[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4537-4554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01104]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68637; File No. SR-NYSEMKT-2012-48]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Amendment No. 3, and Order Granting Accelerated Approval for Proposed 
Rule Change, as Modified by Amendment Nos. 1 and 3, To Amend the 
Listing Rules for Compensation Committees To Comply With Securities 
Exchange Act Rule 10C-1 and Make Other Related Changes

January 11, 2013.

I. Introduction

    On September 25, 2012, NYSE MKT LLC (``NYSE MKT'' or ``Exchange'') 
filed with the Securities and Exchange

[[Page 4538]]

Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify the Exchange's rules 
for compensation committees of listed issuers to comply with Rule 10C-1 
under the Act and make other related changes. On October 1, 2012, NYSE 
MKT filed Amendment No. 1 to the proposed rule change. The proposed 
rule change, as modified by Amendment No. 1 thereto, was published for 
comment in the Federal Register on October 15, 2012.\3\ The Commission 
subsequently extended the time period in which to either approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change, to January 13, 2013.\4\ The Commission received no comments on 
the NYSE MKT proposal,\5\ but received a response letter from NYSE 
Euronext, Inc. regarding the NYSE MKT proposal, based on comment 
letters received on related filings.\6\ On December 4, 2012, the 
Exchange filed Amendment No. 2 to the proposed rule change, which was 
later withdrawn.\7\ On January 8, 2013, the Exchange filed Amendment 
No. 3 to the proposed rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68007 (October 9, 
2012), 77 FR 62576 (``Notice'').
    \4\ See Securities Exchange Act Release No. 68313 (November 28, 
2012), 77 FR 71853 (December 4, 2012).
    \5\ However, the Commission received eight comments on two 
substantially similar proposals by New York Stock Exchange LLC 
(``NYSE'') and NYSE Arca, Inc. (``NYSE Arca'') by parties that did 
not specifically comment on the NYSE MKT filing. See Securities 
Exchange Act Release Nos. 68006 (October 9, 2012), 77 FR 62587 
(October 15, 2012) (SR-NYSEArca-2012-105) and 68011 (October 9, 
2012), 77 FR 62541 (October 15, 2012) (SR-NYSE-2012-49).
    The Commission received seven letters on the NYSE proposal. See 
Letters to Elizabeth M. Murphy, Secretary, Commission, from: Thomas 
R. Moore, Vice President, Corporate Secretary and Chief Governance 
Officer, Ameriprise Financial, Inc., dated October 18, 2012 
(``Ameriprise Letter''); J. Robert Brown, Jr., Director, Corporate & 
Commercial Law Program, University of Denver Sturm College of Law, 
dated October 30, 3012 (``Brown Letter''); Dorothy Donohue, Deputy 
General Counsel, Securities Regulation, Investment Company 
Institute, dated November 1, 2012 (``ICI Letter''); Brandon J. Rees, 
Acting Director, Office of Investment, AFL-CIO, dated November 5, 
2012 (``AFL-CIO Letter''); Carin Zelenko, Director, Capital 
Strategies Department, International Brotherhood of Teamsters, dated 
November 5, 2012 (``Teamsters Letter''); Wilson Sonsini Goodrich & 
Rosati, Professional Corporation, dated November 14, 2012 (``Wilson 
Sonsini Letter''); and Robert B. Lamm, Chair, Securities Law 
Committee, The Society of Corporate Secretaries & Governance 
Professionals, dated December 7, 2012 (``Corporate Secretaries 
Letter'').
    In addition, the Commission received one comment on the NYSE 
Arca proposal. See Letter from Jeff Mahoney, General Counsel, 
Council of Institutional Investors to Elizabeth M. Murphy, 
Secretary, Commission, dated November 1, 2012 (``CII Letter''). 
Since the comment letters received on the NYSE and NYSE Arca filings 
discuss issues directly related to the NYSE MKT filing, the 
Commission has included them in its discussion of this filing.
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, Executive Vice President and Corporate 
Secretary, NYSE Euronext, Inc., dated January 10, 2013 (``NYSE 
Response Letter''). In the NYSE Response Letter, NYSE Euronext, 
Inc., the parent company of NYSE MKT, states that, as the comments 
made by the letters submitted on the NYSE and NYSE Arca proposals 
are applicable in substance to NYSE, NYSE Arca and NYSE MKT LLC, its 
response will address the comments on behalf of all three exchanges.
    \7\ Amendment No. 2, dated December 4, 2012, was withdrawn on 
January 7, 2013.
    \8\ In Amendment No. 3 to SR-NYSEMKT-2012-48, NYSE MKT: (a) 
Revised the transition period for companies that cease to be Smaller 
Reporting Companies to comply with the full range of new 
requirements, see infra notes 76-78 and accompanying text; (b) 
changed references in the rule text from Regulation S-K, Item 
10(f)(1) to Exchange Act Rule 12b-2 and made other non-substantive 
revisions to proposed rule text; (c) added commentary to state that 
the independence assessment of compensation advisers required of 
compensation committees does not need to be conducted for advisers 
whose roles are limited to those entitled to an exception from the 
compensation adviser disclosure rules under Item 407(e)(3)(iii) of 
Regulation S-K, see infra notes 50-53 and accompanying text; and (d) 
added commentary to state that the independence assessment of 
compensation advisers required of compensation committees does not 
require the adviser to be independent, only that the compensation 
committee consider the enumerated factors before selecting or 
receiving advice from the adviser. See infra notes 54-56 and 
accompanying text.
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    This order approves the proposed rule change, as modified by 
Amendment Nos. 1 and 3 thereto, on an accelerated basis.

II. Description of the Proposed Rule Change

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

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

[[Page 4539]]

factors identified by the relevant exchange in its listing 
standards.\18\
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    \15\ See Rule 10C-1(b)(2).
    \16\ See Rule 10C-1(b)(3).
    \17\ See Rule 10C-1(b)(4). The six factors, which NYSE MKT 
proposes to set forth in its rules, are specified in the text 
accompanying note 48, infra.
    \18\ Other provisions in Rule 10C-1 relate to exemptions from 
the rule and a requirement that each exchange provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. NYSE MKT's Proposed Rule Change, as Amended

    To comply with Rule 10C-1, NYSE MKT proposes to amend four sections 
of its rules concerning corporate governance requirements for companies 
listed on the Exchange: NYSE MKT LLC Company Guide (``Guide'') Section 
110, ``Securities of Foreign Companies;'' Section 801 ``General;'' 
Section 803, ``Independent Directors and Audit Committee;'' and Section 
805, ``Executive Compensation.'' In addition, NYSE MKT proposes to make 
some other changes to its rules regarding compensation committees. To 
accomplish these changes, the Exchange proposes to replace current 
Sections 110, 801, 803 and 805 of the Guide with new operative text 
that will be effective on July 1, 2013.
    Current Section 805(a) of the Guide provides that the compensation 
of the executive offers of a listed company must be determined, or 
recommended to the company's board for determination, either by a 
compensation committee comprised of ``Independent Directors'' \19\; or, 
as an alternative to a formal committee, by a majority of the 
independent directors on the board.\20\
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    \19\ ``Independent Directors'', as defined in Section 803(A)(2) 
of the Guide and used herein, includes a two-part test for 
independence. The rule sets forth specific categories of directors 
who cannot be considered independent because of certain discrete 
relationships (``bright-line tests''); and also provides that a 
listed company's board make an affirmative determination that each 
independent director does not have a relationship that would 
interfere with the exercise of independent judgment in carrying out 
the responsibilities of a director. Id.
    \20\ The current rule also provides that the chief executive 
officer (``CEO'') may not be present during voting or deliberations 
regarding the CEO's own compensation. See Section 805(a) of the 
Guide.
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    Under its proposal, NYSE MKT rules will retain its existing 
requirement that each listed company determine the compensation of 
executive officers either by a compensation committee of Independent 
Directors or by a majority of the independent directors on the 
board,\21\ each of whom must be an Independent Director, as defined in 
NYSE MKT's rules.\22\ Under the proposed amendment, however, each 
Compensation Committee member must also satisfy additional independence 
requirements, as described in Section II.B.1 below.\23\
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    \21\ As NYSE MKT does not require a formal compensation 
committee, the term ``Compensation Committee'' for purposes of the 
NYSE MKT proposal and as discussed in this release, in addition to 
describing a formal compensation committee, also refers to the 
listed company's independent directors as a group when dealing with 
executive compensation matters. See proposed Section 805(a) of the 
Guide.
    \22\ See Section 805(a) of the Guide.
    \23\ See proposed Section 805(c)(1) of the Guide (concerning the 
consideration of director compensation and affiliation).
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    NYSE MKT does not require an issuer to adopt a formal written 
compensation committee charter,\24\ nor does it require an issuer to 
have a formal compensation committee. NYSE MKT proposes, however, rules 
that would require listed issuers to provide for the Compensation 
Committee's responsibilities and how it carries out those 
responsibilities, including structure, operations and membership 
requirements.\25\ The Compensation Committee of a listed issuer must 
have the responsibility and authority with respect to retaining its own 
advisers; appointing, compensating and overseeing such advisers; 
considering certain independence factors before selecting advisers; and 
receiving funding from the company to engage them, which are discussed 
in detail in Section II.B.2 below and set forth in proposed Section 
805(c)(3)-(4) of the Guide.\26\
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    \24\ Rule 10C-1 requires a compensation committee to have 
certain specified authority and responsibilities. See supra notes 
15-17 and accompanying text. NYSE MKT proposed rule sets forth 
language concerning this authority and set of responsibilities and 
adds the required content discussed infra at text accompanying notes 
45-47.
    \25\ See proposed Section 805(c)(3)-(4) of the Guide.
    \26\ See proposed Section 805(c)(3)-(4) of the Guide. As 
discussed below, smaller reporting companies are not required to 
comply with the new compensation adviser independence 
considerations.
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1. Compensation Committee Composition and Independence Standards
    NYSE MKT proposes to amend Section 803(A)(2) of the Guide, which 
would continue to provide that no director qualifies as ``independent'' 
unless the issuer's board of directors affirmatively determines that 
the director does not have a relationship that would interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director. As noted above, NYSE MKT's rules currently require each 
member of a listed company's Compensation Committee to be an 
Independent Director, as defined in Section 803(A)(2) of the Guide.\27\ 
Rule 10C-1, as discussed above, provides that exchange standards must 
require Compensation Committee members to be independent, and further 
provides that each exchange, in determining independence for this 
purpose, must consider relevant factors, including the Fees Factor and 
Affiliation Factor described above. In its proposal, NYSE MKT discussed 
its consideration of these factors,\28\ and proposed the following: 
\29\
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    \27\ See supra note 19.
    \28\ See Notice, supra note 3.
    \29\ See Notice, supra note 3, for the Exchange's explanation of 
its reasons for the proposed change. See infra Sections II.B.3 and 
II.B.4 concerning entities that would be exempt from this 
requirement.
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    With respect to the Fees and Affiliation Factors, NYSE MKT proposes 
to adopt a provision stating that the board of directors of a listed 
company would be required, in affirmatively determining the 
independence of any director who will serve on the compensation 
committee of the listed company's board of directors, or, in the case 
of a company that does not have a compensation committee, in 
affirmatively determining the independence of all independent 
directors, to consider all factors specifically relevant to determining 
whether a director has a relationship to the listed company which is 
material to that director's ability to be independent from management 
in connection with the duties of a Compensation Committee member, 
including, but not limited to: (A) The source of compensation of such 
director, including any consulting, advisory, or other compensatory fee 
paid by the listed company to such director; and (B) whether such 
director is affiliated with the listed company, a subsidiary of the 
listed company or an affiliate of a subsidiary of the listed 
company.\30\
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    \30\ See proposed Section 805(c)(1) of the Guide. See also 
Notice, supra note 3.
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    With respect to the Fees Factor, NYSE MKT also proposes new 
Commentary .03 to Section 805 to provide that the board should consider 
whether the director receives compensation from any person or entity 
that would impair his ability to make independent judgments about the 
listed company's executive compensation.\31\
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    \31\ See proposed Commentary .03 to Section 805 of the Guide.
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    With respect to the Affiliation Factor, NYSE MKT proposes, 
similarly, to amend the commentary to provide that the board should 
consider whether an affiliate relationship places the director under 
the direct or indirect control of the listed company or its senior 
management, or creates a direct relationship between the director and 
members of senior management, ``* * * in each case of a nature that 
would impair his ability to make independent

[[Page 4540]]

judgments about the listed company's executive compensation.'' \32\
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    \32\ Id.
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    Although Rule 10C-1 requires that exchanges consider ``relevant 
factors'' not limited to the Fees and Affiliation Factors, NYSE MKT 
states that, after reviewing its current and proposed listing rules, it 
concluded not to propose any specific numerical tests with respect to 
the factors specified in proposed Section 805(c)(1) or to adopt a 
requirement to consider any other specific factors. In its proposal, 
NYSE MKT stated that it did not intend to adopt an absolute prohibition 
on a board making an affirmative finding that a director is independent 
solely on the basis that the director or any of the director's 
affiliates are shareholders owning more than some specified percentage 
of the listed company.\33\ Further, as stated in its filing, NYSE MKT 
believes that its existing ``bright-line'' independence standards, as 
set forth in Section 803(A)(2) of the Guide, are sufficiently broad to 
encompass the types of relationships which would generally be material 
to a director's independence for Compensation Committee service.\34\ 
Additionally, NYSE MKT stated that Section 803(A)(2) already requires 
the board to consider any relationships that would interfere with the 
director's exercise of independent judgment in carrying out the 
responsibilities of a director that are not the subject of ``bright-
line'' tests.\35\ NYSE MKT believes that these requirements with 
respect to general director independence, when combined with the 
specific considerations required by proposed Section 805(c)(1), 
represent an appropriate standard for Compensation Committee 
independence.\36\
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    \33\ See Notice, supra note 3.
    \34\ See Notice, supra note 3. The following are the ``bright-
line'' tests set forth in Section 803(A)(2): (a) A director who is, 
or during the past three years was, employed by the company, other 
than prior employment as an interim executive officer (provided the 
interim employment did not last longer than one year) (See 
Commentary .08); (b) a director who accepted or has an immediate 
family member who accepted any compensation from the company in 
excess of $120,000 during any period of twelve consecutive months 
within the three years preceding the determination of independence, 
other than the following: (i) Compensation for board or board 
committee service, (ii) compensation paid to an immediate family 
member who is an employee (other than an executive officer) of the 
company, (iii) compensation received for former service as an 
interim executive officer (provided the interim employment did not 
last longer than one year) (See Commentary .08), or (iv) benefits 
under a tax-qualified retirement plan, or non-discretionary 
compensation; (c) a director who is an immediate family member of an 
individual who is, or at any time during the past three years was, 
employed by the company as an executive officer; (d) a director who 
is, or has an immediate family member who is, a partner in, or a 
controlling shareholder or an executive officer of, any organization 
to which the company made, or from which the company received, 
payments (other than those arising solely from investments in the 
company's securities or payments under non-discretionary charitable 
contribution matching programs) that exceed 5% of the organization's 
consolidated gross revenues for that year, or $200,000, whichever is 
more, in any of the most recent three fiscal years; (e) a director 
who is, or has an immediate family member who is, employed as an 
executive officer of another entity where at any time during the 
most recent three fiscal years any of the issuer's executive 
officers serve on the compensation committee of such other entity; 
or (f) a director who is, or has an immediate family member who is, 
a current partner of the company's outside auditor, or was a partner 
or employee of the company's outside auditor who worked on the 
company's audit at any time during any of the past three years.
    \35\ See Notice, supra note 3.
    \36\ See id.
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    NYSE MKT proposes a cure period for a failure of a listed company 
to meet its Compensation Committee composition requirements for 
independence. Under the provision, if a listed company fails to comply 
with the Compensation Committee composition requirements in Sections 
805(a) or, if applicable Section 805(c), because a member of the 
Compensation Committee ceases to be independent for reasons outside the 
member's reasonable control, that person, only so long as a majority of 
the members of the Compensation Committee continue to be independent, 
may remain a member of the Compensation Committee until the earlier of 
the next annual shareholders' meeting of the listed company or one year 
from the occurrence of the event that caused the member to be no longer 
independent.\37\ The proposed rule also requires a company relying on 
this provision to provide notice to NYSE MKT promptly.\38\
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    \37\ See proposed Section 805(c)(2) of the Guide.
    \38\ See id.
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    NYSE MKT modified the suggested cure period language contained in 
Rule 10C-1(a)(3) by limiting the cure period's use to circumstances 
where the Committee Continues to have a majority of independent 
directors, as NYSE MKT believes this would ensure that the applicable 
committee could not take an action without the agreement of one or more 
independent directors.\39\
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    \39\ See Notice, supra note 3. The Commission notes that while 
NYSE MKT does not provide any new procedures for an issuer to have 
an opportunity to cure any other defects with respect to its 
proposed compensation committee requirements, current NYSE MKT rules 
provide issuers with an opportunity to cure defects, and appeal, 
before their securities are delisted for rule violations. See NYSE 
MKT Listed Company Guide, Sections 1009-1011 (``Suspension and 
Delisting Procedures Procedure for Delisting'').
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    NYSE MKT's current rules relating to Compensation Committees 
include an exception that allows a director who is not an Independent 
Director to be appointed to such a committee under exceptional and 
limited circumstances, as long as that director is not currently an 
executive officer, an employee, or the family member of an executive 
officer.\40\ The exception applies, however, only if the committee is 
comprised of at least three members and the board determines that the 
individual's membership on the committee is required by the best 
interests of the company and its shareholders.\41\
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    \40\ See current Section 805(b) of the Guide.
    \41\ See id.
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    NYSE MKT proposes to amend Section 805(b) of the Guide to remove, 
except for smaller reporting companies, the availability of this 
exception for a director who fails the current requirements or the new 
enhanced director independence requirements proposed by NYSE MKT.\42\ 
In effect, NYSE MKT proposes to retain the exception only for smaller 
reporting companies. Under the exception, a Compensation Committee 
member of a smaller reporting company may not serve longer than two 
years with this exception. In addition, a smaller reporting company 
relying on the exception must make certain disclosures on its Web site 
or in its proxy statement regarding the nature of the relationship and 
the reasons for the determination.\43\
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    \42\ See proposed Section 805(b) of the Guide. As noted below, 
smaller reporting companies are not subject to enhanced director 
independence requirements.
    \43\ See id. See also Notice, supra note 3.
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2. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers
    In its proposed rule change, NYSE MKT proposes to fulfill the 
requirements imposed by Rule 10C-1(b)(2)-(4) under the Act concerning 
compensation advisers by setting forth those requirements in its own 
rules and requiring compensation committees to have these new rights 
and responsibilities.\44\ Thus, proposed Section 805(c)(3)(i)-(iii) of 
the Guide proposes to adopt the requirements that NYSE MKT believes are 
required by Rule 10C-1(b)(2)-(3) that: (i) The Compensation Committee 
may, in its sole discretion, retain or obtain the advice of a 
compensation consultant,

[[Page 4541]]

independent legal counsel or other adviser; (ii) the Compensation 
Committee shall be directly responsible for the appointment, 
compensation and oversight of the work of any compensation consultant, 
independent legal counsel or other adviser retained by the Compensation 
Committee; \45\ and (iii) the listed company must provide for 
appropriate funding, as determined by the Compensation Committee, for 
payment of reasonable compensation to a compensation consultant, 
independent legal counsel or any other adviser retained by the 
Compensation Committee.\46\
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    \44\ Rule 10C-1(b)(4) does not include the word ``independent'' 
before ``legal counsel'' and requires an independence assessment for 
any legal counsel to a compensation committee, other than in-house 
counsel. In providing Commentary .05 to proposed Section 805(c)(3)-
(4), as modified by Amendment No. 3, NYSE MKT provides for two 
limited exceptions. See infra notes 50-53 and accompanying text.
    \45\ The proposal also includes a provision, derived from Rule 
10C-1, stating that nothing in the rule may be construed: (A) To 
require the Compensation Committee to implement or act consistently 
with the advice or recommendations of the compensation consultant, 
independent legal counsel or other adviser to the Compensation 
Committee; or (B) to affect the ability or obligation of the 
Compensation Committee to exercise its own judgment in fulfillment 
of the duties of the Compensation Committee. See Commentary .04 to 
Section 805(c) of the Guide.
    \46\ See Notice, supra note 3.
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    Proposed Section 804(c)(4) of the Guide, as amended, also sets 
forth explicitly, in accordance with Rule 10C-1, that the Compensation 
Committee may select, or receive advice from, a compensation 
consultant, legal counsel or other adviser to the Compensation 
Committee, other than in-house legal counsel, only after taking into 
consideration all factors relevant to that person's independence from 
management, including the following six factors set forth in Rule 10C-1 
regarding independence assessments of compensation advisers.\47\
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    \47\ See Rule 10C-1(b)(4).
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    The six factors, which are set forth in full in the proposed rule, 
are (i) the provision of other services to the listed company by the 
person that employs the compensation consultant, legal counsel or other 
adviser; (ii) the amount of fees received from the listed company by 
the person that employs the compensation consultant, legal counsel or 
other adviser, as a percentage of the total revenue of the person that 
employs the compensation consultant, legal counsel or other adviser; 
(iii) the policies and procedures of the person that employs the 
compensation consultant, legal counsel or other adviser that are 
designed to prevent conflicts of interest; (iv) any business or 
personal relationship of the compensation consultant, legal counsel or 
other adviser with a member of the Compensation Committee; (v) any 
stock of the listed company owned by the compensation consultant, legal 
counsel or other adviser; and (vi) any business or personal 
relationship of the compensation consultant, legal counsel, other 
adviser or the person employing the adviser with an executive officer 
of the listed company.\48\
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    \48\ See also Rule 10C-1(b)(4)(i)-(vi).
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    As proposed, Section 805(c)(4) of the Guide would not include any 
specific additional factors for consideration, as NYSE MKT stated that 
it believes the list included in Rule 10C-1(b)(4) is very comprehensive 
and the proposed listing standard would also require the Compensation 
Committee to consider any other factors that would be relevant to the 
adviser's independence from management.\49\
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    \49\ See Notice, supra note 3.
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    Proposed Commentary .05 to proposed Section 805 of the Guide, as 
modified by Amendment No. 3,\50\ further states that, as provided in 
Rule 10C-1, a Compensation Committee is required to conduct the 
independence assessment outlined in proposed Section 805(c)(4) with 
respect to any compensation consultant, legal counsel or other adviser 
that provides advice to the Compensation Committee, other than (i) in-
house legal counsel \51\ and (ii) any compensation consultant, legal 
counsel or other adviser whose role is limited to the following 
activities for which no disclosure would be required under Item 
407(e)(3)(iii) of Regulation S-K: consulting on any broad-based plan 
that does not discriminate in scope, terms, or operation, in favor of 
executive officers or directors of the listed company, and that is 
available generally to all salaried employees; or providing information 
that either is not customized for a particular company or that is 
customized based on parameters that are not developed by the 
compensation consultant, and about which the compensation consultant 
does not provide advice.\52\ NYSE MKT noted that this second exception 
is based on Item 407(e)(3)(iii) of Regulation S-K, which provides a 
limited exception to the Commission's requirement for a registrant to 
disclose any role of compensation advisers in determining or 
recommending the amount or form of a registrant's executive and 
director compensation.\53\
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    \50\ See supra note 8. NYSE MKT's proposal as submitted 
originally only contained an exception for in-house legal counsel. 
As described below, the Exchange amended its proposal to add an 
exception for advisers whose role is limited to certain broad-based 
plans or to providing non-customized information.
    \51\ See proposed Commentary .05 to Section 805 of the Guide.
    \52\ See Exhibit 5 to Amendment No. 3 (amending, in part, the 
proposed Commentary .05 to Section 805 of the Guide).
    \53\ See Amendment No. 3, supra note 8; see also 17 CFR 
229.407(e)(3)(iii). The Exchange believes that its proposed 
exception from the independence assessment requirement is 
appropriate because the types of services excepted do not raise 
conflict of interest concerns, and noted that this is the same 
reason for which the Commission excluded these types of services 
from the disclosure requirement in Item 407(e)(3)(iii) of Regulation 
S-K.
---------------------------------------------------------------------------

    Proposed Commentary .06 to Section 805 of the Guide, as modified by 
Amendment No. 3, also clarifies that nothing in the rule requires a 
compensation consultant, legal counsel or other compensation adviser to 
be independent, only that the Compensation Committee consider the 
enumerated independence factors before selecting or receiving advice 
from a compensation adviser.\54\ It further clarifies that Compensation 
Committees may select or receive advice from any compensation adviser 
they prefer, including ones that are not independent, after considering 
the six independence factors set forth in Section 805(c)(4)(i)-
(vi).\55\ The Exchange clarified that, while the Compensation Committee 
is required to consider the independence of compensation advisers, the 
Compensation Committee is not precluded from selecting or receiving 
advice from compensation advisers that are not independent.\56\
---------------------------------------------------------------------------

    \54\ See Exhibit 5 to Amendment No. 3, supra note 8.
    \55\ See id.
    \56\ See Amendment No. 3, supra note 8.
---------------------------------------------------------------------------

3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies 
from all the requirements included within the rule.\57\ Consistent with 
this Rule 10C-1 provision, NYSE MKT, as a general matter, proposes that 
a smaller reporting company, as defined in Rule 12b-2 \58\ under the 
Act (hereinafter, a ``Smaller Reporting Company''), not be subject to 
the new requirements set forth in its proposal specifically to comply 
with Rule 10C-1.\59\ Thus, NYSE MKT proposes not to require Smaller 
Reporting Companies to comply with either the enhanced independence 
standards for members of Compensation Committees relating to 
compensatory fees and affiliation or the compensation adviser 
independence considerations.\60\
---------------------------------------------------------------------------

    \57\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \58\ 17 CFR 240.12b-2.
    \59\ See proposed Section 801(h) of the Guide; see also proposed 
Commentary .01 to Section 805 of the Guide.
    \60\ See supra text accompanying notes 30 and 48.

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[[Page 4542]]

    NYSE MKT proposes in Section 801(h) of the Guide that Smaller 
Reporting Companies are not required to comply with Section 805(c)(1) 
concerning the additional independence factors for members serving on 
the Compensation Committee.\61\ A Smaller Reporting Company will be 
required to comply with proposed Section 805(c)(3) of the Guide 
regarding the requirements concerning the Compensation Committee's 
authority, responsibility and funding of compensation advisers.\62\ 
However, NYSE MKT proposes an exception from the proposed Section 
805(c)(4) that would otherwise require the Smaller Reporting Company's 
Compensation Committee to consider independence factors before 
selecting such advisers.\63\ Finally, as noted above, NYSE MKT proposes 
to amend Section 805(b) of the Guide to clarify that only Smaller 
Reporting Companies will be eligible to continue to avail themselves of 
the ability of the board, under exceptional and limited circumstances, 
to appoint a non-independent director to the Compensation Committee.
---------------------------------------------------------------------------

    \61\ See Notice, supra note 3.
    \62\ See id.
    \63\ See Notice, supra note 3.
---------------------------------------------------------------------------

4. Exemptions
    NYSE MKT proposes its existing exemptions from the Exchange's 
compensation-related listing rules currently in place, which are set 
forth in Section 801(a)-(d) and (g) of the Guide, apply also to the new 
requirements of the proposed rule change and thereby will continue to 
provide a general exemption from all of the Compensation Committee 
requirements of Section 805 of the Guide.\64\ These include exemptions 
to the following issuers: (a) Any listed company of which over 50% of 
the voting power is held by an individual, group or another company (in 
other words, a controlled company); (b) limited partnerships and 
companies in bankruptcy; (c) asset backed and other passive business 
organizations (such as royalty trusts) or derivatives and special 
purpose securities; (d) closed-end and open-end management investment 
companies registered under the Investment Company Act of 1940; and (g) 
companies listing only preferred or debt securities.\65\ NYSE MKT 
states that these categories of issuers typically: (i) Are externally 
managed and do not directly employ executives; (ii) do not by their 
nature have employees; or (iii) have executive compensation policy set 
by a body other than the board.\66\ In light of these structural 
reasons why these categories of issuers generally do not have 
compensation committees, the Exchange believes that it would be a 
significant and unnecessarily burdensome alteration in their governance 
structures to require them to comply with the proposed new requirements 
and that it is appropriate to grant them an exemption.\67\
---------------------------------------------------------------------------

    \64\ See id. In addition, such exempt companies would also 
thereby be exempt from the enhanced independence requirements for 
Compensation Committee composition described in proposed Section 
803(A)(2) of the Guide.
    \65\ See current Sections 801(a)-(d) and (g) of the Guide.
    \66\ See Notice, supra note 3.
    \67\ See id.
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    Concerning foreign private issuers,\68\ NYSE MKT's current rules in 
Section 110 of the Guide permit any such issuer to apply for an 
exemption from existing Compensation Committee requirements. NYSE MKT 
proposes that this allowance continue to apply, generally, to the 
Exchange's Compensation Committee requirements to foreign private 
issuers that seek exemption on the basis that they follow home country 
practice.\69\
---------------------------------------------------------------------------

    \68\ Under NYSE MKT's listing rules, the term ``foreign private 
issuer'' used in Section 110 of the Guide is defined by SEC's 
definition of foreign private issuer set out in Rule 3b-4(c) (17 CFR 
240.3b-4). See Section 110 of the Guide; see also Notice, supra note 
3. The proposal also adds language to clarify that the exemption is 
not available to a foreign-based issuer that is not a foreign 
private issuer, as defined in Rule 3b-4(c) under the Act.
    \69\ See Notice, supra note 3.
---------------------------------------------------------------------------

    NYSE MKT notes that Section 110 will continue to require foreign 
private issuers to disclose any significant ways in which their 
corporate governance practices differ from those followed by domestic 
companies under NYSE MKT listing standards in their annual report.\70\ 
As NYSE MKT no longer requires companies to distribute annual reports, 
except for its requirements in Section 610 with respect to the Web site 
posting and distribution of annual reports filed with the SEC, NYSE MKT 
proposes to modify Section 110 to provide that a company must either 
include this disclosure on its Web site or in its annual report it is 
required to file with the SEC. NYSE MKT does not propose to add any 
additional requirements to the disclosure requirement applicable to 
foreign private issuers, and argues that the explanation companies 
would likely provide for not having an independent compensation 
committee would simply be that they were not required to do so by home 
country law.\71\
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    \70\ See id. See also Section 110 of the Guide. A foreign 
private issuer may provide this disclosure either on its Web site 
and/or in its annual report as distributed to shareholders in the 
United States.
    \71\ See Notice, supra note 3.
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5. Transition to the New Rules for Companies Listed as of the Effective 
Date
    The proposed rule change provides that certain of the new 
requirements for listed companies will be effective on July 1, 2013 and 
others will be effective after that date.\72\ Specifically, NYSE MKT 
proposes to amend Section 805(c)(5) to provide transition periods by 
which listed companies would be required to comply with the new Section 
805(c)(1) Compensation Committee director independence standards. 
Pursuant to the proposal, listed companies would have until the earlier 
of their first annual meeting after January 15, 2014, or October 31, 
2014, to comply with the new standards for Compensation Committee 
director independence. Existing Compensation Committee independence 
standards would continue to apply pending the transition to the new 
independence standards. NYSE MKT proposes that all other proposed 
sections of the proposal would become effective on July 1, 2013 for 
purposes of compliance by currently listed issuers that are not 
otherwise exempted. On July 1, 2013, such issuers will be required to 
comply with the provisions relating to the authority of a Compensation 
Committee to retain compensation consultants, legal counsel, and other 
compensation advisers, the authority to fund such advisers; and the 
responsibility of the committee to consider independence factors before 
selecting or receiving advice from such advisers.
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    \72\ During the transition periods described herein, existing 
Compensation Committee independence standards would continue to 
apply pending the transition to the new independence standards. The 
Exchange believes that its prior use of a similar transition period 
was satisfactory and that it is reasonable to follow the same 
approach in connection with the proposed changes to the Compensation 
Committee independence standards.
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6. Compliance Schedules: IPOs; Companies That Lose their Exemptions; 
Companies Transferring From Other Markets
    NYSE MKT's existing rules permit certain companies listing on the 
Exchange to phase-in compliance with all of the Exchange's applicable 
independence requirements for Compensation Committees after the date 
that the company's securities first trade on NYSE MKT.\73\ NYSE MKT 
proposes to preserve its current compliance periods for those 
categories of issuers with respect to the enhanced independence 
standard for directors serving on the Compensation

[[Page 4543]]

Committee, which means that companies listing in conjunction with their 
initial public offerings would continue to be entitled to a transition 
under which the company must have: At least one independent member that 
meets the enhanced standards (concerning fees received by members and 
their affiliations) on its compensation committee by the listing date; 
at least a majority of independent members that meet the enhanced 
standards on the compensation committee within 90 days of the listing 
date; and a fully independent compensation committee where all members 
meet the enhanced standards within one year of the listing date.\74\ 
Alternatively, companies listing in conjunction with their IPO may 
choose, instead, not to establish a formal compensation committee, 
instead relying upon a majority of independent directors to discharge 
the responsibilities.\75\
---------------------------------------------------------------------------

    \73\ See Section 809(a) of the Guide (``Effective Dates/
Transitions'').
    \74\ Currently, Section 809(a) of the Guide also provides that 
companies emerging from bankruptcy and companies which have ceased 
to be controlled companies are required to meet the majority 
independent board requirement within one year. Further, as with 
companies listing in conjunction with their IPOs, such companies may 
choose not to establish a compensation committee, instead relying 
upon a majority of independent directors to discharge the 
responsibilities of the committee. As NYSE MKT proposes no changes 
to this section, these companies would continue to be entitled to 
this transition period.
    \75\ See current Section 809(a) of the Guide (``Effective Dates/
Transitions'').
---------------------------------------------------------------------------

    Companies that cease to qualify as foreign private issuers would 
not have a transition period under the proposed rules.
    Companies listing upon transfer from another market with a 
substantially similar requirement will continue to be afforded the 
balance of any grace period afforded by the other market under current 
Section 809(b) of the Guide. Companies transferring from other markets 
that do not have a substantially similar requirement would have one 
year from the date of listing to satisfy the requirements of Section 
805.
    For a company that was, but has ceased to be, a Smaller Reporting 
Company, the proposed rule change, as modified by Amendment No. 3, 
establishes a compliance schedule based on certain dates relating to 
the company's change in status.\76\ Pursuant to Rule 12b-2 under the 
Act, a company tests its status as a Smaller Reporting Company on an 
annual basis as of the last business day of its most recently completed 
second fiscal quarter (the ``Smaller Reporting Company Determination 
Date''). A company with a public float of $75 million or more as of the 
Smaller Reporting Company Determination Date will cease to be a Smaller 
Reporting Company as of the beginning of the fiscal year following the 
Smaller Reporting Company Determination Date. Under NYSE MKT's 
proposal, the day of this change in status is the beginning of the 
compliance period (``Start Date'').\77\
---------------------------------------------------------------------------

    \76\ See proposed Section 805(c)(5) of the Guide (Transition 
Period), as amended. In the proposal as originally submitted, the 
compliance schedule was to require compliance with the enhanced 
standards for director independence six months after the company 
ceases to be a Smaller Reporting Company, but immediate compliance 
with all other requirements. In Amendment No. 3, NYSE MKT states 
that while the revised compliance schedule is different from what it 
originally proposed, the amended version will allow companies 
sufficient time to adjust to the differences, as many companies will 
likely not become aware of their change in status until 
significantly after the determination date and would therefore not 
utilize the transition period as originally proposed to bring 
themselves into compliance with the enhanced requirements, and that 
such companies would have significant difficulty in becoming 
compliant within the transition period as originally proposed.
    \77\ See Amendment No. 3, supra note 8.
---------------------------------------------------------------------------

    By six months from the Start Date, the company will be required to 
comply with Section 805(c)(4) of the Guide, which sets forth the 
provision described above relating to the requirement that the 
committee consider independence factors before selecting compensation 
advisers. Six months from the Start Date, the company will begin to 
comply with the additional requirements in Section 805(c)(1) regarding 
member independence on the compensation committee. Under the proposal, 
as amended, a company that has ceased to be a Smaller Reporting Company 
will be permitted to phase in its compliance with the enhanced 
independence requirements for compensation committee members (relating 
to compensatory fees and affiliation) as follows: (i) One member must 
satisfy the requirements by six months from the Start Date; (ii) a 
majority of members must satisfy the requirements by nine months from 
the Start Date; and (iii) all members must satisfy the requirements by 
one year from the Start Date.\78\ Alternatively, any such Smaller 
Reporting Company that does not have a formal compensation committee 
may comply with the transition requirements with respect to all of its 
independent directors as a group.
---------------------------------------------------------------------------

    \78\ During the compliance schedule, a company that has ceased 
to be a Smaller Reporting Company will be required to continue to 
comply with the rules previously applicable to it.
---------------------------------------------------------------------------

III. Comments on the Proposed Rule Change and NYSE MKT's Response

    As stated previously, the Commission received no comments on the 
NYSE MKT Proposal. However, the Commission received a total of eight 
comment letters on the NYSE \79\ and NYSE Arca proposals.\80\ The 
Commission is treating the comment letters submitted on the NYSE and 
NYSE Arca filings, for which comparable letters were not submitted on 
the NYSE MKT filing, as also being applicable to the NYSE MKT filing 
since the NYSE, NYSE Arca and NYSE MKT filings address the same 
substantive issues. NYSE Euronext, Inc., on behalf of NYSE MKT, also 
responds to these comment letters for the NYSE MKT proposal.\81\
---------------------------------------------------------------------------

    \79\ See supra note 5.
    \80\ See id.
    \81\ See supra note 6. NYSE Euronext, Inc.'s response addresses 
comments received on both the NYSE and NYSE Arca proposals.
---------------------------------------------------------------------------

    Three commenters expressed general support for the proposal, 
although two believed that it needed to be amended before being 
approved.\82\ Some commenters supported specific provisions of the 
proposal,\83\ some opposed specific provisions,\84\ and some sought 
clarification of certain aspects of the proposal.\85\ Some commenters 
believed that the proposal fell short of meeting the requirements of 
Rule 10C-1 and believed that it should have been more stringent.\86\ 
These and other comments, as well as NYSE MKT's responses to some of 
the comments that raised issues with the proposal, are summarized 
below.
---------------------------------------------------------------------------

    \82\ See Ameriprise Letter, which supported the proposal but 
believed that certain aspects were not sufficiently clear such that 
the proposal needed to be amended to provide additional clarity; ICI 
Letter, which urged approval of the proposal; and Corporate 
Secretaries Letter, which generally supported the proposal, but 
believed that certain of its aspects were unnecessarily burdensome 
or not sufficiently clear such that the proposal needed to be 
amended before being approved by the Commission.
    \83\ See Brown Letter, CII Letter, and ICI Letter.
    \84\ See AFL-CIO Letter, Brown Letter, and Wilson Sonsini 
Letter. See also CII Letter, which stated that it believed that 
specific aspects of the NYSE Arca proposal were lacking.
    \85\ See Ameriprise Letter and Corporate Secretaries Letter.
    \86\ See AFL-CIO Letter, Brown Letter, CII Letter, and Teamsters 
Letter.
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A. Definition of Independence

1. Consideration of Director Compensation
    Three commenters believed that the proposal falls short of the 
requirements of Rule 10C-1, which, in their view, requires that fees 
paid to a director for service on the company's board also be 
considered.\87\ Two of these commenters,

[[Page 4544]]

after noting that the proposal did not require boards of directors to 
also consider the compensation paid to the directors for their service 
on the board in determining the independence of directors serving on 
the compensation committee, argued that the proposal falls short of the 
requirements of Rule 10C-1, which, in their view, requires that fees 
paid to a director for service on the company's board also be 
considered.\88\ The other commenter argued that the language of Section 
10C of the Act itself, as well as its legislative history, indicates 
Congress's intent that such fees be considered.\89\ These commenters 
believed that compensation for board service can result in ``the 
impairment of independence as a result of excessive fees,'' \90\ 
because ``[h]igh director fees relative to other sources of income can 
compromise director objectivity,'' \91\ and ``[h]ighly paid directors 
also may be inclined to approve large executive pay packages.'' \92\ 
One of these commenters believed that the requirement of Section 10C of 
the Act and Rule 10C-1 to consider the source of compensation of a 
director goes further, and applies to all types of compensation that a 
director may receive, including compensation paid by any person, 
including non-issuers.\93\
---------------------------------------------------------------------------

    \87\ See Brown Letter, AFL-CIO Letter, and Teamsters Letter. As 
noted above, the comment letters refer specifically to NYSE, but 
apply equally to the NYSE MKT proposal.
    \88\ See AFL-CIO Letter and Teamsters Letter, noting that Rule 
10C-1 requires the exchanges to consider a director's ``source of 
compensation,'' and arguing that this phrase includes director fees.
    \89\ See Brown Letter.
    \90\ Id.
    \91\ See AFL-CIO Letter and Teamsters Letter.
    \92\ Id.
    \93\ See Brown Letter.
---------------------------------------------------------------------------

    In its response to comments, NYSE MKT stated that, as all non-
management directors of a listed company are eligible to receive the 
same fees for service as a director or board committee member, NYSE MKT 
does not believe that it is likely that director compensation would be 
a relevant consideration for compensation committee independence.\94\ 
NYSE MKT noted that, however, the proposed rules require the board to 
consider all relevant factors in making compensation committee 
independence determinations.\95\ Therefore, NYSE MKT believed that, to 
the extent that excessive board compensation might affect a director's 
independence, the proposed rules would require the board to consider 
that factor in its determination.\96\
---------------------------------------------------------------------------

    \94\ See NYSE Response Letter.
    \95\ See id.
    \96\ See id.
---------------------------------------------------------------------------

2. Personal or Business Relationships Between Directors and Officers
    Some commenters believed that the proposed rules should explicitly 
require the board of a listed company, when considering affiliations of 
a director in determining eligibility for compensation committee 
membership, to consider personal or business relationships between the 
director and the company's executive officers.\97\ As expressed by two 
of these commenters, ``too many corporate directors have significant 
personal, financial or business ties to the senior executives that they 
are responsible for compensating.'' \98\
---------------------------------------------------------------------------

    \97\ See AFL-CIO Letter, Brown Letter, CII Letter, and Teamsters 
Letter. As noted above, the comment letters refer specifically to 
NYSE and NYSE Arca, but apply equally to the NYSE MKT proposal.
    \98\ AFL-CIO Letter and Teamsters Letter.
---------------------------------------------------------------------------

    Some commenters believed that related party transactions should 
explicitly be included as a relevant factor in determining independence 
for members of compensation committees.\99\ The additional requirements 
suggested by commenters also included, for example, disqualification of 
a director from membership on the compensation committee if an 
immediate family member of the director received compensation in excess 
of $120,000 a year from the company even if that family member was not 
an executive officer of the company; \100\ or if the director has, or 
in the past five years has had, a personal contract with the company, 
with an executive officer of the company, or with any affiliate of the 
company.\101\
---------------------------------------------------------------------------

    \99\ See AFL-CIO Letter and Teamsters Letter. As noted above, 
the comment letters refer specifically to NYSE, but apply equally to 
the NYSE MKT proposal.
    \100\ See id. NYSE MKT's definition of Independent Director 
already disqualifies a director from membership on the compensation 
committee if an immediate family member of the director receives in 
excess of $120,000 from the company or was an executive officer of 
the company.
    \101\ See CII Letter. The commenter acknowledged, however, that 
NYSE Arca's existing director requirements implicitly require this 
consideration, but similarly recommended that the importance of the 
factor requires it be explicit in the proposal. Outside the scope of 
this proposal, the commenter also suggested NYSE Arca consider, at 
some future date, developing a more comprehensive and robust 
definition of independent directors that could be applicable to all 
board committees and provided a proposed definition for NYSE Arca's 
consideration.
---------------------------------------------------------------------------

    One commenter acknowledged that the proposal would require 
consideration of all factors specifically relevant to determining 
whether a director has a relationship which is material to that 
director's ability to be independent from management, but argued that 
such requirement is not sufficient to ensure that boards weigh personal 
or business relationships between directors and executive 
officers.\102\ In support, the commenter argued that: (1) Such 
relationships were not technically with the ``listed company'' and 
therefore would at least create confusion as to whether it should be 
considered; (2) the omission of an explicit reference to this 
relationship was inconsistent with other approaches taken in the 
proposal that made reference to certain other relationships; and (3) 
legislative history makes it clear that Congress expected these 
relationships to be explicitly considered in determining director 
independence.\103\
---------------------------------------------------------------------------

    \102\ See Brown Letter. As noted above, the comment letter 
refers specifically to NYSE, but applies equally to the NYSE MKT 
proposal.
    \103\ See id.
---------------------------------------------------------------------------

    In response, NYSE MKT noted that the existing independence 
standards of NYSE MKT require the board to make an affirmative 
determination that there is no material relationship between the 
director and the company which would affect the director's 
independence.\104\ NYSE MKT further stated that commentary to Section 
303A.02(a) of the NYSE Listed Company Manual explicitly notes with 
respect to the board's affirmative determination of a director's 
independence that the concern is independence from management, and NYSE 
MKT and NYSE Arca have always interpreted their respective director 
independence requirements in the same way.\105\ Consequently, NYSE MKT 
stated that it did not believe that any further clarification of this 
requirement is necessary.\106\
---------------------------------------------------------------------------

    \104\ See NYSE Response Letter.
    \105\ See id.
    \106\ See id.
---------------------------------------------------------------------------

    As to a requirement to consider related party transactions, NYSE 
MKT responded that it believes that this is unnecessary as the existing 
director independence standards require boards to consider all material 
factors relevant to an independence determination, as do the specific 
compensation committee independence requirements of the proposed 
rules.\107\
---------------------------------------------------------------------------

    \107\ See NYSE Response Letter.
---------------------------------------------------------------------------

3. Sufficiency of Single Factor and Additional Comments on Independence
    Two commenters explicitly sought clarification that a single factor 
can result in the loss of independence.\108\ In its response letter, 
NYSE MKT confirmed that it has interpreted the

[[Page 4545]]

existing general board independence standards as providing that a 
single relationship could be sufficiently material that it would render 
a director non-independent. NYSE MKT stated it was not aware that there 
has been any confusion with respect to this interpretation.\109\ 
Consequently, NYSE MKT did not believe it is necessary to include in 
the proposed rules a statement that a single factor may be sufficiently 
material to render a director non-independent, as this is clearly the 
intention of the rules as drafted.\110\
---------------------------------------------------------------------------

    \108\ See AFL-CIO Letter and Teamsters Letter. As noted above, 
the comment letters refer specifically to NYSE, but apply equally to 
the NYSE MKT proposal.
    \109\ See NYSE Response Letter.
    \110\ See id.
---------------------------------------------------------------------------

    Some of the above commenters expressed the belief, in general, that 
the definition of an independent director should be more narrowly 
drawn, that the bright-line tests of independence should be 
strengthened, and that the standards of independence should be uniform 
for all committees requiring independent directors.\111\
---------------------------------------------------------------------------

    \111\ See CII Letter, AFL-CIO Letter, and Teamsters Letter.
---------------------------------------------------------------------------

    One commenter believed that the requirement that the board ``must 
consider all factors specifically relevant to determining whether a 
director has a relationship to the listed company which is material to 
that director's ability to be independent from management in connection 
with the duties of a compensation committee member'' was vague and 
unnecessary in light of the comprehensive factors already 
required.\112\ In responding to this commenter, NYSE MKT disagreed, 
noting that the requirement to consider all material relationships, not 
just those enumerated, was essential, as it is impossible to foresee 
all relationships that may be material.\113\
---------------------------------------------------------------------------

    \112\ See Corporate Secretaries Letter. As noted above, the 
comment letter refers specifically to NYSE, but applies equally to 
the NYSE MKT proposal.
    \113\ See NYSE Response Letter.
---------------------------------------------------------------------------

B. Compensation Adviser Independence Factors

    The Commission received letters from four commenters relating to 
the provision of the proposed rule change that requires a compensation 
committee to take into consideration the factors set forth in the 
proposal in the selection of a compensation consultant, legal counsel, 
or other adviser to the committee.\114\
---------------------------------------------------------------------------

    \114\ See Ameriprise Letter, Wilson Sonsini Letter, CII Letter, 
and Corporate Secretaries Letter. As noted above, the comment 
letters refer specifically to NYSE and NYSE Arca, but apply equally 
to the NYSE MKT proposal.
---------------------------------------------------------------------------

1. Additional Factors for Consideration
    One commenter generally supported the proposal's requirement that a 
board consider six independence factors before engaging an adviser, but 
believed that at least one additional factor should be considered: 
``Whether the compensation committee consultants, legal counsel or 
other advisers require that their clients contractually agree to 
indemnify or limit their liability.'' \115\ The commenter believed that 
such contractual provisions, which the commenter indicated have become 
standard practice for many consultants, ``raise conflict of interest 
red flags'' that every compensation committee should consider in 
determining the independence of the consultant.\116\
---------------------------------------------------------------------------

    \115\ See CII Letter. As noted above, the comment letter refers 
specifically to NYSE Arca, but applies equally to the NYSE MKT 
proposal.
    \116\ See CII Letter.
---------------------------------------------------------------------------

    In response, NYSE MKT stated that it did not believe that this is 
an appropriate addition because a relationship would affect an 
adviser's independence from management only if it gave rise to a 
concern that it would subject the adviser to influence by 
management.\117\ It was not apparent to NYSE MKT why the existence of 
contractual indemnification and limitation of liability provisions 
would subject an adviser to any influence by management and, therefore, 
it is not clear how they are relevant to an independence 
determination.\118\ NYSE MKT expressed no view on the desirability of 
such agreements.\119\
---------------------------------------------------------------------------

    \117\ See NYSE Response Letter.
    \118\ See id.
    \119\ See id.
---------------------------------------------------------------------------

2. Non-Independent Consultants
    One commenter suggested that, although the portion of the proposal 
which relates to the compensation committee's use of a compensation 
consultant was thoughtfully drafted and accurately reflects the 
substance of Rule 10C-1, there was a possibility that a reader may not 
properly interpret the intended meaning of proposed Section 303A.05(c) 
of the NYSE Listed Company Manual concerning the use of compensation 
consultants, legal counsel and advisers that are not independent.\120\ 
First, the commenter suggested the use of the example ``independent 
legal counsel'' might be read to require the compensation committee to 
only use independent legal counsel, when Rule 10C-1 would otherwise 
permit a compensation committee to receive advice from non-independent 
counsel, such as in-house counsel or outside counsel retained by 
management.\121\ Second, the commenter suggested that the proposal 
could be revised to emphasize that a compensation committee is not 
responsible for advisers retained by management or other parties.\122\ 
Third, the commenter suggested that the section addressing the funding 
of consultants should be revised to make clear that: (a) Retained legal 
counsel need not be independent: And (b) expenses of an adviser, in 
addition to its compensation, would also be provided for by the 
issuer.\123\ Fourth, the commenter suggested that the proposal be 
clarified to require a compensation committee to take into account the 
independence requirements only when selecting a consultant for matters 
related to executive compensation, rather than for consultants selected 
to assist with any other responsibilities the committee may have in 
addition to executive compensation.\124\ In response, NYSE MKT noted 
that Amendment No. 3 amended the proposed rule text to provide that: 
(i) Nothing in the proposed rules requires a compensation consultant, 
legal counsel or other compensation adviser to be independent, only 
that the compensation committee consider the enumerated independence 
factors before selecting a compensation adviser; and (ii) the 
compensation committee may select any compensation adviser they prefer 
including ones that are not independent, after considering the six 
independence factors outlined in the proposed rules.\125\ In addition, 
NYSE MKT noted that Rule 10C-1 and the SEC's adopting release refer 
only to compensation advisers generally without carving out 
compensation advisers retained by the compensation committee with 
respect to matters other than executive compensation.\126\
---------------------------------------------------------------------------

    \120\ See Ameriprise Letter.
    \121\ See id.
    \122\ See id.
    \123\ See id.
    \124\ See id. See also Corporate Secretaries Letter.
    \125\ See NYSE Response Letter.
    \126\ See id.
---------------------------------------------------------------------------

    One commenter believed that the proposed rule could be read as 
requiring a compensation committee to consider the independence factors 
set forth in Rule 10C-1 when selecting any consultant providing advice 
to the compensation committee, including any outside legal counsel that 
might provide legal advice to a compensation committee.\127\ The 
commenter argued that outside legal counsel often provides advice to 
compensation committees on matters other than how much a

[[Page 4546]]

company should pay an executive.\128\ The commenter suggested it would 
not be ``necessary or a good use of resources for compensation 
committees to review independence factors for such attorneys providing 
advice to the compensation committee.'' \129\ The commenter stated that 
no other rule requires a board committee to consider the independence 
of its regular legal counsel,\130\ and noted that, while it may, at 
times, be appropriate for a board or a committee to consider 
independence factors, such a consideration should not be made part of a 
listing standard that singles out the compensation committee.\131\ The 
commenter suggested that different language originally proposed by The 
NASDAQ Stock Market LLC reflected a more balanced rule that only 
required the compensation committee to consider the independence when 
selecting independent legal counsel, not every outside attorney that 
provides advice to the compensation committee.\132\
---------------------------------------------------------------------------

    \127\ See Wilson Sonsini Letter.
    \128\ See id.
    \129\ See id.
    \130\ See id.
    \131\ See id.
    \132\ See id. The Commission notes that The NASDAQ Stock Market 
LLC has since revised its proposed rule language and added 
commentary that makes clear its original intent that the 
compensation committee of an issuer listed on The NASDAQ Stock 
Market LLC, absent an exemption, must consider the independence of 
every adviser, other than in-house legal counsel, that provides 
advice to the compensation committee, including non-independent 
legal counsel. See SR-NASDAQ-2012-109, Amendment No. 1.
---------------------------------------------------------------------------

    In response, NYSE MKT stated that it believes that its proposal is 
dictated by Rule 10C-1, which excludes only in-house legal counsel from 
the requirement to conduct an independence analysis with respect to any 
legal counsel consulted by the compensation committee, including the 
company's regular securities or tax counsel.\133\ NYSE MKT noted that 
the Rule 10C-1 Adopting Release provides that ``[t]he exemption of in-
house counsel from the independence analysis will not affect the 
obligation of a compensation committee to consider the independence of 
outside legal counsel or compensation consultants or other advisers 
retained by management or by the issuer.'' \134\
---------------------------------------------------------------------------

    \133\ See NYSE Response Letter.
    \134\ See id.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the proposal, 
maintained that the required independence assessment will be ``time-
consuming and burdensome'' due to the scope of information that will 
need to be gathered in order to conduct the required independence 
assessment.\135\ This commenter believed that uncertainty over the 
scope of the requirement could have a counterproductive effect of 
discouraging compensation committees from obtaining the advice of 
advisers subject to the rule, particularly in situations where quick 
action is required of the compensation committee, and further 
identified a number of specific issues that it believed NYSE should 
address to provide greater clarity regarding the standard.\136\
---------------------------------------------------------------------------

    \135\ See Corporate Secretaries Letter.
    \136\ The Commission notes that NYSE MKT addressed some of the 
commenter's concerns in Amendment No. 3, supra note 8.
---------------------------------------------------------------------------

    In response, NYSE MKT disagreed with the commenter, arguing that it 
was impossible to specifically enumerate every category of relationship 
which might be material to a compensation committee adviser's 
independence.\137\ NYSE MKT believes that it is therefore necessary for 
a compensation committee to conduct a more flexible analysis.\138\ NYSE 
MKT believes that it would not be appropriate for it to identify 
additional relevant factors in the rule, as it would be impossible to 
predict every category of relationship that might be material.\139\
---------------------------------------------------------------------------

    \137\ See NYSE Response Letter.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

C. Opportunity To Cure Defects

    One commenter supported the rule proposed to permit issuers a 
period of time, under specified conditions, to cure failures to comply 
with the independence requirements for compensation committee 
members.\140\ The commenter was concerned, however, that the proposed 
rules did not specify a cure period for any other form of non-
compliance with the new rules.\141\ The commenter believed that a 
company should be allowed to take corrective action within a reasonable 
time after the company's senior executives learn of the non-compliance.
---------------------------------------------------------------------------

    \140\ See Corporate Secretaries Letter. As noted above, the 
comment letters refer specifically to NYSE, but apply equally to the 
NYSE MKT proposal.
    \141\ See id. The commenter mentioned, in particular, the 
requirement that the committee may obtain advice from a consultant 
or adviser only after assessing that individual's independence. The 
commenter believed that inadvertent violations of this requirement 
could arise, for example, if a person is appearing before a 
compensation committee solely to provide information or other 
services, and the individual then on a solicited or unsolicited 
basis makes a statement that could be viewed as providing advice on 
executive compensation. In the absence of a cure mechanism, the 
commenter believed, the company would be in violation of the listing 
standard and have no recourse.
---------------------------------------------------------------------------

    In response, NYSE MKT noted that it had existing policies and 
procedures that govern non-compliance with rules generally and that 
these provisions would apply to any events of non-compliance under the 
proposed rules.\142\ NYSE MKT believes these provisions provide it with 
the ability to grant a discretionary period for an issuer to return to 
compliance, and noted that the determination of a reasonable cure 
period can only be made in light of specific facts and 
circumstances.\143\
---------------------------------------------------------------------------

    \142\ See NYSE Response Letter.
    \143\ See id.
---------------------------------------------------------------------------

D. Exemptions

    The Commission received one comment letter supporting the proposal 
to exempt investment companies from the Rule 10C-1 requirements.\144\ 
As the commenter noted, although Rule 10C-1 exempts certain entities, 
including registered open-end management investment companies, from the 
enhanced independence requirements for members of compensation 
committees, it did not explicitly exempt other types of investment 
companies registered under the Investment Company Act of 1940 
(``Investment Company Act''), including closed-end funds, from any of 
the requirements of Rule 10C-1. Under the proposal, both closed-end and 
open-end funds would be exempt from all the requirements of the rule. 
The commenter supported this aspect of the proposal, stating that both 
open-end and closed-end funds typically are externally managed and do 
not employ executives or, by their nature, have employees. The 
commenter agreed with the proposal that it would be significantly and 
unnecessarily burdensome to require such entities to comply with the 
proposed requirements, and further noted that any conflicts with 
respect to compensation of investment advisers are governed by the 
Investment Company Act.\145\
---------------------------------------------------------------------------

    \144\ See ICI Letter. As noted above, the comment letters refer 
specifically to NYSE, but apply equally to the NYSE MKT proposal.
    \145\ See ICI Letter.
---------------------------------------------------------------------------

E. Transition Period

    One commenter voiced support for the transition period proposed for 
compliance with the new compensation committee independence standard, 
but believed that NYSE should provide a longer period for companies to 
satisfy proposed Section 303A.05 of the NYSE Listed Company Manual, 
relating to the authority of a compensation committee to retain 
compensation consultants, legal counsel, and other compensation 
advisers; the authority to fund such advisers; and the responsibility 
of the

[[Page 4547]]

committee to consider independence factors before selecting such 
advisers.\146\
---------------------------------------------------------------------------

    \146\ See Corporate Secretaries Letter. As noted above, the 
comment letters refer specifically to NYSE, but apply equally to the 
NYSE MKT proposal.
---------------------------------------------------------------------------

    In response, the Exchange stated that it believed that the 
transition periods are sufficient to enable companies to become 
compliant on a timely basis in a manner that is not unduly 
burdensome.\147\ The Exchange also noted that the proposed transition 
period was identical to that used at the time of the initial 
implementation of NYSE's current board and committee independence 
requirements and that NYSE MKT believes that the transition period was 
not unduly burdensome for companies at that time.\148\
---------------------------------------------------------------------------

    \147\ See NYSE Response Letter.
    \148\ See id.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the NYSE MKT 
proposal, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\149\ In particular, the Commission finds that the amended 
proposed rule change is consistent with the requirements of Section 
6(b) of the Act,\150\ as well as with Section 10C of the Act \151\ and 
Rule 10C-1 thereunder.\152\ Specifically, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\153\ which requires that the rules of a national securities 
exchange be designed, among other things, to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest; and not be 
designed to permit, among other things, unfair discrimination between 
issuers.
---------------------------------------------------------------------------

    \149\ In approving the NYSE MKT proposed rule change, as 
amended, the Commission has considered its impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \150\ 15 U.S.C. 78f(b).
    \151\ 15 U.S.C. 78j-3.
    \152\ 17 CFR 240.10C-1.
    \153\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The development and enforcement of meaningful listing standards for 
a national securities exchange is of substantial importance to 
financial markets and the investing public. Meaningful listing 
standards are especially important given investor expectations 
regarding the nature of companies that have achieved an exchange 
listing for their securities. The corporate governance standards 
embodied in the listing rules of national securities exchanges, in 
particular, play an important role in assuring that companies listed 
for trading on the exchanges' markets observe good governance 
practices, including a reasoned, fair, and impartial approach for 
determining the compensation of corporate executives. The Commission 
believes that the NYSE MKT proposal will foster greater transparency, 
accountability, and objectivity in the oversight of compensation 
practices of listed issuers and in the decision-making processes of 
their Compensation Committees.
    In enacting Section 10C of the Act as one of the reforms of the 
Dodd-Frank Act,\154\ Congress resolved to require that ``board 
committees that set compensation policy will consist only of directors 
who are independent.'' \155\ In June 2012, as required by this 
legislation, the Commission adopted Rule 10C-1 under the Act, which 
directs the national securities exchanges to prohibit, by rule, the 
initial or continued listing of any equity security of an issuer (with 
certain exceptions) that is not in compliance with the rule's 
requirements regarding issuer compensation committees and compensation 
advisers.
---------------------------------------------------------------------------

    \154\ See supra note 9.
    \155\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of 
the Committee of Conference, Title IX, Subtitle E ``Accountability 
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29, 
2010).
---------------------------------------------------------------------------

    In response, NYSE MKT submitted the proposed rule change, which 
includes rules intended to comply with the requirements of Rule 10C-1 
and additional provisions designed to strengthen the Exchange's listing 
standards relating to compensation committees. The Commission believes 
that the proposed rule change satisfies the mandate of Rule 10C-1 and 
otherwise will promote effective oversight of its listed issuers' 
executive compensation practices.
    The Commission notes that a number of the commenters generally 
supported substantially similar proposed rule changes, although some 
commenters offered suggestions to clarify or improve various provisions 
of the proposals. The Commission believes that the proposed rule 
change, as modified by Amendment Nos. 1 and 3, appropriately revises 
NYSE MKT's rules for Compensation Committees of listed companies, for 
the following reasons:

A. Compensation Committee Composition

    As discussed above, under Rule 10C-1, the exchanges must adopt 
listing standards that require each member of a compensation committee 
to be independent, and to develop a definition of independence after 
considering, among other relevant factors, the source of compensation 
of a director, including any consulting, advisory or other compensatory 
fee paid by the issuer to the director, as well as whether the director 
is affiliated with the issuer or any of its subsidiaries or their 
affiliates.
    The Commission notes that Rule 10C-1 leaves it to each exchange to 
formulate a final definition of independence for these purposes, 
subject to review and final Commission approval pursuant to Section 
19(b) of the Act. As the Commission stated in the Rule 10C-1 Adopting 
Release, ``given the wide variety of issuers that are listed on 
exchanges, we believe that the exchanges should be provided with 
flexibility to develop independence requirements appropriate for the 
issuers listed on each exchange and consistent with the requirements of 
the independence standards set forth in Rule 10C-1(b)(1).'' \156\ This 
discretion comports with the Act, which gives the exchanges the 
authority, as self-regulatory organizations, to propose the standards 
they wish to set for companies that seek to be listed on their markets 
consistent with the Act and the rules and regulations thereunder, and, 
in particular, Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \156\ As explained further in the Rule 10C-1 Adopting Release, 
prior to final approval, the Commission will consider whether the 
exchanges' proposed rule changes are consistent with the 
requirements of Section 6(b) and Section 10C of the Act.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence 
standards that currently apply to board and Compensation Committee 
members, which include certain bright-line tests, NYSE MKT has enhanced 
its listing requirements regarding Compensation Committees by adopting 
additional standards for independence to comply with the Fees Factor 
and Affiliation Factor, as well as the other standards set forth in 
Rule 10C-1. The NYSE MKT's proposal also adopts the cure procedures 
required in Rule 10C-1(a)(3) for Compensation Committee members who 
cease to be independent for reasons outside their reasonable control, 
so long as the majority of the members of the Compensation Committee 
continue to be independent, and proposes the requirement that executive

[[Page 4548]]

compensation must be determined either by a compensation committee 
comprised of independent directors,\157\ or by a majority of 
independent directors in the absence of a formal committee, as required 
by Rule 10C-1.
---------------------------------------------------------------------------

    \157\ Under the NYSE MKT proposal, Smaller Reporting Companies 
will retain the ability to appoint, under exceptional and limited 
circumstances, a non-independent director to a Compensation 
Committee, thereby allowing executive compensation to be determined 
by a compensation committee comprised of a majority of independent 
directors, rather than entirely by independent directors.
---------------------------------------------------------------------------

    In addition, as noted above, NYSE MKT eliminates, for all companies 
other than Smaller Reporting Companies, the ability of the board under 
exceptional and limited circumstances to appoint a non-independent 
director to the Compensation Committee.
    Further, as discussed in more detail below, the NYSE MKT proposal, 
while it does not require a formal charter, still includes requirements 
that the Compensation Committee must be afforded the authority and 
responsibilities as to compensation advisers as set forth under Rule 
10C-1. Taken as a whole, the Commission believes that these changes 
will strengthen the oversight of executive compensation in NYSE MKT-
listed companies and further greater accountability, and will therefore 
further the protection of investors consistent with Section 6(b)(5) of 
the Act.
    The Commission believes that the Exchange's proposal, which 
requires the consideration of the additional independence factors for 
Compensation Committee members, is designed to protect investors and 
the public interest and is consistent with the requirements of Sections 
6(b)(5) and 10C of the Act and Rule 10C-1 thereunder.
    With respect to the Fees Factor of Rule 10C-1, the Exchange 
commentary states when considering the source of a director's 
compensation in determining independence for compensation committee 
service, the board should consider whether the director receives 
compensation from any person or entity that would impair his ability to 
make independent judgments about the listed company's executive 
compensation. In addition to the continued application of the NYSE 
MKT's current bright-line tests, NYSE MKT's new rules also require the 
board to consider all relevant factors in making independence 
determinations for compensation committee membership. The Exchange 
believes that these requirements of proposed Section 805(c)(1) of the 
Guide, in addition to the general director independence requirements, 
represent an appropriate standard for Compensation Committee 
independence that is consistent with the requirements of Rule 10C-1 and 
the Fees Factor.
    The Commission believes that the provisions noted above to address 
the Fees Factor give a board broad flexibility to consider a wide 
variety of fees, including any consulting, advisory or other 
compensatory fee paid by the issuer or entity, when considering a 
director's independence for Compensation Committee service. While the 
Exchange does not bar all compensatory fees, the approach is consistent 
with Rule 10C-1 and provides a basis for a board to prohibit a director 
from being a member of the Compensation Committee, should the director 
receive compensation that impairs the ability to make independent 
decisions on executive compensation matters, even if that compensation 
does not exceed the threshold in the bright-line test.\158\ The 
Commission, therefore, believes that the proposed compensatory fee 
requirements comply with Rule 10C-1 and are designed to protect 
investors and the public interest, consistent with Section 6(b)(5) of 
the Act. The Commission notes that the compensatory fee consideration 
may help ensure that Compensation Committee members are less likely to 
have received fees, from either the issuer or another entity, that 
could potentially influence their decisions on compensation matters.
---------------------------------------------------------------------------

    \158\ See supra note 34, setting forth the existing bright-line 
tests.
---------------------------------------------------------------------------

    The Commission recognizes that some commenters did not believe that 
the proposal went far enough because NYSE MKT did not adequately 
consider the compensation that directors receive for board or committee 
service in formulating its standards of independence for service on the 
compensation committee, and, in particular, the levels to which such 
compensation may rise,\159\ or otherwise favored additional 
requirements.\160\ The Commission notes, however, that to the extent a 
conflict of interest exists because directors set their own 
compensation, companies must disclose director compensation, and 
investors will become aware of excessive or non-customary director 
compensation through this means. In addition, as NYSE MKT states, a 
company's board of directors must consider all relevant factors in 
making compensation committee independence determinations, and if 
director fees could, in the opinion of the board, impair the director's 
independent judgment with respect to compensation-related matters, the 
board could therefore consider director compensation in that 
context.\161\ The Commission believes that, based on the NYSE MKT's 
argument and the disclosure requirements noted above, these arguments 
are sufficient to find that NYSE MKT has complied with the requirements 
of Rule 10C-1 in this regard.
---------------------------------------------------------------------------

    \159\ See AFL-CIO Letter, Brown Letter, and Teamsters Letter, 
maintaining that NYSE's proposal ``falls short'' of the Rule 10C-1 
provision requiring exchanges to consider a director's source of 
compensation. See also supra notes 97-101 and accompanying text. As 
stated by commenters, ``[h]igh director fees relative to other 
sources of income can compromise director objectivity'' and 
``[h]ighly paid directors also may be more inclined to approve large 
executive pay packages.'' AFL-CIO Letter. See also Teamsters Letter. 
As noted above, the comment letters refer specifically to NYSE, but 
apply equally to the NYSE MKT proposal.
    \160\ See, e.g., CII Letter.
    \161\ See NYSE Response letter, supra note 6. The Commission 
also notes that in the NYSE Response Letter, the Exchange states 
that to the extent that excessive board compensation might affect a 
director's independence, the new rules would require the board to 
consider that factor in its independence determination.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, NYSE MKT has 
concluded that an outright bar from service on a company's Compensation 
Committee of any director with an affiliation with the company, its 
subsidiaries, and their affiliates is inappropriate for Compensation 
Committees. NYSE MKT's existing independence standards will also 
continue to apply to those directors serving on the Compensation 
Committee. NYSE MKT maintains that it may be appropriate for certain 
affiliates, such as representatives of significant stockholders, to 
serve on Compensation Committees as ``share ownership in the listed 
company aligns the director's interests with those of unaffiliated 
shareholders, as their stock ownership gives them the same economic 
interest in ensuring that the listed company's executive compensation 
is not excessive.'' In spite of the argument of two commenters in favor 
of an outright ban on affiliations with the company,\162\ the 
Commission believes that NYSE MKT's approach of requiring boards only 
to consider such affiliations is reasonable and consistent with the 
requirements of the Act.
---------------------------------------------------------------------------

    \162\ See Teamsters Letter and AFL-CIO Letter. As noted above, 
the comment letters refer specifically to NYSE, but apply equally to 
the NYSE MKT proposal.
---------------------------------------------------------------------------

    The Commission notes that Congress, in requiring the Commission to 
direct the exchanges to consider the Affiliation Factor, did not 
declare that an absolute bar was necessary. Moreover, as the

[[Page 4549]]

Commission stated in the Rule 10C-1 Adopting Release, ``In establishing 
their independence requirements, the exchanges may determine that, even 
though affiliated directors are not allowed to serve on audit 
committees, such a blanket prohibition would be inappropriate for 
compensation committees, and certain affiliates, such as 
representatives of significant shareholders, should be permitted to 
serve.'' \163\ In determining that NYSE MKT's affiliation standard is 
consistent with Sections 6(b)(5) and 10C under the Act, the Commission 
notes that NYSE MKT's proposal requires a company's board, in selecting 
Compensation Committee members, to consider whether any such 
affiliation would impair a director's judgment as a member of the 
Compensation Committee. The NYSE MKT rule further states that, in 
considering affiliate relationships, a board should consider whether 
such affiliate relationship places the director under the direct or 
indirect control of the listed company or its senior management such 
that it would impair the ability of the director to make independent 
judgments on executive compensation. We believe that this should give 
companies the flexibility to assess whether a director who is an 
affiliate, including a significant shareholder, should or should not 
serve on the company's Compensation Committee, depending on the 
director's particular affiliations with the company or its senior 
management.\164\
---------------------------------------------------------------------------

    \163\ Rule 10C-1 Adopting Release. At the same time, the 
Commission noted that significant shareholders may have other 
relationships with the listed company that would result in such 
shareholders' interests not being aligned with those of other 
shareholders and that the exchanges may want to consider these other 
ties between a listed issuer and a director. While the Exchange did 
not adopt any additional factors, the current affiliation standard 
would still allow a company to prohibit a director whose 
affiliations ``impair his ability to make independent judgment'' as 
a member of the committee. See also supra notes 32-36 and 
accompanying text.
    \164\ The Commission notes that one commenter suggested there 
was ambiguity as to whether boards must consider business or 
personal relationships between directors and senior management. See 
Brown Letter. In response, NYSE MKT noted that its existing 
independence standards require the board to make an affirmative 
determination that there is no material relationship between the 
director and the company which would affect the director's 
independence. NYSE MKT noted that Commentary to Section 303A.02(a) 
of the NYSE Listed Company Manual explicitly notes with respect to 
the board's affirmative determination of a director's independence 
that the concern is independence from management, and NYSE MKT has 
always interpreted its director independence requirements in the 
same way. Consequently, NYSE MKT did not believe that any further 
clarification of this requirement is necessary. See NYSE Response 
Letter.
---------------------------------------------------------------------------

    As to whether NYSE MKT should adopt any additional relevant 
independence factors, the Exchange stated that it reviewed its rules in 
light of Rule 10C-1, and concluded that its existing rules together 
with its proposed rules are sufficient to ensure committee member 
independence. The Commission believes that, through this review, the 
Exchange has complied with the requirement that it consider relevant 
factors, including, but not limited to, the Fees and Affiliation 
Factors in determining its definition of independence for Compensation 
Committee members. The Commission does not agree with the commenters 
who argued that the NYSE's substantially similar proposal falls short 
of ``the requirements and/or intent'' of Section 10C of the Act and 
Rule 10C-1. The Commission notes that Rule 10C-1 requires each exchange 
to consider relevant factors in determining independence requirements 
for members of a compensation committee, but does not require the 
exchange's proposal to reflect any such additional factors.
    As noted above, several commenters argued that the proposal should 
require that other ties between directors and the company, including 
business and personal relationships with executives of the company, be 
considered by boards in making independence determinations.\165\ The 
Commission did emphasize in the Rule 10C-1 Adopting Release that ``it 
is important for exchanges to consider other ties between a listed 
issuer and a director * * * that might impair the director's judgment 
as a member of the compensation committee,'' \166\ and noted that ``the 
exchanges might conclude that personal or business relationships 
between members of the compensation committee and the listed issuer's 
executive officers should be addressed in the definition of 
independence.'' However, the Commission did not require exchanges to 
reach this conclusion and thus NYSE MKT's decision that such ties need 
not be included explicitly in its definition of independence does not 
render its proposal insufficient.
---------------------------------------------------------------------------

    \165\ See supra notes 97-107 and accompanying text. As noted 
above, the comment letters refer specifically to NYSE and NYSE Arca, 
but apply equally to the NYSE MKT proposal.
    \166\ See supra note 11.
---------------------------------------------------------------------------

    In explaining why it did not include, specifically, personal and 
business relationships as a factor, NYSE MKT cites its standards for 
Independent Directors, generally, which require the board of directors 
of a listed issuer to make an affirmative determination that each such 
director has no material relationship with the listed company with 
respect to their independence from management.\167\ All Compensation 
Committee members must meet the general independence standards under 
NYSE MKT's rules in addition to the two new criteria being adopted 
herein. The Commission therefore expects that boards, in fulfilling 
their obligations, will apply this standard to each such director's 
individual responsibilities as a board member, including specific 
committee memberships such as the Compensation Committee. Although 
personal and business relationships, related party transactions, and 
other matters suggested by commenters are not specified either as 
bright-line disqualifications or explicit factors that must be 
considered in evaluating a director's independence, the Commission 
believes that compliance with NYSE MKT's rules and the provision noted 
above would demand consideration of such factors with respect to 
Compensation Committee members, as well as to all Independent Directors 
on the board.
---------------------------------------------------------------------------

    \167\ See Section 803(A)(2) of the Guide. See also NYSE Response 
Letter.
---------------------------------------------------------------------------

    Notwithstanding the concern of some commenters, the Commission 
confirms that Rule 10C-1 does not mean that a director cannot be 
disqualified on the basis of one factor alone. Although NYSE MKT does 
not state this explicitly in its rules, in response to comments, the 
Exchange confirmed that they have interpreted their current rules as 
providing that a single relationship could be sufficiently material 
that it would render a director non-independent. The Commission 
believes that nothing in Rule 10C-1 or in NYSE MKT's current or 
proposed rules implies otherwise.
    Finally, the Commission does not believe that NYSE MKT is required 
in the current proposed rule change to consider further revisions of 
its independence rules as suggested by some commenters, although it may 
wish to do so in the future after it has experience with its rules. The 
Commission notes that the NYSE MKT provision requires a board to 
further exercise appropriate discretion to consider all factors 
specifically relevant in determining whether a director has a 
relationship to the listed company which is material to that director's 
ability to be independent from management in connection with the duties 
of a Compensation Committee member. The Commission notes that one 
commenter argues this provision is

[[Page 4550]]

vague and unnecessary and should be deleted from the proposal.\168\ The 
Commission does not agree with the commenter, however, that the 
consideration of the explicitly enumerated factors will be sufficient 
in all cases to achieve the objectives of Section 10C(a)(3), because it 
is not possible to foresee all possible kinds of relationships that 
might be material to a Compensation Committee member's independence. We 
therefore believe the flexibility provided in NYSE MKT's new 
compensation committee independence standards provides companies with 
guidance, while allowing them to identify those relationships that 
might raise questions of independence for service on the compensation 
committee. For these reasons, we believe the director independence 
standards are consistent with the investor protection provision of 
Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \168\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

    Under NYSE MKT's proposal, only Smaller Reporting Companies will be 
able to avail themselves of the ``Exceptional and Limited 
Circumstances'' provision that permits the board to appoint one non-
independent director to serve on a Compensation Committee under certain 
circumstances. Accordingly, all listed companies, except Smaller 
Reporting Companies, will be required to have a compensation committee 
comprised of members that all meet the existing and enhanced 
independence requirements, or in the case of a company that does not 
have a formal compensation committee, all of the independent directors 
must meet the existing and new independence requirements. We note that 
eliminating this exception for all issuers except Smaller Reporting 
Companies will ensure that, for most NYSE MKT-listed companies, 
executive compensation will only be considered by independent 
directors, which should help to ensure impartial executive compensation 
decisions.
    The Commission believes that the discretion granted to each 
exchange by Rule 10C-1, generally, to determine the independence 
standards it adopts to comply with the Rule includes the leeway to 
carve out exceptions to those standards, as long as they are consistent 
with the Act. Regarding the justification for retaining this exception 
only for Smaller Reporting Companies, the Commission notes that it long 
ago approved as consistent with the Act the broader exception and 
concept in the context of NYSE MKT's definition of Independent Director 
under Section 803(A)(2) of the Guide with respect to Compensation 
Committees. For these reasons, the Commission believes that retaining 
this provision for Smaller Reporting Companies is reasonable and 
consistent with Section 6(b)(5) of the Act and with Rule 10C-1. We note 
that Smaller Reporting Companies are already exempted out of the 
enhanced independence standards under NYSE MKT's proposal and Rule 10C-
1. The provision was previously approved by the Commission as 
consistent with the Act, and finally, the Commission notes that a 
member appointed to a Smaller Reporting Company's Compensation 
Committee under this Exceptional and Limited Circumstances provision 
may not serve longer than two years.

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

    As discussed above, NYSE MKT proposes to set forth explicitly in 
its rules the requirements of Rule 10C-1 regarding a Compensation 
Committee's authority to retain compensation advisers, its 
responsibilities with respect to such advisers, and the listed 
company's obligation to provide appropriate funding for payment of 
reasonable compensation to a compensation adviser retained by the 
committee. As such, the Commission believes these provisions meet the 
mandate of Rule 10C-1 \169\ and are consistent with the Act.\170\
---------------------------------------------------------------------------

    \169\ 17 CFR 240.10C-1.
    \170\ 15 U.S.C. 78j-3.
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to 
specify the enhanced compensation committee responsibilities through 
official board action will help to assure that there is adequate 
transparency as to the rights and responsibilities of compensation 
committee members. As discussed above, the proposed rule change 
requires the compensation committee of a listed company to consider the 
six factors relating to independence that are enumerated in the 
proposal before selecting a compensation consultant, legal counsel or 
other adviser to the compensation committee. The Commission believes 
that this provision is consistent with Rule 10C-1 and Section 6(b)(5) 
of the Act.
    As noted above, one commenter believed that Rule 10C-1 could be 
read as not requiring a compensation committee to consider the 
enumerated independence factors with respect to regular outside legal 
counsel and sought to have NYSE revise its substantially similar 
proposal.\171\ This reading is incorrect, and NYSE MKT's rule language 
reflects the appropriate reading. The Commission notes that Rule 10C-1 
includes an instruction that specifically requires a compensation 
committee to conduct the independence assessment with respect to ``any 
compensation consultant, legal counsel or other adviser that provides 
advice to the compensation committee, other than in-house counsel.'' 
\172\ To avoid any confusion, NYSE MKT added rule text that reflects 
this instruction in its own rules.\173\
---------------------------------------------------------------------------

    \171\ See Wilson Sonsini Letter and supra notes 127-132 and 
accompanying text.
    \172\ See Instruction to paragraph (b)(4) of Rule 10C-1.
    \173\ See supra note 51 and accompanying text.
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    In approving this aspect of the proposal, the Commission notes that 
compliance with the rule requires an independence assessment of any 
compensation consultant, legal counsel, or other adviser that provides 
advice to the compensation committee, and is not limited to advice 
concerning executive compensation. However, NYSE MKT has proposed, in 
Amendment No. 3, to add language to the provision regarding the 
independence assessment of compensation advisers\174\ to state that the 
compensation committee is not required to conduct an independence 
assessment for a compensation adviser that acts in a role limited to 
the following activities for which no disclosure is required under Item 
407(e)(3)(iii) of Regulation S-K: (a) Consulting on any broad-based 
plan that does not discriminate in scope, terms, or operation, in favor 
of executive officers or directors of the company, and that is 
available generally to all salaried employees; and/or (b) providing 
information that either is not customized for a particular issuer or 
that is customized based on parameters that are not developed by the 
adviser, and about which the adviser does not provide advice. NYSE MKT 
states that this exception is based on Item 407(e)(3)(iii) of 
Regulation S-K, which provides a limited exception to the Commission's 
requirement for a registrant to disclose any role of compensation 
consultants in determining or recommending the amount and form of a 
registrant's executive and director compensation.\175\
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    \174\ See proposed Commentary .05 to Section 805, as amended by 
Amendment No. 3.
    \175\ See 17 CFR 229.407(e)(3)(iii).
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    The Commission views NYSE MKT's proposed exception as reasonable, 
as the Commission determined, when adopting the compensation consultant 
disclosure requirements in Item

[[Page 4551]]

407(e)(3)(iii), that the two excepted categories of advice do not raise 
conflict of interest concerns.\176\ The Commission also made similar 
findings when it noted it was continuing such exceptions in the Rule 
10C-1 Adopting Release, including excepting such roles from the new 
conflict of interest disclosure rule required to implement Section 
10C(c)(2). The Commission also believes that the exception should allay 
some of the concerns raised by the commenters regarding the scope of 
the independence assessment requirement. Based on the above, the 
Commission believes these limited exceptions are consistent with the 
investor protection provisions of Section 6(b)(5) of the Act.
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    \176\ See Proxy Disclosure Enhancements, Securities Act Release 
No. 9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348 
(``We are persuaded by commenters who noted that surveys that 
provide general information regarding the form and amount of 
compensation typically paid to executive officers and directors 
within a particular industry generally do not raise the potential 
conflicts of interest that the amendments are intended to 
address.'').
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    Regarding the belief of another commenter that the independence 
assessment requirement could discourage compensation committees from 
obtaining the advice of advisers,\177\ the Commission notes that, as 
already discussed, nothing in the proposed rule prevents a compensation 
committee from selecting any adviser that it prefers, including ones 
that are not independent, after considering the six factors. In this 
regard, in Amendment No. 3, NYSE MKT added specific rule language 
stating, among other things, that nothing in its rule requires a 
compensation adviser to be independent, only that the Compensation 
Committee must consider the six independence factors before selecting 
or receiving advice from a compensation adviser.\178\ Regarding the 
commenter's concern over the burdens that the NYSE's substantially 
similar proposal imposes, the Commission notes that Rule 10C-1 
explicitly requires exchanges to require consideration of these six 
factors.\179\ Moreover, five of the six factors were dictated by 
Congress itself in the Dodd-Frank Act. As previously stated by the 
Commission in adopting Rule 10C-1, the requirement that compensation 
committees consider the independence of potential compensation advisers 
before they are selected should help assure that compensation 
committees of affected listed companies are better informed about 
potential conflicts, which could reduce the likelihood that they are 
unknowingly influenced by conflicted compensation advisers.\180\
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    \177\ See Corporate Secretaries Letter and supra note 135 and 
accompanying text.
    \178\ See supra notes 54-55 and accompanying text.
    \179\ The Commission also does not agree with the argument of 
one commenter that NYSE Arca's substantially similar proposal must 
require compensation committees to specifically consider, among the 
independence factors relating to compensation advisers, whether such 
an adviser requires that clients contractually agree to indemnify or 
limit their liability. See CII Letter. The Commission views as 
reasonable the Exchange's belief that the six factors set forth in 
Rule 10C-1 are sufficient for the required independence assessment.
    \180\ See Rule 10C-1 Adopting Release, supra note 11.
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    Finally, one commenter requested guidance ``on how often the 
required independence assessment should occur.'' \181\ This commenter 
observed that it ``will be extremely burdensome and disruptive if prior 
to each such [compensation committee] meeting, the committee had to 
conduct a new assessment.'' The Commission anticipates that 
compensation committees will conduct such an independence assessment at 
least annually.
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    \181\ See Corporate Secretaries Letter.
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    The changes to NYSE MKT's rules on compensation advisers should 
therefore benefit investors in NYSE MKT-listed companies and are 
consistent with the requirements in Section 6(b)(5) of the Act that 
rules of the exchange further investor protection and the public 
interest.

C. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting 
Companies, like all other listed companies, to have a Compensation 
Committee composed solely of Independent Directors is reasonable and 
consistent with the protection of investors.\182\ The Commission notes 
that NYSE MKT's rules for Compensation Committees have not made a 
distinction for Smaller Reporting Companies in the past. However, 
consistent with the exemption of Smaller Reporting Companies from Rule 
10C-1, the NYSE MKT proposal would: (i) Exempt Smaller Reporting 
Companies from having to consider the additional independence 
requirements as to compensatory fees and affiliation; and (ii) exempt 
their Compensation Committees from having to consider the additional 
independence factors for compensation advisers. Under this approach, 
Smaller Reporting Companies will now be required to comply with only 
the additional requirements to provide the Compensation Committee with 
the sole authority and funding for the retention of compensation 
advisers.
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    \182\ As discussed above, the Commission believes that providing 
an exception to this requirement for Smaller Reporting Companies in 
limited and exceptional circumstances is appropriate.
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    The Commission believes that these provisions are consistent with 
the Act and do not unfairly discriminate between issuers. The 
Commission believes that, for similar reasons to those for which 
Smaller Reporting Companies are exempted from the Rule 10C-1 
requirements, it makes sense for NYSE MKT to provide some flexibility 
to Smaller Reporting Companies. Further, in view of the potential 
additional costs of a consideration of the independence of compensation 
advisers that NYSE MKT is requiring all other listed companies to 
include to comply with Rule 10C-1, it is reasonable not to require a 
Smaller Reporting Company to conduct such analysis of compensation 
advisers.

D. Opportunity To Cure Defects

    Rule 10C-1 requires the rules of an exchange to provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing. Rule 10C-
1 also specifies that, with respect to the independence standards 
adopted in accordance with the requirements of the Rule, an exchange 
may provide a cure period until the earlier of the next annual 
shareholders meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent.
    The Commission notes that the cure period that NYSE MKT proposes 
for companies that fail to comply with the enhanced independence 
requirements designed to comply with Rule 10C-1 is the same as the cure 
period suggested under Rule 10C-1, but NYSE MKT limits the cure 
period's use to circumstances where the committee continues to have a 
majority of independent directors, as NYSE MKT believes this would 
ensure that the applicable committee could not take an action without 
the agreement of one or more independent directors. The Commission 
believes that the accommodation, including the proposed period and 
limitation, although it gives a company less leeway in certain 
circumstances than the cure period provided as an option by Rule 10C-1, 
is fair and reasonable and consistent with investor protection under 
Rule 6(b)(5) by ensuring that a compensation committee cannot take 
action without a majority of independent directors even when a member 
ceases to be independent and the committee is

[[Page 4552]]

entitled to a period to cure that situation.
    The Commission agrees with the understanding of the commenter who 
believed that Rule 10C-1 requires that an exchange provide a company an 
opportunity to cure any defects in compliance with any of the new 
requirements. The Commission believes that NYSE MKT's general due 
process procedures for the delisting of companies that are out of 
compliance with the Exchange's rules satisfy this requirement. For 
example, NYSE MKT's rules provide that, unless continued listing of the 
company raises a public interest concern, when a company is deficient 
in compliance with listing standards, the Exchange will provide the 
company with an opportunity to provide NYSE MKT with a plan of 
definitive action the company has taken, or is taking, that would bring 
it into conformity with continued listing standards within 18 months of 
receipt of a notice of a deficiency.\183\
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    \183\ See supra text accompanying notes 142-143. See also NYSE 
Response Letter, supra note 6.
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    The Commission believes that these general procedures for companies 
out of compliance with listing requirements, in addition to the 
particular cure provisions for failing to meet the new independence 
standards, adequately meet the mandate of Rule 10C-1 and also are 
consistent with investor protection and the public interest, since they 
give a company a reasonable time period to cure non-compliance with 
these important requirements before they will be delisted.\184\
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    \184\ The Commission notes that the general procedures to cure 
non-compliance adequately address the comments made in the Corporate 
Secretaries Letter.
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E. Exemptions

    The Commission believes that it is appropriate for NYSE MKT to 
exempt from the new requirements established by the proposed rule 
change the same categories of issuers that are exempt from its existing 
standards for oversight of executive compensation for listed companies. 
Although Rule 10C-1 does not explicitly exempt some of these categories 
of issuers from its requirements, it does grant discretion to exchanges 
to provide additional exemptions. NYSE MKT states that the reasons it 
adopted the existing exemptions apply equally to the new requirements, 
and the Commission believes that this assertion is reasonable.
    NYSE MKT proposed to exempt limited partnerships, companies in 
bankruptcy proceedings and open-end management investment companies 
that are registered under the Investment Company Act from all of the 
requirements of Rule 10C-1. The Commission believes such exemptions are 
reasonable, and notes that such entities, which were already generally 
exempt from NYSE MKT's existing compensation committee requirements, 
also are exempt from the compensation committee independence 
requirements specifically under Rule 10C-1.
    NYSE MKT also proposes to exempt closed-end management investment 
companies registered under the Investment Company Act from the 
requirements of Rule 10C-1. The Commission believes that this exemption 
is reasonable because the Investment Company Act already assigns 
important duties of investment company governance, such as approval of 
the investment advisory contract, to independent directors, and because 
such entities were already generally exempt from NYSE MKT's existing 
compensation committee requirements. The Commission notes that, as one 
commenter stated, typically registered investment companies do not 
employ executives or employees or have compensation committees. The 
Commission notes that the existing language of these exemptive 
provisions is not changed, but that the provisions, which go beyond 
Rule 10C-1's exemptions, are consistent with Rule 10C-1.
    The Commission further believes that other proposed exemption 
provisions relating to controlled companies,\185\ asset-backed issuers 
and other passive issuers, and issuers whose only listed equity stock 
is a preferred stock are reasonable, given the specific characteristics 
of these entities. As noted by the Exchange, many of these issuers are 
externally managed and do not directly employ executives; do not, by 
their nature, have employees, or have executive compensation policy set 
by a body other than their board.
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    \185\ The Commission notes that controlled companies are 
provided an automatic exemption from the application of the entirety 
of Rule 10C-1 by Rule 10C-1(b)(5).
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    The NYSE MKT proposal would continue to permit foreign private 
issuers to follow home country practice in lieu of the provisions of 
the new rules, without requiring any further disclosure from such 
entities. The Commission believes that granting exemptions to foreign 
private issuers in deference to their home country practices with 
respect to compensation committee practices is appropriate, and 
believes that the existing disclosure requirements will help investors 
determine whether they are satisfied with the alternative standard. The 
Commission notes that such entities are exempt from the compensation 
committee independence requirements of Rule 10C-1 to the extent such 
entities disclose in their annual reports the reasons they do not have 
independent compensation committees.

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

    The Commission believes that the deadlines for compliance with the 
proposal's various provisions are reasonable and should afford listed 
companies adequate time to make the changes, if any, necessary to meet 
the new standards. The Commission believes that the deadline proposed 
is clear-cut and matches the deadline set forth by NYSE and The NASDAQ 
Stock Market, as revised.\186\ Accordingly, the deadline gives 
companies until the earlier of their first annual meeting after January 
15, 2014, or October 31, 2014, to comply with the remaining 
provisions.\187\
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    \186\ See Securities Exchange Act Release Nos. 68011 (October 9, 
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49); 68013 (October 9, 2012), 77 FR 62563 (October 15, 2012) 
(Notice of File No. SR-NASDAQ-2012-109); see also Amendment No. 1 to 
File No. SR-NASDAQ-2012-109.
    \187\ The proposal is, however, otherwise effective on July 1, 
2013, and issuers will be required to comply with the new 
compensation committee charter and adviser requirements as of that 
date. As noted above, certain existing issuers, such as smaller 
reporting companies, are exempt from compliance with the new 
independence requirement with respect to compensation committee 
service.
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G. Compliance Schedules: IPOs; Companies That Lose Their Exemptions; 
Companies Transferring From Other Markets

    The Commission believes that it is reasonable for NYSE MKT to 
allow, with respect to IPOs, companies emerging from bankruptcy, 
companies ceasing to be controlled companies, companies ceasing to 
qualify as a foreign private issuer, and companies transferring from 
other markets, the same phase-in schedule for compliance with the new 
requirements as is permitted under its current compensation-related 
rules.
    The Commission also believes that the compliance schedule for 
companies that cease to be Smaller Reporting Companies, as revised in 
Amendment No. 3, affords such companies ample time to come into 
compliance with the full panoply of rules that apply to other 
companies. In the Commission's view, the revised schedule also offers 
such companies more clarity in determining

[[Page 4553]]

when they will be subject to the heightened requirements.

V. Accelerated Approval of Amendment No. 3 to the Proposed Rule Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\188\ for approving the proposed rule change, as modified by 
Amendment Nos. 1 and 3, prior to the 30th day after the date of 
publication of notice in the Federal Register.
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    \188\ 15 U.S.C. 78s(b)(2).
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    The change made to the proposal by Amendment No. 3 to change a 
reference from Item 10(f)(1) of Regulation S-K to a reference to 
Exchange Act Rule 12b-2 is not a substantive one and merely references 
an otherwise identical definition.
    The revision made by Amendment No. 3 to the compliance rules for 
companies that cease to be Smaller Reporting Companies \189\ 
establishes a schedule that is easier to understand, while still 
affording such companies adequate time to come into compliance with the 
applicable requirements. The Commission notes that the Start Date of 
the compliance period for such a company is six months after the 
Smaller Reporting Company Determination Date, and the company is given 
no less than another six months from the Start Date to gain compliance 
with the rules from which it had been previously exempt. As originally 
proposed a Smaller Reporting Company had to comply within six months of 
the Smaller Reporting Company Determination Date, and for the adviser 
assessment at the Smaller Reporting Company Determination Date. The 
Commission believes the amendments to the transitions for issuers that 
lose their status as a Smaller Reporting Company will afford such 
companies additional time to comply and avoid issues involving 
inadvertent non-compliance because of the provision that originally 
applied immediately on the Smaller Reporting Company Determination 
Date. The amendments also provide additional clarity on when the time 
frames commence, and as such the Commission believes good cause exists 
to accelerate approval.
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    \189\ See supra notes 76-78 and accompanying text.
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    The change to commentary made by Amendment No. 3 to exclude 
advisers that provide only certain types of services from the 
independence assessment is also appropriate. As discussed above, the 
Commission has already determined to exclude such advisers from the 
disclosure requirement regarding compensation advisers in Regulation S-
K because these types of services do not raise conflict of interest 
concerns. Finally, the addition of further guidance by Amendment No. 3 
merely clarifies that nothing in the Exchange's rules requires a 
compensation adviser to be independent, only that the Compensation 
Committee consider the independence factors before selecting or 
receiving advice from a compensation adviser, and is not a substantive 
change, as it was the intent of the rule as originally proposed.
    For all the reasons discussed above, the Commission finds good 
cause to accelerate approval of the proposed changes made by Amendment 
No. 3.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment No. 3 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-NYSEMKT-2012-48 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEMKT-2012-48. This 
file number should be included on the subject line if email is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal office of NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEMKT-2012-48, and should be submitted on or before 
February 12, 2013.

VII. Conclusion

    In summary, and for the reasons discussed in more detail above, the 
Commission believes that the rules being adopted by NYSE MKT, taken as 
whole, should benefit investors by helping listed companies make 
informed decisions regarding the amount and form of executive 
compensation. NYSE MKT's new rules will help to meet Congress's intent 
that compensation committees that are responsible for setting 
compensation policy for executives of listed companies consist only of 
independent directors.
    NYSE MKT's rules also, consistent with Rule 10C-1, require 
Compensation Committees of listed companies to assess the independence 
of compensation advisers, taking into consideration six specified 
factors. This should help to assure that Compensation Committees of 
NYSE MKT-listed companies are better informed about potential conflicts 
when selecting and receiving advice from advisers. Similarly, the 
provisions of NYSE MKT's standards that require Compensation Committees 
to be given the authority to engage and oversee compensation advisers, 
and require the listed company to provide for appropriate funding to 
compensate such advisers, should help to support the compensation 
committee's role to oversee executive compensation and help provide 
Compensation Committees with the resources necessary to make better 
informed compensation decisions.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, SR-NYSEMKT-2012-48, as modified by Amendment Nos. 1 and 3, 
is consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
Section 6(b)(5) of the Act.\190\
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    \190\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\191\ that the

[[Page 4554]]

proposed rule change, SR-NYSEMKT-2012-48, as modified by Amendment Nos. 
1 and 3, be, and it hereby is, approved.
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    \191\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\192\
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    \192\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01104 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P