[Federal Register Volume 77, Number 199 (Monday, October 15, 2012)]
[Notices]
[Pages 62563-62572]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25281]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68013; File No. SR-NASDAQ-2012-109]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Modify the Listing Rules
for Compensation Committees To Comply With Rule 10C-1 Under the
Exchange Act and Make Other Related Changes
October 9, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on September 25, 2012, The NASDAQ Stock Market LLC
(``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by Nasdaq. 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\ 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
Nasdaq proposes to modify the listing rules for compensation
committees to comply with Rule 10C-1 under the Exchange Act and make
other related changes. The text of the proposed rule change is
available on Nasdaq's Web site at http://nasdaq.cchwallstreet.com, at
Nasdaq's principal office, and at the Commission's Public Reference
Room.
Nasdaq will implement the proposed rule upon approval. Proposed
Nasdaq Listing Rule 5605(d)(3), which requires compensation committees
to have the specific responsibilities and authority necessary to comply
with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act,
shall be effective immediately.\3\ To the extent a Company does not
have a compensation committee, the provisions of this rule shall apply
to the Independent Directors who determine, or recommend to the board
for determination, the compensation of the chief executive officer and
all other Executive Officers of the Company.
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\3\ The Commission notes that this portion of the proposed rule,
proposed Nasdaq Listing Rule 5605(d)(3), will be effective upon
approval by the Commission.
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Companies must comply with the remaining provisions of the amended
listing rules by the earlier of: (1) Their second annual meeting held
after the date of approval of this proposal; or (2) December 31, 2014.
Until a Company is required to comply with the amended listed rules, it
must continue to comply with Nasdaq's existing listing rules.
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, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified
[[Page 62564]]
in Item IV below. Nasdaq has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the ``Dodd-Frank Act'') \4\ added Section 10C
to the Exchange Act.\5\ Section 10C required the Commission to direct
the national securities exchanges, including Nasdaq, and national
securities associations to prohibit the listing of any equity security
of an issuer, with certain exemptions, that does not comply with
Section 10C's requirements relating to compensation committees and
advisers. To effect this requirement, the Commission has adopted Rule
10C-1 under the Exchange Act, which became effective on July 27, 2012.
Rule 10C-1 requires each national securities exchange and national
securities association to provide to the Commission, no later than
September 25, 2012, proposed rules or rule amendments that comply with
the requirements of Rule 10C-1.\6\
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\4\ Public Law 111-203, 124 Stat. 1376 (2010).
\5\ 15 U.S.C. 78j-3.
\6\ See 17 CFR 240.10C-1(a)(4)(i).
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Rule 10C-1 generally requires that:
Each member of the compensation committee of a listed
issuer must be an independent member of the board of directors;
in determining independence requirements for compensation
committee members, exchanges must consider relevant factors, including,
but not limited to:
The source of compensation of a member, including any
consulting, advisory or other compensatory fee paid by the issuer to
such member; and
whether the member is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the issuer;
the compensation committee must have the authority to
retain or obtain the advice of a compensation consultant, independent
legal counsel or other compensation adviser;
the listed issuer must provide for appropriate funding, as
determined by the compensation committee, for payment of reasonable
compensation to such compensation advisers;
the compensation committee may select such compensation
advisers only after taking into consideration six independence factors
that are enumerated in Rule 10C-1, as well as any other factors
identified by an exchange; and
certain categories of issuers, including, but not limited
to, controlled companies and smaller reporting companies, are generally
exempt from all of Rule 10C-1, while other categories of issuers,
including, but not limited to, foreign private issuers that provide
certain disclosures, are specifically exempt from the requirement to
have a fully independent compensation committee.
General Overview of Nasdaq's Proposals
Nasdaq is proposing to modify its compensation-related listing
rules, as required by Rule 10C-1. Generally, Nasdaq's proposals provide
that:
Companies \7\ must have a compensation committee
consisting of at least two members, each of whom must be an Independent
Director \8\ as defined under Nasdaq's current listing rules;
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\7\ ``Company'' means ``the issuer of a security listed or
applying to list on Nasdaq.'' Nasdaq Listing Rule 5005(a)(6).
\8\ For a discussion of the definition of the term ``Independent
Director,'' see the section entitled ``Compensation Committee
Composition--General Independence Definition'' below.
Notwithstanding any of the proposed changes, and consistent with
Nasdaq's existing listing rules, a Company's board has the
responsibility to make an affirmative determination that no
Independent Director has a relationship that, in the opinion of the
board, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
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compensation committee members must not accept directly or
indirectly any consulting, advisory or other compensatory fee, other
than for board service, from a Company or any subsidiary thereof;
in determining whether a director is eligible to serve on
a compensation committee, a Company's board must consider whether the
director is affiliated with the Company, a subsidiary of the Company or
an affiliate of a subsidiary of the Company to determine whether such
affiliation would impair the director's judgment as a member of the
compensation committee;
Companies may continue to rely on Nasdaq's existing
exception that allows certain non-Independent Directors to serve on a
compensation committee under exceptional and limited circumstances;
if a Company fails to comply with the compensation
committee composition requirements in certain circumstances, it may
rely on a cure period;
Companies must adopt a formal, written compensation
committee charter that must specify the compensation committee
responsibilities and authority in Rule 10C-1 relating to the: (i)
Authority to retain compensation consultants, independent legal counsel
and other compensation advisers; (ii) authority to fund such advisers;
and (iii) responsibility to consider certain independence factors
before selecting such advisers, other than in-house legal counsel;
Companies must review and reassess the adequacy of the
compensation committee charter on an annual basis;
Nasdaq's existing exemptions from, and phase-in schedules
for, the compensation-related listing rules remain generally unchanged;
and
Smaller Reporting Companies \9\ must have a compensation
committee comprised of at least two Independent Directors and a formal
written compensation committee charter or board resolution that
specifies the committee's responsibilities and authority, but such
Companies are not required to adhere to the compensation committee
eligibility requirements relating to compensatory fees and affiliation,
or the requirements relating to compensation consultants, independent
legal counsel and other compensation advisers that Nasdaq is proposing
to adopt under Rule 10C-1.
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\9\ Smaller Reporting Company is defined in Rule 12b-2 under the
Exchange Act.
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Rule 10C-1 requires Nasdaq to include in its submission: (i) A
review of whether and how its existing or proposed listing rules
satisfy the requirements of Rule 10C-1; (ii) a discussion of the
consideration of factors relevant to compensation committee
independence conducted by Nasdaq; and (iii) the definition of
independence applicable to compensation committee members that Nasdaq
proposes to adopt or retain in light of such review.\10\ Nasdaq's
proposals and its underlying analysis are discussed in depth below.
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\10\ See 17 CFR 240.10C-1(a)(4)(i).
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Requirement To Have a Compensation Committee
Nasdaq's current listing rules require that compensation of the
chief executive officer and all other Executive Officers \11\ of a
Company must be determined, or recommended to the board for
determination, either by: (i) A compensation committee comprised solely
of Independent Directors; or (ii) Independent Directors constituting a
majority of the board's Independent
[[Page 62565]]
Directors in a vote in which only Independent Directors participate
(the ``Alternative'').\12\
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\11\ ``Executive Officer'' is defined as an officer ``covered in
Rule 16a-1(f) under the [Exchange] Act.'' Nasdaq Listing Rule
5605(a)(1).
\12\ See Nasdaq Listing Rules 5605(d)(1) and (2).
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Although it was not required to do so by Rule 10C-1,\13\ Nasdaq
considered whether the Alternative remains appropriate given the
heightened importance of compensation decisions in today's corporate
governance environment. Since responsibility for executive compensation
decisions is one of the most important responsibilities entrusted to a
board of directors, Nasdaq believes that there are benefits from a
board having a standing committee dedicated solely to oversight of
executive compensation. Specifically, directors on a standing
compensation committee may develop expertise in a Company's executive
compensation program in the same way that directors on a standing audit
committee develop expertise in a Company's accounting and financial
reporting processes. In addition, a formal committee structure may help
promote accountability to stockholders for executive compensation
decisions.
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\13\ See Securities Exchange Act Release No. 67220 (June 20,
2012), 77 FR 38422, 38425 (June 27, 2012) (the ``Adopting Release'')
(stating that ``[t]he final rule will not require a listed issuer to
have a compensation committee or a committee that performs functions
typically assigned to a compensation committee.'')
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Nasdaq also considered whether eliminating the Alternative would
pose an undue hardship on Nasdaq-listed Companies. Only a small number
of Companies rely on the Alternative,\14\ and since the Alternative
requires certain executive compensation decisions to be determined, or
recommended to the board for determination, by a majority of the
board's Independent Directors, these Companies already have some
directors who focus on executive compensation. In addition, Nasdaq
would allow a transition period for these Companies to implement a
standing compensation committee. As a result, Nasdaq does not believe
that eliminating the Alternative would be unduly burdensome to
Companies.
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\14\ As of June 30, 2012, only 25 of 2,636 Nasdaq-listed
Companies relied on the Alternative in lieu of having a standing
compensation committee.
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As a result, Nasdaq proposes to eliminate the Alternative and
require Nasdaq-listed Companies to have a standing compensation
committee with the responsibility for determining, or recommending to
the full board for determination, the compensation of the chief
executive officer and all other Executive Officers of the Company.
Compensation Committee Size
Nasdaq's current listing rules do not impose size requirements on
any board committees, other than the audit committee, which must
consist of at least three members.\15\ As a result, it is possible to
have a compensation committee comprised of only one member under
Nasdaq's current listing rules.
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\15\ See Nasdaq Listing Rule 5605(c)(2)(A).
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Although it was not required to do so by Rule 10C-1, Nasdaq
considered whether it is appropriate to impose a minimum size
requirement on a compensation committee. Given the importance of
compensation decisions to stockholders, Nasdaq believes that it is
appropriate to have more than one director responsible for these
decisions and that therefore, a compensation committee should consist
of at least two members. Nasdaq then considered whether to require
compensation committees to adhere to the same size requirement as audit
committees and have a minimum of three members. However, Nasdaq was
concerned that it might be difficult for Companies, especially smaller
Companies, to comply with a requirement to have a three-member
compensation committee, in addition to a three-member audit committee.
Nasdaq also considered whether imposing a minimum size requirement
on a compensation committee would be unduly burdensome to Nasdaq-listed
Companies, especially in combination with the proposal to eliminate the
Alternative, as discussed above. Since only a small number of Companies
currently have a compensation committee of one member and Nasdaq would
allow a transition period to add an additional member, Nasdaq does not
believe that requiring a compensation committee to consist of at least
two members would be an undue hardship for Nasdaq-listed Companies.\16\
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\16\ As of June 30, 2012, only 26 of 2,636 Nasdaq-listed
Companies had a compensation committee of only one member.
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As a result, Nasdaq proposes to require a compensation committee of
a Company to consist of at least two members of the board of directors.
Compensation Committee Composition--General Independence Definition
Nasdaq's current listing rules require a compensation committee to
be comprised solely of Independent Directors, as defined in Nasdaq
Listing Rule 5605(a)(2).\17\ This definition includes a two-part test
for independence. First, there are certain categories of directors who
cannot be considered independent, including:
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\17\ See Nasdaq Listing Rules 5605(d)(1) and (2).
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A director who is an Executive Officer or employee of the
Company; \18\
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\18\ See Nasdaq Listing Rule 5605(a)(2). The rule's reference to
the term ``Company'' includes any parent or subsidiary of the
Company. The term ``parent or subsidiary'' is intended to cover
entities the Company controls and consolidates with the Company's
financial statements as filed with the Commission (but not if the
Company reflects such entity solely as an investment in its
financial statements). See IM-5605.
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a director who is, or at any time during the past three
years was, employed by the Company; \19\
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\19\ See Nasdaq Listing Rule 5605(a)(2)(A).
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A director who accepted or who has a Family Member \20\
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; \21\
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\20\ ``Family Member'' is defined as ``a person's spouse,
parents, children and siblings, whether by blood, marriage or
adoption, or anyone residing in such person's home.'' Nasdaq Listing
Rule 5605(a)(2).
\21\ See Nasdaq Listing Rule 5605(a)(2)(B). This prohibition
includes exceptions for: (i) Compensation for board or board
committee service; (ii) compensation paid to a Family Member who is
an employee (other than an Executive Officer) of the Company; or
(iii) benefits under a tax-qualified retirement plan, or non-
discretionary compensation.
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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; \22\
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\22\ See Nasdaq Listing Rule 5605(a)(2)(C).
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A director who is, or has a Family Member who is, a
partner in, or a controlling Shareholder \23\ 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; \24\
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\23\ ``Shareholder'' is defined as ``a record or beneficial
owner of a security listed or applying to list. For purposes of
[Nasdaq's Listing Rules], the term `Shareholder' includes, for
example, a limited partner, the owner of a depository receipt, or
unit.'' Nasdaq Listing Rule 5005(a)(38).
\24\ See Nasdaq Listing Rule 5605(a)(2)(D). This prohibition
includes exceptions for payments: (i) Arising solely from
investments in the Company's securities; or (ii) under non-
discretionary charitable contribution matching programs.
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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
[[Page 62566]]
compensation committee of such other entity; \25\ or
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\25\ See Nasdaq Listing Rule 5605(a)(2)(E).
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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.\26\
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\26\ See Nasdaq Listing Rule 5605(a)(2)(F). In the case of an
investment company, in lieu of the prohibitions in Nasdaq Listing
Rule 5605(a)(2)(A)-(F), a director cannot be considered independent
if he or she 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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Second, a Company's board of directors must make an affirmative
determination that each Independent Director has no relationship that,
in the opinion of the board, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director.\27\
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\27\ See Nasdaq Listing Rule 5605(a)(2) and IM-5605.
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Nasdaq proposes to continue unchanged its existing requirement that
a compensation committee be comprised solely of Independent Directors,
as defined in Nasdaq Listing Rule 5605(a)(2).
Compensation Committee Composition--Compensatory Fees
Rule 10C-1 requires that in determining the independence
requirements for compensation committee members, Nasdaq must consider
relevant factors, including, but not limited to, the source of
compensation of a member, including any consulting, advisory or other
compensatory fee paid by the issuer to the member.\28\ In considering
this particular factor, Nasdaq reviewed its current listing rules
relating to compensatory fees. As outlined above, Nasdaq's current
listing rules require compensation committee members to be Independent
Directors. Independent Director is defined to exclude any director who:
(i) Accepted any compensation from the Company in excess of $120,000
during any period of twelve consecutive months within the prior three
years; or (ii) 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.\29\ As a result, directors who receive compensatory
fees from a Company below these thresholds may serve on a compensation
committee under Nasdaq's current listing rules.
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\28\ See 17 CFR 240.10C-1(b)(1)(ii)(A).
\29\ See Nasdaq Listing Rules 5605(a)(2)(B) and (D).
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This is in contrast to Nasdaq's current listing rules relating to
audit committees, which require audit committee members to meet the
criteria for independence set forth in Rule 10A-3(b)(1) under the
Exchange Act, subject to certain exemptions.\30\ Rule 10A-3(b)(1)
prohibits an audit committee member from accepting directly or
indirectly any consulting, advisory or other compensatory fee from an
issuer or any subsidiary, with certain exemptions.
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\30\ See Nasdaq Listing Rule 5605(c)(2)(A)(ii).
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After reviewing its current listing rules, Nasdaq concluded that
there is no compelling justification to have different independence
standards for audit and compensation committee members with respect to
the acceptance of compensatory fees from a Company. Accordingly, Nasdaq
proposes to adopt the same standard for compensation committee members
that applies to audit committee members under Rule 10A-3 under the
Exchange Act with respect to compensatory fees. Specifically, Nasdaq's
proposal prohibits a compensation committee member from accepting
directly or indirectly any consulting, advisory or other compensatory
fee from an issuer or any subsidiary. As in Rule 10A-3, compensatory
fees shall not include: (i) Fees received as a member of the
compensation committee, the board of directors or any other board
committee; or (ii) the receipt of fixed amounts of compensation under a
retirement plan (including deferred compensation) for prior service
with the Company (provided that such compensation is not contingent in
any way on continued service).\31\ Also similar to Rule 10A-3, the
proposed requirement applicable to compensation committee members will
not include a ``look-back'' period.\32\ Accordingly, the prohibition on
the receipt of any consulting, advisory or other compensatory fee by a
compensation committee member begins with the member's term of service
on the compensation committee.\33\
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\31\ See 17 CFR 240.10A-3(b)(1).
\32\ See Securities Exchange Act Release No. 47654 (April 9,
2003), 68 FR 18788, 18792 (April 16, 2003) (stating that ``[t]he
final rule, like [the] proposal, applies the prohibitions only to
current relationships with the audit committee member and related
persons. They do not extend to a `look back' period before
appointment to the audit committee * * *.'')
\33\ Nasdaq notes, however, that as discussed above,
compensation committee members must be Independent Directors as
defined in Nasdaq Listing Rule 5605(a)(2). Each of the bright-line
tests in this definition includes a three-year ``lookback'' period.
See Nasdaq Listing Rule 5605(a)(2).
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Compensation Committee Composition--Affiliation
Rule 10C-1 requires that in determining the independence
requirements for compensation committee members, Nasdaq also must
consider whether a member is affiliated with the issuer, a subsidiary
of the issuer or an affiliate of a subsidiary of the issuer.\34\ In
considering this particular factor, Nasdaq reviewed its current listing
rules relating to affiliation. As outlined above, Nasdaq's current
listing rules require compensation committee members to be Independent
Directors. The definition of the term ``Independent Director'' does not
refer to affiliation, although the definition does exclude certain
individuals who may be considered affiliates from being an Independent
Director. For example, any director who is an Executive Officer of the
Company cannot be considered an Independent Director.\35\
Significantly, the Interpretive Material to Nasdaq's definition of
Independent Director states that ``[b]ecause Nasdaq does not believe
that ownership of Company stock by itself would preclude a board
finding of independence, it is not included in the aforementioned
objective factors.'' \36\
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\34\ See 17 CFR 240.10C-1(b)(1)(ii)(B).
\35\ See Nasdaq Listing Rule 5605(a)(2).
\36\ IM-5605.
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Beyond the definition of Independent Director, Nasdaq's current
listing rules relating to audit committees require audit committee
members to meet the criteria for independence set forth in Rule 10A-
3(b)(1) under the Exchange Act, subject to certain exemptions.\37\ Rule
10A-3(b)(1) prohibits an audit committee member from being an
affiliated person of the issuer or any subsidiary thereof. The term
``affiliate'' means ``a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.'' \38\ However, Rule 10A-3
includes a safe harbor for a person that is not: (i) The beneficial
owner, directly or indirectly, of more than 10% of any class of voting
equity securities of the specified person; and
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(ii) an executive officer of a specified person.\39\
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\37\ See Nasdaq Listing Rule 5605(c)(2)(A)(ii).
\38\ See 17 CFR 240.10A-3(e)(1).
\39\ Id.
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After reviewing its current listing rules, Nasdaq considered
whether to propose that compensation committee members must meet the
same standard applicable to audit committee members under Rule 10A-3
under the Exchange Act with respect to affiliation, similar to its
proposal with respect to compensatory fees. However, Nasdaq concluded
that such a blanket prohibition would be inappropriate for compensation
committees. In fact, Nasdaq believes that it may be appropriate for
certain affiliates, such as representatives of significant
stockholders, to serve on compensation committees since their interests
are likely aligned with those of other stockholders in seeking an
appropriate executive compensation program.
As a result, Nasdaq proposes that Companies' boards of directors
should consider affiliation in making an eligibility determination for
compensation committee members, but it does not propose bright-line
rules around this factor. In making this eligibility determination, a
Company's board specifically must consider whether the director is
affiliated with the Company, a subsidiary of the Company or an
affiliate of a subsidiary of the Company to determine whether such
affiliation would impair the director's judgment as a member of the
compensation committee. In performing this analysis, a board of
directors is not required to apply a ``look-back'' period, and is
therefore required to consider affiliation only with respect to
relationships that occur during an individual's term of service as a
compensation committee member.
A board may conclude that it is appropriate for a director who is
an affiliate to serve on the compensation committee. While this differs
from the requirement applicable to audit committee members, Nasdaq
could identify no compelling policy justification for precluding all
affiliates, such as owners of a Company, even those with very large
stakes, from serving on the compensation committee.
Compensation Committee Composition--Other
Rule 10C-1 permits Nasdaq to consider other relevant factors in
determining the independence requirements for compensation committee
members.\40\ After reviewing its current and proposed listing rules,
Nasdaq concluded that these rules are sufficient to ensure the
independence of compensation committee members. Therefore, Nasdaq
determined not to propose further independence requirements.
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\40\ See 17 CFR 240.10C-1(b)(1)(ii).
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Exceptional and Limited Circumstances Exception
With minor edits, Nasdaq proposes to retain its existing exception
that allows a Company to have a non-Independent Director serve on the
compensation committee under exceptional and limited circumstances.\41\
Under this exception, if a compensation committee consists of at least
three members, one director who is not an Independent Director and is
not currently an Executive Officer or employee or a Family Member of an
Executive Officer, may be appointed to the compensation committee if
the board, under exceptional and limited circumstances, determines that
such individual's membership on the committee is required by the best
interests of the Company and its Shareholders. A Company that relies on
this exception must disclose either on or through the Company's Web
site or in the proxy statement for the next annual meeting subsequent
to such determination (or, if the Company does not file a proxy, in its
Form 10-K or 20-F), the nature of the relationship and the reasons for
the determination. In addition, the Company must provide any disclosure
required by Instruction 1 to Item 407(a) of Regulation S-K regarding
its reliance on this exception. A member appointed under this exception
may not serve longer than two years.
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\41\ See Nasdaq Listing Rule 5605(d)(3).
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In addition to the existing exception for compensation committees,
Nasdaq's current listing rules include similar exceptions for audit and
nominations committees.\42\ While these exceptions are used
infrequently by Nasdaq-listed Companies,\43\ Nasdaq believes they are
an important means to allow Companies flexibility as to board and
committee membership and composition in unusual circumstances, which
may be particularly important for smaller Companies.
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\42\ See Nasdaq Listing Rules 5605(c)(2)(B) and 5605(e)(3).
Nasdaq recently amended the exceptions for all three committees to
allow a Company to rely on the exception for a non-Independent
Director who is a Family Member of a non-executive employee of the
Company. See Securities Exchange Act Release No. 67468 (July 19,
2012), 77 FR 43618 (July 25, 2012) (SR-NASDAQ-2012-062). Nasdaq
proposes to retain this aspect of the exception for compensation
committees, as well as audit and nominations committees.
\43\ On June 30, 2012, ten of 2,636 Nasdaq-listed Companies were
using one of these exceptions: six Companies for the audit committee
and four Companies for the nominations committee. No Companies were
using this exception for the compensation committee.
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Nasdaq would allow a Company to avail itself of the exception even
for a director who fails the new requirements adopted pursuant to Rule
10C-1.
Cure Period
Consistent with Rule 10C-1, Nasdaq's proposal provides Companies
with an opportunity to cure defects in the composition of compensation
committees.\44\ The proposed cure period is copied from the cure period
in Nasdaq's current listing rules for noncompliance with the
requirement to have a majority independent board.\45\
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\44\ See 17 CFR 240.10C-1(a)(3).
\45\ See Nasdaq Listing Rule 5605(b)(1)(A).
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Under Nasdaq's proposal, if a Company fails to comply with the
compensation committee composition requirements due to one vacancy, or
one compensation committee member ceases to be independent due to
circumstances beyond the member's reasonable control, the Company shall
regain compliance by the earlier of the next annual shareholders
meeting or one year from the occurrence of the event that caused the
noncompliance. However, if the annual shareholders meeting occurs no
later than 180 days following the event that caused the noncompliance,
the Company shall instead have 180 days from such event to regain
compliance. 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. A Company relying on this
provision shall provide notice to Nasdaq immediately upon learning of
the event or circumstance that caused the noncompliance.
Compensation Committee Charter
Nasdaq proposes to require each Company to certify that it has
adopted a formal written compensation committee charter and that the
compensation committee will review and reassess the adequacy of the
formal written charter on an annual basis.\46\ This proposal is similar
to Nasdaq's current requirement for Companies to certify as to the
adoption of a formal written audit committee charter, except that the
proposed requirement for annual review and reassessment of the
[[Page 62568]]
adequacy of the compensation committee charter is written
prospectively, rather than retrospectively.\47\ In other words, the
proposed compensation committee charter requirement states that the
compensation committee will review and reassess the adequacy of the
charter on an annual basis, while the current audit committee charter
requirement states that the audit committee has reviewed and reassessed
the adequacy of the charter on an annual basis.\48\
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\46\ Smaller Reporting Companies may adopt either a formal
written compensation committee charter or a board resolution that
specifies the committee's responsibilities and authority, except
Smaller Reporting Companies are not required to specify the specific
compensation responsibilities and authority set forth in proposed
Nasdaq Listing Rule 5605(d)(3). For further discussion, see the
section entitled ``Smaller Reporting Companies'' below.
\47\ See Nasdaq Listing Rule 5605(c)(1).
\48\ Nasdaq proposes to make a conforming change to its audit
committee charter requirement to clarify that Companies' annual
review and reassessment of the audit committee charter should be
prospective. This is consistent with Nasdaq's current interpretation
of its audit committee charter requirement. By proposing this
amendment, Nasdaq seeks to minimize differences between the audit
committee and compensation committee charter requirements and to
eliminate potential questions as to whether Nasdaq intended a
discrepancy between these two requirements.
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Nasdaq proposes that the compensation committee charter must
specify:
the scope of the compensation committee's
responsibilities, and how it carries out those responsibilities,
including structure, processes and membership requirements;
the compensation committee's responsibility for
determining, or recommending to the board for determination, the
compensation of the chief executive officer and all other Executive
Officers of the Company;
that the chief executive officer of the Company may not be
present during voting or deliberations by the compensation committee on
his or her compensation; and
the specific compensation committee responsibilities and
authority set forth in proposed Nasdaq Listing Rule 5605(d)(3), which
implements the requirements of Section 10C(b)-(e) of the Exchange Act
and Rule 10C-1(b)(2), (3) and (4)(i)-(vi) thereunder.
The requirement for the charter to specify the scope of the
compensation committee's responsibilities, and how it carries out those
responsibilities, including structure, processes and membership
requirements, is copied from Nasdaq's similar listing rule relating to
audit committee charters.\49\
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\49\ See Nasdaq Listing Rule 5605(c)(1)(A).
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The requirement for the charter to specify the compensation
committee's responsibility for determining, or recommending to the
board for determination, the compensation of the chief executive
officer and all other Executive Officers of the Company, is based upon
Nasdaq's current compensation-related listing rules.\50\ These listing
rules require that the compensation of a Company's chief executive
officer and all other Executive Officers must be determined by (i) a
compensation committee comprised solely of Independent Directors or
(ii) the Independent Directors constituting a majority of the board's
Independent Directors in a vote in which only Independent Directors
participate. As discussed above, Nasdaq proposes to eliminate the
Alternative, and therefore, the compensation of a Company's chief
executive officer and all other Executive Officers must be determined,
or recommended to the board for determination, by a compensation
committee comprised of Independent Directors. Going forward, Nasdaq
proposes to implement this requirement by requiring Companies to
include it in their formal written compensation committee charters.
---------------------------------------------------------------------------
\50\ See Nasdaq Listing Rules 5605(d)(1) and (2).
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The requirement for the charter to specify that the chief executive
officer of the Company may not be present during voting or
deliberations by the compensation committee on his or her compensation
is based upon Nasdaq's current compensation-related listing rules.\51\
Going forward, Nasdaq proposes to implement this requirement by
requiring Companies to include it in their formal written compensation
committee charters.
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\51\ See Nasdaq Listing Rule 5605(d)(1).
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Finally, the requirement for the charter to specify the specific
compensation committee responsibilities and authority set forth in
proposed Nasdaq Listing Rule 5605(d)(3) is modeled after Nasdaq's
similar listing rule relating to audit committee charters.\52\ Proposed
Nasdaq Listing Rule 5605(d)(3) implements the requirements of Section
10C(b)-(e) of the Exchange Act and Rule 10C-1(b)(2), (3) and (4)(i)-
(vi) thereunder. Specifically, the proposed listing rule states that a
compensation committee must have the specific compensation committee
responsibilities and authority necessary to comply with Rule 10C-
1(b)(2), (3) and (4)(i)-(vi) relating to the: (i) Authority to retain
compensation consultants, independent legal counsel and other
compensation advisers; (ii) authority to fund such advisers; and (iii)
responsibility to consider certain independence factors before
selecting such advisers, other than in-house legal counsel.\53\
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\52\ See Nasdaq Listing Rule 5605(c)(1)(D), which requires that
an audit committee charter set forth the specific audit committee
responsibilities and authority set forth in Nasdaq Listing Rule
5605(c)(3). Nasdaq Listing Rule 5605(c)(3) states that an audit
committee must have the specific responsibilities and authority
necessary to comply with Rule 10A-3(b)(2), (3), (4) and (5) under
the Exchange Act, with certain exemptions. Rule 10A-3(b)(2), (3),
(4) and (5) under the Exchange Act concerns responsibilities
relating to: (i) Registered public accounting firms; (ii) complaints
relating to accounting, internal accounting controls or auditing
matters; (iii) authority to engage advisors; and (iv) funding as
determined by the audit committee.
\53\ The independence factors include: (i) The provision of
other services to the issuer by the person that employs the adviser
(the ``Employer''); (ii) the amount of fees received from the issuer
by the Employer, as a percentage of the total revenue of the
Employer; (iii) the policies and procedures of the Employer that are
designed to prevent conflicts of interest; (iv) any business or
personal relationship of the adviser with a member of the
compensation committee; (v) any stock of the issuer owned by the
adviser; and (vi) any business or personal relationship of the
adviser or the Employer with an executive officer of the issuer. See
17 CFR 240.10C-1(b)(4).
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Rule 10C-1 permits Nasdaq to identify other relevant independence
factors that a compensation committee must consider when selecting a
compensation consultant, legal counsel or other adviser.\54\ Nasdaq
considered whether to adopt other independence factors, but ultimately
concluded that the six independence factors enumerated in Rule 10C-1
will provide compensation committees with a broad and sufficient range
of facts and circumstances to consider in making an independence
determination. Like the Commission, Nasdaq seeks to emphasize that a
compensation committee is not required to retain an independent
compensation adviser; rather, a compensation committee is required only
to conduct the independence analysis described in Rule 10C-1 before
selecting a compensation adviser.\55\
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\54\ Id.
\55\ See the Adopting Release, at 38432-3 (stating that
``neither the [Dodd-Frank] Act nor [Rule 10C-1] requires a
compensation adviser to be independent, only that the compensation
committee consider the enumerated independence factors before
selecting a compensation adviser. Compensation committees may select
any compensation adviser they prefer, including ones that are not
independent, after considering the six independence factors outlined
in the [Rule 10C-1].'')
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Exemptions
Rule 10C-1 allows 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.\56\ Nasdaq
proposes that its existing exemptions from the compensation-related
listing rules remain generally unchanged. Nasdaq's current listing
rules include exemptions for: asset-backed issuers and other
[[Page 62569]]
passive issuers,\57\ cooperatives,\58\ limited partnerships,\59\
management investment companies \60\ and Controlled Companies.\61\ For
the same reasons that these categories of Companies have traditionally
been exempt from Nasdaq's compensation-related listing rules, Nasdaq
proposes that they continue to be exempt from its revised listing rules
relating to compensation committees.
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\56\ See 17 CFR 240.10C-1(b)(5).
\57\ See Nasdaq Listing Rule 5615(a)(1). Asset-backed issuers
and other passive issuers have traditionally been exempt from
Nasdaq'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. See
IM-5615-1.
\58\ See Nasdaq Listing Rule 5615(a)(2). Certain member-owned
cooperatives that list their preferred stock are required to have
their common stock owned by their members. Because of their unique
structure and the fact that they do not have a publicly traded class
of common stock, these entities have traditionally been exempt from
Nasdaq's compensation-related listing rules. See IM-5615-2.
\59\ See Nasdaq Listing Rule 5615(a)(4). Nasdaq's compensation-
related listing rules historically have not been applied to limited
partnerships because 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, limited partners do not expect to have a voice
in the operations of the partnership. Limited partnerships also are
exempt from the independence requirements of Rule 10C-1. See 17 CFR
240.10C-1(b)(1)(iii)(A)(1).
\60\ See Nasdaq Listing Rule 5615(a)(5). 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 Nasdaq's compensation-
related listing rules. See IM-5615-4. Open-end management investment
companies registered under the Investment Company Act of 1940 also
are exempt from the independence requirements of Rule 10C-1. See 17
CFR 240.10C-1(b)(1)(iii)(A)(3).
\61\ See Nasdaq Listing Rule 5615(c). This exemption recognizes
that majority Shareholders, including parent companies, have the
right to select directors and control certain key decisions, such as
executive officer compensation, by virtue of their ownership rights.
See IM-5615-5. A Controlled Company is defined as ``a Company of
which more than 50% of the voting power for the election of
directors is held by an individual, a group or another company.''
Nasdaq Listing Rule 5615(c)(1). Controlled Companies also are exempt
from all of the requirements of Rule 10C-1. See 17 CFR 240.10C-
1(b)(5)(ii).
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In addition, Nasdaq's current listing rules provide that a Foreign
Private Issuer may follow its home country practice in lieu of Nasdaq'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.\62\
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. Nasdaq proposes that a Foreign Private
Issuer continue to be allowed to follow its home country practice in
lieu of Nasdaq's revised listing rules relating to compensation
committees if the Foreign Private Issuer provides the disclosures
described above. Nasdaq also proposes to add an additional disclosure
requirement for any Foreign Private Issuer that follows its home
country practice in lieu of the requirement to have an independent
compensation committee to disclose in its annual reports filed with the
Commission the reasons why it does not have such a committee.\63\
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\62\ See Nasdaq Listing Rule 5615(a)(3). Under Nasdaq's listing
rules, Foreign Private Issuer has the same meaning as under Rule 3b-
4 under the Exchange Act. See Nasdaq Listing Rule 5005(a)(18).
Nasdaq'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, except to the extent such exemptions
would be contrary to the public securities laws. See Securities
Exchange Act Release No. 48745 (November 4, 2003), 68 FR 64154,
64165 (November 12, 2003) (SR-NASD-2002-138).
\63\ This proposal 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 a ``foreign private
issuer that discloses in its annual report the reasons that the
foreign private issuer does not have an independent compensation
committee.''
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Phase-In Schedules
Nasdaq proposes that its existing phase-in schedules for the
requirements relating to compensation committee composition remain
generally unchanged. Nasdaq's current listing rules include phase-in
schedules for: Companies listing in connection with an initial public
offering,\64\ Companies emerging from bankruptcy \65\ and Companies
ceasing to be Controlled Companies.\66\ Since each of these categories
of Company did not previously have a compensation committee, each is
allowed to phase in compliance with the compensation committee
composition requirement 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.
Nasdaq proposes that these phase-in schedules remain unchanged under
its revised listing rules, except to clarify that a Company may phase
in compliance with the minimum size requirement and the additional
eligibility requirements adopted pursuant to Rule 10C-1, as well as the
requirement for compensation committee members to be Independent
Directors.\67\
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\64\ See Nasdaq Listing Rule 5615(b)(1).
\65\ See Nasdaq Listing Rule 5615(b)(2).
\66\ See Nasdaq Listing Rule 5615(c)(3).
\67\ To provide an illustration of how the compensation
committee composition requirement will interact with the minimum
size requirement, consider a Company that at the time of listing has
a compensation committee consisting of two members, both of whom are
Independent Directors, but one of whom accepts compensatory fees of
$50,000 annually from the Company pursuant to a consulting
agreement. Although only one of these directors is fully eligible to
serve on the compensation committee, the committee meets the
requirements of Nasdaq's phase-in schedule because it has one fully
eligible member at the time of listing. By the 90th day from
listing, the committee must have a majority of fully eligible
members, so the Company could: (i) Remove the ineligible member and
temporarily have a committee of one fully eligible member; (ii)
replace the ineligible member with a fully eligible member so that
the committee consists of two members, all of whom are fully
eligible; or (iii) add a second fully eligible member so that the
committee consists of three members, a majority of whom are fully
eligible. By one year from listing, the Company's compensation
committee must consist of at least two members, and all members must
by fully eligible under Nasdaq's compensation committee composition
requirement.
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In addition, Nasdaq proposes no changes to the phase-in schedule in
its current listing rules for Companies transferring from other
markets.\68\ Companies transferring from other markets with a
substantially similar requirement shall be afforded the balance of any
grace period afforded by the other market. Companies transferring from
other listed markets that do not have a substantially similar
requirement shall be afforded one year from the date of listing on
Nasdaq to comply with the compensation committee composition
requirements.
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\68\ See Nasdaq Listing Rule 5615(b)(3).
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None of the aforementioned phase-in schedules apply to the
requirement to adopt a formal written compensation committee charter
including the content specified in Nasdaq Listing Rule 5605(d)(1)(A)-
(D).\69\
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\69\ As discussed below under ``Smaller Reporting Companies,''
Nasdaq is proposing a new phase-in schedule for a Company ceasing to
be a Smaller Reporting Company. Nasdaq proposes to allow such a
Company 30 days to certify to Nasdaq that it has adopted a formal
written compensation committee charter including the content
specified in Nasdaq Listing Rule 5605(d)(1)(A)-(D). See footnote 71,
infra.
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Smaller Reporting Companies
While Rule 10C-1 exempts Smaller Reporting Companies from all of
its requirements, Nasdaq's current listing rules do not include any
such exemptions.\70\ Consistent with the
[[Page 62570]]
exemption in Rule 10C-1, however, Nasdaq proposes not to require
Smaller Reporting Companies to adhere to the new requirements relating
to compensatory fees and affiliation, which Nasdaq is proposing in
response to Rule 10C-1, or to incorporate into their formal written
compensation committee charter or board resolution that specifies the
committee's responsibilities and authority the language in Rule 10C-1
regarding compensation advisers. This approach will minimize new costs
imposed on Smaller Reporting Companies and allow them some flexibility
not allowed for larger Companies.
---------------------------------------------------------------------------
\70\ See 17 CFR 240.10C-1(b)(5)(ii).
---------------------------------------------------------------------------
However, as discussed above, Nasdaq proposes to eliminate the
Alternative in its current listing rules that allows compensation
decisions to be made by a majority of the Independent Directors rather
than by a committee composed entirely of Independent Directors. Nasdaq
proposes to eliminate the Alternative for Smaller Reporting Companies,
just like all other Nasdaq-listed Companies. As a result, Smaller
Reporting Companies would be required to have a compensation committee
comprised of at least two Independent Directors as defined under
Nasdaq's existing listing rules.
In addition, Nasdaq proposes that Smaller Reporting Companies must
adopt a formal written compensation committee charter or board
resolution that specifies the committee's responsibilities and
authority. Unlike other Companies, Smaller Reporting Companies may
include this content in a board resolution, rather than a compensation
committee charter, and Smaller Reporting Companies are not required to
review and reassess the adequacy of the charter or board resolution on
an annual basis. The charter or board resolution must specify the same
content as other Companies, except Smaller Reporting Companies are not
required to specify the specific compensation responsibilities and
authority set forth in proposed Nasdaq Listing Rule 5605(d)(3) relating
to the: (i) Authority to retain compensation consultants, independent
legal counsel and other compensation advisers; (ii) authority to fund
such advisers; and (iii) responsibility to consider certain
independence factors before selecting such advisers, other than in-
house legal counsel.\71\
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\71\ Nasdaq notes that Smaller Reporting Companies remain
subject to the disclosure requirements of Item 407(e)(3)(iv) of
Regulation S-K, which were adopted at the same time as Rule 10C-1.
See the Adopting Release.
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Nasdaq also proposes to apply the same phase-in schedule to a
Company ceasing to be a Smaller Reporting Company that applies to a
Company listing in conjunction with its initial public offering. Since
a Smaller Reporting Company is required to have a compensation
committee comprised of at least two Independent Directors, a Company
that has ceased to be a Smaller Reporting Company may use the phase-in
schedule for the additional eligibility requirements relating to
compensatory fees and affiliation, but not for the minimum size
requirement or the requirement that the committee consist only of
Independent Directors. This phase-in schedule will start to run on the
due date of the SEC filing in which the Company is required to report
that it is an issuer other than a Smaller Reporting Company.\72\ During
the phase-in schedule, a Smaller Reporting Company must continue to
comply with the requirement to have a compensation committee comprised
of at least two Independent Directors as defined under Nasdaq's
existing listing rules.
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\72\ Within 30 days after the start of its phase-in schedule, a
Company that has ceased to be a Smaller Reporting Company must
certify to Nasdaq that: (i) It has complied with the requirement in
Nasdaq Listing Rule 5605(d)(1) to have a compensation committee
charter including the content specified in Nasdaq Listing Rule
5605(d)(1)(A)-(D); and (ii) it has, or will within the applicable
phase-in schedule, comply with the requirement in Nasdaq Listing
Rule 5605(d)(2) regarding compensation committee composition.
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Effective Dates/Transition
Nasdaq proposes that Rule 5605(d)(3), relating to compensation
committee responsibilities and authority, shall be effective
immediately.\73\ Specifically, this proposed rule states that a
compensation committee must have the specific compensation committee
responsibilities and authority necessary to comply with Rule 10C-
1(b)(2), (3) and (4)(i)-(vi) under the Act relating to the: (i)
Authority to retain compensation consultants, independent legal counsel
and other compensation advisers; (ii) authority to fund such advisers;
and (iii) responsibility to consider certain independence factors
before selecting such advisers, other than in-house legal counsel. To
the extent a Company does not have a compensation committee, the
provisions of this rule shall apply to the Independent Directors who
determine, or recommend to the board for determination, the
compensation of the chief executive officer and all other Executive
Officers of the Company. Companies should consider under state
corporate law whether to grant these specific responsibilities and
authority through a charter, resolution or other board action; however,
Nasdaq proposes to require only that compensation committees
immediately have such responsibilities and authority. While Nasdaq
proposes that Companies must eventually have a written compensation
committee charter that includes, among others, these responsibilities
and authority, Companies may implement such a charter on the schedule
discussed below.
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\73\ See supra note 3.
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In order to allow Companies to make necessary adjustments to their
boards and committees in the course of their regular annual meeting
schedules, Nasdaq proposes that Companies must comply with the
remaining provisions of the amended listing rules on compensation
committees by the earlier of: (1) Their second annual meeting held
after the date of approval of Nasdaq's amended listing rules; or (2)
December 31, 2014. This transition period is similar to the transition
period used when Nasdaq implemented similar requirements for audit
committees in 2003.\74\
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\74\ See Securities Exchange Act Release No. 48745 (November 4,
2003), 68 FR 64154 (November 12, 2003) (SR-NASD-2002-141).
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A Company must certify to Nasdaq, no later than 30 days after the
implementation deadline applicable to it, that it has complied with the
amended listing rules on compensation committees. Nasdaq will provide
Companies with a form for this certification.
During the transition period, Companies that are not yet required
to comply with the amended listing rules on compensation committees
must continue to comply with Nasdaq's existing listing rules, which
have been redesignated as Listing Rule 5605A(d) and IM-5605A-6 in
Nasdaq's proposal.
Conforming Changes and Correction of Typographical Errors
Finally, Nasdaq proposes to make minor conforming changes to its
requirements relating to audit and nominations committees. Nasdaq also
proposes to correct certain typographical errors in its corporate
governance requirements as set forth in Exhibit 5.\75\
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\75\ The Commission notes that Exhibit 5 is available at http://nasdaq.cchwallstreet.com.
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Exchange Act,\76\ in general, and
with Section 6(b)(5) of the Exchange Act,\77\ in particular. Section
6(b)(5) requires,
[[Page 62571]]
among other things, that a national securities exchange's rules must be
designed 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. Section 6(b)(5) also requires that a national securities
exchange's rules not be designed to permit unfair discrimination
between customers, issuers, brokers or dealers.
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\76\ 15 U.S.C. 78f.
\77\ 15 U.S.C. 78f(b)(5).
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As required by the Dodd-Frank Act and Rule 10C-1, Nasdaq is
proposing amendments to its listing rules relating to the independence
of compensation committees and their advisers. Nasdaq reviewed its
existing compensation-relating listing rules, in combination with the
requirements of Rule 10C-1, to develop a set of proposed compensation-
related listing rules. These proposals generally fall into three
categories: Proposed rule amendments to comply with Rule 10C-1;
proposals to continue certain rules relatively unchanged; and proposed
rule amendments not required by Rule 10C-1. Nasdaq believes that
collectively, these proposals protect investors and the public interest
by requiring Companies, with certain exemptions, to have a compensation
committee meeting certain requirements relating to composition,
responsibilities and authority.
More specifically, Nasdaq's proposed amendments to its listing
rules in order to comply with Rule 10C-1 set forth: Additional
eligibility requirements for compensation committee members relating to
compensatory fees and affiliation; an opportunity to cure defects in
compensation committee composition; a requirement that compensation
committees have the specific responsibilities and authority necessary
to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange
Act; and exemptions for limited partnerships, management investment
companies, Controlled Companies, foreign private issuers that provide
certain required disclosures, and Smaller Reporting Companies. Nasdaq
believes that its proposals fairly balance the goal of protecting the
investing public by ensuring effective deliberation over executive
compensation with the goal of avoiding the imposition of undue costs on
Companies.
Nasdaq's proposals to continue relatively unchanged some of its
existing exemptions to the compensation-related listing rules for
certain categories of Companies takes into account the unique
characteristics of these Companies.\78\ As a result, Nasdaq does not
believe that continuing these exemptions will discriminate unfairly
among issuers, consistent with Section 6(b)(5) of the Exchange Act.\79\
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\78\ See footnotes 56-61, supra.
\79\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The proposed rule amendments not required by Rule 10C-1 require
that: Companies must have a standing compensation committee; the
committee must consist of a minimum of two members; the committee must
have a formal written charter (or board resolution, in the case of
Smaller Reporting Companies) that specifies the committee's
responsibilities and authority; and Smaller Reporting Companies must
continue to comply with certain of Nasdaq's compensation-related
listing rules. As discussed in the ``Purpose'' section, Nasdaq believes
that these new requirements will facilitate effective oversight of
executive compensation and promote accountability to investors for
executive compensation decisions. With regard to Smaller Reporting
Companies, Nasdaq notes that these Companies continue to be subject to
the same requirements as all other Companies, except the new
requirements that Nasdaq is proposing under Rule 10C-1 relating to
compensatory fees, affiliation and the specific compensation committee
responsibilities and authority set forth in proposed Nasdaq Listing
Rule 5605(d)(3). Nasdaq believes that this hybrid approach does not
discriminate unfairly between issuers because it recognizes the fact
that the ```executive compensation arrangements of [Smaller Reporting
Companies] generally are so much less complex than those of other
public companies that they do not warrant the more extensive disclosure
requirements imposed on companies that are not [Smaller Reporting
Companies] and related regulatory burdens that could be
disproportionate for [Smaller Reporting Companies].' '' \80\ In
addition, Nasdaq notes that the Commission exempted Smaller Reporting
Companies from Rule 10C-1.\81\ As a result, this distinction does not
discriminate unfairly among issuers.
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\80\ See the Adopting Release, at 38438 (quoting Securities
Exchange Act Release No. 54302A (August 29, 2006), 71 FR 53158,
53192 (September 8, 2006)).
\81\ See 17 CFR 240.10C-1(b)(5)(ii).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Nasdaq did not solicit comments on the proposed rule change. Nasdaq
received two written comments, which are attached as Exhibit 2.\82\
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\82\ The Commission notes that the comments are available at
http://nasdaq.cchwallstreet.com.
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The first commenter recommended that Nasdaq should require
Companies to disclose: (i) How they are complying with the requirement
to consider the independence factors enumerated in Rule 10C-1; and (ii)
the nature of any conflict of interest arising from the engagement of
legal counsel by a compensation committee. Nasdaq considered these
recommendations, but it preferred to defer to the judgment of the
Commission with respect to the appropriate disclosure framework under
Rule 10C-1. Nasdaq therefore decided not to propose any new disclosure
requirements for Companies, other than those that are required by Rule
10C-1.\83\
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\83\ Specifically, as required by Rule 10C-1(b)(1)(iii)(A)(4),
Nasdaq proposes to require a Foreign Private Issuer that follows a
home country practice in lieu of the requirement to have an
independent compensation committee to disclose the reasons why it
does not have such a committee.
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The second commenter proffered four recommendations. First, this
commenter recommended that Nasdaq include director fees within the list
of relevant factors that must be considered when assessing the
independence of compensation committee members. Nasdaq does not believe
that the intent of the Dodd-Frank Act or Rule 10C-1 was to limit
independence based on director compensation, and therefore, Nasdaq
proposes to continue to exempt board fees from its prohibition on
payment of compensatory fees to a compensation committee member.
Second, this commenter recommended that Nasdaq include in the
requirements for compensation committee independence a factor relating
to business or personal relationships between directors and officers.
As discussed in the ``Purpose'' section above, Nasdaq reviewed its
current and proposed listing rules and concluded that these rules are
sufficient to ensure the independence of compensation committee
members. Therefore, Nasdaq determined not to propose further
independence requirements, other than those discussed above. Third,
this commenter recommended that Nasdaq expand the additional factors
for
[[Page 62572]]
compensation committee eligibility to cover all independent directors,
not just those serving on the compensation committee. While Nasdaq
heavily weighed the commenter's concern that multiple definitions of
independence add to the complexity of board membership, Nasdaq believed
that the intent of the Dodd-Frank Act and Rule 10C-1 was to address the
independence of compensation committee members, as well as their
advisers, specifically. Nasdaq concluded therefore that it is
inappropriate to expand the additional requirements proposed herein to
cover all independent directors. Finally, this commenter recommended
that Nasdaq clarify that, while the factors must be considered in their
totality, a single factor can result in a loss of director
independence. Nasdaq confirms that a director cannot be deemed
independent if he or she fails any one of the bright-line prohibitions
in Nasdaq Listing Rule 5605(a)(2).
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 Exchange consents, the Commission will: (a) By order approve
or disapprove such 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 Exchange 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-NASDAQ-2012-109 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-NASDAQ-2012-109. 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, 100 F Street NE.,
Washington, DC 20549, 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 Nasdaq. 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 publicly available. All
submissions should refer to File Number SR-NASDAQ-2012-109 and should
be submitted on or before November 5, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\84\
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\84\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25281 Filed 10-12-12; 8:45 am]
BILLING CODE 8011-01-P