Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 2, and Order Granting Accelerated Approval for Proposed Rule Change, as Modified by Amendment No. 2, To Amend the Listing Rules for Compensation Comply With Securities Exchange Act Rule 10C-1 and Make Other Related Changes, 4508-4524 [2013-01105]

Download as PDF 4508 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices Paper Comments regardless of whether or not such Participants are FINRA members. 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. Specifically, the Exchange believes that the proposed change will result in the same regulatory fees being charged to all Participants who are required to report information to the CRD system and for services performed by FINRA, regardless of whether or not such Participants are FINRA members. 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 The proposed rule change is to effect upon filing pursuant to Section 19(b)(3)(A)(ii) of the Act 30 and subparagraph (f)(2) of Rule 19b–4 thereunder 31 because it establishes or changes a due, fee or other charge imposed by the Exchange. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. tkelley on DSK3SPTVN1PROD with 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: • 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–2013–01. 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– 2013–01, and should be submitted on or before February 12, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.32 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–01075 Filed 1–18–13; 8:45 am] BILLING CODE 8011–01–P 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–2013–01 on the subject line. 30 15 31 17 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). VerDate Mar<15>2010 18:11 Jan 18, 2013 32 17 Jkt 229001 PO 00000 CFR 200.30–3(a)(12). Frm 00132 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68638; File No. SR– NYSEArca–2012–105] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 2, and Order Granting Accelerated Approval for Proposed Rule Change, as Modified by Amendment No. 2, To Amend the Listing Rules for Compensation Comply With Securities Exchange Act Rule 10C–1 and Make Other Related Changes January 11, 2013. I. Introduction On September 25, 2012, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) 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 modify the Exchange’s rules for compensation committees of listed issuers to comply with Rule 10C–1 under the Act and make other related changes. The proposed rule change was published for comment in the Federal Register on October 15, 2012.3 The Commission subsequently extended the time period in which to either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change, to January 13, 2013.4 The Commission received one comment letter on the proposed rule change,5 as well as a 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 68006 (October 9, 2012), 77 FR 62587 (October 15, 2012) (‘‘Notice’’). 4 See Securities Exchange Act Release No. 68313 (November 28, 2012), 77 FR 71853 (December 4, 2012). 5 See Letter from Jeff Mahoney, General Counsel, Council of Institutional Investors to Elizabeth M. Murphy, Secretary, Commission, dated November 1, 2012 (‘‘CII Letter’’). In addition, the Commission received seven comments on a substantially similar proposal by New York Stock Exchange LLC (‘‘NYSE’’) by parties that did not specifically comment on the NYSE Arca filing. See Securities Exchange Act Release No. 68011 (October 9, 2012), 77 FR 62541 (October 15, 2012) (SR–NYSE–2012–49). The comment letters received on the NYSE filing were letters to Elizabeth M. Murphy, Secretary, Commission, from: Thomas R. Moore, Vice President, Corporate Secretary and Chief Governance Officer, Ameriprise Financial, Inc., dated October 18, 2012 (‘‘Ameriprise Letter’’); J. Robert Brown, Jr., Director, Corporate & Commercial Law Program, University of Denver Sturm College of Law, dated October 30, 3012 (‘‘Brown Letter’’); Dorothy Donohue, Deputy General Counsel, Securities Regulation, Investment Company Institute, dated November 1, 2012 (‘‘ICI Letter’’); Brandon J. Rees, Acting Director, Office of 2 17 E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices response to the comment letter from NYSE Euronext, Inc. regarding the NYSE Arca proposal.6 On December 4, 2012, the Exchange filed Amendment No. 1 to the proposed rule change, which was later withdrawn.7 On January 8, 2013, the Exchange filed Amendment No. 2 to the proposed rule change.8 This order approves the proposed rule change, as modified by Amendment No. 2 thereto, on an accelerated basis. II. Description of the Proposed Rule Change tkelley on DSK3SPTVN1PROD with A. Background: Rule 10C–1 under the Act On March 30, 2011, to implement Section 10C of the Act, as added by Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’),9 the Investment, AFL–CIO, dated November 5, 2012 (‘‘AFL–CIO Letter’’); Carin Zelenko, Director, Capital Strategies Department, International Brotherhood of Teamsters, dated November 5, 2012 (‘‘Teamsters Letter’’); Wilson Sonsini Goodrich & Rosati, Professional Corporation, dated November 14, 2012 (‘‘Wilson Sonsini Letter’’); and Robert B. Lamm, Chair, Securities Law Committee, The Society of Corporate Secretaries & Governance Professionals, dated December 7, 2012 (‘‘Corporate Secretaries Letter’’). Since the comment letters received on the NYSE filing discuss issues directly related to the NYSE Arca filing, the Commission has included them in its discussion of this filing. 6 See Letter to Elizabeth M. Murphy, Secretary, Commission, from Janet McGinness, Executive Vice President and Corporate Secretary, NYSE Euronext, Inc., dated January 10, 2013 (‘‘NYSE Response Letter’’). In the NYSE Response Letter, NYSE Euronext, Inc., the parent company of NYSE Arca, states that, as the comments made by the letters submitted on the NYSE and NYSE Arca proposals are applicable in substance to NYSE, NYSE Arca and NYSE MKT LLC, its response will address the comments on behalf of all three exchanges. 7 Amendment No. 1, dated December 4, 2012, was withdrawn on January 8, 2013. 8 In Amendment No. 2 to SR–NYSEArca–2012– 105, NYSE Arca: (a) Revised the transition period for companies that cease to be Smaller Reporting Companies to comply with the full range of new requirements, see infra notes 73–76 and accompanying text; (b) changed references in the rule text from Regulation S–K, Item 10(f)(1) to Exchange Act Rule 12b–2 and made other nonsubstantive revisions to proposed rule text; (c) added commentary to state that the independence assessment of compensation advisers required of compensation committees does not need to be conducted for advisers whose roles are limited to those entitled to an exception from the compensation adviser disclosure rules under Item 407(e)(3)(iii) of Regulation S–K, see infra notes 49– 52 and accompanying text; (d) added commentary to state that the independence assessment of compensation advisers required of compensation committees does not require the adviser to be independent, only that the compensation committee consider the enumerated factors before selecting or receiving advice from the adviser, see infra notes 53–55 and accompanying text; and (e) clarified that a foreign private issuer is required to provide a reason why it does not have an independent compensation committee. See infra note 70. 9 Public Law 111–203, 124 Stat. 1900 (2010). VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 Commission proposed Rule 10C–1 under the Act,10 which directs each national securities exchange (hereinafter, ‘‘exchange’’) to prohibit the listing of any equity security of any issuer, with certain exceptions, that does not comply with the rule’s requirements regarding compensation committees of listed issuers and related requirements regarding compensation advisers. On June 20, 2012, the Commission adopted Rule 10C–1.11 Rule 10C–1 requires, among other things, each exchange to adopt rules providing that each member of the compensation committee 12 of a listed issuer must be a member of the board of directors of the issuer, and must otherwise be independent.13 In determining the independence standards for members of compensation committees of listed issuers, Rule 10C– 1 requires the exchanges to consider relevant factors, including, but not limited to: (a) The source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the issuer to the director (hereinafter, the ‘‘Fees Factor’’); and (b) whether the director is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer (hereinafter, the ‘‘Affiliation Factor’’).14 In addition, Rule 10C–1 requires the listing rules of exchanges to mandate that compensation committees be given the authority to retain or obtain the advice of a compensation adviser, and have direct responsibility for the appointment, compensation and oversight of the work of any compensation adviser they retain.15 The exchange rules must also provide that each listed issuer provide for appropriate funding for the payment of reasonable compensation, as determined by the compensation committee, to any compensation adviser retained by the 10 See Securities Act Release No. 9199, Securities Exchange Act Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011) (‘‘Rule 10C–1 Proposing Release’’). 11 See Securities Act Release No. 9330, Securities Exchange Act Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012) (‘‘Rule 10C–1 Adopting Release’’). 12 For a definition of the term ‘‘compensation committee’’ for purposes of Rule 10C–1, see Rule 10C–1(c)(2)(i)–(iii). 13 See Rule 10C–1(a) and (b)(1). 14 See id. See also Rule 10C–1(b)(1)(iii)(A), which sets forth exemptions from the independence requirements for certain categories of issuers. In addition, an exchange may exempt a particular relationship with respect to members of a compensation committee from these requirements as it deems appropriate, taking into consideration the size of an issuer and any other relevant factors. See Rule 10C–1(b)(1)(iii)(B). 15 See Rule 10C–1(b)(2). PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 4509 compensation committee.16 Finally, among other things, Rule 10C–1 requires each exchange to provide in its rules that the compensation committee of each listed issuer may select a compensation consultant, legal counsel or other adviser to the compensation committee only after taking into consideration six factors specified in Rule 10C–1,17 as well as any other factors identified by the relevant exchange in its listing standards.18 B. NYSE Arca’s Proposed Rule Change, as Amended To comply with Rule 10C–1, NYSE Arca, through its wholly-owned corporation, NYSE Arca Equities, proposes to amend two of its rules concerning corporate governance requirements for companies listed on the Exchange: NYSE Arca Equities Rule (‘‘Equities Rule’’) 5.3(k), ‘‘Independent Directors/Board Committees;’’ and Equities Rule 5.3(n), ‘‘Listed Foreign Private Issuers.’’ In addition, NYSE Arca proposes to make some other changes to its rules regarding compensation committees. To accomplish these changes, the Exchange proposes to replace current Equities Rules 5.3(k)(4) and 5.3(n) with new operative text that will be effective on July 1, 2013. Current Equities Rule 5.3(k)(4) provides that each listed company have a compensation committee, and that such compensation committee be composed entirely of ‘‘Independent Directors’’ 19 and have a written charter.20 Under its proposal, NYSE Arca will retain its existing requirement that each listed company be required to have a compensation committee composed entirely of Independent Directors, as defined in NYSE Arca’s Equities Rules.21 Under the proposed 16 See Rule 10C–1(b)(3). Rule 10C–1(b)(4). The six factors, which NYSE Arca proposes to set forth in its rules, are specified in the text accompanying note 47, infra. 18 Other provisions in Rule 10C–1 relate to exemptions from the rule and a requirement that each exchange provide for appropriate procedures for a listed issuer to have a reasonable opportunity to cure any defects that would be the basis for the exchange, under Rule 10C–1, to prohibit the issuer’s listing. 19 ‘‘Independent Directors’’, as defined in Equities Rule 5.3(k)(1) and used herein, includes a two-part test for independence. The rule sets forth specific categories of directors who cannot be considered independent because of certain discrete relationships (‘‘bright-line tests’’); and also provides that a listed company’s board make an affirmative determination that each independent director has no material relationship that, in the opinion of the board, would raise concerns about independence from management. Id. 20 See Equities Rule 5.3(k)(4). 21 See Equities Rules 5.3(k)(1) and 5.3(k)(4). Proposed Equities Rule 5.3(k)(4)(i)(a) reflects a 17 See E:\FR\FM\22JAN1.SGM Continued 22JAN1 4510 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices amendment, however, each compensation committee member must also satisfy additional independence requirements, as described in Section II.B.1 below.22 NYSE Arca will also retain the existing requirement that a listed issuer adopt a formal written compensation committee charter 23 that specifies the scope of the committee’s responsibilities and how it carries out those responsibilities, including structure, operations and membership requirements.24 The proposed amendment to the rule, which continues to require a charter to address the committee’s duties and responsibilities, requires the issuer to specify additional responsibilities and authority for the compensation committee with respect to retaining its own advisers; appointing, compensating, and overseeing such advisers; considering certain independence factors before selecting and receiving advice from advisers; and receiving funding from the company to engage them, which are discussed in detail in Section II.B.2 below and set forth in proposed Equities Rule 5.3(k)(4).25 tkelley on DSK3SPTVN1PROD with 1. Compensation Committee Composition and Independence Standards NYSE Arca proposes to retain Equities Rule 5.3(k)(1), which would continue to provide that no director qualifies as ‘‘independent’’ unless the board of renumbering of the existing requirement of Equities Rule 5.3(k)(4). 22 See proposed Equities Rule 5.3(k)(4)(ii) (concerning the consideration of director compensation and affiliation). 23 See proposed Equities Rule 5.3(k)(4)(iii). Rule 10C–1 requires a compensation committee to have certain specified authority and responsibilities. See supra notes 15–17 and accompanying text. The existing NYSE Arca Equities rule already requires compensation committees of listed companies to have a charter setting forth specified responsibilities, and the proposed rule updates the language concerning this authority and set of responsibilities and adds the required content discussed infra at text accompanying notes 44–46. 24 See current Equities Rule 5.3(k)(4)(A)–(E). Existing Equities Rule 5.3(k)(4)(E), which NYSE Arca proposed to replace in relevant part with a comparable provision in proposed Equities Rule 5.3(k)(4)(iv)(I)–(III), currently provides that a written charter must address ‘‘[t]he committee’s authority to retain and terminate a consultant to assist in the evaluation of a director, CEO or senior executive compensation. The committee shall have the sole authority to approve the consultant’s fees and other retention items.’’ See discussion infra at text accompanying notes 43–45. 25 See proposed NYSE Arca Equities Rule 5.3(k)(4)(iv)–(v). Because smaller reporting companies are not required to comply with the new compensation adviser independence considerations in proposed NYSE Arca Equities Rule 5.3(k)(4)(v), see infra notes 56–62 and accompanying text, such issuers would not be required to specify this consideration. See also proposed Commentary .02 to NYSE Arca Equities Rule 5.3(k)(4). VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 directors of the listed company affirmatively determines that the director has no material relationship with the listed company. As noted above, NYSE Arca’s rules currently require each member of a listed company’s compensation committee to be an Independent Director, as defined in Equities Rule 5.3(k)(1).26 Rule 10C–1, as discussed above, provides that exchange standards must require compensation committee members to be independent, and further provides that each exchange, in determining independence for this purpose, must consider relevant factors, including the Fees Factor and Affiliation Factor described above. In its proposal, NYSE Arca discussed its consideration of these factors,27 and proposed the following: 28 With respect to the Fees and Affiliation Factors, NYSE Arca proposes to adopt a provision stating that the board of directors of the listed company would be required, in affirmatively determining the independence of any director who will serve on the compensation committee of the board, to consider all factors specifically relevant to determining whether a director has a relationship to the listed company 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: (A) The source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the listed company to such director; and (B) whether such director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.29 With respect to the Fees Factor, NYSE Arca also proposes to amend the rule to provide that the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation.30 With respect to the Affiliation Factor, NYSE Arca proposes, similarly, to amend the commentary to provide that the board should consider whether an affiliate relationship places the director 26 See supra note 19. Notice, supra note 3. 28 See Notice, supra note 3, for the Exchange’s explanation of its reasons for the proposed change. See infra Sections II.B.3 and II.B.4 concerning entities that would be exempt from this requirement. 29 See proposed Equities Rule 5.3(k)(4)(ii). See also Notice, supra note 3. 30 See proposed Equities Rule 5.3(k)(4)(ii). 27 See PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 under the direct or indirect control of the listed company 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 his ability to make independent judgments about the listed company’s executive compensation.’’ 31 Although Rule 10C–1 requires that exchanges consider ‘‘relevant factors’’ not limited to the Fees and Affiliation Factors, NYSE Arca states that, after reviewing its current and proposed listing rules, it concluded not to propose any specific numerical tests with respect to the factors specified in proposed Equities Rule 5.3(k)(4)(ii) or to adopt a requirement to consider any other specific factors. In its proposal, NYSE Arca stated that it did 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 listed company.32 Further, as stated in its filing, NYSE Arca believes that its existing ‘‘brightline’’ independence standards, as set forth in Equities Rule 5.3(k)(1), are sufficiently broad to encompass the types of relationships which would generally be material to a director’s independence for compensation committee service.33 Additionally, 31 See id. Notice, supra note 3. 33 See Notice, supra note 3. The following are the ‘‘bright-line’’ tests set forth in Equities Rule 5.3(k)(1): (A) A director who is or has been within the last three years, an employee of the listed company, or whose immediate family member is or has been within the last three years an executive officer of the listed company; (B) (i) A director or a director who has an immediate family member who is a current partner of a firm that is the company’s internal or external auditor; (ii) A director who is a current employee of such a firm; (iii) A director who has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (iv) A director or a director who has an immediate family member who was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the listed company’s audit within that time; (C) A director or a director who has an immediate family member who is, or in the past three years has been, part of an interlocking directorate in which an executive officer of the listed company serves or served on the compensation committee of another company that concurrently employs or employed the director; (D) A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $200,000 or 5% of such other company’s consolidated gross revenues, is not ‘‘independent’’ until three years after falling below such threshold; (E) A director who received, or whose immediate 32 See E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with NYSE Arca stated that Equities Rule 5.3(k)(1) already requires the board to consider any other material relationships between the director and the listed company or its management that are not the subject of ‘‘bright-line’’ tests from Equities Rule 5.3(k)(1)(A)– (F).34 NYSE Arca believes that these requirements with respect to general director independence, when combined with the specific considerations required by proposed Equities Rule 5.3(k)(4)(ii), represent an appropriate standard for compensation committee independence.35 NYSE Arca proposes a cure period for a failure of a listed company to meet its committee composition requirements for independence. Under the provision, if a listed company fails to comply with the compensation committee composition requirements because a member of the compensation committee ceases to be independent for reasons outside the member’s reasonable control, that person, only so long as a majority of the members of the compensation committee continue to be independent, may remain a member of the compensation committee until the earlier of the next annual shareholders’ meeting of the listed company or one year from the occurrence of the event that caused the member to be no longer independent.36 The proposed rule also requires a company relying on this provision to provide notice to NYSE Arca promptly.37 NYSE Arca modified the suggested cure period language contained in Rule 10C–1(a)(3) by limiting the cure period’s use to circumstances where the committee continues to have a majority of independent directors, as NYSE Arca believes this would ensure that the applicable committee could not take an action without the agreement of one or more independent directors.38 family member is an executive officer who received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service); (F) In the case of an investment company, in lieu of paragraphs (A)– (E) above, 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. 34 See Notice, supra note 3. 35 See id. 36 See proposed Equities Rule 5.3(k)(4)(ii). 37 See id. 38 See Notice, supra note 3. The Commission notes that while NYSE Arca does not provide any new procedures for an issuer to have an opportunity to cure any other defects with respect to its proposed compensation committee requirements, current NYSE Arca Equities rules VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 NYSE Arca’s current rules relating to compensation committees include an exception that allows a director who is not an Independent Director to be appointed to such a committee under exceptional and limited circumstances, as long as that director is not currently an executive officer, an employee, or the family member of an executive officer.39 The exception applies, however, only if the committee is comprised of at least three members and the board determines that the individual’s membership on the committee is required by the best interests of the company and its shareholders.40 NYSE Arca proposes to amend Equities Rule 5.3(k)(4) to remove, except for smaller reporting companies, the availability of this exception for a director who fails the current requirements or the new enhanced director independence requirements proposed by NYSE Arca.41 In effect, NYSE Arca proposes to retain the exception only for smaller reporting companies. Under the exception, a compensation committee member of a smaller reporting company may not serve longer than two years with this exception. In addition, a smaller reporting company relying on the exception must make certain disclosures in its proxy statement regarding the nature of the relationship and the reasons for the determination.42 2. Authority of Committees To Retain Compensation Advisers; Funding; and Independence of Compensation Advisers In its proposed rule change, NYSE Arca proposes to fulfill the requirements imposed by Rule 10C–1(b)(2)–(4) under the Act concerning compensation advisers by setting forth those requirements in its own rules and requiring issuers to provide these new rights and responsibilities to their compensation committees.43 Thus, provide issuers with an opportunity to cure defects, and appeal, before their securities are delisted for rule violations. See Equities Rule 5.5(a) (‘‘Maintenance Requirements and Delisting Procedures’’) and Equities Rule 5.5(m) (‘‘Delisting Procedures’’). 39 See current Equities Rule 5.3(k)(4). 40 See id. 41 See proposed Equities Rule 5.3(k)(4)(i)(b). As noted below, smaller reporting companies are not subject to enhanced director independence requirements. 42 See id. See also Notice, supra note 3. 43 Rule 10C–1(b)(4), does not include the word ‘‘independent’’ before ‘‘legal counsel’’ and requires an independence assessment for any legal counsel to a compensation committee, other than in-house counsel. In providing Commentary .05 to proposed Equities Rule 5.3(k)(4), as modified by Amendment No. 2, NYSE Arca provides for two limited exceptions. See infra notes 49–52 and accompanying text. PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 4511 proposed Equities Rule 5.3(k)(4)(iv) proposes to adopt the requirements that NYSE Arca believes are required by Rule 10C–1(b)(2)–(3) that: (i) The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser; (ii) the compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel or other adviser retained by the compensation committee; 44 and (iii) the listed company must 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.45 Proposed Equities Rule 5.3(k)(4)(v), as amended, also sets forth explicitly, in accordance with Rule 10C–1, that the compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the compensation committee, other than in-house legal counsel, only after taking into consideration all factors relevant to that person’s independence from management, including the following six factors set forth in Rule 10C–1 regarding independence assessments of compensation advisers.46 The six factors, which are set forth in full in the proposed rule, are: (I) The provision of other services to the listed company by the person that employs the compensation consultant, legal counsel or other adviser; (II) the amount of fees received from the listed company 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 44 The proposal also includes a provision, derived from Rule 10C–1, stating that nothing in the rule may be construed: (A) 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 to the compensation committee; or (B) to affect the ability or obligation of the compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee. See Commentary .06 to Equities Rule 5.3(k)(4). 45 See Notice, supra note 3. 46 Rule 10C–1(b)(4). E:\FR\FM\22JAN1.SGM 22JAN1 4512 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices consultant, legal counsel or other adviser with a member of the compensation committee; (V) any stock of the listed company owned by the compensation consultant, legal counsel or other adviser; and (VI) any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the listed company.47 As proposed, Equities Rule 5.3(k)(4)(v) would not include any specific additional factors for consideration, as NYSE Arca stated that it believes the list included in Rule 10C–1(b)(4) is very comprehensive and the proposed listing standard would also require the compensation committee to consider any other factors that would be relevant to the adviser’s independence from management.48 Proposed Commentary .05 to Equities Rule 5.3(k)(4), as modified by Amendment No. 2,49 further states that, as provided in Rule 10C–1, a compensation committee is required to conduct the independence assessment outlined in proposed Equities Rule 5.3(k)(4)(v) with respect to any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than (i) in-house legal counsel 50 and (ii) any compensation consultant, legal counsel or other adviser whose role is limited to the following activities for which no disclosure would be required under Item 407(e)(3)(iii) of Regulation S–K: Consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the listed company, and that is available generally to all salaried employees; or providing information that either is not customized for a particular company or that is customized based on parameters that are not developed by the compensation consultant, and about which the compensation consultant does not provide advice.51 NYSE Arca noted that this second exception is based on Item 407(e)(3)(iii) of Regulation S–K, which provides a limited exception to the Commission’s requirement for a registrant to disclose any role of 47 See also Rule 10C–1(b)(4)(i)–(vi). Notice, supra note 3. 49 See supra note 8. NYSE Arca’s proposal as submitted originally only contained an exception for in-house legal counsel. As described below, the Exchange amended its proposal to add an exception for advisers whose role is limited to certain broadbased plans or to providing non-customized information. 50 See proposed Commentary .02 to Equities Rule 5.3(k)(4). 51 See Exhibit 5 to Amendment No. 2 (amending, in part, the proposed Commentary .02). tkelley on DSK3SPTVN1PROD with 48 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 compensation advisers in determining or recommending the amount or form of a registrant’s executive and director compensation.52 Proposed Commentary .06 to Equities Rule 5.3(k)(4), as modified by Amendment No. 2, also clarifies that nothing in the rule requires a compensation consultant, legal counsel or other compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting or receiving advice from a compensation adviser.53 It further clarifies that compensation committees may select or receive advice from any compensation adviser they prefer, including ones that are not independent, after considering the six independence factors set forth in Equities Rule 5.3(k)(4)(v)(I)–(VI).54 The Exchange clarified that, while the compensation committee is required to consider the independence of compensation advisers, the compensation committee is not precluded from selecting or receiving advice from compensation advisers that are not independent.55 3. Application to Smaller Reporting Companies Rule 10C–1 includes an exemption for smaller reporting companies from all the requirements included within the rule.56 Consistent with this Rule 10C–1 provision, NYSE Arca, as a general matter, proposes that a smaller reporting company, as defined in Rule 12b–2 57 under the Act (hereinafter, a ‘‘Smaller Reporting Company’’), not be subject to the new requirements set forth in its proposal specifically to comply with Rule 10C–1.58 Thus, NYSE Arca proposes not to require Smaller Reporting Companies to comply with either the enhanced independence standards for members of compensation committees relating to compensatory fees and affiliation or the compensation adviser independence considerations.59 52 See Amendment No. 2; see also 17 CFR 229.407(e)(3)(iii). The Exchange believes that its proposed exception from the independence assessment requirement is appropriate because the types of services excepted do not raise conflict of interest concerns, and noted that this is the same reason for which the Commission excluded these types of services from the disclosure requirement in Item 407(e)(3)(iii) of Regulation S–K. 53 See Exhibit 5 to Amendment No. 2, supra note 8. 54 See id. 55 See Amendment No. 2, supra note 8. 56 See supra Section II.A; see also Rule 10C– 1(b)(5)(ii). 57 17 CFR 240.12b–2. 58 See proposed Commentary .02 to Equities Rule 5.3(k)(4). 59 See supra text accompanying notes 29 and 47. PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 NYSE Arca proposes in Commentary .02 to Equities Rule 5.3(k)(4) that Smaller Reporting Companies are not required to comply with Equities Rule 5.3(k)(4)(ii) concerning the additional independence factors for members serving on the compensation committee.60 A Smaller Reporting Company will be required to comply with proposed Equities Rule 5.3(k)(4)(iv) regarding the requirements concerning the compensation committee’s authority, responsibility and funding of compensation advisers.61 However, NYSE Arca proposes an exception from the proposed Equities Rule 5.3(k)(4)(v) that would otherwise require the Smaller Reporting Company’s compensation committee to consider independence factors before selecting such advisers, which goes beyond NYSE Arca’s existing requirements.62 Finally, as noted above, NYSE Arca proposes to amend Equities Rule 5.3(k)(4)(i)(b) to clarify that only Smaller Reporting Companies will be eligible to continue to avail themselves of the ability of the board, under exceptional and limited circumstances, to appoint a nonindependent director to the compensation committee. 4. Exemptions NYSE Arca proposes that its existing exemptions from the Exchange’s compensation-related listing rules currently in place, which are set forth in Equities Rules 5.3 and 5.3(k), apply also to the new requirements of the proposed rule change and thereby will continue to provide a general exemption from all of the compensation committee requirements of Equities Rule 5.3(k)(4).63 These include exemptions to the following issuers: any listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company (in other words, a controlled company); limited partnerships; companies in bankruptcy; closed-end and open-end management investment companies that are 60 See Notice, supra note 3. id. 62 See id. As noted above, NYSE Arca currently requires such authority, responsibility and funding be provided by all listed companies to compensation committees, including by Smaller Reporting Companies. See supra text accompanying note 24. As Smaller Reporting Companies will not be required to comply with the consideration of certain independence factors when selecting an adviser, such issuers will not be required to specify this provision. 63 See Notice, supra note 3. In addition, such exempt companies would also thereby be exempt from the enhanced independence requirements for compensation committee composition described in proposed Equities Rule 5.3(k)(4)(ii). 61 See E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices registered under the Investment Company Act of 1940; passive business organizations in the form of trusts (such as royalty trusts) or derivatives and special purpose securities; and issuers whose only listed equity stock is a preferred stock.64 NYSE Arca states that these categories of issuers typically: (i) Are externally managed and do not directly employ executives; (ii) do not by their nature have employees; or (iii) have executive compensation policy set by a body other than the board.65 In light of these structural reasons why these categories of issuers generally do not have compensation committees, the Exchange believes that it would be a significant and unnecessarily burdensome alteration in their governance structures to require them to comply with the proposed new requirements and that it is appropriate to grant them an exemption.66 Concerning foreign private issuers,67 NYSE Arca’s current Equities Rule 5.3(n) permit any such issuer to follow its home country practice in lieu of many of NYSE Arca’s corporate governance listing standards, including the Exchange’s compensation-related listing rules. Rule 5.3(n) currently provides that listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the provisions of Equities Rule 5.3, but this allowance is granted on condition that the issuer discloses in its annual report any significant ways in which its corporate governance practices differ from those followed by domestic companies under NYSE Arca listing standards.68 NYSE Arca proposes that this allowance continue to apply, generally, to the Exchange’s compensation committee rules as revised by the instant proposal on the same condition, namely that the issuer discloses any significant ways in which its corporate governance practices differ from those followed by domestic companies under NYSE Arca listing standards in its annual report.69 NYSE Arca also proposes an additional requirement to the disclosure requirement applicable to foreign private issuers—that the foreign private issuer explain the reason as to why the 64 See Equities Rules 5.3 and 5.3(k). Notice, supra note 3. 66 See id. 67 Under NYSE Arca’s listing rules, ‘‘foreign private issuer’’ has the same meaning and is defined in accordance with the SEC’s definition of foreign private issuer set out in Rule 3b–4(c) (17 CFR 240.3b–4). See Equities Rule 5.1(b)(3). 68 See Equities Rule 5.3(n). A foreign private issuer may provide this disclosure either on its Web site and/or in its annual report as distributed in shareholders to the United States. 69 See Notice, supra note 3. tkelley on DSK3SPTVN1PROD with 65 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 company does not comply with the compensation committee rules.70 5. Transition to the New Rules for Companies Listed as of the Effective Date The proposed rule change provides that certain of the new requirements for listed companies will be effective on July 1, 2013.71 NYSE Arca does not propose to provide any other transition periods by which listed companies would be required to comply with the new Equities Rule 5.3(k)(4)(ii) compensation committee director independence standards. NYSE Arca proposes that all proposed sections of the proposal would become effective on July 1, 2013 for purposes of compliance by currently listed issuers that are not otherwise exempted.72 6. Compliance Schedule: Companies That Cease To Qualify as Smaller Reporting Companies NYSE Arca’s existing rules do not permit companies listing on the Exchange to phase-in compliance with all of the Exchange’s applicable independence requirements for compensation committees after the date that the company’s securities first trade on NYSE Arca. NYSE Arca proposes to create a compliance schedule for companies that cease to be a Smaller Reporting Company. For a company that was, but has ceased to be, a Smaller Reporting Company, the proposed rule change, as modified by Amendment No. 2, establishes a compliance schedule based on certain dates relating to the company’s change in status.73 Pursuant 70 See Exhibit 5 to the Notice, supra note 3 and Amendment No. 2, supra note 8; see also Commentary .03 to Equities Rule 5.3(k)(4). 71 Existing compensation committee independence standards would continue to apply until that time. 72 As noted above, current NYSE Arca Equities rules require that the compensation committee charter give that committee sole authority to retain and terminate a consultant to assist in the evaluation of director, CEO or executive officer compensation, including sole authority to approve the firm’s fees and other retention terms. 73 See proposed Commentary .02 to Equities Rule 5.3(k)(4), as amended. In the proposal as originally submitted, the compliance schedule was to require compliance with the enhanced standards for director independence six months after the company ceases to be a Smaller Reporting Company, but immediate compliance with all other requirements. In Amendment No. 2, NYSE Arca states that while the revised compliance schedule is different from what it originally proposed, the amended version will allow companies sufficient time to adjust to the differences, as many companies will likely not become aware of their change in status until significantly after the determination date and would therefore not utilize the transition period as originally proposed to bring themselves into compliance with the enhanced requirements, and that such companies would have PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 4513 to Rule 12b–2 under the Act, a company tests its status as a Smaller Reporting Company on an annual basis as of the last business day of its most recently completed second fiscal quarter (the ‘‘Smaller Reporting Company Determination Date’’). A company with a public float of $75 million or more as of the Smaller Reporting Company Determination Date will cease to be a Smaller Reporting Company as of the beginning of the fiscal year following the Smaller Reporting Company Determination Date. Under NYSE Arca’s proposal, the day of this change in status is the beginning of the compliance period (‘‘Start Date’’).74 By six months from the Start Date, the company will be required to comply with Equities Rule 5.3(k)(4)(v), which sets forth the provision described above relating to the requirement that the committee consider independence factors before selecting compensation advisers.75 Six months from the Start Date, the company will begin to comply with the additional requirements in Equities Rule 5.3(k)(4)(ii) regarding member independence on the compensation committee. Under the proposal, as amended, a company that has ceased to be a Smaller Reporting Company will be permitted to phase in its compliance with the enhanced independence requirements for compensation committee members (relating to compensatory fees and affiliation) as follows: (i) One member must satisfy the requirements by six months from the Start Date; (ii) a majority of members must satisfy the requirements by nine months from the Start Date; and (iii) all members must satisfy the requirements by one year from the Start Date.76 III. Comments on the Proposed Rule Change and NYSE Arca’s Response As stated previously, the Commission received one comment letter on the NYSE Arca proposal,77 and seven comment letters on a related NYSE proposal.78 The Commission is treating the comment letter submitted on the NYSE filing, for which a comparable letter was not submitted on the NYSE Arca filing, as also being applicable to significant difficulty in becoming compliant within the transition period as originally proposed. 74 See Amendment No. 2. 75 In addition, this will require the company to act in order to reflect this additional requirement for the compensation committee. See proposed Equities Rule 5.3(k)(4)(iii). 76 During the compliance schedule, a company that has ceased to be a Smaller Reporting Company will be required to continue to comply with the rules previously applicable to it. 77 See supra note 5. 78 See id. E:\FR\FM\22JAN1.SGM 22JAN1 4514 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices the NYSE Arca filing since the NYSE and NYSE Arca filings address the same substantive issues. NYSE Euronext, Inc., on behalf of NYSE Arca, responds to these comment letters for the NYSE Arca proposal.79 Three commenters expressed general support for the proposal, although two believed that it needed to be amended before being approved.80 Some commenters supported specific provisions of the proposal,81 some opposed specific provisions,82 and some sought clarification of certain aspects of the proposal.83 Some commenters believed that the proposal fell short of meeting the requirements of Rule 10C– 1 and believed that it should have been more stringent.84 These and other comments, as well as NYSE Arca’s responses to some of the comments that raised issues with the proposal, are summarized below. A. Definition of Independence 1. Consideration of Director Compensation tkelley on DSK3SPTVN1PROD with Three commenters believed that the proposal falls short of the requirements of Rule 10C–1, which, in their view, requires that fees paid to a director for service on the company’s board also be considered.85 Two of these commenters, after noting that the proposal did not require boards of directors to also consider the compensation paid to the directors for their service on the board in determining the independence of directors serving on the compensation committee, argued that the proposal falls short of the requirements of Rule 10C–1, which, in their view, requires that fees paid to a director for service on the company’s board also be 79 See supra note 6. NYSE Euronext, Inc.’s response addresses comments received on both the NYSE and NYSE Arca proposals. 80 See Ameriprise Letter, which supported the proposal but believed that certain aspects were not sufficiently clear such that the proposal needed to be amended to provide additional clarity; ICI Letter, which urged approval of the proposal; and Corporate Secretaries Letter, which generally supported the proposal, but believed that certain of its aspects were unnecessarily burdensome or not sufficiently clear such that the proposal needed to be amended before being approved by the Commission. 81 See Brown Letter, CII Letter, and ICI Letter. 82 See AFL–CIO Letter, Brown Letter, and Wilson Sonsini Letter. See also CII Letter, which stated that it believed that specific aspects of the proposal were lacking. 83 See Ameriprise Letter and Corporate Secretaries Letter. 84 See AFL–CIO Letter, Brown Letter, CII Letter, and Teamsters Letter. 85 See Brown Letter; AFL–CIO Letter; and Teamsters Letter. As noted above, the comment letters refer specifically to NYSE, but apply equally to the NYSE Arca proposal. VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 considered.86 The other commenter argued that the language of Section 10C of the Act itself, as well as its legislative history, indicates Congress’s intent that such fees be considered.87 These commenters believed that compensation for board service can result in ‘‘the impairment of independence as a result of excessive fees,’’ 88 because ‘‘[h]igh director fees relative to other sources of income can compromise director objectivity,’’ 89 and ‘‘[h]ighly paid directors also may be inclined to approve large executive pay packages.’’ 90 One of these commenters believed that the requirement of Section 10C of the Act and Rule 10C–1 to consider the source of compensation of a director goes further, and applies to all types of compensation that a director may receive, including compensation paid by any person, including nonissuers.91 In its response to comments, NYSE Arca stated that, as all non-management directors of a listed company are eligible to receive the same fees for service as a director or board committee member, NYSE Arca does not believe that it is likely that director compensation would be a relevant consideration for compensation committee independence.92 NYSE Arca noted that, however, the proposed rules require the board to consider all relevant factors in making compensation committee independence determinations.93 Therefore, NYSE Arca believes that, to the extent that excessive board compensation might affect a director’s independence, the proposed rules would require the board to consider that factor in its determination.94 2. Personal or Business Relationships Between Directors and Officers Some commenters believed that the proposed rules should explicitly require the board of a listed company, when considering affiliations of a director in determining eligibility for compensation committee membership, to consider personal or business relationships between the director and the company’s executive officers.95 As expressed by 86 See AFL–CIO Letter and Teamsters Letter, noting that Rule 10C–1 requires the exchanges to consider a director’s ‘‘source of compensation,’’ and arguing that this phrase includes director fees. 87 See Brown Letter. 88 Id. 89 See AFL–CIO Letter and eamsters Letter 90 Id. 91 See Brown Letter. 92 See NYSE Response Letter. 93 See id. 94 See id. 95 See AFL–CIO Letter, Brown Letter, CII Letter, Teamsters Letter. As noted above, several of these PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 two of these commenters, ‘‘too many corporate directors have significant personal, financial or business ties to the senior executives that they are responsible for compensating.’’ 96 Some commenters believed that related party transactions should explicitly be included as a relevant factor in determining independence for members of compensation committees.97 The additional requirements Disclosure suggested by commenters also included, for example, disqualification of a director from membership on the compensation committee if an immediate family member of the director received compensation in excess of $120,000 a year from the company even if that family member was not an executive officer of the company; 98 or if the director has, or in the past five years has had, a personal contract with the company, with an executive officer of the company, or with any affiliate of the company.99 One commenter acknowledged that the proposal would require consideration of all factors specifically relevant to determining whether a director has a relationship which is material to that director’s ability to be independent from management, but argued that such requirement is not sufficient to ensure that boards weigh personal or business relationships between directors and executive officers.100 In support, the commenter argued that: (1) Such relationships were not technically with the ‘‘listed company’’ and therefore would at least create confusion as to whether it should be considered; (2) the omission of an explicit reference to this relationship was inconsistent with other approaches taken in the proposal that made reference to certain other relationships; and (3) legislative history makes it clear that Congress expected these comment letters refer specifically to NYSE, but apply equally to the NYSE Arca proposal. 96 AFL–CIO Letter and Teamsters Letter. 97 See AFL–CIO Letter and Teamsters Letter. 98 See id.. NYSE’s definition of Independent Director already disqualifies a director from membership on the compensation committee if an immediate family member of the director receives in excess of $120,000 from the company or was an executive officer of the company. 99 See CII Letter. The commenter acknowledged, however, that NYSE Arca’s existing director requirements implicitly require this consideration, but similarly recommended that the importance of the factor requires it be explicit in the proposal. Outside the scope of this proposal, the commenter also suggested NYSE Arca consider, at some future date, developing a more comprehensive and robust definition of independent directors that could be applicable to all board committees and provided a proposed definition for NYSE Arca’s consideration. 100 See Brown Letter. E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices relationships to be explicitly considered in determining director independence.101 In response, NYSE Arca noted that the existing independence standards of NYSE Arca require the board to make an affirmative determination that there is no material relationship between the director and the company which would affect the director’s independence.102 NYSE Arca further stated that commentary to Section 303A.02(a) of the NYSE Listed Company Manual explicitly notes with respect to the board’s affirmative determination of a director’s independence that the concern is independence from management, and NYSE MKT LLC and NYSE Arca have always interpreted their respective director independence requirements in the same way.103 Consequently, NYSE Arca stated that it did not believe that any further clarification of this requirement is necessary.104 As to a requirement to consider related party transactions, NYSE Arca responded that it believes that this is unnecessary as the existing director independence standards require boards to consider all material factors relevant to an independence determination, as do the specific compensation committee independence requirements of the proposed rules.105 3. Sufficiency of Single Factor and Additional Comments on Independence Two commenters explicitly sought clarification that a single factor can result in the loss of independence.106 In its response letter, NYSE Arca confirmed that it has interpreted the existing general board independence standards as providing that a single relationship could be sufficiently material that it would render a director non-independent. NYSE Arca stated it was not aware that there has been any confusion with respect to this interpretation.107 Consequently, NYSE Arca did not believe it is necessary to include in the proposed rules a statement that a single factor may be sufficiently material to render a director non-independent, as this is clearly the intention of the rules as drafted.108 101 See id. NYSE Response Letter. 103 See id. 104 See id. 105 See id. 106 See AFL–CIO Letter; Teamsters Letter. As noted above, the comment letters refer specifically to NYSE, but apply equally to the NYSE Arca proposal. 107 See NYSE Response Letter. 108 See id. tkelley on DSK3SPTVN1PROD with 102 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 Some of the above commenters expressed the belief, in general, that the definition of an independent director should be more narrowly drawn, that the bright-line tests of independence should be strengthened, and that the standards of independence should be uniform for all committees requiring independent directors.109 One commenter believed that the requirement that the board ‘‘must consider all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member’’ was vague and unnecessary in light of the comprehensive factors already required.110 In responding to this commenter, NYSE Arca disagreed, noting that the requirement to consider all material relationships, not just those enumerated, was essential, as it is impossible to foresee all relationships that may be material.111 B. Compensation Adviser Independence Factors The Commission received letters from four commenters relating to the provision of the proposed rule change that requires a compensation committee to take into consideration the factors set forth in the proposal in the selection of a compensation consultant, legal counsel, or other adviser to the committee.112 1. Additional Factors for Consideration One commenter generally supported the proposal’s requirement that a board consider six independence factors before engaging an adviser, but believed that at least one additional factor should be considered: ‘‘Whether the compensation committee consultants, legal counsel or other advisers require that their clients contractually agree to indemnify or limit their liability.’’ 113 The commenter believed that such contractual provisions, which the commenter indicated have become standard practice for many consultants, ‘‘raise conflict of interest red flags’’ that every compensation committee should consider in determining the independence of the consultant.114 109 See CII Letter, AFL–CIO Letter, Teamsters Letter. 110 See Corporate Secretaries Letter. 111 See NYSE Response Letter. 112 See Ameriprise Letter, Wilson Sonsini Letter, CII Letter, and Corporate Secretaries Letter. As noted above, several of these comment letters refer specifically to NYSE, but apply equally to the NYSE Arca proposal. 113 See CII Letter. 114 See id. PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 4515 In response, NYSE Arca stated that it did not believe that this is an appropriate addition because a relationship would affect an adviser’s independence from management only if it gave rise to a concern that it would subject the adviser to influence by management.115 It was not apparent to NYSE Arca why the existence of contractual indemnification and limitation of liability provisions would subject an adviser to any influence by management and, therefore, it is not clear how they are relevant to an independence determination.116 NYSE Arca expressed no view on the desirability of such agreements.117 2. Non-Independent Consultants One commenter suggested that, although the portion of the proposal which relates to the compensation committee’s use of a compensation consultant was thoughtfully drafted and accurately reflects the substance of Rule 10C–1, there was a possibility that a reader may not properly interpret the intended meaning of proposed Section 303A.05(c) of the NYSE Listed Company Manual concerning the use of compensation consultants, legal counsel and advisers that are not independent.118 First, the commenter suggested the use of the example ‘‘independent legal counsel’’ might be read to require the compensation committee to only use independent legal counsel, when Rule 10C–1 would otherwise permit a compensation committee to receive advice from nonindependent counsel, such as in-house counsel or outside counsel retained by management.119 Second, the commenter suggested that the proposal could be revised to emphasize that a compensation committee is not responsible for advisers retained by management or other parties.120 Third, the commenter suggested that the section addressing the funding of consultants should be revised to make clear that: (a) Retained legal counsel need not be independent: And (b) expenses of an adviser, in addition to its compensation, would also be provided for by the issuer.121 Fourth, the commenter suggested that the proposal be clarified to require a compensation committee to take into account the independence requirements only when selecting a consultant for matters related 115 See NYSE Response Letter. id. 117 See id. 118 See Ameriprise Letter. 119 See id. 120 See id. 121 See id. 116 See E:\FR\FM\22JAN1.SGM 22JAN1 4516 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices to executive compensation, rather than for consultants selected to assist with any other responsibilities the committee may have in addition to executive compensation.122 In response, NYSE Arca noted that Amendment No. 2 amended the proposed rule text to provide that: (i) Nothing in the proposed rules requires a compensation consultant, legal counsel or other compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting a compensation adviser; and (ii) the compensation committee may select any compensation adviser they prefer including ones that are not independent, after considering the six independence factors outlined in the proposed rules.123 In addition, NYSE Arca noted that Rule 10C–1 and the SEC’s adopting release refer only to compensation advisers generally without carving out compensation advisers retained by the compensation committee with respect to matters other than executive compensation.124 One commenter believed that the proposed rule could be read as requiring a compensation committee to consider the independence factors set forth in Rule 10C–1 when selecting any consultant providing advice to the compensation committee, including any outside legal counsel that might provide legal advice to a compensation committee.125 The commenter argued that outside legal counsel often provides advice to compensation committees on matters other than how much a company should pay an executive.126 The commenter suggested it would not be ‘‘necessary or a good use of resources for compensation committees to review independence factors for such attorneys providing advice to the compensation committee.’’ 127 The commenter stated that no other rule requires a board committee to consider the independence of its regular legal counsel,128 and noted that, while it may, at times, be appropriate for a board or a committee to consider independence factors, such a consideration should not be made part of a listing standard that singles out the compensation committee.129 The commenter suggested that different language originally proposed by The NASDAQ Stock 122 See id. See also Corporate Secretaries Letter. NYSE Response Letter. 124 See NYSE Response Letter. 125 See Wilson Sonsini Letter. 126 See id. 127 See id. 128 See id. 129 See id. tkelley on DSK3SPTVN1PROD with 123 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 Market LLC reflected a more balanced rule that only required the compensation committee to consider the independence when selecting independent legal counsel, not every outside attorney that provides advice to the compensation committee.130 In response, NYSE Arca stated that it believes that its proposal is dictated by Rule 10C–1, which excludes only inhouse legal counsel from the requirement to conduct an independence analysis with respect to any legal counsel consulted by the compensation committee, including the company’s regular securities or tax counsel.131 NYSE Arca noted that the Rule 10C–1 Adopting Release provides that ‘‘[t]he exemption of in-house counsel from the independence analysis will not affect the obligation of a compensation committee to consider the independence of outside legal counsel or compensation consultants or other advisers retained by management or by the issuer.’’ 132 Another commenter, while generally supporting the proposal, maintained that the required independence assessment will be ‘‘time-consuming and burdensome’’ due to the scope of information that will need to be gathered in order to conduct the required independence assessment.133 This commenter believed that uncertainty over the scope of the requirement could have a counterproductive effect of discouraging compensation committees from obtaining the advice of advisers subject to the rule, particularly in situations where quick action is required of the compensation committee, and further identified a number of specific issues that it believed NYSE should address to provide greater clarity regarding the standard.134 In response, NYSE Arca disagreed with the commenter, arguing that it was impossible to specifically enumerate every category of relationship which might be material to a compensation committee adviser’s independence.135 130 See id. The Commission notes that The NASDAQ Stock Market LLC has since revised its proposed rule language and added commentary that makes clear its original intent that the compensation committee of an issuer listed on The NASDAQ Stock Market LLC, absent an exemption, must consider the independence of every adviser, other than in-house legal counsel, that provides advice to the compensation committee, including non-independent legal counsel. See SR–NASDAQ– 2012–109, Amendment No. 1. 131 See NYSE Response Letter. 132 See id. 133 See Corporate Secretaries Letter. 134 The Commission notes that NYSE Arca addressed some of the commenter’s concerns in Amendment No. 2. 135 See NYSE Response Letter. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 NYSE Arca believes that it is therefore necessary for a compensation committee to conduct a more flexible analysis.136 NYSE Arca believes that it would not be appropriate for it to identify additional relevant factors in the rule, as it would be impossible to predict every category of relationship that might be material.137 C. Opportunity To Cure Defects One commenter supported the rule proposed to permit issuers a period of time, under specified conditions, to cure failures to comply with the independence requirements for compensation committee members.138 The commenter was concerned, however, that the proposed rules did not specify a cure period for any other form of non-compliance with the new rules.139 The commenter believed that a company should be allowed to take corrective action within a reasonable time after the company’s senior executives learn of the non-compliance. In response, NYSE Arca noted that it had existing policies and procedures that govern non-compliance with rules generally and that these provisions would apply to any events of noncompliance under the proposed rules.140 NYSE Arca believes these provisions provide it with the ability to grant a discretionary period for an issuer to return to compliance, and noted that the determination of a reasonable cure period can only be made in light of specific facts and circumstances.141 D. Exemptions The Commission received one comment letter supporting the proposal to exempt investment companies from the Rule 10C–1 requirements.142 As the commenter noted, although Rule 10C–1 exempts certain entities, including 136 See id. id. 138 See Corporate Secretaries Letter. As noted above, the comment letter refers specifically to NYSE, but applies equally to the NYSE Arca proposal. 139 See id. The commenter mentioned, in particular, the requirement that the committee may obtain advice from a consultant or adviser only after assessing that individual’s independence. The commenter believed that inadvertent violations of this requirement could arise, for example, if a person is appearing before a compensation committee solely to provide information or other services, and the individual then on a solicited or unsolicited basis makes a statement that could be viewed as providing advice on executive compensation. In the absence of a cure mechanism, the commenter believed, the company would be in violation of the listing standard and have no recourse. 140 See NYSE Response Letter. 141 See id. 142 See ICI Letter. As noted above, the comment letter refers specifically to NYSE, but applies equally to the NYSE Arca proposal. 137 See E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices registered open-end management investment companies, from the enhanced independence requirements for members of compensation committees, it did not explicitly exempt other types of investment companies registered under the Investment Company Act of 1940 (‘‘Investment Company Act’’), including closed-end funds, from any of the requirements of Rule 10C–1. Under the proposal, both closed-end and open-end funds would be exempt from all the requirements of the rule. The commenter supported this aspect of the proposal, stating that both open-end and closed-end funds typically are externally managed and do not employ executives or, by their nature, have employees. The commenter agreed with the proposal that it would be significantly and unnecessarily burdensome to require such entities to comply with the proposed requirements, and further noted that any conflicts with respect to compensation of investment advisers are governed by the Investment Company Act.143 E. Transition Period As noted above, NYSE Arca does not propose a transition period. One commenter voiced support for the transition period proposed by NYSE for compliance with the new compensation committee independence standard, but believed that NYSE should provide a longer period for companies to satisfy proposed Section 303A.05 of the NYSE Listed Company Manual, relating to the authority of a compensation committee to retain compensation consultants, legal counsel, and other compensation advisers; the authority to fund such advisers; and the responsibility of the committee to consider independence factors before selecting such advisers.144 IV. Discussion After careful review, the Commission finds that the NYSE Arca proposal, as amended, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.145 In particular, the Commission finds that the amended proposed rule change is consistent with the requirements of Section 6(b) of the Act,146 as well as with Section 10C of 143 See ICI Letter. Corporate Secretaries Letter. Here, the comment letter refers specifically to NYSE, and does not apply to the NYSE Arca filing, as NYSE Arca provides no transition period for currently listed companies. 145 In approving the NYSE Arca proposed rule change, as amended, the Commission has considered its impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 146 15 U.S.C. 78f(b). tkelley on DSK3SPTVN1PROD with 144 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 the Act 147 and Rule 10C–1 thereunder.148 Specifically, the Commission finds that the proposed rule change, as amended, is consistent with Section 6(b)(5) of the Act,149 which requires that the rules of a national securities exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to remove impediments to and perfect the mechanism of a free and open market and a national market system; and, in general, to protect investors and the public interest; and not be designed to permit, among other things, unfair discrimination between issuers. The development and enforcement of meaningful listing standards for a national securities exchange is of substantial importance to financial markets and the investing public. Meaningful listing standards are especially important given investor expectations regarding the nature of companies that have achieved an exchange listing for their securities. The corporate governance standards embodied in the listing rules of national securities exchanges, in particular, play an important role in assuring that companies listed for trading on the exchanges’ markets observe good governance practices, including a reasoned, fair, and impartial approach for determining the compensation of corporate executives. The Commission believes that the NYSE Arca proposal will foster greater transparency, accountability, and objectivity in the oversight of compensation practices of listed issuers and in the decisionmaking processes of their compensation committees. In enacting Section 10C of the Act as one of the reforms of the Dodd-Frank Act,150 Congress resolved to require that ‘‘board committees that set compensation policy will consist only of directors who are independent.’’ 151 In June 2012, as required by this legislation, the Commission adopted Rule 10C–1 under the Act, which directs the national securities exchanges to prohibit, by rule, the initial or continued listing of any equity security of an issuer (with certain exceptions) that is not in compliance with the rule’s requirements regarding issuer 147 15 U.S.C. 78j–3. CFR 240.10C–1. 149 15 U.S.C. 78f(b)(5). 150 See supra note 9. 151 See H.R. Rep. No. 111–517, Joint Explanatory Statement of the Committee of Conference, Title IX, Subtitle E ‘‘Accountability and Executive Compensation,’’ at 872–873 (Conf. Rep.) (June 29, 2010). 148 17 PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 4517 compensation committees and compensation advisers. In response, NYSE Arca submitted the proposed rule change, which includes rules intended to comply with the requirements of Rule 10C–1 and additional provisions designed to strengthen the Exchange’s listing standards relating to compensation committees. The Commission believes that the proposed rule change satisfies the mandate of Rule 10C–1 and otherwise will promote effective oversight of its listed issuers’ executive compensation practices. The Commission notes that a number of the commenters generally supported substantially similar proposed rule changes, although some commenters offered suggestions to clarify or improve various provisions NYSE Arca’s proposal or NYSE’s substantially similar proposal. The Commission believes that the proposed rule change, as modified by Amendment No. 2, appropriately revises NYSE Arca’s rules for compensation committees of listed companies, for the following reasons: A. Compensation Committee Composition As discussed above, under Rule 10C– 1, the exchanges must adopt listing standards that require each member of a compensation committee to be independent, and to develop a definition of independence after considering, among other relevant factors, the source of compensation of a director, including any consulting, advisory or other compensatory fee paid by the issuer to the director, as well as whether the director is affiliated with the issuer or any of its subsidiaries or their affiliates. The Commission notes that Rule 10C– 1 leaves it to each exchange to formulate a final definition of independence for these purposes, subject to review and final Commission approval pursuant to Section 19(b) of the Act. As the Commission stated in the Rule 10C–1 Adopting Release, ‘‘given the wide variety of issuers that are listed on exchanges, we believe that the exchanges should be provided with flexibility to develop independence requirements appropriate for the issuers listed on each exchange and consistent with the requirements of the independence standards set forth in Rule 10C–1(b)(1).’’ 152 This discretion 152 As explained further in the Rule 10C–1 Adopting Release, prior to final approval, the Commission will consider whether the exchanges’ proposed rule changes are consistent with the requirements of Section 6(b) and Section 10C of the Exchange Act. E:\FR\FM\22JAN1.SGM 22JAN1 tkelley on DSK3SPTVN1PROD with 4518 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices comports with the Act, which gives the exchanges the authority, as selfregulatory organizations, to propose the standards they wish to set for companies that seek to be listed on their markets consistent with the Act and the rules and regulations thereunder, and, in particular, Section 6(b)(5) of the Act. As noted above, in addition to retaining its existing independence standards that currently apply to board and compensation committee members, which include certain bright-line tests, NYSE Arca has enhanced its listing requirements regarding compensation committees by adopting additional standards for independence to comply with the Fees Factor and Affiliation Factor, as well as the other standards set forth in Rule 10C–1. The NYSE Arca’s proposal also adopts the cure procedures required in Rule 10C–1(a)(3) for compensation committee members who cease to be independent for reasons outside their reasonable control, so long as the majority of the members of the compensation committee continue to be independent, and retains the requirement that listed issuers have a compensation committee composed entirely of independent directors as required by Rule 10C–1. In addition, as noted above, NYSE Arca eliminates, for all companies other than Smaller Reporting Companies, the ability of the board under exceptional and limited circumstances to appoint a non independent director to the compensation committee. Further, as discussed in more detail below, the NYSE Arca proposal retains the requirement that the compensation committee have a written charter that addresses the committee’s purpose and responsibilities, and adds requirements to specify the compensation committee’s authority and responsibilities as to compensation advisers as set forth under Rule 10C–1. Finally, to help in assuring that companies comply with these provisions, Exchange rules will continue to require that the compensation committee charter address an annual performance evaluation of the compensation committee. Taken as a whole, the Commission believes that these changes will strengthen the oversight of executive compensation in NYSE Arcalisted companies and further greater accountability, and will therefore further the protection of investors consistent with Section 6(b)(5) of the Act. The Commission believes that the Exchange’s proposal, which requires the consideration of the additional independence factors for compensation VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 committee members, is designed to protect investors and the public interest and is consistent with the requirements of Sections 6(b)(5) and 10C of the Act and Rule 10C–1 thereunder. With respect to the Fees Factor of Rule 10C–1, the Exchange rule text states when considering the source of a director’s compensation in determining independence for compensation committee service, the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation. In addition to the continued application of the NYSE Arca’s current bright-line tests, NYSE Arca’s new rules also require the board to consider all relevant factors in making independence determinations for compensation committee membership. The Exchange believes that these requirements of proposed NYSE Arca Equities Rule 5.3(k)(4)(ii), in addition to the general director independence requirements, represent an appropriate standard for compensation committee independence that is consistent with the requirements of Rule 10C–1 and the Fees Factor. The Commission believes that the provisions noted above to address the Fees Factor give a board broad flexibility to consider a wide variety of fees, including any consulting, advisory or other compensatory fee paid by the issuer or entity, when considering a director’s independence for compensation committee service. While the Exchange does not bar all compensatory fees, the approach is consistent with Rule 10C–1 and provides a basis for a board to prohibit a director from being a member of the compensation committee, should the director receive compensation that impairs the ability to make independent decisions on executive compensation matters, even if that compensation does not exceed the threshold in the brightline test.153 The Commission, therefore, believes that the proposed compensatory fee requirements comply with Rule 10C–1 and are designed to protect investors and the public interest, consistent with Section 6(b)(5) of the Act. The Commission notes that the compensatory fee consideration may help ensure that compensation committee members are less likely to have received fees, from either the issuer or another entity, that could 153 See supra note 33, setting forth the existing bright-line tests. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 potentially influence their decisions on compensation matters. The Commission recognizes that some commenters did not believe that the proposal went far enough because the NYSE Arca did not adequately consider the compensation that directors receive for board or committee service in formulating its standards of independence for service on the compensation committee, and, in particular, the levels to which such compensation may rise,154 or otherwise favored additional requirements.155 The Commission notes, however, that to the extent a conflict of interest exists because directors set their own compensation, companies must disclose director compensation, and investors will become aware of excessive or noncustomary director compensation through this means. In addition, as NYSE Arca states, a company’s board of directors must consider all relevant factors in making compensation committee independence determinations, and if director fees could, in the opinion of the board, impair the director’s independent judgment with respect to compensationrelated matters, the board could therefore consider director compensation in that context.156 The Commission believes that, based on the NYSE Arca’s argument and the disclosure requirements noted above, these arguments are sufficient to find that NYSE Arca has complied with the requirements of Rule 10C–1 in this regard. With respect to the Affiliation Factor of Rule 10C–1, NYSE Arca has concluded that an outright bar from service on a company’s compensation committee of any director with an affiliation with the company, its subsidiaries, and their affiliates is inappropriate for compensation committees. NYSE Arca’s existing independence standards will also continue to apply to those directors 154 See AFL–CIO Letter, Brown Letter, and Teamsters Letter, maintaining that NYSE’s proposal ‘‘falls short’’ of the Rule 10C–1 provision requiring exchanges to consider a director’s source of compensation. See also supra notes 95–99 and accompanying text. As stated by commenters, ‘‘[h]igh director fees relative to other sources of income can compromise director objectivity’’ and ‘‘[h]ighly paid directors also may be more inclined to approve large executive pay packages.’’ AFL–CIO Letter. See also Teamsters Letter. As noted above, the comment letters refer specifically to NYSE, but apply equally to the NYSE Arca proposal. 155 See, e.g., CII Letter. 156 See NYSE Response letter, supra note 6. The Commission also notes that in the NYSE Response Letter, the Exchange states that to the extent that excessive board compensation might affect a director’s independence, the new rules would require the board to consider that factor in its independence determination. E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with serving on the compensation committee. NYSE Arca maintains that it may be appropriate for certain affiliates, such as representatives of significant stockholders, to serve on compensation committees as ‘‘share ownership in the listed company aligns the director’s interests with those of unaffiliated shareholders, as their stock ownership gives them the same economic interest in ensuring that the listed company’s executive compensation is not excessive.’’ In spite of the argument of two commenters in favor of an outright ban on affiliations with the company,157 the Commission believes that NYSE Arca’s approach of requiring boards only to consider such affiliations is reasonable and consistent with the requirements of the Act. The Commission notes that Congress, in requiring the Commission to direct the exchanges to consider the Affiliation Factor, did not declare that an absolute bar was necessary. Moreover, as the Commission stated in the Rule 10C–1 Adopting Release, ‘‘In establishing their independence requirements, the exchanges may determine that, even though affiliated directors are not allowed to serve on audit committees, such a blanket prohibition would be inappropriate for compensation committees, and certain affiliates, such as representatives of significant shareholders, should be permitted to serve.’’ 158 In determining that NYSE Arca’s affiliation standard is consistent with Sections 6(b)(5) and 10C under the Act, the Commission notes that NYSE Arca’s proposal requires a company’s board, in selecting compensation committee members, to consider whether any such affiliation would impair a director’s judgment as a member of the compensation committee. The NYSE Arca Equities rule further states that, in considering affiliate relationships, a board should consider whether such affiliate relationship places the director under the direct or indirect control of the listed company or its senior 157 See Teamsters Letter and AFL–CIO Letter. As noted above, the comment letters refer specifically to NYSE, but apply equally to the NYSE Arca proposal. 158 Rule 10C–1 Adopting Release. At the same time, the Commission noted that significant shareholders may have other relationships with the listed company that would result in such shareholders’ interests not being aligned with those of other shareholders and that the exchanges may want to consider these other ties between a listed issuer and a director. While the Exchange did not adopt any additional factors, the current affiliation standard would still allow a company to prohibit a director whose affiliations ‘‘impair his ability to make independent judgment’’ as a member of the committee. See also supra notes 31–35 and accompanying text. VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 management such that it would impair the ability of the director to make independent judgments on executive compensation. We believe that this should give companies the flexibility to assess whether a director who is an affiliate, including a significant shareholder, should or should not serve on the company’s compensation committee, depending on the director’s particular affiliations with the company or its senior management.159 As to whether NYSE Arca should adopt any additional relevant independence factors, the Exchange stated that it reviewed its rules in light of Rule 10C–1, and concluded that its existing rules together with its proposed rules are sufficient to ensure committee member independence. The Commission believes that, through this review, the Exchange has complied with the requirement that it consider relevant factors, including, but not limited to, the Fees and Affiliation Factors in determining its definition of independence for compensation committee members. The Commission does not agree with the commenters who argued that the NYSE’s substantially similar proposal falls short of ‘‘the requirements or intent’’ of Section 10C of the Act and Rule 10C– 1. The Commission notes that Rule 10C– 1 requires each exchange to consider relevant factors in determining independence requirements for members of a compensation committee, but does not require the exchange’s proposal to reflect any such additional factors. As noted above, several commenters argued that the proposal should require other ties between directors and the company, including business and personal relationships with executives of the company, be considered by boards in making independence determinations.160 The Commission did 159 The Commission notes that one commenter suggested there was ambiguity as to whether boards must consider business or personal relationships between directors and senior management. See Brown Letter. In response, NYSE Arca noted that its existing independence standards require the board to make an affirmative determination that there is no material relationship between the director and the company which would affect the director’s independence. NYSE Arca noted that Commentary to Section 303A.02(a) of the NYSE Listed Company Manual explicitly notes with respect to the board’s affirmative determination of a director’s independence that the concern is independence from management, and NYSE Arca has always interpreted their director independence requirements in the same way. Consequently, NYSE Arca does not believe that any further clarification of this requirement is necessary. See NYSE Response Letter. 160 See supra notes 95–105 and accompanying text. As noted above, several of the comment letters PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 4519 emphasize in the Rule 10C–1 Adopting Release that ‘‘it is important for exchanges to consider other ties between a listed issuer and a director * * * that might impair the director’s judgment as a member of the compensation committee,’’ 161 and noted that ‘‘the exchanges might conclude that personal or business relationships between members of the compensation committee and the listed issuer’s executive officers should be addressed in the definition of independence.’’ However, the Commission did not require exchanges to reach this conclusion and thus NYSE Arca’s decision that such ties need not be included explicitly in its definition of independence does not render its proposal insufficient. In explaining why it did not include, specifically, personal and business relationships as a factor, NYSE Arca cites its standards for Independent Directors, generally, which require the board of directors of a listed issuer to make an affirmative determination that each such director has no material relationship with the listed company with respect to their independence from management.162 All compensation committee members must meet the general independence standards under NYSE Arca’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE Arca’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board. Notwithstanding the concern of some commenters, the Commission confirms that Rule 10C–1 does not mean that a director cannot be disqualified on the basis of one factor alone. Although NYSE Arca does not state this explicitly in its rules, in response to comments, refer specifically to NYSE, but apply equally to the NYSE Arca proposal. 161 See supra note 11. 162 See Equities Rule 5.3(k)(1). See also NYSE Response Letter. E:\FR\FM\22JAN1.SGM 22JAN1 tkelley on DSK3SPTVN1PROD with 4520 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices the Exchange confirmed that they have interpreted their current rules as providing that a single relationship could be sufficiently material that it would render a director nonindependent. The Commission believes that nothing in Rule 10C–1 or in NYSE Arca’s current or proposed rules implies otherwise. Finally, the Commission does not believe that NYSE Arca is required in the current proposed rule change to consider further revisions of its independence rules as suggested by some commenters, although it may wish to do so in the future after it has experience with its rules. The Commission notes that the NYSE Arca provision requires a board to further exercise appropriate discretion to consider all factors specifically relevant in determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member. The Commission notes that one commenter argues this provision is vague and unnecessary and should be deleted from the proposal.163 The Commission does not agree with the commenter, however, that the consideration of the explicitly enumerated factors will be sufficient in all cases to achieve the objectives of Section 10C(a)(3), because it is not possible to foresee all possible kinds of relationships that might be material to a compensation committee member’s independence. We therefore believe the flexibility provided in NYSE Arca’s new compensation committee independence standards provides companies with guidance, while allowing them to identify those relationships that might raise questions of independence for service on the compensation committee. For these reasons, we believe the director independence standards are consistent with the investor protection provision of Section 6(b)(5) of the Act. Under NYSE Arca’s proposal, only Smaller Reporting Companies will be able to avail themselves of the ‘‘Exceptional and Limited Circumstances’’ provision that permits the board to appoint one nonindependent director serve on a compensation committee under certain circumstances. Accordingly, all listed companies, except Smaller Reporting Companies, will be required to have a compensation committee comprised of members that all meet the existing and enhanced independence requirements. We note that this change will ensure that, for all NYSE Arca-listed companies that are not Smaller Reporting Companies, executive compensation will only be considered by independent directors, which should help to ensure impartial executive compensation decisions. The Commission believes that the discretion granted to each exchange by Rule 10C–1, generally, to determine the independence standards it adopts to comply with the Rule includes the leeway to carve out exceptions to those standards, as long as they are consistent with the Act. Regarding the justification for retaining this exception only for Smaller Reporting Companies, the Commission notes that it long ago approved as consistent with the Act the broader exception and concept in the context of NYSE Arca’s definition of Independent Director under Equities Rule 5.3(k)(1) with respect to compensation committees. For these reasons, the Commission believes that retaining this provision for Smaller Reporting Companies is reasonable and consistent with Section 6(b)(5) of the Act and with Rule 10C–1. We note that Smaller Reporting Companies are already exempted out of the enhanced independence standards under NYSE Arca’s proposal and Rule 10C–1. The provision was previously approved by the Commission as consistent with the Act, and finally, the Commission notes that a member appointed to a Smaller Reporting Company’s compensation committee under this Exceptional and Limited Circumstances provision may not serve longer than two years. B. Authority of Committees To Retain Compensation Advisers; Funding; and Independence of Compensation Advisers and Factors As discussed above, NYSE Arca proposes to set forth explicitly in its rules the requirements of Rule 10C–1 regarding a compensation committee’s authority to retain compensation advisers, its responsibilities with respect to such advisers, and the listed company’s obligation to provide appropriate funding for payment of reasonable compensation to a compensation adviser retained by the committee. As such, the Commission believes these provisions meet the mandate of Rule 10C–1 164 and are consistent with the Act.165 In addition, the Commission believes that requiring companies to specify the enhanced compensation committee responsibilities through official board action will help to assure that there is 164 17 163 See Corporate Secretaries Letter. VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 165 15 PO 00000 CFR 240.10C–1. U.S.C. 78j–3. Frm 00144 Fmt 4703 Sfmt 4703 adequate transparency as to the rights and responsibilities of compensation committee members. As discussed above, the proposed rule change requires the compensation committee of a listed company to consider the six factors relating to independence that are enumerated in the proposal before selecting a compensation consultant, legal counsel or other adviser to the compensation committee. The Commission believes that this provision is consistent with Rule 10C–1 and Section 6(b)(5) of the Act. As noted above, one commenter believed that Rule 10C–1 could be read as not requiring a compensation committee to consider the enumerated independence factors with respect to regular outside legal counsel and sought to have NYSE revise its substantially similar proposal.166 This reading is incorrect, and NYSE Arca’s rule language reflects the appropriate reading. The Commission notes that Rule 10C–1 includes an instruction that specifically requires a compensation committee to conduct the independence assessment with respect to ‘‘any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than in-house counsel.’’ 167 To avoid any confusion, NYSE Arca added rule text that reflects this instruction in its own rules.168 In approving this aspect of the proposal, the Commission notes that compliance with the rule requires an independence assessment of any compensation consultant, legal counsel, or other adviser that provides advice to the compensation committee, and is not limited to advice concerning executive compensation. However, NYSE Arca has proposed, in Amendment No. 2, to add language to the provision regarding the independence assessment of compensation advisers 169 to state that the compensation committee is not required to conduct an independence assessment for a compensation adviser that acts in a role limited to the following activities for which no disclosure is required under Item 407(e)(3)(iii) of Regulation S–K: (a) Consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the company, and that is available generally to all salaried employees; and/or (b) providing 166 See Wilson Sonsini Letter and supra notes 125–130 and accompanying text. 167 See Instruction to paragraph (b)(4) of Rule 10C–1. 168 See supra note 50 and accompanying text. 169 See proposed Commentary .05 to Equities Rule 5.3(k)(4), as amended by Amendment No. 2. E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice. NYSE Arca states that this exception is based on Item 407(e)(3)(iii) of Regulation S–K, which provides a limited exception to the Commission’s requirement for a registrant to disclose any role of compensation consultants in determining or recommending the amount and form of a registrant’s executive and director compensation.170 The Commission views NYSE Arca’s proposed exception as reasonable, as the Commission determined, when adopting the compensation consultant disclosure requirements in Item 407(e)(3)(iii), that the two excepted categories of advice do not raise conflict of interest concerns.171 The Commission also made similar findings when it noted it was continuing such exceptions in the Rule 10C–1 Adopting Release, including excepting such roles from the new conflict of interest disclosure rule required to implement Section 10C(c)(2). The Commission also believes that the exception should allay some of the concerns raised by the commenters regarding the scope of the independence assessment requirement. Based on the above, the Commission believes these limited exceptions are consistent with the investor protection provisions of Section 6(b)(5) of the Act. Regarding the belief of another commenter that the independence assessment requirement could discourage compensation committees from obtaining the advice of advisers,172 the Commission notes that, as already discussed, nothing in the proposed rule prevents a compensation committee from selecting any adviser that it prefers, including ones that are not independent, after considering the six factors. In this regard, in Amendment No. 2, NYSE Arca added specific rule language stating, among other things, that nothing in its rule requires a compensation adviser to be independent, only that the compensation committee must consider the six independence factors before 170 See 17 CFR 229.407(e)(3)(iii). Proxy Disclosure Enhancements, Securities Act Release No. 9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348 (‘‘We are persuaded by commenters who noted that surveys that provide general information regarding the form and amount of compensation typically paid to executive officers and directors within a particular industry generally do not raise the potential conflicts of interest that the amendments are intended to address.’’). 172 See Corporate Secretaries Letter and supra note 133 and accompanying text. tkelley on DSK3SPTVN1PROD with 171 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 selecting or receiving advice from a compensation adviser.173 Regarding the commenter’s concern over the burdens that the Exchange proposal imposes, the Commission notes that Rule 10C–1 explicitly requires exchanges to require consideration of these six factors.174 Moreover, five of the six factors were dictated by Congress itself in the DoddFrank Act. As previously stated by the Commission in adopting Rule 10C–1, the requirement that compensation committees consider the independence of potential compensation advisers before they are selected should help assure that compensation committees of affected listed companies are better informed about potential conflicts, which could reduce the likelihood that they are unknowingly influenced by conflicted compensation advisers.175 Finally, one commenter requested guidance ‘‘on how often the required independence assessment should occur.’’ 176 This commenter observed that it ‘‘will be extremely burdensome and disruptive if prior to each such [compensation committee] meeting, the committee had to conduct a new assessment.’’ The Commission anticipates that compensation committees will conduct such an independence assessment at least annually. The changes to NYSE Arca’s rules on compensation advisers should therefore benefit investors in NYSE Arca-listed companies and are consistent with the requirements in Section 6(b)(5) of the Act that rules of the exchange further investor protection and the public interest. C. Application to Smaller Reporting Companies The Commission believes that the requirement for Smaller Reporting Companies, like all other listed companies, to have a compensation committee, composed solely of Independent Directors is reasonable and consistent with the protection of investors.177 The Commission notes that 173 See supra notes 53–54 and accompanying text. Commission also does not agree with the argument of one commenter that NYSE Arca’s proposal must require compensation committees to specifically consider, among the independence factors relating to compensation advisers, whether such an adviser requires that clients contractually agree to indemnify or limit their liability. See CII Letter. The Commission views as reasonable the Exchange’s belief that the six factors set forth in Rule 10C–1 are sufficient for the required independence assessment. 175 See Rule 10C–1 Adopting Release, supra note 11. 176 See Corporate Secretaries Letter. 177 As discussed above, the Commission believes that providing an exception to this requirement for 174 The PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 4521 NYSE Arca’s rules for compensation committees have not made a distinction for Smaller Reporting Companies in the past. However, consistent with the exemption of Smaller Reporting Companies from Rule 10C–1, the NYSE Arca proposal would: (i) Exempt Smaller Reporting Companies from having to consider the additional independence requirements as to compensatory fees and affiliation; and (ii) exempt their compensation committees from having to consider the additional independence factors for compensation advisers. Under this approach, Smaller Reporting Companies will effectively be subject to the same requirements as is currently the case under the existing requirements of Equities Rule 5.3(k)(4) for all companies with respect to providing the compensation committee with the authority and funding for the retention of compensation advisers. The Commission believes that these provisions are consistent with the Act and do not unfairly discriminate between issuers. The Commission believes that, for similar reasons to those for which Smaller Reporting Companies are exempted from the Rule 10C–1 requirements, it makes sense for NYSE Arca to provide some flexibility to Smaller Reporting Companies. Further, because a Smaller Reporting Company does not need to include the additional provision regarding the independence of compensation advisers that NYSE Arca is requiring all other listed companies to include to comply with Rule 10C–1,178 and in view of the potential additional costs of such review, it is reasonable not to require a Smaller Reporting Company to conduct such analysis of compensation advisers. D. Opportunity To Cure Defects Rule 10C–1 requires the rules of an exchange to provide for appropriate procedures for a listed issuer to have a reasonable opportunity to cure any defects that would be the basis for the exchange, under Rule 10C–1, to prohibit the issuer’s listing. Rule 10C–1 also specifies that, with respect to the independence standards adopted in accordance with the requirements of the Rule, an exchange may provide a cure period until the earlier of the next annual shareholders meeting of the Smaller Reporting Companies in limited and exceptional circumstances is appropriate. 178 As discussed supra note 62 and accompanying text, a Smaller Reporting Company will not be required to include, like other listed companies, a requirement that the committee consider independence factors before selecting such advisers, because Smaller Reporting Companies are not subject to that requirement. E:\FR\FM\22JAN1.SGM 22JAN1 tkelley on DSK3SPTVN1PROD with 4522 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices listed issuer or one year from the occurrence of the event that caused the member to be no longer independent. The Commission notes that the cure period that NYSE Arca proposes for companies that fail to comply with the enhanced independence requirements designed to comply with Rule 10C–1 is the same as the cure period suggested under Rule 10C–1, but NYSE Arca limits the cure period’s use to circumstances where the committee continues to have a majority of independent directors, as NYSE Arca believes this would ensure that the applicable committee could not take an action without the agreement of one or more independent directors. The Commission believes that the accommodation, including the proposed period and limitation, although it gives a company less leeway in certain circumstances than the cure period provided as an option by Rule 10C–1, is fair and reasonable and consistent with investor protection under Rule 6(b)(5) by ensuring that a compensation committee cannot take action without a majority of independent directors even when a member ceases to be independent and the committee is entitled to a period to cure that situation. The Commission agrees with the understanding of the commenter who believed that Rule 10C–1 requires that an exchange provide a company an opportunity to cure any defects in compliance with any of the new requirements. The Commission believes that NYSE Arca’s general due process procedures for the delisting of companies that are out of compliance with the Exchange’s rules satisfy this requirement. For example, NYSE Arca’s rules provide that, unless continued listing of the company raises a public interest concern,179 when a company is deficient in compliance with listing standards, the Exchange will request the issuer to take action to remedy any identified deficiency. If the issuer fails to remedy the deficiency, NYSE Arca will hold a meeting to hear any reasons why the issuer believes its security should not be delisted, including reviewing any written response. If, after such meeting, NYSE Arca determines that the security should be delisted, the issuer may appeal the decision to the Board of Directors and request a hearing.180 The Commission believes that these general procedures for companies out of compliance with listing requirements, 179 See Equities Rule 7.13 (Trading Suspensions). 180 See supra text accompanying notes 140–141. See also NYSE Response Letter, supra note 6. VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 in addition to the particular cure provisions for failing to meet the new independence standards, adequately meet the mandate of Rule 10C–1 and also are consistent with investor protection and the public interest, since they give a company a reasonable time period to cure non-compliance with these important requirements before they will be delisted.181 E. Exemptions The Commission believes that it is appropriate for NYSE Arca to exempt from the new requirements established by the proposed rule change the same categories of issuers that are exempt from its existing standards for oversight of executive compensation for listed companies. Although Rule 10C–1 does not explicitly exempt some of these categories of issuers from its requirements, it does grant discretion to exchanges to provide additional exemptions. NYSE Arca states that the reasons it adopted the existing exemptions apply equally to the new requirements, and the Commission believes that this assertion is reasonable. NYSE Arca proposed to exempt limited partnerships, companies in bankruptcy proceedings and open-end management investment companies that are registered under the Investment Company Act from all of the requirements of Rule 10C–1. The Commission believes such exemptions are reasonable, and notes that such entities, which were already generally exempt from NYSE Arca’s existing compensation committee requirements, also are exempt from the compensation committee independence requirements specifically under Rule 10C–1. NYSE Arca also proposes to exempt closedend management investment companies registered under the Investment Company Act from the requirements of Rule 10C–1. The Commission believes that this exemption is reasonable because the Investment Company Act already assigns important duties of investment company governance, such as approval of the investment advisory contract, to independent directors, and because such entities were already generally exempt from NYSE Arca’s existing compensation committee requirements. The Commission notes that, as one commenter stated, typically registered investment companies do not employ executives or employees or have compensation committees. The Commission notes that the existing 181 The Commission notes that the general procedures to cure non-compliance adequately address the comments made in the Corporate Secretaries Letter. PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 language of these exemptive provisions is not changed, but that the provisions, which go beyond Rule 10C–1’s exemptions, are consistent with Rule 10C–1. The Commission further believes that other proposed exemption provisions relating to controlled companies,182 asset-backed issuers and other passive issuers, and issuers whose only listed equity stock is a preferred stock are reasonable, given the specific characteristics of these entities. As noted by the Exchange, many of these issuers are externally managed and do not directly employ executives; do not, by their nature, have employees, or have executive compensation policy set by a body other than their board. The NYSE Arca proposal would continue to permit foreign private issuers to follow home country practice in lieu of the provisions of the new rules, but would now require further disclosure from such entities regarding the reason why they do not have a compensation committee. The Commission believes that granting exemptions to foreign private issuers in deference to their home country practices with respect to compensation committee practices is appropriate, and believes that the existing and proposed disclosure requirements will help investors determine whether they are satisfied with the alternative standard. The Commission also notes that NYSE Arca’s proposal conforms its rules to Rule 10C–1, which exempts foreign private issuers from the compensation committee independence requirements of Rule 10C–1 to the extent such entities disclose in their annual reports the reasons they do not have independent compensation committees. F. Transition to the New Rules for Companies Listed as of the Effective Date The Commission believes that the NYSE Arca’s deadline for compliance with the proposal’s provisions, July 1, 2013, is reasonable and should afford listed companies adequate time to make the changes, if any, necessary to meet the new standards. The Commission believes that the deadline proposed is clear-cut. G. Compliance Schedule: Companies That Cease To Be a Smaller Reporting Company The Commission believes that the compliance schedule for companies that cease to be Smaller Reporting 182 The Commission notes that controlled companies are provided an automatic exemption from the application of the entirety of Rule 10C– 1 by Rule 10C–1(b)(5). E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with Companies, as revised in Amendment No. 2, affords such companies ample time to come into compliance with the full panoply of rules that apply to other companies. In the Commission’s view, the revised schedule also offers such companies more clarity in determining when they will be subject to the heightened requirements. V. Accelerated Approval of Amendment No. 2 to the Proposed Rule Change The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,183 for approving the proposed rule change, as modified by Amendment No. 2, prior to the 30th day after the date of publication of notice in the Federal Register. The change made to the proposal by Amendment No. 2 to change a reference from Item 10(f)(1) of Regulation S–K to a reference to Exchange Act Rule 12b– 2 is not a substantive one and merely references an otherwise identical definition. The revision made by Amendment No. 2 to the compliance rules for companies that cease to be Smaller Reporting Companies 184 establishes a schedule that is easier to understand, while still affording such companies adequate time to come into compliance with the applicable requirements. The Commission notes that the Start Date of the compliance period for such a company is six months after the Smaller Reporting Company Determination Date, and the company is given no less than another six months from the Start Date to gain compliance with the rules from which it had been previously exempt. As originally proposed a Smaller Reporting Company had to comply within six months of the Smaller Reporting Company Determination Date, and for the adviser assessment at the Smaller Reporting Company Determination Date. The Commission believes the amendments to the transitions for issuers that lose their status as a Smaller Reporting Company will afford such companies additional time to comply and avoid issues involving inadvertent non-compliance because of the provision that originally applied immediately on the Smaller Reporting Company Determination Date. The amendments also provide additional clarity on when the time frames commence, and as such the Commission believes good cause exists to accelerate approval. The change to commentary made by Amendment No. 2 to exclude advisers 183 15 U.S.C. 78s(b)(2). supra notes 73–76 and accompanying text. 184 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 that provide only certain types of services from the independence assessment is also appropriate. As discussed above, the Commission has already determined to exclude such advisers from the disclosure requirement regarding compensation advisers in Regulation S–K because these types of services do not raise conflict of interest concerns. Finally, the addition of further guidance by Amendment No. 2 merely clarifies that nothing in the Exchange’s rules requires a compensation adviser to be independent, only that the compensation committee consider the independence factors before selecting or receiving advice from a compensation adviser, and is not a substantive change, as it was the intent of the rule as originally proposed. For all the reasons discussed above, the Commission finds good cause to accelerate approval of the proposed changes made by Amendment No. 2. VI. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing and whether Amendment No. 2 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 rulecomments@sec.gov. Please include File Number SR–NYSEArca–2012–105 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–NYSEArca–2012–105. 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 PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 4523 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 office of NYSE. 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–NYSEArca–2012–105, and should be submitted on or before February 12, 2013. VII. Conclusion In summary, and for the reasons discussed in more detail above, the Commission believes that the rules being adopted by NYSE Arca, taken as whole, should benefit investors by helping listed companies make informed decisions regarding the amount and form of executive compensation. NYSE Arca’s new rules will help to meet Congress’s intent that compensation committees that are responsible for setting compensation policy for executives of listed companies consist only of independent directors. NYSE Arca’s rules also, consistent with Rule 10C–1, require compensation committees of listed companies to assess the independence of compensation advisers, taking into consideration six specified factors. This should help to assure that compensation committees of NYSE Arca-listed companies are better informed about potential conflicts when selecting and receiving advice from advisers. Similarly, the provisions of NYSE Arca’s standards that require compensation committees to be given the authority to engage and oversee compensation advisers, and require the listed company to provide for appropriate funding to compensate such advisers, should help to support the compensation committee’s role to oversee executive compensation and help provide compensation committees with the resources necessary to make better informed compensation decisions. For the foregoing reasons, the Commission finds that the proposed rule change, SR–NYSEArca–2012–105, as modified by Amendment No. 2, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in E:\FR\FM\22JAN1.SGM 22JAN1 4524 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices particular, with Section 6(b)(5) of the Act.185 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,186 that the proposed rule change, SR–NYSEArca– 2012–105, as modified by Amendment No. 2, be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.187 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–01105 Filed 1–18–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68658; File No. SR–NYSE– 2013–01] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend the Pilot Program That Provides an Exception to NYSE Rule 2B by Permitting the Exchange’s Equity Ownership Interest in BIDS Holdings L.P. January 15, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that, on January 2, 2013, the New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. tkelley on DSK3SPTVN1PROD with I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to extend for an additional 12 months the January 22, 2013 expiration date of the pilot program that provides an exception to NYSE Rule 2B by permitting the Exchange’s equity ownership interest in BIDS Holdings L.P. (‘‘BIDS Holdings’’), which is the parent company of a member of the Exchange, and BIDS Holdings’ affiliation with the New York Block Exchange LLC, an affiliate of the Exchange. The text of the proposed rule change is available on the Exchange’s 185 15 U.S.C. 78f(b)(5). U.S.C. 78s(b)(2). 187 17 CFR 200.30–3(a)(12). 1 15 U.S.C.78s(b)(1). 2 17 CFR 240.19b–4. 186 15 VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 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 self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, Proposed Rule Change 1. Purpose On January 22, 2009, the Securities and Exchange Commission (the ‘‘Commission’’ or ‘‘SEC’’) approved the governance structure proposed by the Exchange with respect to the New York Block Exchange (‘‘NYBX’’), an electronic trading facility of the Exchange for NYSE-listed securities that was established by means of a joint venture between the Exchange and BIDS Holdings.3 The governance structure that was approved is reflected in the Limited Liability Company Agreement of New York Block Exchange LLC (the ‘‘Company’’), the entity that owns and operates NYBX. Under the governance structure approved by the Commission, the Exchange and BIDS Holdings each own a 50% economic interest in the Company. In addition, the Exchange, through its wholly-owned subsidiary NYSE Market, Inc., owns less than 10% of the aggregate limited partnership interest in BIDS Holdings. BIDS Holdings is the parent company of BIDS Trading, L.P. (‘‘BIDS Trading’’), which became a member of the Exchange in connection with the establishment of NYBX. The foregoing ownership arrangements would violate NYSE Rule 2B without an exception from the Commission.4 First, the Exchange’s 3 See Securities Exchange Act Release No. 59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (SR–NYSE–2008–120) (the ‘‘Approval Order’’). 4 NYSE Rule 2B provides, in relevant part, that ‘‘[w]ithout prior SEC approval, the Exchange or any entity with which it is affiliated shall not, directly or indirectly, acquire or maintain an ownership interest in a member organization. In addition, a member organization shall not be or become an PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 indirect ownership interest in BIDS Trading violates the prohibition in Rule 2B against the Exchange maintaining an ownership interest in a member organization. Second, BIDS Trading is an affiliate of an affiliate of the Exchange,5 which violates the prohibition in Rule 2B against a member of the Exchange having such status. Consequently, in the Approval Order, the Commission permitted an exception to these two potential violations of NYSE Rule 2B, subject to a number of limitations and conditions. One of the conditions for Commission approval was that the proposed exception from NYSE Rule 2B to permit NYSE’s indirect ownership/interest in BIDS Trading and BIDS Trading’s affiliation with the Company (which is an affiliate of NYSE) would be for a pilot period of 12 months.6 In discussing the pilot basis of the exception to NYSE Rule 2B, the Approval Order noted that the pilot period ‘‘will provide NYSE and the Commission an opportunity to assess whether there might be any adverse consequences of the exception and whether a permanent exception is warranted.’’ 7 The original 12-month pilot period expired on January 22, 2010 and was extended for three additional 12-month periods to January 22, 2013.8 While the Exchange believes that the experience to date operating under the exception to Rule 2B fully justifies making the exception permanent, the Exchange now seeks to extend the ending date for the pilot program for an additional 12 months, to January 22, 2014, to allow additional time, if necessary, for the Commission to obtain and review the information it needs in order to make its determination regarding any adverse consequences of the exception and whether a permanent exception is warranted. During the proposed extension of the pilot program period, the Exchange’s current indirect ownership interest in BIDS Trading 9 affiliate of the Exchange, or an affiliate of any affiliate of the Exchange. * * * The term affiliate shall have the meaning specified in Rule 12b–2 under the Act.’’ 5 Specifically, the Company is an affiliate of the Exchange, and BIDS Trading is an affiliate of the Company based on their common control by BIDS Holdings. The affiliation in each case is the result of the 50% ownership interest in the Company by each of the Exchange and BIDS Holdings. 6 See Approval Order at 5018. 7 Id. at 5019. 8 See Securities Exchange Act Release Nos. 61409 (January 22, 2010), 75 FR 4889 (January 29, 2010) (SR–NYSE–2010–04); 63545 (December 14, 2010), 75 FR 80088 (December 21, 2010) (SR–NYSE–2010– 82); and 66059 (December 27, 2011), 77 FR 145 (January 3, 2012) (SR–NYSE–2011–67). 9 Another condition for the exception to NYSE Rule 2B specified in the Approval Order was that E:\FR\FM\22JAN1.SGM 22JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4508-4524]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01105]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68638; File No. SR-NYSEArca-2012-105]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2, and Order Granting Accelerated Approval for 
Proposed Rule Change, as Modified by Amendment No. 2, To Amend the 
Listing Rules for Compensation Comply With Securities Exchange Act Rule 
10C-1 and Make Other Related Changes

January 11, 2013.

I. Introduction

    On September 25, 2012, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') 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 modify the Exchange's rules for compensation 
committees of listed issuers to comply with Rule 10C-1 under the Act 
and make other related changes. The proposed rule change was published 
for comment in the Federal Register on October 15, 2012.\3\ The 
Commission subsequently extended the time period in which to either 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change, to January 13, 2013.\4\ The Commission received 
one comment letter on the proposed rule change,\5\ as well as a

[[Page 4509]]

response to the comment letter from NYSE Euronext, Inc. regarding the 
NYSE Arca proposal.\6\ On December 4, 2012, the Exchange filed 
Amendment No. 1 to the proposed rule change, which was later 
withdrawn.\7\ On January 8, 2013, the Exchange filed Amendment No. 2 to 
the proposed rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68006 (October 9, 
2012), 77 FR 62587 (October 15, 2012) (``Notice'').
    \4\ See Securities Exchange Act Release No. 68313 (November 28, 
2012), 77 FR 71853 (December 4, 2012).
    \5\ See Letter from Jeff Mahoney, General Counsel, Council of 
Institutional Investors to Elizabeth M. Murphy, Secretary, 
Commission, dated November 1, 2012 (``CII Letter'').
    In addition, the Commission received seven comments on a 
substantially similar proposal by New York Stock Exchange LLC 
(``NYSE'') by parties that did not specifically comment on the NYSE 
Arca filing. See Securities Exchange Act Release No. 68011 (October 
9, 2012), 77 FR 62541 (October 15, 2012) (SR-NYSE-2012-49). The 
comment letters received on the NYSE filing were letters to 
Elizabeth M. Murphy, Secretary, Commission, from: Thomas R. Moore, 
Vice President, Corporate Secretary and Chief Governance Officer, 
Ameriprise Financial, Inc., dated October 18, 2012 (``Ameriprise 
Letter''); J. Robert Brown, Jr., Director, Corporate & Commercial 
Law Program, University of Denver Sturm College of Law, dated 
October 30, 3012 (``Brown Letter''); Dorothy Donohue, Deputy General 
Counsel, Securities Regulation, Investment Company Institute, dated 
November 1, 2012 (``ICI Letter''); Brandon J. Rees, Acting Director, 
Office of Investment, AFL-CIO, dated November 5, 2012 (``AFL-CIO 
Letter''); Carin Zelenko, Director, Capital Strategies Department, 
International Brotherhood of Teamsters, dated November 5, 2012 
(``Teamsters Letter''); Wilson Sonsini Goodrich & Rosati, 
Professional Corporation, dated November 14, 2012 (``Wilson Sonsini 
Letter''); and Robert B. Lamm, Chair, Securities Law Committee, The 
Society of Corporate Secretaries & Governance Professionals, dated 
December 7, 2012 (``Corporate Secretaries Letter''). Since the 
comment letters received on the NYSE filing discuss issues directly 
related to the NYSE Arca filing, the Commission has included them in 
its discussion of this filing.
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, Executive Vice President and Corporate 
Secretary, NYSE Euronext, Inc., dated January 10, 2013 (``NYSE 
Response Letter''). In the NYSE Response Letter, NYSE Euronext, 
Inc., the parent company of NYSE Arca, states that, as the comments 
made by the letters submitted on the NYSE and NYSE Arca proposals 
are applicable in substance to NYSE, NYSE Arca and NYSE MKT LLC, its 
response will address the comments on behalf of all three exchanges.
    \7\ Amendment No. 1, dated December 4, 2012, was withdrawn on 
January 8, 2013.
    \8\ In Amendment No. 2 to SR-NYSEArca-2012-105, NYSE Arca: (a) 
Revised the transition period for companies that cease to be Smaller 
Reporting Companies to comply with the full range of new 
requirements, see infra notes 73-76 and accompanying text; (b) 
changed references in the rule text from Regulation S-K, Item 
10(f)(1) to Exchange Act Rule 12b-2 and made other non-substantive 
revisions to proposed rule text; (c) added commentary to state that 
the independence assessment of compensation advisers required of 
compensation committees does not need to be conducted for advisers 
whose roles are limited to those entitled to an exception from the 
compensation adviser disclosure rules under Item 407(e)(3)(iii) of 
Regulation S-K, see infra notes 49-52 and accompanying text; (d) 
added commentary to state that the independence assessment of 
compensation advisers required of compensation committees does not 
require the adviser to be independent, only that the compensation 
committee consider the enumerated factors before selecting or 
receiving advice from the adviser, see infra notes 53-55 and 
accompanying text; and (e) clarified that a foreign private issuer 
is required to provide a reason why it does not have an independent 
compensation committee. See infra note 70.
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    This order approves the proposed rule change, as modified by 
Amendment No. 2 thereto, on an accelerated basis.

II. Description of the Proposed Rule Change

A. Background: Rule 10C-1 under the Act

    On March 30, 2011, to implement Section 10C of the Act, as added by 
Section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act''),\9\ the Commission proposed 
Rule 10C-1 under the Act,\10\ which directs each national securities 
exchange (hereinafter, ``exchange'') to prohibit the listing of any 
equity security of any issuer, with certain exceptions, that does not 
comply with the rule's requirements regarding compensation committees 
of listed issuers and related requirements regarding compensation 
advisers. On June 20, 2012, the Commission adopted Rule 10C-1.\11\
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    \9\ Public Law 111-203, 124 Stat. 1900 (2010).
    \10\ See Securities Act Release No. 9199, Securities Exchange 
Act Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011) 
(``Rule 10C-1 Proposing Release'').
    \11\ See Securities Act Release No. 9330, Securities Exchange 
Act Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012) 
(``Rule 10C-1 Adopting Release'').
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    Rule 10C-1 requires, among other things, each exchange to adopt 
rules providing that each member of the compensation committee \12\ of 
a listed issuer must be a member of the board of directors of the 
issuer, and must otherwise be independent.\13\ In determining the 
independence standards for members of compensation committees of listed 
issuers, Rule 10C-1 requires the exchanges to consider relevant 
factors, including, but not limited to: (a) The source of compensation 
of the director, including any consulting, advisory or other 
compensatory fee paid by the issuer to the director (hereinafter, the 
``Fees Factor''); and (b) whether the director is affiliated with the 
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of 
the issuer (hereinafter, the ``Affiliation Factor'').\14\
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    \12\ For a definition of the term ``compensation committee'' for 
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \13\ See Rule 10C-1(a) and (b)(1).
    \14\ See id. See also Rule 10C-1(b)(1)(iii)(A), which sets forth 
exemptions from the independence requirements for certain categories 
of issuers. In addition, an exchange may exempt a particular 
relationship with respect to members of a compensation committee 
from these requirements as it deems appropriate, taking into 
consideration the size of an issuer and any other relevant factors. 
See Rule 10C-1(b)(1)(iii)(B).
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    In addition, Rule 10C-1 requires the listing rules of exchanges to 
mandate that compensation committees be given the authority to retain 
or obtain the advice of a compensation adviser, and have direct 
responsibility for the appointment, compensation and oversight of the 
work of any compensation adviser they retain.\15\ The exchange rules 
must also provide that each listed issuer provide for appropriate 
funding for the payment of reasonable compensation, as determined by 
the compensation committee, to any compensation adviser retained by the 
compensation committee.\16\ Finally, among other things, Rule 10C-1 
requires each exchange to provide in its rules that the compensation 
committee of each listed issuer may select a compensation consultant, 
legal counsel or other adviser to the compensation committee only after 
taking into consideration six factors specified in Rule 10C-1,\17\ as 
well as any other factors identified by the relevant exchange in its 
listing standards.\18\
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    \15\ See Rule 10C-1(b)(2).
    \16\ See Rule 10C-1(b)(3).
    \17\ See Rule 10C-1(b)(4). The six factors, which NYSE Arca 
proposes to set forth in its rules, are specified in the text 
accompanying note 47, infra.
    \18\ Other provisions in Rule 10C-1 relate to exemptions from 
the rule and a requirement that each exchange provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. NYSE Arca's Proposed Rule Change, as Amended

    To comply with Rule 10C-1, NYSE Arca, through its wholly-owned 
corporation, NYSE Arca Equities, proposes to amend two of its rules 
concerning corporate governance requirements for companies listed on 
the Exchange: NYSE Arca Equities Rule (``Equities Rule'') 5.3(k), 
``Independent Directors/Board Committees;'' and Equities Rule 5.3(n), 
``Listed Foreign Private Issuers.'' In addition, NYSE Arca proposes to 
make some other changes to its rules regarding compensation committees. 
To accomplish these changes, the Exchange proposes to replace current 
Equities Rules 5.3(k)(4) and 5.3(n) with new operative text that will 
be effective on July 1, 2013.
    Current Equities Rule 5.3(k)(4) provides that each listed company 
have a compensation committee, and that such compensation committee be 
composed entirely of ``Independent Directors'' \19\ and have a written 
charter.\20\
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    \19\ ``Independent Directors'', as defined in Equities Rule 
5.3(k)(1) and used herein, includes a two-part test for 
independence. The rule sets forth specific categories of directors 
who cannot be considered independent because of certain discrete 
relationships (``bright-line tests''); and also provides that a 
listed company's board make an affirmative determination that each 
independent director has no material relationship that, in the 
opinion of the board, would raise concerns about independence from 
management. Id.
    \20\ See Equities Rule 5.3(k)(4).
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    Under its proposal, NYSE Arca will retain its existing requirement 
that each listed company be required to have a compensation committee 
composed entirely of Independent Directors, as defined in NYSE Arca's 
Equities Rules.\21\ Under the proposed

[[Page 4510]]

amendment, however, each compensation committee member must also 
satisfy additional independence requirements, as described in Section 
II.B.1 below.\22\
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    \21\ See Equities Rules 5.3(k)(1) and 5.3(k)(4). Proposed 
Equities Rule 5.3(k)(4)(i)(a) reflects a renumbering of the existing 
requirement of Equities Rule 5.3(k)(4).
    \22\ See proposed Equities Rule 5.3(k)(4)(ii) (concerning the 
consideration of director compensation and affiliation).
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    NYSE Arca will also retain the existing requirement that a listed 
issuer adopt a formal written compensation committee charter \23\ that 
specifies the scope of the committee's responsibilities and how it 
carries out those responsibilities, including structure, operations and 
membership requirements.\24\ The proposed amendment to the rule, which 
continues to require a charter to address the committee's duties and 
responsibilities, requires the issuer to specify additional 
responsibilities and authority for the compensation committee with 
respect to retaining its own advisers; appointing, compensating, and 
overseeing such advisers; considering certain independence factors 
before selecting and receiving advice from advisers; and receiving 
funding from the company to engage them, which are discussed in detail 
in Section II.B.2 below and set forth in proposed Equities Rule 
5.3(k)(4).\25\
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    \23\ See proposed Equities Rule 5.3(k)(4)(iii). Rule 10C-1 
requires a compensation committee to have certain specified 
authority and responsibilities. See supra notes 15-17 and 
accompanying text. The existing NYSE Arca Equities rule already 
requires compensation committees of listed companies to have a 
charter setting forth specified responsibilities, and the proposed 
rule updates the language concerning this authority and set of 
responsibilities and adds the required content discussed infra at 
text accompanying notes 44-46.
    \24\ See current Equities Rule 5.3(k)(4)(A)-(E). Existing 
Equities Rule 5.3(k)(4)(E), which NYSE Arca proposed to replace in 
relevant part with a comparable provision in proposed Equities Rule 
5.3(k)(4)(iv)(I)-(III), currently provides that a written charter 
must address ``[t]he committee's authority to retain and terminate a 
consultant to assist in the evaluation of a director, CEO or senior 
executive compensation. The committee shall have the sole authority 
to approve the consultant's fees and other retention items.'' See 
discussion infra at text accompanying notes 43-45.
    \25\ See proposed NYSE Arca Equities Rule 5.3(k)(4)(iv)-(v). 
Because smaller reporting companies are not required to comply with 
the new compensation adviser independence considerations in proposed 
NYSE Arca Equities Rule 5.3(k)(4)(v), see infra notes 56-62 and 
accompanying text, such issuers would not be required to specify 
this consideration. See also proposed Commentary .02 to NYSE Arca 
Equities Rule 5.3(k)(4).
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1. Compensation Committee Composition and Independence Standards
    NYSE Arca proposes to retain Equities Rule 5.3(k)(1), which would 
continue to provide that no director qualifies as ``independent'' 
unless the board of directors of the listed company affirmatively 
determines that the director has no material relationship with the 
listed company. As noted above, NYSE Arca's rules currently require 
each member of a listed company's compensation committee to be an 
Independent Director, as defined in Equities Rule 5.3(k)(1).\26\ Rule 
10C-1, as discussed above, provides that exchange standards must 
require compensation committee members to be independent, and further 
provides that each exchange, in determining independence for this 
purpose, must consider relevant factors, including the Fees Factor and 
Affiliation Factor described above. In its proposal, NYSE Arca 
discussed its consideration of these factors,\27\ and proposed the 
following: \28\
---------------------------------------------------------------------------

    \26\ See supra note 19.
    \27\ See Notice, supra note 3.
    \28\ See Notice, supra note 3, for the Exchange's explanation of 
its reasons for the proposed change. See infra Sections II.B.3 and 
II.B.4 concerning entities that would be exempt from this 
requirement.
---------------------------------------------------------------------------

    With respect to the Fees and Affiliation Factors, NYSE Arca 
proposes to adopt a provision stating that the board of directors of 
the listed company would be required, in affirmatively determining the 
independence of any director who will serve on the compensation 
committee of the board, to consider all factors specifically relevant 
to determining whether a director has a relationship to the listed 
company 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: (A) The source of 
compensation of such director, including any consulting, advisory or 
other compensatory fee paid by the listed company to such director; and 
(B) whether such director is affiliated with the listed company, a 
subsidiary of the listed company or an affiliate of a subsidiary of the 
listed company.\29\
---------------------------------------------------------------------------

    \29\ See proposed Equities Rule 5.3(k)(4)(ii). See also Notice, 
supra note 3.
---------------------------------------------------------------------------

    With respect to the Fees Factor, NYSE Arca also proposes to amend 
the rule to provide that the board should consider whether the director 
receives compensation from any person or entity that would impair his 
ability to make independent judgments about the listed company's 
executive compensation.\30\
---------------------------------------------------------------------------

    \30\ See proposed Equities Rule 5.3(k)(4)(ii).
---------------------------------------------------------------------------

    With respect to the Affiliation Factor, NYSE Arca proposes, 
similarly, to amend the commentary to provide that the board should 
consider whether an affiliate relationship places the director under 
the direct or indirect control of the listed company 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 his ability to make independent judgments about the listed 
company's executive compensation.'' \31\
---------------------------------------------------------------------------

    \31\ See id.
---------------------------------------------------------------------------

    Although Rule 10C-1 requires that exchanges consider ``relevant 
factors'' not limited to the Fees and Affiliation Factors, NYSE Arca 
states that, after reviewing its current and proposed listing rules, it 
concluded not to propose any specific numerical tests with respect to 
the factors specified in proposed Equities Rule 5.3(k)(4)(ii) or to 
adopt a requirement to consider any other specific factors. In its 
proposal, NYSE Arca stated that it did 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 listed company.\32\ Further, as stated in its filing, 
NYSE Arca believes that its existing ``bright-line'' independence 
standards, as set forth in Equities Rule 5.3(k)(1), are sufficiently 
broad to encompass the types of relationships which would generally be 
material to a director's independence for compensation committee 
service.\33\ Additionally,

[[Page 4511]]

NYSE Arca stated that Equities Rule 5.3(k)(1) already requires the 
board to consider any other material relationships between the director 
and the listed company or its management that are not the subject of 
``bright-line'' tests from Equities Rule 5.3(k)(1)(A)-(F).\34\ NYSE 
Arca believes that these requirements with respect to general director 
independence, when combined with the specific considerations required 
by proposed Equities Rule 5.3(k)(4)(ii), represent an appropriate 
standard for compensation committee independence.\35\
---------------------------------------------------------------------------

    \32\ See Notice, supra note 3.
    \33\ See Notice, supra note 3. The following are the ``bright-
line'' tests set forth in Equities Rule 5.3(k)(1): (A) A director 
who is or has been within the last three years, an employee of the 
listed company, or whose immediate family member is or has been 
within the last three years an executive officer of the listed 
company; (B) (i) A director or a director who has an immediate 
family member who is a current partner of a firm that is the 
company's internal or external auditor; (ii) A director who is a 
current employee of such a firm; (iii) A director who has an 
immediate family member who is a current employee of such a firm and 
who participates in the firm's audit, assurance or tax compliance 
(but not tax planning) practice; or (iv) A director or a director 
who has an immediate family member who was within the last three 
years (but is no longer) a partner or employee of such a firm and 
personally worked on the listed company's audit within that time; 
(C) A director or a director who has an immediate family member who 
is, or in the past three years has been, part of an interlocking 
directorate in which an executive officer of the listed company 
serves or served on the compensation committee of another company 
that concurrently employs or employed the director; (D) A director 
who is an executive officer or an employee, or whose immediate 
family member is an executive officer, of a company that makes 
payments to, or receives payments from, the listed company for 
property or services in an amount which, in any single fiscal year, 
exceeds the greater of $200,000 or 5% of such other company's 
consolidated gross revenues, is not ``independent'' until three 
years after falling below such threshold; (E) A director who 
received, or whose immediate family member is an executive officer 
who received, during any twelve-month period within the last three 
years, more than $100,000 in direct compensation from the listed 
company, other than director and committee fees and pension or other 
forms of deferred compensation for prior service (provided such 
compensation is not contingent in any way on continued service); (F) 
In the case of an investment company, in lieu of paragraphs (A)-(E) 
above, 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.
    \34\ See Notice, supra note 3.
    \35\ See id.
---------------------------------------------------------------------------

    NYSE Arca proposes a cure period for a failure of a listed company 
to meet its committee composition requirements for independence. Under 
the provision, if a listed company fails to comply with the 
compensation committee composition requirements because a member of the 
compensation committee ceases to be independent for reasons outside the 
member's reasonable control, that person, only so long as a majority of 
the members of the compensation committee continue to be independent, 
may remain a member of the compensation committee until the earlier of 
the next annual shareholders' meeting of the listed company or one year 
from the occurrence of the event that caused the member to be no longer 
independent.\36\ The proposed rule also requires a company relying on 
this provision to provide notice to NYSE Arca promptly.\37\
---------------------------------------------------------------------------

    \36\ See proposed Equities Rule 5.3(k)(4)(ii).
    \37\ See id.
---------------------------------------------------------------------------

    NYSE Arca modified the suggested cure period language contained in 
Rule 10C-1(a)(3) by limiting the cure period's use to circumstances 
where the committee continues to have a majority of independent 
directors, as NYSE Arca believes this would ensure that the applicable 
committee could not take an action without the agreement of one or more 
independent directors.\38\
---------------------------------------------------------------------------

    \38\ See Notice, supra note 3. The Commission notes that while 
NYSE Arca does not provide any new procedures for an issuer to have 
an opportunity to cure any other defects with respect to its 
proposed compensation committee requirements, current NYSE Arca 
Equities rules provide issuers with an opportunity to cure defects, 
and appeal, before their securities are delisted for rule 
violations. See Equities Rule 5.5(a) (``Maintenance Requirements and 
Delisting Procedures'') and Equities Rule 5.5(m) (``Delisting 
Procedures'').
---------------------------------------------------------------------------

    NYSE Arca's current rules relating to compensation committees 
include an exception that allows a director who is not an Independent 
Director to be appointed to such a committee under exceptional and 
limited circumstances, as long as that director is not currently an 
executive officer, an employee, or the family member of an executive 
officer.\39\ The exception applies, however, only if the committee is 
comprised of at least three members and the board determines that the 
individual's membership on the committee is required by the best 
interests of the company and its shareholders.\40\
---------------------------------------------------------------------------

    \39\ See current Equities Rule 5.3(k)(4).
    \40\ See id.
---------------------------------------------------------------------------

    NYSE Arca proposes to amend Equities Rule 5.3(k)(4) to remove, 
except for smaller reporting companies, the availability of this 
exception for a director who fails the current requirements or the new 
enhanced director independence requirements proposed by NYSE Arca.\41\ 
In effect, NYSE Arca proposes to retain the exception only for smaller 
reporting companies. Under the exception, a compensation committee 
member of a smaller reporting company may not serve longer than two 
years with this exception. In addition, a smaller reporting company 
relying on the exception must make certain disclosures in its proxy 
statement regarding the nature of the relationship and the reasons for 
the determination.\42\
---------------------------------------------------------------------------

    \41\ See proposed Equities Rule 5.3(k)(4)(i)(b). As noted below, 
smaller reporting companies are not subject to enhanced director 
independence requirements.
    \42\ See id. See also Notice, supra note 3.
---------------------------------------------------------------------------

2. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers
    In its proposed rule change, NYSE Arca proposes to fulfill the 
requirements imposed by Rule 10C-1(b)(2)-(4) under the Act concerning 
compensation advisers by setting forth those requirements in its own 
rules and requiring issuers to provide these new rights and 
responsibilities to their compensation committees.\43\ Thus, proposed 
Equities Rule 5.3(k)(4)(iv) proposes to adopt the requirements that 
NYSE Arca believes are required by Rule 10C-1(b)(2)-(3) that: (i) The 
compensation committee may, in its sole discretion, retain or obtain 
the advice of a compensation consultant, independent legal counsel or 
other adviser; (ii) the compensation committee shall be directly 
responsible for the appointment, compensation and oversight of the work 
of any compensation consultant, independent legal counsel or other 
adviser retained by the compensation committee; \44\ and (iii) the 
listed company must 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.\45\
---------------------------------------------------------------------------

    \43\ Rule 10C-1(b)(4), does not include the word ``independent'' 
before ``legal counsel'' and requires an independence assessment for 
any legal counsel to a compensation committee, other than in-house 
counsel. In providing Commentary .05 to proposed Equities Rule 
5.3(k)(4), as modified by Amendment No. 2, NYSE Arca provides for 
two limited exceptions. See infra notes 49-52 and accompanying text.
    \44\ The proposal also includes a provision, derived from Rule 
10C-1, stating that nothing in the rule may be construed: (A) 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 to the compensation 
committee; or (B) to affect the ability or obligation of the 
compensation committee to exercise its own judgment in fulfillment 
of the duties of the compensation committee. See Commentary .06 to 
Equities Rule 5.3(k)(4).
    \45\ See Notice, supra note 3.
---------------------------------------------------------------------------

    Proposed Equities Rule 5.3(k)(4)(v), as amended, also sets forth 
explicitly, in accordance with Rule 10C-1, that the compensation 
committee may select, or receive advice from, a compensation 
consultant, legal counsel or other adviser to the compensation 
committee, other than in-house legal counsel, only after taking into 
consideration all factors relevant to that person's independence from 
management, including the following six factors set forth in Rule 10C-1 
regarding independence assessments of compensation advisers.\46\
---------------------------------------------------------------------------

    \46\ Rule 10C-1(b)(4).
---------------------------------------------------------------------------

    The six factors, which are set forth in full in the proposed rule, 
are: (I) The provision of other services to the listed company by the 
person that employs the compensation consultant, legal counsel or other 
adviser; (II) the amount of fees received from the listed company 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

[[Page 4512]]

consultant, legal counsel or other adviser with a member of the 
compensation committee; (V) any stock of the listed company owned by 
the compensation consultant, legal counsel or other adviser; and (VI) 
any business or personal relationship of the compensation consultant, 
legal counsel, other adviser or the person employing the adviser with 
an executive officer of the listed company.\47\
---------------------------------------------------------------------------

    \47\ See also Rule 10C-1(b)(4)(i)-(vi).
---------------------------------------------------------------------------

    As proposed, Equities Rule 5.3(k)(4)(v) would not include any 
specific additional factors for consideration, as NYSE Arca stated that 
it believes the list included in Rule 10C-1(b)(4) is very comprehensive 
and the proposed listing standard would also require the compensation 
committee to consider any other factors that would be relevant to the 
adviser's independence from management.\48\
---------------------------------------------------------------------------

    \48\ See Notice, supra note 3.
---------------------------------------------------------------------------

    Proposed Commentary .05 to Equities Rule 5.3(k)(4), as modified by 
Amendment No. 2,\49\ further states that, as provided in Rule 10C-1, a 
compensation committee is required to conduct the independence 
assessment outlined in proposed Equities Rule 5.3(k)(4)(v) with respect 
to any compensation consultant, legal counsel or other adviser that 
provides advice to the compensation committee, other than (i) in-house 
legal counsel \50\ and (ii) any compensation consultant, legal counsel 
or other adviser whose role is limited to the following activities for 
which no disclosure would be required under Item 407(e)(3)(iii) of 
Regulation S-K: Consulting on any broad-based plan that does not 
discriminate in scope, terms, or operation, in favor of executive 
officers or directors of the listed company, and that is available 
generally to all salaried employees; or providing information that 
either is not customized for a particular company or that is customized 
based on parameters that are not developed by the compensation 
consultant, and about which the compensation consultant does not 
provide advice.\51\ NYSE Arca noted that this second exception is based 
on Item 407(e)(3)(iii) of Regulation S-K, which provides a limited 
exception to the Commission's requirement for a registrant to disclose 
any role of compensation advisers in determining or recommending the 
amount or form of a registrant's executive and director 
compensation.\52\
---------------------------------------------------------------------------

    \49\ See supra note 8. NYSE Arca's proposal as submitted 
originally only contained an exception for in-house legal counsel. 
As described below, the Exchange amended its proposal to add an 
exception for advisers whose role is limited to certain broad-based 
plans or to providing non-customized information.
    \50\ See proposed Commentary .02 to Equities Rule 5.3(k)(4).
    \51\ See Exhibit 5 to Amendment No. 2 (amending, in part, the 
proposed Commentary .02).
    \52\ See Amendment No. 2; see also 17 CFR 229.407(e)(3)(iii). 
The Exchange believes that its proposed exception from the 
independence assessment requirement is appropriate because the types 
of services excepted do not raise conflict of interest concerns, and 
noted that this is the same reason for which the Commission excluded 
these types of services from the disclosure requirement in Item 
407(e)(3)(iii) of Regulation S-K.
---------------------------------------------------------------------------

    Proposed Commentary .06 to Equities Rule 5.3(k)(4), as modified by 
Amendment No. 2, also clarifies that nothing in the rule requires a 
compensation consultant, legal counsel or other compensation adviser to 
be independent, only that the compensation committee consider the 
enumerated independence factors before selecting or receiving advice 
from a compensation adviser.\53\ It further clarifies that compensation 
committees may select or receive advice from any compensation adviser 
they prefer, including ones that are not independent, after considering 
the six independence factors set forth in Equities Rule 
5.3(k)(4)(v)(I)-(VI).\54\ The Exchange clarified that, while the 
compensation committee is required to consider the independence of 
compensation advisers, the compensation committee is not precluded from 
selecting or receiving advice from compensation advisers that are not 
independent.\55\
---------------------------------------------------------------------------

    \53\ See Exhibit 5 to Amendment No. 2, supra note 8.
    \54\ See id.
    \55\ See Amendment No. 2, supra note 8.
---------------------------------------------------------------------------

3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies 
from all the requirements included within the rule.\56\ Consistent with 
this Rule 10C-1 provision, NYSE Arca, as a general matter, proposes 
that a smaller reporting company, as defined in Rule 12b-2 \57\ under 
the Act (hereinafter, a ``Smaller Reporting Company''), not be subject 
to the new requirements set forth in its proposal specifically to 
comply with Rule 10C-1.\58\ Thus, NYSE Arca proposes not to require 
Smaller Reporting Companies to comply with either the enhanced 
independence standards for members of compensation committees relating 
to compensatory fees and affiliation or the compensation adviser 
independence considerations.\59\
---------------------------------------------------------------------------

    \56\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \57\ 17 CFR 240.12b-2.
    \58\ See proposed Commentary .02 to Equities Rule 5.3(k)(4).
    \59\ See supra text accompanying notes 29 and 47.
---------------------------------------------------------------------------

    NYSE Arca proposes in Commentary .02 to Equities Rule 5.3(k)(4) 
that Smaller Reporting Companies are not required to comply with 
Equities Rule 5.3(k)(4)(ii) concerning the additional independence 
factors for members serving on the compensation committee.\60\ A 
Smaller Reporting Company will be required to comply with proposed 
Equities Rule 5.3(k)(4)(iv) regarding the requirements concerning the 
compensation committee's authority, responsibility and funding of 
compensation advisers.\61\ However, NYSE Arca proposes an exception 
from the proposed Equities Rule 5.3(k)(4)(v) that would otherwise 
require the Smaller Reporting Company's compensation committee to 
consider independence factors before selecting such advisers, which 
goes beyond NYSE Arca's existing requirements.\62\ Finally, as noted 
above, NYSE Arca proposes to amend Equities Rule 5.3(k)(4)(i)(b) to 
clarify that only Smaller Reporting Companies will be eligible to 
continue to avail themselves of the ability of the board, under 
exceptional and limited circumstances, to appoint a non-independent 
director to the compensation committee.
---------------------------------------------------------------------------

    \60\ See Notice, supra note 3.
    \61\ See id.
    \62\ See id. As noted above, NYSE Arca currently requires such 
authority, responsibility and funding be provided by all listed 
companies to compensation committees, including by Smaller Reporting 
Companies. See supra text accompanying note 24. As Smaller Reporting 
Companies will not be required to comply with the consideration of 
certain independence factors when selecting an adviser, such issuers 
will not be required to specify this provision.
---------------------------------------------------------------------------

4. Exemptions
    NYSE Arca proposes that its existing exemptions from the Exchange's 
compensation-related listing rules currently in place, which are set 
forth in Equities Rules 5.3 and 5.3(k), apply also to the new 
requirements of the proposed rule change and thereby will continue to 
provide a general exemption from all of the compensation committee 
requirements of Equities Rule 5.3(k)(4).\63\ These include exemptions 
to the following issuers: any listed company of which more than 50% of 
the voting power for the election of directors is held by an 
individual, a group or another company (in other words, a controlled 
company); limited partnerships; companies in bankruptcy; closed-end and 
open-end management investment companies that are

[[Page 4513]]

registered under the Investment Company Act of 1940; passive business 
organizations in the form of trusts (such as royalty trusts) or 
derivatives and special purpose securities; and issuers whose only 
listed equity stock is a preferred stock.\64\ NYSE Arca states that 
these categories of issuers typically: (i) Are externally managed and 
do not directly employ executives; (ii) do not by their nature have 
employees; or (iii) have executive compensation policy set by a body 
other than the board.\65\ In light of these structural reasons why 
these categories of issuers generally do not have compensation 
committees, the Exchange believes that it would be a significant and 
unnecessarily burdensome alteration in their governance structures to 
require them to comply with the proposed new requirements and that it 
is appropriate to grant them an exemption.\66\
---------------------------------------------------------------------------

    \63\ See Notice, supra note 3. In addition, such exempt 
companies would also thereby be exempt from the enhanced 
independence requirements for compensation committee composition 
described in proposed Equities Rule 5.3(k)(4)(ii).
    \64\ See Equities Rules 5.3 and 5.3(k).
    \65\ See Notice, supra note 3.
    \66\ See id.
---------------------------------------------------------------------------

    Concerning foreign private issuers,\67\ NYSE Arca's current 
Equities Rule 5.3(n) permit any such issuer to follow its home country 
practice in lieu of many of NYSE Arca's corporate governance listing 
standards, including the Exchange's compensation-related listing rules. 
Rule 5.3(n) currently provides that listed companies that are foreign 
private issuers are permitted to follow home country practice in lieu 
of the provisions of Equities Rule 5.3, but this allowance is granted 
on condition that the issuer discloses in its annual report any 
significant ways in which its corporate governance practices differ 
from those followed by domestic companies under NYSE Arca listing 
standards.\68\ NYSE Arca proposes that this allowance continue to 
apply, generally, to the Exchange's compensation committee rules as 
revised by the instant proposal on the same condition, namely that the 
issuer discloses any significant ways in which its corporate governance 
practices differ from those followed by domestic companies under NYSE 
Arca listing standards in its annual report.\69\ NYSE Arca also 
proposes an additional requirement to the disclosure requirement 
applicable to foreign private issuers--that the foreign private issuer 
explain the reason as to why the company does not comply with the 
compensation committee rules.\70\
---------------------------------------------------------------------------

    \67\ Under NYSE Arca's listing rules, ``foreign private issuer'' 
has the same meaning and is defined in accordance with the SEC's 
definition of foreign private issuer set out in Rule 3b-4(c) (17 CFR 
240.3b-4). See Equities Rule 5.1(b)(3).
    \68\ See Equities Rule 5.3(n). A foreign private issuer may 
provide this disclosure either on its Web site and/or in its annual 
report as distributed in shareholders to the United States.
    \69\ See Notice, supra note 3.
    \70\ See Exhibit 5 to the Notice, supra note 3 and Amendment No. 
2, supra note 8; see also Commentary .03 to Equities Rule 5.3(k)(4).
---------------------------------------------------------------------------

5. Transition to the New Rules for Companies Listed as of the Effective 
Date
    The proposed rule change provides that certain of the new 
requirements for listed companies will be effective on July 1, 
2013.\71\ NYSE Arca does not propose to provide any other transition 
periods by which listed companies would be required to comply with the 
new Equities Rule 5.3(k)(4)(ii) compensation committee director 
independence standards. NYSE Arca proposes that all proposed sections 
of the proposal would become effective on July 1, 2013 for purposes of 
compliance by currently listed issuers that are not otherwise 
exempted.\72\
---------------------------------------------------------------------------

    \71\ Existing compensation committee independence standards 
would continue to apply until that time.
    \72\ As noted above, current NYSE Arca Equities rules require 
that the compensation committee charter give that committee sole 
authority to retain and terminate a consultant to assist in the 
evaluation of director, CEO or executive officer compensation, 
including sole authority to approve the firm's fees and other 
retention terms.
---------------------------------------------------------------------------

6. Compliance Schedule: Companies That Cease To Qualify as Smaller 
Reporting Companies
    NYSE Arca's existing rules do not permit companies listing on the 
Exchange to phase-in compliance with all of the Exchange's applicable 
independence requirements for compensation committees after the date 
that the company's securities first trade on NYSE Arca. NYSE Arca 
proposes to create a compliance schedule for companies that cease to be 
a Smaller Reporting Company. For a company that was, but has ceased to 
be, a Smaller Reporting Company, the proposed rule change, as modified 
by Amendment No. 2, establishes a compliance schedule based on certain 
dates relating to the company's change in status.\73\ Pursuant to Rule 
12b-2 under the Act, a company tests its status as a Smaller Reporting 
Company on an annual basis as of the last business day of its most 
recently completed second fiscal quarter (the ``Smaller Reporting 
Company Determination Date''). A company with a public float of $75 
million or more as of the Smaller Reporting Company Determination Date 
will cease to be a Smaller Reporting Company as of the beginning of the 
fiscal year following the Smaller Reporting Company Determination Date. 
Under NYSE Arca's proposal, the day of this change in status is the 
beginning of the compliance period (``Start Date'').\74\
---------------------------------------------------------------------------

    \73\ See proposed Commentary .02 to Equities Rule 5.3(k)(4), as 
amended. In the proposal as originally submitted, the compliance 
schedule was to require compliance with the enhanced standards for 
director independence six months after the company ceases to be a 
Smaller Reporting Company, but immediate compliance with all other 
requirements. In Amendment No. 2, NYSE Arca states that while the 
revised compliance schedule is different from what it originally 
proposed, the amended version will allow companies sufficient time 
to adjust to the differences, as many companies will likely not 
become aware of their change in status until significantly after the 
determination date and would therefore not utilize the transition 
period as originally proposed to bring themselves into compliance 
with the enhanced requirements, and that such companies would have 
significant difficulty in becoming compliant within the transition 
period as originally proposed.
    \74\ See Amendment No. 2.
---------------------------------------------------------------------------

    By six months from the Start Date, the company will be required to 
comply with Equities Rule 5.3(k)(4)(v), which sets forth the provision 
described above relating to the requirement that the committee consider 
independence factors before selecting compensation advisers.\75\ Six 
months from the Start Date, the company will begin to comply with the 
additional requirements in Equities Rule 5.3(k)(4)(ii) regarding member 
independence on the compensation committee. Under the proposal, as 
amended, a company that has ceased to be a Smaller Reporting Company 
will be permitted to phase in its compliance with the enhanced 
independence requirements for compensation committee members (relating 
to compensatory fees and affiliation) as follows: (i) One member must 
satisfy the requirements by six months from the Start Date; (ii) a 
majority of members must satisfy the requirements by nine months from 
the Start Date; and (iii) all members must satisfy the requirements by 
one year from the Start Date.\76\
---------------------------------------------------------------------------

    \75\ In addition, this will require the company to act in order 
to reflect this additional requirement for the compensation 
committee. See proposed Equities Rule 5.3(k)(4)(iii).
    \76\ During the compliance schedule, a company that has ceased 
to be a Smaller Reporting Company will be required to continue to 
comply with the rules previously applicable to it.
---------------------------------------------------------------------------

III. Comments on the Proposed Rule Change and NYSE Arca's Response

    As stated previously, the Commission received one comment letter on 
the NYSE Arca proposal,\77\ and seven comment letters on a related NYSE 
proposal.\78\ The Commission is treating the comment letter submitted 
on the NYSE filing, for which a comparable letter was not submitted on 
the NYSE Arca filing, as also being applicable to

[[Page 4514]]

the NYSE Arca filing since the NYSE and NYSE Arca filings address the 
same substantive issues. NYSE Euronext, Inc., on behalf of NYSE Arca, 
responds to these comment letters for the NYSE Arca proposal.\79\
---------------------------------------------------------------------------

    \77\ See supra note 5.
    \78\ See id.
    \79\ See supra note 6. NYSE Euronext, Inc.'s response addresses 
comments received on both the NYSE and NYSE Arca proposals.
---------------------------------------------------------------------------

    Three commenters expressed general support for the proposal, 
although two believed that it needed to be amended before being 
approved.\80\ Some commenters supported specific provisions of the 
proposal,\81\ some opposed specific provisions,\82\ and some sought 
clarification of certain aspects of the proposal.\83\ Some commenters 
believed that the proposal fell short of meeting the requirements of 
Rule 10C-1 and believed that it should have been more stringent.\84\ 
These and other comments, as well as NYSE Arca's responses to some of 
the comments that raised issues with the proposal, are summarized 
below.
---------------------------------------------------------------------------

    \80\ See Ameriprise Letter, which supported the proposal but 
believed that certain aspects were not sufficiently clear such that 
the proposal needed to be amended to provide additional clarity; ICI 
Letter, which urged approval of the proposal; and Corporate 
Secretaries Letter, which generally supported the proposal, but 
believed that certain of its aspects were unnecessarily burdensome 
or not sufficiently clear such that the proposal needed to be 
amended before being approved by the Commission.
    \81\ See Brown Letter, CII Letter, and ICI Letter.
    \82\ See AFL-CIO Letter, Brown Letter, and Wilson Sonsini 
Letter. See also CII Letter, which stated that it believed that 
specific aspects of the proposal were lacking.
    \83\ See Ameriprise Letter and Corporate Secretaries Letter.
    \84\ See AFL-CIO Letter, Brown Letter, CII Letter, and Teamsters 
Letter.
---------------------------------------------------------------------------

A. Definition of Independence

1. Consideration of Director Compensation
    Three commenters believed that the proposal falls short of the 
requirements of Rule 10C-1, which, in their view, requires that fees 
paid to a director for service on the company's board also be 
considered.\85\ Two of these commenters, after noting that the proposal 
did not require boards of directors to also consider the compensation 
paid to the directors for their service on the board in determining the 
independence of directors serving on the compensation committee, argued 
that the proposal falls short of the requirements of Rule 10C-1, which, 
in their view, requires that fees paid to a director for service on the 
company's board also be considered.\86\ The other commenter argued that 
the language of Section 10C of the Act itself, as well as its 
legislative history, indicates Congress's intent that such fees be 
considered.\87\ These commenters believed that compensation for board 
service can result in ``the impairment of independence as a result of 
excessive fees,'' \88\ because ``[h]igh director fees relative to other 
sources of income can compromise director objectivity,'' \89\ and 
``[h]ighly paid directors also may be inclined to approve large 
executive pay packages.'' \90\ One of these commenters believed that 
the requirement of Section 10C of the Act and Rule 10C-1 to consider 
the source of compensation of a director goes further, and applies to 
all types of compensation that a director may receive, including 
compensation paid by any person, including non-issuers.\91\
---------------------------------------------------------------------------

    \85\ See Brown Letter; AFL-CIO Letter; and Teamsters Letter. As 
noted above, the comment letters refer specifically to NYSE, but 
apply equally to the NYSE Arca proposal.
    \86\ See AFL-CIO Letter and Teamsters Letter, noting that Rule 
10C-1 requires the exchanges to consider a director's ``source of 
compensation,'' and arguing that this phrase includes director fees.
    \87\ See Brown Letter.
    \88\ Id.
    \89\ See AFL-CIO Letter and eamsters Letter.
    \90\ Id.
    \91\ See Brown Letter.
---------------------------------------------------------------------------

    In its response to comments, NYSE Arca stated that, as all non-
management directors of a listed company are eligible to receive the 
same fees for service as a director or board committee member, NYSE 
Arca does not believe that it is likely that director compensation 
would be a relevant consideration for compensation committee 
independence.\92\ NYSE Arca noted that, however, the proposed rules 
require the board to consider all relevant factors in making 
compensation committee independence determinations.\93\ Therefore, NYSE 
Arca believes that, to the extent that excessive board compensation 
might affect a director's independence, the proposed rules would 
require the board to consider that factor in its determination.\94\
---------------------------------------------------------------------------

    \92\ See NYSE Response Letter.
    \93\ See id.
    \94\ See id.
---------------------------------------------------------------------------

2. Personal or Business Relationships Between Directors and Officers
    Some commenters believed that the proposed rules should explicitly 
require the board of a listed company, when considering affiliations of 
a director in determining eligibility for compensation committee 
membership, to consider personal or business relationships between the 
director and the company's executive officers.\95\ As expressed by two 
of these commenters, ``too many corporate directors have significant 
personal, financial or business ties to the senior executives that they 
are responsible for compensating.'' \96\
---------------------------------------------------------------------------

    \95\ See AFL-CIO Letter, Brown Letter, CII Letter, Teamsters 
Letter. As noted above, several of these comment letters refer 
specifically to NYSE, but apply equally to the NYSE Arca proposal.
    \96\ AFL-CIO Letter and Teamsters Letter.
---------------------------------------------------------------------------

    Some commenters believed that related party transactions should 
explicitly be included as a relevant factor in determining independence 
for members of compensation committees.\97\ The additional requirements 
Disclosure suggested by commenters also included, for example, 
disqualification of a director from membership on the compensation 
committee if an immediate family member of the director received 
compensation in excess of $120,000 a year from the company even if that 
family member was not an executive officer of the company; \98\ or if 
the director has, or in the past five years has had, a personal 
contract with the company, with an executive officer of the company, or 
with any affiliate of the company.\99\
---------------------------------------------------------------------------

    \97\ See AFL-CIO Letter and Teamsters Letter.
    \98\ See id.. NYSE's definition of Independent Director already 
disqualifies a director from membership on the compensation 
committee if an immediate family member of the director receives in 
excess of $120,000 from the company or was an executive officer of 
the company.
    \99\ See CII Letter. The commenter acknowledged, however, that 
NYSE Arca's existing director requirements implicitly require this 
consideration, but similarly recommended that the importance of the 
factor requires it be explicit in the proposal. Outside the scope of 
this proposal, the commenter also suggested NYSE Arca consider, at 
some future date, developing a more comprehensive and robust 
definition of independent directors that could be applicable to all 
board committees and provided a proposed definition for NYSE Arca's 
consideration.
---------------------------------------------------------------------------

    One commenter acknowledged that the proposal would require 
consideration of all factors specifically relevant to determining 
whether a director has a relationship which is material to that 
director's ability to be independent from management, but argued that 
such requirement is not sufficient to ensure that boards weigh personal 
or business relationships between directors and executive 
officers.\100\ In support, the commenter argued that: (1) Such 
relationships were not technically with the ``listed company'' and 
therefore would at least create confusion as to whether it should be 
considered; (2) the omission of an explicit reference to this 
relationship was inconsistent with other approaches taken in the 
proposal that made reference to certain other relationships; and (3) 
legislative history makes it clear that Congress expected these

[[Page 4515]]

relationships to be explicitly considered in determining director 
independence.\101\
---------------------------------------------------------------------------

    \100\ See Brown Letter.
    \101\ See id.
---------------------------------------------------------------------------

    In response, NYSE Arca noted that the existing independence 
standards of NYSE Arca require the board to make an affirmative 
determination that there is no material relationship between the 
director and the company which would affect the director's 
independence.\102\ NYSE Arca further stated that commentary to Section 
303A.02(a) of the NYSE Listed Company Manual explicitly notes with 
respect to the board's affirmative determination of a director's 
independence that the concern is independence from management, and NYSE 
MKT LLC and NYSE Arca have always interpreted their respective director 
independence requirements in the same way.\103\ Consequently, NYSE Arca 
stated that it did not believe that any further clarification of this 
requirement is necessary.\104\
---------------------------------------------------------------------------

    \102\ See NYSE Response Letter.
    \103\ See id.
    \104\ See id.
---------------------------------------------------------------------------

    As to a requirement to consider related party transactions, NYSE 
Arca responded that it believes that this is unnecessary as the 
existing director independence standards require boards to consider all 
material factors relevant to an independence determination, as do the 
specific compensation committee independence requirements of the 
proposed rules.\105\
---------------------------------------------------------------------------

    \105\ See id.
---------------------------------------------------------------------------

3. Sufficiency of Single Factor and Additional Comments on Independence
    Two commenters explicitly sought clarification that a single factor 
can result in the loss of independence.\106\ In its response letter, 
NYSE Arca confirmed that it has interpreted the existing general board 
independence standards as providing that a single relationship could be 
sufficiently material that it would render a director non-independent. 
NYSE Arca stated it was not aware that there has been any confusion 
with respect to this interpretation.\107\ Consequently, NYSE Arca did 
not believe it is necessary to include in the proposed rules a 
statement that a single factor may be sufficiently material to render a 
director non-independent, as this is clearly the intention of the rules 
as drafted.\108\
---------------------------------------------------------------------------

    \106\ See AFL-CIO Letter; Teamsters Letter. As noted above, the 
comment letters refer specifically to NYSE, but apply equally to the 
NYSE Arca proposal.
    \107\ See NYSE Response Letter.
    \108\ See id.
---------------------------------------------------------------------------

    Some of the above commenters expressed the belief, in general, that 
the definition of an independent director should be more narrowly 
drawn, that the bright-line tests of independence should be 
strengthened, and that the standards of independence should be uniform 
for all committees requiring independent directors.\109\
---------------------------------------------------------------------------

    \109\ See CII Letter, AFL-CIO Letter, Teamsters Letter.
---------------------------------------------------------------------------

    One commenter believed that the requirement that the board ``must 
consider all factors specifically relevant to determining whether a 
director has a relationship to the listed company which is material to 
that director's ability to be independent from management in connection 
with the duties of a compensation committee member'' was vague and 
unnecessary in light of the comprehensive factors already 
required.\110\ In responding to this commenter, NYSE Arca disagreed, 
noting that the requirement to consider all material relationships, not 
just those enumerated, was essential, as it is impossible to foresee 
all relationships that may be material.\111\
---------------------------------------------------------------------------

    \110\ See Corporate Secretaries Letter.
    \111\ See NYSE Response Letter.
---------------------------------------------------------------------------

B. Compensation Adviser Independence Factors

    The Commission received letters from four commenters relating to 
the provision of the proposed rule change that requires a compensation 
committee to take into consideration the factors set forth in the 
proposal in the selection of a compensation consultant, legal counsel, 
or other adviser to the committee.\112\
---------------------------------------------------------------------------

    \112\ See Ameriprise Letter, Wilson Sonsini Letter, CII Letter, 
and Corporate Secretaries Letter. As noted above, several of these 
comment letters refer specifically to NYSE, but apply equally to the 
NYSE Arca proposal.
---------------------------------------------------------------------------

1. Additional Factors for Consideration
    One commenter generally supported the proposal's requirement that a 
board consider six independence factors before engaging an adviser, but 
believed that at least one additional factor should be considered: 
``Whether the compensation committee consultants, legal counsel or 
other advisers require that their clients contractually agree to 
indemnify or limit their liability.'' \113\ The commenter believed that 
such contractual provisions, which the commenter indicated have become 
standard practice for many consultants, ``raise conflict of interest 
red flags'' that every compensation committee should consider in 
determining the independence of the consultant.\114\
---------------------------------------------------------------------------

    \113\ See CII Letter.
    \114\ See id.
---------------------------------------------------------------------------

    In response, NYSE Arca stated that it did not believe that this is 
an appropriate addition because a relationship would affect an 
adviser's independence from management only if it gave rise to a 
concern that it would subject the adviser to influence by 
management.\115\ It was not apparent to NYSE Arca why the existence of 
contractual indemnification and limitation of liability provisions 
would subject an adviser to any influence by management and, therefore, 
it is not clear how they are relevant to an independence 
determination.\116\ NYSE Arca expressed no view on the desirability of 
such agreements.\117\
---------------------------------------------------------------------------

    \115\ See NYSE Response Letter.
    \116\ See id.
    \117\ See id.
---------------------------------------------------------------------------

2. Non-Independent Consultants
    One commenter suggested that, although the portion of the proposal 
which relates to the compensation committee's use of a compensation 
consultant was thoughtfully drafted and accurately reflects the 
substance of Rule 10C-1, there was a possibility that a reader may not 
properly interpret the intended meaning of proposed Section 303A.05(c) 
of the NYSE Listed Company Manual concerning the use of compensation 
consultants, legal counsel and advisers that are not independent.\118\ 
First, the commenter suggested the use of the example ``independent 
legal counsel'' might be read to require the compensation committee to 
only use independent legal counsel, when Rule 10C-1 would otherwise 
permit a compensation committee to receive advice from non-independent 
counsel, such as in-house counsel or outside counsel retained by 
management.\119\ Second, the commenter suggested that the proposal 
could be revised to emphasize that a compensation committee is not 
responsible for advisers retained by management or other parties.\120\ 
Third, the commenter suggested that the section addressing the funding 
of consultants should be revised to make clear that: (a) Retained legal 
counsel need not be independent: And (b) expenses of an adviser, in 
addition to its compensation, would also be provided for by the 
issuer.\121\ Fourth, the commenter suggested that the proposal be 
clarified to require a compensation committee to take into account the 
independence requirements only when selecting a consultant for matters 
related

[[Page 4516]]

to executive compensation, rather than for consultants selected to 
assist with any other responsibilities the committee may have in 
addition to executive compensation.\122\ In response, NYSE Arca noted 
that Amendment No. 2 amended the proposed rule text to provide that: 
(i) Nothing in the proposed rules requires a compensation consultant, 
legal counsel or other compensation adviser to be independent, only 
that the compensation committee consider the enumerated independence 
factors before selecting a compensation adviser; and (ii) the 
compensation committee may select any compensation adviser they prefer 
including ones that are not independent, after considering the six 
independence factors outlined in the proposed rules.\123\ In addition, 
NYSE Arca noted that Rule 10C-1 and the SEC's adopting release refer 
only to compensation advisers generally without carving out 
compensation advisers retained by the compensation committee with 
respect to matters other than executive compensation.\124\
---------------------------------------------------------------------------

    \118\ See Ameriprise Letter.
    \119\ See id.
    \120\ See id.
    \121\ See id.
    \122\ See id. See also Corporate Secretaries Letter.
    \123\ See NYSE Response Letter.
    \124\ See NYSE Response Letter.
---------------------------------------------------------------------------

    One commenter believed that the proposed rule could be read as 
requiring a compensation committee to consider the independence factors 
set forth in Rule 10C-1 when selecting any consultant providing advice 
to the compensation committee, including any outside legal counsel that 
might provide legal advice to a compensation committee.\125\ The 
commenter argued that outside legal counsel often provides advice to 
compensation committees on matters other than how much a company should 
pay an executive.\126\ The commenter suggested it would not be 
``necessary or a good use of resources for compensation committees to 
review independence factors for such attorneys providing advice to the 
compensation committee.'' \127\ The commenter stated that no other rule 
requires a board committee to consider the independence of its regular 
legal counsel,\128\ and noted that, while it may, at times, be 
appropriate for a board or a committee to consider independence 
factors, such a consideration should not be made part of a listing 
standard that singles out the compensation committee.\129\ The 
commenter suggested that different language originally proposed by The 
NASDAQ Stock Market LLC reflected a more balanced rule that only 
required the compensation committee to consider the independence when 
selecting independent legal counsel, not every outside attorney that 
provides advice to the compensation committee.\130\
---------------------------------------------------------------------------

    \125\ See Wilson Sonsini Letter.
    \126\ See id.
    \127\ See id.
    \128\ See id.
    \129\ See id.
    \130\ See id. The Commission notes that The NASDAQ Stock Market 
LLC has since revised its proposed rule language and added 
commentary that makes clear its original intent that the 
compensation committee of an issuer listed on The NASDAQ Stock 
Market LLC, absent an exemption, must consider the independence of 
every adviser, other than in-house legal counsel, that provides 
advice to the compensation committee, including non-independent 
legal counsel. See SR-NASDAQ-2012-109, Amendment No. 1.
---------------------------------------------------------------------------

    In response, NYSE Arca stated that it believes that its proposal is 
dictated by Rule 10C-1, which excludes only in-house legal counsel from 
the requirement to conduct an independence analysis with respect to any 
legal counsel consulted by the compensation committee, including the 
company's regular securities or tax counsel.\131\ NYSE Arca noted that 
the Rule 10C-1 Adopting Release provides that ``[t]he exemption of in-
house counsel from the independence analysis will not affect the 
obligation of a compensation committee to consider the independence of 
outside legal counsel or compensation consultants or other advisers 
retained by management or by the issuer.'' \132\
---------------------------------------------------------------------------

    \131\ See NYSE Response Letter.
    \132\ See id.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the proposal, 
maintained that the required independence assessment will be ``time-
consuming and burdensome'' due to the scope of information that will 
need to be gathered in order to conduct the required independence 
assessment.\133\ This commenter believed that uncertainty over the 
scope of the requirement could have a counterproductive effect of 
discouraging compensation committees from obtaining the advice of 
advisers subject to the rule, particularly in situations where quick 
action is required of the compensation committee, and further 
identified a number of specific issues that it believed NYSE should 
address to provide greater clarity regarding the standard.\134\
---------------------------------------------------------------------------

    \133\ See Corporate Secretaries Letter.
    \134\ The Commission notes that NYSE Arca addressed some of the 
commenter's concerns in Amendment No. 2.
---------------------------------------------------------------------------

    In response, NYSE Arca disagreed with the commenter, arguing that 
it was impossible to specifically enumerate every category of 
relationship which might be material to a compensation committee 
adviser's independence.\135\ NYSE Arca believes that it is therefore 
necessary for a compensation committee to conduct a more flexible 
analysis.\136\ NYSE Arca believes that it would not be appropriate for 
it to identify additional relevant factors in the rule, as it would be 
impossible to predict every category of relationship that might be 
material.\137\
---------------------------------------------------------------------------

    \135\ See NYSE Response Letter.
    \136\ See id.
    \137\ See id.
---------------------------------------------------------------------------

C. Opportunity To Cure Defects

    One commenter supported the rule proposed to permit issuers a 
period of time, under specified conditions, to cure failures to comply 
with the independence requirements for compensation committee 
members.\138\ The commenter was concerned, however, that the proposed 
rules did not specify a cure period for any other form of non-
compliance with the new rules.\139\ The commenter believed that a 
company should be allowed to take corrective action within a reasonable 
time after the company's senior executives learn of the non-compliance.
---------------------------------------------------------------------------

    \138\ See Corporate Secretaries Letter. As noted above, the 
comment letter refers specifically to NYSE, but applies equally to 
the NYSE Arca proposal.
    \139\ See id. The commenter mentioned, in particular, the 
requirement that the committee may obtain advice from a consultant 
or adviser only after assessing that individual's independence. The 
commenter believed that inadvertent violations of this requirement 
could arise, for example, if a person is appearing before a 
compensation committee solely to provide information or other 
services, and the individual then on a solicited or unsolicited 
basis makes a statement that could be viewed as providing advice on 
executive compensation. In the absence of a cure mechanism, the 
commenter believed, the company would be in violation of the listing 
standard and have no recourse.
---------------------------------------------------------------------------

    In response, NYSE Arca noted that it had existing policies and 
procedures that govern non-compliance with rules generally and that 
these provisions would apply to any events of non-compliance under the 
proposed rules.\140\ NYSE Arca believes these provisions provide it 
with the ability to grant a discretionary period for an issuer to 
return to compliance, and noted that the determination of a reasonable 
cure period can only be made in light of specific facts and 
circumstances.\141\
---------------------------------------------------------------------------

    \140\ See NYSE Response Letter.
    \141\ See id.
---------------------------------------------------------------------------

D. Exemptions

    The Commission received one comment letter supporting the proposal 
to exempt investment companies from the Rule 10C-1 requirements.\142\ 
As the commenter noted, although Rule 10C-1 exempts certain entities, 
including

[[Page 4517]]

registered open-end management investment companies, from the enhanced 
independence requirements for members of compensation committees, it 
did not explicitly exempt other types of investment companies 
registered under the Investment Company Act of 1940 (``Investment 
Company Act''), including closed-end funds, from any of the 
requirements of Rule 10C-1. Under the proposal, both closed-end and 
open-end funds would be exempt from all the requirements of the rule. 
The commenter supported this aspect of the proposal, stating that both 
open-end and closed-end funds typically are externally managed and do 
not employ executives or, by their nature, have employees. The 
commenter agreed with the proposal that it would be significantly and 
unnecessarily burdensome to require such entities to comply with the 
proposed requirements, and further noted that any conflicts with 
respect to compensation of investment advisers are governed by the 
Investment Company Act.\143\
---------------------------------------------------------------------------

    \142\ See ICI Letter. As noted above, the comment letter refers 
specifically to NYSE, but applies equally to the NYSE Arca proposal.
    \143\ See ICI Letter.
---------------------------------------------------------------------------

E. Transition Period

    As noted above, NYSE Arca does not propose a transition period. One 
commenter voiced support for the transition period proposed by NYSE for 
compliance with the new compensation committee independence standard, 
but believed that NYSE should provide a longer period for companies to 
satisfy proposed Section 303A.05 of the NYSE Listed Company Manual, 
relating to the authority of a compensation committee to retain 
compensation consultants, legal counsel, and other compensation 
advisers; the authority to fund such advisers; and the responsibility 
of the committee to consider independence factors before selecting such 
advisers.\144\
---------------------------------------------------------------------------

    \144\ See Corporate Secretaries Letter. Here, the comment letter 
refers specifically to NYSE, and does not apply to the NYSE Arca 
filing, as NYSE Arca provides no transition period for currently 
listed companies.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the NYSE Arca 
proposal, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\145\ In particular, the Commission finds that the amended 
proposed rule change is consistent with the requirements of Section 
6(b) of the Act,\146\ as well as with Section 10C of the Act \147\ and 
Rule 10C-1 thereunder.\148\ Specifically, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\149\ which requires that the rules of a national securities 
exchange be designed, among other things, to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest; and not be 
designed to permit, among other things, unfair discrimination between 
issuers.
---------------------------------------------------------------------------

    \145\ In approving the NYSE Arca proposed rule change, as 
amended, the Commission has considered its impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \146\ 15 U.S.C. 78f(b).
    \147\ 15 U.S.C. 78j-3.
    \148\ 17 CFR 240.10C-1.
    \149\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The development and enforcement of meaningful listing standards for 
a national securities exchange is of substantial importance to 
financial markets and the investing public. Meaningful listing 
standards are especially important given investor expectations 
regarding the nature of companies that have achieved an exchange 
listing for their securities. The corporate governance standards 
embodied in the listing rules of national securities exchanges, in 
particular, play an important role in assuring that companies listed 
for trading on the exchanges' markets observe good governance 
practices, including a reasoned, fair, and impartial approach for 
determining the compensation of corporate executives. The Commission 
believes that the NYSE Arca proposal will foster greater transparency, 
accountability, and objectivity in the oversight of compensation 
practices of listed issuers and in the decision-making processes of 
their compensation committees.
    In enacting Section 10C of the Act as one of the reforms of the 
Dodd-Frank Act,\150\ Congress resolved to require that ``board 
committees that set compensation policy will consist only of directors 
who are independent.'' \151\ In June 2012, as required by this 
legislation, the Commission adopted Rule 10C-1 under the Act, which 
directs the national securities exchanges to prohibit, by rule, the 
initial or continued listing of any equity security of an issuer (with 
certain exceptions) that is not in compliance with the rule's 
requirements regarding issuer compensation committees and compensation 
advisers.
---------------------------------------------------------------------------

    \150\ See supra note 9.
    \151\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of 
the Committee of Conference, Title IX, Subtitle E ``Accountability 
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29, 
2010).
---------------------------------------------------------------------------

    In response, NYSE Arca submitted the proposed rule change, which 
includes rules intended to comply with the requirements of Rule 10C-1 
and additional provisions designed to strengthen the Exchange's listing 
standards relating to compensation committees. The Commission believes 
that the proposed rule change satisfies the mandate of Rule 10C-1 and 
otherwise will promote effective oversight of its listed issuers' 
executive compensation practices.
    The Commission notes that a number of the commenters generally 
supported substantially similar proposed rule changes, although some 
commenters offered suggestions to clarify or improve various provisions 
NYSE Arca's proposal or NYSE's substantially similar proposal. The 
Commission believes that the proposed rule change, as modified by 
Amendment No. 2, appropriately revises NYSE Arca's rules for 
compensation committees of listed companies, for the following reasons:

A. Compensation Committee Composition

    As discussed above, under Rule 10C-1, the exchanges must adopt 
listing standards that require each member of a compensation committee 
to be independent, and to develop a definition of independence after 
considering, among other relevant factors, the source of compensation 
of a director, including any consulting, advisory or other compensatory 
fee paid by the issuer to the director, as well as whether the director 
is affiliated with the issuer or any of its subsidiaries or their 
affiliates.
    The Commission notes that Rule 10C-1 leaves it to each exchange to 
formulate a final definition of independence for these purposes, 
subject to review and final Commission approval pursuant to Section 
19(b) of the Act. As the Commission stated in the Rule 10C-1 Adopting 
Release, ``given the wide variety of issuers that are listed on 
exchanges, we believe that the exchanges should be provided with 
flexibility to develop independence requirements appropriate for the 
issuers listed on each exchange and consistent with the requirements of 
the independence standards set forth in Rule 10C-1(b)(1).'' \152\ This 
discretion

[[Page 4518]]

comports with the Act, which gives the exchanges the authority, as 
self-regulatory organizations, to propose the standards they wish to 
set for companies that seek to be listed on their markets consistent 
with the Act and the rules and regulations thereunder, and, in 
particular, Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \152\ As explained further in the Rule 10C-1 Adopting Release, 
prior to final approval, the Commission will consider whether the 
exchanges' proposed rule changes are consistent with the 
requirements of Section 6(b) and Section 10C of the Exchange Act.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence 
standards that currently apply to board and compensation committee 
members, which include certain bright-line tests, NYSE Arca has 
enhanced its listing requirements regarding compensation committees by 
adopting additional standards for independence to comply with the Fees 
Factor and Affiliation Factor, as well as the other standards set forth 
in Rule 10C-1. The NYSE Arca's proposal also adopts the cure procedures 
required in Rule 10C-1(a)(3) for compensation committee members who 
cease to be independent for reasons outside their reasonable control, 
so long as the majority of the members of the compensation committee 
continue to be independent, and retains the requirement that listed 
issuers have a compensation committee composed entirely of independent 
directors as required by Rule 10C-1.
    In addition, as noted above, NYSE Arca eliminates, for all 
companies other than Smaller Reporting Companies, the ability of the 
board under exceptional and limited circumstances to appoint a non 
independent director to the compensation committee.
    Further, as discussed in more detail below, the NYSE Arca proposal 
retains the requirement that the compensation committee have a written 
charter that addresses the committee's purpose and responsibilities, 
and adds requirements to specify the compensation committee's authority 
and responsibilities as to compensation advisers as set forth under 
Rule 10C-1. Finally, to help in assuring that companies comply with 
these provisions, Exchange rules will continue to require that the 
compensation committee charter address an annual performance evaluation 
of the compensation committee. Taken as a whole, the Commission 
believes that these changes will strengthen the oversight of executive 
compensation in NYSE Arca-listed companies and further greater 
accountability, and will therefore further the protection of investors 
consistent with Section 6(b)(5) of the Act.
    The Commission believes that the Exchange's proposal, which 
requires the consideration of the additional independence factors for 
compensation committee members, is designed to protect investors and 
the public interest and is consistent with the requirements of Sections 
6(b)(5) and 10C of the Act and Rule 10C-1 thereunder.
    With respect to the Fees Factor of Rule 10C-1, the Exchange rule 
text states when considering the source of a director's compensation in 
determining independence for compensation committee service, the board 
should consider whether the director receives compensation from any 
person or entity that would impair his ability to make independent 
judgments about the listed company's executive compensation. In 
addition to the continued application of the NYSE Arca's current 
bright-line tests, NYSE Arca's new rules also require the board to 
consider all relevant factors in making independence determinations for 
compensation committee membership. The Exchange believes that these 
requirements of proposed NYSE Arca Equities Rule 5.3(k)(4)(ii), in 
addition to the general director independence requirements, represent 
an appropriate standard for compensation committee independence that is 
consistent with the requirements of Rule 10C-1 and the Fees Factor.
    The Commission believes that the provisions noted above to address 
the Fees Factor give a board broad flexibility to consider a wide 
variety of fees, including any consulting, advisory or other 
compensatory fee paid by the issuer or entity, when considering a 
director's independence for compensation committee service. While the 
Exchange does not bar all compensatory fees, the approach is consistent 
with Rule 10C-1 and provides a basis for a board to prohibit a director 
from being a member of the compensation committee, should the director 
receive compensation that impairs the ability to make independent 
decisions on executive compensation matters, even if that compensation 
does not exceed the threshold in the bright-line test.\153\ The 
Commission, therefore, believes that the proposed compensatory fee 
requirements comply with Rule 10C-1 and are designed to protect 
investors and the public interest, consistent with Section 6(b)(5) of 
the Act. The Commission notes that the compensatory fee consideration 
may help ensure that compensation committee members are less likely to 
have received fees, from either the issuer or another entity, that 
could potentially influence their decisions on compensation matters.
---------------------------------------------------------------------------

    \153\ See supra note 33, setting forth the existing bright-line 
tests.
---------------------------------------------------------------------------

    The Commission recognizes that some commenters did not believe that 
the proposal went far enough because the NYSE Arca did not adequately 
consider the compensation that directors receive for board or committee 
service in formulating its standards of independence for service on the 
compensation committee, and, in particular, the levels to which such 
compensation may rise,\154\ or otherwise favored additional 
requirements.\155\ The Commission notes, however, that to the extent a 
conflict of interest exists because directors set their own 
compensation, companies must disclose director compensation, and 
investors will become aware of excessive or non-customary director 
compensation through this means. In addition, as NYSE Arca states, a 
company's board of directors must consider all relevant factors in 
making compensation committee independence determinations, and if 
director fees could, in the opinion of the board, impair the director's 
independent judgment with respect to compensation-related matters, the 
board could therefore consider director compensation in that 
context.\156\ The Commission believes that, based on the NYSE Arca's 
argument and the disclosure requirements noted above, these arguments 
are sufficient to find that NYSE Arca has complied with the 
requirements of Rule 10C-1 in this regard.
---------------------------------------------------------------------------

    \154\ See AFL-CIO Letter, Brown Letter, and Teamsters Letter, 
maintaining that NYSE's proposal ``falls short'' of the Rule 10C-1 
provision requiring exchanges to consider a director's source of 
compensation. See also supra notes 95-99 and accompanying text. As 
stated by commenters, ``[h]igh director fees relative to other 
sources of income can compromise director objectivity'' and 
``[h]ighly paid directors also may be more inclined to approve large 
executive pay packages.'' AFL-CIO Letter. See also Teamsters Letter. 
As noted above, the comment letters refer specifically to NYSE, but 
apply equally to the NYSE Arca proposal.
    \155\ See, e.g., CII Letter.
    \156\ See NYSE Response letter, supra note 6. The Commission 
also notes that in the NYSE Response Letter, the Exchange states 
that to the extent that excessive board compensation might affect a 
director's independence, the new rules would require the board to 
consider that factor in its independence determination.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, NYSE Arca has 
concluded that an outright bar from service on a company's compensation 
committee of any director with an affiliation with the company, its 
subsidiaries, and their affiliates is inappropriate for compensation 
committees. NYSE Arca's existing independence standards will also 
continue to apply to those directors

[[Page 4519]]

serving on the compensation committee. NYSE Arca maintains that it may 
be appropriate for certain affiliates, such as representatives of 
significant stockholders, to serve on compensation committees as 
``share ownership in the listed company aligns the director's interests 
with those of unaffiliated shareholders, as their stock ownership gives 
them the same economic interest in ensuring that the listed company's 
executive compensation is not excessive.'' In spite of the argument of 
two commenters in favor of an outright ban on affiliations with the 
company,\157\ the Commission believes that NYSE Arca's approach of 
requiring boards only to consider such affiliations is reasonable and 
consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \157\ See Teamsters Letter and AFL-CIO Letter. As noted above, 
the comment letters refer specifically to NYSE, but apply equally to 
the NYSE Arca proposal.
---------------------------------------------------------------------------

    The Commission notes that Congress, in requiring the Commission to 
direct the exchanges to consider the Affiliation Factor, did not 
declare that an absolute bar was necessary. Moreover, as the Commission 
stated in the Rule 10C-1 Adopting Release, ``In establishing their 
independence requirements, the exchanges may determine that, even 
though affiliated directors are not allowed to serve on audit 
committees, such a blanket prohibition would be inappropriate for 
compensation committees, and certain affiliates, such as 
representatives of significant shareholders, should be permitted to 
serve.'' \158\ In determining that NYSE Arca's affiliation standard is 
consistent with Sections 6(b)(5) and 10C under the Act, the Commission 
notes that NYSE Arca's proposal requires a company's board, in 
selecting compensation committee members, to consider whether any such 
affiliation would impair a director's judgment as a member of the 
compensation committee. The NYSE Arca Equities rule further states 
that, in considering affiliate relationships, a board should consider 
whether such affiliate relationship places the director under the 
direct or indirect control of the listed company or its senior 
management such that it would impair the ability of the director to 
make independent judgments on executive compensation. We believe that 
this should give companies the flexibility to assess whether a director 
who is an affiliate, including a significant shareholder, should or 
should not serve on the company's compensation committee, depending on 
the director's particular affiliations with the company or its senior 
management.\159\
---------------------------------------------------------------------------

    \158\ Rule 10C-1 Adopting Release. At the same time, the 
Commission noted that significant shareholders may have other 
relationships with the listed company that would result in such 
shareholders' interests not being aligned with those of other 
shareholders and that the exchanges may want to consider these other 
ties between a listed issuer and a director. While the Exchange did 
not adopt any additional factors, the current affiliation standard 
would still allow a company to prohibit a director whose 
affiliations ``impair his ability to make independent judgment'' as 
a member of the committee. See also supra notes 31-35 and 
accompanying text.
    \159\ The Commission notes that one commenter suggested there 
was ambiguity as to whether boards must consider business or 
personal relationships between directors and senior management. See 
Brown Letter. In response, NYSE Arca noted that its existing 
independence standards require the board to make an affirmative 
determination that there is no material relationship between the 
director and the company which would affect the director's 
independence. NYSE Arca noted that Commentary to Section 303A.02(a) 
of the NYSE Listed Company Manual explicitly notes with respect to 
the board's affirmative determination of a director's independence 
that the concern is independence from management, and NYSE Arca has 
always interpreted their director independence requirements in the 
same way. Consequently, NYSE Arca does not believe that any further 
clarification of this requirement is necessary. See NYSE Response 
Letter.
---------------------------------------------------------------------------

    As to whether NYSE Arca should adopt any additional relevant 
independence factors, the Exchange stated that it reviewed its rules in 
light of Rule 10C-1, and concluded that its existing rules together 
with its proposed rules are sufficient to ensure committee member 
independence. The Commission believes that, through this review, the 
Exchange has complied with the requirement that it consider relevant 
factors, including, but not limited to, the Fees and Affiliation 
Factors in determining its definition of independence for compensation 
committee members. The Commission does not agree with the commenters 
who argued that the NYSE's substantially similar proposal falls short 
of ``the requirements or intent'' of Section 10C of the Act and Rule 
10C-1. The Commission notes that Rule 10C-1 requires each exchange to 
consider relevant factors in determining independence requirements for 
members of a compensation committee, but does not require the 
exchange's proposal to reflect any such additional factors.
    As noted above, several commenters argued that the proposal should 
require other ties between directors and the company, including 
business and personal relationships with executives of the company, be 
considered by boards in making independence determinations.\160\ The 
Commission did emphasize in the Rule 10C-1 Adopting Release that ``it 
is important for exchanges to consider other ties between a listed 
issuer and a director * * * that might impair the director's judgment 
as a member of the compensation committee,'' \161\ and noted that ``the 
exchanges might conclude that personal or business relationships 
between members of the compensation committee and the listed issuer's 
executive officers should be addressed in the definition of 
independence.'' However, the Commission did not require exchanges to 
reach this conclusion and thus NYSE Arca's decision that such ties need 
not be included explicitly in its definition of independence does not 
render its proposal insufficient.
---------------------------------------------------------------------------

    \160\ See supra notes 95-105 and accompanying text. As noted 
above, several of the comment letters refer specifically to NYSE, 
but apply equally to the NYSE Arca proposal.
    \161\ See supra note 11.
---------------------------------------------------------------------------

    In explaining why it did not include, specifically, personal and 
business relationships as a factor, NYSE Arca cites its standards for 
Independent Directors, generally, which require the board of directors 
of a listed issuer to make an affirmative determination that each such 
director has no material relationship with the listed company with 
respect to their independence from management.\162\ All compensation 
committee members must meet the general independence standards under 
NYSE Arca's rules in addition to the two new criteria being adopted 
herein. The Commission therefore expects that boards, in fulfilling 
their obligations, will apply this standard to each such director's 
individual responsibilities as a board member, including specific 
committee memberships such as the compensation committee. Although 
personal and business relationships, related party transactions, and 
other matters suggested by commenters are not specified either as 
bright-line disqualifications or explicit factors that must be 
considered in evaluating a director's independence, the Commission 
believes that compliance with NYSE Arca's rules and the provision noted 
above would demand consideration of such factors with respect to 
compensation committee members, as well as to all Independent Directors 
on the board.
---------------------------------------------------------------------------

    \162\ See Equities Rule 5.3(k)(1). See also NYSE Response 
Letter.
---------------------------------------------------------------------------

    Notwithstanding the concern of some commenters, the Commission 
confirms that Rule 10C-1 does not mean that a director cannot be 
disqualified on the basis of one factor alone. Although NYSE Arca does 
not state this explicitly in its rules, in response to comments,

[[Page 4520]]

the Exchange confirmed that they have interpreted their current rules 
as providing that a single relationship could be sufficiently material 
that it would render a director non-independent. The Commission 
believes that nothing in Rule 10C-1 or in NYSE Arca's current or 
proposed rules implies otherwise.
    Finally, the Commission does not believe that NYSE Arca is required 
in the current proposed rule change to consider further revisions of 
its independence rules as suggested by some commenters, although it may 
wish to do so in the future after it has experience with its rules. The 
Commission notes that the NYSE Arca provision requires a board to 
further exercise appropriate discretion to consider all factors 
specifically relevant in determining whether a director has a 
relationship to the listed company which is material to that director's 
ability to be independent from management in connection with the duties 
of a compensation committee member. The Commission notes that one 
commenter argues this provision is vague and unnecessary and should be 
deleted from the proposal.\163\ The Commission does not agree with the 
commenter, however, that the consideration of the explicitly enumerated 
factors will be sufficient in all cases to achieve the objectives of 
Section 10C(a)(3), because it is not possible to foresee all possible 
kinds of relationships that might be material to a compensation 
committee member's independence. We therefore believe the flexibility 
provided in NYSE Arca's new compensation committee independence 
standards provides companies with guidance, while allowing them to 
identify those relationships that might raise questions of independence 
for service on the compensation committee. For these reasons, we 
believe the director independence standards are consistent with the 
investor protection provision of Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \163\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

    Under NYSE Arca's proposal, only Smaller Reporting Companies will 
be able to avail themselves of the ``Exceptional and Limited 
Circumstances'' provision that permits the board to appoint one non-
independent director serve on a compensation committee under certain 
circumstances. Accordingly, all listed companies, except Smaller 
Reporting Companies, will be required to have a compensation committee 
comprised of members that all meet the existing and enhanced 
independence requirements. We note that this change will ensure that, 
for all NYSE Arca-listed companies that are not Smaller Reporting 
Companies, executive compensation will only be considered by 
independent directors, which should help to ensure impartial executive 
compensation decisions.
    The Commission believes that the discretion granted to each 
exchange by Rule 10C-1, generally, to determine the independence 
standards it adopts to comply with the Rule includes the leeway to 
carve out exceptions to those standards, as long as they are consistent 
with the Act. Regarding the justification for retaining this exception 
only for Smaller Reporting Companies, the Commission notes that it long 
ago approved as consistent with the Act the broader exception and 
concept in the context of NYSE Arca's definition of Independent 
Director under Equities Rule 5.3(k)(1) with respect to compensation 
committees. For these reasons, the Commission believes that retaining 
this provision for Smaller Reporting Companies is reasonable and 
consistent with Section 6(b)(5) of the Act and with Rule 10C-1. We note 
that Smaller Reporting Companies are already exempted out of the 
enhanced independence standards under NYSE Arca's proposal and Rule 
10C-1. The provision was previously approved by the Commission as 
consistent with the Act, and finally, the Commission notes that a 
member appointed to a Smaller Reporting Company's compensation 
committee under this Exceptional and Limited Circumstances provision 
may not serve longer than two years.

B. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers and Factors

    As discussed above, NYSE Arca proposes to set forth explicitly in 
its rules the requirements of Rule 10C-1 regarding a compensation 
committee's authority to retain compensation advisers, its 
responsibilities with respect to such advisers, and the listed 
company's obligation to provide appropriate funding for payment of 
reasonable compensation to a compensation adviser retained by the 
committee. As such, the Commission believes these provisions meet the 
mandate of Rule 10C-1 \164\ and are consistent with the Act.\165\
---------------------------------------------------------------------------

    \164\ 17 CFR 240.10C-1.
    \165\ 15 U.S.C. 78j-3.
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to 
specify the enhanced compensation committee responsibilities through 
official board action will help to assure that there is adequate 
transparency as to the rights and responsibilities of compensation 
committee members. As discussed above, the proposed rule change 
requires the compensation committee of a listed company to consider the 
six factors relating to independence that are enumerated in the 
proposal before selecting a compensation consultant, legal counsel or 
other adviser to the compensation committee. The Commission believes 
that this provision is consistent with Rule 10C-1 and Section 6(b)(5) 
of the Act.
    As noted above, one commenter believed that Rule 10C-1 could be 
read as not requiring a compensation committee to consider the 
enumerated independence factors with respect to regular outside legal 
counsel and sought to have NYSE revise its substantially similar 
proposal.\166\ This reading is incorrect, and NYSE Arca's rule language 
reflects the appropriate reading. The Commission notes that Rule 10C-1 
includes an instruction that specifically requires a compensation 
committee to conduct the independence assessment with respect to ``any 
compensation consultant, legal counsel or other adviser that provides 
advice to the compensation committee, other than in-house counsel.'' 
\167\ To avoid any confusion, NYSE Arca added rule text that reflects 
this instruction in its own rules.\168\
---------------------------------------------------------------------------

    \166\ See Wilson Sonsini Letter and supra notes 125-130 and 
accompanying text.
    \167\ See Instruction to paragraph (b)(4) of Rule 10C-1.
    \168\ See supra note 50 and accompanying text.
---------------------------------------------------------------------------

    In approving this aspect of the proposal, the Commission notes that 
compliance with the rule requires an independence assessment of any 
compensation consultant, legal counsel, or other adviser that provides 
advice to the compensation committee, and is not limited to advice 
concerning executive compensation. However, NYSE Arca has proposed, in 
Amendment No. 2, to add language to the provision regarding the 
independence assessment of compensation advisers \169\ to state that 
the compensation committee is not required to conduct an independence 
assessment for a compensation adviser that acts in a role limited to 
the following activities for which no disclosure is required under Item 
407(e)(3)(iii) of Regulation S-K: (a) Consulting on any broad-based 
plan that does not discriminate in scope, terms, or operation, in favor 
of executive officers or directors of the company, and that is 
available generally to all salaried employees; and/or (b) providing

[[Page 4521]]

information that either is not customized for a particular issuer or 
that is customized based on parameters that are not developed by the 
adviser, and about which the adviser does not provide advice. NYSE Arca 
states that this exception is based on Item 407(e)(3)(iii) of 
Regulation S-K, which provides a limited exception to the Commission's 
requirement for a registrant to disclose any role of compensation 
consultants in determining or recommending the amount and form of a 
registrant's executive and director compensation.\170\
---------------------------------------------------------------------------

    \169\ See proposed Commentary .05 to Equities Rule 5.3(k)(4), as 
amended by Amendment No. 2.
    \170\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views NYSE Arca's proposed exception as reasonable, 
as the Commission determined, when adopting the compensation consultant 
disclosure requirements in Item 407(e)(3)(iii), that the two excepted 
categories of advice do not raise conflict of interest concerns.\171\ 
The Commission also made similar findings when it noted it was 
continuing such exceptions in the Rule 10C-1 Adopting Release, 
including excepting such roles from the new conflict of interest 
disclosure rule required to implement Section 10C(c)(2). The Commission 
also believes that the exception should allay some of the concerns 
raised by the commenters regarding the scope of the independence 
assessment requirement. Based on the above, the Commission believes 
these limited exceptions are consistent with the investor protection 
provisions of Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \171\ See Proxy Disclosure Enhancements, Securities Act Release 
No. 9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348 
(``We are persuaded by commenters who noted that surveys that 
provide general information regarding the form and amount of 
compensation typically paid to executive officers and directors 
within a particular industry generally do not raise the potential 
conflicts of interest that the amendments are intended to 
address.'').
---------------------------------------------------------------------------

    Regarding the belief of another commenter that the independence 
assessment requirement could discourage compensation committees from 
obtaining the advice of advisers,\172\ the Commission notes that, as 
already discussed, nothing in the proposed rule prevents a compensation 
committee from selecting any adviser that it prefers, including ones 
that are not independent, after considering the six factors. In this 
regard, in Amendment No. 2, NYSE Arca added specific rule language 
stating, among other things, that nothing in its rule requires a 
compensation adviser to be independent, only that the compensation 
committee must consider the six independence factors before selecting 
or receiving advice from a compensation adviser.\173\ Regarding the 
commenter's concern over the burdens that the Exchange proposal 
imposes, the Commission notes that Rule 10C-1 explicitly requires 
exchanges to require consideration of these six factors.\174\ Moreover, 
five of the six factors were dictated by Congress itself in the Dodd-
Frank Act. As previously stated by the Commission in adopting Rule 10C-
1, the requirement that compensation committees consider the 
independence of potential compensation advisers before they are 
selected should help assure that compensation committees of affected 
listed companies are better informed about potential conflicts, which 
could reduce the likelihood that they are unknowingly influenced by 
conflicted compensation advisers.\175\
---------------------------------------------------------------------------

    \172\ See Corporate Secretaries Letter and supra note 133 and 
accompanying text.
    \173\ See supra notes 53-54 and accompanying text.
    \174\ The Commission also does not agree with the argument of 
one commenter that NYSE Arca's proposal must require compensation 
committees to specifically consider, among the independence factors 
relating to compensation advisers, whether such an adviser requires 
that clients contractually agree to indemnify or limit their 
liability. See CII Letter. The Commission views as reasonable the 
Exchange's belief that the six factors set forth in Rule 10C-1 are 
sufficient for the required independence assessment.
    \175\ See Rule 10C-1 Adopting Release, supra note 11.
---------------------------------------------------------------------------

    Finally, one commenter requested guidance ``on how often the 
required independence assessment should occur.'' \176\ This commenter 
observed that it ``will be extremely burdensome and disruptive if prior 
to each such [compensation committee] meeting, the committee had to 
conduct a new assessment.'' The Commission anticipates that 
compensation committees will conduct such an independence assessment at 
least annually.
---------------------------------------------------------------------------

    \176\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

    The changes to NYSE Arca's rules on compensation advisers should 
therefore benefit investors in NYSE Arca-listed companies and are 
consistent with the requirements in Section 6(b)(5) of the Act that 
rules of the exchange further investor protection and the public 
interest.

C. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting 
Companies, like all other listed companies, to have a compensation 
committee, composed solely of Independent Directors is reasonable and 
consistent with the protection of investors.\177\ The Commission notes 
that NYSE Arca's rules for compensation committees have not made a 
distinction for Smaller Reporting Companies in the past. However, 
consistent with the exemption of Smaller Reporting Companies from Rule 
10C-1, the NYSE Arca proposal would: (i) Exempt Smaller Reporting 
Companies from having to consider the additional independence 
requirements as to compensatory fees and affiliation; and (ii) exempt 
their compensation committees from having to consider the additional 
independence factors for compensation advisers. Under this approach, 
Smaller Reporting Companies will effectively be subject to the same 
requirements as is currently the case under the existing requirements 
of Equities Rule 5.3(k)(4) for all companies with respect to providing 
the compensation committee with the authority and funding for the 
retention of compensation advisers.
---------------------------------------------------------------------------

    \177\ As discussed above, the Commission believes that providing 
an exception to this requirement for Smaller Reporting Companies in 
limited and exceptional circumstances is appropriate.
---------------------------------------------------------------------------

    The Commission believes that these provisions are consistent with 
the Act and do not unfairly discriminate between issuers. The 
Commission believes that, for similar reasons to those for which 
Smaller Reporting Companies are exempted from the Rule 10C-1 
requirements, it makes sense for NYSE Arca to provide some flexibility 
to Smaller Reporting Companies. Further, because a Smaller Reporting 
Company does not need to include the additional provision regarding the 
independence of compensation advisers that NYSE Arca is requiring all 
other listed companies to include to comply with Rule 10C-1,\178\ and 
in view of the potential additional costs of such review, it is 
reasonable not to require a Smaller Reporting Company to conduct such 
analysis of compensation advisers.
---------------------------------------------------------------------------

    \178\ As discussed supra note 62 and accompanying text, a 
Smaller Reporting Company will not be required to include, like 
other listed companies, a requirement that the committee consider 
independence factors before selecting such advisers, because Smaller 
Reporting Companies are not subject to that requirement.
---------------------------------------------------------------------------

D. Opportunity To Cure Defects

    Rule 10C-1 requires the rules of an exchange to provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing. Rule 10C-
1 also specifies that, with respect to the independence standards 
adopted in accordance with the requirements of the Rule, an exchange 
may provide a cure period until the earlier of the next annual 
shareholders meeting of the

[[Page 4522]]

listed issuer or one year from the occurrence of the event that caused 
the member to be no longer independent.
    The Commission notes that the cure period that NYSE Arca proposes 
for companies that fail to comply with the enhanced independence 
requirements designed to comply with Rule 10C-1 is the same as the cure 
period suggested under Rule 10C-1, but NYSE Arca limits the cure 
period's use to circumstances where the committee continues to have a 
majority of independent directors, as NYSE Arca believes this would 
ensure that the applicable committee could not take an action without 
the agreement of one or more independent directors. The Commission 
believes that the accommodation, including the proposed period and 
limitation, although it gives a company less leeway in certain 
circumstances than the cure period provided as an option by Rule 10C-1, 
is fair and reasonable and consistent with investor protection under 
Rule 6(b)(5) by ensuring that a compensation committee cannot take 
action without a majority of independent directors even when a member 
ceases to be independent and the committee is entitled to a period to 
cure that situation.
    The Commission agrees with the understanding of the commenter who 
believed that Rule 10C-1 requires that an exchange provide a company an 
opportunity to cure any defects in compliance with any of the new 
requirements. The Commission believes that NYSE Arca's general due 
process procedures for the delisting of companies that are out of 
compliance with the Exchange's rules satisfy this requirement. For 
example, NYSE Arca's rules provide that, unless continued listing of 
the company raises a public interest concern,\179\ when a company is 
deficient in compliance with listing standards, the Exchange will 
request the issuer to take action to remedy any identified deficiency. 
If the issuer fails to remedy the deficiency, NYSE Arca will hold a 
meeting to hear any reasons why the issuer believes its security should 
not be delisted, including reviewing any written response. If, after 
such meeting, NYSE Arca determines that the security should be 
delisted, the issuer may appeal the decision to the Board of Directors 
and request a hearing.\180\
---------------------------------------------------------------------------

    \179\ See Equities Rule 7.13 (Trading Suspensions).
    \180\ See supra text accompanying notes 140-141. See also NYSE 
Response Letter, supra note 6.
---------------------------------------------------------------------------

    The Commission believes that these general procedures for companies 
out of compliance with listing requirements, in addition to the 
particular cure provisions for failing to meet the new independence 
standards, adequately meet the mandate of Rule 10C-1 and also are 
consistent with investor protection and the public interest, since they 
give a company a reasonable time period to cure non-compliance with 
these important requirements before they will be delisted.\181\
---------------------------------------------------------------------------

    \181\ The Commission notes that the general procedures to cure 
non-compliance adequately address the comments made in the Corporate 
Secretaries Letter.
---------------------------------------------------------------------------

E. Exemptions

    The Commission believes that it is appropriate for NYSE Arca to 
exempt from the new requirements established by the proposed rule 
change the same categories of issuers that are exempt from its existing 
standards for oversight of executive compensation for listed companies. 
Although Rule 10C-1 does not explicitly exempt some of these categories 
of issuers from its requirements, it does grant discretion to exchanges 
to provide additional exemptions. NYSE Arca states that the reasons it 
adopted the existing exemptions apply equally to the new requirements, 
and the Commission believes that this assertion is reasonable.
    NYSE Arca proposed to exempt limited partnerships, companies in 
bankruptcy proceedings and open-end management investment companies 
that are registered under the Investment Company Act from all of the 
requirements of Rule 10C-1. The Commission believes such exemptions are 
reasonable, and notes that such entities, which were already generally 
exempt from NYSE Arca's existing compensation committee requirements, 
also are exempt from the compensation committee independence 
requirements specifically under Rule 10C-1. NYSE Arca also proposes to 
exempt closed-end management investment companies registered under the 
Investment Company Act from the requirements of Rule 10C-1. The 
Commission believes that this exemption is reasonable because the 
Investment Company Act already assigns important duties of investment 
company governance, such as approval of the investment advisory 
contract, to independent directors, and because such entities were 
already generally exempt from NYSE Arca's existing compensation 
committee requirements. The Commission notes that, as one commenter 
stated, typically registered investment companies do not employ 
executives or employees or have compensation committees. The Commission 
notes that the existing language of these exemptive provisions is not 
changed, but that the provisions, which go beyond Rule 10C-1's 
exemptions, are consistent with Rule 10C-1.
    The Commission further believes that other proposed exemption 
provisions relating to controlled companies,\182\ asset-backed issuers 
and other passive issuers, and issuers whose only listed equity stock 
is a preferred stock are reasonable, given the specific characteristics 
of these entities. As noted by the Exchange, many of these issuers are 
externally managed and do not directly employ executives; do not, by 
their nature, have employees, or have executive compensation policy set 
by a body other than their board.
---------------------------------------------------------------------------

    \182\ The Commission notes that controlled companies are 
provided an automatic exemption from the application of the entirety 
of Rule 10C-1 by Rule 10C-1(b)(5).
---------------------------------------------------------------------------

    The NYSE Arca proposal would continue to permit foreign private 
issuers to follow home country practice in lieu of the provisions of 
the new rules, but would now require further disclosure from such 
entities regarding the reason why they do not have a compensation 
committee. The Commission believes that granting exemptions to foreign 
private issuers in deference to their home country practices with 
respect to compensation committee practices is appropriate, and 
believes that the existing and proposed disclosure requirements will 
help investors determine whether they are satisfied with the 
alternative standard. The Commission also notes that NYSE Arca's 
proposal conforms its rules to Rule 10C-1, which exempts foreign 
private issuers from the compensation committee independence 
requirements of Rule 10C-1 to the extent such entities disclose in 
their annual reports the reasons they do not have independent 
compensation committees.

F. Transition to the New Rules for Companies Listed as of the Effective 
Date

    The Commission believes that the NYSE Arca's deadline for 
compliance with the proposal's provisions, July 1, 2013, is reasonable 
and should afford listed companies adequate time to make the changes, 
if any, necessary to meet the new standards. The Commission believes 
that the deadline proposed is clear-cut.

G. Compliance Schedule: Companies That Cease To Be a Smaller Reporting 
Company

    The Commission believes that the compliance schedule for companies 
that cease to be Smaller Reporting

[[Page 4523]]

Companies, as revised in Amendment No. 2, affords such companies ample 
time to come into compliance with the full panoply of rules that apply 
to other companies. In the Commission's view, the revised schedule also 
offers such companies more clarity in determining when they will be 
subject to the heightened requirements.

V. Accelerated Approval of Amendment No. 2 to the Proposed Rule Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\183\ for approving the proposed rule change, as modified by 
Amendment No. 2, prior to the 30th day after the date of publication of 
notice in the Federal Register.
---------------------------------------------------------------------------

    \183\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    The change made to the proposal by Amendment No. 2 to change a 
reference from Item 10(f)(1) of Regulation S-K to a reference to 
Exchange Act Rule 12b-2 is not a substantive one and merely references 
an otherwise identical definition.
    The revision made by Amendment No. 2 to the compliance rules for 
companies that cease to be Smaller Reporting Companies \184\ 
establishes a schedule that is easier to understand, while still 
affording such companies adequate time to come into compliance with the 
applicable requirements. The Commission notes that the Start Date of 
the compliance period for such a company is six months after the 
Smaller Reporting Company Determination Date, and the company is given 
no less than another six months from the Start Date to gain compliance 
with the rules from which it had been previously exempt. As originally 
proposed a Smaller Reporting Company had to comply within six months of 
the Smaller Reporting Company Determination Date, and for the adviser 
assessment at the Smaller Reporting Company Determination Date. The 
Commission believes the amendments to the transitions for issuers that 
lose their status as a Smaller Reporting Company will afford such 
companies additional time to comply and avoid issues involving 
inadvertent non-compliance because of the provision that originally 
applied immediately on the Smaller Reporting Company Determination 
Date. The amendments also provide additional clarity on when the time 
frames commence, and as such the Commission believes good cause exists 
to accelerate approval.
---------------------------------------------------------------------------

    \184\ See supra notes 73-76 and accompanying text.
---------------------------------------------------------------------------

    The change to commentary made by Amendment No. 2 to exclude 
advisers that provide only certain types of services from the 
independence assessment is also appropriate. As discussed above, the 
Commission has already determined to exclude such advisers from the 
disclosure requirement regarding compensation advisers in Regulation S-
K because these types of services do not raise conflict of interest 
concerns. Finally, the addition of further guidance by Amendment No. 2 
merely clarifies that nothing in the Exchange's rules requires a 
compensation adviser to be independent, only that the compensation 
committee consider the independence factors before selecting or 
receiving advice from a compensation adviser, and is not a substantive 
change, as it was the intent of the rule as originally proposed.
    For all the reasons discussed above, the Commission finds good 
cause to accelerate approval of the proposed changes made by Amendment 
No. 2.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment No. 2 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-NYSEArca-2012-105 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-NYSEArca-2012-105. 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 office of NYSE. 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-NYSEArca-2012-105, and should be submitted on or before 
February 12, 2013.

VII. Conclusion

    In summary, and for the reasons discussed in more detail above, the 
Commission believes that the rules being adopted by NYSE Arca, taken as 
whole, should benefit investors by helping listed companies make 
informed decisions regarding the amount and form of executive 
compensation. NYSE Arca's new rules will help to meet Congress's intent 
that compensation committees that are responsible for setting 
compensation policy for executives of listed companies consist only of 
independent directors.
    NYSE Arca's rules also, consistent with Rule 10C-1, require 
compensation committees of listed companies to assess the independence 
of compensation advisers, taking into consideration six specified 
factors. This should help to assure that compensation committees of 
NYSE Arca-listed companies are better informed about potential 
conflicts when selecting and receiving advice from advisers. Similarly, 
the provisions of NYSE Arca's standards that require compensation 
committees to be given the authority to engage and oversee compensation 
advisers, and require the listed company to provide for appropriate 
funding to compensate such advisers, should help to support the 
compensation committee's role to oversee executive compensation and 
help provide compensation committees with the resources necessary to 
make better informed compensation decisions.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, SR-NYSEArca-2012-105, as modified by Amendment No. 2, is 
consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in

[[Page 4524]]

particular, with Section 6(b)(5) of the Act.\185\
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    \185\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\186\ that the proposed rule change, SR-NYSEArca-2012-105, as 
modified by Amendment No. 2, be, and it hereby is, approved.
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    \186\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\187\
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    \187\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01105 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P

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