[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Proposed Rules]
[Pages 18966-18990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7948]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229 and 240
[Release Nos. 33-9199; 34-64149; File No. S7-13-11]
RIN 3235-AK95
Listing Standards for Compensation Committees
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing a new rule and rule amendments to implement
the provisions of Section 952 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, which adds Section 10C to the
Securities Exchange Act of 1934 (the ``Exchange Act''). Section 10C
requires the Commission to adopt rules directing the national
securities exchanges (the ``exchanges'') and national securities
associations to prohibit the listing of any equity security of an
issuer that is not in compliance with Section 10C's compensation
committee and compensation adviser requirements. In accordance with the
statute, the proposed rule would direct the exchanges to establish
listing standards that, among other things, require each member of a
listed issuer's compensation committee to be a member of the board of
directors and to be ``independent,'' as defined in the listing
standards of the exchanges adopted in accordance with the proposed
rule. In addition, Section 10C(c)(2) of the Exchange Act requires the
Commission to adopt new disclosure rules concerning the use of
compensation consultants and conflicts of interest.
DATES: Comments should be received on or before April 29, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an e-mail to [email protected]; or
Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-13-11. This file
number should be included on the subject line if e-mail is used. To
help us 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/proposed.shtml). Comments are also available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Nandini A. Acharya, Attorney-Adviser,
or N. Sean Harrison, Special Counsel, at (202) 551-3430, in the Office
of Rulemaking, Division of Corporation Finance, U.S. Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are proposing to add new Rule 10C-1 under
the Securities Exchange Act of 1934.\1\ We are also proposing
amendments to Item 407 \2\ of Regulation S-K.\3\
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\1\ 15 U.S.C. 78a et seq.
\2\ 17 CFR 229.407.
\3\ 17 CFR 229.10 et seq.
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Table of Contents
I. Background and Summary
II. Discussion of the Proposals
A. Proposed Listing Requirements
1. Applicability of Listing Requirements
2. Independence Requirements
3. Authority to Engage Compensation Advisers; Responsibilities;
and Funding
4. Compensation Adviser Independence Factors
5. Opportunity to Cure Defects
B. Implementation of Listing Requirements
1. Exchanges Affected
2. Securities Affected
a. Listed Equity Securities
b. Securities Futures Products and Standardized Options
3. Exemptions
a. General Approach to Exemptions
b. Issuers Not Subject to Independence Requirements
c. Relationships Exempt from Independence Requirements
C. Compensation Consultant Disclosure and Conflicts of Interest
D. Transition and Timing
III. Paperwork Reduction Act
A. Background
B. Summary of Proposed Rule and Rule Amendments
C. Burden and Cost Estimates Related to Proposed Amendments
D. Request for Comment
IV. Cost-Benefit Analysis
A. Introduction and Objectives of Proposals
B. Benefits
C. Costs
D. Request for Comment
V. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation
VI. Small Business Regulatory Enforcement Fairness Act
VII. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Action
D. Reporting, Recordkeeping and Other Compliance Requirements
E. Duplicative, Overlapping or Conflicting Federal Rules
F. Significant Alternatives
G. Solicitation of Comments
[[Page 18967]]
VIII. Statutory Authority and Text of the Proposed Amendments
I. Background and Summary
We are proposing a new rule and rule amendments to implement the
provisions of Section 952 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the ``Act''),\4\ which adds Section
10C to the Securities Exchange Act of 1934 (the ``Exchange Act'').
Section 10C requires the Commission to direct the national securities
exchanges \5\ (the ``exchanges'') and national securities associations
\6\ to prohibit the listing of any equity) \7\ security of an issuer,
with certain exemptions, that does not comply with Section 10C's
compensation committee and compensation adviser requirements.\8\
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\4\ Public Law 111-203, 124 Stat. 1900 (2010).
\5\ A ``national securities exchange'' is an exchange registered
as such under Section 6 of the Exchange Act [15 U.S.C. 78f]. There
are currently fifteen national securities exchanges registered under
Section 6(a) of the Exchange Act: NYSE Amex (formerly the American
Stock Exchange), BATS Exchange, BATS Y-Exchange, NASDAQ OMX BX
(formerly the Boston Stock Exchange), C2 Options Exchange, Chicago
Board Options Exchange, Chicago Stock Exchange, EDGA Exchange, EDGX
Exchange, International Securities Exchange, The NASDAQ Stock
Market, National Stock Exchange, New York Stock Exchange, NYSE Arca
and NASDAQ OMX PHLX (formerly Philadelphia Stock Exchange). Certain
exchanges are registered with the Commission through a notice filing
under Section 6(g) of the Exchange Act for the purpose of trading
security futures. See Section II.B.1, below, for a discussion of
these types of exchanges.
\6\ A ``national securities association'' is an association of
brokers and dealers registered as such under Section 15A of the
Exchange Act [15 U.S.C. 78o-3]. The Financial Industry Regulatory
Authority (``FINRA'') is the only national securities association
registered with the Commission under Section 15A(a) of the Exchange
Act. Because FINRA does not list equity securities, we refer only to
the exchanges in this release.
In addition, Section 15A(k) of the Exchange Act [15 U.S.C. 78o-
3(k)] provides that a futures association registered under Section
17 of the Commodity Exchange Act [7 U.S.C. 21] shall be registered
as a national securities association for the limited purpose of
regulating the activities of members who are registered as broker-
dealers in security futures products pursuant to Section 15(b)(11)
of the Exchange Act [15 U.S.C. 78o(b)(11)]. See Section II.B.2,
below, for a discussion regarding security futures products.
\7\ See Section II.B.2, below, for a discussion of the scope of
Section 10C, including our conclusion that it does not apply to
issuers with only listed debt securities. That section also proposes
an exemption for securities futures products and standardized
options, and clarifies that national securities and futures
associations that do not list securities do not have to adopt
specific rules in accordance with this rulemaking and Section 10C of
the Exchange Act.
\8\ See Exchange Act Sections 10C(a) and (f).
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Specifically, Section 10C(a)(1) of the Exchange Act requires the
Commission to adopt rules directing the exchanges to prohibit the
listing of any equity security of an issuer, with certain exemptions,
that is not in compliance with the independence requirements for
members of the compensation committee of the board of directors of an
issuer. In accordance with the statute, the rules, once adopted, would
require the exchanges to establish listing standards that require each
member of a listed issuer's compensation committee to be a member of
the board of directors and to be ``independent.'' The term
``independent'' is not defined in Section 10C(a)(1). Instead, the
section provides that ``independent'' is to be defined by the exchanges
after taking into consideration ``relevant factors.'' As provided in
Section 10C(a)(1), the ``relevant factors'' are required to include (1)
the source of compensation of a member of the board of directors of an
issuer, including any consulting, advisory, or other compensatory fee
paid by the issuer to such member of the board of directors, and (2)
whether a member of the board of directors of an issuer is affiliated
with the issuer, a subsidiary of the issuer, or an affiliate of a
subsidiary of the issuer. Section 10C(a)(4) of the Exchange Act
requires our rules to permit the exchanges to exempt particular
relationships from the independence requirements, as each exchange
determines is appropriate, taking into consideration the size of an
issuer and any other relevant factors.
In addition to the independence requirements set forth in Section
10C(a), Section 10C(f) of the Exchange Act requires the Commission to
adopt rules directing the exchanges to prohibit the listing of any
security of an issuer that is not in compliance with the following
requirements relating to compensation committees and compensation
advisers, as set forth in paragraphs (b)-(e) of Section 10C:
Each compensation committee must have the authority, in
its sole discretion, to retain or obtain the advice of compensation
consultants, independent legal counsel and other advisers
(collectively, ``compensation advisers''); \9\
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\9\ Exchange Act Sections 10C(c)(1)(A) and 10C(d)(1).
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Before selecting any compensation adviser, the
compensation committee must take into consideration specific factors
identified by the Commission that affect the independence of
compensation advisers;) \10\
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\10\ Exchange Act Section 10C(b).
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The compensation committee must be directly responsible
for the appointment, compensation and oversight of the work of any
compensation adviser; \11\ and
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\11\ Exchange Act Sections 10C(c)(1)(B) and 10C(d)(2).
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Each listed issuer must provide appropriate funding for
the payment of reasonable compensation, as determined by the
compensation committee, to compensation advisers.\12\
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\12\ Exchange Act Section 10C(e).
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Finally, Section 10C(c)(2) requires each issuer to disclose in any
proxy or consent solicitation material for an annual meeting of
shareholders (or a special meeting in lieu of the annual meeting), in
accordance with Commission regulations, whether the issuer's
compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed.
We are proposing new Exchange Act Rule 10C-1 to implement the
compensation committee listing requirements of Sections 10C(a)-(g) \13\
of the Exchange Act. To implement Section 10C(c)(2) of the Exchange
Act, we are proposing rule amendments to Regulation S-K to require
disclosure, in any proxy or information statement relating to an annual
meeting of shareholders at which directors are to be elected (or
special meeting in lieu of the annual meeting), of whether the issuer's
compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed. In connection
with these amendments, we also propose to revise the current disclosure
requirements with respect to the retention of compensation
consultants.\14\
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\13\ Section 10C(g) of the Exchange Act exempts controlled
companies from the requirements of Section 10C.
\14\ See Item 407(e) of Regulation S-K; Proxy Disclosure
Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334].
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II. Discussion of the Proposals
A. Proposed Listing Requirements
1. Applicability of Listing Requirements
In enacting Section 10C of the Exchange Act, Congress intended to
require that ``board committees that set compensation policy will
consist only of directors who are independent.'' \15\ In addition,
Congress sought to provide ``shareholders in a public company'' with
``additional disclosures involving
[[Page 18968]]
compensation practices.'' \16\ Although Section 10C includes numerous
provisions applicable to the ``compensation committees'' of listed
issuers, it does not require a listed issuer to have a compensation
committee or a committee that performs functions typically assigned to
a compensation committee. Nor does Section 10C include provisions that
have the effect of requiring a compensation committee as a practical
matter. For example, it does not require that the compensation of
executives be approved by a compensation committee.
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\15\ 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).
\16\ Id.
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Neither the Act nor the Exchange Act defines the term
``compensation committee.'' \17\ Our rules do not currently require,
and our proposed rules would not mandate, that an issuer establish a
compensation committee. However, current exchange listing standards
generally require listed issuers either to have a compensation
committee or to have independent directors determine, recommend or
oversee specified executive compensation matters.\18\ For example, the
New York Stock Exchange (``NYSE'') requires a listed issuer to have a
compensation committee composed solely of independent directors and to
assign various executive compensation-related tasks to that
committee.\19\ On the other hand, the NASDAQ Stock Market (``Nasdaq'')
does not mandate that a listed issuer have a compensation committee,
but requires that executive compensation be determined or recommended
to the board for determination either by a compensation committee
composed solely of independent directors or by a majority of the
board's independent directors in a vote in which only independent
directors participate.\20\ Some of the other exchanges have standards
comparable to the NYSE's and require their listed issuers to have
independent compensation committees.\21\ Other exchanges have standards
comparable to Nasdaq's and, in the absence of an independent
compensation committee, permit executive compensation determinations to
be made or recommended by a majority of independent directors on the
listed issuer's board.\22\
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\17\ By contrast, Section 3(a)(58) of the Exchange Act defines
an ``audit committee'' as a committee (or equivalent body)
established by and amongst the board of directors of an issuer for
the purpose of overseeing the accounting and financial reporting
processes of the issuer and audits of the financial statements of
the issuer; and if no such committee exists with respect to an
issuer, the entire board of directors of the issuer. Our proposed
rules would not preclude the exchanges from defining ``compensation
committee.''
\18\ There are some exchanges registered under Section 6(a) of
the Exchange Act that have not adopted listing standards that
require executive compensation determinations for listed issuers to
be made or recommended by an independent compensation committee or
independent directors. However, these exchanges, which include the
International Securities Exchange, LLC, EDGA Exchange, Inc., EDGX
Exchange, Inc., BATS Exchange, Inc., BATS Y-Exchange, Inc. and C2
Options Exchange, Inc., currently either trade securities only
pursuant to unlisted trading privileges or trade only standardized
options. In addition, the listing standards of certain exchanges
that are registered with the Commission for the purpose of trading
security futures do not address executive compensation matters. See
Section II.B.1, below, for a discussion of these types of exchanges.
\19\ See NYSE Listed Company Manual Section 303A.05. Section
303A.05 permits a listed issuer's board to allocate the
responsibilities of the compensation committee to another committee,
provided that the committee is composed entirely of independent
directors and has a committee charter. The NYSE exempts certain
issuers from this requirement, including controlled companies,
limited partnerships, companies in bankruptcy, and closed-end and
open-end management investment companies registered under the
Investment Company Act of 1940 (``Investment Company Act''). See
NYSE Listed Company Manual Section 303A.00.
\20\ See Nasdaq Rule 5605(d). We understand that less than 2% of
Nasdaq listed issuers utilize the alternative of having independent
board members, and not a committee, oversee compensation. See also
Nasdaq IM 5605-6, stating that the Nasdaq structure is intended to
provide flexibility for a company to choose an appropriate board
structure and to reduce resource burdens, while ensuring independent
director control of compensation decisions. Nasdaq exempts certain
issuers from this requirement, including asset-backed issuers and
other passive issuers, cooperatives, limited partnerships, and
management investment companies registered under the Investment
Company Act. See Nasdaq Rule 5615(a).
\21\ NYSE Arca, Inc., National Stock Exchange, Inc., and NASDAQ
OMX PHLX, Inc. See NYSE Arca Rule 5.3(k)(4); National Stock Exchange
Rule 15.5(d)(5); and NASDAQ OMX PHLX Rule 867.05.
\22\ NASDAQ OMX BX, Inc., NYSE Amex LLC, Chicago Board Options
Exchange, Incorporated, and Chicago Stock Exchange, Inc. See NASDAQ
OMX BX Rule 4350(c)(3); NYSE Amex Company Guide Section 805; Chicago
Board Options Exchange Rule 31.10; and Chicago Stock Exchange
Article 22, Rules 19(d) and 21.
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Proposed Rule 10C-1(b) would direct the exchanges to adopt listing
standards that would be applicable to any committee of the board that
oversees executive compensation, whether or not the committee performs
multiple functions and/or is formally designated as a ``compensation
committee.'' We believe this is appropriate in order to capture board
committees that perform these functions and to avoid the possibility
that a listed issuer might avoid the proposed requirements merely by
assigning a different name to a committee that is functionally
equivalent to a compensation committee. For example, if a listed issuer
has a designated ``corporate governance committee'' whose
responsibilities include, among other matters, oversight of executive
compensation, such committee would be subject to the compensation
committee listing standards to be adopted pursuant to our new rules, as
would a committee designated as a ``human resources committee'' whose
responsibilities include oversight of executive compensation. However,
proposed Rule 10C-1(b) would not require the listing standards to apply
to those independent directors who oversee executive compensation in
lieu of a board committee, since Section 10C refers only to
compensation committees.\23\
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\23\ To the extent no board committee is authorized to oversee
executive compensation, board determinations with respect to
executive compensation matters may be made by the full board with
only independent directors participating. In such cases, under state
corporate law, we understand that action by the independent
directors would generally be considered action by the full board,
not action by a committee.
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Request for Comment
Should the exchanges be required to only list issuers with
compensation committees?
Our proposed rules would apply to a listed issuer's
compensation committee, or in the absence of such a committee, any
other board committee that performs functions typically performed by a
compensation committee, including oversight of executive compensation.
Is this proposed functional approach appropriate and workable? If not,
why not?
As noted above, the listing standards of some exchanges
permit a listed issuer to have its executive compensation matters be
determined, or recommended to the board for determination, either by a
compensation committee composed solely of independent directors or, in
the absence of such a committee, by a majority of independent directors
in a vote in which only independent directors participate. Should our
rules implementing Section 10C require the exchanges to mandate that
independent directors performing this function in the absence of a
formal committee structure also be subject to our new rules? Would so
doing be consistent with the mandate of Section 10C of the Exchange
Act?
2. Independence Requirements
Most exchanges that list equity securities require that the board
of directors of a listed issuer be composed of a majority of directors
that qualify as ``independent'' under their listing standards.\24\ As
noted above, most
[[Page 18969]]
exchanges that list equity securities require directors on compensation
committees or directors determining or recommending executive
compensation matters to be ``independent'' under their general
independence standards. Although independence requirements and
standards for determining independence vary somewhat among the
different exchanges, listing standards prescribe certain bright-line
independence tests (including restrictions on compensation, employment
and familial or other relationships with the listed issuer that could
interfere with the exercise of independent judgment) that directors
must meet in order to be considered independent. For example, both NYSE
and Nasdaq rules preclude a finding of independence if the director is
or recently was employed by the listed issuer,\25\ the director's
immediate family member is or recently was employed as an executive
officer of the listed issuer,\26\ or the director or director's family
member received compensation from the listed issuer in excess of
specified limits.\27\ In addition, under both NYSE and Nasdaq rules,
directors may be disqualified based on their or their family members'
relationships with a listed issuer's auditor,\28\ affiliation with
entities that have material business relationships with the listed
issuer,\29\ or employment at a company whose compensation committee
includes any of the listed issuer's executive officers.\30\ We note,
however, that with the exception of audit committee membership
requirements, stock ownership alone will not automatically preclude a
director from being considered independent under either NYSE or Nasdaq
listing standards.\31\
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\24\ See NYSE Listed Company Manual Section 303A.01; Nasdaq Rule
5605(b)(1); NYSE AMEX LLC Company Guide Section 802(a); Chicago
Board Options Exchange Rule 31.10(a); Chicago Stock Exchange Article
22, Rules 19(a) and 21(a); NASDAQ OMX BX Rule 4350(c)(1); NASDAQ OMX
PHLX Rule 867.01; National Stock Exchange Rule 15.5(d)(1). NYSE Amex
and the Chicago Stock Exchange permit smaller issuers to have a 50%
independent board. See NYSE Amex Company Guide Section 801(h);
Chicago Stock Exchange Article 22, Rules 19(a), 19(b)(1)(C)(iii),
and 21(a).
\25\ See NYSE Listed Company Manual Section 303A.02(b)(i);
Nasdaq Rule 5605(a)(2)(A).
\26\ See NYSE Listed Company Manual Section 303A.02(b)(i);
Nasdaq Rule 5605(a)(2)(C).
\27\ See NYSE Listed Company Manual Section 303A.02(b)(ii);
Nasdaq Rule 5605(a)(2)(B).
\28\ See NYSE Listed Company Manual Section 303A.02(b)(iii);
Nasdaq Rule 5605(a)(2)(F).
\29\ See NYSE Listed Company Manual Section 303A.02(b)(v);
Nasdaq Rule 5605(a)(2)(D).
\30\ See NYSE Listed Company Manual Section 303A.02(b)(iv);
Nasdaq Rule 5605(a)(2)(E).
\31\ See Commentary to NYSE Listed Company Manual Section
303A.02(a); Nasdaq Rule 5605; Nasdaq IM-5605.
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In addition to requiring directors to meet objective criteria of
independence, the NYSE and Nasdaq also require their listed issuers'
boards to affirmatively determine that each independent director
either, in NYSE's case, has no material relationship with the company
\32\ or, in Nasdaq's case, has no relationship which, in the opinion of
the issuer's board of directors, would interfere with the director's
exercise of independent judgment in carrying out his or her
responsibilities.\33\ The other exchanges have similar
requirements.\34\
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\32\ See NYSE Rule 303A.02.a
\33\ See Nasdaq Rule 4200(a)(15).
\34\ See, e.g., NYSE Arca Rule 5.3(k)(1) or NYSE AMEX LLC
Company Guide Section 803.A.02.
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Under current Commission rules, listed issuers are required to
identify each director who is independent, using the same definition of
independence used for determining whether a majority of the board of
directors is independent.\35\ If an exchange has independence
requirements for members of the compensation committee, then listed
issuers are required to identify each member of the compensation
committee who is not independent under those requirements.\36\ If a
listed issuer does not have a separately designated compensation
committee or committee performing similar functions, then the issuer
must identify all members of the board who do not meet the independence
requirements for compensation committee members.\37\
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\35\ Item 407(a) of Regulation S-K.
\36\ Id.
\37\ Id.
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In addition to meeting exchange listing standards, there are other
reasons for members of the compensation committee to be independent.
For example, in order for a securities transaction between an issuer
and one of its officers or directors to be exempt from short-swing
profit liability under Section 16(b) of the Exchange Act, the
transaction must be approved by the full board of directors or by a
committee of the board that is composed solely of two or more ``Non-
Employee Directors,'' as defined in Exchange Act Rule 16b-3(b)(3).\38\
We understand that many issuers use their independent compensation
committees to avail themselves of this exemption.\39\ Similarly, if an
issuer wishes to preserve the tax deductibility of the amounts of
certain awards paid to executive officers, among other things, the
performance goals of such awards must be determined by a compensation
committee composed of two or more ``outside directors,'' as defined in
Section 162(m) of the Internal Revenue Code.\40\ The definitions of
``Non-Employee Director'' and ``outside director'' are similar to the
exchanges' definitions of director independence.
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\38\ As defined in Exchange Act Rule 16b-3(b)(3)(i) [17 CFR
240.16b-3(b)(3)(i)], a ``Non-Employee Director'' is a director who
is not currently an officer (as defined in Rule 16a-1(f)) of the
issuer or a parent or subsidiary of the issuer, or otherwise
currently employed by the issuer or a parent or subsidiary of the
issuer; does not receive compensation, either directly or
indirectly, from the issuer or a parent or subsidiary of the issuer,
for services rendered as a consultant or in any capacity other than
as a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item
404(a) of Regulation S-K; and does not possess an interest in any
other transaction for which disclosure would be required pursuant to
Item 404(a) of Regulation S-K. In addition, Rule 16b-3(b)(3)(ii)
provides that a Non-Employee Director of a closed-end investment
company is a director who is not an ``interested person'' of the
issuer, as that term is defined in Section 2(a)(19) of the
Investment Company Act [15 U.S.C. 80a-2(a)(19)].
\39\ See letter from Sullivan and Cromwell LLP to Facilitating
Shareholder Director Nominations, Release No. 34-60089, available at
http://www.sec.gov/comments/s7-10-09/s71009-430.pdf (``In our
experience, many compensation committee charters require their
members to meet the requirements of Rule 16b-3 and Section
162(m).''); Ira G. Bogner & Michael Krasnovsky, Exchange Rules
Impact Compensation Committee Composition, Metropolitan Corp.
Couns., April 2004, at 17 (``Most compensation committees of public
companies include at least two directors that are `outside
directors' under Section 162(m) of the Internal Revenue Code * * *
and `non-employee directors' under Rule 16b-3 of the Securities
Exchange Act * * * .'').
\40\ A director is an ``outside director'' if the director (A)
is not a current employee of the publicly held corporation; (B) is
not a former employee of the publicly held corporation who receives
compensation for prior services (other than benefits under a tax-
qualified retirement plan) during the taxable year; (C) has not been
an officer of the publicly held corporation; and (D) does not
receive remuneration from the publicly held corporation, either
directly or indirectly, in any capacity other than as a director.
For this purpose, remuneration includes any payment in exchange for
goods or services. Section 162(m) of the Internal Revenue Code of
1986, as amended. Treas. Reg. Section 1.162-27(e)(3).
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In order to implement the requirements of Section 10C(a)(1) of the
Exchange Act, proposed Rule 10C-1(b)(1)(i) would require each member of
a listed issuer's compensation committee to be a member of the issuer's
board of directors and to be independent. As required by Section
10C(a)(1), proposed Rule 10C-1(b)(1)(ii) would direct the exchanges to
develop a definition of independence applicable to compensation
committee members after considering relevant factors, including, but
not limited to, the source of compensation of a director, including any
consulting, advisory or other compensatory fee paid by the issuer to
such director, and whether the director is affiliated with the issuer,
a subsidiary of the issuer, or an affiliate of a
[[Page 18970]]
subsidiary of the issuer. Other than the factors set out in Section
10C(a)(1), we do not propose to specify any additional factors that the
exchanges must consider in determining independence requirements for
members of compensation committees, although we request comment
regarding whether there are any other such factors that should be
included in our rule.
In proposing Rule 10C-1(b)(1), we considered the similarities and
differences between Section 952 of the Act and Section 301 of the
Sarbanes-Oxley Act of 2002.\41\ Section 301 of the Sarbanes-Oxley Act
added Section 10A(m)(1) to the Exchange Act,\42\ which required the
Commission to direct the exchanges to prescribe independence
requirements for audit committee members. Although the independence
factors in Section 10C(a)(1) are similar to those in Section
10A(m)(1)--and indeed, Section 952 of the Act essentially provides the
compensation committee counterpart to the audit committee requirements
of Section 301 of the Sarbanes-Oxley Act--there is one significant
difference. Section 10C(a) requires only that the exchanges ``consider
relevant factors'' (emphasis added), which include the source of
compensation and any affiliate relationship, in developing independence
standards for compensation committee members, whereas Section 10A(m)
expressly states that certain relationships preclude independence: an
audit committee member ``may not, other than in his or her capacity as
a member of the audit committee * * * [a]ccept any consulting,
advisory, or other compensatory fee from the issuer; or [b]e an
affiliated person of the issuer or any subsidiary thereof'' (emphasis
added).\43\
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\41\ Public Law 107-204, 116 Stat. 745 (2002).
\42\ 15 U.S.C. 78j-1(m)(1).
\43\ See Section 10A(m) of the Exchange Act. Exchange Act Rule
10A-3 states that in order to be considered ``independent,'' an
audit committee member cannot accept any consulting, advisory or
other compensatory fee (other than receipt of fixed amounts under a
retirement plan for prior service with the listed issuer) and, for
non-investment company issuers, cannot be an affiliated person of
the issuer or its subsidiaries. For investment company issuers, the
audit committee member cannot be an ``interested person'' of the
issuer as defined in Section 2(a)(19) of the Investment Company Act.
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As a result, the exchanges have more discretion to determine the
standards of independence that audit committee and compensation
committee members are required to meet. Section 10A(m) prescribes
minimum criteria for the independence of audit committee members and
permits the exchanges to adopt more stringent independence criteria as
they deem appropriate, subject to approval pursuant to Section 19(b) of
the Exchange Act. In contrast, Section 10C gives the exchanges the
flexibility to establish their own minimum independence criteria for
compensation committee members after considering the relevant factors
enumerated in Section 10C(a)(3)(A)-(B). The exchanges may add other
factors, as each such exchange deems appropriate, subject to approval
pursuant to Section 19(b) of the Exchange Act.
To comply with proposed Rule 10C-1, the exchanges' definitions of
independence for compensation committee members would be implemented
through proposed rule changes that the exchanges would file pursuant to
Section 19(b) of the Exchange Act, which are subject to the
Commission's approval.\44\ Proposed Rule 10C-1(a)(4) would require that
each proposed rule change submission include, in addition to any
information required under Section 19(b) of the Exchange Act and the
rules thereunder: a review of whether and how existing or proposed
listing standards satisfy the requirements of this rule; a discussion
of the exchange's consideration of factors relevant to compensation
committee member independence; and the definition of independence
applicable to compensation committee members that the exchange proposes
to adopt in light of such review.\45\ The Commission would then
consider, prior to final approval, whether the exchanges considered the
relevant factors outlined in Section 10C(a) and whether the exchanges'
proposed rule changes are consistent with the requirements of Section
6(b) of the Exchange Act.
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\44\ The standard of review for approving proposed exchange
listing standards is found in Section 19(b)(2)(C) of the Exchange
Act, which provides that ``[t]he Commission shall approve a proposed
rule change of a self-regulatory organization if it finds that such
proposed rule change is consistent with the requirements of this
title and the rules and regulations issued under this title that are
applicable to such organization.'' Under Section 6(b) of the
Exchange Act, the rules of an exchange must be ``designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest.''
\45\ A filing would be required even if an exchange finds that
its existing rules satisfy the requirements of proposed Rule 10C-1.
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Because these relevant factors cover the same matters as the
prohibitions in Section 10A(m)'s definition of audit committee
independence, we believe the exchanges would likely consider whether
those prohibitions should also be applicable to compensation committee
members. The exchanges would not be required to adopt those
prohibitions in their definitions and will have flexibility to consider
other factors in developing their definitions. For example, we
understand that there are concerns, as expressed by several
commentators,\46\ about a prohibition against allowing directors
affiliated with significant investors (such as private equity funds or
venture capital firms) to serve on compensation committees.\47\ Some
commentators have noted that such directors are highly motivated to
rigorously oversee compensation and are well-positioned to exercise
independent judgment regarding compensation.\48\ In addition, some
commentators have noted that, although there is a need for audit
committee members to be able to exercise objective oversight of an
issuer's financial reporting, with respect to the oversight of
executive compensation, the interests of representatives of major
shareholders are generally aligned with those of other
shareholders.\49\
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\46\ To facilitate public input on the Act, the Commission has
provided a series of e-mail links, organized by topic, on its Web
site at http://www.sec.gov/spotlight/regreformcomments.shtml. The
public comments we received are available on our Web site at http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specializeddisclosures-8.pdf. The public comments we have received
on Section 952 of the Act are available on our Web site at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.
Several commentators have suggested that stock ownership alone
should not automatically disqualify a board member from serving as
an independent director on the compensation committee. See, e.g.,
letters from American Bar Association, Brian Foley & Company, Inc,
Compensia, Davis Polk & Wardwell, LLP and Frederick W. Cook & Co.,
Inc.
\47\ One of these commentators noted that one or more venture
capital firms sometimes hold significant equity positions and also
have one of their partners serving as a director and member of the
board's compensation committee. In this commentator's experience,
these individuals, by virtue of their ongoing history with the
listed company as well as their familiarity and experience with
executive compensation practices in their industry sector, are
valuable members of the compensation committee who can offer
perspective and expertise which are largely in line with that of the
company's shareholders. See letter from Compensia.
\48\ See letter from Frederic W. Cook & Co., Inc. (stating that
venture capital and private equity firms ``will often have a more
demanding pay-for-performance orientation than any other category of
investor'').
\49\ See, e.g., letters from Davis Polk & Wardwell LLP, American
Bar Association, Compensia and Frederic W. Cook & Co., Inc.
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The exchanges may determine that, even though affiliated directors
are not allowed to serve on audit committees,
[[Page 18971]]
such a blanket prohibition would be inappropriate for compensation
committees, and certain affiliates, such as representatives of
significant shareholders, should be permitted to serve. The exchanges
might also conclude that other relationships or factors linked more
closely to executive compensation matters, such as relationships
between the members of the compensation committee and the listed
issuer's executive management, should be addressed in the definition of
independence.
Because the compensation committee independence requirements of
Section 10C, unlike the audit committee independence requirements of
Section 10A(m), do not require that the exchanges prohibit all
affiliates from serving on a compensation committee, we do not believe
it is necessary to separately define the term ``affiliate'' for
purposes of proposed Rule 10C-1. As our proposed rule does not
establish required independence standards, we also believe it is
unnecessary to create any safe harbors for particular relationships, as
we did when we adopted our audit committee independence
requirements.\50\ Although each exchange must consider the affiliate
relationships specified in the rule in establishing compensation
committee independence standards, there is no requirement to adopt
listing standards precluding compensation committee membership based on
all such relationships. Accordingly, we do not propose a separate
definition of ``affiliate'' for use in connection with proposed Rule
10C-1.
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\50\ See Exchange Act Rule 10A-3(e)(1)(ii) [17 CFR 240.10A-
3(e)(1)(ii)] (providing that a person will be deemed not to be in
control of a specified person for purposes of this section if the
person ``is not the beneficial owner, directly or indirectly, of
more than 10% of any class of voting equity securities of the
specified person; and is not an executive officer of the specified
person'').
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Request for Comment
Rather than establishing minimum independence standards
that the exchanges must apply to compensation committee members, our
proposed rule would permit each exchange to establish its own
independence criteria, provided the exchange considers the relevant
factors specified in Section 10C relating to affiliate relationships
and sources of compensation. Is this approach appropriate? Is there a
better approach that would be consistent with the requirements of
Section 10C?
The proposed independence factors that must be considered
relate to current relationships between the issuer and the compensation
committee member, which is consistent with the approach in Rule 10A-
3(b)(1) for audit committee members. Should the required factors also
extend to a ``look back'' period before the appointment of the member
to the compensation committee? (We note that the exchanges currently
have look-back periods for their definitions of independence for
purposes of determining whether a majority of the board of directors is
independent.) For members already serving on compensation committees
when the new listing standards take effect, should the required factors
also extend to a ``look back'' period before the effective date of the
new listing standards? If so, what period (e.g., three years or five
years) would be appropriate? Should there be different look-back
periods for different relationships or different parties? If so, what
should they be, and why?
Should there be additional factors apart from the two
proposed factors required to be considered? For example, should the
exchanges be required to include business or personal relationships
between a compensation committee member and an executive officer of the
issuer as mandatory factors for consideration? Should the exchanges be
required to include board interlocks or employment of a director at a
company included in the listed issuer's compensation peer group as
mandatory factors for consideration? Would any such requirements unduly
restrain a company in setting the composition of its board of
directors?
Large shareholders may be deemed affiliates by virtue of
the percentage of their shareholdings. As noted above, some
commentators have expressed the view that directors affiliated with
large shareholders should continue to be permitted to serve on
compensation committees because their interests are aligned with other
shareholders with respect to compensation matters. Would a director
affiliated with a shareholder with a significant ownership interest who
is otherwise independent be sufficiently independent for the purpose of
serving on the compensation committee? Would the interests of all
shareholders be aligned with the interests of large shareholders with
respect to oversight of executive compensation? Should our rules
implementing Section 10C provide additional or different guidance or
standards for the consideration of the affiliated person factor?
3. Authority To Engage Compensation Advisers; Responsibilities; and
Funding
Section 10C(c)(1) of the Exchange Act provides that the
compensation committee of a listed issuer may, in its sole discretion,
retain or obtain the advice of a ``compensation consultant,'' \51\ and
Section 10C(d)(1) extends this authority to ``independent legal counsel
and other advisers'' \52\ (collectively, ``compensation advisers'').
Both sections also provide that the compensation committee shall be
directly responsible for the appointment, compensation, and oversight
of the work of compensation advisers. Sections 10C(c)(1)(C) and
10C(d)(3) provide that the compensation committee's authority to
retain, and responsibility for overseeing the work of, compensation
advisers may not be construed to require the compensation committee to
implement or act consistently with the advice or recommendations of a
compensation adviser or to affect the ability or obligation of the
compensation committee to exercise its own judgment in fulfillment of
its duties. To ensure that the listed issuer's compensation committee
has the necessary funds to pay for such advisers, Section 10C(e)
provides that a listed issuer shall provide ``appropriate funding,'' as
determined by the compensation committee, for payment of ``reasonable
compensation'' to compensation consultants, independent legal counsel
and other advisers to the compensation committee.\53\
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\51\ See Exchange Act Section 10C(c)(1).
\52\ See Exchange Act Section 10C(d)(1).
\53\ See Exchange Act Section 10C(e).
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Proposed Rule 10C-1(b)(2) implements Sections 10C(c)(1) and (d)(1)
by repeating the provisions set forth in those sections regarding the
compensation committee's authority to retain or obtain a compensation
adviser, its direct responsibility for the appointment, compensation
and oversight of the work of any compensation adviser, and the related
rules of construction. In addition, proposed Rule 10C-1(b)(3)
implements Section 10C(e) by repeating the provisions set forth in that
section regarding the requirement that listed issuers provide for
appropriate funding for payment of reasonable compensation to
compensation advisers.
We note that while the statute provides that compensation
committees of listed issuers shall have the express authority to hire
``independent legal counsel,'' the statute does not require that they
do so. Similar to our interpretation \54\ of Section 10A(m) of
[[Page 18972]]
the Exchange Act, which gave the audit committee authority to engage
``independent legal counsel,'' \55\ we do not construe the requirements
related to independent legal counsel and other advisers as set forth in
Section 10C(d)(1) of the Exchange Act as requiring a compensation
committee to retain independent legal counsel or as precluding a
compensation committee from retaining non-independent legal counsel or
obtaining advice from in-house counsel or outside counsel retained by
the issuer or management.
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\54\ See Standards Relating to Listed Company Audit Committees,
Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788], at fn. 114 (``As
proposed, the requirement does not preclude access to or advice from
the company's internal counsel or regular outside counsel. It also
does not require an audit committee to retain independent
counsel.'').
\55\ See Exchange Act Section 10A(m)(5)(``Each audit committee
shall have the authority to engage independent counsel and other
advisers, as it determines necessary to carry out its duties.'').
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Request for Comment
Is additional specificity in the proposed rule needed to
provide clearer guidance to listed issuers? For example, should we
define what constitutes an ``independent legal counsel''? If so, how?
Should we clarify more explicitly in the implementing rule
that this provision is not intended to preclude the compensation
committee from conferring with in-house legal counsel or the company's
outside counsel or from retaining non-independent counsel?
Our audit committee rules implementing Section 10A(m)
provide that each listed issuer must provide funding for ordinary
administrative expenses of the audit committee that are necessary or
appropriate in carrying out its duties.\56\ Would such a provision be
helpful with respect to the compensation committee? Do compensation
committees have administrative expenses? If so, are they significant?
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\56\ See Exchange Act Rule 10A-3(b)(5)(iii).
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4. Compensation Adviser Independence Factors
Section 10C(b) of the Exchange Act provides that the compensation
committee may select a compensation adviser only after taking into
consideration the factors identified by the Commission. In accordance
with Section 10C(b), these factors would apply not only to the
selection of compensation consultants, but also to the selection of
legal counsel and other advisers to the committee. The statute does not
require a compensation adviser to be independent, only that the
compensation committee consider the enumerated independence factors
before selecting a compensation adviser. Section 10C(b) specifies that
the independence factors identified by the Commission must be
competitively neutral \57\ and include, at minimum:
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\57\ Although there is no relevant legislative history, we
assume this is intended to address the concern expressed by the
multi-service compensation consulting firms that the disclosure
requirements the Commission adopted last year are not competitively
neutral because they do not address potential conflicts of interest
presented by boutique consulting firms that are dependent on the
revenues of a small number of clients. See letter from Towers
Perrin, commenting on Proxy Disclosure and Solicitation
Enhancements, Release No. 33-9052 (July 10, 2009), available at
http://www.sec.gov/comments/s7-13-09/s71309-90.pdf. The list in
Section 10C, which covers both multi-service firm ``other services''
conflicts and boutique firm ``revenue concentration'' conflicts, is
consistent with this assumption.
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The provision of other services to the issuer by the
person that employs the compensation consultant, legal counsel or other
adviser;
The amount of fees received from the issuer 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;
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;
Any business or personal relationship of the compensation
consultant, legal counsel, or other adviser with a member of the
compensation committee; and
Any stock of the issuer owned by the compensation
consultant, legal counsel or other adviser.
Because Exchange Act Section 10C does not require compensation
advisers to be independent--only that the compensation committee
consider factors that may bear upon independence--we do not believe
that this provision contemplates that the Commission would necessarily
establish materiality or bright-line numerical thresholds that would
determine whether or when the factors listed in Section 10C of the
Exchange Act, or any other factors added by the Commission or by the
exchanges, must be considered germane by a compensation committee. For
example, we do not believe that our rules should provide that a
committee must consider stock owned by an adviser only if ownership
exceeds a specified minimum percentage of the issuer's stock, or that a
committee must consider the amount of revenues that the issuer's
business represents for an adviser only if the percentage exceeds a
certain percentage of the adviser's revenues. Therefore, proposed Rule
10C-1(b)(4) would require the listing standards developed by the
exchanges to include the independence factors set forth in the statute
and incorporated into the rule without any materiality or bright-line
thresholds or cut-offs. Under the proposed rules, the exchanges may add
other independence factors that must be considered by compensation
committees of listed issuers.
We believe the factors set forth in Section 10C(b) are generally
comprehensive. We are not proposing any additional compensation adviser
independence factors at this time, although we are soliciting comment
as to whether there are any additional independence factors that should
be taken into consideration by a listed issuer's compensation committee
when selecting a compensation adviser. We are also soliciting comment
as to whether the factors set forth in Section 10C(b) and proposed Rule
10C-1(b)(4) are competitively neutral.
We have already received several comment letters with respect to
the compensation adviser independence factors.\58\ Commentators are
generally supportive of the five factors listed in Section 10C(b), but
believe that the factors should be used only in guiding the
compensation committee in its selection process, not as an outright bar
or prohibition against any one category of compensation adviser.\59\
One commentator stated that in requiring the factors to be
``competitively neutral,'' Congress sought to ensure that companies
``have the flexibility to select the types of adviser[s] that best meet
their particular needs.'' \60\ Several commentators suggested that the
stock ownership independence factor should relate only to shares of the
listed issuer owned directly by the consulting firm or by advisers
immediately engaged by the compensation committee.\61\ Other
commentators sought clarification on what constitutes a ``business'' or
``personal'' relationship between the compensation adviser and a member
of the compensation committee.\62\ In light of our overall approach to
implementing the independence factors as provided in Section 10C(b), we
are not proposing to address these points, but solicit comment below on
whether we should.
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\58\ See, e.g., letters from Mercer, Meridian Compensation
Partners, LLC, Pay Governance LLC and Frederick W. Cook & Co., Inc.
\59\ See, e.g., letter from Pay Governance LLC.
\60\ See letter from Towers Watson.
\61\ See, e.g., letters from Frederick W. Cook & Co., Inc and
Mercer.
\62\ See, e.g., letters from Mercer and Pay Governance LLC.
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[[Page 18973]]
Request for Comment
Section 10C(b) specifies that the independence factors
identified by the Commission must be competitively neutral, but does
not state how we should determine whether a factor is competitively
neutral. Are there any issues that should be considered to determine or
assess whether a factor is competitively neutral?
Are the five factors identified in Section 10C(b) of the
Exchange Act competitively neutral among different types of
compensation advisers? If not, what modifications or adjustments should
be made in order to make these factors competitively neutral? Are there
specific categories of compensation advisers that would be adversely
affected by the compensation committee's use of these factors to assess
independence?
Are there any factors affecting independence that we
should add to the list of factors identified in proposed Rule 10C-
1(b)(4)? If so, what are they and why should they be included?
Would the existence of a business or personal relationship
between a compensation adviser and an executive officer of the issuer
be relevant in considering whether to engage the compensation adviser?
If so, why? Should we add this to the required list of factors that
must be considered?
Based on the language in Section 10C(b)(2), which
distinguishes between the adviser and the person that employs the
adviser, a personal or business relationship between the person
employing the adviser and a member of the compensation committee would
not be covered by the proposed rule (which, like Section 10C(b)(2)(D),
only refers to relationships between the adviser and the compensation
committee). Should the required list of factors also include a business
or personal relationship between the person employing the compensation
adviser and a member of the compensation committee? Along those lines,
should it also cover a business or personal relationship between the
person employing the adviser and an executive officer of the issuer?
Should we provide materiality, numerical or other
thresholds that would apply to whether or when the independence factors
must be considered by a compensation committee? If so, what should they
be? For example, should we require consideration of stock ownership
only if the amount of stock owned constitutes a significant portion of
an adviser's net worth, such as 10%?
Would law firms be affected by the requirement to consider
independence factors in a way that would be materially different than
how compensation consultants would be affected?
Should we clarify what is covered by ``provision of other
services'' in proposed Rule 10C-1(b)(4)(i)?
We interpret ``any stock of the issuer owned by the
compensation consultant, independent legal counsel or other adviser''
in proposed Rule 10C-1(b)(4)(v) to include shares owned by the
individuals providing services to the compensation committee and their
immediate family members. We do not believe this factor is intended to
extend to the person that employs the adviser since Section 10C(b) is
specific when factors extend to the employer and that language is not
included for stock ownership. Is this an appropriate interpretation of
this factor? If not, why and how should this phrase be interpreted?
Should it also cover the person that employs the adviser?
Should we define or clarify the meaning of the phrase
``business or personal relationship,'' as used in proposed Rule 10C-
1(b)(4)(iv), and if so, how?
Would the proposed requirements have any unintended
effects on the compensation committee or its process to select a
compensation adviser? If so, please explain.
Should we adopt rule amendments to Regulation S-K to
require listed issuers to describe the compensation committee's process
for selecting compensation advisers pursuant to the new listing
standards? Would information about the compensation committee's
selection process--how it works, what it requires, who is involved,
when it takes place, whether it is followed--provide transparency to
the compensation adviser selection process and provide investors with
information that may be useful to them as they consider the
effectiveness of the selection process? Or, would such a requirement
result in too much detail about this process in the context of
disclosure regarding executive compensation?
5. Opportunity To Cure Defects
Section 10C(f)(2) of the Exchange Act specifies that our rules must
provide for appropriate procedures for an issuer to have a reasonable
opportunity to cure any defects that would be the basis for a
prohibition of the listing of an issuer's securities as a result of its
failure to meet the requirements set forth in Section 10C, before
imposition of such a prohibition.\63\ To implement this requirement,
proposed Rule 10C-1(a)(3) would require the exchanges to establish such
procedures (if their existing procedures are not adequate) before they
prohibit the listing of, or delist, any security of an issuer.
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\63\ See Exchange Act Section 10C(f)(2).
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As a preliminary matter, we believe that existing continued listing
or maintenance standards and delisting procedures of most of the
exchanges would satisfy the requirement for there to be reasonable
procedures for an issuer to have an opportunity to cure any defects on
an ongoing basis. Most exchanges have already adopted procedures to
provide issuers with notice and opportunity for a hearing, an
opportunity for an appeal and an opportunity to cure defects before
their securities are delisted.\64\ Nonetheless, we expect that the
rules of each exchange would provide for definite procedures and time
periods for compliance with the proposed requirements to the extent
they do not already do so.
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\64\ See, e.g., NYSE Listed Company Manual Section 801-805;
Nasdaq Equity Rules 5800 Series; NYSE AMEX LLC Company Guide Section
1009 and Part 12; Chicago Board Options Exchange Rule 31.94; Chicago
Stock Exchange Article 22, Rules 4, 17A, and 22; Nasdaq OMX BX Rule
4800 series; Nasdaq OMX PHLX Rule 811. Neither NYSE Arca nor the
National Stock Exchange has a rule that specifically requires listed
companies to be given an opportunity to submit a plan to regain
compliance with corporate governance listing standards other than
audit committee requirements; issuers listed on these exchanges,
however, are provided notice, an opportunity for a hearing, and an
opportunity for an appeal prior to delisting. See NYSE Arca Rule
5.5(m); National Stock Exchange Rule 15.7 and Chapter X.
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When we adopted Exchange Act Rule 10A-3(a)(3), which requires that
issuers be given an opportunity to cure violations of the audit
committee listing requirements, we noted that several commentators to
the proposing release for those rules expressed concern regarding rare
situations that may occur where an audit committee member ceases to be
independent for reasons outside the member's reasonable control.\65\
For example, a listed issuer's audit committee member could be a
partner in a law firm that provides no services to the listed issuer,
but the listed issuer could acquire another company that is one of the
law firm's clients. Without an opportunity to cure such a defect, the
audit committee member would cease to be independent. Additional time
may be necessary to cure such defects, such as ceasing the issuer's
relationship with the audit committee member's firm or replacing
[[Page 18974]]
the audit committee member. Accordingly, in our final rule, we provided
that the exchanges' rules may provide that if a member of an audit
committee ceases to be independent for reasons outside the member's
reasonable control, that person, with notice by the issuer to the
applicable national securities exchange or national securities
association, may remain an audit committee member of the listed issuer
until the earlier of the next annual meeting of the listed issuer or
one year from the occurrence of the event that caused the member to be
no longer independent.\66\
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\65\ See Standards Relating to Listed Company Audit Committees,
Release No. 33-8220 (Apr. 9, 2003).
\66\ See Exchange Act Rule 10A-3(a)(3) [17 CFR 240.10A-3(a)(3)].
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We are proposing that there should be the same opportunity to cure
violations of the independence requirements for compensation committee
members, for the same reasons we adopted such provisions for curing
violations of the independence requirements for audit committee
members. Accordingly, consistent with Rule 10A-3(a)(3), proposed Rule
10C-1(a)(3) provides that the exchanges' rules may provide that if a
member of a compensation committee ceases to be independent for reasons
outside the member's reasonable control, that person, with notice by
the issuer to the applicable exchange, may remain a compensation
committee member of the listed issuer until the earlier of the next
annual meeting of the listed issuer or one year from the occurrence of
the event that caused the member to be no longer independent.
Request for Comment
Should the exchanges be required to establish specific
procedures for curing defects regarding compliance with compensation
committee listing requirements apart from those proposed? If so, what
should these procedures be? Should there be a specific course for
redress other than the delisting process?
Should our rule, as proposed, allow exchange rules that
would permit the continued service of a compensation committee member
who ceases to be independent for reasons outside the member's
reasonable control? If so, should our rule impose a maximum time limit
for such continued service? Should our rule require that the issuer use
reasonable efforts to replace the member who is no longer independent
as promptly as practicable?
Should our rule include specific provisions that set time
limits for an opportunity to cure defects other than for instances
where a compensation committee member ceases to be independent for
reasons outside the member's reasonable control? If so, what time
limits would be appropriate?
Should companies that have just completed initial public
offerings be given additional time to comply with the requirements, as
is permitted by Exchange Act Rule 10A-3(b)(1)(iv)(A) with respect to
audit committee independence requirements?
B. Implementation of Listing Requirements
1. Exchanges Affected
Section 10C of the Exchange Act by its terms applies to all
national securities exchanges and national securities associations.\67\
These entities, to the extent that their listing standards do not
already comply with the rules we adopt under Section 10C, will be
required to issue or modify their rules, subject to Commission review,
to conform their listing standards to our new rules. An exchange that
lists or trades security futures products (as defined in Exchange Act
Section 3(a)(56)) \68\ may register as a national securities exchange
under Section 6(g) of the Exchange Act solely for the purpose of
trading security futures products.\69\ Because the Exchange Act
definition of ``equity security'' includes security futures on equity
securities,\70\ we believe it is necessary to clarify the application
of proposed Rule 10C-1 to those national securities exchanges
registered solely pursuant to Section 6(g).
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\67\ The OTC Bulletin Board (OTCBB) and the OTC Markets Group
(previously known as the Pink Sheets and Pink OTC Markets) would not
be affected by the proposed requirements, and therefore issuers
whose securities are quoted on these interdealer quotation systems
similarly would not be affected, unless their securities also are
listed on an exchange. The OTCBB is an interdealer quotation system
for the over-the-counter securities market operated by FINRA that
collects and distributes market maker quotes to subscribers. It does
not, however, have a listing agreement or arrangement with the
issuers whose securities are quoted on the system. Although market
makers may be required to review and maintain specified information
about the issuer and to furnish that information to the OTCBB, the
issuers whose securities are quoted on it are not required to file
any information with the system. The OTC Markets Group is not a
registered national securities exchange or association, nor is it
operated by a registered national securities exchange or
association, and thus is not covered by the terms of the proposed
rule.
\68\ Exchange Act Section 3(a)(56) defines the term ``security
futures product'' to mean ``a security future or any put, call,
straddle, option, or privilege on any security future.'' 15 U.S.C.
78c(a)(56).
\69\ Exchanges currently registered solely pursuant to Section
6(g) of the Exchange Act include the Board of Trade of the City of
Chicago, Inc.; the CBOE Futures Exchange, LLC; the Chicago
Mercantile Exchange, Inc.; One Chicago, LLC; the Island Futures
Exchange, LLC; and NQLX LLC.
\70\ Under Section 3(a)(11) of the Exchange Act, the term
``equity security'' is defined as any stock or similar security; or
any security future on any such security; or any security
convertible, with or without consideration, into such a security, or
carrying any warrant or right to subscribe to or purchase such a
security; or any such warrant or right; or any other security which
the Commission shall deem to be of similar nature and consider
necessary or appropriate, by such rules and regulations as it may
prescribe in the public interest or for the protection of investors,
to treat as an equity security.
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Given that Section 10C(f) of the Act makes no distinction between
exchanges registered pursuant to Section 6(a) and those registered
pursuant to Section 6(g), we have not proposed a wholesale exemption
from the requirements of Rule 10C-1 for those exchanges registered
solely pursuant to Section 6(g). However, as discussed below, we are
proposing to exempt security futures products from the scope of
proposed Rule 10C-1. Accordingly, to the extent our final rule exempts
the listing of security futures products from the scope of Rule 10C-1,
any national securities exchange registered as such solely pursuant to
Section 6(g) of the Exchange Act and that lists and trades only
security futures products would not be required to file a rule change
in order to comply with Rule 10C-1.
Currently, the only registered national securities association
under Section 15A(a) of the Exchange Act is FINRA.\71\ However, FINRA
does not list securities.\72\ While we recognize that Section 10C of
the Act specifically requires national securities associations to
prohibit the listing of any equity security of an issuer that does not
comply with the requirements of Section 10C, as FINRA does not list any
securities and does not have listing standards under its rules, we do
not expect FINRA to have to develop listing standards regarding
compensation committees in compliance with proposed Rule 10C-1.\73\
Nevertheless, as Section 10C specifically references national
securities associations, proposed Rule 10C-1 would apply to any
registered national securities association that lists equity securities
in the future.
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\71\ Regarding the National Futures Association (NFA), see note
6, above, and note 73, below.
\72\ See note 6, above.
\73\ Similarly, we do not expect the NFA, which is registered
under Section 15A(k) for the limited purpose of regulating the
activities of members who are registered as broker-dealers in
security futures products, see note 6, above, to develop listing
standards regarding compensation committees in compliance with
proposed Rule 10C-1.
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Request for Comment
Should we exempt certain exchanges or associations from
Section 10C of the Exchange Act? If so, why,
[[Page 18975]]
and which exchanges or associations should we exempt and why?
Would we need to exempt an exchange from Section 10C if we
also exempt the class of securities listed on such exchange?
2. Securities Affected
a. Listed Equity Securities
Section 10C of the Exchange Act specifies in one subsection that
the compensation committee listing requirements are intended to apply
to issuers with listed equity securities, but another subsection may
suggest that it applies to issuers with any listed securities. Section
10C(a) provides that the Commission shall direct the exchanges to
prohibit the listing of any ``equity security'' of an issuer (other
than several types of exempted issuers) that does not comply with the
compensation committee member independence requirements. Section
10C(f)(1), which states generally the scope of the compensation
committee and compensation adviser listing requirements, provides that,
``[n]ot later than 360 days after the date of enactment of this
section, the Commission shall, by rule, direct the national securities
exchanges and national securities associations to prohibit the listing
of any security of an issuer that is not in compliance with the
requirements of this section'' (emphasis added).
The Senate-passed version of the bill did not distinguish between
equity and non-equity securities, referencing only the prohibition
against the listing of ``any security'' of an issuer not in compliance
with the independence requirements. The House-passed version would have
required the Commission to adopt rules to direct the exchanges to
prohibit the listing of ``any class of equity security'' of an issuer
that is not in compliance with the compensation committee independence
standards, as well as with any of the other provisions of that section,
including the provisions relating to compensation advisers. According
to a press release from the House Financial Services Committee, this
language was added during final House deliberations to clarify that the
compensation committee independence standards would apply only to
``public companies, not to companies that have only an issue of
publicly-registered debt.'' \74\
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\74\ See http://www.house.gov/apps/list/press/financialsvcs_dem/press_072809.shtml.
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Because the Senate-passed version of the bill (which did not
specify ``equity'' securities) was used as the base for the conference
draft, it appears that addition of ``equity'' securities in Section
10C(a) of the conference draft is deliberate. Unlike the House-passed
bill, however, the final bill specifically references equity securities
only in connection with compensation committee independence
requirements.
Based on this legislative history, we believe that the compensation
committee and other requirements in Section 10C are intended to apply
only to issuers with listed equity securities.\75\ As noted above, the
provision governing compensation committee independence is specifically
limited to issuers of equity securities. Against this backdrop, in our
view, it is unlikely that Congress intended the remaining compensation
committee provisions (compensation adviser independence factors,
authority to retain compensation advisers, and responsibility for the
appointment, compensation and oversight of the work of the compensation
advisers) to apply to issuers with only listed debt securities. We note
that the NYSE currently exempts debt-only listed issuers from the
compensation committee listing requirements that apply to issuers
listing equity securities.\76\ In addition, Exchange Act Rule 3a12-11
exempts listed debt securities from most of the requirements in our
proxy and information statement rules.\77\ Finally, most, if not all,
issuers with only listed debt securities, other than foreign private
issuers, are privately held.\78\ Thus, subjecting issuers of such
securities to the requirements of proposed Rule 10C-1 would not serve
the general intent of the Act's executive compensation provisions of
protecting ``shareholders in a public company.'' \79\ In light of the
legislative history and our and the exchanges' historical approach to
issuers with only listed debt securities, we believe the new listing
standards required by Section 10C are intended to apply only to issuers
with listed equity securities.
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\75\ Although Section 10C is, in many respects, similar to
Section 10A(m), there are differences in some of the statutory
language. In this regard, we note that the audit committee
independence requirements included in Section 10A(m) of the Exchange
Act, as set forth in Section 301 of the Sarbanes-Oxley Act, are
applicable generally to ``listed securities,'' and no reference is
made to equity securities. Therefore, although Section 10A(m)
applies to issuers whether they have listed debt or equity, we do
not believe this should necessarily prescribe the scope of Section
10C.
\76\ See NYSE Listed Company Manual Section 303A.00.
\77\ In adopting this rule, the Commission determined that debt
holders would receive sufficient protection from the indenture
contract, the Trust Indenture Act, the proxy rules' antifraud
proscriptions, and the Exchange Act rules that facilitate the
transmission of materials to beneficial owners. See Exemptive Relief
and Simplification of Filing Requirements for Debt Securities To Be
Listed on a National Securities Exchange, Release No. 34-34922 (Nov.
1, 1994) [59 FR 55342].
\78\ Based on information reported in the most recent annual
reports on Forms 10-K, 20-F and 40-F that are available on EDGAR,
and current public quotation and trade data on issuers whose debt
securities are listed on an exchange, such as the NYSE Listed and
Traded Bonds and NYSE Amex Listed Bonds, we estimate that there are
approximately 76 issuers that list only debt securities on an
exchange. Of these 76 issuers, approximately 21 are wholly-owned
subsidiaries that would be exempt from proposed Exchange Act Rule
10C-1 pursuant to Section 10C(g) of the Act. None of these 76
issuers has a class of equity securities registered under Section 12
of the Exchange Act.
\79\ 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 (Conf. Rep.) (June 29, 2010)
(``In this subtitle, Congress provides shareholders in a public
company with a vote on executive compensation and additional
disclosures regarding compensation practices.'').
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Request for Comment
We read Section 10C as applying only to issuers with
listed equity securities, and our proposed rules are consistent with
that view. Should we instead mandate that the requirements of Sections
10C(b) through (e) be applied to a broader range of issuers, including
issuers with only listed debt securities or issuers with other types of
listed securities? Why or why not?
b. Securities Futures Products and Standardized Options
The Exchange Act's definition of ``equity security'' includes any
security future on any stock or similar security.\80\ The Commodity
Futures Modernization Act of 2000 (the ``CFMA'') \81\ permits national
securities exchanges registered under Section 6 of the Exchange Act
\82\ and national securities associations registered under Section
15A(a) of the Exchange Act \83\ to trade futures on individual
securities and on narrow-based security indices (``security futures'')
\84\ without such securities being subject to the registration
requirements of the Securities Act of 1933 (the ``Securities Act'') and
Exchange Act so long as they are cleared by a clearing agency that is
registered under Section 17A of the Exchange Act \85\ or that is exempt
from registration under Section 17A(b)(7)(A) of the Exchange Act. In
December 2002, we
[[Page 18976]]
adopted rules to provide comparable regulatory treatment for
standardized options.\86\
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\80\ Exchange Act Section 3(a)(11).
\81\ Public Law 106-554, 114 Stat. 2763 (2000).
\82\ 15 U.S.C. 78f.
\83\ 15 U.S.C. 78o-3(a).
\84\ Exchange Act Section 3(a)(56) [15 U.S.C. 78c(a)(56)], and
Commodities Exchange Act Section 1a(32) [7 U.S.C. 1a(32)] define
``security futures product'' as a security future or any put, call,
straddle, option, or privilege on any security future.
\85\ 15 U.S.C. 78q-1.
\86\ See Release No. 33-8171 (Dec. 23, 2002) [68 FR 188]. In
that release, we exempted standardized options issued by registered
clearing agencies and traded on a registered national securities
exchange or on a registered national securities association from all
provisions of the Securities Act, other than the antifraud provision
of Section 17, as well as the Exchange Act registration
requirements. Standardized options are defined in Exchange Act Rule
9b-1(a)(4) [17 CFR 240.9b-1(a)(4)] as option contracts trading on a
national securities exchange, an automated quotation system of a
registered securities association, or a foreign securities exchange
which relate to option classes the terms of which are limited to
specific expiration dates and exercise prices, or such other
securities as the Commission may, by order, designate.
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The clearing agency for security futures products and standardized
options is the issuer of these securities,\87\ but its role as issuer
is fundamentally different from an issuer of common stock of an
operating company. The purchaser of these securities does not, except
in the most formal sense, make an investment decision regarding the
clearing agency. As a result, information about the clearing agency's
business, its officers and directors and its financial statements is
less relevant to investors in these securities than information about
the issuer of the underlying security. Similarly, the investment risk
in these securities is determined by the market performance of the
underlying security rather than the performance of the clearing agency,
which is a self-regulatory organization subject to regulatory
oversight. Furthermore, unlike a conventional issuer, the clearing
agency does not receive the proceeds from sales of security futures
products or standardized options.\88\
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\87\ See Fair Administration and Governance of Self-Regulatory
Organizations; Disclosure and Regulatory Reporting by Self-
Regulatory Organizations; Recordkeeping Requirements for Self-
Regulatory Organizations; Ownership and Voting Limitations for
Members of Self-Regulatory Organizations; Ownership Reporting
Requirements for Members of Self-Regulatory Organizations; Listing
and Trading of Affiliated Securities by a Self-Regulatory
Organization, Release No. 34-50699 (Nov. 18, 2004) [69 FR 71126], at
n. 260 (``Standardized options and security futures products are
issued and guaranteed by a clearing agency. Currently, all
standardized options and security futures products are issued by the
Options Clearing Corporation (`OCC').'').
\88\ However, the clearing agency may receive a clearing fee
from its members.
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In recognition of these fundamental differences, the Commission
provided exemptions for security futures products and standardized
options when it adopted the audit committee listing requirements in
Exchange Act Rule 10A-3.\89\ Specifically, Rule 10A-3(c) exempts the
listing of a security futures product cleared by a clearing agency that
is registered pursuant to Section 17A of the Exchange Act or that is
exempt from registration pursuant to Section 17A(b)(7)(A) and the
listing of a standardized option issued by a clearing agency that is
registered pursuant to Section 17A of the Exchange Act. For the same
reasons that we exempted these securities from Rule 10A-3, we propose
to exempt these securities from Rule 10C-1, as we believe that there
would be no benefit to investors or to the public interest in
subjecting the issuers of these securities to the requirements of
proposed Rule 10C-1.
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\89\ See Exchange Act Rules 10A-3(c)(4) and (5).
---------------------------------------------------------------------------
Request for Comment
Is our proposed exemption for securities futures products
and standardized options necessary or appropriate in the public
interest and consistent with the protection of investors?
Alternatively, would it further the goal of investor
protection to adopt Rule 10C-1 without the proposed exemption for
securities futures products and standardized options?
3. Exemptions
a. General Approach to Exemptions
Section 10C of the Exchange Act has four different provisions
relating to exemptions from some or all of the requirements of Section
10C:
Section 10C(a)(1) provides that our rules shall direct the
exchanges to prohibit the listing of any equity security of an issuer,
other than an issuer that is in one of five specified categories, that
is not in compliance with the compensation committee member
independence requirements of Section 10C(a)(2);
Section 10C(a)(4) provides that our rules shall authorize
the exchanges to exempt a particular relationship from the independence
requirements applicable to compensation committee members, as each
exchange determines is appropriate, taking into consideration the size
of the issuer and other relevant factors;
Section 10C(f)(3) provides that our rules shall authorize
the exchanges to exempt any category of issuer from the requirements of
Section 10C, taking into account the potential impact of the
requirements on smaller reporting companies; \90\ and
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\90\ Exchange Act Rule 12b-2 defines ``smaller reporting
company'' as ``an issuer that is not an investment company, an
asset-backed issuer * * *, or a majority-owned subsidiary of a
parent that is not a smaller reporting company and that: (1) Had a
public float of less than $75 million as of the last business day of
its most recently completed second fiscal quarter, computed by
multiplying the aggregate worldwide number of shares of its voting
and non-voting common equity held by non-affiliates by the price at
which the common equity was last sold, or the average of the bid and
asked prices of common equity, in the principal market for the
common equity; or (2) In the case of an initial registration
statement under the Securities Act or Exchange Act for shares of its
common equity, had a public float of less than $75 million as of a
date within 30 days of the date of the filing of the registration
statement, computed by multiplying the aggregate worldwide number of
such shares held by non-affiliates before the registration plus, in
the case of a Securities Act registration statement, the number of
such shares included in the registration statement by the estimated
public offering price of the shares; or (3) In the case of an issuer
whose public float as calculated under paragraph (1) or (2) of this
definition was zero, had annual revenues of less than $50 million
during the most recently completed fiscal year for which audited
financial statements are available.'' Whether or not an issuer is a
smaller reporting company is determined on an annual basis.
---------------------------------------------------------------------------
Section 10C(g) specifically exempts controlled companies,
as defined in Section 10C(g), from all of the requirements of Section
10C.
We can exempt any person, security or transaction, or any class or
classes of person, securities or transactions, from any of the
requirements of the Exchange Act, to the extent that such exemption is
necessary or appropriate in the public interest, and is consistent with
the protection of investors.\91\ In addition, as noted above, Section
10C(f)(3) provides that our rules shall authorize the exchanges to
exempt any category of issuers from the requirements of Section
10C.\92\ As with any listing standards, listing standards implementing
this provision would be subject to Commission review pursuant to
Section 19(b) of the Exchange Act. In view of this statutory approach,
we are preliminarily of the view that it should be up to the exchanges
to propose the categories of issuers to be exempted from Section 10C's
requirements, subject to our review in the rule filing process. Because
issuers frequently consult the exchanges regarding independence
determinations and committee responsibilities, the exchanges may be in
the best position to identify the types of common relationships that
are likely to compromise the ability of an issuer's
[[Page 18977]]
compensation committee to make impartial determinations on executive
compensation and the types of issuers that should be exempted from the
other compensation committee listing requirements. Accordingly, relying
on the exchanges to exercise their exemptive authority under our rules
may result in more efficient and effective determinations as to the
types of relationships and the types of issuers that merit an
exemption, whether in whole or in part, from the requirements of
Section 10C.
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\91\ See Exchange Act Section 36.
\92\ We are proposing to implement Section 10C(c)(2)'s
compensation consultant disclosure requirements by amending Item
407(e)(3) of Regulation S-K. See Section II.C., below, for a
discussion of these proposed amendments. Because Item 407 of
Regulation S-K is not part of Section 10C, Section 10C(f)(3) would
not permit exchanges to exempt any category of issuers from our
proposed revisions to Item 407, if adopted. We request comment below
on whether smaller reporting companies should be exempt from our
proposed disclosure requirements in the event the exchanges exempt
such companies from the listing standards required by Section 10C.
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We note that Section 10C of the Exchange Act makes no distinction
between domestic and foreign issuers, other than to exempt from the
independence requirements foreign private issuers that disclose in
their annual reports the reasons why they do not have independent
compensation committees. Many listed foreign private issuers maintain
compensation committees, and other than the committee member
independence requirements in proposed Rule 10C-1(b)(1), the proposed
rule and rule amendments, therefore, would apply to foreign private
issuers as well as domestic issuers.
Because the exchanges will be permitted to propose exemptions to
the listing standards required by Section 10C and our rules, we do not
propose to exempt any category of issuer or any relationship from rules
implementing Section 10C, other than the five categories of issuers not
subject to the compensation committee independence requirements, as
directed by Section 10C(a)(1), securities futures products and
standardized options, as discussed above in Section II.B.2.b, and the
equity securities of controlled companies, as directed by Section
10C(g).
Instead of providing exemptions in our rules, consistent with
Section 10C(f)(3), proposed Rule 10C-1(b)(5)(i) permits the exchanges
to exempt a category of issuers from the requirements of Section 10C,
as each exchange determines is appropriate. In determining appropriate
exemptions, the exchanges are required by the statute to take into
account the potential impact of the requirements of Section 10C on
smaller reporting issuers.\93\
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\93\ See Exchange Act Section 10C(f)(3)(B). Section 10C of the
Exchange Act includes no express exemptions for smaller reporting
companies. We note that neither NYSE nor Nasdaq currently exempts
smaller reporting companies from their corporate governance
requirements. Other than limited exemptions from requirements to
have a majority independent board or three-member audit committee--
for example, NYSE Amex and the Chicago Stock Exchange permit smaller
issuers to have a 50% independent board and a minimum of two members
on the issuer's audit committee--we are unaware of any corporate
governance listing standards or related exemptions that are tailored
to smaller reporting companies. See NYSE Amex Company Guide Section
801(h); Chicago Stock Exchange Article 22, Rules 19(a),
19(b)(1)(C)(iii), and 21(a). Section 10C(f)(3) requires the
exchanges to take into account the potential impact of the listing
requirements on smaller reporting issuers when exercising the
exemptive authority permitted by our rules. Any such exemptions,
rule changes and any other new listing requirements would be subject
to Commission approval through the rule submission process under
Section 19(b) of the Exchange Act.
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Request for Comment
Should the Commission exempt any types of issuers, such as
registered management investment companies, foreign private issuers or
smaller reporting companies, from some or all of the requirements of
Section 10C? If so, why? Instead, should the Commission, as proposed,
defer to the exchanges for exemptions from Section 10C's requirements,
rather than propose and adopt exemptions in our rules?
Should the Commission issue additional guidance to the
exchanges as to the factors that should weigh in favor of granting
exemptions? What concerns, if any, should the Commission be aware of in
reviewing exemptions proposed by the exchanges?
Rather than exempt any category of issuers, should the
Commission require the exchanges to give additional time to certain
types of issuers to comply with the requirements of Section 10C, such
as companies that have just completed initial public offerings? Or,
should we defer to the exchanges to provide temporary exemptions, as
proposed?
b. Issuers Not Subject to Independence Requirements
As noted above, Exchange Act Section 10C(a)(1) provides that our
rules shall direct the exchanges to prohibit the listing of any equity
security of an issuer, other than an issuer that is in one of five
specified categories, that is not in compliance with the compensation
committee member independence requirements of Section 10C(a)(2). These
five categories include controlled companies, limited partnerships,
companies in bankruptcy proceedings, open-end management investment
companies registered under the Investment Company Act \94\ and foreign
private issuers that provide annual disclosures to shareholders of the
reasons why the foreign private issuer does not have an independent
compensation committee. Accordingly, proposed Rule 10C-1(b)(1)(iii)
provides that these five categories of issuers are not subject to an
exchange's compensation committee independence requirements and,
therefore, an issuer that is in one of these categories cannot be
delisted for not complying with such requirements.
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\94\ 15 U.S.C. 80a-1 et seq.
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Controlled Companies
Section 10C(g)(2) of the Exchange Act defines ``controlled
company'' as an issuer that is listed on an exchange and holds an
election for the board of directors of the issuer in which more than 50
percent of the voting power is held by an individual, a group or
another issuer. Proposed Rule 10C-1(c)(2) would incorporate this
definition of ``controlled company.''
Limited Partnerships
Section 10C does not define the term ``limited partnerships.'' In
general, a limited partnership is a form of business ownership and
association consisting of one or more general partners who are fully
liable for the debts and obligations of the partnership and one or more
limited partners whose liability is limited to the amount invested.\95\
We do not propose to define this term in proposed Rule 10C-1(c),
although we solicit comment on whether we should do so.
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\95\ See Unif. Ltd. P'ship Act Sec. Sec. 102, 303 and 404
(2001).
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Companies in Bankruptcy Proceedings
Section 10C does not define the scope of ``companies in bankruptcy
proceedings.'' This term is used in Commission rules without
definition.\96\ We do not propose to define the scope of ``companies in
bankruptcy proceedings,'' although we solicit comment on whether we
should do so.
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\96\ See, e.g., Section 55(a)(3)(A) of the Investment Company
Act [15 U.S.C. 80a-54(a)(3)(A)]; Item 1107(k) of Regulation AB [17
CFR 229.1107(k)]; and Rule 457 under the Securities Act [17 CFR
230.457].
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Open-End Management Investment Companies
Section 10C does not define the term ``open-end management
investment company.'' Under the Investment Company Act, an open-end
management investment company is an investment company, other than a
unit investment trust or face-amount certificate company, that offers
for sale or has outstanding any redeemable security of which it is the
issuer.\97\ We propose to
[[Page 18978]]
define this term by referencing Section 5(a)(1) of the Investment
Company Act.
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\97\ See Sections 4 and 5(a)(1) of the Investment Company Act
[15 U.S.C. 80a-4 and 80a-5(a)(1)]. Open-end and closed-end
management investment companies registered under the Investment
Company Act are generally exempt from current exchange listing
standards that require listed issuers to either have a compensation
committee or to have independent directors determine, recommend, or
oversee specified executive compensation matters. See, e.g., NYSE
Listed Company Manual Section 303A.00; Nasdaq Rule 5615(a)(5); NYSE
Arca Rule 5.3; NYSE AMEX LLC Company Guide Section 801.
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Foreign Private Issuers
Under Section 10C(a), a foreign private issuer that provides annual
disclosure to shareholders of the reasons why the foreign private
issuer does not have an independent compensation committee would be
exempt from the compensation committee independence requirements.
Exchange Act Rule 3b-4 defines ``foreign private issuer'' as ``any
foreign issuer other than a foreign government, except for an issuer
that has more than 50% of its outstanding voting securities held of
record by U.S. residents and any of the following: a majority of its
officers and directors are citizens or residents of the United States,
more than 50% of its assets are located in the United States, or its
business is principally administered in the United States.'' \98\ Since
this definition applies to all Exchange Act rules, we do not believe it
is necessary to provide a cross-reference to Rule 3b-4 in our proposed
rules.
---------------------------------------------------------------------------
\98\ 17 CFR 240.3b-4(c).
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We note that certain foreign private issuers have a two-tier board,
with one tier designated as the management board and the other tier
designated as the supervisory or non-management board. In this
circumstance, we believe that the supervisory or non-management board
would be the body within the company best equipped to comply with the
proposed requirements. Consistent with our approach to Rule 10A-3, we
propose to clarify that in the case of foreign private issuers with
two-tier boards of directors, the term ``board of directors'' means the
supervisory or non-management board. As such, to the extent the
supervisory or non-management board forms a separate compensation
committee, proposed Rule 10C-1 would apply to that committee, with the
exception of the committee member independence requirements, assuming
the foreign private issuer discloses why it does not have an
independent compensation committee in its annual report.
Request for Comment
Should we provide a definition of ``limited partnership''
in our proposed rules? If so, what should it be?
Should we define the scope of ``companies in bankruptcy
proceedings''? If so, what should that scope be?
Do we need to clarify, as proposed, that in the case of
foreign private issuers with two-tier boards of directors, the term
``board of directors'' means the supervisory or non-management board?
c. Relationships Exempt From Independence Requirements
As noted above, Section 10C(a)(4) of the Exchange Act provides that
the Commission's rules shall permit an exchange to exempt a particular
relationship from the compensation committee independence requirements,
as such exchange deems appropriate, taking into consideration the size
of the issuer and any other relevant factors.\99\ To implement this
provision, proposed Rule 10C-1(b)(1)(iii)(B) would authorize the
exchanges to establish listing standards under the Section 19(b)
process that exempt particular relationships between members of the
compensation committee and listed issuers that might otherwise impair
the member's independence, taking into consideration the size of an
issuer and any other relevant factors.
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\99\ See Exchange Act Section 10C(a)(4).
---------------------------------------------------------------------------
We do not propose to exempt any particular relationships from the
independence requirements at this time. As with the authority to exempt
particular categories of issuers, we are preliminarily of the view that
it should be up to the exchanges to identify and propose the types of
particular relationships that should be exempted from the independence
requirements.
Request for Comment
Should the Commission, as proposed, defer to the exchanges
to identify and propose the types of particular relationships to be
exempted from the independence requirements? If not, why not?
Should we give guidance to the exchanges on how they
should analyze relationships to determine whether an exemption is
warranted or not?
Some of the exchanges, in their existing compensation
committee listing standards, permit a listed issuer with a compensation
committee comprised of at least three members to include one director
who is not independent and is not a current officer or employee, or
immediate family member of a current officer or employee, on the
compensation committee for no more than two years if the issuer's
board, under exceptional and limited circumstances, determines that
such individual's membership on the committee is required in the best
interests of the company and its shareholders.\100\ Should our proposed
rule expressly permit the exchanges to continue this practice by
exempting certain relationships from the independence requirements,
based on the conditions outlined above? Should our proposed rule
expressly prohibit the exchanges from continuing this practice?
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\100\ See NYSE Amex LLC Company Guide, Section 805(b); NYSE Arca
Rule 5.3(k)(4); Nasdaq Rule 5605(d)(3); NASDAQ OMX BX Rule
4350(c)(3)(C); Chicago Board Options Exchange Rule 31.10(c)(3); and
Chicago Stock Exchange Article 22, Rule 19(d)(3).
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What issues should an exchange consider in proposing an
exemption?
Exchange Act Rule 10A-3 requires listed issuers that avail
themselves of an exemption from the audit committee independence
requirements to disclose such reliance on an exemption in the listed
issuer's proxy statement and Form 10-K or, in the case of a registered
management investment company, Form N-CSR. Should we similarly require
any issuer availing itself of any of the exemptions set forth directly
in Section 10C(a)(1) of the Exchange Act or any exemption granted by
the relevant exchange to disclose that fact in its proxy statement and
Form 10-K or, in the case of a registered management investment
company, Form N-CSR or another form? Under current rules, an issuer is
required to identify any compensation committee members who are not
independent. In light of this requirement, is a specific requirement to
note reliance on an exemption unnecessary?
If a listed issuer's board of directors determines, in
accordance with applicable listing standards, to appoint a director to
the compensation committee who is not independent, including as a
result of exceptional or limited or similar circumstances, should we
require the issuer to disclose the nature of the relationship that
makes that individual not independent and the reasons for the board of
directors' determination, as we do with respect to audit committee
members in Item 407(d)(2) of Regulation S-K?
C. Compensation Consultant Disclosure and Conflicts of Interest
Section 10C(c)(2) of the Exchange Act requires that, in any proxy
or consent solicitation material for an annual meeting (or a special
meeting in lieu of the annual meeting), each issuer must disclose, in
accordance with regulations of the Commission, whether:
The compensation committee has retained or obtained the
advice of a compensation consultant; and
The work of the compensation consultant has raised any
conflict of interest and, if so, the nature of the
[[Page 18979]]
conflict and how the conflict is being addressed.
Item 407 of Regulation S-K currently requires Exchange Act
registrants that are subject to the proxy rules to provide certain
disclosures concerning their compensation committees and the use of
compensation consultants.\101\ Item 407(e)(3)(iii) generally requires
registrants to disclose ``any role of compensation consultants in
determining or recommending the amount or form of executive and
director compensation,'' including:
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\101\ Registered investment companies are subject to separate
proxy disclosure requirements set forth in Item 22 of Schedule 14A,
which do not include the compensation committee disclosure described
in Item 407(e) of Regulation S-K. See Item 7(g) of Schedule 14A.
Consistent with our current regulations, registered investment
companies would continue to provide disclosure under Item 22 and
would not be subject to the amendments to Item 407(e) proposed in
this release.
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Identifying the consultants;
Stating whether such consultants were engaged directly by
the compensation committee or any other person;
Describing the nature and scope of the consultants'
assignment, and the material elements of any instructions given to the
consultants under the engagement; and
Disclosing the aggregate fees paid to a consultant for
advice or recommendations on the amount or form of executive and
director compensation and the aggregate fees for additional services if
the consultant provided both and the fees for the additional services
exceeded $120,000 during the fiscal year.\102\
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\102\ See current Items 407(e)(3)(iii)(A) and (B) [17 CFR
229.407(e)(3)(iii)(A) and 229.407(e)(3)(iii)(B)]. Fee disclosure,
however, is not required for compensation consultants that work with
management if the compensation committee has retained a separate
consultant. In promulgating these requirements, we recognized that
in this situation the compensation committee may not be relying on
the compensation consultant used by management, and, therefore,
potential conflicts of interest are less of a concern.
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The current item excludes from the disclosure requirement any role
of compensation consultants limited to consulting on any broad-based
plan that does not discriminate in scope, terms or operation in favor
of executive officers or directors of the registrant and that is
available generally to all salaried employees, or limited to providing
information that either is not customized for a particular registrant
or is customized based on parameters that are not developed by the
compensation consultant, and about which the compensation consultant
does not provide advice.\103\
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\103\ See Proxy Disclosure Enhancements, Release No. 33-9089
(Dec. 16, 2009) [74 FR 68334]. The Commission determined (based on
comments it received on the rule proposal) that the provision of
such work by a compensation consultant does not raise conflict of
interest concerns that warrant disclosure of the consultant's
selection, terms of engagement or fees.
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Given the similarities between the disclosure required by Section
10C(c)(2) and the disclosure required by Item 407 of Regulation S-K for
registrants subject to our proxy rules, we propose to integrate Section
10C(c)(2)'s disclosure requirements with the existing disclosure rule,
rather than simply ``tacking on'' the new requirements to the existing
ones. Section 10C(c)(2) specifies that these disclosures are to be
required ``in any proxy or consent solicitation material for an annual
meeting of the shareholders (or a special meeting in lieu of the annual
meeting).'' By contrast, our proxy rules currently require issuers to
provide disclosure relating to the retention of a compensation
consultant and fees paid to consultants only in proxy or information
statements for annual meetings at which directors are to be elected,
and not for all annual meetings. However, Section 10C(c)(2) also
provides that the compensation consultant disclosures be made ``in
accordance with regulations of the Commission.'' Because we view this
disclosure as being most relevant in the context of a meeting at which
directors will be elected, consistent with our current rules, we
propose to require Section 10C(c)(2)'s compensation consultant and
conflict of interest disclosure only for proxy and information
statements for annual meetings (or a special meeting in lieu of an
annual meeting) at which directors are to be elected.
Section 10C(f) of the Exchange Act requires us to adopt rules
directing the exchanges to prohibit the listing of any security of an
issuer that is not in compliance with the requirements of Section 10C,
which include Section 10C(c)(2)'s disclosure requirements.
Consequently, we are required to extend these disclosure requirements
to listed issuers other than controlled companies,\104\ but we are not
required to extend them to all Exchange Act registrants subject to our
proxy rules. However, given the similar nature of the disclosure
required by current Item 407(e) and Section 10C(c)(2) and the apparent
common purpose of these disclosure requirements, and to avoid any
potential confusion that could arise from having different disclosure
requirements on the same topic for listed issuers on one hand and for
unlisted issuers and controlled companies on the other, we propose to
combine the current Item 407(e) and Section 10C(c)(2) into one
disclosure requirement that would apply to Exchange Act registrants
subject to our proxy rules, whether listed or not, whether they are
controlled companies or not.
---------------------------------------------------------------------------
\104\ Section 10C(g) specifically exempts controlled companies,
as defined in Section 10C(g), from all of the requirements of
Section 10C. Controlled companies are subject to our existing Item
407(e)(3) disclosure requirements.
---------------------------------------------------------------------------
We note that the trigger for disclosure about compensation
consultants under Section 10C(c)(2) of the Exchange Act is worded
differently from the trigger for disclosure under the amendments to
Item 407 that we adopted in 2009.\105\ Specifically, Section 10C(c)(2)
states that the issuer must disclose whether the ``compensation
committee retained or obtained the advice of a compensation
consultant.'' By contrast, as noted above, our current rule refers to
whether compensation consultants played ``any role'' in the
registrant's process for determining or recommending the amount or form
of executive or director compensation. Once disclosure is required, the
specifics of what must be disclosed are also different. With regard to
conflicts of interest, our current rule requires detailed disclosure
about fees in certain circumstances in which there may be a conflict of
interest, whereas Section 10C(c)(2) is more open-ended and requires
disclosure of any conflict of interest, the nature of the conflict and
how the conflict is being addressed, which our existing rules do not
require.
---------------------------------------------------------------------------
\105\ Id.
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As proposed, revised Item 407(e)(3)(iii) would have a disclosure
trigger that is consistent with the statutory language and would,
therefore, require the registrant to disclose whether the compensation
committee has ``retained or obtained'' the advice of a compensation
consultant during the registrant's last completed fiscal year. We
anticipate that the practical effect of the proposed change would be
minimal, as we believe it would be unusual for a consultant to play a
role in determining or recommending the amount of executive
compensation without the compensation committee also retaining or
obtaining the consultant's advice. And, we believe having a consistent
trigger for disclosure would benefit issuers and investors by reducing
potential confusion about the disclosure requirements.
Consistent with Section 10C(c)(2), disclosure of whether the
compensation committee obtained or retained the advice of a
compensation consultant during the registrant's last completed
[[Page 18980]]
fiscal year and whether the consultant's work raised any conflict of
interest and, if so, the nature of the conflict and how it is being
addressed, would be required without regard to the existing exceptions
in Item 407(e)(3). For example, disclosure about the compensation
consultant would be required even if the consultant provides only
advice on broad-based plans or provides only non-customized benchmark
data. In this regard, we would be broadening the scope of disclosure
currently required by Item 407(e)(3)(iii). We believe this is
consistent with the purposes of Section 10C(c)(2), which is to require
disclosure about compensation consultants and any conflicts of interest
they have in a competitively neutral fashion. We solicit comment,
however, on whether any of the current exclusions should extend to this
new disclosure requirement or, conversely, whether we should eliminate
the exclusions with respect to the existing disclosure requirements. We
also solicit comment on whether it would be preferable to retain the
existing requirements without modification and add the new requirements
without integrating them into the existing ones.
The other existing disclosure requirements of Item 407(e)(3) would
remain the same, aside from amending the fee disclosure requirements to
link the disclosure of fees to the compensation committee ``retaining
or obtaining the advice of a compensation consultant'' and to
management ``retaining or obtaining the advice of a compensation
consultant.'' \106\ The disclosure of the aggregate fees paid to a
compensation consultant is intended to enable security holders to
assess the potential for conflicts of interest resulting from the
compensation consultant's financial incentive to provide services to
the issuer in addition to executive compensation consulting services.
We believe that this disclosure benefits investors and complements the
required Section 10C(c)(2) disclosures, and therefore propose to retain
this existing disclosure requirement, modified as noted above.
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\106\ See proposed Items 407(e)(3)(iii)(A) and (B). The fee
disclosure requirements would continue to include the existing
exclusions for consulting on any non-discriminatory, broad-based
plan or providing non-customized information.
---------------------------------------------------------------------------
To provide guidance to issuers as to whether the compensation
committee or management has ``obtained the advice'' of a compensation
consultant,\107\ we are proposing an instruction to clarify this
statutory language. This instruction would provide that the phrase
``obtained the advice'' relates to whether a compensation committee or
management has requested or received advice from a compensation
consultant, regardless of whether there is a formal engagement of the
consultant or a client relationship between the compensation consultant
and the compensation committee or management or any payment of fees to
the consultant for its advice.
---------------------------------------------------------------------------
\107\ See letter from Compensia.
---------------------------------------------------------------------------
Currently, Item 407(e)(3) focuses on the conflicts of interest that
may arise from a compensation consultant also providing other non-
executive compensation consulting services to an issuer, which may lead
the consultant to provide executive compensation advice favored by
management in order to obtain or retain such other assignments. Section
10C(c)(2) is more open-ended about conflicts of interest in that it
requires issuers to disclose whether the work of a compensation
consultant raised ``any conflict of interest'' and, if so, the nature
of the conflict and how the conflict is being addressed. The term
``conflict of interest'' is not defined in Section 10C(c)(2), and our
proposed rule would not supply a definition.
As discussed above, Sections 10C(f) and 10C(b) of the Exchange Act
require the Commission to adopt rules directing the exchanges to
prohibit the listing of the securities of an issuer whose compensation
committee does not consider the independence factors identified by the
Commission when retaining compensation advisers. Section 10C(b)(2)
identifies specific factors that must be included in these listing
standards, and, as described above, we are proposing to include them in
proposed Rule 10C-1(b)(4)(i) through (v).\108\
---------------------------------------------------------------------------
\108\ See Section II.A.4, above, for a description of proposed
Rule 10C-1(b)(4)(i) through (v).
---------------------------------------------------------------------------
In light of the link between the requirement that the compensation
committees of listed issuers consider independence factors before
retaining compensation advisers and the disclosure requirements about
compensation consultants and their conflicts of interest, we believe it
would be appropriate to provide some guidance to issuers as to the
factors that should be considered in determining whether there is a
conflict of interest that would trigger disclosure under the proposed
amendments. Therefore, we propose to include an instruction that
identifies the factors set forth in proposed Rule 10C-1(b)(4)(i)
through (v) as among the factors that issuers should consider in
determining whether there is a conflict of interest that may need to be
disclosed in response to our proposed amendments to Item
407(e)(3)(iii). Although only listed issuers will be required to
consider the five independence factors before selecting a compensation
consultant, we believe that these five factors will be helpful to all
Exchange Act registrants subject to the proxy rules in assessing
potential conflicts of interest.
We have not concluded that the presence or absence of any of these
individual factors indicates that a compensation consultant has a
conflict of interest that would require disclosure under the proposed
amendments, nor have we concluded that there are no other circumstances
or factors that might present a conflict of interest for a compensation
consultant retained by a compensation committee. Moreover, if, under
our rules, disclosure of fees paid to a compensation consultant is
required, this does not reflect a conclusion that a conflict of
interest is present.\109\ In addition to considering the factors
enumerated above and any other factors that the exchanges may highlight
in applicable listing standards, the issuer would need to consider the
specific facts and circumstances relating to a consultant's engagement
to determine whether there may be a conflict of interest that would be
required to be disclosed under our new rules.
---------------------------------------------------------------------------
\109\ See Proxy Disclosure Enhancements, Release No. 33-9089
(Dec. 16, 2009) [74 FR 68334] (``Our amendments as adopted are
intended to facilitate investors' consideration of whether, in
providing advice, a compensation consultant may have been influenced
by a desire to retain other engagements from the company. This does
not reflect a conclusion that we believe that a conflict of interest
is present when disclosure is required under our new rule, or that a
compensation committee or a company could not reasonably conclude
that it is appropriate to engage a consultant that provides other
services to the company requiring disclosure under our new rule.'').
---------------------------------------------------------------------------
If a compensation committee determines that there is a conflict of
interest with the compensation consultant based on the relevant facts
and circumstances, the issuer would be required to provide a clear,
concise and understandable description of the specific conflict and how
the issuer has addressed it. A general description of an issuer's
policies and procedures to address conflicts of interest or the
appearance of conflicts of interest would not suffice.
Request for Comment
We request comment on our proposed implementation of the
requirements of Section 10C(c)(2). Is it appropriate to limit Section
10C(c)(2)'s disclosure requirement to proxy and information statements
for meetings at
[[Page 18981]]
which directors are to be elected? If not, why not? Is it appropriate
to extend Section 10C(c)(2)'s disclosure requirement to controlled
companies and those Exchange Act registrants that are not listed
issuers, as proposed? If not, why not?
Should we amend Forms 20-F and 40-F to require foreign
private issuers that are not subject to our proxy rules to provide
annual disclosure of the type required by Section 10C(c)(2)? Why or why
not?
Is it preferable to integrate the Section 10C(c)(2)
disclosure requirements with the existing requirements of Item
407(e)(3), as proposed, or, instead, should we add the new requirements
without modifying the existing requirements of the item?
Should we extend any of the current exclusions under Item
407(e)(3) to the new Section 10C(c)(2) disclosures? Conversely, should
we eliminate altogether the exclusions under Item 407(e)(3)?
Are there any additional disclosures concerning conflicts
of interest involving the activities of compensation consultants that
would be beneficial to investors?
Is additional clarification necessary regarding the phrase
``obtained the advice''? Does our proposed instruction provide adequate
guidance to issuers on how to interpret that phrase?
Do the five factors in proposed Rule 10C-1(b)(4)(i)
through (v) help issuers determine whether there is a ``conflict of
interest''? Should we define the term ``conflict of interest''? If so,
how? Are there other factors that should be considered in determining
whether there is a conflict of interest? If so, should these factors
also be identified in the proposed instruction?
Because a compensation committee may be reluctant or
unable to definitively conclude whether a conflict of interest exists,
should we also include the appearance of a conflict of interest in our
interpretation of what constitutes a ``conflict of interest'' that must
be disclosed under our proposed rules? Why or why not? Should we
include potential conflicts of interest in our interpretation? Why or
why not? We note that our 2009 amendments to Item 407(e) did not
conclude that there was a conflict of interest posed by a consultant
providing additional services to the issuer, only that there was a
potential conflict of interest.
Should we should require fee disclosure for other types of
potential conflicts of interest, such as revenue concentration, in
light of Section 10C(c)(2)'s requirement that the factors considered by
the compensation committee before engaging compensation advisers be
``competitively neutral''? For example, to address revenue
concentration, we could require disclosure of an adviser's fees
received from the issuer (in percentage terms) if such fees comprise
more than 10% of the adviser's annual revenues. Would this be
appropriate?
Although a listed issuer's compensation committee is
required to consider independence factors before selecting any
compensation adviser, Section 10C(c)(2) requires conflict of interest
disclosure only as to compensation consultants. Should we also extend
this disclosure requirement to other types of advisers to the
compensation committee, such as legal counsel? Why or why not?
As proposed, and consistent with current rules, Item
407(e)(3) would apply to smaller reporting companies. Should we exempt
such companies from these disclosure requirements? Do many smaller
reporting companies' compensation committees retain or obtain the
advice of compensation consultants? Should an exemption be provided if
the exchanges exempt such companies from the listing standards required
by Section 10C?
D. Transition and Timing
The Act requires us to issue rules directing the exchanges to
prohibit the listing of issuers not in compliance with Section 10C
``not later than 360 days after'' the enactment of Section 10C, or by
July 16, 2011.\110\ The Act did not establish a specific deadline by
which the listing standards promulgated by the exchanges must be in
effect. To facilitate timely implementation of the proposals, we
propose that each exchange must provide to the Commission, no later
than 90 days after publication of our final rule in the Federal
Register, proposed rules or rule amendments that comply with our final
rule. Further, each exchange would need to have final rule or rule
amendments that comply with our final rule approved by the Commission
no later than one year after publication of our final rule in the
Federal Register. We request comment below on the appropriateness of
these periods.
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\110\ See Section 10C(f)(1) of the Exchange Act [15 U.S.C. 78j-
3(f)(1)]. The Act was enacted on July 21, 2010. The 360th day
following enactment would be July 16, 2011.
---------------------------------------------------------------------------
Section 10C(c)(2) requires that each issuer disclose in any proxy
or consent solicitation material for an annual meeting of shareholders
(or a special meeting in lieu of the annual meeting) whether the
issuer's compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed. Although the
statute specifies that this disclosure would be required with respect
to meetings occurring on or after the date that is one year after the
enactment of Section 10C, which would be July 21, 2011, the statute
also requires these disclosures to be ``in accordance with regulations
of the Commission,'' and our regulations do not currently require such
disclosures to be made. Consequently, Section 10C(c)(2)'s compensation
consultant and conflict of interest disclosures would not be required
for proxy or information statements filed in definitive form before the
effective date of our rules implementing Section 10C(c)(2).
Request for Comment
Do the proposed implementation dates provide sufficient
time for exchanges to propose and obtain Commission approval for new or
amended rules to meet the requirements of our proposed rules? If not,
what other dates would be appropriate, and why?
What factors should the Commission consider in determining
these dates?
Should our rules also specify the dates by which listed
issuers must comply with an exchange's new or amended rules meeting the
requirements of our proposed rules? If so, what dates would be
appropriate? Should there be uniformity among the exchanges with
respect to the dates by which their listed issuers must comply with the
exchanges' new or amended rules?
Would a period beyond the proposed date be necessary or
appropriate for compliance by smaller reporting companies? Are there
special considerations that we should take into account for foreign
private issuers?
General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the amendments, and any suggestions for additional changes. With
respect to any comments, we note that they are of greatest assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments and by alternatives
to our proposals where appropriate.
[[Page 18982]]
III. Paperwork Reduction Act
A. Background
Certain provisions of the proposed rule and rule amendments contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (PRA).\111\ We are submitting the
proposed rule and rule amendments to the Office of Management and
Budget (OMB) for review in accordance with the PRA.\112\ The titles for
the collection of information are:
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\111\ 44 U.S.C. 3501 et seq.
\112\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
(1) ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-
0059);
(2) ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-
0057); and
(3) ``Regulation S-K'' (OMB Control No. 3235-0071).\113\
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\113\ The paperwork burden from Regulation S-K is imposed
through the forms that are subject to the disclosure requirements in
Regulation S-K and is reflected in the analysis of these forms. To
avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens, for administrative convenience we estimate the burden
imposed by Regulation S-K to be a total of one hour.
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Regulation S-K was adopted under the Securities Act and Exchange
Act; Regulations 14A and 14C and the related schedules were adopted
under the Exchange Act. The regulations and schedules set forth the
disclosure requirements for proxy and information statements filed by
companies to help investors make informed investment and voting
decisions. The hours and costs associated with preparing, filing and
sending the schedules constitute reporting and cost burdens imposed by
each collection of information. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. Compliance
with the proposed rule and rule amendments would be mandatory.
Responses to the information collections would not be kept confidential
and there would be no mandatory retention period for the information
disclosed.
B. Summary of Proposed Rule and Rule Amendments
As discussed in more detail above, we are proposing new Rule 10C-1
under the Exchange Act and amendments to Item 407(e) of Regulation S-K.
Proposed Rule 10C-1 would implement the requirements of Section 10C of
the Exchange Act, as added by Section 952 of the Act. Specifically,
proposed Rule 10C-1 would direct the exchanges to prohibit the listing
of any equity security of an issuer, with certain exemptions, that is
not in compliance with Section 10C's compensation committee and
compensation adviser requirements. We are proposing to adopt several
limited exemptions from the requirements of proposed Rule 10C-1 and to
authorize the exchanges to include other exemptions in their listing
standards, pursuant to the rule filing process under Section 19(b) of
the Exchange Act, as each exchange determines is appropriate, taking
into consideration the size of the issuer and any other relevant
factors.
To implement Section 10C(c)(2), we are proposing to amend Item
407(e)(3) of Regulation S-K to require disclosure, in any proxy or
information statement relating to an annual meeting of shareholders (or
a special meeting in lieu of an annual meeting) at which directors are
to be elected, of whether the issuer's compensation committee (or
another board committee performing similar functions) retained or
obtained the advice of a compensation consultant; whether the work of
the compensation consultant has raised any conflict of interest; and,
if so, the nature of the conflict and how the conflict is being
addressed.\114\ We also propose to combine and streamline these
disclosure requirements with the existing disclosure requirements of
Item 407(e)(3).
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\114\ Section 10C(c)(2) requires listed issuers to provide this
disclosure; we propose to extend this disclosure requirement to non-
listed issuers as well. We have not, however, proposed to require
comparable disclosure from foreign private issuers, as foreign
private issuers are not subject to Exchange Act Sections 14(a) and
14(c). See Exchange Act Rule 3a12-3.
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C. Burden and Cost Estimates Related to the Proposed Amendments
The proposed amendments to Item 407(e)(3) of Regulation S-K would
require, if adopted, additional disclosure in proxy or information
statements filed on Schedule 14A or Schedule 14C relating to an annual
meeting of shareholders (or a special meeting in lieu of an annual
meeting) at which directors are to be elected and would increase the
burden hour and cost estimates for each of those forms. For purposes of
the PRA, we estimate the total annual increase in the paperwork burden
for all affected issuers to comply with our proposed collection of
information requirements to be approximately 23,940 hours of in-house
personnel time and approximately $3,192,000 for the services of outside
professionals.\115\ These estimates include the time and the cost of
collecting the information, preparing and reviewing disclosure, filing
documents, and retaining records. In deriving our estimates, we assumed
that the burden hours of the proposed disclosure requirements would be
comparable to the burden hours related to similar disclosure
requirements under our current rules regarding compensation
consultants.\116\ Based on our assumptions, we estimated that the
proposed amendments to Item 407(e)(3)(iii) of Regulation S-K would
impose on average four incremental burden hours.\117\
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\115\ Our estimates represent the average burden for all
issuers, both large and small.
\116\ See Proxy Disclosure Enhancements, Release No. 33-9089
(Dec. 16, 2009) [74 FR 68334] (in which the Commission estimated the
average incremental disclosure burden for the rule amendments to
Item 407(e)(3) relating to compensation consultants to be three
hours).
\117\ These four incremental burden hours would be in addition
to the three incremental burden hours relating to our current
compensation consultant disclosure rules. Id.
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The table below shows the total annual compliance burden, in hours
and in costs, of the collection of information pursuant to the proposed
amendments to proxy and information statements and to Regulation S-
K.\118\ The burden estimates were calculated by multiplying the
estimated number of responses by the estimated average amount of time
it would take an issuer to prepare and review the proposed disclosure
requirements. The portion of the burden carried by outside
professionals is reflected as a cost, while the portion of the burden
carried by the issuer internally is reflected in hours. For purposes of
the PRA, we estimate that 75% of the burden of preparation of Schedules
14A and 14C is carried by the issuer internally and that 25% of the
burden of preparation is carried by outside professionals retained by
the issuer at an average cost of $400 per hour. There is no change to
the estimated burden of the collections of information under Regulation
S-K because the burdens that this regulation imposes are reflected in
our burden estimates for Schedules 14A and 14C.
---------------------------------------------------------------------------
\118\ For convenience, the estimated hour and cost burdens in
the table have been rounded to the nearest whole number.
[[Page 18983]]
Table 1--Incremental Paperwork Burden Under the Proposed Amendments for Schedules 14A and 14C.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total
Number of Incremental incremental Internal External Professional
responses (A) burden hours/ burden hours company time professional costs
\119\ form (B) (C)=(A)*(B) (D) time (E) (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sch. 14A................................................ 7,300 4 29,200 21,900 7,300 $2,920,000
Sch. 14C................................................ 680 4 2,720 2,040 680 $272,000
-----------------------------------------------------------------------------------------------
Total............................................... 7,980 .............. 31,920 23,940 7,980 $3,192,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
D. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
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\119\ The number of responses reflected in the table equals the
actual number of schedules filed with the Commission during the 2010
fiscal year.
---------------------------------------------------------------------------
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility;
Evaluate the accuracy of our assumptions and estimates of
the burden of the proposed collections of information;
Determine whether there are ways to enhance the quality,
utility and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collections of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments will have any
effects on any other collections of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to Elizabeth M. Murphy,
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-13-11.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-13-11 and be submitted to the U.S. Securities and Exchange
Commission, Office of Investor Education and Advocacy, 100 F Street,
NE, Washington DC 20549-0213. Because the OMB is required to make a
decision concerning the collections of information between 30 and 60
days after publication of this release, your comments are best assured
of having their full effect if the OMB receives them within 30 days of
publication.
IV. Cost-Benefit Analysis
A. Introduction and Objectives of Proposals
We are proposing rulemaking to implement and supplement the
provisions of the Act relating to compensation committees and
compensation advisers. Section 952 of the Act amends the Exchange Act
by adding new Section 10C. Section 10C(a)(1) requires the Commission to
adopt rules directing the exchanges to prohibit the listing of any
equity security of an issuer, with certain exemptions, that is not in
compliance with the independence requirements for members of the
compensation committee. In accordance with the statute, the rules, once
adopted, would require the exchanges to establish listing standards
that require each member of a listed issuer's compensation committee to
be a member of the board of directors and to be ``independent.'' The
term ``independent'' is not defined in Section 10C(a)(1). Instead, the
section provides that ``independent'' is to be defined by the exchanges
after taking into consideration relevant factors, including, but not
limited to, the source of compensation of a director, including any
consulting, advisory or other compensatory fee paid by the issuer to
the director, and whether the director is affiliated with the issuer, a
subsidiary of the issuer, or an affiliate of a subsidiary of the
issuer.
In addition to the independence requirements set forth in Section
10C(a), Section 10C(f) requires the Commission to adopt rules directing
the exchanges to prohibit the listing of any security of an issuer that
is not in compliance with the following requirements relating to
compensation committees and compensation advisers, as set forth in
paragraphs (b) through (e) of Section 10C:
Each compensation committee must have the authority, in
its sole discretion, to retain or obtain the advice of compensation
consultants, independent legal counsel and other advisers
(collectively, ``compensation advisers''); \120\
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\120\ Exchange Act Sections 10C(c)(1)(A) and 10C(d)(1) [15
U.S.C. 78j-3(c)(1)(A) and (d)(1)].
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Before selecting any compensation adviser, the
compensation committee must take into consideration specific factors
identified by the Commission that affect the independence of
compensation advisers; \121\
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\121\ Exchange Act Section 10C(b) [15 U.S.C. 78j-3(b)].
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The compensation committee must be directly responsible
for the appointment, compensation and oversight of the work of any
compensation adviser; \122\ and
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\122\ Exchange Act Sections 10C(c)(1)(B) and 10C(d)(2) [15
U.S.C. 78j-3(c)(1)(B) and (d)(2)].
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Each listed issuer must provide appropriate funding for
the payment of reasonable compensation, as determined by the
compensation committee, to compensation advisers.\123\
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\123\ Exchange Act Section 10C(e) [15 U.S.C. 78j-3(e)].
Finally, Section 10C(c)(2) requires each listed issuer to disclose in
any proxy or consent solicitation material for an annual meeting of
shareholders (or a special meeting in lieu of the annual meeting), in
accordance with Commission regulations, whether the issuer's
compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed.
Under Section 10C, our rules must permit the exchanges to exempt
particular categories of issuers from the requirements of Section 10C
and particular relationships from the compensation committee
independence requirements of Section 10C(a). Our rules must also
provide for appropriate procedures for an issuer to have a reasonable
opportunity to cure any defects that might otherwise result in the
delisting of the issuer's securities.
[[Page 18984]]
We are proposing new Exchange Act Rule 10C-1 to implement the
compensation committee listing requirements of Sections 10C(a)-(g) of
the Exchange Act. Proposed Rule 10C-1 closely tracks the statutory
requirements of Section 10C. To implement Section 10C(c)(2) of the
Exchange Act, we are proposing rule amendments to Regulation S-K to
require disclosure, in any proxy or information statement relating to
an annual meeting of shareholders at which directors are to be elected
(or special meeting in lieu of the annual meeting), of whether the
issuer's compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed. In connection
with these amendments, we also propose to revise the current disclosure
requirements relating to the retention of compensation consultants by
providing a uniform trigger for when compensation consultant
disclosures will be required. In addition, our proposed amendments
would eliminate the existing exception from the requirement to identify
compensation consultants and describe their engagements for those cases
in which a consultant's role is limited to consulting on a broad-based
plan or providing information that either is not customized for a
particular registrant 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.
The Commission is sensitive to the costs and benefits imposed by
the proposed rule and rule amendments. The discussion below focuses on
the costs and benefits of the proposals made by the Commission to
implement the Act within its permitted discretion, rather than the
costs and benefits of the Act itself.
B. Benefits
The proposed rulemaking is intended to implement and supplement the
requirements of Section 10C of the Exchange Act as set forth in Section
952 of the Act.
Required Listing Standards
Under proposed Rule 10C-1, the exchanges would be directed to adopt
listing standards that would apply to any committee of the board that
oversees executive compensation, whether or not such committee performs
other functions or is formally designated as a ``compensation
committee.'' We believe this aspect of the rule proposal may help
achieve the objectives of the Act by providing clarity and reducing any
uncertainty about the application of Section 10C. Moreover, this may
benefit investors because it would limit the ability of listed issuers
to circumvent the compensation committee independence requirements
under Section 10C by delegating oversight of executive compensation to
a board committee that is not formally designated as the ``compensation
committee,'' but performs that function.
As directed by Section 10C, proposed Rule 10C-1 directs the
exchanges to develop a definition of independence applicable to
compensation committee members after considering the relevant factors
set forth in Exchange Act Section 10C(a)(3). We do not propose to
specify any additional factors that the exchanges must consider in
determining independence requirements for compensation committee
members. We believe that permitting exchanges greater latitude in
crafting the required independence standards, subject to Commission
review pursuant to Section 19(b) of the Exchange Act, may result in
more efficient and effective determinations as to what types of
relationships should preclude a finding of independence with respect to
membership on a board committee that oversees executive compensation.
Because issuers frequently consult the exchanges regarding independence
determinations, the exchanges may be in the best position to identify
the types of common relationships that are likely to compromise the
ability of an issuer's compensation committee to make impartial
determinations on executive compensation.
Disclosure Amendments
Our proposed amendments to Item 407(e)(3) of Regulation S-K would
require the specific disclosures mandated by Section 10C(c)(2). While
no other disclosures are proposed to be required, our proposed
amendments would extend the disclosure requirement of Section 10C(c)(2)
to issuers, whether listed or not, that file proxy or information
statements relating to an election of directors. Although controlled
companies are exempt from the requirements of Section 10C, we propose
to extend the disclosure requirements of Section 10C(c)(2) to
controlled companies in order to have uniform compensation consultant
disclosure requirements for all issuers subject to our proxy rules.
Under the proposed amendments, in addition to the disclosure currently
required by Item 407(e)(3), issuers would be required to disclose
whether the compensation committee has retained or obtained the advice
of a compensation consultant, whether the work of the compensation
consultant has raised any conflict of interest, and, if so, the nature
of the conflict and how the conflict is being addressed.
We believe that requiring these disclosures of issuers subject to
the proxy rules will benefit investors by providing them with easily
understandable and uniform disclosure regarding compensation consultant
conflicts of interest. Under our existing disclosure rules, these
issuers must already discuss the selection of compensation consultants
and disclose the nature and scope of their assignment, including any
material instructions or directions governing their performance under
the engagement. We believe the proposed amendment would complement
these existing disclosure requirements by increasing the transparency
of issuers' policies regarding compensation consultant conflicts of
interest. To the extent that the relationships between an issuer and a
compensation consultant are more transparent under the proposed
amendments, investors should benefit through their ability to better
monitor the process of recommending and determining executive and
director pay. The increased disclosure should improve the ability of
investors to monitor performance of directors responsible for
overseeing compensation consultants, thus enabling them to make more
informed voting and investment decisions.
We also propose to harmonize current Item 407(e)(3)(iii)'s
disclosure triggers with the requirements of Section 10C(c)(2). Our
goal in proposing uniform disclosure triggers is to prevent the
adoption of potentially duplicative or overlapping disclosure
requirements; we also believe that providing a uniform standard for
when these disclosures will be required will benefit issuers by
allowing them to streamline their procedures for ensuring proper
disclosure compliance.
The proposed amendments also include an instruction that provides
guidance to issuers as to whether the compensation committee has
``obtained the advice'' of a compensation consultant. This instruction
should benefit issuers by providing clarity and reducing any
uncertainty about whether disclosure under the new rules is required.
In addition, we propose to include an instruction that identifies the
factors set forth in proposed Rule 10C-
[[Page 18985]]
1(b)(4)(i) through (v) as among the factors to be considered in
determining whether there is a conflict of interest that may need to be
disclosed in response to our proposed amendments to Item
407(e)(3)(iii). Although only listed issuers will be required to
consider the five independence factors before selecting a compensation
consultant, we believe that identifying these five factors as factors
that should be considered in determining whether conflict of interest
disclosure is required will aid all Exchange Act registrants subject to
the proxy rules in complying with their proxy disclosure obligations.
C. Costs
Required Listing Standards
Under our proposed rules, exchanges would be required to adopt
independence requirements that apply to members of listed issuer
compensation committees or committees performing equivalent functions,
but not to directors who oversee executive compensation matters in the
absence of such committees. Some exchange listing standards currently
require issuers to form compensation or equivalent committees; others
require independent directors to oversee specified compensation matters
but do not require the formation of a compensation or equivalent
committee. Exchanges that do not require the formation of a
compensation or equivalent committee could, on their own initiative,
determine to apply the same independence standards to directors who
oversee compensation matters in the absence of a compensation committee
as they do to formally organized compensation committees. In the event
they do not, however, issuers could seek to list on such exchanges in
order to avoid having to comply with the compensation committee
independence standards that would apply at the exchanges that require
the formation of a compensation or equivalent committee. Further, to
the extent exchanges compete for listings, they may have an incentive
to propose standards that issuers may find less onerous. This could
result in costs to exchanges to the extent they lose issuer listings,
as well as costs to issuers to the extent they choose to alter their
existing committee structure to avoid having to comply with the new
standards.
Our decision not to exempt additional categories of issuers, beyond
those specified in Section 10C(a)(1), from the independence
requirements of our proposed rule and instead to rely on the various
exchanges to propose additional exemptions for appropriate categories
of issuers, may also result in certain direct or indirect costs. For
example, the exchanges will bear the direct cost of evaluating whether
additional exemptions would be appropriate and including such
exemptions in the rule filings that they are required to make in order
to comply with our proposed rule.
Disclosure Amendments
As noted above, our proposal implements the requirements of Section
10C(c)(2). In addition, although not required by Section 10C(c)(2), we
propose to require all issuers subject to our proxy rules, rather than
only listed issuers, to provide the disclosures called for by Section
10C(c)(2). We also propose to combine and streamline the new disclosure
requirements with the existing compensation consultant disclosure
requirements. Specifically, we propose to provide a uniform trigger for
when compensation consultant disclosures will be required and eliminate
the existing exception from the requirement to identify compensation
consultants and describe their engagements for those cases in which a
consultant's role is limited to consulting on a broad-based plan or
providing non-customized benchmark compensation information.
As a result, controlled companies and non-listed issuers will incur
costs in disclosing all compensation consultant engagements and in
determining and disclosing whether the work of any compensation
consultant has raised any conflict of interest, the nature of the
conflict, and how the conflict is being addressed. These costs, which
would not be required to be incurred by Section 10C(c)(2), may be
mitigated to an extent because our existing rules already require
issuers subject to our proxy rules to disclose, with limited
exceptions, any role of compensation consultants in determining or
recommending the amount or form of executive and director compensation.
As a result, these issuers will already have developed procedures for
collecting and analyzing information about the use of compensation
consultants.
For purposes of the PRA, we estimate the aggregate annual cost of
the proposed compensation consultant and related conflicts of interest
disclosure to be approximately 23,940 hours of company personnel time
and approximately $3,192,000 for the services of outside professionals.
However, this amount includes the costs associated with the disclosure
requirements of Section 10C(c)(2) of the Exchange Act, as well as our
proposed extension of the disclosure requirement to controlled
companies and non-listed issuers and the revisions proposed for the
purpose of integrating the new disclosure requirements with existing
Item 407(e)(3). As a result, a portion of the reporting costs are
attributable to the requirements of the Act rather than to our proposed
amendments to Item 407.
We have not proposed that compensation committees of non-listed
issuers be required to consider the independence of compensation
consultants or other compensation advisers before they are selected;
nonetheless, in light of our proposal that issuers subject to our proxy
rules will be required to identify and disclose how they manage any
conflicts of interest raised by the work of compensation consultants
that serve as advisers to the compensation committee, non-listed
issuers may incur additional costs to develop more formalized selection
processes than they otherwise would have absent such a disclosure
requirement. For example, to prepare for the disclosure requirement, at
the time any compensation consultant is selected, compensation
committees of non-listed issuers may devote additional time and
resources to analyzing and assessing the independence of the
compensation consultant and addressing and resolving potential
conflicts of interest. Although our proposed disclosure requirement
will not preclude compensation committees from selecting the
compensation consultant of their choosing, such committees may elect to
engage new, alternative or additional compensation advisers after
considering what disclosure might be required under our proposed rules.
Such decisions could result in additional costs to issuers, including
costs related to termination of existing services and search and
engagement costs to retain new advisers. In addition, costs may
increase if an issuer decides to engage multiple compensation
consultants for services that had previously been provided by a single
consultant.
As a mitigating factor, our proposed rules would require issuers to
provide narrative disclosure regarding the management of conflicts of
interest. To the extent a non-listed issuer's compensation committee
determines to retain a compensation consultant, despite potential
conflicts of interest, this provision provides the issuer a means to
communicate to investors both the reasons why the committee believes
that retaining the consultant and managing the potential conflict of
interest is the best approach and the methods employed by the issuer to
manage or address the potential conflict.
[[Page 18986]]
D. Request for Comment
We request data to quantify the costs and the value of the benefits
described above. We seek estimates of these costs and benefits, as well
as any costs and benefits not already defined, that may result from the
adoption of these proposed amendments. We also request qualitative
feedback on the nature of the benefits and costs described above and
any benefits and costs we may have overlooked.
V. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation
Section 23(a)(2) of the Exchange Act requires us, when adopting
rules under the Exchange Act, to consider the impact that any new rule
would have on competition.\124\ In addition, Section 23(a)(2) prohibits
us from adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
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\124\ 15 U.S.C. 78w(a)(2).
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Section 2(b) of the Securities Act \125\ and Section 3(f) of the
Exchange Act \126\ require us, when engaging in rulemaking where we are
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation.
---------------------------------------------------------------------------
\125\ 15 U.S.C. 77b(b).
\126\ 15 U.S.C. 78c(f).
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Our proposed rule and rule amendments would implement the
requirements of Section 952 of the Act, which added Section 10C to the
Exchange Act. Among other provisions, Section 10C requires us to direct
the exchanges to prohibit the listing of any equity security of an
issuer that is not in compliance with Section 10C's compensation
committee and compensation adviser requirements. It is possible that
some listed issuers might find the proposed requirements too onerous
and seek to list on foreign exchanges or other markets to avoid
compliance. This could cause U.S. exchanges to lose trading volume. We
do not believe our proposed rules are likely to have this effect, as
issuers listed on U.S. exchanges must, for the most part, already
provide for executive compensation oversight by independent
directors.\127\ It is also possible that, in competing for listings,
the exchanges could adopt different definitions of independence for
compensation committee members, which could affect an issuer's decision
about where to list its securities.
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\127\ See, e.g., NYSE Listed Company Manual Section 303A.05(a)
and Nasdaq Rule 5605(d).
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Section 10C also requires disclosure from listed issuers, other
than controlled companies, as to their use and oversight of
compensation consultants. We propose to require companies subject to
our proxy rules, including controlled companies, to provide this
disclosure, whether listed or not. We believe this expansion of the
statutory disclosure requirement will promote uniform disclosure on
these topics among reporting companies and may allow investors to
better understand the process by which compensation committees select
compensation consultants and manage conflicts of interest.
Our proposals may promote efficiency and competitiveness of the
U.S. capital markets by increasing the transparency of executive
compensation decision-making processes and by improving the ability of
investors to make informed voting and investment decisions, which may
encourage more efficient capital formation. The proposals also may
affect competition among compensation consultants. By requiring
disclosure of the existence and management of potential compensation
consultant conflicts of interest, our proposed rules may lead
compensation committees to engage in more thorough and deliberative
analyses of adviser independence. If this results in the selection of
compensation advisers that are more independent or impartial than might
otherwise be chosen, this could in turn promote more efficient
executive compensation determinations. The proposed disclosure also
could incent consultants to compete on the basis of their policies that
serve to minimize any potential conflicts of interest or, to the extent
other consultants are available, lead compensation committees to avoid
hiring consultants perceived as having a conflict of interest.
We request comment on whether the proposed amendments, if adopted,
would promote efficiency, competition and capital formation or have an
impact or burden on competition. Commentators are requested to provide
empirical data and other factual support for their views, to the extent
possible.
VI. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA),\128\ we solicit data to determine whether the
proposed rule amendments constitute a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in:
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\128\ 5 U.S.C. 801 et seq.
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An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
Commentators should provide empirical data on (1) The potential
annual effect on the economy; (2) any increase in costs or prices for
consumers or individual industries; and (3) any potential effect on
competition, investment or innovation.
VII. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Analysis (IRFA) has been
prepared in accordance with the Regulatory Flexibility Act.\129\ This
IRFA involves proposals to direct the national securities exchanges and
national securities associations to prohibit the listing of an equity
security of an issuer that is not in compliance with several
requirements relating to the issuer's compensation committee, and to
revise the disclosure requirements of Regulation S-K Item 407 related
to compensation consultants.
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\129\ 5 U.S.C. 603.
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A. Reasons for, and Objectives of, the Proposed Action
We are proposing amendments to implement Section 10C of the
Exchange Act as added by Section 952 of the Act. The proposals would
direct the exchanges to prohibit the listing of equity securities of
any issuer that does not comply with Section 10C's compensation
committee and compensation adviser requirements. Our proposed
amendments would also require issuers to provide certain disclosures
regarding their use of compensation consultants and management of
compensation consultant conflicts of interest.
B. Legal Basis
We are proposing the amendments pursuant to Sections 6, 7, 10, and
19(a) of the Securities Act; and Sections 10C, 12, 13, 14, 15(d), 23(a)
and 36 of the Exchange Act.
C. Small Entities Subject to the Proposed Action
The proposals would affect exchanges that list equity securities
and issuers subject to our proxy rules. The Regulatory Flexibility Act
defines ``small
[[Page 18987]]
entity'' to mean ``small business,'' ``small organization,'' or ``small
governmental jurisdiction.'' \130\ The Commission's rules define
``small business'' and ``small organization'' for purposes of the
Regulatory Flexibility Act for each of the types of entities regulated
by the Commission. Exchange Act Rule 0-10(e) provides that the term
``small business'' or ``small organization,'' when referring to an
exchange, means any exchange that: (1) Has been exempted from the
reporting requirements of Exchange Act Rule 601; \131\ and (2) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization, as defined under Exchange Act
Rule 0-10. No exchanges are small entities because none meet these
criteria. Securities Act Rule 157 \132\ and Exchange Act Rule 0-10(a)
\133\ define a company, other than an investment company, to be a
``small business'' or ``small organization'' if it had total assets of
$5 million or less on the last day of its most recent fiscal year. We
estimate that there are approximately 1,207 registrants, other than
registered investment companies, that may be considered small entities.
The proposed amendments would affect small entities that have a class
of securities that are registered under Section 12 of the Exchange Act.
An investment company, including a business development company, is
considered to be a ``small business'' if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year.\134\ We believe that the amendments to Item 407(e) of
Regulation S-K would affect small entities that are business
development companies that have a class of securities registered under
Section 12 of the Exchange Act. We estimate that there are
approximately 31 business development companies that may be considered
small entities.
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\130\ 5 U.S.C. 601(6).
\131\ 17 CFR 242.601.
\132\ 17 CFR 230.157.
\133\ 17 CFR 240.0-10(a).
\134\ 17 CFR 270.0-10(a).
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D. Reporting, Recordkeeping and Other Compliance Requirements
Under the proposals, the exchanges will be directed to prohibit the
listing of an equity security of an issuer that does not comply with
Section 10C's compensation committee and compensation adviser
requirements. These requirements relate to: the independence of
compensation committee members; the authority of the compensation
committee to engage compensation advisers; the compensation committee's
responsibility for considering factors that affect the independence of
compensation advisers prior to their selection; the compensation
committee's responsibility for the appointment, compensation, and
oversight of the work of compensation advisers; funding for advisers
engaged by the compensation committee; and the opportunity to cure
defects.
The proposals would also require additional disclosure about the
use of compensation consultants and conflicts of interest. Large and
small entities would be subject to the same disclosure requirements.
The proposals would require small entities subject to the proxy rules
to provide disclosure of whether:
The compensation committee has retained or obtained the
advice of a compensation consultant; and
The work of a compensation consultant has raised any
conflict of interest and, if so, the nature of the conflict and how the
conflict is being addressed.
The proposals will impose additional costs on small entities in
order to comply with the new listing standards and to collect, record
and report the disclosures that we propose to require. Our existing
disclosure rules require small entities to disclose information
regarding any compensation consultant that plays a role in determining
or recommending the amount and form of executive and director
compensation in proxy and information statements. The additional
information concerning compensation consultants that would be required
under the proposals should be readily available to these small
entities. Also, we believe that many small entities do not use the
services of a compensation consultant, which would significantly
minimize the impact of the reporting and recordkeeping requirements
under the proposals on small entities. In addition, we believe that the
impact of the proposals on small entities will be lessened because most
aspects of the proposals apply only to listed issuers, and the
quantitative listing standards applicable to issuers listing securities
on an exchange, such as market capitalization, minimum revenue, and
shareholder equity requirements, will serve to limit the number of
small entities that would be affected.
E. Duplicative, Overlapping or Conflicting Federal Rules
We believe the proposed amendments would not duplicate, overlap, or
conflict with other Federal rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider alternatives
that would accomplish our stated objectives, while minimizing any
significant adverse impact on small entities. In connection with the
proposed disclosure amendments, we considered the following
alternatives:
Clarifying, consolidating or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards;
Exempting small entities from all or part of the
requirements; and
Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities.
We believe that our proposed amendments would require clear and
straightforward disclosure of the use of compensation consultants and
the management of compensation consultant conflicts of interest. We
believe that our proposed rules will promote consistent disclosure
among all companies without creating a significant new burden for small
entities.
The proposals attempt to clarify, consolidate and simplify the
compliance and reporting requirements for all entities, including small
entities, by including instructions to the amendments to clarify the
circumstances under which disclosure is required. We have used a mix of
design and performance standards in developing the proposed disclosure
requirements. Based on our past experience, we believe the amendments
will be more useful to investors if there are specific disclosure
requirements; however, we have not proposed specific procedures or
arrangements that an issuer must develop to comply with the proposed
amendments. The additional disclosure requirements are intended to
result in more comprehensive and clear disclosure.
Although we preliminarily believe that an exemption for small
entities from coverage of the proposals would not be appropriate at
this time, we seek comment on whether we should exempt small entities
from any of the proposed disclosure requirements or scale the proposed
amendments to reflect the characteristics of small entities and the
needs of their investors. Further, as
[[Page 18988]]
directed by Exchange Act Section 10C, our proposed rules would permit
the exchanges to exempt particular categories of issuers from the
requirements of Section 10C and particular relationships from the
compensation committee membership requirements of Section 10C(a),
taking into account the potential impact of the requirements on smaller
reporting companies. To the extent exchanges adopt such exemptions for
small entities, the compliance burden would be reduced.
At this time, we do not believe that different compliance methods
or timetables for small entities would be appropriate. The proposals
are intended to improve the accountability for and transparency of
executive compensation determinations. The specific disclosure
requirements in the proposals will promote consistent disclosure among
all issuers, including small entities. Separate compliance requirements
or timetables for small entities could interfere with achieving the
goals of the statute and our proposals. Nevertheless, we solicit
comment on whether different compliance requirements or timetables for
small entities would be appropriate, and consistent with the purposes
of Section 952 of the Dodd-Frank Act.
G. Solicitation of Comments
We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding:
How the proposed amendments can achieve their objective
while lowering the burden on small entities;
The number of small entities that may be affected by the
proposed amendments;
Whether small entities should be exempt from the rules;
The existence or nature of the potential impact of the
proposed amendments on small entities discussed in the analysis; and
How to quantify the impact of the proposed amendments.
Respondents are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed rule amendments are adopted, and
will be placed in the same public file as comments on the proposed
amendments themselves.
VIII. Statutory Authority and Text of the Proposed Amendments
The amendments contained in this release are being proposed under
the authority set forth in Sections 6, 7, 10, and 19(a) of the
Securities Act and Sections 10C, 12, 13, 14, 15(d), 23(a), and 36 of
the Exchange Act.
List of Subjects in 17 CFR Parts 229 and 240
Reporting and recordkeeping requirements, Securities.
Text of the Proposed Amendments
For the reasons set out in the preamble, the Commission proposes to
amend title 17, chapter II, of the Code of Federal Regulations as
follows:
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
1. The authority citation for part 229 is revised to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c),
80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
2. In Sec. 229.407, revise paragraph (e)(3)(iii) and add
instructions 1 and 2 to item 407(e)(3) to read as follows:
Sec. 229.407 (Item 407) Corporate governance.
* * * * *
(e) * * *
(3) * * *
(iii) Whether the compensation committee (or another board
committee performing equivalent functions) retained or obtained the
advice of a compensation consultant during the registrant's last
completed fiscal year, identifying such consultants, stating whether
such consultants were engaged directly by the compensation committee
(or another board committee performing equivalent functions),
describing the nature and scope of the consultant's assignment and the
material elements of the instructions or directions given to the
consultant with respect to the performance of the consultant's duties
under the engagement, and discussing whether the work of the consultant
has raised any conflict of interest and, if so, the nature of the
conflict and how the conflict is being addressed:
(A) If the compensation committee (or another board committee
performing equivalent functions) retained or obtained the advice of a
compensation consultant and the consultant's services were not limited
to consulting on any broad-based plan that does not discriminate in
scope, terms, or operation, in favor of executive officers or directors
of the registrant, and that is available generally to all salaried
employees, or providing information that either is not customized for a
particular registrant 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, and the compensation
consultant or its affiliates also provided additional services to the
registrant or its affiliates in an amount in excess of $120,000 during
the registrant's last completed fiscal year, then disclose the
aggregate fees for determining or recommending the amount or form of
executive and director compensation and the aggregate fees for such
additional services. Disclose whether the decision to engage the
compensation consultant or its affiliates for these other services was
made, or recommended, by management, and whether the compensation
committee (or another board committee performing equivalent functions)
or the board approved such other services of the compensation
consultant or its affiliates.
(B) If the compensation committee (or another board committee
performing equivalent functions) has not retained or obtained the
advice of a compensation consultant, but management has retained or
obtained the advice of a compensation consultant and the consultant's
services were not limited to consulting on any broad-based plan that
does not discriminate in scope, terms, or operation, in favor of
executive officers or directors of the registrant, and that is
available generally to all salaried employees, or providing information
that either is not customized for a particular registrant 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, and such compensation consultant or its
affiliates has provided additional services to the registrant in an
amount in excess of $120,000 during the registrant's last completed
fiscal year, then disclose the aggregate fees for determining or
recommending the amount or form of executive and director compensation
and the aggregate fees for any additional services provided
[[Page 18989]]
by the compensation consultant or its affiliates.
Instruction 1 to Item 407(e)(3). For purposes of this paragraph, a
compensation committee (or another board committee performing
equivalent functions) or management has ``obtained the advice'' of a
compensation consultant if such committee or management has requested
or received advice from a compensation consultant, regardless of
whether there is a formal engagement of the consultant or a client
relationship between the compensation consultant and the compensation
committee or management or any payment of fees to the consultant for
its advice.
Instruction 2 to Item 407(e)(3). For purposes of this paragraph,
the factors outlined in Sec. 240.10C-1(b)(4)(i) through (v) of this
chapter are among the factors that should be considered in determining
whether a conflict of interest exists.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
3. The general authority citation for part 240 is revised to read
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78j-3, 78k, 78k-1,78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p,
78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, and
12 U.S.C. 5221(e)(3), unless otherwise noted.
* * * * *
4. Add an undesignated center heading following Sec. 240.10A-3 to
read as follows:
Requirements Under Section 10C
5. Add Sec. 240.10C-1 to read as follows:
Sec. 240.10C-1 Listing standards relating to compensation committees.
(a) Pursuant to section 10C(a) of the Act (15 U.S.C. 78j-3(a)) and
section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1900):
(1) National securities exchanges. The rules of each national
securities exchange registered pursuant to section 6 of the Act (15
U.S.C. 78f), to the extent such national securities exchange lists
equity securities, must, in accordance with the provisions of this
section, prohibit the initial or continued listing of any equity
security of an issuer that is not in compliance with the requirements
of any portion of paragraph (b) or (c) of this section.
(2) National securities associations. The rules of each national
securities association registered pursuant to section 15A of the Act
(15 U.S.C. 78o-3), to the extent such national securities association
lists equity securities in an automated inter-dealer quotation system,
must, in accordance with the provisions of this section, prohibit the
initial or continued listing in an automated inter-dealer quotation
system of any equity security of an issuer that is not in compliance
with the requirements of any portion of paragraph (b) or (c) of this
section.
(3) Opportunity to cure defects. The rules required by paragraphs
(a)(1) and (a)(2) of this section must provide for appropriate
procedures for a listed issuer to have a reasonable opportunity to cure
any defects that would be the basis for a prohibition under paragraph
(a) of this section, before the imposition of such prohibition. Such
rules may provide that if a member of a compensation committee ceases
to be independent in accordance with the requirements of this section
for reasons outside the member's reasonable control, that person, with
notice by the issuer to the applicable national securities exchange or
national securities association, may remain a compensation committee
member of the listed issuer 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.
(4) Implementation. (i) Each national securities exchange and
national securities association that lists equity securities must
provide to the Commission, no later than 90 days after publication of
this section in the Federal Register, proposed rules or rule amendments
that comply with this section. Each submission must include, in
addition to any other information required under section 19(b) of the
Act (15 U.S.C. 78s(b)) and the rules thereunder, a review of whether
and how existing listing standards satisfy the requirements of this
rule, a discussion of the consideration of factors relevant to
compensation committee independence conducted by the national
securities exchange or national securities association, and the
definition of independence applicable to compensation committee members
that the national securities exchange or national securities
association proposes to adopt in light of such review.
(ii) Each national securities exchange and national securities
association that lists equity securities must have rules or rule
amendments that comply with this section approved by the Commission no
later than one year after publication of this section in the Federal
Register.
(b) Required standards. The requirements of this section apply to
the compensation committees of listed issuers. If a listed issuer has a
committee of the board performing functions typically performed by a
compensation committee, including oversight of executive compensation,
then such committee, even if it is not designated as a compensation
committee or performs other functions, shall be fully subject to the
requirements of this section.
(1) Independence. (i) Each member of the compensation committee
must be a member of the board of directors of the listed issuer, and
must otherwise be independent.
(ii) Independence requirements. In determining independence
requirements for members of compensation committees, the national
securities exchanges and national securities associations shall
consider relevant factors, including, but not limited to:
(A) The source of compensation of a member of the board of
directors of an issuer, including any consulting, advisory or other
compensatory fee paid by the issuer to such member of the board of
directors; and
(B) Whether a member of the board of directors of an issuer is
affiliated with the issuer, a subsidiary of the issuer or an affiliate
of a subsidiary of the issuer.
(iii) Exemptions from the independence requirements. (A) The
listing of equity securities of the following categories of listed
issuers are not subject to the requirements of paragraph (b)(1) of this
section:
(1) Controlled companies;
(2) Limited partnerships;
(3) Companies in bankruptcy proceedings;
(4) Open-end management investment companies registered under the
Investment Company Act of 1940; and
(5) Any foreign private issuer that discloses in its annual report
the reasons that the foreign private issuer does not have an
independent compensation committee.
(B) In addition to the issuer exemptions set forth in paragraph
(b)(1)(iii)(A) of this section, a national securities exchange or a
national securities association, pursuant to section 19(b) of the Act
(15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the
requirements of paragraph (b)(1) of this section a particular
relationship with respect to members of the compensation committee, as
each national securities exchange or national securities
[[Page 18990]]
association determines is appropriate, taking into consideration the
size of an issuer and any other relevant factors.
(2) Authority to engage compensation consultants, independent legal
counsel and other compensation advisers. The compensation committee of
a listed issuer, in its capacity as a committee of the board of
directors, may, in its sole discretion, retain or obtain the advice of
a compensation consultant, independent legal counsel or other adviser.
The compensation committee shall be directly responsible for the
appointment, compensation and oversight of the work of any compensation
consultant, independent legal counsel and other adviser to the
compensation committee. Nothing in this paragraph (b) shall be
construed:
(i) 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
(ii) To affect the ability or obligation of a compensation
committee to exercise its own judgment in fulfillment of the duties of
the compensation committee.
(3) Funding. Each listed issuer must provide for appropriate
funding, as determined by the compensation committee, in its capacity
as a committee of the board of directors, for payment of reasonable
compensation to a compensation consultant, independent legal counsel or
any other adviser to the compensation committee.
(4) Independence of compensation consultants and other advisers.
The compensation committee of a listed issuer may select a compensation
consultant, legal counsel, or other adviser to the compensation
committee only after taking into consideration the following factors,
as well as any other factors identified by the relevant national
securities exchange or national securities association in its listing
standards:
(i) The provision of other services to the issuer by the person
that employs the compensation consultant, legal counsel or other
adviser;
(ii) The amount of fees received from the issuer 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; and
(v) Any stock of the issuer owned by the compensation consultant,
legal counsel or other adviser.
(5) General exemptions. (i) The national securities exchanges and
national securities associations, pursuant to section 19(b) of the Act
(15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the
requirements of this section certain categories of issuers, as the
national securities exchange or national securities association
determines is appropriate, taking into consideration the potential
impact of such requirements on smaller reporting issuers.
(ii) The requirements of this section shall not apply to any
controlled company.
(iii) The listing of a security futures product cleared by a
clearing agency that is registered pursuant to section 17A of the Act
(15 U.S.C. 78q-1) or that is exempt from the registration requirements
of section 17A(b)(7)(A) (15 U.S.C. 78q-1(b)(7)(A)) is not subject to
the requirements of this section.
(iv) The listing of a standardized option, as defined in Sec.
240.9b-1(a)(4), issued by a clearing agency that is registered pursuant
to section 17A of the Act (15 U.S.C. 78q-1) is not subject to the
requirements of this section.
(c) Definitions. Unless the context otherwise requires, all terms
used in this section have the same meaning as in the Act. In addition,
unless the context otherwise requires, the following definitions apply
for purposes of this section:
(1) In the case of foreign private issuers with a two-tier board
system, the term board of directors means the supervisory or non-
management board.
(2) The term controlled company means an issuer:
(i) That is listed on a national securities exchange or by a
national securities association; and
(ii) That holds an election for the board of directors of the
issuer in which more than 50 percent of the voting power is held by an
individual, a group or another issuer.
(3) The terms listed and listing refer to equity securities listed
on a national securities exchange or listed in an automated inter-
dealer quotation system of a national securities association or to
issuers of such securities.
(4) The term open-end management investment company means an open-
end company, as defined by Section 5(a)(1) of the Investment Company
Act of 1940 (15 U.S.C. 80a-5(a)(1)), that is registered under that Act.
Dated: March 30, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-7948 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P