Self-Regulatory Organizations; Chicago Board Options Exchange, Inc.; Order Approving a Proposed Rule Change To Amend the Listing Rules for Compensation Committees To Comply with Securities Exchange Act Rule 10C-1 and Make Other Related Changes, 4529-4536 [2013-01109]
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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68642; File No. SR–CBOE–
2012–094]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule
Change To Amend the Listing Rules
for Compensation Committees To
Comply with Securities Exchange Act
Rule 10C–1 and Make Other Related
Changes
January 11, 2013.
I. Introduction
On September 25, 2012, Chicago
Board Options Exchange, Inc.
(‘‘Exchange’’ or ‘‘CBOE’’) 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 Commission
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 no
comment letters on the proposed rule
change.5 This order approves the CBOE
proposed rule change.
II. Description of the Proposal
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’’),6 the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 68020
(October 09, 2012), 77 FR 625558 (‘‘Notice’’).
4 See Securities Exchange Act Release No. 34–
68313 (November 28, 2012), 77 FR 71853
(December 4, 2012).
5 The Commission notes that comments were
received on similar proposals filed by New York
Stock Exchange, LLC and Nasdaq Stock Market
LLC. For a synopsis of these comments see
Securities Exchange Act Release Nos. 68011
(October 9, 2012) (‘‘NYSE Notice) (File No. SR–
NYSE–2012–49); 68013 (October 9, 2012) (‘‘Nasdaq
Notice’’) (File No. SR–NASDAQ–2012–109); 68639
(January 11, 2013), (‘‘NYSE Approval Order’’);
68640 (January 11, 2013), (‘‘Nasdaq Approval
Order’’).
6 Public Law 111–203, 124 Stat. 1900 (2010).
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Commission proposed Rule 10C–1
under the Act,7 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–1.8
Rule 10C–1 requires, among other
things, each exchange to adopt rules
providing that each member of the
compensation committee 9 of a listed
issuer must be a member of the board
of directors of the issuer, and must
otherwise be independent.10 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’’).11
In addition, Rule 10C–1 requires the
listing rules of exchanges to address the
authority of compensation committees
to retain or obtain a compensation
adviser, and its direct responsibility for
the appointment, compensation and
oversight of the work of any
compensation adviser it retains.12 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.13 Finally,
7 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’’).
8 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’’).
9 For a definition of the term ‘‘compensation
committee’’ for purposes of Rule 10C–1, see Rule
10C–1(c)(2)(i)–(iii).
10 See Rule 10C–1(a) and (b)(1).
11 See id. See also Rule 10C–1(b)(i)(iii)(A), which
sets forth exemptions from the independence
requirements for certain categories of issuers. See
Rule 10C–1(b)(1)(iii)(A). In addition, an exchange
may exempt a particular relationship with respect
to 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).
12 See Rule 10C–1(b)(2).
13 See Rule 10C–1(b)(3).
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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–1,14 as well as any other
factors identified by the relevant
exchange in its listing standards.15
B. CBOE Proposal
To comply with Rule 10C–1, CBOE
proposes to amend Exchange Rule 31.10
‘‘Corporate Governance.’’ In particular,
to accomplish these changes, the
Exchange proposes to amend paragraph
(c) of Rule 31.10, entitled
‘‘Compensation of Officers.’’ CBOE also
proposes to amend the Interpretations
and Policies section of Rule 31.10 by
adding a new provision entitled
Compensation Consultants,
Independent Legal Counsel and Other
Compensation Advisors. Current
paragraph (c) of Rule 31.10 provides
that compensation of the chief executive
officers and all other executive officers
of a listed company must be determined
by a majority of independent
directors,16 or a compensation
14 See Rule 10C–1(b)(4). The six factors, which
CBOE proposes to set forth explicitly in its rules,
are specified in the text accompanying note 35,
infra.
15 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.
16 ‘‘Independent Director’’ is defined in Rule
31.10(h)(2) as: A person other than an officer or
employee of the company or its subsidiaries or any
other individual having a relationship, which, in
the opinion of the company’s board of directors,
would interfere with the exercise of independent
judgment in carrying out the responsibilities of a
director. The following persons shall not be
considered independent: (A) A director who is, or
at any time during the past three years was,
employed by the company or by any parent or
subsidiary of the company; (B) a director who
accepted or who has a family member who accepted
any payments from the company or any parent or
subsidiary of the company in excess of $60,000
during the current or any of the past three fiscal
years, other than the following: (i) Compensation
for board or board committee service; (ii) payments
arising solely from investments in the company’s
securities; (iii) compensation paid to a family
member who is a non-executive employee of the
company or a parent or subsidiary of the company;
(iv) benefits under a tax-qualified retirement plan,
or non-discretionary compensation; or (v) loans
permitted under Exchange Act Section 13(k).
Provided, however, that audit committee members
are subject to additional, more stringent
requirements under Exchange Act Rule 10A–3,
which requirements are incorporated by reference
in the Exchange rules pursuant to Rule 31.10(b); (C)
a director who is a family member of an individual
who is, or at any time during the past three years
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committee comprised solely of
independent directors.
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1. Compensation Committee
Composition and Independence
Standards
First, the Exchange is proposing to
amend text in Rule 31.10 to require that
the compensation of all executive
officers must be determined by, or
recommended for determination by a
compensation committee.17 The
Exchange proposes to define the term
compensation committee as one of the
following: (1) A committee of the board
of directors that is designated as the
compensation committee; (2) in the
absence of a specifically designated
committee, a committee of the board of
directors that performs functions
typically performed by a compensation
committee, including oversight of
executive compensation, even if it is not
designated as the compensation
committee or also performs other
functions; or (3) in the absence of either
of the immediately preceding
definitions, the members of the board of
directors who oversee executive
compensation matters on behalf of the
board of directors.18
The Exchange also proposes to amend
Rule 31.10(c) to state that all members
of a Compensation Committee must be
was, employed by the company or by any parent
or subsidiary of the company as an executive
officer; (D) a director who is, or has a family
member who is, a partner in, or a controlling
shareholder or an executive officer of, any
organization to which the company made, or from
which the company received, payments for
property or services in the current or any of the past
three fiscal years that exceed 5% of the recipient’s
consolidated gross revenues for that year, or
$200,000, whichever is more, other than the
following: (i) Payments arising solely from
investments in the company’s securities; or (ii)
payments under non-discretionary charitable
contribution matching programs; (E) a director of
the listed company who is, or has a family member
who is, employed as an executive officer of another
entity where at any time during the past three years
any of the executive officers of the listed company
serve on the compensation committee of such other
entity; (F) a director who is, or has a family member
who is, a current partner of the company’s outside
auditor, or was a partner or employee of the
company’s outside auditor who worked on the
company’s audit at any time during any of the past
three years; or (G) in the case of an investment
company, in lieu of Rules 31.10(h)(2)(A)–(F), 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.
17 See Rule 31.10(c)(1).
18 As CBOE does not require a formal
compensation committee, the term ‘‘Compensation
Committee’’ for purposes of the CBOE proposal and
as discussed in this release, in addition to
describing a formal compensation committee, also
refers to the listed company’s independent directors
as a group when dealing with executive
compensation matters. See proposed Rule
31.10(c)(1).
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‘‘Independent Directors’’ as defined in
Rule 31.10(h)(2).19 In its proposal, the
Exchange stated that it believes that its
current definition of Independent
Director meets the independence
requirements of Rule 10C–1.20 The
Exchange notes that, as part of existing
Rule 31.10(h)(2) defining independent
director, the Exchange has requirements
that a director is not considered
‘‘independent’’ if he or a family member
has accepted any payments from the
company or any parent or subsidiary of
the company in excess of $60,000
during the current or any of the past
three fiscal years, other than
compensation for board or committee
service, payments arising solely from
investments in the company’s securities,
compensation paid to a family member
who is a non-executive employee of the
company or a parent or subsidiary of the
company, benefits under a tax-qualified
retirement plan, or non-discretionary
compensation, or loans permitted under
Exchange Act Section 13(k).21 The
Exchange stated it believes that these
requirements demonstrate that the
definition of ‘‘independent’’ considers
the sources of compensation of a
member of the compensation
committee.22
The Exchange stated that it believes
that its current definition of
Independent Director meets the
requirement in Rule 10C–1 that the
Exchange’s rules must consider whether
the director is affiliated with the issuer
or a subsidiary or affiliate of a
subsidiary of the issuer.23 CBOE Rule
31.10(h)(2) states that a director is not
‘‘independent’’ if, in the opinion of the
issuer’s board of directors, the person
has a relationship which would
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director. As the
19 See Rule 31.10(c)(2). For a definition of
independent directors under Rule 31.10(h)(2) see
supra, note 16.
20 See Notice, supra note 3.
See Rule 10C–1(b)(1)(ii)(A) requiring that in
determining the independence requirements for
members of compensation committees, exchanges
must consider all relevant factors, including, but
not limited to, the source of compensation of that
director (including any consulting, advisory, or
other compensatory fee paid by the issuer to the
director), and whether the director is affiliated with
the issuer, a subsidiary of the issuer, or an affiliate
of a subsidiary of the issuer.
21 See Rule 31.10(h)(2), and supra note 16.
22 See Notice, supra note 3.
23 See Notice, supra note 3. See also Rule 10C–
1(b)(1)(ii)(B) requiring that in determining the
independence requirements for members of
compensation committees, exchanges must
consider all relevant factors, including, but not
limited to whether a member of the board of
directors of an issuer is affiliated with the issuer,
a subsidiary of the issuer or an affiliate of a
subsidiary of the issuer.
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Exchange stated, ‘‘any kind of affiliate
relationship could be viewed as a
conflict of interest that might interfere
with the exercise of independent
judgment in carrying out the
responsibilities of a director.’’ 24 In its
proposal, the Exchange stated it believes
that its requirement that a board of
directors consider whether a director
has a relationship which would
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director in order
to determine whether or not the director
is ‘‘independent’’ requires consideration
of whether the director is affiliated with
the issuer, a subsidiary of the issuer or
an affiliate of a subsidiary of the
issuer.25
The Exchange also proposes to add in
Rule 31.10(c)(2) language stating that if
a member of a compensation committee
ceases to be an Independent Director for
reasons outside of that member’s
reasonable control, that person may
remain a compensation committee
member until the earlier of the next
annual shareholders meeting of the
issuer or one year from the occurrence
of the event that caused the member to
no longer be an Independent Director.
The Exchange will require that an issuer
relying on this provision must provide
notice to the Exchange immediately
upon learning of the event or
circumstance that caused the member to
cease to be an Independent Director.26
Exchange Rule 31.10(c) currently
provides an exception to the
independence requirement for
compensation committee members. This
exception states that, notwithstanding
said independence requirements, if the
compensation committee is comprised
of at least three members, one director,
who is not independent as defined in
Rule 31.10(h)(2) and is not a current
officer or employee or a family member
of an officer or employee, may be
appointed to the compensation
committee if the board, under
exceptional and limited circumstances,
determines that such individual’s
membership on the committee is
required by the best interests of the
company and its shareholders, and the
board discloses, in the proxy statement
for the next annual meeting subsequent
to such determination (or, if the issuer
does not file a proxy, in its Form 10–K
24 The Commission notes that CBOE’s rules
provide a definition of affiliate that states an
affiliate of or a person ‘‘affiliated with’’ another
person means a person who, directly or indirectly,
controls, is controlled by, or is under common
control with, such other person. See CBOE Rule
1.1(j).
25 See Notice, supra note 3.
26 See Rule 31.10(c)(2).
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or 20–F), the nature of the relationship
and the reasons for the determination. A
member appointed under this exception
may not serve longer than two years.27
CBOE notes that Rule 10C–1 is silent
with respect to such exception to the
independence requirements, and
therefore is proposing to delete this
exception. As the Exchange stated, it
believes that independence of
compensation committee members is
important to ensure that there exist no
undue influences in the compensation
of executive officers.28
2. Authority of Committees To Retain
Compensation Advisers; Funding; and
Independence of Compensation
Advisers
Rule 10C–1 also discusses the
retention of compensation consultants,
independent legal counsel and other
compensation advisers to assist the
compensation committee of an issuer in
determining compensation for
executives.29 CBOE Rule 31.10 currently
does not contain provisions regarding
the authority to retain compensation
advisers. Therefore, the Exchange
proposes to adopt the provisions of Rule
10C–1 regarding this issue in a
substantively identical manner to that in
Rule 10C–1 in new Interpretation and
Policy .11 to Rule 31.10.30
The new Interpretation and Policy
would state that the Compensation
Committee of an issuer, in its capacity
as a committee of the board of directors,
may, in its sole discretion, retain or
obtain the advice of a compensation
consultant, independent legal counsel
or other adviser.31 The Interpretation
and Policy states that the Compensation
Committee shall be directly responsible
for the appointment, compensation and
oversight of the work of any
compensation consultant, independent
legal counsel and other adviser retained
by the Compensation Committee.32
Further, the Interpretation and Policy
states that ‘‘nothing in this
Interpretation and Policy .11 to Rule
31.10 shall be construed to require the
Compensation Committee to implement
or act consistently with the advice or
recommendations of the compensation
consultant, legal counsel or other
27 See
Rule 31.10(c)(3).
Notice, supra note 3. CBOE is also
proposing to extend to all executive officers the
requirement that an executive officer not be present
during the deliberations regarding his or her own
compensation.
29 See Rule 10C–1(b)(2).
30 See id. and Interpretation and Policy .11 to
Rule 31.10.
31 See proposed Interpretation and Policy
.11(a)(1) to Rule 31.10.
32 See proposed Interpretation and Policy
.11(a)(2) to Rule 31.10.
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adviser to the Compensation Committee,
or to affect the ability or obligation of a
Compensation Committee to exercise its
own judgment in fulfillment of the
duties of the Compensation
Committee.’’ 33 Under the new
Interpretation and Policy .11 to Rule
31.10, each listed issuer must provide
for appropriate funding, as determined
by the Compensation Committee, in its
capacity as a committee of the board of
directors, for payment of reasonable
compensation to a compensation
consultant, legal counsel or any other
adviser retained by the Compensation
Committee.34
Regarding the independence of
compensation advisers, the new
Interpretation and Policy .11 to Rule
31.10 states that the compensation
committee of a listed issuer may select
a compensation consultant, legal
counsel or other adviser to the
compensation committee only after
taking into consideration the following
factors: (1) The provision of other
services to the issuer by the person that
employs the compensation consultant,
legal counsel or other adviser, (2) the
amount of fees received from the issuer
by the person that employs the
compensation consultant, legal counsel
or other adviser, as a percentage of the
total revenue of the person that employs
the compensation consultant, legal
counsel or other adviser, (3) 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,
(4) any business or personal relationship
of the compensation consultant, legal
counsel or other adviser with a member
of the compensation committee, (5) any
stock of the issuer owned by the
compensation consultant, legal counsel
or other adviser, and (6) any business or
personal relationship of the
compensation consultant, legal counsel,
other adviser or the person employing
the adviser with an executive office of
the issuer.35 Pursuant to the new
Interpretation and Policy, a
compensation committee must consider
these factors with respect to any
compensation consultant, legal counsel
or other advisor that provides advice to
the compensation committee other than
in-house legal counsel.36
33 See proposed Interpretation and Policy
.11(a)(3)(A) and (B) to Rule 31.10.
34 See proposed Interpretation and Policy .11(b)
to Rule 31.10.
35 See Interpretation and Policy .11(c)(1)–(6) to
Rule 31.10.
36 Id.
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3. Exemptions
The Exchange proposes that the
requirements of Interpretation and
Policy .11 to Rule 31.10, concerning
compensation advisers, discussed above
at Section II(B)(2), shall not apply to any
controlled company or to any smaller
reporting company.37 The Exchange
notes that this exemption complies with
exemptions stated in Rule 10C–1.38
Under the new proposal, as the
Exchange states, smaller reporting
companies will still be subject to other
corporate governance rules, as
applicable.39 The Commission notes
that this includes the provisions
described above concerning
independent oversight of executive
compensation.
The Exchange proposes that the
requirements of Interpretation and
Policy .11 to Rule 31.10, concerning
compensation advisers, discussed above
at Section II(B)(2), shall not apply to the
listing of a security futures product
cleared by a clearing agency that is
registered pursuant to section 17A of the
Act (15 U.S.C. 78q–1) or that is exempt
from the registration requirements of
section 17A(b)(7)(A) (15 U.S.C. 78q–
1(b)(7)(A)) 40 or the listing of a
standardized option, as defined in
§ 240.9b–1(a)(4), issued by a clearing
agency that is registered pursuant to
section 17A of the Act (15 U.S.C. 78q–
1).41 The Exchange stated that these
exemptions comply with those stated in
Rule 10C–1.42
Rule 10C–1 exempts from the
independence requirements any limited
partnership, company in bankruptcy
proceedings, open end management
investment company registered
pursuant to the Investment Company
Act of 1940, and foreign private issuer
that discloses in its annual report the
reasons that the foreign private issuer
does not have an independent
compensation committee.43 CBOE
thereby proposes to incorporate these
exemptions into proposed Rule
31.10(f)(6) by reference by stating that
the categories of issuers listed in Rule
10C–1(b)(1)(iii)(A) under the Securities
Exchange Act of 1934 are also exempt
from the requirements of Rule
37 See Interpretation and Policy .11(d)(1) to Rule
31.10. See also Notice, supra note 3.
38 See Rule 10C–1(b)(5) which exempts such
entities from the entire requirements of Rule 10C–
1. See also Notice, supra note 3.
39 See Notice, supra note 3.
40 See Interpretation and Policy .11(d)(2) to Rule
31.10.
41 See Interpretation and Policy .11(d)(3) to Rule
31.10.
42 See Rule 10C–1(b)(5) which exempts such
entities from the requirements of Rule 10C–1.
43 See Rule 10C–1(b)(1)(iii)(A).
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31.10(c)(2) regarding the independence
of directors on an issuer’s compensation
committee. These entities are exempt
from the independent director
requirements of Rule 31.10(c)(2),
discussed supra in Section II(B)(1).
Finally, as to exemptions, Rule
31.10(f) currently exempts a number of
other categories of issuers from the
executive compensation requirements of
Rule 31.10(c).44 These types of issuers
are controlled companies, registered
management investment companies
(which are similar to open-end
management investment companies),
and asset-backed issuers and other
passive issuers, cooperatives. The
Exchange determined to exempt these
categories of issuers from executive
compensation requirements of Rule
31.10(c) due to their various unique
attributes.45 While the Rule 10C–1
changes some of the executive
compensation requirements, CBOE
believes that these categories of issuers
should still be exempt from all
executive compensation requirements in
Rule 31.10(c) generally.46 The Exchange
has also proposed to add language to its
rules to make clear that to the extent the
proposed Rule 31.10(f)(6)’s exemption
of open-end management investment
companies registered under the
Investment Company Act of 1940 from
the Compensation Committee director
independence requirements of Rule
31.10(c)(2) conflicts with the more
general already-existing exemption of
registered management investment
companies from the requirements of
Rule 31.10(c), the more general
exemption of registered management
investment companies from the
requirements of Rule 31.10(c) shall be
controlling.47 As such, the exchange
proposes to amend Rule 31.10(f)(2) to
state that the exemption of management
investment companies from the
requirements of Rule 31.10(c) shall be
controlling over any other potentiallyconflicting exemptions that may arise
under Rule 31.10(f)(6).48
44 See
Rule 31.10(f).
Notice, supra note 3.
46 See Rule 10C–1(b)(1)(iii)(B) establishing that
‘‘in addition to the issuer exemptions set forth in
paragraph (b)(1)(iii)(A) of this section, a national
securities exchange or a national securities
association, pursuant to section 19(b) of the Act (15
U.S.C. 78s(b)) and the rules thereunder, may
exempt from the requirements of paragraph (b)(1) of
this section a particular relationship with respect to
members of the compensation committee, as each
national securities exchange or national securities
association determines is appropriate, taking into
consideration the size of an issuer and any other
relevant factors. Id.
47 See Notice, supra note 3.
48 See Rule 31.10(f)(2).
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III. Discussion and Commission
Findings
After careful review, the Commission
finds that the CBOE proposal is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities exchange.49 In
particular, the Commission finds that
the proposed rule change is consistent
with the requirements of Section 6(b) of
the Act,50 as well as with Section 10C
of the Act 51 and Rule 10C–1
thereunder.52 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,53 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 CBOE 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,54 Congress resolved to require that
‘‘board committees that set
49 In approving the CBOE proposed rule change
the Commission has considered its impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
50 15 U.S.C. 78f(b).
51 15 U.S.C. 78j–3.
52 17 CFR 240.10C–1.
53 15 U.S.C. 78f(b)(5).
54 See supra note 6.
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compensation policy will consist only
of directors who are independent.’’ 55 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.
In response, CBOE 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 believes that the
proposed rule change appropriately
revises CBOE’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
55 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).
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Rule 10C–1(b)(1).’’ 56 This discretion
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 considering the
Fees Factor and Affiliation Factor of
Rule 10C–1 CBOE decided its existing
independence standards that currently
apply to board and compensation
committee members, which include
certain bright line tests, in Rule
31.10(h)(2), are sufficient.57 The CBOE’s
proposal also adopts: (1) A requirement
that listed issuers have a compensation
committee composed entirely of
Independent Directors as required by
Rule 10C–1 and (2) the cure procedures
set forth in Rule 10C–1(a)(3) for
compensation committee members who
cease to be independent for reasons
outside their reasonable control.
The Commission notes that CBOE’s
proposal to require executive officer
compensation to be determined only by
Independent Directors, as defined in
CBOE rules, is consistent with the
requirements of Rule 10C–1 and Section
6(b)(5) of the Act. The Commission
notes, compensation of executive
officers must be determined only by
Independent Directors even where the
board oversees executive compensation
without a formal committee. The
Commission also believes that CBOE
has met the requirements of Rule 10C–
1 to consider relevant factors including
the Fee Factor and Affiliation Factor. As
noted above, after such consideration,
CBOE has determined that its existing
independence standards, including its
bright line independence factors,
adequately take into account the
additional independence factors for
compensation committee members
contained in Rule 10C–1.58
With respect to the Fees Factors of
Rule 10C–1,59 the Exchange
commentary states that as part of Rule
31.10(h)(2) defining independent
director, the Exchange has requirements
that a director is not considered
‘‘independent’’ if he or a family member
has accepted any payments from the
company or any parent or subsidiary of
56 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.
57 See Rule 31.10(h)(2) and supra footnotes 16–26
and accompanying text.
58 See Rule 10C–1(b)(1)(ii).
59 See Rule 10C–1(b)(1)(ii)(A)
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the company in excess of $60,000
during the current or any of the past
three fiscal years, other than
compensation for board or committee
service, payments arising solely from
investments in the company’s securities,
compensation paid to a family member
who is a non-executive employee of the
company or a parent or subsidiary of the
company, benefits under a tax-qualified
retirement plan, or non-discretionary
compensation, or loans permitted under
Exchange Act Section 13(k).60 The
Exchange stated it believes that this
existing requirement demonstrates that
the definition of ‘‘independent’’
considers the sources of compensation
of a member of the compensation
committee.61
The Commission believes that the
provisions noted above to address the
Fees Factor give clear guidance when
considering 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, by providing an
aggregate fee cap in their bright line
tests, the approach is consistent with
Rule 10C–1. The Exchange’s general
independence standards will also
provide a basis for a board to prohibit
a director from being a member of the
compensation committee, should the
director receive compensation to a
degree 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. The
Commission, therefore, believes that the
proposed existing 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, which could
potentially influence their decisions on
compensation matters.
With respect to the Affiliation Factor
of Rule 10C–1,62 the Exchange
concluded that it believes that the
current definition of Independent
Director meets the requirement in Rule
10C–1 that the Exchange’s rules must
consider whether the director is
affiliated with the issuer, a subsidiary of
60 See
Rule 31.10(h)(2).
Notice, supra note 3.
62 See Rule 10C–1(b)(1)(ii)(B).
61 See
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4533
the issuer, or an affiliate of a subsidiary
of the issuer.63 CBOE Rule 31.10(h)(2)
states that a director is not
‘‘independent’’ if, in the opinion of the
issuer’s board of directors, the person
has a relationship which would
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director.64 As
the Exchange noted, ‘‘any kind of
affiliate relationship, under the
Exchange’s own definition of affiliate
* * * could be viewed as a conflict of
interest that might interfere with the
exercise of independent judgment in
carrying out the responsibilities of a
director.’’ 65
In considering whether a has a
relationship, which, in the opinion of
the company’s board of directors, would
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director, the
board would necessarily have to
consider whether the director is an
affiliate of the issuer, a subsidiary of the
issuer, or an affiliate of a subsidiary of
the issuer, as those relationships
necessarily could be relationships that
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director,
including the responsibilities as a
member of the Compensation
Committee.
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.’’ 66 In determining that CBOE’s
63 See Notice, supra note 3. See also Rule 10C–
1(b)(1)(ii)(B) requiring that in determining the
independence requirements for members of
compensation committees, exchanges must
consider all relevant factors, including, but not
limited to whether a member of the board of
directors of an issuer is affiliated with the issuer,
a subsidiary of the issuer or an affiliate of a
subsidiary of the issuer.
64 See Rule 31.10(h)(2).
65 See Notice, supra note 3.
66 See Rule 10C–1 Adopting Release, supra note
8. 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
Continued
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affiliation standard is consistent with
Sections 6(b)(5) and 10C under the Act,
the Commission notes that CBOE’s
proposal requires a company’s board, in
selecting compensation committee
members, to consider ‘‘whether the
person has a relationship which would
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director.’’ 67 The
Commission believes the Exchange has
adequately considered the affiliation
standard. As such, the Exchange’s
decision to retain its current definition
of Independent Director is consistent
with Sections 6(b)(5) and 10C under the
Act.68
B. Authority of Committees to Retain
Compensation Advisers; Funding; and
Independence of Compensation
Advisers
As discussed above, CBOE 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 69 and are consistent with the
Act.70
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C. Compensation Adviser Independence
Factors
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
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 compensation committee. See
also supra notes 23–25 and accompanying text.
67 See Interpretation and Policy .01 to Rule
31.10(h)(2) stating that ‘‘[i]t is important for
investors to have confidence that individuals
serving as independent directors do not have a
relationship with the listed company that would
impair their independence. The board has a
responsibility to make an affirmative determination
that no such relationships exist through the
application of Rule 31.10(h)(2).’’
68 The Commission also believes it is consistent
with Section 6(b)(5) for CBOE to prohibit all
executive officers, not just the chief executive
officer as currently required, to be barred from all
compensation committee deliberations regarding
their own compensation. We agree this will help
prohibit undue influence in the determination of
executive officer compensation.
69 17 CFR 240.10C–1.
70 15 U.S.C. 78j–3.
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or other adviser to the compensation
committee.71 Of these factors, five of the
six 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.72 The
Commission believes that this provision
is consistent with Rule 10C–1 and
Section 6(b)(5) of the Act.
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. Finally, one
commenter on the New York Stock
Exchange LLC’s proposal requested
guidance ‘‘on how often the required
independence assessment should
occur.73 This commenter observed that
it ‘‘will be extremely burdensome and
disruptive if prior to each compensation
committee meeting, the committee had
to conduct a new assessment.’’ The
Commission anticipates that
Compensation Committees will conduct
such an independent assessment at least
annually.74
The changes to CBOE’s rules on
compensation advisers should therefore
benefit investors of 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.
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
71 See
72 See
note 35, supra and accompanying text.
Rule 10C–1 Adopting Release, supra note
8.
73 See Comment to NYSE Notice by Robert B.
Lamm, Chair, Securities Law Committee, The
Society of Corporate Secretaries & Governance
Professionals, dated December 7, 2012 (‘‘Corporate
Secretaries Letter’’).
74 See NYSE Approval Order and Nasdaq
Approval Order, supra note 5 for a discussion of
comments.
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accordance with the requirements of the
Rule, an exchange may provide a cure
period of until the earlier of the next
annual shareholders meeting of the
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 CBOE 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. The Commission
believes that the accommodation is fair
and reasonable and consistent with
investor protection under Rule 6(b)(5)
by ensuring that when a member ceases
to be independent, the committee is
entitled to a period to cure that
situation. CBOE has delisting
procedures that provide issuers with
notice, opportunity for a hearing,
opportunity for appeals, and delisting.75
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.
As noted above, CBOE is removing its
exception that allows members of a
Compensation Committee to not be
independent in certain circumstances.
The Commission agrees with CBOE’s
rationale for eliminating the exception.
As the Exchange noted, independence
of compensation committee members is
important to ensure that no undue
influences affect the compensation of
executive officers. Given the heightened
importance of executive compensation
decisions, we think that this is
consistent with the investor protection
provisions of Section 6(b)(5) of the Act.
E. 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. However, consistent with the
exemption of Smaller Reporting
Companies from Rule 10C–1, the CBOE
proposal would exempt smaller
reporting companies from the
75 See
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requirements of Interpretation and
Policy .11 to Rule 31.10 concerning
compensation advisers, discussed supra
at Section II(B)(2).76 Under the new
proposal, as the Exchange states, smaller
reporting companies will still be subject
to other corporate governance rules, as
applicable, and are only exempted out
of the compensation advisor
provisions.77
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
CBOE to provide some flexibility to
Smaller Reporting Companies. Further,
regarding the exemption from having to
consider additional factors regarding
compensation advisers, 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.
F. Additional Exemptions
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The Commission believes that it is
appropriate for CBOE 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. CBOE states that the
reasons it adopted the existing
exemptions apply equally to the new
requirements, and the Commission
believes that this assertion is reasonable.
The requirements of Interpretation
and Policy .11 to Rule 31.10, concerning
compensation advisers, discussed supra
at Section II(B)(2), exempt security
futures products cleared by a clearing
agency that is registered pursuant to
section 17A of the Act (15 U.S.C. 78q–
1) or that is exempt from the registration
requirements of section 17A(b)(7)(A) (15
U.S.C. 78q–1(b)(7)(A)) 78 and the listing
of a standardized option, as defined in
§ 240.9b–1(a)(4), issued by a clearing
agency that is registered pursuant to
section 17A of the Act (15 U.S.C. 78q–
1).79 The Commission notes that these
76 See Interpretation and Policy .11(d)(1) to Rule
31.10. See also Rule 10C–1(b)(5).
77 See Notice, supra note 3.
78 See Interpretation and Policy .11(d)(2) to Rule
31.10.
79 See Interpretation and Policy .11(d)(3) to Rule
31.10.
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exemptions comply with those stated in
the Rule 10C–1.80
Additionally, Rule 10C–1 exempts
from the independence requirements
Limited partnerships, companies in
bankruptcy proceedings, and open-end
management investment companies
registered under the Investment
Company Act of 1940.81 The CBOE
proposal incorporates these exemptions
into proposed Rule 31.10(f)(6).82 The
Commission believes such exemptions
are reasonable, and notes that such
entities also are exempt from the
compensation committee independence
requirements specifically under Rule
10C–1.
The CBOE proposal would exempt
any foreign private issuer that discloses
in its annual report the reasons that the
foreign private issuer does not have an
independent compensation
committee. 83 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 disclosure requirements will
help investors determine whether they
are satisfied with the alternative
standard. The Commission notes that
such entities are exempt from the
compensation committee independence
requirements of Rule 10C–1 to the
extent such entities disclosure in annual
reports the reasons it does not have an
independent compensation committee.
The CBOE proposal would retain Rule
31.10(f), which currently exempts a
number of other categories of issuers
from all of the executive compensation
requirements of Rule 31.10(c).84 These
types of issuers are controlled
companies, registered management
investment companies (which are
similar to open-end management
investment companies and include
closed-end management investment
companies), asset-backed issuers and
other passive issuers, and cooperatives.
The Exchange determined to exempt
these categories of issuers from
executive compensation requirements of
Rule 31.10(c) due to their various
unique attributes. The Commission
believes that this exemption is
reasonable because the Investment
80 See Rule 10C–1(b)(5) which exempts such
entities from all of the requirements of Rule 10C–
1.
81 See Rule 10C–1(b)(1)(iii)(A) and Rule
31.10(f)(6).
82 The Commission notes that proposed Rule
31.10(f), open end management investment
companies would also be exempt from all the
requirements of Rule 31.10(c), not just the
independence standards.
83 Rule 10C–1(b)(1)(iii).
84 See Rule 31.10(f).
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Company Act already assigns important
duties of investment company
governance, such as approval of the
investment advisory contract, to
Independent Directors of closed end
management investment companies.
The Commission further believes that
other proposed exemption provisions
relating to controlled companies,85
asset-backed issuers and other passive
issuers, and cooperatives are reasonable
given the specific characteristics of
these entities, and as noted by the
Exchange, their various unique
attributes. The Commission believes
that exemption of these entities from the
requirements of Rule 10C–1 is
consistent with the exemptive authority
granted in Rule 10C–1.86
IV. Conclusion
In summary, and for the reasons
discussed in more detail above, the
Commission believes that the rules
being adopted by CBOE, taken as whole,
should benefit investors by helping
listed companies make informed
decisions regarding the amount and
form of executive compensation.
CBOE’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 that meet
CBOE’s requirements.
CBOE’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 potential CBOE-listed
companies are better informed about
potential conflicts when selecting and
receiving advice from advisers.
Similarly, the provisions of CBOE’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
85 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).
86 See Rule 10C–1(b)(1)(iii)(B) establishing that
‘‘in addition to the issuer exemptions set forth in
paragraph (b)(1)(iii)(A) of this section, a national
securities exchange or a national securities
association, pursuant to section 19(b) of the Act (15
U.S.C. 78s(b)) and the rules thereunder, may
exempt from the requirements of paragraph (b)(1) of
this section a particular relationship with respect to
members of the compensation committee, as each
national securities exchange or national securities
association determines is appropriate, taking into
consideration the size of an issuer and any other
relevant factors.’’ Id.
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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–CBOE–2012–094 is
consistent with the Exchange Act and
the rules and regulations thereunder
applicable to a national securities
exchange, and, in particular, with
Section 6(b)(5) of the Exchange Act.87
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,88 that the
proposed rule change, SR–CBOE–2012–
094 be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.89
Kevin M. O’Neill,
Deputy Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68654; File No. SR–
NASDAQ–2013–007]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Extend the
Operative Date of Recent Changes
Made to Rules 4613(a)(2)(F) and (G),
and Rule 4751(f)(15)
January 15, 2013.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on January
14, 2013, The NASDAQ Stock Market
LLC (the ‘‘NASDAQ’’ 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 self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to extend the
operative date of recent changes made to
1. Purpose
On December 17, 2012, the Exchange
filed an immediately effective rule
change to retire the automated quotation
refresh functionality (‘‘AQR’’) provided
to Exchange market makers under Rules
4613(a)(2)(F) and (G), and to make
conforming changes to Rule
4751(f)(15).4 The proposed changes are
operative on January 15, 2013. The
Exchange received one comment letter
to the rule change, seeking an extension
of the AQR retirement date to February
25, 2013.5 The commenter, an industry
association which represents a
substantial number of NASDAQ
members, noted it was concerned that
the January 15, 2013 retirement date
does not allow sufficient time for
implementation of all functionality
associated with the AQR system. The
commenter explained that new
functionality to automate quote
movement after quote execution must be
developed and incorporated into order
management and trading systems. In
support of its argument for an extension,
the commenter noted that some firms
require architectural reprogramming to
mission critical systems that control
trading operations, and that thorough
testing of such changes must be done.
The commenter further noted that yearend code freezes, which typically
4 Securities Exchange Act Release No. 68528
(December 21, 2012), 77 FR 77165 (December 31,
2012) (SR–NASDAQ–2012–140).
5 See Letter from Manisha Kimmel, Executive
Director, Financial Information Forum, to Elizabeth
M. Murphy, Secretary, Commission, dated
December 21, 2012.
87 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
89 17 CFR 200.30–3(a)(12).
1 15 U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
88 15
18:11 Jan 18, 2013
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
Exchange 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 these
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 aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2013–01109 Filed 1–18–13; 8:45 am]
VerDate Mar<15>2010
Rules 4613(a)(2)(F) and (G), and Rule
4751(f)(15) to February 25, 2013,
thereby extending the retirement of the
automated quotation refresh
functionality from January 15, 2013 to
February 25, 2013.
Jkt 229001
PO 00000
Frm 00160
Fmt 4703
Sfmt 4703
extend into the first week of January,
will make it difficult for firms to
adequately implement and test these
significant changes to their systems by
January 15, 2013. The Exchange has
received similar telephonic comments
from some of its member firms that are
Exchange market makers.
In light of member firm and industry
feedback received on the current
retirement date, the Exchange believes
that a brief extension is warranted to
allow member firms adequate time to
program and test their systems to use
the Market Maker Peg Order 6 or
develop alternative means of complying
with their market maker obligations.
Given that member firms may not be
prepared to comply with their market
making obligations on January 15, 2013
in the absence of AQR and the potential
market disruption that may be caused
by eliminating AQR on that date, the
Exchange has determined to extend the
retirement date of AQR to February 25,
2013, and likewise extend the related
changes to Rules 4613(a)(2)(F) and (G),
and Rule 4751(f)(15) filed with the
Commission on December 21, 2012 7 to
February 25, 2013.
The Exchange reminds member firms
that AQR presents difficulties to market
makers in meeting their obligations
under Rule 15c3–5 under the Act (the
‘‘Market Access Rule’’) 8 and Regulation
SHO under the Act.9 The Exchange
emphasizes that market makers using
AQR remain obligated to monitor their
quotes and are responsible for
complying with all Exchange rules, the
Market Access Rule, as well as Rule 610,
Rule 611 of Regulation NMS and Rule
200(g) of Regulation SHO, even in the
event that AQR is not functioning
properly. Market makers must have
policies and procedures to address such
contingencies and systems in place to
ensure that they can continuously meet
their two-sided obligation.
2. Statutory Basis
The statutory basis for the proposed
rule change is Section 6(b)(5) of the
Act,10 which requires the rules of an
exchange 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
6 On August 2, 2012, the Commission approved
the Exchange’s new Market Maker Peg Order, which
is designed to replace AQR. See Securities
Exchange Act Release No. 67584 (August 2, 2012),
77 FR 47472 (August 8, 2012) (SR–NASDAQ–2012–
066).
7 Supra note 3.
8 17 CFR 240.15c3–5.
9 17 CFR 242.200 through 204.
10 15 U.S.C. 78f(b)(5).
E:\FR\FM\22JAN1.SGM
22JAN1
]]>Agencies
[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4529-4536]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01109]
[[Page 4529]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68642; File No. SR-CBOE-2012-094]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule Change To Amend the Listing Rules
for Compensation Committees To Comply with Securities Exchange Act Rule
10C-1 and Make Other Related Changes
January 11, 2013.
I. Introduction
On September 25, 2012, Chicago Board Options Exchange, Inc.
(``Exchange'' or ``CBOE'') 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 Commission
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 no comment letters on the proposed rule change.\5\
This order approves the CBOE proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 68020 (October 09,
2012), 77 FR 625558 (``Notice'').
\4\ See Securities Exchange Act Release No. 34-68313 (November
28, 2012), 77 FR 71853 (December 4, 2012).
\5\ The Commission notes that comments were received on similar
proposals filed by New York Stock Exchange, LLC and Nasdaq Stock
Market LLC. For a synopsis of these comments see Securities Exchange
Act Release Nos. 68011 (October 9, 2012) (``NYSE Notice) (File No.
SR-NYSE-2012-49); 68013 (October 9, 2012) (``Nasdaq Notice'') (File
No. SR-NASDAQ-2012-109); 68639 (January 11, 2013), (``NYSE Approval
Order''); 68640 (January 11, 2013), (``Nasdaq Approval Order'').
---------------------------------------------------------------------------
II. Description of the Proposal
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''),\6\ the Commission proposed
Rule 10C-1 under the Act,\7\ 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.\8\
---------------------------------------------------------------------------
\6\ Public Law 111-203, 124 Stat. 1900 (2010).
\7\ 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'').
\8\ 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'').
---------------------------------------------------------------------------
Rule 10C-1 requires, among other things, each exchange to adopt
rules providing that each member of the compensation committee \9\ of a
listed issuer must be a member of the board of directors of the issuer,
and must otherwise be independent.\10\ 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'').\11\
---------------------------------------------------------------------------
\9\ For a definition of the term ``compensation committee'' for
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
\10\ See Rule 10C-1(a) and (b)(1).
\11\ See id. See also Rule 10C-1(b)(i)(iii)(A), which sets forth
exemptions from the independence requirements for certain categories
of issuers. See Rule 10C-1(b)(1)(iii)(A). In addition, an exchange
may exempt a particular relationship with respect to 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).
---------------------------------------------------------------------------
In addition, Rule 10C-1 requires the listing rules of exchanges to
address the authority of compensation committees to retain or obtain a
compensation adviser, and its direct responsibility for the
appointment, compensation and oversight of the work of any compensation
adviser it retains.\12\ 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.\13\
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,\14\ as well as any
other factors identified by the relevant exchange in its listing
standards.\15\
---------------------------------------------------------------------------
\12\ See Rule 10C-1(b)(2).
\13\ See Rule 10C-1(b)(3).
\14\ See Rule 10C-1(b)(4). The six factors, which CBOE proposes
to set forth explicitly in its rules, are specified in the text
accompanying note 35, infra.
\15\ 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.
---------------------------------------------------------------------------
B. CBOE Proposal
To comply with Rule 10C-1, CBOE proposes to amend Exchange Rule
31.10 ``Corporate Governance.'' In particular, to accomplish these
changes, the Exchange proposes to amend paragraph (c) of Rule 31.10,
entitled ``Compensation of Officers.'' CBOE also proposes to amend the
Interpretations and Policies section of Rule 31.10 by adding a new
provision entitled Compensation Consultants, Independent Legal Counsel
and Other Compensation Advisors. Current paragraph (c) of Rule 31.10
provides that compensation of the chief executive officers and all
other executive officers of a listed company must be determined by a
majority of independent directors,\16\ or a compensation
[[Page 4530]]
committee comprised solely of independent directors.
---------------------------------------------------------------------------
\16\ ``Independent Director'' is defined in Rule 31.10(h)(2) as:
A person other than an officer or employee of the company or its
subsidiaries or any other individual having a relationship, which,
in the opinion of the company's board of directors, would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director. The following persons shall not be
considered independent: (A) A director who is, or at any time during
the past three years was, employed by the company or by any parent
or subsidiary of the company; (B) a director who accepted or who has
a family member who accepted any payments from the company or any
parent or subsidiary of the company in excess of $60,000 during the
current or any of the past three fiscal years, other than the
following: (i) Compensation for board or board committee service;
(ii) payments arising solely from investments in the company's
securities; (iii) compensation paid to a family member who is a non-
executive employee of the company or a parent or subsidiary of the
company; (iv) benefits under a tax-qualified retirement plan, or
non-discretionary compensation; or (v) loans permitted under
Exchange Act Section 13(k). Provided, however, that audit committee
members are subject to additional, more stringent requirements under
Exchange Act Rule 10A-3, which requirements are incorporated by
reference in the Exchange rules pursuant to Rule 31.10(b); (C) a
director who is a family member of an individual who is, or at any
time during the past three years was, employed by the company or by
any parent or subsidiary of the company as an executive officer; (D)
a director who is, or has a family member who is, a partner in, or a
controlling shareholder or an executive officer of, any organization
to which the company made, or from which the company received,
payments for property or services in the current or any of the past
three fiscal years that exceed 5% of the recipient's consolidated
gross revenues for that year, or $200,000, whichever is more, other
than the following: (i) Payments arising solely from investments in
the company's securities; or (ii) payments under non-discretionary
charitable contribution matching programs; (E) a director of the
listed company who is, or has a family member who is, employed as an
executive officer of another entity where at any time during the
past three years any of the executive officers of the listed company
serve on the compensation committee of such other entity; (F) a
director who is, or has a family member who is, a current partner of
the company's outside auditor, or was a partner or employee of the
company's outside auditor who worked on the company's audit at any
time during any of the past three years; or (G) in the case of an
investment company, in lieu of Rules 31.10(h)(2)(A)-(F), 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.
---------------------------------------------------------------------------
1. Compensation Committee Composition and Independence Standards
First, the Exchange is proposing to amend text in Rule 31.10 to
require that the compensation of all executive officers must be
determined by, or recommended for determination by a compensation
committee.\17\ The Exchange proposes to define the term compensation
committee as one of the following: (1) A committee of the board of
directors that is designated as the compensation committee; (2) in the
absence of a specifically designated committee, a committee of the
board of directors that performs functions typically performed by a
compensation committee, including oversight of executive compensation,
even if it is not designated as the compensation committee or also
performs other functions; or (3) in the absence of either of the
immediately preceding definitions, the members of the board of
directors who oversee executive compensation matters on behalf of the
board of directors.\18\
---------------------------------------------------------------------------
\17\ See Rule 31.10(c)(1).
\18\ As CBOE does not require a formal compensation committee,
the term ``Compensation Committee'' for purposes of the CBOE
proposal and as discussed in this release, in addition to describing
a formal compensation committee, also refers to the listed company's
independent directors as a group when dealing with executive
compensation matters. See proposed Rule 31.10(c)(1).
---------------------------------------------------------------------------
The Exchange also proposes to amend Rule 31.10(c) to state that all
members of a Compensation Committee must be ``Independent Directors''
as defined in Rule 31.10(h)(2).\19\ In its proposal, the Exchange
stated that it believes that its current definition of Independent
Director meets the independence requirements of Rule 10C-1.\20\ The
Exchange notes that, as part of existing Rule 31.10(h)(2) defining
independent director, the Exchange has requirements that a director is
not considered ``independent'' if he or a family member has accepted
any payments from the company or any parent or subsidiary of the
company in excess of $60,000 during the current or any of the past
three fiscal years, other than compensation for board or committee
service, payments arising solely from investments in the company's
securities, compensation paid to a family member who is a non-executive
employee of the company or a parent or subsidiary of the company,
benefits under a tax-qualified retirement plan, or non-discretionary
compensation, or loans permitted under Exchange Act Section 13(k).\21\
The Exchange stated it believes that these requirements demonstrate
that the definition of ``independent'' considers the sources of
compensation of a member of the compensation committee.\22\
---------------------------------------------------------------------------
\19\ See Rule 31.10(c)(2). For a definition of independent
directors under Rule 31.10(h)(2) see supra, note 16.
\20\ See Notice, supra note 3.
See Rule 10C-1(b)(1)(ii)(A) requiring that in determining the
independence requirements for members of compensation committees,
exchanges must consider all relevant factors, including, but not
limited to, the source of compensation of that director (including
any consulting, advisory, or other compensatory fee paid by the
issuer to the director), and whether the director is affiliated with
the issuer, a subsidiary of the issuer, or an affiliate of a
subsidiary of the issuer.
\21\ See Rule 31.10(h)(2), and supra note 16.
\22\ See Notice, supra note 3.
---------------------------------------------------------------------------
The Exchange stated that it believes that its current definition of
Independent Director meets the requirement in Rule 10C-1 that the
Exchange's rules must consider whether the director is affiliated with
the issuer or a subsidiary or affiliate of a subsidiary of the
issuer.\23\ CBOE Rule 31.10(h)(2) states that a director is not
``independent'' if, in the opinion of the issuer's board of directors,
the person has a relationship which would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director. As the Exchange stated, ``any kind of affiliate relationship
could be viewed as a conflict of interest that might interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.'' \24\ In its proposal, the Exchange stated it believes
that its requirement that a board of directors consider whether a
director has a relationship which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director
in order to determine whether or not the director is ``independent''
requires consideration of whether the director is affiliated with the
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of
the issuer.\25\
---------------------------------------------------------------------------
\23\ See Notice, supra note 3. See also Rule 10C-1(b)(1)(ii)(B)
requiring that in determining the independence requirements for
members of compensation committees, exchanges must consider all
relevant factors, including, but not limited to whether a member of
the board of directors of an issuer is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the
issuer.
\24\ The Commission notes that CBOE's rules provide a definition
of affiliate that states an affiliate of or a person ``affiliated
with'' another person means a person who, directly or indirectly,
controls, is controlled by, or is under common control with, such
other person. See CBOE Rule 1.1(j).
\25\ See Notice, supra note 3.
---------------------------------------------------------------------------
The Exchange also proposes to add in Rule 31.10(c)(2) language
stating that if a member of a compensation committee ceases to be an
Independent Director for reasons outside of that member's reasonable
control, that person may remain a compensation committee member until
the earlier of the next annual shareholders meeting of the issuer or
one year from the occurrence of the event that caused the member to no
longer be an Independent Director. The Exchange will require that an
issuer relying on this provision must provide notice to the Exchange
immediately upon learning of the event or circumstance that caused the
member to cease to be an Independent Director.\26\
---------------------------------------------------------------------------
\26\ See Rule 31.10(c)(2).
---------------------------------------------------------------------------
Exchange Rule 31.10(c) currently provides an exception to the
independence requirement for compensation committee members. This
exception states that, notwithstanding said independence requirements,
if the compensation committee is comprised of at least three members,
one director, who is not independent as defined in Rule 31.10(h)(2) and
is not a current officer or employee or a family member of an officer
or employee, may be appointed to the compensation committee if the
board, under exceptional and limited circumstances, determines that
such individual's membership on the committee is required by the best
interests of the company and its shareholders, and the board discloses,
in the proxy statement for the next annual meeting subsequent to such
determination (or, if the issuer does not file a proxy, in its Form 10-
K
[[Page 4531]]
or 20-F), the nature of the relationship and the reasons for the
determination. A member appointed under this exception may not serve
longer than two years.\27\ CBOE notes that Rule 10C-1 is silent with
respect to such exception to the independence requirements, and
therefore is proposing to delete this exception. As the Exchange
stated, it believes that independence of compensation committee members
is important to ensure that there exist no undue influences in the
compensation of executive officers.\28\
---------------------------------------------------------------------------
\27\ See Rule 31.10(c)(3).
\28\ See Notice, supra note 3. CBOE is also proposing to extend
to all executive officers the requirement that an executive officer
not be present during the deliberations regarding his or her own
compensation.
---------------------------------------------------------------------------
2. Authority of Committees To Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers
Rule 10C-1 also discusses the retention of compensation
consultants, independent legal counsel and other compensation advisers
to assist the compensation committee of an issuer in determining
compensation for executives.\29\ CBOE Rule 31.10 currently does not
contain provisions regarding the authority to retain compensation
advisers. Therefore, the Exchange proposes to adopt the provisions of
Rule 10C-1 regarding this issue in a substantively identical manner to
that in Rule 10C-1 in new Interpretation and Policy .11 to Rule
31.10.\30\
---------------------------------------------------------------------------
\29\ See Rule 10C-1(b)(2).
\30\ See id. and Interpretation and Policy .11 to Rule 31.10.
---------------------------------------------------------------------------
The new Interpretation and Policy would state that the Compensation
Committee of an issuer, in its capacity as a committee of the board of
directors, may, in its sole discretion, retain or obtain the advice of
a compensation consultant, independent legal counsel or other
adviser.\31\ The Interpretation and Policy states that the Compensation
Committee shall be directly responsible for the appointment,
compensation and oversight of the work of any compensation consultant,
independent legal counsel and other adviser retained by the
Compensation Committee.\32\ Further, the Interpretation and Policy
states that ``nothing in this Interpretation and Policy .11 to Rule
31.10 shall be construed to require the Compensation Committee to
implement or act consistently with the advice or recommendations of the
compensation consultant, legal counsel or other adviser to the
Compensation Committee, or to affect the ability or obligation of a
Compensation Committee to exercise its own judgment in fulfillment of
the duties of the Compensation Committee.'' \33\ Under the new
Interpretation and Policy .11 to Rule 31.10, each listed issuer must
provide for appropriate funding, as determined by the Compensation
Committee, in its capacity as a committee of the board of directors,
for payment of reasonable compensation to a compensation consultant,
legal counsel or any other adviser retained by the Compensation
Committee.\34\
---------------------------------------------------------------------------
\31\ See proposed Interpretation and Policy .11(a)(1) to Rule
31.10.
\32\ See proposed Interpretation and Policy .11(a)(2) to Rule
31.10.
\33\ See proposed Interpretation and Policy .11(a)(3)(A) and (B)
to Rule 31.10.
\34\ See proposed Interpretation and Policy .11(b) to Rule
31.10.
---------------------------------------------------------------------------
Regarding the independence of compensation advisers, the new
Interpretation and Policy .11 to Rule 31.10 states that the
compensation committee of a listed issuer may select a compensation
consultant, legal counsel or other adviser to the compensation
committee only after taking into consideration the following factors:
(1) The provision of other services to the issuer by the person that
employs the compensation consultant, legal counsel or other adviser,
(2) the amount of fees received from the issuer by the person that
employs the compensation consultant, legal counsel or other adviser, as
a percentage of the total revenue of the person that employs the
compensation consultant, legal counsel or other adviser, (3) 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, (4) any business or personal relationship of the
compensation consultant, legal counsel or other adviser with a member
of the compensation committee, (5) any stock of the issuer owned by the
compensation consultant, legal counsel or other adviser, and (6) any
business or personal relationship of the compensation consultant, legal
counsel, other adviser or the person employing the adviser with an
executive office of the issuer.\35\ Pursuant to the new Interpretation
and Policy, a compensation committee must consider these factors with
respect to any compensation consultant, legal counsel or other advisor
that provides advice to the compensation committee other than in-house
legal counsel.\36\
---------------------------------------------------------------------------
\35\ See Interpretation and Policy .11(c)(1)-(6) to Rule 31.10.
\36\ Id.
---------------------------------------------------------------------------
3. Exemptions
The Exchange proposes that the requirements of Interpretation and
Policy .11 to Rule 31.10, concerning compensation advisers, discussed
above at Section II(B)(2), shall not apply to any controlled company or
to any smaller reporting company.\37\ The Exchange notes that this
exemption complies with exemptions stated in Rule 10C-1.\38\ Under the
new proposal, as the Exchange states, smaller reporting companies will
still be subject to other corporate governance rules, as
applicable.\39\ The Commission notes that this includes the provisions
described above concerning independent oversight of executive
compensation.
---------------------------------------------------------------------------
\37\ See Interpretation and Policy .11(d)(1) to Rule 31.10. See
also Notice, supra note 3.
\38\ See Rule 10C-1(b)(5) which exempts such entities from the
entire requirements of Rule 10C-1. See also Notice, supra note 3.
\39\ See Notice, supra note 3.
---------------------------------------------------------------------------
The Exchange proposes that the requirements of Interpretation and
Policy .11 to Rule 31.10, concerning compensation advisers, discussed
above at Section II(B)(2), shall not apply to the listing of a security
futures product cleared by a clearing agency that is registered
pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that is exempt
from the registration requirements of section 17A(b)(7)(A) (15 U.S.C.
78q-1(b)(7)(A)) \40\ or the listing of a standardized option, as
defined in Sec. 240.9b-1(a)(4), issued by a clearing agency that is
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1).\41\
The Exchange stated that these exemptions comply with those stated in
Rule 10C-1.\42\
---------------------------------------------------------------------------
\40\ See Interpretation and Policy .11(d)(2) to Rule 31.10.
\41\ See Interpretation and Policy .11(d)(3) to Rule 31.10.
\42\ See Rule 10C-1(b)(5) which exempts such entities from the
requirements of Rule 10C-1.
---------------------------------------------------------------------------
Rule 10C-1 exempts from the independence requirements any limited
partnership, company in bankruptcy proceedings, open end management
investment company registered pursuant to the Investment Company Act of
1940, and foreign private issuer that discloses in its annual report
the reasons that the foreign private issuer does not have an
independent compensation committee.\43\ CBOE thereby proposes to
incorporate these exemptions into proposed Rule 31.10(f)(6) by
reference by stating that the categories of issuers listed in Rule 10C-
1(b)(1)(iii)(A) under the Securities Exchange Act of 1934 are also
exempt from the requirements of Rule
[[Page 4532]]
31.10(c)(2) regarding the independence of directors on an issuer's
compensation committee. These entities are exempt from the independent
director requirements of Rule 31.10(c)(2), discussed supra in Section
II(B)(1).
---------------------------------------------------------------------------
\43\ See Rule 10C-1(b)(1)(iii)(A).
---------------------------------------------------------------------------
Finally, as to exemptions, Rule 31.10(f) currently exempts a number
of other categories of issuers from the executive compensation
requirements of Rule 31.10(c).\44\ These types of issuers are
controlled companies, registered management investment companies (which
are similar to open-end management investment companies), and asset-
backed issuers and other passive issuers, cooperatives. The Exchange
determined to exempt these categories of issuers from executive
compensation requirements of Rule 31.10(c) due to their various unique
attributes.\45\ While the Rule 10C-1 changes some of the executive
compensation requirements, CBOE believes that these categories of
issuers should still be exempt from all executive compensation
requirements in Rule 31.10(c) generally.\46\ The Exchange has also
proposed to add language to its rules to make clear that to the extent
the proposed Rule 31.10(f)(6)'s exemption of open-end management
investment companies registered under the Investment Company Act of
1940 from the Compensation Committee director independence requirements
of Rule 31.10(c)(2) conflicts with the more general already-existing
exemption of registered management investment companies from the
requirements of Rule 31.10(c), the more general exemption of registered
management investment companies from the requirements of Rule 31.10(c)
shall be controlling.\47\ As such, the exchange proposes to amend Rule
31.10(f)(2) to state that the exemption of management investment
companies from the requirements of Rule 31.10(c) shall be controlling
over any other potentially-conflicting exemptions that may arise under
Rule 31.10(f)(6).\48\
---------------------------------------------------------------------------
\44\ See Rule 31.10(f).
\45\ See Notice, supra note 3.
\46\ See Rule 10C-1(b)(1)(iii)(B) establishing that ``in
addition to the issuer exemptions set forth in paragraph
(b)(1)(iii)(A) of this section, a national securities exchange or a
national securities association, pursuant to section 19(b) of the
Act (15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the
requirements of paragraph (b)(1) of this section a particular
relationship with respect to members of the compensation committee,
as each national securities exchange or national securities
association determines is appropriate, taking into consideration the
size of an issuer and any other relevant factors. Id.
\47\ See Notice, supra note 3.
\48\ See Rule 31.10(f)(2).
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the CBOE proposal
is consistent with the Act and the rules and regulations thereunder
applicable to a national securities exchange.\49\ In particular, the
Commission finds that the proposed rule change is consistent with the
requirements of Section 6(b) of the Act,\50\ as well as with Section
10C of the Act \51\ and Rule 10C-1 thereunder.\52\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\53\ 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.
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\49\ In approving the CBOE proposed rule change the Commission
has considered its impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
\50\ 15 U.S.C. 78f(b).
\51\ 15 U.S.C. 78j-3.
\52\ 17 CFR 240.10C-1.
\53\ 15 U.S.C. 78f(b)(5).
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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 CBOE 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,\54\ Congress resolved to require that ``board
committees that set compensation policy will consist only of directors
who are independent.'' \55\ 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.
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\54\ See supra note 6.
\55\ 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).
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In response, CBOE 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 believes that the proposed rule change appropriately
revises CBOE'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
[[Page 4533]]
Rule 10C-1(b)(1).'' \56\ This discretion 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.
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\56\ 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.
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As noted above, in considering the Fees Factor and Affiliation
Factor of Rule 10C-1 CBOE decided its existing independence standards
that currently apply to board and compensation committee members, which
include certain bright line tests, in Rule 31.10(h)(2), are
sufficient.\57\ The CBOE's proposal also adopts: (1) A requirement that
listed issuers have a compensation committee composed entirely of
Independent Directors as required by Rule 10C-1 and (2) the cure
procedures set forth in Rule 10C-1(a)(3) for compensation committee
members who cease to be independent for reasons outside their
reasonable control.
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\57\ See Rule 31.10(h)(2) and supra footnotes 16-26 and
accompanying text.
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The Commission notes that CBOE's proposal to require executive
officer compensation to be determined only by Independent Directors, as
defined in CBOE rules, is consistent with the requirements of Rule 10C-
1 and Section 6(b)(5) of the Act. The Commission notes, compensation of
executive officers must be determined only by Independent Directors
even where the board oversees executive compensation without a formal
committee. The Commission also believes that CBOE has met the
requirements of Rule 10C-1 to consider relevant factors including the
Fee Factor and Affiliation Factor. As noted above, after such
consideration, CBOE has determined that its existing independence
standards, including its bright line independence factors, adequately
take into account the additional independence factors for compensation
committee members contained in Rule 10C-1.\58\
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\58\ See Rule 10C-1(b)(1)(ii).
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With respect to the Fees Factors of Rule 10C-1,\59\ the Exchange
commentary states that as part of Rule 31.10(h)(2) defining independent
director, the Exchange has requirements that a director is not
considered ``independent'' if he or a family member has accepted any
payments from the company or any parent or subsidiary of the company in
excess of $60,000 during the current or any of the past three fiscal
years, other than compensation for board or committee service, payments
arising solely from investments in the company's securities,
compensation paid to a family member who is a non-executive employee of
the company or a parent or subsidiary of the company, benefits under a
tax-qualified retirement plan, or non-discretionary compensation, or
loans permitted under Exchange Act Section 13(k).\60\ The Exchange
stated it believes that this existing requirement demonstrates that the
definition of ``independent'' considers the sources of compensation of
a member of the compensation committee.\61\
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\59\ See Rule 10C-1(b)(1)(ii)(A)
\60\ See Rule 31.10(h)(2).
\61\ See Notice, supra note 3.
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The Commission believes that the provisions noted above to address
the Fees Factor give clear guidance when considering 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, by providing an aggregate fee cap in their bright
line tests, the approach is consistent with Rule 10C-1. The Exchange's
general independence standards will also provide a basis for a board to
prohibit a director from being a member of the compensation committee,
should the director receive compensation to a degree 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. The Commission, therefore, believes that the proposed
existing 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, which could potentially influence their decisions on
compensation matters.
With respect to the Affiliation Factor of Rule 10C-1,\62\ the
Exchange concluded that it believes that the current definition of
Independent Director meets the requirement in Rule 10C-1 that the
Exchange's rules must consider whether the director is affiliated with
the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary
of the issuer.\63\ CBOE Rule 31.10(h)(2) states that a director is not
``independent'' if, in the opinion of the issuer's board of directors,
the person has a relationship which would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director.\64\ As the Exchange noted, ``any kind of affiliate
relationship, under the Exchange's own definition of affiliate * * *
could be viewed as a conflict of interest that might interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.'' \65\
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\62\ See Rule 10C-1(b)(1)(ii)(B).
\63\ See Notice, supra note 3. See also Rule 10C-1(b)(1)(ii)(B)
requiring that in determining the independence requirements for
members of compensation committees, exchanges must consider all
relevant factors, including, but not limited to whether a member of
the board of directors of an issuer is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the
issuer.
\64\ See Rule 31.10(h)(2).
\65\ See Notice, supra note 3.
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In considering whether a has a relationship, which, in the opinion
of the company's board of directors, would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director, the board would necessarily have to consider whether the
director is an affiliate of the issuer, a subsidiary of the issuer, or
an affiliate of a subsidiary of the issuer, as those relationships
necessarily could be relationships that interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director, including the responsibilities as a member of the
Compensation Committee.
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.'' \66\ In determining that CBOE's
[[Page 4534]]
affiliation standard is consistent with Sections 6(b)(5) and 10C under
the Act, the Commission notes that CBOE's proposal requires a company's
board, in selecting compensation committee members, to consider
``whether the person has a relationship which would interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.'' \67\ The Commission believes the Exchange has
adequately considered the affiliation standard. As such, the Exchange's
decision to retain its current definition of Independent Director is
consistent with Sections 6(b)(5) and 10C under the Act.\68\
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\66\ See Rule 10C-1 Adopting Release, supra note 8. 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 compensation committee. See also supra notes 23-25
and accompanying text.
\67\ See Interpretation and Policy .01 to Rule 31.10(h)(2)
stating that ``[i]t is important for investors to have confidence
that individuals serving as independent directors do not have a
relationship with the listed company that would impair their
independence. The board has a responsibility to make an affirmative
determination that no such relationships exist through the
application of Rule 31.10(h)(2).''
\68\ The Commission also believes it is consistent with Section
6(b)(5) for CBOE to prohibit all executive officers, not just the
chief executive officer as currently required, to be barred from all
compensation committee deliberations regarding their own
compensation. We agree this will help prohibit undue influence in
the determination of executive officer compensation.
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B. Authority of Committees to Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers
As discussed above, CBOE 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 \69\ and are consistent with the Act.\70\
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\69\ 17 CFR 240.10C-1.
\70\ 15 U.S.C. 78j-3.
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C. Compensation Adviser Independence Factors
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.\71\ Of these factors, five of the six 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.\72\ The Commission believes that this provision is consistent
with Rule 10C-1 and Section 6(b)(5) of the Act.
---------------------------------------------------------------------------
\71\ See note 35, supra and accompanying text.
\72\ See Rule 10C-1 Adopting Release, supra note 8.
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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. Finally, one commenter on the New
York Stock Exchange LLC's proposal requested guidance ``on how often
the required independence assessment should occur.\73\ This commenter
observed that it ``will be extremely burdensome and disruptive if prior
to each compensation committee meeting, the committee had to conduct a
new assessment.'' The Commission anticipates that Compensation
Committees will conduct such an independent assessment at least
annually.\74\
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\73\ See Comment to NYSE Notice by Robert B. Lamm, Chair,
Securities Law Committee, The Society of Corporate Secretaries &
Governance Professionals, dated December 7, 2012 (``Corporate
Secretaries Letter'').
\74\ See NYSE Approval Order and Nasdaq Approval Order, supra
note 5 for a discussion of comments.
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The changes to CBOE's rules on compensation advisers should
therefore benefit investors of 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.
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 of until the earlier of the next annual
shareholders meeting of the 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 CBOE 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. The Commission believes that the
accommodation is fair and reasonable and consistent with investor
protection under Rule 6(b)(5) by ensuring that when a member ceases to
be independent, the committee is entitled to a period to cure that
situation. CBOE has delisting procedures that provide issuers with
notice, opportunity for a hearing, opportunity for appeals, and
delisting.\75\
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\75\ See Rule 31.94(G).
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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.
As noted above, CBOE is removing its exception that allows members
of a Compensation Committee to not be independent in certain
circumstances. The Commission agrees with CBOE's rationale for
eliminating the exception. As the Exchange noted, independence of
compensation committee members is important to ensure that no undue
influences affect the compensation of executive officers. Given the
heightened importance of executive compensation decisions, we think
that this is consistent with the investor protection provisions of
Section 6(b)(5) of the Act.
E. 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. However, consistent with
the exemption of Smaller Reporting Companies from Rule 10C-1, the CBOE
proposal would exempt smaller reporting companies from the
[[Page 4535]]
requirements of Interpretation and Policy .11 to Rule 31.10 concerning
compensation advisers, discussed supra at Section II(B)(2).\76\ Under
the new proposal, as the Exchange states, smaller reporting companies
will still be subject to other corporate governance rules, as
applicable, and are only exempted out of the compensation advisor
provisions.\77\
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\76\ See Interpretation and Policy .11(d)(1) to Rule 31.10. See
also Rule 10C-1(b)(5).
\77\ See Notice, supra note 3.
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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 CBOE to provide some flexibility to
Smaller Reporting Companies. Further, regarding the exemption from
having to consider additional factors regarding compensation advisers,
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.
F. Additional Exemptions
The Commission believes that it is appropriate for CBOE 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. CBOE states that the reasons it adopted
the existing exemptions apply equally to the new requirements, and the
Commission believes that this assertion is reasonable.
The requirements of Interpretation and Policy .11 to Rule 31.10,
concerning compensation advisers, discussed supra at Section II(B)(2),
exempt security futures products cleared by a clearing agency that is
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that
is exempt from the registration requirements of section 17A(b)(7)(A)
(15 U.S.C. 78q-1(b)(7)(A)) \78\ and the listing of a standardized
option, as defined in Sec. 240.9b-1(a)(4), issued by a clearing agency
that is registered pursuant to section 17A of the Act (15 U.S.C. 78q-
1).\79\ The Commission notes that these exemptions comply with those
stated in the Rule 10C-1.\80\
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\78\ See Interpretation and Policy .11(d)(2) to Rule 31.10.
\79\ See Interpretation and Policy .11(d)(3) to Rule 31.10.
\80\ See Rule 10C-1(b)(5) which exempts such entities from all
of the requirements of Rule 10C-1.
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Additionally, Rule 10C-1 exempts from the independence requirements
Limited partnerships, companies in bankruptcy proceedings, and open-end
management investment companies registered under the Investment Company
Act of 1940.\81\ The CBOE proposal incorporates these exemptions into
proposed Rule 31.10(f)(6).\82\ The Commission believes such exemptions
are reasonable, and notes that such entities also are exempt from the
compensation committee independence requirements specifically under
Rule 10C-1.
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\81\ See Rule 10C-1(b)(1)(iii)(A) and Rule 31.10(f)(6).
\82\ The Commission notes that proposed Rule 31.10(f), open end
management investment companies would also be exempt from all the
requirements of Rule 31.10(c), not just the independence standards.
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The CBOE proposal would exempt any foreign private issuer that
discloses in its annual report the reasons that the foreign private
issuer does not have an independent compensation committee. \83\ 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 disclosure requirements will help investors determine whether
they are satisfied with the alternative standard. The Commission notes
that such entities are exempt from the compensation committee
independence requirements of Rule 10C-1 to the extent such entities
disclosure in annual reports the reasons it does not have an
independent compensation committee.
---------------------------------------------------------------------------
\83\ Rule 10C-1(b)(1)(iii).
---------------------------------------------------------------------------
The CBOE proposal would retain Rule 31.10(f), which currently
exempts a number of other categories of issuers from all of the
executive compensation requirements of Rule 31.10(c).\84\ These types
of issuers are controlled companies, registered management investment
companies (which are similar to open-end management investment
companies and include closed-end management investment companies),
asset-backed issuers and other passive issuers, and cooperatives. The
Exchange determined to exempt these categories of issuers from
executive compensation requirements of Rule 31.10(c) due to their
various unique attributes. 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 of closed
end management investment companies. The Commission further believes
that other proposed exemption provisions relating to controlled
companies,\85\ asset-backed issuers and other passive issuers, and
cooperatives are reasonable given the specific characteristics of these
entities, and as noted by the Exchange, their various unique
attributes. The Commission believes that exemption of these entities
from the requirements of Rule 10C-1 is consistent with the exemptive
authority granted in Rule 10C-1.\86\
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\84\ See Rule 31.10(f).
\85\ 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).
\86\ See Rule 10C-1(b)(1)(iii)(B) establishing that ``in
addition to the issuer exemptions set forth in paragraph
(b)(1)(iii)(A) of this section, a national securities exchange or a
national securities association, pursuant to section 19(b) of the
Act (15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the
requirements of paragraph (b)(1) of this section a particular
relationship with respect to members of the compensation committee,
as each national securities exchange or national securities
association determines is appropriate, taking into consideration the
size of an issuer and any other relevant factors.'' Id.
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IV. Conclusion
In summary, and for the reasons discussed in more detail above, the
Commission believes that the rules being adopted by CBOE, taken as
whole, should benefit investors by helping listed companies make
informed decisions regarding the amount and form of executive
compensation. CBOE'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 that meet CBOE's requirements.
CBOE'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 potential
CBOE-listed companies are better informed about potential conflicts
when selecting and receiving advice from advisers. Similarly, the
provisions of CBOE'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
[[Page 4536]]
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-CBOE-2012-094 is consistent with the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and, in particular, with Section 6(b)(5) of the
Exchange Act.\87\
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\87\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\88\ that the proposed rule change, SR-CBOE-2012-094 be, and it
hereby is, approved.
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\88\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\89\
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\89\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01109 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P
