[Federal Register Volume 77, Number 199 (Monday, October 15, 2012)]
[Notices]
[Pages 62576-62582]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68007; File No. SR-NYSEMKT-2012-48]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Amending Sections
110, 801, 803 and 805 of the Exchange's Company Guide 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 MKT LLC (the ``Exchange'' or
``NYSE MKT'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which filing was amended and replaced in its
entirety by Amendment No. 1 thereto on October 1, 2012, and 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 Sections 110, 801, 803 and 805 of
the Exchange's Company Guide (the ``Company Guide'') 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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[[Page 62577]]
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.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 1 to SR-NYSEMKT-2012-48 (the ``filing'')
replaces the original Filing submitted on September 25, 2012 in its
entirety. Amendment No. 1 corrects a single error in the rule text in
Exhibit 5 as originally filed. The error was in Section 805(c)(5) under
the heading ``Transition Period.''
NYSE MKT proposes to amend Sections 110, 801, 803 and 805 of the
Company Guide to comply with the requirements of SEC Rule 10C-1.
The proposed changes to Sections 110, 801, 803 and 805 will become
operative on July 1, 2013. Consequently, the existing text of these
sections will remain in the Company Guide 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 Company
Guide 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.
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\6\ Pub. L. No. 111-203, 124 Stat. 1900 (2010).
\7\ 15 U.S.C. 78j-3.
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Rule 10C-1 does not by its terms require a national securities
exchange to mandate that listed companies must have a compensation
committee. However, in the absence of a compensation committee, most of
the provisions of Rule 10C-1 applicable to compensation committees are
applicable to ``the members of the board of directors who oversee
executive compensation matters on behalf of the board of directors.''
\8\ NYSE MKT's listing standard with respect to executive compensation,
Section 805 of the Company Guide, provides that the compensation of the
chief executive officer of a listed company must be determined, or
recommended to the board for determination, either by a compensation
committee comprised of independent directors or by a majority of the
independent directors on the company's board of directors.
Consequently, if a listed company does not have a compensation
committee, the Exchange's proposed amendments to its rules pursuant to
Rule 10C-1 would apply to the independent directors of the listed
company individually and as a group, as applicable. The Exchange
proposes to amend Section 805(a) to provide that all references to a
listed company's compensation committee in Section 805 will, in the
case of a listed company that does not have a compensation committee,
be applicable to the listed company's independent directors as a group,
and the same approach is utilized in this filing.
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\8\ See the definition of the term ``compensation committee'' in
Rule 10C-1(c)(2)(iii).
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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
Section 803(A)(2). That section provides that no director qualifies as
independent unless the issuer's board of directors affirmatively
determines that the director does not have a relationship that would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. In addition, Section 803(A)(2) 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\ The following are the ``bright line'' tests set forth in
Section 803(A)(2): (a) The director is, or during the past three
years was, employed by the company, other than prior employment as
an interim executive officer (provided the interim employment did
not last longer than one year); (b) The director accepted or has an
immediate 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: (i)
Compensation for board or board committee service; or, (ii)
compensation paid to an immediate family member who is an employee
(other than an executive officer) of the company; or, (iii)
compensation received for former service as an interim executive
officer (provided the interim employment did not last longer than
one year); or, (iv) benefits under a tax-qualified retirement plan,
or non-discretionary compensation; (c) The director is an immediate
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; (d) The director is, or has an immediate family member who
is, a partner in, or a controlling shareholder or an executive
officer of, any organization to which the company made, or from
which the company received, payments (other than those arising
solely from investments in the company's securities or payments
under non-discretionary charitable contribution matching programs)
that exceed 5% of the organization's consolidated gross revenues for
that year, or $200,000, whichever is more, in any of the most recent
three fiscal years; (e) The director is, or has an immediate family
member who is, employed as an executive officer of another entity
where at any time during the most recent three fiscal years any of
the issuer's executive officers serve on the compensation committee
of such other entity; or (f) The director is, or has an immediate
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. In lieu of Section 803A(2)(a) through (f), a
director of a business development company is considered to be
independent if he or she is not an ``interested person'' of the
company, as defined in Section 2(a)(19) of the Investment Company
Act of 1940.
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The provisions of Section 803(A)(2) will continue to be applicable
to
[[Page 62578]]
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 Section 803(A)(2), in addition to the independence
requirements proposed specifically for compensation committee service.
The Exchange proposes to amend Section 803(A)(2) of the Company
Guide 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, or, in the case of a company that does
not have a compensation committee, in affirmatively determining the
independence of all independent 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 explicitly
enumerated in Rule 10C-1(b)(ii) that are set forth in proposed Section
805(c)(1). When considering the sources of a director's compensation in
determining his independence for purposes of compensation committee
service, proposed new commentary .03 to Section 805 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 commentary 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 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 Section 805(c)(1) 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 Section 803(A)(2) of the Company
Guide 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, Section 803(A)(2) already
requires the board to consider any relationship that would interfere
with the director's exercise of independent judgment in carrying out
the responsibilities of a director. The Exchange believes that these
requirements with respect to general director independence, when
combined with the specific considerations required by proposed Section
805(c)(1), 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 (c)(3) to Section 805.
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.
[[Page 62579]]
Accordingly, the Exchange proposes to add as new subsection (c)(4)
to Section 805 a provision specifying that, before engaging an adviser,
the compensation committee must consider the factors enumerated above.
As proposed, Section 805(c)(4) 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 Rule 805 an explicit statement that
nothing in Section 805(c) 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 Section 805 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 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 new Rule 805(c)(2), 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.\19\ However, the Exchange proposes to modify this cure
provision by limiting its use to circumstances where the committee
continues to have a majority of independent directors, as this would
ensure that the applicable 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).
\19\ See proposed Section 803(c)(3).
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Transition Periods
The Adopting Release contemplates that exchanges may provide
transition periods through the exemptive authority provided to the
exchanges under Rule 10C-1(b)(1)(iii).\20\ Consistent with the
transition periods approved by the SEC for inclusion in the Exchange's
current corporate governance requirements at the time of their original
adoption,\21\ the Exchange proposes to adopt new Section 805(c)(5),
under which listed companies would have until the earlier of their
first annual meeting after January 15, 2014, or October 31, 2014, to
comply with the new Section 805(c)(1) compensation committee
independence standards. Existing compensation committee independence
standards would continue to apply pending the transition to the new
independence standards. The Exchange believes that its prior use of a
similar transition period was satisfactory and that it is reasonable to
follow the same approach in connection with the proposed changes to the
compensation committee independence standards. In addition, the
Exchange proposes to continue to apply to the proposed new compensation
committee requirements the existing transition periods available to
newly-listed companies under Section 809(a) of the Company Guide.\22\
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\20\ See Adopting Release at 38444.
\21\ See Securities Exchange Act Release No. 48863 (December 1,
2003), 68 FR 68432 (December 8, 2003) (SR-Amex-2003-65).
\22\ Section 809(a) affords companies that have listed in
conjunction with their initial public offering exemptions from all
board composition requirements consistent with the exemptions
afforded in Exchange Act Rule 10A-3. That is, for each applicable
committee that the company establishes (i.e., nominating and/or
compensation) the company must have one independent member at the
time of listing, a majority of independent members within 90 days of
listing and all independent members within one year.
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The Exchange proposes to exempt smaller reporting companies \23\
from compliance with the proposed new independence requirements with
respect to compensation committee service. Under SEC Rule 12b-2, a
smaller reporting company is required to test whether it continues to
qualify for that status as of the last business day of its second
quarter of each fiscal year (the ``Smaller Reporting Company
Determination Date'') and ceases as of the first day of the next fiscal
year to be able to avail itself of the benefits under SEC rules
applicable to smaller reporting companies. Consequently, the Exchange
proposes to include in proposed Section 805(c)(5) a transition
provision applicable to companies that cease to be smaller reporting
companies and become subject to the compensation committee independence
requirements of proposed Section 805(c)(1).\24\ As proposed, a company
that ceases to be a smaller reporting company would be required, if
applicable, to (I) have a committee composed entirely of members that
meet the independence requirements of proposed Section 805(c) within
six months of the Smaller Reporting Company Determination Date and (II)
have a compensation committee as of the Smaller Reporting Company
Determination Date that complies with the requirements of proposed
Section 805(c)(4) with respect to compensation consultant independence
considerations.
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\23\ As defined in SEC Rule 12b-2 and Item 10(f) of Regulation
S-K.
\24\ A company that is otherwise exempt from the requirement to
have an independent compensation committee when it ceases to be a
smaller reporting company would not, of course, be subject to a
transition period. See discussion infra.
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General Exemptions
Rule 10C-1(b)(5) \25\ provides an automatic exemption from the
application of the entirety of Rule 10C-1 for controlled companies and
smaller reporting companies,\26\ and Rule 10C-1(b)(1)(iii)(A) \27\
provides an automatic
[[Page 62580]]
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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\25\ 17 CFR 240.10C-1(b)(5).
\26\ The Exchange proposes to amend subsection (h) of Section
801 to include a statement that smaller reporting companies are
required to comply with Section 805(c), with the exception of the
compensation committee independence requirements of [sic] Section
803(c)(1) [sic] and the requirements of proposed Section 805(c)(4)
with respect to compensation consultant independence considerations.
The same statement will be included in proposed Commentary .01 to
Section 805. In addition, the Exchange proposes to amend Section
805(b) to clarify that henceforth only smaller reporting companies
will be eligible to avail themselves of the ability of the board
under exceptional and limited circumstances to appoint a non-
independent director to the compensation committee.
\27\ 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 issuers 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, companies in
bankruptcy, and open-end and closed-end funds that are registered under
the 1940 Act, asset-backed issuers and other passive business
organizations (such as royalty trusts) or derivatives and special
purpose securities listed pursuant to Exchange Rules 1000, and 1200 and
Sections 106, 107 and 118B would be exempt from both the new
compensation committee independence requirements and the new
compensation adviser requirements. 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 (such as royalty trusts)); 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.
Foreign private issuers \28\ are currently permitted by Section 110
to apply for an exemption from the Exchange's compensation committee
requirements. 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),\29\ from the proposed new compensation
committee requirements to foreign private issuers that seek an
exemption on the basis that they follow home country practice. The
Exchange notes that Section 110 provides that foreign based entities
availing themselves of exemptions from compliance with Exchange rules
must provide English language disclosure of any significant ways in
which their corporate governance practices differ from those followed
by domestic companies pursuant to the Exchange's standards. Section 110
currently provides that this disclosure may be provided on the
company's Web site and/or in its annual report as distributed to
shareholders in the U.S. As the Exchange no longer requires companies
to distribute annual reports, except for its requirements in Section
610 with respect to the Web site posting and distribution of annual
reports filed with the SEC, the Exchange proposes to modify this
provision to provide that a company must either include this disclosure
on its web site or in the annual report it is required to file with the
SEC that includes audited financial statements (including on Forms 10-
K, 20-F, or 40-F) While Section 110 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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\28\ The term ``foreign private issuer'' used in Section 110 is
defined in Exchange Act Rule 3b-4(c).
\29\ 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 Section 805. 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 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) \30\ of the Exchange Act in general, and
furthers the objectives of Section 6(b)(5) of the Exchange Act,\31\ 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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\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendments to its
compensation committee listing standards are consistent with the
protection of investors and the public interest in that they strengthen
the independence requirements for compensation committee membership,
provide additional authority to compensation committees and require
compensation committees to consider the independence of compensation
consultants.
The Exchange believes that the general exemptions from the proposed
requirements that it is granting to foreign private issuers that
request an exemption based on home country practice 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
[[Page 62581]]
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.\32\ 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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\32\ 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. Section
803(A) provides that, in making its affirmative determination with
respect to a director's independence, the board must satisfy itself
that the director ``does not have a relationship that would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director.'' 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
listing standards a statement that a single factor may be sufficiently
material to render a director non-independent, as this is clearly the
intention of the listing standards as drafted. Section 803(A) in its
current form and in its proposed amended form requires the board to
consider the materiality of each separate relationship between the
director and the listed company or its management.
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.
[[Page 62582]]
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 rule-comments@sec.gov. Please include
File Number SR-NYSEMKT-2012-48 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-NYSEMKT-2012-48. 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-NYSEMKT-2012-48, and should
be submitted on or before November 5, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25222 Filed 10-12-12; 8:45 am]
BILLING CODE 8011-01-P