 10C-1(b)(5)(ii) and exempts smaller
reporting companies only from the compensation adviser requirements of
proposed Rule 19(d)(4) and the additional independent director
requirements specific to compensation committees of proposed Rule
19(p)(3)(B). This is because under current CHX rules, small business
issuers are already subject to independent director requirements for
its compensation committees and, as such, the Exchange submits that
requiring such issuers to continue to comply with similar proposed
rules is not overly burdensome. Moreover, the proposed rule includes a
phase-in provision similar to proposed Rule 19(d)(5)(B)(iv) for foreign
private issuers and proposed Section 303A.00 (Compliance Dates/A
Company Ceases to Qualify as a Smaller Reporting Company) of the NYSE
Listing Company Manual,\53\ which states that if the smaller reporting
company ceases to qualify as such under SEC rules, it is required to
(i) meet the additional
[[Page 63379]]
independent director requirements of proposed Rule 19(p)(3)(B) within
six months of the date on which the issuer failed to qualify as a
smaller reporting company and (ii) comply with the compensation adviser
requirements of proposed Rule 19(d)(4) as of the date on which the
issuer failed to qualify as a smaller reporting company.
---------------------------------------------------------------------------
\53\ Section 303A.00 (Compliance Dates/A Company Ceases to
Qualify as a Smaller Reporting Company) states, in pertinent part,
``under SEC Rule 12b-2, a company tests its status as a smaller
reporting company on an annual basis at the end of its most recently
completed second fiscal quarter [* * *] To the extent a smaller
reporting company ceases to qualify as such under SEC rules, it is
required, if applicable, to: (1) Have a compensation committee of
which all of the members meet the independence standards of Section
303A.02(a)(ii) within six months of the Smaller Reporting Company
Determination Date; and (II) comply with Section 303A.05(c)(iv) as
of the Smaller Reporting Company Determination Date.'' The
Commission notes that this is language proposed in NYSE-2012-049.
---------------------------------------------------------------------------
Proposed Paragraph .05 of the Interpretations and Policies
Pursuant to the exemptive authority provided to the exchanges under
Exchange Act Rule 10C-1(b)(1)(iii), the Exchange proposes to amend
paragraph .05 (Transition Periods and Compliance Dates) of the
Interpretations and Policies of Rule 19 to establish a transition
period for issuers to conform to the requirements of proposed Rule 19,
as proposed paragraph .05(6). Specifically, proposed paragraph .05(6)
establishes that proposed Rule 19(d), Rule 19(p)(3), Rule 19(p)(5) and
paragraphs .03 and .05 of the Interpretations and Policies of Rule 19
(which are all of the provisions that have been amended under this
proposed rule filing) will become immediately operative upon approval
by the SEC. However, issuers shall have until the earlier of its first
annual shareholders meeting after January 15, 2014 or October 31, 2014
to comply with the compensation committee charter requirements of
proposed Rule 19(d)(2), the compensation adviser requirements of
proposed Rule 19(d)(4) and the additional independent director
requirements of proposed Rule 19(p)(3)(B). That is, the amendments that
do not require issuers to do anything in addition to what they are
already required to do, under current rules, will become operative
immediately upon approval and the amendments that place additional
requirements on the issuers will be subject to the longer transition
period.
This proposed transition period is similar to proposed Section
303A.00 (Transition Periods for Compensation Committee Requirements) of
the NYSE Listed Company Manual, which provides that listed companies
will have until the earlier of their first annual meeting after January
15, 2014 or October 31, 2004, to comply with the new standards with
respect to compensation committees. The only difference between the
NYSE proposed transition period and this proposed paragraph .05(6) is
that the NYSE proposes to maintain current rule language operative
through June 30, 2013, whereas the Exchange proposes to make amended
rule language that does not substantively change the current
compensation committee listing standards immediately operative.
However, the Exchange submits that both approaches are practically
similar and the differences are based on how CHX rules are organized.
2. Statutory Basis
The proposed rule change in relation to the Exchange's compensation
committee requirements and the proposed compensation committee
consultant independence requirements are consistent with the
requirements of Rule 10C-1, with respect to the adoption by national
securities exchange of compensation committee listing standards.
Moreover, the proposed rule changes are consistent with Section 6(b) of
the Act \54\ in general, and furthers the objectives of Section 6(b)(5)
\55\ in particular, in that it is designed to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transaction in securities, to
remove impediments and perfect the mechanisms of a free and open
market, and, in general, to protect investors and the public interest.
Specifically, the Exchange believes that the proposed rule change
supports the objective of the Exchange Act by providing harmonization
between CHX Rules and rules of all other organization subject to the
requirements of Exchange Act Rule 10C-1, which would result in less
burdensome and more efficient regulatory compliance. Moreover, the
Exchange submits that the proposed amendments to its compensation
committee listing standards are consistent with the protection of
investors and the public interest in that they strengthen the
independence requirements for compensation committee membership,
provide additional authority to compensation committees and require
compensation committees to consider the independence of compensation
consultants.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78f(b).
\55\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Furthermore, the Exchange submits that the exemptions from the
proposed requirements that it is granting to limited partnerships and
companies in bankruptcies, management companies registered under the
Investment Company Act of 1940, passive business organizations or
derivatives and special purpose entities that are exempt from the
requirements of Exchange Act 10A-3, foreign private issuers, issuer's
listing only preferred or debt securities, controlled companies and
clearing agencies that clear and list securities futures products or
standardized options are consistent with Section 10C and Rule 10C-1 for
the reasons stated above in the ``Purpose'' section. Specifically, Rule
10C-1(b)(5)(ii) explicitly exempts smaller reporting companies and
foreign private issuers will comply with their home country law and, if
they avail themselves of the exemption, will be required to disclose
that fact under existing Exchange listing requirements. Moreover, the
Exchange submits it is an appropriate use of its exemptive authority
under Rule 10C-1(b)(5)(i), and that it is not unfairly discriminatory
under Section 6(b)(5) of the Act, to provide general exemptions under
the proposed rules to issuers whose only listed class of equity
securities on the Exchange is a preferred stock, as holders of listed
preferred stock have significantly greater protections with respect to
their rights to receive dividends and a liquidation preference upon
dissolution of the issuer, and preferred stocks are typically regarded
by investors as a fixed income investment comparable to debt
securities, the issuers of which are exempt from compliance with Rule
10C-1. In addition, the Exchange submits that it is an appropriate use
of its exemptive authority under Rule 10C-1(b)(5)(i) and that is not
unfairly discriminatory under Section 6(b)(5) of the Exchange Act, to
provide general exemptions under the proposed rules for all of the
other categories of issuers that are not currently subject to the
Exchange's compensation committee requirement, for the structural
reasons discussed in the ``Purpose'' section and because it would be a
significant and unnecessarily burdensome alteration in their governance
structures to require them to comply with the proposed new
requirements.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i)
[[Page 63380]]
as the Commission may designated up to 90 days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CHX-2012-13 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CHX-2012-13. This file
number should be included on the subject line if email 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 (https://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 Web site viewing and
printing in the Commission's Public Reference Room on official business
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for inspection and copying at the
principal offices of the Exchange. 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-CHX-2012-13, and should be submitted on or before
November 6, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
---------------------------------------------------------------------------
\56\ 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25407 Filed 10-15-12; 8:45 am]
BILLING CODE 8011-01-P
