Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of Amendment Nos. 2 and 3, and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2 and 3, To Amend the Listing Rules for Compensation Committees To Comply With Securities Exchange Act Rule 10C-1 and Make Other Related Changes, 4494-4502 [2013-01110]

Download as PDF 4494 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices disclosure requirement regarding compensation advisers in Regulation S– K because these types of services do not raise conflict of interest concerns. For all the reasons discussed above, the Commission finds good cause to accelerate approval of the proposed changes made by Amendment No. 1. V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing and whether Amendment No. 1 are consistent with the Act. Comments may be submitted by any of the following methods: tkelley on DSK3SPTVN1PROD with Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–BX–2012–063 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BX–2012–063. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of BX. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BX–2012–063, and should VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 be submitted on or before February 12, 2013. SECURITIES AND EXCHANGE COMMISSION VI. Conclusion [Release No. 34–68643; File No. SR–BATS– 2012–039] In summary, and for the reasons discussed in more detail above, the Commission believes that the rules being adopted by BX, taken as whole, should benefit investors by helping listed companies make informed decisions regarding the amount and form of executive compensation. BX’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. BX’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 BX-listed companies are better informed about potential conflicts when selecting and receiving advice from advisers. Similarly, the provisions of BX’s standards that require compensation committees to be given the authority to engage and oversee compensation advisers, and require the listed company to provide for appropriate funding to compensate such advisers, should help to support the compensation committee’s role to oversee executive compensation and help provide compensation committees with the resources necessary to make better informed compensation decisions. For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with Section 6(b)(5) of the Act.144 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,145 that the proposed rule change, SR–BX–2012– 063, as modified by Amendment No. 1, is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.146 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–01108 Filed 1–18–13; 8:45 am] BILLING CODE 8011–01–P 144 15 U.S.C. 78f(b)(5). U.S.C. 78s(b)(2). 146 17 CFR 200.30–3(a)(12). 145 15 PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of Amendment Nos. 2 and 3, and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2 and 3, 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, BATS Exchange, Inc. (‘‘Exchange’’ or ‘‘BATS’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to modify the Exchange’s rules for compensation committees of listed issuers to comply with Rule 10C–1 under the Act and make other related changes. On October 9, 2012, BATS filed Amendment No. 1 to the proposed rule change.3 The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on October 15, 2012.4 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, 2013.5 The Commission received no comment letters on the proposed rule change.6 On January 10, 2013, the Exchange filed Amendment No. 2 to the proposed rule change.7 On 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Amendment No. 1 replaced the proposed rule change in full. 4 See Securities Exchange Act Release No. 68022 (October 9, 2012), 77 FR 62572 (‘‘Notice’’). 5 See Securities Exchange Act Release No. 68313 (November 28, 2012), 77 FR 71853 (December 4, 2012). 6 The Commission notes that comments were received on substantially 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’’). 7 In Amendment No. 2 to SR–BATS–2012–039, BATS proposes to: (1) Add additional language to further outline the responsibilities of the compensation committee, as well as to make certain clarifying changes to the compensation committee’s 2 17 E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices January 11, 2013, the Exchange filed Amendment No. 3 to the proposed rule change.8 This order approves the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated basis. II. Description of the Proposed Rule Change A. Background: Rule 10C–1 Under the Act tkelley on DSK3SPTVN1PROD with On March 30, 2011, to implement Section 10C of the Act, as added by Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’),9 the Commission proposed Rule 10C–1 under the Act,10 which directs each national securities exchange (hereinafter, ‘‘exchange’’) to prohibit the listing of any equity security of any issuer, with certain exceptions, that does not comply with the rule’s requirements regarding compensation committees of listed issuers and related requirements regarding compensation advisers. On June 20, 2012, the Commission adopted Rule 10C–1.11 Rule 10C–1 requires, among other things, each exchange to adopt rules providing that each member of the responsibilities and authority; (2) increase the cure period for meeting compensation committee requirements where the annual shareholders meeting occurs no later than 180 days following the event that cause the failure to comply, as well as make several clarifying changes to the cure period rule; (3) amend language from the proposal in order to create full exemptions from Rule 14.10(c)(4) for limited partnerships, management investment companies, and companies in bankruptcy proceedings; (4) move the effective date of the proposal from June 1, 2013 to July 1, 2013; and (5) make several non-substantive clarifying changes, as well as correcting certain rule references within the proposal. 8 In Amendment No. 3 to SR–BATS–2012–039, BATS added language to make clear that for Smaller Reporting Companies the current standards for independent oversight of executive compensation are not changing, as BATS is only exempting Smaller Reporting Companies from the newly proposed enhanced independence standards as well as the new compensation adviser standards. Therefore, the Exchange amended its exemption for Smaller Reporting Companies to state that executive compensation must be determined either by a compensation committee comprised of Independent Directors meeting the definition of independent in Rule 14.10(c)(1)(B), or by a majority of the Board’s Independent Directors in a vote in which only Independent Directors meeting the definition of Independent Director in Rule 14.10(c)(1)(B) participate. 9 Public Law 111–203, 124 Stat. 1900 (2010). 10 See Securities Act Release No. 9199, Securities Exchange Act Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011) (‘‘Rule 10C–1 Proposing Release’’). 11 See Securities Act Release No. 9330, Securities Exchange Act Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012) (‘‘Rule 10C–1 Adopting Release’’). VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 compensation committee 12 of a listed issuer must be a member of the board of directors of the issuer, and must otherwise be independent.13 In determining the independence standards for members of compensation committees of listed issuers, Rule 10C– 1 requires the exchanges to consider relevant factors, including, but not limited to: (a) The source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the issuer to the director (hereinafter, the ‘‘Fees Factor’’); and (b) whether the director is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer (hereinafter, the ‘‘Affiliation Factor’’).14 In addition, Rule 10C–1 requires the listing rules of exchanges to mandate that compensation committees be given the authority to retain or obtain the advice of a compensation adviser, and have direct responsibility for the appointment, compensation and oversight of the work of any compensation adviser they retain.15 The exchange rules must also provide that each listed issuer provide for appropriate funding for the payment of reasonable compensation, as determined by the compensation committee, to any compensation adviser retained by the compensation committee.16 Finally, among other things, Rule 10C–1 requires each exchange to provide in its rules that the compensation committee of each listed issuer may select a compensation consultant, legal counsel or other adviser to the compensation committee only after taking into consideration six factors specified in Rule 10C–1,17 as well as any other factors identified by the relevant exchange in its listing standards.18 12 For a definition of the term ‘‘compensation committee’’ for purposes of Rule 10C–1, see Rule 10C–1(c)(2)(i)–(iii). 13 See Rule 10C–1(a) and (b)(1). 14 See Rule 10C–1(b)(1)(ii). See also Rule 10C– 1(b)(1)(iii)(A), which sets forth exemptions from the independence requirements for certain categories of issuers. In addition, an exchange may exempt a particular relationship with respect to compensation committee from these requirements as it deems appropriate, taking into consideration the size of an issuer and any other relevant factors. See Rule 10C–1(b)(1)(iii)(B). 15 See Rule 10C–1(b)(2). 16 See Rule 10C–1(b)(3). 17 See Rule 10C–1(b)(4). The six factors, which BATS proposes to set forth explicitly in its rules, are specified in the text accompanying note 34, infra. 18 Other provisions in Rule 10C–1 relate to exemptions from the rule and a requirement that each exchange provide for appropriate procedures for a listed issuer to have a reasonable opportunity to cure any defects that would be the basis for the exchange, under Rule 10C–1, to prohibit the issuer’s listing. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 4495 B. BATS Proposed Rule Change, as Amended To comply with Rule 10C–1, BATS proposes to amend several provisions of Exchange BATS Rule 14.10, ‘‘Corporate Governance Requirements.’’ Specifically, BATS proposes to amend BATS Rule 14.10(c)(4), ‘‘Independent Director Oversight of Executive Officer Compensation,’’ and BATS Rule 14.10(e), ‘‘Exemptions from Certain Corporate Governance Requirements.’’ 1. Compensation Committee Composition and Independence Standards Current BATS Rule 14.10(c)(4) provides that compensation of the executive officers of a listed company must be determined, or recommended to the company’s board for determination, either by a compensation committee comprised solely of ‘‘Independent Directors,’’ as defined in the Exchange’s rules,19 or, as an alternative, by a vote of such Independent Directors constituting a majority of the board’s Independent Directors in a vote in which only Independent Directors participate (‘‘Alternative Option’’).20 BATS is retaining the requirement that executive compensation be determined by individuals who qualify as Independent Directors, but, in compliance with Rule 10C–1, is proposing to require the board to consider two additional factors in evaluating the independence of these individuals. Specifically, the Exchange proposes to amend BATS Rule 14.10(c)(4) to require the board to consider: (i) The source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company 19 ‘‘Independent Directors,’’ as defined in BATS Rule 14.10(c)(1)(B) and used herein, includes a twopart test for independence. The definition sets forth seven specific categories of directors who cannot be considered independent because of certain discrete relationships (‘‘the bright-line tests’’). In addition, an Independent Director may not have 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. The board must make an affirmative determination that an individual serving as an Independent Director does not have a relationship with the company that would impair the individual’s independence. See Interpretation and Policy .01 to BATS Rule 14.10(c)(1)(B). 20 Current BATS Rule 14.10(c)(4)(A) sets forth the two alternatives (formal committee or majority of Independent Directors) with respect to determining compensation of the chief executive officer (‘‘CEO’’) of the company, and provides that the CEO may not be present during voting or deliberations regarding the CEO’s own compensation. Current BATS Rule 14.10(c)(4)(B) sets forth the same two alternatives with respect to determining compensation of all other executive officers. Under the proposed rule change, these provisions will be renumbered. See infra note 21. E:\FR\FM\22JAN1.SGM 22JAN1 4496 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with to such director; and (ii) whether the director is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.21 In discussing the proposed rule change, BATS stated that the adoption of this new requirement, along with its existing bright-line tests for director independence, will bring the Exchange into compliance with Rule 10C– 1(b)(1).22 The Exchange stated that, after reviewing its current and proposed listing rules, it concluded that these rules are sufficient to ensure the independence of a company’s directors who determine or recommend to the board for determination executive compensation. The Exchange believes that its existing bright-line standards are ‘‘sufficiently broad to encompass the types of relationships which would generally be material to a director’s independence’’ for these purposes, and therefore determined not to propose independence requirements in addition to the specific ones it is proposing.23 21 See Notice, supra note 4. Under the proposal, the new requirement to consider the additional independence factors will be set forth as BATS Rule 14.10(c)(4)(A), and current BATS Rule 14.10(c)(4)(A) and (B) will be renumbered as BATS Rule 14.10(c)(B)(i) and (ii), respectively. 22 See Notice, supra note 4 and supra note 12 and accompanying text. 23 See BATS Rule 14.10(c)(1)(b) specifying the bright line tests: The following persons shall not be considered independent: (i) A director who is, or at any time during the past three years was, employed by the Company; (ii) a director who accepted or who has a Family Member who accepted any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than the following: (a) Compensation for board or board committee service; (b) compensation paid to a Family Member who is an employee (other than an Executive Officer) of the Company; or (c) benefits under a tax-qualified retirement plan, or non-discretionary compensation. Provided, however, that in addition to the requirements contained in this paragraph (ii), audit committee members are also subject to additional, more stringent requirements under Rule 14.10(c)(3)(B). (iii) 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 as an Executive Officer; (iv) 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: (a) Payments arising solely from investments in the Company’s securities; or (b) payments under non-discretionary charitable contribution matching programs; (v) a director of the 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 Company serve on the compensation committee of such other entity; or (vi) a director who is, or has a Family VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 After considering the factors set forth in Rule 10C–1(b)(1)(ii) and evaluating how the factors could impact the ability of a director to act independently in determining executive compensation, the Exchange further stated, it believes that it can best comply with Rule 10C– 1 by adopting those factors in its rules.24 The Exchange is also proposing to delete existing BATS Rule 14.10(c)(4)(C). Current BATS Rule 14.10(c)(4)(C) provides that, notwithstanding the Exchanges independence requirements for compensation committees, if such a committee is comprised of at least three members, one director who is not independent and is not a current officer or employee or a family member of an officer or employee may be appointed to the committee if the board, under exceptional and limited circumstances, determines that such individual’s membership is required by the best interest of the company and its shareholders.25 The Exchange notes that no such exception exists under Rule 10C–1, and states that, after considering the factors relevant to compensation committee independence under Rule 10C–1, it believes that the deletion of the exception under its rules would comply with Rule 10C–1. BATS further proposes to add a cure period provision for a failure of a listed company to meet its compensation committee composition requirements.26 Under the provision, a company that fails to comply with the compensation committee independence requirements due to one committee member ceasing to be independent due to circumstances beyond the member’s reasonable control, the company must regain compliance by the earlier of its next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply.27 However, if the annual shareholders meeting occurs no later than 180 days following the event that caused the 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. (vii) in the case of an investment company, in lieu of paragraphs (i)–(vi), a director who is an ‘‘interested person’’ of the Company as defined in Section 2(a)(19) of the Investment Company Act of 1940, other than in his or her capacity as a member of the board of directors or any board committee. 24 See id. 25 See current BATS Rule 14.10(c)(4)(C). 26 See proposed BATS Rule 14.10(c)(4)(D). 27 See Proposed BATS Rule 14.10(c)(4)(D). If the annual shareholders meeting occurs no later than 180 days following the event that caused the failure to comply with this requirement, the company shall instead have 180 days from such event to regain compliance. Id. PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 failure to comply, the company will be allowed 180 days from the event to regain compliance.28 A company relying on this provision must provide notice to the Exchange immediately upon learning of the event or circumstances that caused the noncompliance. BATS’s proposal expressly limits the availability of this cure period to companies with formal compensation committees.29 2. Authority of Committees To Retain Compensation Advisers; Funding; and Independence of Compensation Advisers In its proposed rule change, BATS proposes to fulfill the requirements imposed by Rule 10C–1(b)(2)–(4) under the Act—regarding the authority of compensation committees to retain compensation advisers, the funding of such advisers, and assessment of their independence—by setting forth those requirements in its own rules. Thus, proposed BATS Rule 14.10(c)(4)(C), as amended by Amendment Nos. 1, 2 and 3, sets forth the following requirements relating to compensation committees of listed companies, which, for these purposes, includes Independent Directors overseeing compensation pursuant to the Alternative Option: • The committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel,30 or other adviser; 31 • The committee shall be directly responsible for the appointment, compensation and oversight of the work of any retained compensation consultant, legal counsel, or other adviser retained by the compensation committee; 32 and • The company must provide for appropriate funding, as determined by 28 See Amendment No. 2 to the proposed rule change. 29 BATS does not otherwise propose any new procedures for an issuer to have an opportunity to cure defects with respect to its proposed requirements, but BATS does have existing delisting procedures that provide issuers with notice, opportunity for a hearing, opportunity for appeals, and an opportunity to cure defects before an issuer’s securities are delisted. See Rules of BATS Exchange, Rule 14.12 Failure to Meet Listing Standards. For example, Rule 14.12(c) provides procedures for providing deficient companies with notice, Rule 14.12(h) provides procedures for an issuer to request the review of a hearing panel, and Rule 14.12(i) provides procedures for issuers to appeal to BATS’ Listing Council. 30 Rule 10C–1(b)(4) does not include the word ‘‘independent’’ before ‘‘legal counsel’’ and requires an independence assessment for any legal counsel to a compensation committee, other than in-house counsel. In setting forth the requirements of Rule 10C–1(b)(2) and (3), BATS has deleted the word ‘‘independent’’ prior to ‘‘legal counsel’’ so as to avoid confusion. 31 See proposed BATS Rule 14.10(c)(4)(C)(i). 32 See proposed BATS Rule 14.10(c)(4)(C)(ii). E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with the compensation committee, for payment of reasonable compensation to a compensation consultant, legal counsel, or any other adviser retained by the compensation committee.33 The committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the compensation committee, other than inhouse legal counsel, only after taking into consideration the six factors set forth in Rule 10C–1(b)(4) regarding independence assessments of compensation advisers.34 The six factors, which are set forth in full in the proposed rule, are: (i) The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser; (ii) the amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser; (iii) the policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee; (v) any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and (vi) any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the issuer. The Exchange stated that it believes this list of factors is comprehensive. Therefore, the Exchange did not include any specific additional factors for consideration by compensation committees in making the required independence assessment. The amended proposed rule change also states that nothing in the rule shall be construed to require the compensation committee to implement or act consistently with the advice or recommendations of the retained compensation adviser or to affect the ability or obligation of the committee to exercise its own judgment in fulfilling its duties.35 In Amendment No. 2, the Exchange modified the proposed rule change to state that the committee is required to conduct the independence assessment outlined in the rule with 33 See proposed BATS Rule 14.10(c)(4)(C)(iii). proposed BATS Rule 14.10(c)(4)(C)(iv), setting forth the factors listed in Rule 10C– 1(b)(4)(i)–(vi) under the Act. 35 See id, based on Rule 10C–1(b)(2)(iii). 34 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 respect to any compensation consultant, legal counsel or other adviser that provides advice to the committee, other than in-house counsel.36 Amendment No. 2 also provides that a compensation committee is not required to conduct the independence assessment with respect to any compensation consultant, legal counsel or other adviser whose role is limited to the following activities for which no disclosure would be required under Item 407(e)(3)(iii) of Regulation S–K, including: consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the listed company, and that is available generally to all salaried employees; or providing information that either is not customized for a particular company or that is customized based on parameters that are not developed by the compensation consultant, and about which the compensation consultant does not provide advice.37 Proposed BATS Rule 14.10(c)(4)(C)(iv), as amended, also clarifies that nothing in the rule requires a compensation consultant, legal counsel or other compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting or receiving advice from a compensation adviser.38 It further clarifies that compensation committees may select or receive advice from any compensation adviser they prefer, including ones that are not independent, after considering the six independence factors set forth above.39 3. Application to Smaller Reporting Companies Rule 10C–1 includes an exemption for smaller reporting companies from all the requirements included within the rule.40 Consistent with this Rule 10C–1 provision, BATS proposes that a smaller reporting company, as defined in Rule 12b–2 under the Act (hereinafter, a ‘‘Smaller Reporting Company’’), be exempt from the compensation-related rules added by the proposed rule change. Thus, Smaller Reporting Companies will not be required to comply with the enhanced independence standards for members of compensation committees relating to 36 See id, based on Instruction to paragraph (b)(4) of Rule 10C–1. 37 See proposed BATS Rule 14.10(c)(4)(C)(iv) and Amendment Nos. 2 and 3, supra notes 7 and 8, respectively. 38 See id. 39 See id. 40 See supra Section II.A; see also Rule 10C– 1(b)(5)(ii). PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 4497 compensatory fees and affiliation and the requirements relating to compensation advisers.41 4. Exemptions Rule 10C–1 permits the national securities exchanges to exempt from the listing rules adopted pursuant to Rule 10C–1 certain categories of issuers, as the national securities exchange determines is appropriate, taking into consideration, among other relevant factors, the potential impact of the listing rules on smaller reporting issuers.42 As modified by Amendment No. 2, the proposed rule change would leave the existing exemptions from the compensation-related listing standards in the Exchange’s current rules generally unchanged. These include exemptions for asset-backed issuers and other passive issuers,43 cooperatives,44 limited partnerships,45 and management investment companies.46 For the same 41 See proposed BATS Rule 14.10(e)(1)(F), as amended by Amendment No. 3 which makes clear that for Smaller Reporting Companies the current standards for independent oversight of executive compensation are not changing. Therefore, the Exchange amended its exemption for Smaller Reporting Companies to state that executive compensation must be determined either by a compensation committee comprised of Independent Directors meeting the definition of independent in Rule 14.10(c)(1)(B), or by a majority of the Board’s Independent Directors in a vote in which only Independent Directors meeting the definition of Independent Director in Rule 14.10(c)(1)(B) participate. 42 See 17 CFR 240.10C–1(b)(5). 43 See BATS Rule 14.10(e)(1)(A). Asset-backed issuers and other passive issuers have traditionally been exempt from the Exchange’s compensationrelated listing rules because these issuers do not have a board of directors or persons acting in a similar capacity and their activities are limited to passively owning or holding (as well as administering and distributing amounts in respect of) securities, rights, collateral, or other assets on behalf of or for the benefit of the holders of the listed securities. 44 See BATS Rule 14.10(e)(1)(B). Certain memberowned cooperatives that list their preferred stock are required to have their common stock owned by their members. As BATS stated in its proposal, these entities have traditionally been exempt from the Exchange’s compensation-related listing rules because of their unique structure and the fact that they do not have a publicly traded class of common stock. 45 See BATS Rule 14.10(e)(1)(D). The Exchange’s compensation-related listing rules historically have not been applied to limited partnerships because, according to the Exchange, the structure of these entities requires that public investors have limited rights and that the general partners make all significant decisions about the operation of the limited partnership. As such, BATS notes that limited partners do not expect to have a voice in the operations of the partnership. 46 See BATS Rule 14.10(e)(1)(E). According to BATS, management investment companies registered under the Investment Company Act of 1940 are already subject to a pervasive system of federal regulation in certain areas of corporate governance, and, as a result, these entities have traditionally been exempt from the Exchange’s compensation-related listing rules. E:\FR\FM\22JAN1.SGM 22JAN1 4498 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with reasons that these categories of companies have traditionally been exempt from the Exchange’s compensation-related listing rules, the Exchange proposes that they continue to be exempt from its revised listing rules relating to compensation committees. In addition, the Exchange’s current listing rules provide that a foreign private issuer may follow its home country practice in lieu of the Exchange’s compensation-related listing rules if the foreign private issuer discloses in its annual reports filed with the Commission each requirement that it does not follow and describes the home country practice followed by the company in lieu of such requirements.47 Under the proposed rule change as modified by Amendment No. 2, this allowance will continue to apply generally to the Exchange’s compensation committee rules as revised, on the same condition, namely that the issuer discloses each requirement it does not follow and describes the home country practice it follows in lieu of such requirement. However, with respect, specifically, to the enhanced standards of independence for compensation committees (concerning the Fees and Affiliation Factors), if a listed company follows its home country practice, it will be required additionally disclose in its annual report filed with the Commission the reasons why it does not have an independent compensation committee as set forth in these standards.48 Lastly, in Amendment No. 2, the Exchange proposes to leave the requirements relating to compensation committee composition for companies in bankruptcy proceeding generally unchanged. Because companies in bankruptcy proceedings are not currently required to have a compensation committee, the Exchange is proposing to continue to rely on the existing schedule to phase in compliance with the compensation 47 See BATS Rule 14.10(e)(1)(C). Alternatively, a foreign private issuer that is not required to file its annual report with the Commission on Form 20–F may make this disclosure only on its Web site. Id. The Exchange’s listing rules have traditionally provided qualified exemptions for Foreign Private Issuers so that such issuers are not required to do any act that is contrary to a law, rule, or regulation of any public authority exercising jurisdiction over such issuer or that is contrary to generally accepted business practices in the issuer’s country of domicile. 48 As explained by the Exchange, Amendment No. 2 adopts the requirements of Rule 10C– 1(b)(1)(iii)(A)(4), which provides an exemption from the independence requirements of Rule 10C– 1 for foreign private issuers. VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 committee composition requirement for companies emerging from bankruptcy.49 5. Transition to the New Rules for Companies Listed as of the Effective Date The proposed rule change, as amended, provides that certain of the new requirements for companies listed prior to July 1, 2013. A company listed on the Exchange prior to July 1, 2013 will be permitted, commencing on July 1, to phase-in compliance with the Independent Director Oversight of Executive Officer Compensation requirements on the same schedule as Companies listing in conjunction with their initial public offering.50 The phase-in period for companies listing in conjunction with the initial public offering is discussed in section II.B.6 below. 6. Phase-In Schedules: IPOs; Companies that Lose their Exemptions; Companies Transferring from Other Markets BATS proposes to amend BATS Rule 14.10(e)(2)(A) to allow a company listing in connection with its initial public offering to phase-in the compensation committee independence rules, as revised, as follows: (1) One independent member at the time of listing; (2) a majority of independent members within 90 days of listing; and (3) all independent members within one year of listing.51 Since companies listing in connection with an initial public offering may not have previously had an independent compensation committee, the Exchange believes that allowing such companies to phase in compliance with these requirements will reasonably provide these companies with a window identical to the phase-in schedule for the Exchange’s rules regarding Independent Director Oversight of Director Nominations under BATS Rule 14.10(c)(4) and the independent audit committee requirements of Rule 10A– 3(b)(1)(iv)(A) under the Act. The Exchange states that, as noted above, the proposed rule would require that the company have at least one independent member at the time of listing, meaning that even though it is described as a ‘‘phase-in period,’’ the company would never actually be without at least one independent member. 7. Conforming Changes and Correction of Typographical Errors The Exchange is also proposing to amend BATS Rule 14.10(c)(4)(B) to add 49 See BATS Rule 14.10(e)(2)(C). BATS Rule 14.10(e)(2)(D). 51 See Proposed BATS Rule 14.10(e)(2)(A); Exhibit 5 to Amendment No. 2, supra note 6. 50 See PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 a title to and adjust the numbering of the Rule. The changes are being proposed in order to remain consistent with existing rule structure and to ensure that the rules are well-organized and understandable. III. Discussion After careful review, the Commission finds that the BATS proposal, as amended, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.52 In particular, the Commission finds that the amended proposed rule change is consistent with the requirements of Section 6(b) of the Act,53 as well as with Section 10C of the Act 54 and Rule 10C–1 thereunder.55 Specifically, the Commission finds that the proposed rule change, as amended, is consistent with Section 6(b)(5) of the Act,56 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 BATS proposal will foster greater transparency, accountability, and objectivity in the oversight of compensation practices of listed issuers and in the decision52 In approving the BATS proposed rule change, as amended, the Commission has considered its impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 53 15 U.S.C. 78f(b). 54 15 U.S.C. 78j–3. 55 17 CFR 240.10C–1. 56 15 U.S.C. 78f(b)(5). E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices making processes of their compensation committees. In enacting Section 10C of the Act as one of the reforms of the Dodd-Frank Act,57 Congress resolved to require that ‘‘board committees that set compensation policy will consist only of directors who are independent.’’ 58 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, BATS 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, as modified by Amendment Nos. 1, 2, and 3, appropriately revises BATS’s rules for compensation committees of listed companies, for the following reasons: tkelley on DSK3SPTVN1PROD with 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. This discretion comports with the Act, which gives the exchanges the authority, as self57 See supra note 9. 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). 58 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 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. As the Commission stated in the Rule 10C–1 Adopting Release, ‘‘given the wide variety of issuers that are listed on exchanges, we believe that the exchanges should be provided with flexibility to develop independence requirements appropriate for the issuers listed on each exchange and consistent with the requirements of the independence standards set forth in Rule 10C–1(b)(1).’’ 59 As noted above, in addition to retaining its existing independence standards that currently apply to board and compensation committee members, which include certain bright-line tests, BATS has enhanced its listing requirements regarding compensation committees. Under BATS’s current rules, each member of a listed issuer’s compensation committee—or each individual participating under the Alternative Option—must be a member of the board and independent. The enhanced listing requirements proposed by BATS specifically require that when evaluating the independence of a director responsible for determining executive compensation, a company’s board of directors consider the following factors: (i) The source of compensation of the director, including consulting, advisory or other compensatory fee paid by the company to the director; and (ii) whether the director is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in accordance with the requirements of Rule 10C–1(b)(1). The Commission believes that by incorporating these independence standards, the Exchange has complied with the independence requirements of Rule 10C–1(b)(1), and that the proposed independence requirements, which are designed to protect investors and the public interest, are consistent with the requirements of Section 6(b)(5) of the Act. The Commission believes that the enhanced standards, in conjunction with the Exchange’s existing ‘‘bright line’’ independence standards set forth in BATS Rule 14.10(c)(1)(B), are sufficiently broad to encompass the types of relationships which would generally be material to a director’s 59 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. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 4499 independence for determining executive compensation. As to whether BATS should adopt any additional relevant independence factors, the Exchange stated that it reviewed its rules in the light of Rule 10C–1, and concluded that its existing rules together with its proposed rules are sufficient to ensure committee member independence.60 Further, BATS stated it believes it can best comply with Rule 10C–1 by adopting in its Rules the factors set forth in Rule 10C– 1(b)(1)(ii).61 The Commission believes that, through this review, the Exchange has complied with the requirement that it consider relevant factors, including, but not limited to the fees and affiliation factors in determining its definition of independence for compensation committee members. The Commission notes that Rule 10C–1 requires each exchange to consider relevant factors, but does not require the exchange’s proposal to reflect any such additional factors. B. Authority of Committees To Retain Compensation Advisers; Funding; and Independence of Compensation Advisers As discussed above, BATS 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 and are consistent with 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. However, BATS has proposed, in Amendment No. 2, to add language to the provision regarding the independence assessment of compensation advisers 62 to state that the compensation committee is not required to conduct an independence assessment for a compensation adviser that acts in a role limited to the following activities for which no disclosure is required under Item 60 See Notice, supra note 4. id. 62 See proposed Rule 14.10(c)(4)(C)(iv), as amended by Amendment No. 2. 61 See E:\FR\FM\22JAN1.SGM 22JAN1 4500 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices 407(e)(3)(iii) of Regulation S–K: (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the company, and that is available generally to all salaried employees; and/or (b) providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice. BATS states that this exception is based on Item 407(e)(3)(iii) of Regulation S–K, which provides a limited exception to the Commission’s requirement for a registrant to disclose any role of compensation consultants in determining or recommending the amount and form of a registrant’s executive and director compensation.63 The Commission views BATS’ proposed exception as reasonable, as the Commission determined, when adopting the compensation consultant disclosure requirements in Item 407(e)(3)(iii), that the two excepted categories of advice do not raise conflict of interest concerns.64 The Commission also made similar findings when it noted it was continuing such exceptions in the Rule 10C–1 Adopting Release, including excepting such roles from the new conflict of interest disclosure rule required to implement Section 10C(c)(2). The Commission also believes that the exception should allay some of the concerns raised by the commenters to other filings regarding the scope of the independence assessment requirement.65 Based on the above, the Commission believes these limited exceptions are consistent with the investor protection provisions of Section 6(b)(5) of the Act. compensation advisers, which will be set forth in BATS Rule 14.10(c)(4)(C)(ii). Codifying the comprehensive list of factors, as set forth in Rule 10C–1, into its own Rules will ensure that issuers adequately assess the independence of potential compensation advisers. BATS Rules require an independence assessment to be performed on every potential compensation adviser, other than in-house counsel.67 The Commission notes that Rule 10C–1 includes an instruction that specifically requires a compensation committee to conduct the independence assessment with respect to ‘‘any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than inhouse counsel.’’ To avoid any confusion, BATS, in Amendment No. 2, added rule text that reflects this instruction in its own rules.68 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’s proposal requested guidance ‘‘on how often the required independence assessment should occur.’’ 69 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.70 C. Compensation Adviser Independence Factors As noted above, the compensation committee may select, or receive advice from, a compensation consultant, legal counsel, or other adviser to the compensation committee, other than inhouse legal counsel, only after taking into consideration the six factors set forth in Rule 10C–1 66 regarding independence assessments of D. Application to Smaller Reporting Companies The Commission believes that the requirement for Smaller Reporting Companies, like all other BATS-listed companies, to have a compensation committee, composed solely of independent directors or compensation determined by a majority of the independent directors, is reasonable and consistent with the protection of investors. The Commission notes that BATS’ rules for compensation 63 See 17 CFR 229.407(e)(3)(iii). Proxy Disclosure Enhancements, Release No. 33–9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348 (‘‘We are persuaded by commenters who noted that surveys that provide general information regarding the form and amount of compensation typically paid to executive officers and directors within a particular industry generally do not raise the potential conflicts of interest that the amendments are intended to address.’’). 65 See NYSE Approval Order and Nasdaq Approval Order, supra note 6. 66 See Rule 10C–1(b)(4). tkelley on DSK3SPTVN1PROD with 64 See VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 67 See BATS Rule 14.10(c)(4)(C)(iv). supra note 38 and accompanying text. 69 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’’). 70 See NYSE Approval Order and Nasdaq Approval Order, supra note 6, for a discussion of comments. 68 See PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 committees have not made a distinction for Smaller Reporting Companies in the past. However, consistent with the exemption of Smaller Reporting Companies from Rule 10C–1, the Exchange has decided not to require Smaller Reporting Companies to meet its proposed new independence requirements as to compensatory fees and affiliation as well as the requirements concerning compensation advisers.71 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 BATS to provide some flexibility to Smaller Reporting Companies. Further, in view of the potential additional costs, it is reasonable not to require a Smaller Reporting Company to comply with these additional compensation adviser requirements.72 E. Opportunity To Cure Defects The Commission notes that the cure period that BATS proposes for companies that fail to comply with the enhanced independence requirements designed to comply with Rule 10C–1 is not exactly the same as the cure period suggested under Rule 10C–1.73 The BATS proposal adds the proviso that, if the annual shareholders meeting occurs no later than 180 days following the event that caused the noncompliance, the company instead has 180 days from the event to regain compliance. The Commission believes that, although the cure period proposed by BATS gives a company more leeway in certain circumstances than the cure period suggested under Rule 10C–1, the accommodation is fair and reasonable. As a general matter, it allows all companies at least 180 days to cure 71 See Amendment No. 3, supra note 8, regarding proposed BATS Rule 14.10(e)(i). 72 As discussed supra notes 40–41 and accompanying text, under BATS’ proposal, Smaller Reporting Companies are exempted from all of the compensation adviser requirements, including the requirement that specified independence factors be considered before selecting such advisers. 73 Rule 10C–1 allows 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 BATS proposal adds that, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused the noncompliance, the company instead has 180 days from the event to regain compliance. As explained by BATS, this provides a company at least 180 days to cure noncompliance and would typically allow a company to regain compliance in connection with its next annual meeting. See supra notes 28–29 and accompanying text. E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices noncompliance. To give a specific example, the proposal would afford a company additional time to comply, than the Rule 10C–1 option, where a member of the compensation committee ceases to be independent two weeks before the company’s next annual meeting. The Commission believes that it is reasonable for BATS not to provide this cure period when the listed company has no formal compensation committee and executive compensation is determined under the Alternative Option. The Commission notes that under this option, only a majority—not all—of the board’s Independent Directors who also meet the enhanced requirements are required for determining, or recommending to the board for determination, executive compensation. In addition, as the Exchange notes, its general rules include delisting procedures that provide issuers with notice, opportunity for a hearing, opportunity for appeals, and an opportunity to cure defects before an issuer’s securities are delisted. The Commission believes that these general procedures for companies out of compliance with listing requirements, in addition to the particular cure provisions for compensation committees 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 noncompliance with these important requirements before they will be delisted. tkelley on DSK3SPTVN1PROD with F. Exemptions As discussed above, asset-backed issuers and other passive issuers, cooperatives, limited partnerships, registered management investment companies, and controlled companies are exempt from BATS’s existing rules relating to compensation, and BATS proposes to extend the exemptions for these entities to the new requirements of the proposed rule change. The Commission notes that Rule 10C–1 allows exchanges to exempt from the listing rules adopted pursuant to Rule 10C–1 certain categories of issuers, as the national securities exchange determines is appropriate.74 The Commission believes that, given the 74 The Commission notes, moreover, that, in the case of limited partnerships and open-end registered management investment companies, Rule 10C–1 itself provides exemptions from the independence requirements of the Rule. 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). VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 specific characteristics of the aforementioned types of issuers,75 it is reasonable and consistent with Section 6(b)(5) of the Act for the Exchange to exempt them from the new requirements. The Commission notes that BATS proposes, however, to amend its current rule for foreign private issuers, which allows such issuers to follow their home country practice in lieu of the Exchange’s standards regarding a company’s compensation decisionmaking process. The current rule includes the proviso that the issuer must disclose its reliance on the exemption. BATS proposes to conform its rules in this regard with the provision of Rule 10C–1 permitting a foreign private issuer to follow home country practice only when it meets the additional condition that the issuer disclose the reasons why it does not have an independent compensation committee. G. Transition to the New Rules for Companies Listed as of the Effective Date The Commission believes that the deadlines for compliance with the proposal’s various provisions are reasonable and should afford listed companies adequate time to make the changes, if any, necessary to meet the new standards. The Commission believes that the deadline proposed is clear-cut and matches the NYSE deadline and the revised deadline set forth by The NASDAQ Stock Market.76 Additionally, the Commission believes that the BATS compliance dates and transition periods associated with the new independence standards relating to the compensation committee are consistent with Rule 10C–1 and provide for ease of implementation. Accordingly, issuers will be expected to begin complying with the new compensation committee independence standards commencing on July 1, 2013, from which time issuers will be required to have one independent compensation committee member at that time, a majority of independent members within 90 days from July 1, 2013, and all independent members within one year of July 1, 2013. H. Phase-In Schedules: IPOs; Companies That Lose Their Exemptions; Companies Transferring From Other Markets The Commission believes that it is reasonable for BATS to allow, with supra Section II.B.4. NYSE Approval Order and Nasdaq Approval Order, supra note 6. 4501 respect to IPOs, companies listing in conjunction with a carve-out or spin-off transaction, companies emerging from bankruptcy, companies ceasing to be controlled companies, companies ceasing to qualify as a foreign private issuer, and companies transferring from other markets, the same phase-in schedule for compliance with the new requirements as is permitted under its current compensation-related rules. In the Commission’s view, the implementation schedule offers such companies clarity in determining when they will be subject to the heightened requirements. IV. Accelerated Approval of Amendment Nos. 2 and 3 to the Proposed Rule Change The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,77 for approving the proposed rule change, as modified by Amendment Nos. 1, 2 and 3, prior to the 30th day after the date of publication of notice in the Federal Register. The changes made to the proposal by Amendment No. 2 that clarified the responsibilities and authority of Independent Directors responsible for determining executive compensation and the requirement that listed companies provide appropriate funding for compensation advisers merely set forth in detail the relevant requirements of Rule 10C–1(b)(2)–(4) explicitly in the Exchange’s rules. Moreover, the changes improve the proposal because they bring together the full set of the Exchange’s rules on compensation committees in one place, thereby easing compliance for listed companies and benefiting investors seeking an understanding of an issuer’s obligations with regard to determining executive compensation. The inclusion in Amendment No. 2 of language in BATS’s rules that requires a compensation committee to conduct the independence assessment with respect to ‘‘any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than inhouse counsel’’ merely reflects an instruction in Rule 10C–1 itself. The addition of further guidance by Amendment No. 2 merely clarifies that nothing in the Exchange’s rules requires a compensation adviser to be independent, only that the compensation committee consider the independence factors before selecting or receiving advice from a compensation adviser,78 and is not a substantive 75 See 76 See PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 77 15 U.S.C. 78s(b)(2). supra note 38 and accompanying text. 78 See E:\FR\FM\22JAN1.SGM 22JAN1 4502 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Notices tkelley on DSK3SPTVN1PROD with change. Regarding the provision added by Amendment No. 2 to exclude advisers that provide certain types of services from the independence assessment, as discussed above, the Commission has already determined to exclude such advisers from the disclosure requirement regarding compensation advisers in Regulation S– K because these types of services do not raise conflict of interest concerns. The change made by Amendment No. 1 to require companies currently listed on BATS to comply with certain of the new rules by July 1, 2013 brings BATS’s effective date in line with that of other exchanges.79 The addition of exemptions that were not originally proposed for specific types of entities, including limited partnerships, cooperatives, foreign private issuers, management investment companies registered under the Investment company Act of 1940 continue exemptions available under the current rules and are appropriate exercises of BATS’s exemptive authority under Rule 10C–1. The revision in Amendment No. 2 to adopt a cure period for companies to comply with the rule’s requirements in the event a director ceases to be independent for reasons outside his or her control is suggested by Rule 10C–1 itself, and the additional proviso to allow companies at least 180 days has been approved by the Commission in other contexts. The change made by Amendment No. 3 regarding the exemption for Smaller Reporting Companies merely clarifies that for Smaller Reporting Companies the current standards for independent oversight of executive compensation are not changing, as BATS is only exempting Smaller Reporting Companies from the newly proposed enhanced independence standards, not all the independence standards. Thus, Smaller reporting Companies will continue to be required to comply with existing oversight of executive compensation rules. For all the reasons discussed above, the Commission finds good cause to accelerate approval of the proposed changes as made by Amendment Nos. 2 and 3. V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing and whether Amendment Nos. 2 and 3 are consistent with the Act. Comments may be submitted by any of the following methods: 79 See NYSE Approval Order and Nasdaq Approval Order, supra note 6. VerDate Mar<15>2010 18:11 Jan 18, 2013 Jkt 229001 Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–BATS–2012–039 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BATS–2012–039. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of BATS. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BATS–2012–039, and should be submitted on or before February 12, 2013. VI. Conclusion In summary, and for the reasons discussed in more detail above, the Commission believes that the rules being adopted by BATS, taken as whole, should benefit investors by helping listed companies make informed decisions regarding the amount and form of executive compensation. BATS’ new rules will help to meet Congress’s intent that compensation committees that are responsible for setting compensation policy for executives of PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 listed companies consist only of independent directors. BATS’ 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 BATS-listed companies are better informed about potential conflicts when selecting and receiving advice from advisers. Similarly, the provisions of BATS’ standards that require compensation committees to be given the authority to engage and oversee compensation advisers, and require the listed company to provide for appropriate funding to compensate such advisers, should help to support the compensation committee’s role to oversee executive compensation and help provide compensation committees with the resources necessary to make better informed compensation decisions. For the foregoing reasons, the Commission finds that the proposed rule change, SR–BATS–2012–039, as modified by Amendment Nos. 1, 2 and 3, 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 Act.80 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,81 that the proposed rule change, SR–BATS–2012– 039, as amended, be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.82 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–01110 Filed 1–18–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68659; File No. SR–BATS– 2013–002] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Fees for Use of BATS Exchange, Inc. January 15, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the 80 15 U.S.C. 78f(b)(5). U.S.C. 78s(b)(2). 82 17 CFR 200.30–3(a)(12). 81 15 E:\FR\FM\22JAN1.SGM 22JAN1

Agencies

[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4494-4502]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01110]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68643; File No. SR-BATS-2012-039]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Amendment Nos. 2 and 3, and Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2 
and 3, 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, BATS Exchange, Inc. (``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the Exchange's rules for compensation 
committees of listed issuers to comply with Rule 10C-1 under the Act 
and make other related changes. On October 9, 2012, BATS filed 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as modified by Amendment No. 1, was published for comment in 
the Federal Register on October 15, 2012.\4\ 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.\5\ The Commission received no comment 
letters on the proposed rule change.\6\ On January 10, 2013, the 
Exchange filed Amendment No. 2 to the proposed rule change.\7\ On

[[Page 4495]]

January 11, 2013, the Exchange filed Amendment No. 3 to the proposed 
rule change.\8\ This order approves the proposed rule change, as 
modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the proposed rule change in full.
    \4\ See Securities Exchange Act Release No. 68022 (October 9, 
2012), 77 FR 62572 (``Notice'').
    \5\ See Securities Exchange Act Release No. 68313 (November 28, 
2012), 77 FR 71853 (December 4, 2012).
    \6\ The Commission notes that comments were received on 
substantially 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'').
    \7\ In Amendment No. 2 to SR-BATS-2012-039, BATS proposes to: 
(1) Add additional language to further outline the responsibilities 
of the compensation committee, as well as to make certain clarifying 
changes to the compensation committee's responsibilities and 
authority; (2) increase the cure period for meeting compensation 
committee requirements where the annual shareholders meeting occurs 
no later than 180 days following the event that cause the failure to 
comply, as well as make several clarifying changes to the cure 
period rule; (3) amend language from the proposal in order to create 
full exemptions from Rule 14.10(c)(4) for limited partnerships, 
management investment companies, and companies in bankruptcy 
proceedings; (4) move the effective date of the proposal from June 
1, 2013 to July 1, 2013; and (5) make several non-substantive 
clarifying changes, as well as correcting certain rule references 
within the proposal.
    \8\ In Amendment No. 3 to SR-BATS-2012-039, BATS added language 
to make clear that for Smaller Reporting Companies the current 
standards for independent oversight of executive compensation are 
not changing, as BATS is only exempting Smaller Reporting Companies 
from the newly proposed enhanced independence standards as well as 
the new compensation adviser standards. Therefore, the Exchange 
amended its exemption for Smaller Reporting Companies to state that 
executive compensation must be determined either by a compensation 
committee comprised of Independent Directors meeting the definition 
of independent in Rule 14.10(c)(1)(B), or by a majority of the 
Board's Independent Directors in a vote in which only Independent 
Directors meeting the definition of Independent Director in Rule 
14.10(c)(1)(B) participate.
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II. Description of the Proposed Rule Change

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

    On March 30, 2011, to implement Section 10C of the Act, as added by 
Section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act''),\9\ the Commission proposed 
Rule 10C-1 under the Act,\10\ which directs each national securities 
exchange (hereinafter, ``exchange'') to prohibit the listing of any 
equity security of any issuer, with certain exceptions, that does not 
comply with the rule's requirements regarding compensation committees 
of listed issuers and related requirements regarding compensation 
advisers. On June 20, 2012, the Commission adopted Rule 10C-1.\11\
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    \9\ Public Law 111-203, 124 Stat. 1900 (2010).
    \10\ See Securities Act Release No. 9199, Securities Exchange 
Act Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011) 
(``Rule 10C-1 Proposing Release'').
    \11\ See Securities Act Release No. 9330, Securities Exchange 
Act Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012) 
(``Rule 10C-1 Adopting Release'').
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    Rule 10C-1 requires, among other things, each exchange to adopt 
rules providing that each member of the compensation committee \12\ of 
a listed issuer must be a member of the board of directors of the 
issuer, and must otherwise be independent.\13\ In determining the 
independence standards for members of compensation committees of listed 
issuers, Rule 10C-1 requires the exchanges to consider relevant 
factors, including, but not limited to: (a) The source of compensation 
of the director, including any consulting, advisory or other 
compensatory fee paid by the issuer to the director (hereinafter, the 
``Fees Factor''); and (b) whether the director is affiliated with the 
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of 
the issuer (hereinafter, the ``Affiliation Factor'').\14\
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    \12\ For a definition of the term ``compensation committee'' for 
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \13\ See Rule 10C-1(a) and (b)(1).
    \14\ See Rule 10C-1(b)(1)(ii). See also Rule 10C-
1(b)(1)(iii)(A), which sets forth exemptions from the independence 
requirements for certain categories of issuers. In addition, an 
exchange may exempt a particular relationship with respect to 
compensation committee from these requirements as it deems 
appropriate, taking into consideration the size of an issuer and any 
other relevant factors. See Rule 10C-1(b)(1)(iii)(B).
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    In addition, Rule 10C-1 requires the listing rules of exchanges to 
mandate that compensation committees be given the authority to retain 
or obtain the advice of a compensation adviser, and have direct 
responsibility for the appointment, compensation and oversight of the 
work of any compensation adviser they retain.\15\ The exchange rules 
must also provide that each listed issuer provide for appropriate 
funding for the payment of reasonable compensation, as determined by 
the compensation committee, to any compensation adviser retained by the 
compensation committee.\16\ Finally, among other things, Rule 10C-1 
requires each exchange to provide in its rules that the compensation 
committee of each listed issuer may select a compensation consultant, 
legal counsel or other adviser to the compensation committee only after 
taking into consideration six factors specified in Rule 10C-1,\17\ as 
well as any other factors identified by the relevant exchange in its 
listing standards.\18\
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    \15\ See Rule 10C-1(b)(2).
    \16\ See Rule 10C-1(b)(3).
    \17\ See Rule 10C-1(b)(4). The six factors, which BATS proposes 
to set forth explicitly in its rules, are specified in the text 
accompanying note 34, infra.
    \18\ Other provisions in Rule 10C-1 relate to exemptions from 
the rule and a requirement that each exchange provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. BATS Proposed Rule Change, as Amended

    To comply with Rule 10C-1, BATS proposes to amend several 
provisions of Exchange BATS Rule 14.10, ``Corporate Governance 
Requirements.'' Specifically, BATS proposes to amend BATS Rule 
14.10(c)(4), ``Independent Director Oversight of Executive Officer 
Compensation,'' and BATS Rule 14.10(e), ``Exemptions from Certain 
Corporate Governance Requirements.''
1. Compensation Committee Composition and Independence Standards
    Current BATS Rule 14.10(c)(4) provides that compensation of the 
executive officers of a listed company must be determined, or 
recommended to the company's board for determination, either by a 
compensation committee comprised solely of ``Independent Directors,'' 
as defined in the Exchange's rules,\19\ or, as an alternative, by a 
vote of such Independent Directors constituting a majority of the 
board's Independent Directors in a vote in which only Independent 
Directors participate (``Alternative Option'').\20\
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    \19\ ``Independent Directors,'' as defined in BATS Rule 
14.10(c)(1)(B) and used herein, includes a two-part test for 
independence. The definition sets forth seven specific categories of 
directors who cannot be considered independent because of certain 
discrete relationships (``the bright-line tests''). In addition, an 
Independent Director may not have 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. The board must make an affirmative determination 
that an individual serving as an Independent Director does not have 
a relationship with the company that would impair the individual's 
independence. See Interpretation and Policy .01 to BATS Rule 
14.10(c)(1)(B).
    \20\ Current BATS Rule 14.10(c)(4)(A) sets forth the two 
alternatives (formal committee or majority of Independent Directors) 
with respect to determining compensation of the chief executive 
officer (``CEO'') of the company, and provides that the CEO may not 
be present during voting or deliberations regarding the CEO's own 
compensation. Current BATS Rule 14.10(c)(4)(B) sets forth the same 
two alternatives with respect to determining compensation of all 
other executive officers. Under the proposed rule change, these 
provisions will be renumbered. See infra note 21.
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    BATS is retaining the requirement that executive compensation be 
determined by individuals who qualify as Independent Directors, but, in 
compliance with Rule 10C-1, is proposing to require the board to 
consider two additional factors in evaluating the independence of these 
individuals. Specifically, the Exchange proposes to amend BATS Rule 
14.10(c)(4) to require the board to consider: (i) The source of 
compensation of the director, including any consulting, advisory or 
other compensatory fee paid by the company

[[Page 4496]]

to such director; and (ii) whether the director is affiliated with the 
company, a subsidiary of the company, or an affiliate of a subsidiary 
of the company.\21\
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    \21\ See Notice, supra note 4. Under the proposal, the new 
requirement to consider the additional independence factors will be 
set forth as BATS Rule 14.10(c)(4)(A), and current BATS Rule 
14.10(c)(4)(A) and (B) will be renumbered as BATS Rule 
14.10(c)(B)(i) and (ii), respectively.
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    In discussing the proposed rule change, BATS stated that the 
adoption of this new requirement, along with its existing bright-line 
tests for director independence, will bring the Exchange into 
compliance with Rule 10C-1(b)(1).\22\ The Exchange stated that, after 
reviewing its current and proposed listing rules, it concluded that 
these rules are sufficient to ensure the independence of a company's 
directors who determine or recommend to the board for determination 
executive compensation. The Exchange believes that its existing bright-
line standards are ``sufficiently broad to encompass the types of 
relationships which would generally be material to a director's 
independence'' for these purposes, and therefore determined not to 
propose independence requirements in addition to the specific ones it 
is proposing.\23\ After considering the factors set forth in Rule 10C-
1(b)(1)(ii) and evaluating how the factors could impact the ability of 
a director to act independently in determining executive compensation, 
the Exchange further stated, it believes that it can best comply with 
Rule 10C-1 by adopting those factors in its rules.\24\
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    \22\ See Notice, supra note 4 and supra note 12 and accompanying 
text.
    \23\ See BATS Rule 14.10(c)(1)(b) specifying the bright line 
tests: The following persons shall not be considered independent: 
(i) A director who is, or at any time during the past three years 
was, employed by the Company; (ii) a director who accepted or who 
has a Family Member who accepted any compensation from the Company 
in excess of $120,000 during any period of twelve consecutive months 
within the three years preceding the determination of independence, 
other than the following: (a) Compensation for board or board 
committee service; (b) compensation paid to a Family Member who is 
an employee (other than an Executive Officer) of the Company; or (c) 
benefits under a tax-qualified retirement plan, or non-discretionary 
compensation. Provided, however, that in addition to the 
requirements contained in this paragraph (ii), audit committee 
members are also subject to additional, more stringent requirements 
under Rule 14.10(c)(3)(B). (iii) 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 as an Executive Officer; (iv) 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: (a) Payments arising solely from investments in 
the Company's securities; or (b) payments under non-discretionary 
charitable contribution matching programs; (v) a director of the 
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 Company serve 
on the compensation committee of such other entity; or (vi) 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. (vii) in the case of an 
investment company, in lieu of paragraphs (i)-(vi), a director who 
is an ``interested person'' of the Company as defined in Section 
2(a)(19) of the Investment Company Act of 1940, other than in his or 
her capacity as a member of the board of directors or any board 
committee.
    \24\ See id.
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    The Exchange is also proposing to delete existing BATS Rule 
14.10(c)(4)(C). Current BATS Rule 14.10(c)(4)(C) provides that, 
notwithstanding the Exchanges independence requirements for 
compensation committees, if such a committee is comprised of at least 
three members, one director who is not independent and is not a current 
officer or employee or a family member of an officer or employee may be 
appointed to the committee if the board, under exceptional and limited 
circumstances, determines that such individual's membership is required 
by the best interest of the company and its shareholders.\25\ The 
Exchange notes that no such exception exists under Rule 10C-1, and 
states that, after considering the factors relevant to compensation 
committee independence under Rule 10C-1, it believes that the deletion 
of the exception under its rules would comply with Rule 10C-1.
---------------------------------------------------------------------------

    \25\ See current BATS Rule 14.10(c)(4)(C).
---------------------------------------------------------------------------

    BATS further proposes to add a cure period provision for a failure 
of a listed company to meet its compensation committee composition 
requirements.\26\ Under the provision, a company that fails to comply 
with the compensation committee independence requirements due to one 
committee member ceasing to be independent due to circumstances beyond 
the member's reasonable control, the company must regain compliance by 
the earlier of its next annual shareholders meeting or one year from 
the occurrence of the event that caused the failure to comply.\27\ 
However, if the annual shareholders meeting occurs no later than 180 
days following the event that caused the failure to comply, the company 
will be allowed 180 days from the event to regain compliance.\28\ A 
company relying on this provision must provide notice to the Exchange 
immediately upon learning of the event or circumstances that caused the 
noncompliance. BATS's proposal expressly limits the availability of 
this cure period to companies with formal compensation committees.\29\
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    \26\ See proposed BATS Rule 14.10(c)(4)(D).
    \27\ See Proposed BATS Rule 14.10(c)(4)(D). If the annual 
shareholders meeting occurs no later than 180 days following the 
event that caused the failure to comply with this requirement, the 
company shall instead have 180 days from such event to regain 
compliance. Id.
    \28\ See Amendment No. 2 to the proposed rule change.
    \29\ BATS does not otherwise propose any new procedures for an 
issuer to have an opportunity to cure defects with respect to its 
proposed requirements, but BATS does have existing delisting 
procedures that provide issuers with notice, opportunity for a 
hearing, opportunity for appeals, and an opportunity to cure defects 
before an issuer's securities are delisted. See Rules of BATS 
Exchange, Rule 14.12 Failure to Meet Listing Standards. For example, 
Rule 14.12(c) provides procedures for providing deficient companies 
with notice, Rule 14.12(h) provides procedures for an issuer to 
request the review of a hearing panel, and Rule 14.12(i) provides 
procedures for issuers to appeal to BATS' Listing Council.
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2. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers
    In its proposed rule change, BATS proposes to fulfill the 
requirements imposed by Rule 10C-1(b)(2)-(4) under the Act--regarding 
the authority of compensation committees to retain compensation 
advisers, the funding of such advisers, and assessment of their 
independence--by setting forth those requirements in its own rules. 
Thus, proposed BATS Rule 14.10(c)(4)(C), as amended by Amendment Nos. 
1, 2 and 3, sets forth the following requirements relating to 
compensation committees of listed companies, which, for these purposes, 
includes Independent Directors overseeing compensation pursuant to the 
Alternative Option:
     The committee may, in its sole discretion, retain or 
obtain the advice of a compensation consultant, legal counsel,\30\ or 
other adviser; \31\
---------------------------------------------------------------------------

    \30\ Rule 10C-1(b)(4) does not include the word ``independent'' 
before ``legal counsel'' and requires an independence assessment for 
any legal counsel to a compensation committee, other than in-house 
counsel. In setting forth the requirements of Rule 10C-1(b)(2) and 
(3), BATS has deleted the word ``independent'' prior to ``legal 
counsel'' so as to avoid confusion.
    \31\ See proposed BATS Rule 14.10(c)(4)(C)(i).
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     The committee shall be directly responsible for the 
appointment, compensation and oversight of the work of any retained 
compensation consultant, legal counsel, or other adviser retained by 
the compensation committee; \32\ and
---------------------------------------------------------------------------

    \32\ See proposed BATS Rule 14.10(c)(4)(C)(ii).
---------------------------------------------------------------------------

     The company must provide for appropriate funding, as 
determined by

[[Page 4497]]

the compensation committee, for payment of reasonable compensation to a 
compensation consultant, legal counsel, or any other adviser retained 
by the compensation committee.\33\
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    \33\ See proposed BATS Rule 14.10(c)(4)(C)(iii).
---------------------------------------------------------------------------

    The committee may select, or receive advice from, a compensation 
consultant, legal counsel or other adviser to the compensation 
committee, other than in-house legal counsel, only after taking into 
consideration the six factors set forth in Rule 10C-1(b)(4) regarding 
independence assessments of compensation advisers.\34\ The six factors, 
which are set forth in full in the proposed rule, are: (i) The 
provision of other services to the issuer by the person that employs 
the compensation consultant, legal counsel or other adviser; (ii) the 
amount of fees received from the issuer by the person that employs the 
compensation consultant, legal counsel or other adviser, as a 
percentage of the total revenue of the person that employs the 
compensation consultant, legal counsel or other adviser; (iii) the 
policies and procedures of the person that employs the compensation 
consultant, legal counsel or other adviser that are designed to prevent 
conflicts of interest; (iv) any business or personal relationship of 
the compensation consultant, legal counsel or other adviser with a 
member of the compensation committee; (v) any stock of the issuer owned 
by the compensation consultant, legal counsel or other adviser; and 
(vi) any business or personal relationship of the compensation 
consultant, legal counsel, other adviser or the person employing the 
adviser with an executive officer of the issuer. The Exchange stated 
that it believes this list of factors is comprehensive. Therefore, the 
Exchange did not include any specific additional factors for 
consideration by compensation committees in making the required 
independence assessment.
---------------------------------------------------------------------------

    \34\ See proposed BATS Rule 14.10(c)(4)(C)(iv), setting forth 
the factors listed in Rule 10C-1(b)(4)(i)-(vi) under the Act.
---------------------------------------------------------------------------

    The amended proposed rule change also states that nothing in the 
rule shall be construed to require the compensation committee to 
implement or act consistently with the advice or recommendations of the 
retained compensation adviser or to affect the ability or obligation of 
the committee to exercise its own judgment in fulfilling its 
duties.\35\ In Amendment No. 2, the Exchange modified the proposed rule 
change to state that the committee is required to conduct the 
independence assessment outlined in the rule with respect to any 
compensation consultant, legal counsel or other adviser that provides 
advice to the committee, other than in-house counsel.\36\ Amendment No. 
2 also provides that a compensation committee is not required to 
conduct the independence assessment with respect to any compensation 
consultant, legal counsel or other adviser whose role is limited to the 
following activities for which no disclosure would be required under 
Item 407(e)(3)(iii) of Regulation S-K, including: consulting on any 
broad-based plan that does not discriminate in scope, terms, or 
operation, in favor of executive officers or directors of the listed 
company, and that is available generally to all salaried employees; or 
providing information that either is not customized for a particular 
company or that is customized based on parameters that are not 
developed by the compensation consultant, and about which the 
compensation consultant does not provide advice.\37\
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    \35\ See id, based on Rule 10C-1(b)(2)(iii).
    \36\ See id, based on Instruction to paragraph (b)(4) of Rule 
10C-1.
    \37\ See proposed BATS Rule 14.10(c)(4)(C)(iv) and Amendment 
Nos. 2 and 3, supra notes 7 and 8, respectively.
---------------------------------------------------------------------------

    Proposed BATS Rule 14.10(c)(4)(C)(iv), as amended, also clarifies 
that nothing in the rule requires a compensation consultant, legal 
counsel or other compensation adviser to be independent, only that the 
compensation committee consider the enumerated independence factors 
before selecting or receiving advice from a compensation adviser.\38\ 
It further clarifies that compensation committees may select or receive 
advice from any compensation adviser they prefer, including ones that 
are not independent, after considering the six independence factors set 
forth above.\39\
---------------------------------------------------------------------------

    \38\ See id.
    \39\ See id.
---------------------------------------------------------------------------

3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies 
from all the requirements included within the rule.\40\ Consistent with 
this Rule 10C-1 provision, BATS proposes that a smaller reporting 
company, as defined in Rule 12b-2 under the Act (hereinafter, a 
``Smaller Reporting Company''), be exempt from the compensation-related 
rules added by the proposed rule change. Thus, Smaller Reporting 
Companies will not be required to comply with the enhanced independence 
standards for members of compensation committees relating to 
compensatory fees and affiliation and the requirements relating to 
compensation advisers.\41\
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    \40\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \41\ See proposed BATS Rule 14.10(e)(1)(F), as amended by 
Amendment No. 3 which makes clear that for Smaller Reporting 
Companies the current standards for independent oversight of 
executive compensation are not changing. Therefore, the Exchange 
amended its exemption for Smaller Reporting Companies to state that 
executive compensation must be determined either by a compensation 
committee comprised of Independent Directors meeting the definition 
of independent in Rule 14.10(c)(1)(B), or by a majority of the 
Board's Independent Directors in a vote in which only Independent 
Directors meeting the definition of Independent Director in Rule 
14.10(c)(1)(B) participate.
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4. Exemptions
    Rule 10C-1 permits the national securities exchanges to exempt from 
the listing rules adopted pursuant to Rule 10C-1 certain categories of 
issuers, as the national securities exchange determines is appropriate, 
taking into consideration, among other relevant factors, the potential 
impact of the listing rules on smaller reporting issuers.\42\ As 
modified by Amendment No. 2, the proposed rule change would leave the 
existing exemptions from the compensation-related listing standards in 
the Exchange's current rules generally unchanged. These include 
exemptions for asset-backed issuers and other passive issuers,\43\ 
cooperatives,\44\ limited partnerships,\45\ and management investment 
companies.\46\ For the same

[[Page 4498]]

reasons that these categories of companies have traditionally been 
exempt from the Exchange's compensation-related listing rules, the 
Exchange proposes that they continue to be exempt from its revised 
listing rules relating to compensation committees.
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    \42\ See 17 CFR 240.10C-1(b)(5).
    \43\ See BATS Rule 14.10(e)(1)(A). Asset-backed issuers and 
other passive issuers have traditionally been exempt from the 
Exchange's compensation-related listing rules because these issuers 
do not have a board of directors or persons acting in a similar 
capacity and their activities are limited to passively owning or 
holding (as well as administering and distributing amounts in 
respect of) securities, rights, collateral, or other assets on 
behalf of or for the benefit of the holders of the listed 
securities.
    \44\ See BATS Rule 14.10(e)(1)(B). Certain member-owned 
cooperatives that list their preferred stock are required to have 
their common stock owned by their members. As BATS stated in its 
proposal, these entities have traditionally been exempt from the 
Exchange's compensation-related listing rules because of their 
unique structure and the fact that they do not have a publicly 
traded class of common stock.
    \45\ See BATS Rule 14.10(e)(1)(D). The Exchange's compensation-
related listing rules historically have not been applied to limited 
partnerships because, according to the Exchange, the structure of 
these entities requires that public investors have limited rights 
and that the general partners make all significant decisions about 
the operation of the limited partnership. As such, BATS notes that 
limited partners do not expect to have a voice in the operations of 
the partnership.
    \46\ See BATS Rule 14.10(e)(1)(E). According to BATS, management 
investment companies registered under the Investment Company Act of 
1940 are already subject to a pervasive system of federal regulation 
in certain areas of corporate governance, and, as a result, these 
entities have traditionally been exempt from the Exchange's 
compensation-related listing rules.
---------------------------------------------------------------------------

    In addition, the Exchange's current listing rules provide that a 
foreign private issuer may follow its home country practice in lieu of 
the Exchange's compensation-related listing rules if the foreign 
private issuer discloses in its annual reports filed with the 
Commission each requirement that it does not follow and describes the 
home country practice followed by the company in lieu of such 
requirements.\47\ Under the proposed rule change as modified by 
Amendment No. 2, this allowance will continue to apply generally to the 
Exchange's compensation committee rules as revised, on the same 
condition, namely that the issuer discloses each requirement it does 
not follow and describes the home country practice it follows in lieu 
of such requirement. However, with respect, specifically, to the 
enhanced standards of independence for compensation committees 
(concerning the Fees and Affiliation Factors), if a listed company 
follows its home country practice, it will be required additionally 
disclose in its annual report filed with the Commission the reasons why 
it does not have an independent compensation committee as set forth in 
these standards.\48\
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    \47\ See BATS Rule 14.10(e)(1)(C). Alternatively, a foreign 
private issuer that is not required to file its annual report with 
the Commission on Form 20-F may make this disclosure only on its Web 
site. Id. The Exchange's listing rules have traditionally provided 
qualified exemptions for Foreign Private Issuers so that such 
issuers are not required to do any act that is contrary to a law, 
rule, or regulation of any public authority exercising jurisdiction 
over such issuer or that is contrary to generally accepted business 
practices in the issuer's country of domicile.
    \48\ As explained by the Exchange, Amendment No. 2 adopts the 
requirements of Rule 10C-1(b)(1)(iii)(A)(4), which provides an 
exemption from the independence requirements of Rule 10C-1 for 
foreign private issuers.
---------------------------------------------------------------------------

    Lastly, in Amendment No. 2, the Exchange proposes to leave the 
requirements relating to compensation committee composition for 
companies in bankruptcy proceeding generally unchanged. Because 
companies in bankruptcy proceedings are not currently required to have 
a compensation committee, the Exchange is proposing to continue to rely 
on the existing schedule to phase in compliance with the compensation 
committee composition requirement for companies emerging from 
bankruptcy.\49\
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    \49\ See BATS Rule 14.10(e)(2)(C).
---------------------------------------------------------------------------

5. Transition to the New Rules for Companies Listed as of the Effective 
Date
    The proposed rule change, as amended, provides that certain of the 
new requirements for companies listed prior to July 1, 2013. A company 
listed on the Exchange prior to July 1, 2013 will be permitted, 
commencing on July 1, to phase-in compliance with the Independent 
Director Oversight of Executive Officer Compensation requirements on 
the same schedule as Companies listing in conjunction with their 
initial public offering.\50\ The phase-in period for companies listing 
in conjunction with the initial public offering is discussed in section 
II.B.6 below.
---------------------------------------------------------------------------

    \50\ See BATS Rule 14.10(e)(2)(D).
---------------------------------------------------------------------------

6. Phase-In Schedules: IPOs; Companies that Lose their Exemptions; 
Companies Transferring from Other Markets
    BATS proposes to amend BATS Rule 14.10(e)(2)(A) to allow a company 
listing in connection with its initial public offering to phase-in the 
compensation committee independence rules, as revised, as follows: (1) 
One independent member at the time of listing; (2) a majority of 
independent members within 90 days of listing; and (3) all independent 
members within one year of listing.\51\ Since companies listing in 
connection with an initial public offering may not have previously had 
an independent compensation committee, the Exchange believes that 
allowing such companies to phase in compliance with these requirements 
will reasonably provide these companies with a window identical to the 
phase-in schedule for the Exchange's rules regarding Independent 
Director Oversight of Director Nominations under BATS Rule 14.10(c)(4) 
and the independent audit committee requirements of Rule 10A-
3(b)(1)(iv)(A) under the Act. The Exchange states that, as noted above, 
the proposed rule would require that the company have at least one 
independent member at the time of listing, meaning that even though it 
is described as a ``phase-in period,'' the company would never actually 
be without at least one independent member.
---------------------------------------------------------------------------

    \51\ See Proposed BATS Rule 14.10(e)(2)(A); Exhibit 5 to 
Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

7. Conforming Changes and Correction of Typographical Errors
    The Exchange is also proposing to amend BATS Rule 14.10(c)(4)(B) to 
add a title to and adjust the numbering of the Rule. The changes are 
being proposed in order to remain consistent with existing rule 
structure and to ensure that the rules are well-organized and 
understandable.

III. Discussion

    After careful review, the Commission finds that the BATS proposal, 
as amended, is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\52\ In 
particular, the Commission finds that the amended proposed rule change 
is consistent with the requirements of Section 6(b) of the Act,\53\ as 
well as with Section 10C of the Act \54\ and Rule 10C-1 thereunder.\55\ 
Specifically, the Commission finds that the proposed rule change, as 
amended, is consistent with Section 6(b)(5) of the Act,\56\ 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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    \52\ In approving the BATS proposed rule change, as amended, the 
Commission has considered its impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \53\ 15 U.S.C. 78f(b).
    \54\ 15 U.S.C. 78j-3.
    \55\ 17 CFR 240.10C-1.
    \56\ 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 BATS proposal will foster greater transparency, 
accountability, and objectivity in the oversight of compensation 
practices of listed issuers and in the decision-

[[Page 4499]]

making processes of their compensation committees.
    In enacting Section 10C of the Act as one of the reforms of the 
Dodd-Frank Act,\57\ Congress resolved to require that ``board 
committees that set compensation policy will consist only of directors 
who are independent.'' \58\ 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.
---------------------------------------------------------------------------

    \57\ See supra note 9.
    \58\ 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, BATS 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, as modified 
by Amendment Nos. 1, 2, and 3, appropriately revises BATS'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. 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. 
As the Commission stated in the Rule 10C-1 Adopting Release, ``given 
the wide variety of issuers that are listed on exchanges, we believe 
that the exchanges should be provided with flexibility to develop 
independence requirements appropriate for the issuers listed on each 
exchange and consistent with the requirements of the independence 
standards set forth in Rule 10C-1(b)(1).'' \59\
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    \59\ As explained further in the Rule 10C-1 Adopting Release, 
prior to final approval, the Commission will consider whether the 
exchanges' proposed rule changes are consistent with the 
requirements of Section 6(b) and Section 10C of the Exchange Act.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence 
standards that currently apply to board and compensation committee 
members, which include certain bright-line tests, BATS has enhanced its 
listing requirements regarding compensation committees. Under BATS's 
current rules, each member of a listed issuer's compensation 
committee--or each individual participating under the Alternative 
Option--must be a member of the board and independent. The enhanced 
listing requirements proposed by BATS specifically require that when 
evaluating the independence of a director responsible for determining 
executive compensation, a company's board of directors consider the 
following factors: (i) The source of compensation of the director, 
including consulting, advisory or other compensatory fee paid by the 
company to the director; and (ii) whether the director is affiliated 
with the company, a subsidiary of the company, or an affiliate of a 
subsidiary of the company, in accordance with the requirements of Rule 
10C-1(b)(1).
    The Commission believes that by incorporating these independence 
standards, the Exchange has complied with the independence requirements 
of Rule 10C-1(b)(1), and that the proposed independence requirements, 
which are designed to protect investors and the public interest, are 
consistent with the requirements of Section 6(b)(5) of the Act. The 
Commission believes that the enhanced standards, in conjunction with 
the Exchange's existing ``bright line'' independence standards set 
forth in BATS Rule 14.10(c)(1)(B), are sufficiently broad to encompass 
the types of relationships which would generally be material to a 
director's independence for determining executive compensation.
    As to whether BATS should adopt any additional relevant 
independence factors, the Exchange stated that it reviewed its rules in 
the light of Rule 10C-1, and concluded that its existing rules together 
with its proposed rules are sufficient to ensure committee member 
independence.\60\ Further, BATS stated it believes it can best comply 
with Rule 10C-1 by adopting in its Rules the factors set forth in Rule 
10C-1(b)(1)(ii).\61\ The Commission believes that, through this review, 
the Exchange has complied with the requirement that it consider 
relevant factors, including, but not limited to the fees and 
affiliation factors in determining its definition of independence for 
compensation committee members. The Commission notes that Rule 10C-1 
requires each exchange to consider relevant factors, but does not 
require the exchange's proposal to reflect any such additional factors.
---------------------------------------------------------------------------

    \60\ See Notice, supra note 4.
    \61\ See id.
---------------------------------------------------------------------------

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

    As discussed above, BATS 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 and are consistent with 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. However, BATS has proposed, in 
Amendment No. 2, to add language to the provision regarding the 
independence assessment of compensation advisers \62\ to state that the 
compensation committee is not required to conduct an independence 
assessment for a compensation adviser that acts in a role limited to 
the following activities for which no disclosure is required under Item

[[Page 4500]]

407(e)(3)(iii) of Regulation S-K: (a) consulting on any broad-based 
plan that does not discriminate in scope, terms, or operation, in favor 
of executive officers or directors of the company, and that is 
available generally to all salaried employees; and/or (b) providing 
information that either is not customized for a particular issuer or 
that is customized based on parameters that are not developed by the 
adviser, and about which the adviser does not provide advice. BATS 
states that this exception is based on Item 407(e)(3)(iii) of 
Regulation S-K, which provides a limited exception to the Commission's 
requirement for a registrant to disclose any role of compensation 
consultants in determining or recommending the amount and form of a 
registrant's executive and director compensation.\63\
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    \62\ See proposed Rule 14.10(c)(4)(C)(iv), as amended by 
Amendment No. 2.
    \63\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views BATS' proposed exception as reasonable, as the 
Commission determined, when adopting the compensation consultant 
disclosure requirements in Item 407(e)(3)(iii), that the two excepted 
categories of advice do not raise conflict of interest concerns.\64\ 
The Commission also made similar findings when it noted it was 
continuing such exceptions in the Rule 10C-1 Adopting Release, 
including excepting such roles from the new conflict of interest 
disclosure rule required to implement Section 10C(c)(2). The Commission 
also believes that the exception should allay some of the concerns 
raised by the commenters to other filings regarding the scope of the 
independence assessment requirement.\65\ Based on the above, the 
Commission believes these limited exceptions are consistent with the 
investor protection provisions of Section 6(b)(5) of the Act.
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    \64\ See Proxy Disclosure Enhancements, Release No. 33-9089 
(Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348 (``We are 
persuaded by commenters who noted that surveys that provide general 
information regarding the form and amount of compensation typically 
paid to executive officers and directors within a particular 
industry generally do not raise the potential conflicts of interest 
that the amendments are intended to address.'').
    \65\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 6.
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C. Compensation Adviser Independence Factors

    As noted above, the compensation committee may select, or receive 
advice from, a compensation consultant, legal counsel, or other adviser 
to the compensation committee, other than in-house legal counsel, only 
after taking into consideration the six factors set forth in Rule 10C-1 
\66\ regarding independence assessments of compensation advisers, which 
will be set forth in BATS Rule 14.10(c)(4)(C)(ii). Codifying the 
comprehensive list of factors, as set forth in Rule 10C-1, into its own 
Rules will ensure that issuers adequately assess the independence of 
potential compensation advisers.
---------------------------------------------------------------------------

    \66\ See Rule 10C-1(b)(4).
---------------------------------------------------------------------------

    BATS Rules require an independence assessment to be performed on 
every potential compensation adviser, other than in-house counsel.\67\ 
The Commission notes that Rule 10C-1 includes an instruction that 
specifically requires a compensation committee to conduct the 
independence assessment with respect to ``any compensation consultant, 
legal counsel or other adviser that provides advice to the compensation 
committee, other than in-house counsel.'' To avoid any confusion, BATS, 
in Amendment No. 2, added rule text that reflects this instruction in 
its own rules.\68\
---------------------------------------------------------------------------

    \67\ See BATS Rule 14.10(c)(4)(C)(iv).
    \68\ See supra note 38 and accompanying text.
---------------------------------------------------------------------------

    In approving this aspect of the proposal, the Commission notes that 
compliance with the rule requires an independence assessment of any 
compensation consultant, legal counsel, or other adviser that provides 
advice to the compensation committee, and is not limited to advice 
concerning executive compensation. Finally, one commenter on the New 
York Stock Exchange's proposal requested guidance ``on how often the 
required independence assessment should occur.'' \69\ 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.\70\
---------------------------------------------------------------------------

    \69\ 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'').
    \70\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 6, for a discussion of comments.
---------------------------------------------------------------------------

D. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting 
Companies, like all other BATS-listed companies, to have a compensation 
committee, composed solely of independent directors or compensation 
determined by a majority of the independent directors, is reasonable 
and consistent with the protection of investors. The Commission notes 
that BATS' rules for compensation committees have not made a 
distinction for Smaller Reporting Companies in the past. However, 
consistent with the exemption of Smaller Reporting Companies from Rule 
10C-1, the Exchange has decided not to require Smaller Reporting 
Companies to meet its proposed new independence requirements as to 
compensatory fees and affiliation as well as the requirements 
concerning compensation advisers.\71\
---------------------------------------------------------------------------

    \71\ See Amendment No. 3, supra note 8, regarding proposed BATS 
Rule 14.10(e)(i).
---------------------------------------------------------------------------

    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 BATS to provide some flexibility to 
Smaller Reporting Companies. Further, in view of the potential 
additional costs, it is reasonable not to require a Smaller Reporting 
Company to comply with these additional compensation adviser 
requirements.\72\
---------------------------------------------------------------------------

    \72\ As discussed supra notes 40-41 and accompanying text, under 
BATS' proposal, Smaller Reporting Companies are exempted from all of 
the compensation adviser requirements, including the requirement 
that specified independence factors be considered before selecting 
such advisers.
---------------------------------------------------------------------------

E. Opportunity To Cure Defects

    The Commission notes that the cure period that BATS proposes for 
companies that fail to comply with the enhanced independence 
requirements designed to comply with Rule 10C-1 is not exactly the same 
as the cure period suggested under Rule 10C-1.\73\ The BATS proposal 
adds the proviso that, if the annual shareholders meeting occurs no 
later than 180 days following the event that caused the noncompliance, 
the company instead has 180 days from the event to regain compliance. 
The Commission believes that, although the cure period proposed by BATS 
gives a company more leeway in certain circumstances than the cure 
period suggested under Rule 10C-1, the accommodation is fair and 
reasonable. As a general matter, it allows all companies at least 180 
days to cure

[[Page 4501]]

noncompliance. To give a specific example, the proposal would afford a 
company additional time to comply, than the Rule 10C-1 option, where a 
member of the compensation committee ceases to be independent two weeks 
before the company's next annual meeting.
---------------------------------------------------------------------------

    \73\ Rule 10C-1 allows 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 BATS proposal adds that, if the annual 
shareholders' meeting occurs no later than 180 days following the 
event that caused the noncompliance, the company instead has 180 
days from the event to regain compliance. As explained by BATS, this 
provides a company at least 180 days to cure noncompliance and would 
typically allow a company to regain compliance in connection with 
its next annual meeting. See supra notes 28-29 and accompanying 
text.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable for BATS not to 
provide this cure period when the listed company has no formal 
compensation committee and executive compensation is determined under 
the Alternative Option. The Commission notes that under this option, 
only a majority--not all--of the board's Independent Directors who also 
meet the enhanced requirements are required for determining, or 
recommending to the board for determination, executive compensation. In 
addition, as the Exchange notes, its general rules include delisting 
procedures that provide issuers with notice, opportunity for a hearing, 
opportunity for appeals, and an opportunity to cure defects before an 
issuer's securities are delisted.
    The Commission believes that these general procedures for companies 
out of compliance with listing requirements, in addition to the 
particular cure provisions for compensation committees 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.

F. Exemptions

    As discussed above, asset-backed issuers and other passive issuers, 
cooperatives, limited partnerships, registered management investment 
companies, and controlled companies are exempt from BATS's existing 
rules relating to compensation, and BATS proposes to extend the 
exemptions for these entities to the new requirements of the proposed 
rule change. The Commission notes that Rule 10C-1 allows exchanges to 
exempt from the listing rules adopted pursuant to Rule 10C-1 certain 
categories of issuers, as the national securities exchange determines 
is appropriate.\74\ The Commission believes that, given the specific 
characteristics of the aforementioned types of issuers,\75\ it is 
reasonable and consistent with Section 6(b)(5) of the Act for the 
Exchange to exempt them from the new requirements.
---------------------------------------------------------------------------

    \74\ The Commission notes, moreover, that, in the case of 
limited partnerships and open-end registered management investment 
companies, Rule 10C-1 itself provides exemptions from the 
independence requirements of the Rule. 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).
    \75\ See supra Section II.B.4.
---------------------------------------------------------------------------

    The Commission notes that BATS proposes, however, to amend its 
current rule for foreign private issuers, which allows such issuers to 
follow their home country practice in lieu of the Exchange's standards 
regarding a company's compensation decision-making process. The current 
rule includes the proviso that the issuer must disclose its reliance on 
the exemption. BATS proposes to conform its rules in this regard with 
the provision of Rule 10C-1 permitting a foreign private issuer to 
follow home country practice only when it meets the additional 
condition that the issuer disclose the reasons why it does not have an 
independent compensation committee.

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

    The Commission believes that the deadlines for compliance with the 
proposal's various provisions are reasonable and should afford listed 
companies adequate time to make the changes, if any, necessary to meet 
the new standards. The Commission believes that the deadline proposed 
is clear-cut and matches the NYSE deadline and the revised deadline set 
forth by The NASDAQ Stock Market.\76\ Additionally, the Commission 
believes that the BATS compliance dates and transition periods 
associated with the new independence standards relating to the 
compensation committee are consistent with Rule 10C-1 and provide for 
ease of implementation. Accordingly, issuers will be expected to begin 
complying with the new compensation committee independence standards 
commencing on July 1, 2013, from which time issuers will be required to 
have one independent compensation committee member at that time, a 
majority of independent members within 90 days from July 1, 2013, and 
all independent members within one year of July 1, 2013.
---------------------------------------------------------------------------

    \76\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 6.
---------------------------------------------------------------------------

H. Phase-In Schedules: IPOs; Companies That Lose Their Exemptions; 
Companies Transferring From Other Markets

    The Commission believes that it is reasonable for BATS to allow, 
with respect to IPOs, companies listing in conjunction with a carve-out 
or spin-off transaction, companies emerging from bankruptcy, companies 
ceasing to be controlled companies, companies ceasing to qualify as a 
foreign private issuer, and companies transferring from other markets, 
the same phase-in schedule for compliance with the new requirements as 
is permitted under its current compensation-related rules. In the 
Commission's view, the implementation schedule offers such companies 
clarity in determining when they will be subject to the heightened 
requirements.

IV. Accelerated Approval of Amendment Nos. 2 and 3 to the Proposed Rule 
Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\77\ for approving the proposed rule change, as modified by 
Amendment Nos. 1, 2 and 3, prior to the 30th day after the date of 
publication of notice in the Federal Register.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    The changes made to the proposal by Amendment No. 2 that clarified 
the responsibilities and authority of Independent Directors responsible 
for determining executive compensation and the requirement that listed 
companies provide appropriate funding for compensation advisers merely 
set forth in detail the relevant requirements of Rule 10C-1(b)(2)-(4) 
explicitly in the Exchange's rules. Moreover, the changes improve the 
proposal because they bring together the full set of the Exchange's 
rules on compensation committees in one place, thereby easing 
compliance for listed companies and benefiting investors seeking an 
understanding of an issuer's obligations with regard to determining 
executive compensation.
    The inclusion in Amendment No. 2 of language in BATS's rules that 
requires a compensation committee to conduct the independence 
assessment with respect to ``any compensation consultant, legal counsel 
or other adviser that provides advice to the compensation committee, 
other than in-house counsel'' merely reflects an instruction in Rule 
10C-1 itself. The addition of further guidance by Amendment No. 2 
merely clarifies that nothing in the Exchange's rules requires a 
compensation adviser to be independent, only that the compensation 
committee consider the independence factors before selecting or 
receiving advice from a compensation adviser,\78\ and is not a 
substantive

[[Page 4502]]

change. Regarding the provision added by Amendment No. 2 to exclude 
advisers that provide certain types of services from the independence 
assessment, as discussed above, the Commission has already determined 
to exclude such advisers from the disclosure requirement regarding 
compensation advisers in Regulation S-K because these types of services 
do not raise conflict of interest concerns.
---------------------------------------------------------------------------

    \78\ See supra note 38 and accompanying text.
---------------------------------------------------------------------------

    The change made by Amendment No. 1 to require companies currently 
listed on BATS to comply with certain of the new rules by July 1, 2013 
brings BATS's effective date in line with that of other exchanges.\79\ 
The addition of exemptions that were not originally proposed for 
specific types of entities, including limited partnerships, 
cooperatives, foreign private issuers, management investment companies 
registered under the Investment company Act of 1940 continue exemptions 
available under the current rules and are appropriate exercises of 
BATS's exemptive authority under Rule 10C-1. The revision in Amendment 
No. 2 to adopt a cure period for companies to comply with the rule's 
requirements in the event a director ceases to be independent for 
reasons outside his or her control is suggested by Rule 10C-1 itself, 
and the additional proviso to allow companies at least 180 days has 
been approved by the Commission in other contexts.
---------------------------------------------------------------------------

    \79\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 6.
---------------------------------------------------------------------------

    The change made by Amendment No. 3 regarding the exemption for 
Smaller Reporting Companies merely clarifies that for Smaller Reporting 
Companies the current standards for independent oversight of executive 
compensation are not changing, as BATS is only exempting Smaller 
Reporting Companies from the newly proposed enhanced independence 
standards, not all the independence standards. Thus, Smaller reporting 
Companies will continue to be required to comply with existing 
oversight of executive compensation rules.
    For all the reasons discussed above, the Commission finds good 
cause to accelerate approval of the proposed changes as made by 
Amendment Nos. 2 and 3.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment Nos. 2 and 3 
are consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2012-039 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2012-039. This file 
number should be included on the subject line if email is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal office of BATS. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-BATS-2012-039, and should be submitted on or before 
February 12, 2013.

VI. Conclusion

    In summary, and for the reasons discussed in more detail above, the 
Commission believes that the rules being adopted by BATS, taken as 
whole, should benefit investors by helping listed companies make 
informed decisions regarding the amount and form of executive 
compensation. BATS' 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.
    BATS' 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 BATS-listed 
companies are better informed about potential conflicts when selecting 
and receiving advice from advisers. Similarly, the provisions of BATS' 
standards that require compensation committees to be given the 
authority to engage and oversee compensation advisers, and require the 
listed company to provide for appropriate funding to compensate such 
advisers, should help to support the compensation committee's role to 
oversee executive compensation and help provide compensation committees 
with the resources necessary to make better informed compensation 
decisions.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, SR-BATS-2012-039, as modified by Amendment Nos. 1, 2 and 
3, 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 Act.\80\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\81\ that the proposed rule change, SR-BATS-2012-039, as amended, 
be, and it hereby is, approved.
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    \81\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\82\
---------------------------------------------------------------------------

    \82\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01110 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P