[Federal Register Volume 77, Number 199 (Monday, October 15, 2012)]
[Notices]
[Pages 62587-62592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25221]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68006; File No. SR-NYSEArca-2012-105]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Amending NYSE Arca Equities Rule 5.3(k)(4) To
Comply With the Requirements of Securities and Exchange Commission Rule
10C-1
October 9, 2012.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on September 25, 2012, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend NYSE Arca Equities Rule 5.3(k)(4) to
comply with the requirements of Securities and Exchange Commission
(``Commission'' or ``SEC'') Rule 10C-1.\4\ The text of the proposed
rule change is available on the Exchange's Web site at www.nyse.com, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
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\4\ 17 CFR 240.10C-1.
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II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
[[Page 62588]]
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
NYSE Arca, through its wholly-owned corporation, NYSE Arca
Equities, proposes to amend NYSE Arca Equities Rule 5.3(k)(4) to comply
with the requirements of SEC Rule 10C-1.
The proposed changes to NYSE Arca Equities Rule 5.3(k)(4) will
become operative on July 1, 2013. Consequently, the existing text of
these sections will remain in the NYSE Arca Equities Rulebook until
June 30, 2013 and will be removed immediately thereafter.\5\ Upon
approval of this filing, the amended provisions of those sections will
be included in the Rulebook with introductory text indicating that the
revised text does not become operative until July 1, 2013
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\5\ The Commission notes that the Exchange will have to comply
with Section 19(b) of the Act.
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Section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the ``Dodd-Frank Act'') \6\ added Section 10C
to the Securities Exchange Act of 1934.\7\ Section 10C requires the
Commission to adopt rules directing the national securities exchanges
and national securities associations to prohibit the listing of any
equity security of an issuer that is not in compliance with Section
10C's compensation committee and compensation adviser requirements. On
June 20, 2012, to comply with the requirements of Section 10C, the
Commission adopted new Rule 10C-1, which directs the national
securities exchanges to adopt listing rules effectuating the
compensation committee and compensation adviser requirements of Section
10C.\8\
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\6\ Public Law 111-203, 124 Stat. 1900 (2010).
\7\ 15 U.S.C. 78j-3.
\8\ There are currently no issuers listed on the Exchange that
would be subject to the proposed rules.
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Compensation Committee Director Independence Requirement
In adopting independence requirements for compensation committee
members, 10C-1(b)(1)(ii) \9\ requires the exchanges to consider
relevant factors including, but not limited to: (i) The source of the
director's compensation, including any consulting, advisory or other
compensatory fees paid by the listed company; and (ii) whether the
director has an affiliate relationship with the company, a subsidiary
of the company or an affiliate of a subsidiary of the company. Rule
10C-1(a)(4) \10\ requires that the rule filing submitted to the SEC by
each exchange in connection with the adoption of the rules required by
Rule 10C-1 must include a review of whether and how the proposed
listing standards satisfy the requirements of the final rule; a
discussion of the exchange's consideration of factors relevant to
compensation committee independence; and the definition of independence
applicable to compensation committee members that the exchange proposes
to adopt or retain in light of such review.
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\9\ 17 CFR 240.10C-1(b)(1)(ii).
\10\ 17 CFR 240.10C-1(a)(4).
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The Exchange's director independence standards are set forth in
NYSE Arca Equities Rule 5.3(k)(1). That section provides that no
director qualifies as independent unless the board of directors
affirmatively determines that the director has no material relationship
with the listed company, either directly or as a partner, shareholder
or officer of an organization that has a relationship with the company.
In addition, NYSE Arca Equities Rule 5.3(k)(1) provides that a director
may not be deemed to be independent if such director has a relationship
with the listed company which violates any one of five ``bright line''
tests.\11\
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\11\ NYSE Arca Equities Rule 5.3(k)(1) provides that the
following categories of directors may not be deemed independent: (A)
A director who is or has been within the last three years, an
employee of the listed company, or whose immediate family member is
or has been within the last three years an executive officer of the
listed company; (B) (i) A director or a director who has an
immediate family member who is a current partner of a firm that is
the company's internal or external auditor; (ii) A director who is a
current employee of such a firm; (iii) A director who has an
immediate family member who is a current employee of such a firm and
who participates in the firm's audit, assurance or tax compliance
(but not tax planning) practice; or (iv) A director or a director
who has an immediate family member who was within the last three
years (but is no longer) a partner or employee of such a firm and
personally worked on the listed company's audit within that time;
(C) A director or a director who has an immediate family member who
is, or in the past three years has been, part of an interlocking
directorate in which an executive officer of the listed company
serves or served on the compensation committee of another company
that concurrently employs or employed the director; (D) A director
who is an executive officer or an employee, or whose immediate
family member is an executive officer, of a company that makes
payments to, or receives payments from, the listed company for
property or services in an amount which, in any single fiscal year,
exceeds the greater of $200,000 or 5% of such other company's
consolidated gross revenues, is not ``independent'' until three
years after falling below such threshold; (E) A director who
received, or whose immediate family member is an executive officer
who received, during any twelve-month period within the last three
years, more than $100,000 in direct compensation from the listed
company, other than director and committee fees and pension or other
forms of deferred compensation for prior service (provided such
compensation is not contingent in any way on continued service); (F)
In the case of an investment company, in lieu of paragraphs (A)-(E)
above, a director who is an ``interested person'' of the company as
defined in section 2(a)(19) of the Investment Company Act of 1940,
other than in his or her capacity as a member of the board of
directors or any board committee.
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The provisions of NYSE Arca Equities Rule 5.3(k)(1) as currently in
effect will continue to be applicable to independence determinations in
relation to compensation committee service, as compensation committee
members will be required to be independent under the Exchange's general
board independence standards set forth in NYSE Arca Equities Rule
5.3(k)(1), in addition to the independence requirements proposed
specifically for compensation committee service.
The Exchange proposes to amend NYSE Arca Equities Rule 5.3(k)(4) to
require that, in affirmatively determining the independence of any
director who will serve on the compensation committee of the listed
company's board of directors, the board of directors must consider all
factors specifically relevant to determining whether a director has a
relationship to the listed company which is material to that director's
ability to be independent from management, in connection with the
duties of a compensation committee member including, but not limited
to, the two factors that are set forth in proposed NYSE Arca Equities
Rule 5.3(k)(4) and are explicitly enumerated in Rule 10C-1(b)(ii). When
considering the sources of a director's compensation in determining his
independence for purposes of compensation committee service, NYSE Arca
Equities Rule 5.3(k)(4) as amended provides that the board should
consider whether the director receives compensation from any person or
entity that would impair his ability to make independent judgments
about the listed company's executive compensation. Similarly, when
considering any affiliate relationship a director has with the company,
a subsidiary of the company, or an affiliate of a subsidiary of the
company, in determining his independence for purposes of compensation
committee service, the proposed amended rule text provides that the
board should consider whether the affiliate relationship places the
director under the direct or indirect control of the listed company or
its senior management, or creates a direct relationship between the
director and members of senior management, in each case of a nature
that would impair his ability to make independent judgments
[[Page 62589]]
about the listed company's executive compensation.
The Exchange does not propose to adopt any specific numerical tests
with respect to the factors specified in proposed NYSE Arca Equities
Rule 5.3(k)(4)(ii) or to adopt a requirement to consider any other
specific factors. In particular, the Exchange does not intend to adopt
an absolute prohibition on a board making an affirmative finding that a
director is independent solely on the basis that the director or any of
the director's affiliates are shareholders owning more than some
specified percentage of the listed company. In the adopting release for
Rule 10C-1 (the ``Adopting Release''),\12\ the SEC recognized that the
exchanges might determine that not all affiliate relationships would
adversely affect a director's ability to be independent from
management.\13\ Consistent with the views of commenters on the SEC's
rules as originally proposed, the Exchange believes that--rather than
adversely affecting a director's ability to be independent from
management as a compensation committee member--share ownership in the
listed company aligns the director's interests with those of
unaffiliated shareholders, as their stock ownership gives them the same
economic interest in ensuring that the listed company's executive
compensation is not excessive.
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\12\ Release Nos. 33-9330; 34-67220 (June 20, 2012); 77 FR 38422
(June 27, 2012).
\13\ See Adopting Release at 38428.
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The Exchange believes that its existing ``bright line''
independence standards as set forth in NYSE Arca Equities Rule
5.3(k)(1) are sufficiently broad to encompass the types of
relationships which would generally be material to a director's
independence for compensation committee service. In addition to these
``bright line'' tests, NYSE Arca Equities Rule 5.3(k)(1) also already
requires the board to consider any relationship that would be material
to the independence of a director. The Exchange believes that these
requirements with respect to general director independence, when
combined with the specific considerations required by proposed NYSE
Arca Equities Rule 5.3(k)(4)(ii), represent an appropriate standard for
compensation committee independence that is consistent with the
requirements of Rule 10C-1.
Compensation Committee Advisers
Rule 10C-1(b)(2) \14\ requires exchange rules to mandate that
compensation committees must have broad authority to engage advisers to
assist in their performance of the committee's functions. Specifically,
exchange rules must mandate that:
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\14\ 17 CFR 240.10C-1(b)(2).
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(a) The compensation committee may, in its sole discretion, retain
or obtain the advice of a compensation consultant, independent legal
counsel or other adviser; and
(b) The compensation committee shall be directly responsible for
the appointment, compensation and oversight of the work of any
compensation consultant, independent legal counsel and other adviser
retained by the compensation committee.
Rule 10C-1(b)(3) \15\ requires exchange rules to mandate that the
listed company must provide for appropriate funding, as determined by
the compensation committee, for payment of reasonable compensation to a
compensation consultant, independent legal counsel or any other adviser
retained by the compensation committee.
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\15\ 17 CFR 240.10C-1(b)(3).
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The Exchange proposes to adopt the requirements specified in Rule
10C-1(b)(2) and (3) verbatim as new subsection (iv) to NYSE Arca
Equities Rule 5.3(k)(4).
Compensation Adviser Independence Factors
Rule 10C-1(b)(4) \16\ provides that the compensation committee of a
listed issuer may select a compensation consultant, legal counsel or
other adviser to the compensation committee only after taking into
consideration the following factors, as well as any other factors
identified by the relevant national securities exchange or national
securities association in its listing standards:
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\16\ 17 CFR 240.10C-1(b)(4).
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(i) The provision of other services to the listed company by the
person that employs the compensation consultant, legal counsel or other
adviser;
(ii) The amount of fees received from the listed company by the
person that employs the compensation consultant, legal counsel or other
adviser, as a percentage of the total revenue of the person that
employs the compensation consultant, legal counsel or other adviser;
(iii) The policies and procedures of the person that employs the
compensation consultant, legal counsel or other adviser that are
designed to prevent conflicts of interest;
(iv) Any business or personal relationship of the compensation
consultant, legal counsel or other adviser with a member of the
compensation committee;
(v) Any stock of the listed company owned by the compensation
consultant, legal counsel or other adviser; and
(vi) Any business or personal relationship of the compensation
consultant, legal counsel, other adviser or the person employing the
adviser with an executive officer of the listed company.
Accordingly, the Exchange proposes to add as new subsection (v) to
NYSE Arca Equities Rule 5.3(k)(4) a provision specifying that, before
engaging an adviser, the compensation committee must consider the
factors enumerated above. As proposed, NYSE Arca Equities Rule
5.3(k)(4)(v) would not include any additional factors for
consideration, as the Exchange believes that the list included in Rule
10C-1(b)(4) is very comprehensive and the proposed listing standard
would also require the compensation committee to consider any other
factors that would be relevant to the adviser's independence from
management.
Consistent with Rule 10C-1(b)(2)(iii),\17\ the Exchange proposes to
include as new Commentary .04 to NYSE Arca Equities Rule 5.3(k)(4) an
explicit statement that nothing in NYSE Arca Equities Rule
5.3(k)(4)(ii) shall be construed: (A) To require the Compensation
Committee to implement or act consistently with the advice or
recommendations of the compensation consultant, independent legal
counsel or other adviser to the compensation committee; or (B) to
affect the ability or obligation of the Compensation Committee to
exercise its own judgment in fulfillment of the duties of the
Compensation Committee (or, if applicable, the independent directors).
In addition, as provided by Rule 10C-1(b)(4), proposed new Commentary
.05 to NYSE Arca Equities Rule 5.3(k)(4) would specify that the
compensation committee need not engage in an analysis of the
independence factors before consulting with or obtaining advice from
in-house legal counsel.
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\17\ 17 CFR 240.10C-1(b)(2)(iii).
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Cure Periods
Rule 10C-1(a)(3) \18\ requires that exchange rules must include
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any non-compliance with the provisions of exchange
rules adopted as required by Rule 10C-1. In addition, Rule 10C-1(a)(3)
states that such rules may provide that if a member of a compensation
committee ceases to be
[[Page 62590]]
independent in accordance with the requirements of Rule 10C-1 for
reasons outside the member's reasonable control, that person, with
notice by the issuer to the exchange, may remain a compensation
committee member of the listed issuer until the earlier of the next
annual meeting or one year from the occurrence of the event that caused
the member to be no longer independent. The Exchange proposes to adopt,
as a third paragraph in new subsection (ii) to NYSE Arca Equities Rule
5.3(k)(4), this cure provision period for events of non-compliance with
the proposed compensation committee independence requirements that are
outside of the director's reasonable control. However, the Exchange
proposes to modify this cure provision by limiting its use to
circumstances where the compensation committee continues to have a
majority of independent directors, as this would ensure that the
compensation committee could not take any action without the agreement
of one or more independent directors. The Exchange believes that this
requirement addresses any actual or apparent conflict of interest which
may arise due to the continued service of a non-independent director on
the compensation committee.
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\18\ 17 CFR 240.10C-1(a)(3).
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General Exemptions
Rule 10C-1(b)(5) \19\ provides an automatic exemption from the
application of the entirety of Rule 10C-1 for controlled companies and
smaller reporting companies,\20\ and Rule 10C-1(b)(1)(iii)(A) \21\
provides an automatic exemption from the compensation committee
independence requirements for limited partnerships, companies in
bankruptcy, open-end management investment companies registered under
the Investment Company Act of 1940 (``1940 Act''). Rule 10C-
1(b)(1)(iii)(A) also exempts from the compensation committee
independence requirements any foreign private issuer that discloses in
its annual report filed with the SEC the reasons that the foreign
private issuer does not have an independent compensation committee.
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\19\ 17 CFR 240.10C-1(b)(5).
\20\ A ``smaller reporting company'' is defined in SEC Rule 12b-
2 and in Regulation S-K, Item 10(f)(1). Proposed Commentary .02 to
NYSE Equities Rule 5.3(k)(4) will state that smaller reporting
companies must comply with NYSE Equities Rule 5.3(k)(4), except that
they need not comply with NYSE Equities Rule 5.3(k)(4)(ii) and (v).
Proposed Commentary .02 will also include a transition period
applicable to a company that ceases to be a smaller reporting
company. Under SEC Rule 12b-2, a company tests its status as a
smaller reporting company on an annual basis at the end of its most
recently completed second fiscal quarter (hereinafter, for purposes
of this subsection, the ``Smaller Reporting Company Determination
Date''). To the extent a smaller reporting company ceases to qualify
as such under SEC rules, Commentary .02 will provide that such
company is required, if applicable, to: (I) Have a compensation
committee of which all of the members meet the independence standard
of Rule 5.3(k)(4)(ii) within six months of the Smaller Reporting
Company Determination Date; and (II) comply with Rule 5.3(k)(4)(v)
as of the Smaller Reporting Company Determination Date.
\21\ 17 CFR 240.10C-1(b)(1)(iii)(A).
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Pursuant to the general exemptive authority granted in Rule 10C-
1(b)(5)(i), the Exchange proposes to exempt from all of the proposed
requirements each category of issuer that qualifies for a general or
specific exemption under Rule 10C-1(b)(1)(iii)(A). The Exchange also
proposes to provide a general exemption from all of the requirements to
all of the other categories of issuers that are currently exempt from
the Exchange's existing compensation committee requirements. Thus, as
proposed, controlled companies, limited partnerships and companies in
bankruptcy, closed-end and open-end funds registered under the 1940
Act, asset backed issuers and other passive business organizations
(such as royalty trusts), derivatives and special purpose securities,
and issuers whose only listed equity security is a preferred stock,
would be exempt. The Exchange notes that these categories of issuers
typically: (i) Are externally managed and do not directly employ
executives (e.g., limited partnerships that are managed by their
general partner or closed-end funds managed by an external investment
adviser); (ii) do not by their nature have employees (e.g., passive
business organizations in the form of trusts or issuers of derivative
or special purpose securities); or (iii) have executive compensation
policy set by a body other than the board (e.g., bankrupt companies
have their executive compensation determined by the bankruptcy court).
In light of these structural reasons why these categories of issuers
generally do not have compensation committees, the Exchange believes
that it would be a significant and unnecessarily burdensome alteration
in their governance structures to require them to comply with the
proposed new requirements and that it is appropriate to grant them an
exemption.
The Exchange proposes to adopt as new Commentary .03 to NYSE Arca
Equities 5.3(k)(4) a general exemption from the application of the rule
for foreign private issuers. Foreign private issuers are currently
exempt from the existing compensation committee requirement pursuant to
NYSE Arca Equities Rule 5.3(n). The Exchange proposes to follow this
approach by granting a general exemption, pursuant to the discretion
granted to the Exchange by Rule 10C-1(b)(5)(i),\22\ from the proposed
new compensation committee requirements to foreign private issuers that
follow home country practice. The Exchange notes that NYSE Arca
Equities Rule 5.3(n) requires foreign private issuers to disclose any
significant ways in which their corporate governance practices differ
from those followed by domestic companies under Exchange listing
standards. Listed foreign private issuers may provide this disclosure
either on their Web site (provided it is in the English language and
accessible from the United States) and/or in their annual report as
distributed to shareholders in the United States (again, in the English
language). If the disclosure is only made available on the Web site,
the annual report must so state and provide the Web address at which
the information may be obtained. As any foreign private issuer availing
itself of the proposed exemption would have to disclose that fact in
its statement of significant differences, the Exchange does not propose
to require those companies to comply with the disclosure requirement of
Rule 10C-1(b)(1)(iii)(A). While Section 110 [sic] does not require a
statement as to why a company does not comply with an applicable
requirement in the manner provided by Rule 10C-1(b)(1)(iii)(A), the
Exchange does not believe that this is a significant difference, as the
explanation companies would likely provide for not having an
independent compensation committee would simply be that they were not
required to do so by home country law.
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\22\ 17 CFR 240.10C-1(b)(5)(i).
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The Exchange currently does not require issuers whose only listed
security is a preferred stock to comply with NYSE Arca Equities Rule
5.3(k)(4). The Exchange proposes to grant these issuers a general
exemption from compliance with the proposed amended rule. The Exchange
believes this approach is appropriate because holders of listed
preferred stock have significantly greater protections with respect to
their rights to receive dividends and a liquidation preference upon
dissolution of the issuer, and preferred stocks are typically regarded
by investors as a fixed income investment comparable to debt
securities, the issuers of which are exempt from compliance with Rule
10C-1.
2. Statutory Basis
The Exchange believes that the proposed rule change in relation to
the Exchange's compensation committee
[[Page 62591]]
requirements and the proposed compensation consultant independence
requirements are consistent with Section 10C of the Exchange Act and
Rule 10C-1 thereunder in that they comply with the requirements of Rule
10C-1 with respect to the adoption by national securities exchanges of
compensation committee listing standards. The Exchange believes that
the proposed rule change is consistent with Section 6(b) \23\ of the
Exchange Act in general, and furthers the objectives of Section 6(b)(5)
of the Exchange Act,\24\ in particular in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendments to its
compensation committee listing standard are consistent with the
protection of investors and the public interest in that they strengthen
the independence requirements for compensation committee membership,
provide additional authority to compensation committees and require
compensation committees to consider the independence of compensation
consultants.
The Exchange believes that the general exemptions from the proposed
requirements that it is granting to foreign private issuers and smaller
reporting companies are consistent with Section 10C and Rule 10C-1, for
the reasons stated above in the ``Purpose'' section, including because
(i) Rule 10C-1(b)(5)(ii) explicitly exempts smaller reporting companies
and (ii) foreign private issuers will comply with their home country
law and, if they avail themselves of the exemption, will be required to
disclose that fact under existing Exchange listing requirements. The
Exchange believes it is an appropriate use of its exemptive authority
under Rule 10C-1(b)(5)(i), and that it is not unfairly discriminatory
under Section 6(b)(5) of the Act, to provide general exemptions under
the proposed rules to issuers whose only listed class of equity
securities on the Exchange is a preferred stock, as holders of listed
preferred stock have significantly greater protections with respect to
their rights to receive dividends and a liquidation preference upon
dissolution of the issuer, and preferred stocks are typically regarded
by investors as a fixed income investment comparable to debt
securities, the issuers of which are exempt from compliance with Rule
10C-1. The Exchange believes that it is an appropriate use of its
exemptive authority under Rule 10C-1(b)(5)(i), and that it is not
unfairly discriminatory under Section 6(b)(5) of the Act, to provide
general exemptions under the proposed rules for all of the other
categories of issuers that are not currently subject to the Exchange's
compensation committee requirement, for the structural reasons
discussed in the ``Purpose'' section and because it would be a
significant and unnecessarily burdensome alteration in their governance
structures to require them to comply with the proposed new
requirements.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited written comments on the proposed
rule change. The Exchange has received two comment letters on the
proposed rule change.\25\ One commenter made the following points: (i)
The Exchange should specify that the relevant factors for consideration
with respect to compensation committee independence should include a
consideration of fees received for service on the board itself; (ii)
the relevant factors should explicitly include consideration of the
personal and business relationships between directors and officers;
(iii) the additional factors to be considered for compensation
committee independence should be considered as a part of general board
independence determinations; and (iv) the listing standards should
specify that, while the factors must be considered in their totality, a
single factor can result in the loss of board independence.
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\25\ Both of these letters were addressed to NYSE Regulation,
Inc. Neither author indicated that the comments related to just one
of the three national securities exchanges owned by NYSE Euronext.
Therefore, the Exchange is addressing those comments to the extent
they are applicable to its existing rules and the proposed
amendments.
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The Exchange does not believe that it is appropriate to consider
board compensation as part of the compensation committee independence
determination with respect to individual directors. Non-executive
directors devote considerable time to the affairs of the companies on
whose boards they sit and eligible candidates would be difficult to
find if board and committee service were unpaid in nature.
Consequently, independent directors of listed companies are almost
invariably paid for their board and committee service. As all
independent directors are almost certainly going to receive board
compensation from the company and do so on terms determined by the
board as a whole, the Exchange does not believe that an analysis of the
board compensation of individual directors is a meaningful
consideration in determining their independence for purposes of
compensation committee service.
The Exchange interprets its existing director independence
requirements as requiring the board to consider relationships between
the director and any member of management in making its affirmative
independence determinations. Consequently, the Exchange does not
believe that any further clarification of this requirement is
necessary.
The Exchange does not believe that it is necessary to explicitly
require that the additional independence considerations for
compensation committee service should be a part of the board's general
independence determinations for all independent directors. NYSE Arca
Equities Rule 5.3(k)(1) provides that the board must affirmatively
determine that the director has no material relationship with the
listed company, either directly or as a partner, shareholder or officer
of an organization that has a relationship with the company. As such,
the Exchange believes that, where appropriate, listed company boards
should already be including in their general independence
determinations factors including those being added to the compensation
committee independence determination.
The Exchange does not believe it is necessary to include in the
rule a statement that a single factor may be sufficiently material to
render a director non-independent, as this is clearly the intention of
the rule as drafted. NYSE Arca Equities Rule 5.3(k)(1) in its current
form and proposed NYSE Arca Equities Rule 5.3(k)(4) require the board
to consider the materiality of each separate relationship between the
director and the listed company or its management.
[[Page 62592]]
The second commenter proposed that the Exchange should require
companies to make a public disclosure with respect to the factors
considered by the compensation committee in reviewing the independence
of compensation consultants, legal counsel and other compensation
advisers. This commenter also proposed that the Exchange should require
with respect to outside counsel hired by the compensation committee the
same disclosure as is required by Item 407(e)(3)(iv) of Regulation S-K
with respect to the nature of any conflict that arises from the
engagement of a compensation consultant identified in the proxy
statement. The Exchange does not believe that it is necessary to
establish additional disclosure requirements of this nature. Item 407
of Regulation S-K contains extensive disclosure requirements with
respect to a listed company's corporate governance. Moreover, with
respect to disclosure of any conflicts of interest that may arise with
respect to outside counsel hired by the compensation committee, the
Exchange believes that the rigorous conflict of interest requirements
applicable to attorneys adequately address such concerns, and the
Exchange is mindful that requiring additional public disclosures
regarding outside counsel could require a listed company to disclose
information that otherwise may be protected by attorney-client
privilege.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2012-105 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-105. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 and the Internet Web site of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2012-105, and
should be submitted on or before November 5, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25221 Filed 10-12-12; 8:45 am]
BILLING CODE 8011-01-P