[Federal Register Volume 78, Number 241 (Monday, December 16, 2013)]
[Notices]
[Pages 76179-76182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29802]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71037; File No. SR-NASDAQ-2013-147]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Listing Rules on Independence of Compensation Committee
Members
December 11, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 26, 2013, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 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 its listing rules on compensation
committee composition. Specifically, Nasdaq proposes to amend Nasdaq
Listing Rule 5605(d)(2)(A) and IM-5605-6 to replace the prohibition on
the receipt of compensatory fees by compensation committee members with
a requirement that a board of directors instead consider the receipt of
such fees when determining eligibility for compensation committee
membership.
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the ``Dodd-Frank Act'') \3\ and Rule 10C-1
under the Act,\4\ Nasdaq amended its listing rules (the ``Amended
Rules'') relating to compensation committee composition,
responsibilities and authority earlier this year.\5\ Rule 10C-1
required Nasdaq to consider, in determining independence requirements
for compensation committee members, certain relevant factors, including
the ``source of compensation of a member of the board of directors of
an issuer, including any consulting, advisory or other compensatory fee
paid by the issuer to such member of the board of directors.'' \6\
Following consideration of this factor, Nasdaq adopted a prohibition on
the receipt of compensatory fees by compensation committee members,\7\
which is the same standard applicable to audit committee members under
Nasdaq's listing rules and Rule 10A-3 under the Act.\8\
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\3\ Public Law 111-203, 124 Stat. 1376 (2010).
\4\ 17 CFR 240.10C-1.
\5\ See Securities Exchange Act Release No. 68640 (January 11,
2013), 78 FR 4554 (January 22, 2013) (SR-NASDAQ-2012-109).
\6\ 17 CFR 240.10C-1(b)(1)(ii)(A).
\7\ See Nasdaq Listing Rule 5605(d)(2)(A), which states that
each compensation committee member must not accept directly or
indirectly any consulting, advisory or other compensatory fee from
the company or any subsidiary thereof.
\8\ See Nasdaq Listing Rule 5605(c)(2)(A), which states that
each audit committee member must meet the criteria for independence
set forth in Rule 10A-3(b)(1) under the Act. Under this rule, audit
committee members may not accept directly or indirectly any
consulting, advisory or other compensatory fee from the issuer or
any subsidiary thereof. See 17 CFR 240.10A-3(b)(1).
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During the rulemaking process, Nasdaq received limited comment on
the prohibition on the receipt of compensatory fees by compensation
committee members.\9\ Over the past few months, however, Nasdaq has
received feedback from listed companies and others that the prohibition
on compensatory fees creates a burden on issuers at a time when
regulatory burdens are higher than ever before. For example, there are
companies in some industries (e.g., the energy and banking industries)
where it is common to have directors who do a de minimis amount of
business with the issuer and would, therefore, be ineligible to serve
on the compensation committee under the Nasdaq rules. These companies
may have difficulty recruiting a sufficient number of eligible
directors to serve on their boards, given the different requirements
for board, audit committee
[[Page 76180]]
and compensation committee composition. Companies and their
representatives have indicated that this additional burden could
influence a company's choice of listing venue.
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\9\ Specifically, Nasdaq received only two comments objecting to
the prohibition. See (i) Letter from Harold R. Carpenter, CFO,
Pinnacle Financial Partners, Nashville, Tennessee, dated November 5,
2012; and (ii) Letter from Robert B. Lamm, Chair, Securities Law
Committee, Society of Corporate Secretaries and Governance
Professionals, New York, New York, dated December 7, 2012. Nasdaq
also received three comments that supported the prohibition, but
argued that in considering a director's eligibility to serve on a
compensation committee, a board should also consider fees paid to
directors for service on the board and board committees. See (i)
Letter from J. Robert Brown, Jr., University of Denver Sturm College
of Law, dated October 30, 2012; (ii) Letter from Brandon J. Rees,
Acting Director, Office of Investment, AFL-CIO, dated November 5,
2012; and (iii) Letter from Carin Zelenko, Director, Capital
Strategies Department, International Brotherhood of Teamsters, dated
November 5, 2012. All the comment letters are available at http://www.sec.gov/comments/sr-nasdaq-2012-109/nasdaq2012109.shtml.
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After weighing these comments, Nasdaq proposes to remove the
prohibition on the receipt of compensatory fees by compensation
committee members. Nasdaq proposes to state instead that in
affirmatively determining the independence of any director who will
serve on the compensation committee, a company's board must consider
the source of compensation of the director, including any consulting,
advisory or other compensatory fee paid by the company to the
director.\10\ In IM-5605-6, Nasdaq proposes to state that when
considering the sources of a director's compensation in determining
independence for purposes of compensation committee service, the board
should consider whether the director receives compensation from any
person or entity that would impair the director's ability to make
independent judgments about the company's executive compensation.
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\10\ Nasdaq also proposes to add language to IM-5605-6 to state
that for purposes of the affirmative independence determination
described in Rule 5605(d)(2)(A), any reference to the defined 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). This language is copied from IM-5605, which explains
the interpretation of the definition of Independent Director in Rule
5605(a)(2). Since Rule 5605(d)(2)(A) describes an additional
independence test for compensation committee members, Nasdaq
believes it would be useful to repeat its construction of the term
``Company'' for independence purposes in the interpretive material
for this rule.
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Nasdaq proposes to remove the exception in the current rule that
states that compensatory fees do 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).\11\ As a result,
boards of director [sic] should consider such fees, in aggregate with
all other sources of compensation of the director, to determine whether
such compensation would impair the director's judgment as a member of
the compensation committee. This proposal is consistent with the
approach of other exchanges, which do not exempt any types of fees from
the analysis of compensation committee eligibility.\12\ In addition,
during the rulemaking process on the Amended Rules, Nasdaq received
several comments arguing that in determining eligibility for
compensation committee membership, a board should consider the fees
paid to directors for their service on the board or board
committees.\13\
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\11\ See Nasdaq Listing Rule 5605(d)(2)(A).
\12\ See Section 303A.02(a)(ii)(A) of the NYSE Listed Company
Manual; see also BATS Rule 14.10(c)(4)(A)(i)(a); see also NYSE Arca
Equities Rule 5.3(k)(4)(ii); see also Section 805(c)(1) of the NYSE
MKT Company Guide.
\13\ See footnote 9, supra.
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Nasdaq's overall proposal is consistent with the Dodd-Frank Act and
Rule 10C-1, which required Nasdaq to consider compensatory fees when
determining eligibility for compensation committee membership, but did
not require a prohibition on such fees. Even with the proposed change,
a compensation committee member will not be allowed to receive
unlimited fees from a company since such a member must continue to be
an Independent Director as defined under Nasdaq Listing Rule
5605(a)(2).\14\ That definition excludes 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; \15\
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.\16\ Boards of directors would be required to consider, based on
the company's and the director's unique circumstances, whether the
receipt of any fees, even fees below these caps, would impair the
director's ability to make independent judgments about the company's
executive compensation, and therefore render the director ineligible to
serve on the compensation committee.
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\14\ See Nasdaq Listing Rule 5605(d)(2)(A).
\15\ See Nasdaq Listing Rule 5605(a)(2)(B). Nasdaq notes that
this rule excludes compensation for board or board committee service
from the $120,000 cap. However, any compensation for board or board
committee service still must be considered for purposes of
affirmatively determining the independence of any director who will
serve on the compensation committee.
\16\ See Nasdaq Listing Rule 5605(a)(2)(D).
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In addition, the proposal is consistent with Nasdaq's approach to
affiliation, which is the other specific factor enumerated in Rule 10C-
1 that Nasdaq was required to consider in determining eligibility for
compensation committee membership. The Amended Rules require that
boards of directors consider affiliation in determining compensation
committee membership, but they do not include any outright prohibitions
in this regard.\17\ Nasdaq is proposing some minor wording changes to
Rule 5605(d)(2)(A) to make the affiliation prong more clear, in light
of the revisions to the prong relating to compensatory fees; however,
Nasdaq believes that substantively, the affiliation prong will remain
unchanged following this proposed rule change. Nasdaq also proposes to
add text to IM-5605-6 to state that when considering any affiliate
relationship a director has with the company, a subsidiary, or an
affiliate of a subsidiary, in determining independence for purposes of
compensation committee service, the board should consider whether the
affiliate relationship places the director under the direct or indirect
control of the 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 the director's ability to make
independent judgments about the Company's executive compensation.\18\
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\17\ See Nasdaq Listing Rule 5605(d)(2)(A).
\18\ Nasdaq proposes to retain existing language in IM-5605-6
that states that while a board may conclude differently with respect
to individual facts and circumstances, Nasdaq does not believe that
ownership of a company's stock by itself, or possession of a
controlling interest through ownership of a company's stock,
precludes a board finding that it is appropriate for a director to
serve on the compensation committee. In fact, 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.
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Nasdaq also proposes to add language to Rule 5605(d)(2)(A) to
clarify that in affirmatively determining the independence of any
director who will serve on the compensation committee, the board of
directors must consider all factors specifically relevant to
determining whether a director has a relationship to the company which
is material to that director's ability to be independent from
management in connection with the duties of a compensation committee
member. Nasdaq does not believe this is a substantive change since the
existing rule requires compensation committee members to be Independent
Directors as defined under Rule 5605(a)(2). This definition requires,
among other things, that a company's board make an affirmative
determination that the director has no relationship which
[[Page 76181]]
would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director. The responsibilities of a
director who serves on the compensation committee would include any
responsibilities relating to compensation committee membership.
However, Nasdaq believes it will be helpful to clarify this requirement
in the text of Rule 5605(d)(2)(A), which describes the requirements for
compensation committee composition.
Finally, Nasdaq proposes a minor edit to the first sentence of Rule
5605(d)(2)(A) to split it into two sentences in light of the revisions
to the rule described above.\19\ This edit clarifies that each
compensation committee must consist of at least two members, and each
committee member must be an Independent Director as defined under Rule
5605(a)(2).
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\19\ Nasdaq also proposes conforming edits to IM-5605-6.
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Companies are required to comply with the compensation committee
composition aspects of the Amended Rules by the earlier of their first
annual meeting after January 15, 2014, or October 31, 2014.\20\ As a
result, Nasdaq believes it is important to implement the proposed
change now, before companies propose changes to board and committee
composition in connection with their 2014 annual meetings.
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\20\ See Nasdaq Listing Rule 5605(d)(6). During the transition
period, companies that are not yet required to comply with a
particular provision of revised Rule 5605(d) and IM-5605-6 must
continue to comply with the corresponding provision, if any, of Rule
5605A(d) and IM-5605A-6.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\21\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\22\ in particular, in that it is designed 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. Specifically, the proposal removes impediments to and
perfects the mechanism of a free and open market by allowing boards of
directors greater flexibility in determining eligibility for
compensation committee membership, consistent with the requirements of
the Dodd-Frank Act and Rule 10C-1. Nasdaq will continue to protect
investors and the public interest by maintaining overall caps on the
amount of compensatory fees that may be received by a compensation
committee member from a company. However, a board of directors must
consider, given the particular circumstances of a company and/or a
director, whether any fees, even fees below the overall caps, would
impair the director's ability to make independent judgments about the
company's executive compensation, and therefore render the director
ineligible to serve on the compensation committee.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
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In addition, Nasdaq proposes other changes in the rule to clarify
its interpretation of the additional independence test for compensation
committee members in light of the change discussed above. Specifically,
Nasdaq proposes to: (i) Delete an exception for certain types of
compensatory fees that may be received by a compensation committee
member; (ii) clarify the standard a board must use when considering
certain affiliate relationships of a compensation committee member;
(iii) explicitly state that as part of the independence test, a board
of directors must consider all factors specifically relevant to
determining whether a director has a relationship to the company which
is material to that director's ability to be independent from
management in connection with the duties of a compensation committee
member; (iv) reiterate the definition of the term ``Company'' for
purposes of the independence test; and (v) clarify that each
compensation committee must be an Independent Director as defined under
Rule 5605(a)(2). These changes will make Nasdaq's compensation
committee composition requirements more transparent and easier to
understand. As a result, the changes will protect investors and the
public interest.
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 not necessary or appropriate in
furtherance of the purposes of the Act. The Dodd-Frank Act and Rule
10C-1 under the Act required each national securities exchange to adopt
similar rules to Nasdaq's Amended Rules. Like Nasdaq, each other
exchange was required to consider compensatory fees when determining
eligibility requirements for compensation committee membership. Other
than Nasdaq and NASDAQ OMX BX,\23\ which is not currently operational
as a listing market, no other exchange prohibits compensatory fees to
members of the compensation committee.\24\ This change will harmonize
Nasdaq's rule regarding compensation committee composition with the
more flexible rules of the other exchanges. As a result, this proposal
removes a potential competitive advantage for the other exchanges and
thereby enhances competition among exchanges.
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\23\ Like Nasdaq, NASDAQ OMX BX adopted an outright prohibition
on the receipt of compensatory fees by compensation committee
members. See BX Venture Market Listing Rule 5605(d)(2)(A). However,
Nasdaq expects that NASDAQ OMX BX will file a proposed rule change
to conform its rule to the Nasdaq rule.
\24\ See Section 303A.02(a)(ii)(A) of the NYSE Listed Company
Manual; see also BATS Rule 14.10(c)(4)(A)(i)(a); see also NYSE Arca
Equities Rule 5.3(k)(4)(ii); see also Section 805(c)(1) of the NYSE
MKT Company Guide.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \25\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\26\
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\25\ 15 U.S.C. 78s(b)(3)(a)(ii).
\26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
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change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2013-147 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-2013-147. 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 at 100 F Street NE.,
Washington, DC 20549-1090 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 offices 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-
NASDAQ-2013-147, and should be submitted on or before January 6, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29802 Filed 12-13-13; 8:45 am]
BILLING CODE 8011-01-P