[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4482-4494]
[FR Doc No: 2013-01108]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68641; File No. SR-BX-2012-063]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Amendment No. 1, and Order Granting Accelerated Approval of
Proposed Rule Change, as Modified by Amendment No. 1, To Amend the
Listing Rules for Compensation Committees To Comply With Rule 10C-1
Under the Act and Make Other Related Changes

January 11, 2013.

I. Introduction

    On September 25, 2012, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
modify the Exchange's rules for compensation committees of listed
issuers to comply with Rule 10C-1 under the Act and make other related
changes. The proposed rule change was published for comment in the
Federal Register on October 15, 2012.\3\ The Commission subsequently
extended the time period in which to either approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to disapprove the proposed rule change, to January
13, 2013.\4\ The Commission received no comment letters on the proposed
rule change.\5\ On January 8, 2013, the Exchange filed Amendment No. 1
to the proposed rule change.\6\ This order approves the proposed rule
change, as modified by Amendment No. 1 thereto, on an accelerated
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68018 (October 9,
2012), 77 FR 62547 (``Notice'').
    \4\ See Securities Exchange Act Release No. 68313 (November 28,
2012), 77 FR 71853 (December 4, 2012).
    \5\ The Commission received eight comments on a substantially
similar proposal by The Nasdaq Stock Market, LLC (``Nasdaq'') by
parties that did not specifically comment on the BX filing, and
received a response letter from Nasdaq on these comment letters. See
Securities Exchange Act Release No. 68013 (October 9, 2012), 77 FR
62563 (October 15, 2012) (Notice of File No. SR-NASDAQ-2012-109)
(``Nasdaq Proposal'') and comment letters relating to the Nasdaq
Proposal. See also Securities Exchange Act Release No. 68640
(January 11, 2013) (``Nasdaq Approval Order''). The Nasdaq Approval
Order contains a discussion of the comments received on the Nasdaq
Proposal and Nasdaq's response. See also Securities Exchange Act
Release No. 68639 (January 11, 2013) (File No. SR-NYSE-2012-49)
(``NYSE Approval Order'').
    \6\ In Amendment No. 1, BX: (a) Added language to proposed Rule
5605(d)(3) to set forth in detail the requirements of Rule 10C-
1(b)(2)-(4) regarding the authority of a compensation committee to
retain compensation advisers, the requirement that a listed company
fund such advisers, and the independence assessment required to be
made before selecting or receiving advice from such advisers, rather
than incorporating these details by reference as in the original
proposal, see infra notes 51-58 and accompanying text; (b) revised
the dates by which companies currently listed on BX will be required
to comply with the new rules, see infra notes 76-82 and accompanying
text; (c) revised the phase-in schedule for companies that cease to
be Smaller Reporting Companies to comply with the full range of the
new requirements, see infra notes 89-92 and accompanying text; (d)
added a preamble to the new rules clarifying that, during the
transition periods until the new rules apply, a company must
continue to comply with the corresponding provisions, if any, in the
current rules, see infra note 76; and (e) revised the proposed rules
to state that the independence assessment of compensation advisers
required of compensation committees does not need to be conducted
for advisers whose roles are limited to those entitled to an
exception from the adviser disclosure rules under Item
407(e)(3)(iii) of Regulation S-K. See infra notes 59-60 and
accompanying text.
    In Amendment No. 1 the Exchange also made conforming changes to
the Purpose section of the proposal, provided explanations for the
revisions, and clarified certain matters, see, e.g., infra notes 58,
114, and 119 and accompanying text; and also added, as Exhibit 3 to
the proposal, the form that it will provide for companies to certify
their compliance with the rules. The Exchange states that, while no
comments were submitted regarding its proposed rule change, some of
the changes contained in Amendment No. 1 were made in response to
comments submitted on Nasdaq's substantially similar proposal. See
supra note 5 and infra note 123.
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II. Description of Proposed Rule Change

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

    On March 30, 2011, to implement Section 10C of the Act, as added by
Section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''),\7\ the Commission proposed
Rule 10C-1 under the Act,\8\ which directs each national securities
exchange (hereinafter, ``exchange'') to prohibit the listing of any
equity security of any issuer, with certain exceptions, that does not
comply with the rule's requirements regarding compensation committees
of listed issuers and related requirements regarding compensation
advisers. On June 20, 2012, the Commission adopted Rule 10C-1.\9\
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    \7\ Public Law 111-203, 124 Stat. 1900 (2010).
    \8\ See Securities Act Release No. 9199, Securities Exchange Act
Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011)
(``Rule 10C-1 Proposing Release'').
    \9\ See Securities Act Release No. 9330, Securities Exchange Act
Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012)
(``Rule 10C-1 Adopting Release'').
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    Rule 10C-1 requires, among other things, each exchange to adopt
rules providing that each member of the compensation committee \10\ of
a listed issuer must be a member of the board of directors of the
issuer, and must otherwise be independent.\11\ In determining the
independence standards for members of compensation committees of listed
issuers, Rule 10C-1 requires the exchanges to consider relevant
factors, including, but not limited to: (a) The source of compensation
of the director, including any consulting, advisory or other
compensatory fee paid by the issuer to the director (hereinafter, the
``Fees Factor''); and (b) whether the director is affiliated with the
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of
the issuer (hereinafter, the ``Affiliation Factor'').\12\
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    \10\ For a definition of the term ``compensation committee'' for
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \11\ See Rule 10C-1(a) and (b)(1).
    \12\ See id. See also Rule 10C-1(b)(1)(iii)(A), which sets forth
exemptions from the independence requirements for certain categories
of issuers. In addition, an exchange may exempt a particular
relationship with respect to members of a compensation committee
from these requirements as it deems appropriate, taking into
consideration the size of an issuer and any other relevant factors.
See Rule 10C-1(b)(1)(iii)(B).
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    In addition, Rule 10C-1 requires the listing rules of exchanges to
mandate that compensation committees be given the authority to retain
or obtain the advice of a compensation adviser, and have direct
responsibility for the appointment, compensation and oversight of the
work of any compensation adviser they retain.\13\ The exchange rules
must also provide that each listed issuer provide for appropriate
funding for the payment of reasonable compensation, as determined by
the compensation committee, to any compensation adviser retained by the
compensation committee.\14\ Finally, among other things, Rule 10C-1
requires each exchange to provide in its rules that the compensation
committee of each listed issuer may select a compensation consultant,
legal counsel or other adviser to the compensation committee only after
taking into consideration six factors specified in Rule 10C-1,\15\ as
well as any other

factors identified by the relevant exchange in its listing
standards.\16\
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    \13\ See Rule 10C-1(b)(2).
    \14\ See Rule 10C-1(b)(3).
    \15\ See Rule 10C-1(b)(4). The six factors, which BX proposes to
set forth explicitly in its rules, are specified in the text
accompanying note 55, infra.
    \16\ Other provisions in Rule 10C-1 relate to exemptions from
the rule and a requirement that each exchange provide for
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any defects that would be the basis for the
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. BX's Proposed Rule Change, as Amended

    To comply with Rule 10C-1, BX proposes to amend two sections of its
rules \17\ concerning corporate governance requirements for companies
listed on the Exchange: BX Venture Market Rule 5605, ``Boards of
Directors and Committees,'' and Rule 5615, ``Exemptions from Certain
Corporate Governance Requirements.'' In addition, BX proposes to make
some other changes to its rules regarding compensation committees.\18\
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    \17\ References in this filing to BX Rules refer to the listing
rules for the Exchange's BX Venture Market.
    \18\ While BX does not presently list any securities, its rules
for the BX Venture Market have been approved by the Commission. BX
is proposing to modify its compensation-related listing rules for
this market, as required by Rule 10C-1.
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    To accomplish these changes, the Exchange proposes to replace
current paragraph (d) of Rule 5605, entitled ``Independent Director
Oversight of Executive Officer Compensation,'' with a new paragraph (d)
entitled ``Compensation Committee Requirements.'' Current paragraph (d)
provides that compensation of the executive officers of a listed
company must be determined, or recommended to the company's board for
determination, either by a compensation committee comprised solely of
``Independent Directors'' \19\; or, as an alternative to a formal
committee, by a majority of the board's Independent Directors in a vote
in which only Independent Directors participate (``Alternative
Option'').\20\
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    \19\ ``Independent Directors,'' as defined in BX Rule 5605(a)(2)
and used herein, includes a two-part test for independence. The rule
sets forth seven specific categories of directors who cannot be
considered independent because of certain discrete relationships
(``the bright-line tests''); and also provides that a listed
company's board must make an affirmative determination that each
independent director has no relationship that, in the opinion of the
board, ``would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director.'' Id. See also
the Interpretive Material to Rule 5605.
    \20\ The current rule also provides that the chief executive
officer (``CEO'') may not be present during voting or deliberations
regarding the CEO's own compensation. See Rule 5605(d)(1).
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1. Compensation Committee Composition and Independence Standards
    First, BX proposes that each listed company be required to have a
compensation committee.\21\ The Alternative Option described above
would be eliminated. In addition, BX proposes that the compensation
committee be required to be composed of at least two members, each of
whom must be an Independent Director as defined in BX's rules and also
meet the additional independence requirements described below.\22\
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    \21\ See proposed Rule 5605(d)(2).
    \22\ Id. For the definition of ``Independent Director, see supra
note 19.
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    In discussing the proposed elimination of the Alternative Option,
BX stated that it had considered whether the Alternative Option remains
appropriate, ``given the heightened importance of compensation
decisions in today's corporate governance environment.'' The Exchange
concluded that ``there are benefits from a board having a standing
committee dedicated solely to oversight of executive compensation.''
\23\ BX added that, since it does not currently have any listed
companies, it does not believe that eliminating the Alternative would
be unduly burdensome. In discussing the proposed requirement that the
committee have at least two members, the Exchange stated that ``[g]iven
the importance of compensation decisions to stockholders, BX believes
that it is appropriate to have more than one director responsible for
these decisions.'' \24\
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    \23\ See Notice, supra note 3, for the Exchange's more complete
explanation of its reasons for the proposed change, including a
discussion of whether eliminating the Alternative Option would pose
an undue hardship on companies to be listed on the Exchange.
    \24\ See id. for the Exchange's more complete discussion of the
proposed size requirement.
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    BX also proposes that a compensation committee must have a formal
written charter.\25\ Under this provision, a listed company must
certify that it has adopted such a charter and that its compensation
committee will review and reassess the adequacy of that charter on an
annual basis.\26\
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    \25\ See proposed BX Rule 5605(d)(1). As discussed further in
Section II.B.3., a Smaller Reporting Company may adopt either a
formal written compensation committee charter or a board resolution
that specifies the committee's responsibilities and authority.
    \26\ The Commission notes that Rule 10C-1 does not require a
listed issuer specifically to have a charter. As noted above,
however, see supra notes 13-15 and accompanying text, Rule 10C-1
does require a compensation committee to have certain specified
authority and responsibilities. Often, listed issuers will specify
authority and responsibilities of this kind in a charter in any
case. The proposed rule requires them to have a charter, and to
include this authority and set of responsibilities in addition to
the required content discussed infra at text accompanying notes 27-
29.
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    The charter must specify the scope of the committee's
responsibilities and how it carries out those responsibilities,
including structure, processes, and membership requirements.\27\ It
must specify the committee's responsibility for determining or
recommending to the board for determination, the compensation of the
CEO and all other executive officers of the company, and provide that
the CEO may not be present during voting or deliberations on his or her
compensation.\28\ In addition, the charter must specify the committee's
responsibilities and authority set forth in the Exchange's rules with
respect to retaining its own advisers; appointing, compensating, and
overseeing such advisers; considering certain independence factors
before selecting advisers; and receiving funding from the company to
engage them, which are discussed in detail below.\29\
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    \27\ Proposed Rule 5605(d)(1)(A). BX states that this
requirement is copied from the Exchange's similar listing rule
relating to audit committee charters, Rule 5605(c)(1), except that
the annual review and reassessment requirement is written
prospectively, rather than retrospectively. The proposed rule change
includes a conforming revision to make the audit committee review
and reassessment prospective, as well. See Notice.
    \28\ Proposed Rule 5605(d)(1)(B)-(C). BX states that these
provisions are based upon BX's current compensation-related listing
rules, except that the Alternative Option discussed above is not
available under the proposed rule change. See supra note 21 and
accompanying text.
    \29\ See proposed Rule 5605(d)(1)(D) and infra notes 49-58 and
accompanying text. Because Smaller Reporting Companies are not
required to comply with the provisions relating to compensation
advisers in proposed BX Rule 5605(d)(3), see infra notes 62-67,
their charters or board resolutions are not required to reflect
these responsibilities.
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    BX's rules currently require each member of a listed company's
compensation committee to be an Independent Director as defined in BX
Rule 5605(a)(2).\30\ Rule 10C-1, as discussed above, provides that
exchange standards must require compensation committee members to be
independent, and further provides that each exchange, in determining
independence for this purpose, must consider relevant factors,
including the Fees Factor and Affiliation Factor described above. In
its proposal, BX discussed its consideration of these factors,\31\ and
proposed the following \32\:
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    \30\ See supra note 19.
    \31\ Notice, supra note 3.
    \32\ These additional factors would not apply to the selection
of members of the compensation committee of a Smaller Reporting
Company. See infra note 64.
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    With respect to the Fees Factor, BX proposes to adopt a provision
stating that each member of a compensation committee of a listed
company must not accept directly or indirectly any consulting, advisory
or other compensatory fee from the listed

company or any of its subsidiaries.\33\ In discussing its review of its
current listing rules and the Fees Factor, BX noted that its rules for
audit committees of listed companies, in meeting the criteria of Rule
10A-3 under the Act, prohibit an audit committee member from accepting
such fees. The Exchange concluded that ``there is no compelling
justification to have different standards for audit and compensation
committee members'' with respect to the Fees Factor.\34\
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    \33\ See proposed Rule 5605(d)(2)(A).
    \34\ See Notice.
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    As currently permitted under BX's rules for audit committee
members, however, the proposed rule would permit a compensation
committee member to receive fees for his or her membership on the
committee, on the company's board, or on any other board committee.\35\
In addition, a compensation committee member would be permitted to
receive fixed amounts of compensation under a retirement plan
(including deferred compensation) for prior service with the company,
provided that such compensation is not contingent in any way on
continued service.\36\
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    \35\ See supra note 33.
    \36\ Id.
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    With respect to the Affiliation Factor, BX proposes that, in
determining whether a director is eligible to serve on the compensation
committee, the company's board also must consider whether the director
is affiliated with the company, a subsidiary of the company, or an
affiliate of a subsidiary of the company to determine whether such
affiliation would impair the director's judgment as a member of the
compensation committee.\37\ In discussing its review of its current
rules and its consideration of the Rule 10C-1 requirement in this
area,\38\ the Exchange noted that its rules for audit committees of
listed companies, in meeting the criteria of Rule 10A-3 under the Act,
prohibit an audit committee member from being an affiliated person of
the issuer or any subsidiary thereof. The Exchange said that it
concluded, however, that ``such a blanket prohibition would be
inappropriate for compensation committees.'' \39\ BX believes that ``it
may be appropriate for certain affiliates, such as representatives of
significant stockholders, to serve on compensation committees since
their interests are likely aligned with those of other stockholders in
seeking an appropriate executive compensation program.'' \40\
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    \37\ See proposed Rule 5605(d)(2)(A).
    \38\ See Notice.
    \39\ Id.
    \40\ Id.
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    Although Rule 10C-1 requires that exchanges consider ``relevant
factors'' not limited to the Fees and Affiliation Factors, BX states
that, after reviewing its current and proposed listing rules, it
concluded that these rules are sufficient to ensure the independence of
compensation committee members. The Exchange therefore determined not
to propose further independence requirements.\41\
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    \41\ Id.
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    BX proposes a cure period for a failure of a listed company to meet
its committee composition requirements. The proposed cure period is the
same as the cure period currently provided in BX's rules for
noncompliance with the requirement to have a majority independent
board.\42\ Under the provision, if a listed company fails to comply
with the compensation committee composition requirements due to one
vacancy, or if one compensation committee member ceases to be
independent due to circumstances beyond the member's reasonable
control, the company must regain compliance by the earlier of the next
annual shareholders meeting or one year from the occurrence of the
event that caused the noncompliance.\43\ The proposed rule also
requires a company relying on this provision to provide notice to BX
immediately upon learning of the event or circumstance that caused the
noncompliance.
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    \42\ See Rule 5605(b)(1)(A) regarding the majority board
requirement.
    \43\ See proposed Rule 5605(d)(4).
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    However, if the annual shareholders meeting occurs no later than
180 days following the event that caused the noncompliance, the company
instead has 180 days from the event to regain compliance. As explained
by BX, this provides a company at least 180 days to cure noncompliance
and would typically allow a company to regain compliance in connection
with its next annual meeting.\44\
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    \44\ See Notice.
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    BX's current rules relating to compensation committees include an
exception that allows a director who is not an Independent Director to
be appointed to such a committee under exceptional and limited
circumstances, as long as that director is not a current officer, an
employee, or the family member of an officer or employee.\45\ The
exception applies, however, only if the committee is comprised of at
least three members and the company's board determines that the
individual's membership on the committee is required by the best
interests of the company and its shareholders.\46\ A compensation
committee member may not serve longer than two years under this
exception, and a company relying on the exception must make certain
disclosures on its Web site or in its proxy statement regarding the
nature of the relationship and the reasons for the determination.
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    \45\ See current Rule 5605(d)(3).
    \46\ See id.
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    BX proposes to retain the exception under the proposed rule change,
and to permit a listed company to avail itself of the allowance even
for a director who fails the new requirements regarding the Fees and
Affiliation Factors,\47\ with an additional change pertaining to the
exception, generally. Nasdaq recently amended an identical provision
for exceptional and limited circumstances in its rules to allow a
company to rely on the exception for a non-Independent Director who is
a family member of a non-executive employee of the company, and BX
proposes to make the same revision.\48\
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    \47\ See proposed Rule 5605(d)(2)(b).
    \48\ See Securities Exchange Act Release No. 67468 (July 19,
2012), 77 FR 43618 (July 25, 2012) (File No. SR-NASDAQ-2012-062).
Nasdaq made the same change to its exceptional and limited
circumstances exception for audit committee members, and BX also
proposes, in its filing, to make a conforming change to its
identical exception for audit committee members. BX notes that under
both the current and proposed versions of the exception for audit
committee members, a company could not rely on the exception for a
director who does not meet the criteria set forth in Section
10A(m)(3) of the Exchange Act and the rules thereunder to allow a
director to serve on the audit committee. See 15 U.S.C. 78j-1(m)(3)
and 17 CFR. 240.10A-3(b)(1).
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    The Exchange believes that this exception is an important means to
allow companies flexibility as to board and committee membership and
composition in unusual circumstances. The Exchange further believes
that the exception may be particularly important for smaller companies.
2. Authority of Committees to Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers
    In its proposed rule change, as modified by Amendment No. 1,\49\ BX
proposes to fulfill the requirements imposed by Rule 10C-1(b)(2)-(4)
under the Act by setting forth those requirements in full in its own
rules.\50\

Thus, proposed BX Rule 5605(d)(3), as amended, provides that the
compensation committee of a listed company may, in its sole discretion,
retain or obtain the advice of a compensation consultant, legal counsel
or other adviser.\51\ Further, the compensation committee shall be
directly responsible for the appointment, compensation and oversight of
the work of any compensation consultant, legal counsel and other
adviser retained by the compensation committee.\52\ In addition, the
listed company must provide for appropriate funding, as determined by
the compensation committee, for payment of reasonable compensation to a
compensation consultant, legal counsel or any other adviser retained by
the compensation committee.\53\
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    \49\ See supra note 6. BX's proposal as submitted originally
incorporated the requirements of Rule 10C-1(b)(2)-(4) by reference.
The Exchange amended the proposal to set forth those requirements
explicitly.
    \50\ Rule 10C-1(b)(4) does not include the word ``independent''
before ``legal counsel'' and requires an independence assessment for
any legal counsel to a compensation committee, other than in-house
counsel. In setting forth the requirements of Rule 10C-1(b)(2) and
(3), BX has deleted the word ``independent'' prior to ``legal
counsel'' so as to avoid confusion.
    \51\ See Item 9 of Amendment No. 1.
    \52\ See id. The proposal, as amended, also includes a
provision, derived from Rule 10C-1, stating that nothing in these
rules may be construed: (i) To require the compensation committee to
implement or act consistently with the advice or recommendations of
the compensation consultant, 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. Id.
    \53\ See id.
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    Proposed BX Rule 5605(d)(3), as amended, also sets forth
explicitly, in accordance with Rule 10C-1, that the compensation
committee may select, or receive advice from, a compensation
consultant, legal counsel or other adviser to the compensation
committee, other than in-house legal counsel, only after taking into
consideration the six factors set forth in Rule 10C-1 regarding
independence assessments of compensation advisers.\54\
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    \54\ See Rule 10C-1(b)(4).
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    The six factors, which are set forth in full in the proposed rule,
are: (i) The provision of other services to the 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; (v) any
stock of the issuer owned by the compensation consultant, legal counsel
or other adviser; and (vi) any business or personal relationship of the
compensation consultant, legal counsel, other adviser or the person
employing the adviser with an executive officer of the issuer.\55\
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    \55\ Rule 10C-1(b)(4)(i)-(vi).
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    Proposed Rule 5605(d)(3), as amended, also clarifies that nothing
in the rule requires a compensation consultant, legal counsel or other
compensation adviser to be independent, only that the compensation
committee consider the enumerated independence factors before
selecting, or receiving advice from, a compensation adviser.\56\ It
further clarifies that compensation committees may select, or receive
advice from, any compensation adviser they prefer, including ones that
are not independent, after considering the six independence factors set
forth in the rule.\57\ In Amendment No. 1, BX emphasizes that a
compensation committee is not required to retain an independent
compensation adviser; rather, a compensation committee is required only
to conduct the independence analysis described in Rule 10C-1 before
selecting a compensation adviser.\58\
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    \56\ See id.
    \57\ See id.
    \58\ See Item 2 of Amendment No. 1.
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    In Amendment No. 1, BX also added language to the provision
regarding the independence assessment of compensation advisers \59\ to
state that the compensation committee is not required to conduct an
independence assessment for a compensation adviser that acts in a role
limited to the following activities for which no disclosure is required
under Item 407(e)(3)(iii) of Regulation S-K: (a) Consulting on any
broad-based plan that does not discriminate in scope, terms, or
operation, in favor of executive officers or directors of the company,
and that is available generally to all salaried employees; and/or (b)
providing information that either is not customized for a particular
issuer or that is customized based on parameters that are not developed
by the adviser, and about which the adviser does not provide advice.
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    \59\ See proposed Rule 5605(d)(3), as amended by Amendment No.
1.
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    BX states that this exception copies language from Item
407(e)(3)(iii) of Regulation S-K, which provides a limited exception to
the Commission's requirement for a registrant to disclose any role of
compensation consultants in determining or recommending the amount and
form of a registrant's executive and director compensation.\60\ The
Exchange believes that its proposed exception from the independence
assessment requirement is appropriate because the types of services
excepted do not raise conflict of interest concerns, and noted that
this is the same reason for which the Commission excluded these types
of services from the disclosure requirement in Item 407(e)(3)(iii) of
Regulation S-K.\61\
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    \60\ See 17 CFR 229.407(e)(3)(iii).
    \61\ See Amendment No. 1.
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3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies
from all the requirements included within the rule.\62\ Consistent with
this Rule 10C-1 provision, BX, as a general matter, proposes that a
smaller reporting company, as defined in Rule 12b-2 under the Act
(hereinafter, a ``Smaller Reporting Company''), not be subject to the
new requirements set forth in its proposal specifically to comply with
Rule 10C-1.\63\ Thus, BX proposes not to require Smaller Reporting
Companies to comply with the enhanced independence standards for
members of compensation committees relating to compensatory fees and
affiliation.\64\
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    \62\ See supra Section II.A.
    \63\ See proposed Rule 5605(d)(5).
    \64\ See supra text accompanying notes 33 and 37.
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    In addition, a Smaller Reporting Company will not be required to
include in its compensation committee charter (or, as discussed below,
in a board resolution) a grant of authority to the committee to retain
compensation advisers, a requirement that the company fund such
advisers, and a requirement that the committee consider independence
factors before selecting such advisers. As stated by BX, the exception
for Smaller Reporting Companies also means that the compensation
committees of such companies are not required to review and reassess
the adequacy of their charters on an annual basis.\65\ The

Exchange believes that this approach will minimize new costs imposed on
Smaller Reporting Companies and allow them some flexibility not allowed
for larger companies.
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    \65\ See Notice. In addition, a Smaller Reporting Company, like
other listed companies, will be required to certify that it has
adopted a formal written compensation committee charter (or, if it
so chooses, a board resolution) that specifies the scope of the
committee's responsibilities and its responsibility for determining
or recommending to the board for determination the compensation of
the CEO and other executive officers. See supra notes 27-28.
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    BX proposes not to exclude a Smaller Reporting Company, however,
from its proposal to require a listed company to have, and to certify
that it has and will continue to have, a compensation committee of at
least two members, each of whom must be an Independent Director as
defined in the Exchange's Rule 5605(a)(2).\66\ In its discussion of the
rules from which Smaller Reporting Companies are not exempt, BX notes
that its current listing rules regarding compensation committees do not
provide any exemptions for Smaller Reporting Companies.\67\
---------------------------------------------------------------------------

    \66\ See proposed Rule 5605(d)(5). See also proposed
interpretive material IM-5605-6. As noted above, listed companies
other than Smaller Reporting Companies and other exempted issuers
must comply with the additional independence requirements for
compensation committee members set forth in proposed BX Rule
5605(d)(2)(A). See discussion in Section II.B.1., supra.
    \67\ See Notice.
---------------------------------------------------------------------------

4. Exemptions
    BX proposes that its existing exemptions from the Exchange's
compensation-related listing rules currently in place, which are set
forth in BX Rule 5615, apply also to the new requirements of the
proposed rule change. These include exemptions for asset-backed issuers
and other passive issuers, limited partnerships, management investment
companies registered under the Investment Company Act of 1940
(``registered management investment companies'').\68\ BX states that
each of these categories has ``traditionally been exempt from BX's
compensation-related listing rules,'' and believes that the reasons for
the exemptions apply to the new requirements, as well.\69\
---------------------------------------------------------------------------

    \68\ See Rule 5615(a)(1), (4), and (5).
    \69\ See Notice. See also discussion below at note 79, infra,
for transition periods for companies that currently use the
Alternative Option and do not have compensation committees.
---------------------------------------------------------------------------

    Asset-backed issuers and other passive issuers have been exempted,
according to the Exchange, because they do not have a board of
directors or persons acting in a similar capacity and their activities
are limited to passively owning or holding (as well as administering
and distributing amounts in respect of) assets on behalf of or for the
benefit of the holders of the listed securities. BX further states that
the structure of limited partnerships requires that public investors
have limited rights and the general partners make all significant
decisions about the operation of the limited partnership, and, as such,
limited partners do not expect to have a voice in the operations of the
partnership. Registered management investment companies, the Exchange
states, are already subject to a pervasive system of federal regulation
in certain areas of corporate governance.
    Finally, BX proposes to add exemptions to its compensation
committee rules for cooperatives and controlled companies, which BX
proposes to define as companies ``of which more than 50% of the voting
power for the election of directors is held by an individual, a group
or another company.'' Certain member-owned cooperatives that list their
preferred stock are required to have their common stock owned by their
members, and BX believes that because of their unique structure and the
fact that they do not have a publicly traded class of common stock,
they should be exempt from its compensation committee rules.\70\ The
proposed exemption for controlled companies, BX states, recognizes that
majority shareholders, including parent companies, have the right to
select directors and control certain key decisions, such as executive
officer compensation, by virtue of their ownership rights.\71\ The
Exchange further states that the proposed exemptions for cooperatives
and controlled companies are modeled after the similar exemptions in
Nasdaq's rules.\72\
---------------------------------------------------------------------------

    \70\ See Notice.
    \71\ See id. BX further notes that controlled companies also are
exempt from all of the requirements of Rule 10C-1. See Rule 10C-
1(b)(5)(ii).
    \72\ See Nasdaq Listing Rule 5615(a)(2), Nasdaq IM-5615-2,
Nasdaq Listing Rule 5615(c) and Nasdaq IM-5615-5.
---------------------------------------------------------------------------

    Concerning foreign private issuers, BX's current rules permit any
such issuer to follow its home country practice in lieu of many of BX's
corporate governance listing standards, including the Exchange's
compensation-related listing rules.\73\ This allowance is granted on
condition that the issuer discloses in its annual report filed with the
Commission each requirement that it does not follow and describes the
home country practice followed by the issuer in lieu of such
requirement.\74\ BX proposes that this allowance continue to apply
generally to the Exchange's compensation committee rules as revised by
the instant proposal on the same condition, namely that the issuer
discloses each requirement it does not follow and describes the home
country practice it follows in lieu of such requirement. However, with
respect, specifically, to the enhanced standards of independence for
compensation committees (concerning fees received by members and their
affiliations) BX proposes that, if a listed company follows its home
country practice, it must additionally disclose in its annual report
filed with the Commission the reasons why it does not have an
independent compensation committee as set forth in these standards.\75\
---------------------------------------------------------------------------

    \73\ See Rule 5615(a)(3). Under BX's listing rules, ``foreign
private issuer'' has the same meaning as under Rule 3b-4 under the
Exchange Act. See Rule 5005(a)(18). BX's listing rules have
traditionally provided qualified exemptions for foreign private
issuers so that such issuers are not required to do any act that is
contrary to a law, rule or regulation of any public authority
exercising jurisdiction over such issuer or that is contrary to
generally accepted business practices in the issuer's country of
domicile, except to the extent such exemptions would be contrary to
the public securities laws. See Securities Exchange Act Release No.
48745 (November 4, 2003), 68 FR 64154, 64165 (November 12, 2003)
(SR-NASD-2002-138).
    \74\ A Foreign Private Issuer that is not required to file its
annual report with the Commission on Form 20-F may make this
disclosure only on its Web site.
    \75\ As stated by BX, this proposed condition adopts the
requirements of Rule 10C-1(b)(1)(iii)(A)(4), which provides an
exemption from the independence requirements of Rule 10C-1 for a
``foreign private issuer that discloses in its annual report the
reasons that the foreign private issuer does not have an independent
compensation committee.''
---------------------------------------------------------------------------

5. Transition to the New Rules for Companies Listed as of the Effective
Date \76\
---------------------------------------------------------------------------

    \76\ During the transition periods described herein, until a
company is required to comply with a particular provision of the new
rules, the company must continue to comply with the corresponding
provision, if any, in the current rules, which are re-designated as
Rule 5605A(d) and IM-5605A-6 (``Sunsetting Provisions). See
Amendment No. 1, which added this clarification as a preamble to the
new Rule 5605(d). The addition mirrors a similar statement already
included in the original proposal as a preamble to the Sunsetting
Provisions.
---------------------------------------------------------------------------

    The proposed rule change, as amended, provides that certain of the
new requirements for listed companies will be effective on July 1,
2013.\77\ Specifically, as of that date, listed companies will be
required to comply with the provisions of the proposed rule change
relating to the authority of a compensation committee to retain
compensation consultants, legal counsel, and other compensation
advisers; the authority to fund such advisers; and the responsibility
of the committee to consider independence factors before selecting such
advisers.\78\ To the extent a company does not yet have a compensation
committee by that

date,\79\ these provisions will apply to the Independent Directors who
determine, or recommend to the board for determination, the
compensation of the CEO and all other executive officers of the
company.\80\
---------------------------------------------------------------------------

    \77\ See proposed Rule 5605(d)(6), as modified by Amendment No.
1 to the proposed rule change. The original proposal provided that
these provisions were to be effective immediately.
    \78\ Id.
    \79\ A listed company that does not currently have a
compensation committee is not required to meet the requirement to
have such a committee until the earlier of its first annual meeting
after January 15, 2014, or October 31, 2014. See infra note 81 and
accompanying text.
    \80\ While the provisions of the proposed rule change relating
to the authority of a compensation committee to retain compensation
advisers, the company's obligation to fund such advisers, and the
responsibility of the committee to consider independence factors
before selecting such advisers must be assigned to the committee or
Independent Directors acting in lieu of a committee by July 1, 2013,
the requirement that they be included in a written committee charter
does not apply until a later date, as it is one of the remaining
provisions of the new compensation committee rule subject to the
transition period discussed below. Rule 5605(d)(6) states that
companies should consider under state corporate law whether to grant
the specific responsibilities and authority referenced through a
charter, resolution or other board action.
---------------------------------------------------------------------------

    Regarding the remaining new provisions for compensation committees,
the proposed rule change, as amended, provides that, in order to allow
listed companies to make necessary adjustments in the course of their
regular annual meeting schedule, they will have until the earlier of
their first annual meeting after January 15, 2014, or October 31,
2014,\81\ to comply with these remaining provisions.\82\ A listed
company must certify to BX, no later than 30 days after the final
implementation deadline applicable to it, that it has complied with
Rule 5605(d).
---------------------------------------------------------------------------

    \81\ See proposed Rule 5605(d)(6), as modified by Amendment No.
1 to the proposed rule change. The original proposal had required
these provisions to be implemented by the company's second annual
meeting after the proposal was approved, but no later than December
31, 2014.
    \82\ The remaining provisions subject to this schedule include
IM-5605-6, which is new interpretive material to be included in the
text of BX's rules that elaborates on the compensation committee
requirements.
---------------------------------------------------------------------------

6. Phase-In Schedules: IPOs; Companies that Lose their Exemptions;
Companies Transferring From Other Markets
    BX's existing rules permit a company listing in connection with its
initial public offering (``IPO'') to phase in its compliance with the
Exchange's independence requirements for compensation and nominations
committees,\83\ as follows: Each such committee must have one
independent member at the time of listing; a majority of members must
be independent within 90 days of listing; and all members of such
committees must be independent within one year of listing. The same
phase-in schedule is permitted for companies emerging from
bankruptcy.\84\ BX proposes that this schedule continue to apply and
that it remain the same with respect to the new compensation committee
composition requirements set forth in the proposed rule change.\85\
---------------------------------------------------------------------------

    \83\ See Rule 5615(b)(1).
    \84\ See Rule 5615(b)(2).
    \85\ Specifically, the phase-in schedule would apply to proposed
Rule 5605(d)(2).
---------------------------------------------------------------------------

    As stated by BX, this would mean that a company listing on the
Exchange in connection with its IPO or a company emerging from
bankruptcy would be permitted to phase in its compliance with the
requirements that a compensation committee have at least two members,
that these members be Independent Directors as defined in BX's rules,
and that they meet the enhanced standards of independence for
compensation committees (concerning fees received by members and their
affiliations) adopted pursuant to Rule 10C-1.\86\
---------------------------------------------------------------------------

    \86\ See Notice for an illustration provided by BX of how the
compensation committee composition requirement will interact with
the minimum size requirement.
---------------------------------------------------------------------------

    Since BX is proposing to add to its rules an exemption for
controlled companies, as discussed above, BX also proposes to add a
phase-in schedule for companies ceasing to be controlled companies.
This proposed phase-in schedule is modeled after the similar phase-in
schedule in Nasdaq's rules.\87\
---------------------------------------------------------------------------

    \87\ See Nasdaq Rule 5615(c)(3).
---------------------------------------------------------------------------

    In addition, BX proposes minor clarifying changes to the phase-in
schedule in its current listing rules for companies transferring from
other markets, which will now applied to the new compensation-related
rules under the proposal.\88\ Under this schedule, companies
transferring from another national securities exchange with a
substantially similar requirement shall be immediately subject to the
compensation committee requirement, provided that such companies will
be afforded the balance of any grace period afforded by the other
market. Companies that are not subject to a substantially similar
requirement at the time of listing on BX, such as a company quoted in
the over-the-counter market, will be permitted to phase in compliance
with the compensation committee composition requirements in Rule
5605(d)(2)(A), including the requirement that compensation committee
members be Independent Directors, the minimum size requirement and the
additional eligibility requirements adopted pursuant to Rule 10C-1, on
the same schedule as companies listing in connection with an initial
public offering.
---------------------------------------------------------------------------

    \88\ See Rule 5615(b)(3). For example, BX proposes to delete the
sentence in this provision stating that companies may choose not to
adopt a compensation committee and may instead rely upon a majority
of the Independent Directors to discharge these responsibilities, as
BX has eliminated the Alternative Option.
---------------------------------------------------------------------------

    For a company that was, but has ceased to be, a Smaller Reporting
Company, the proposed rule change, as modified by Amendment No. 1,
establishes a phase-in schedule based on certain dates relating to the
company's change in status.\89\ Pursuant to Rule 12b-2 under the Act, a
company tests its status as a Smaller Reporting Company on an annual
basis as of the last business day of its most recently completed second
fiscal quarter (the ``Determination Date''). A company with a public
float of $75 million or more as of the Determination Date will cease to
be a Smaller Reporting Company as of the beginning of the fiscal year
following the Determination Date. Under BX's proposal, the day of this
change in status is the beginning of the phase-in period (``Start
Date'').\90\
---------------------------------------------------------------------------

    \89\ See proposed Rule 5605(d)(4), as amended. In the proposal
as originally submitted, the phase-in schedule was to be the same as
the phase-in schedule for a company listing in conjunction with an
IPO, and was to start to run on the due date of the filing with the
Commission in which the company is required to report that it is an
issuer other than a Smaller Reporting Company. In Amendment No. 1,
BX states that while the revised phase-in schedule is different from
what it originally proposed, the amended version will allow
companies sufficient time to adjust to the differences.
    \90\ See Amendment No. 1.
---------------------------------------------------------------------------

    By six months from the Start Date, the company will be required to
comply with Rule 5605(d)(3), which sets forth the provisions described
above relating to authority of a compensation committee to retain
compensation advisers, the requirement that the company fund such
advisers, and the requirement that the committee consider independence
factors before selecting such advisers. By six months from the Start
Date, the company will also be required to certify to BX (i) that it
has complied with the requirement in Rule 5605(d)(1) to adopt a formal
written compensation committee charter including the content specified
in Rule 5605(d)(1)(A)-(D); \91\ and (ii) that it has complied, or
within the applicable phase-in schedule will comply, with the
additional requirements in Rule

5605(d)(2)(A) regarding compensation committee composition.
---------------------------------------------------------------------------

    \91\ See supra notes 26-29. This includes the provisions with
which the company is now required to comply relating to authority of
a compensation committee to retain compensation advisers, the
requirement that the company fund such advisers, and the requirement
that the committee consider independence factors before selecting
such advisers.
---------------------------------------------------------------------------

    Under the proposal, as amended, a company that has ceased to be a
Smaller Reporting Company will be permitted to phase in its compliance
with the enhanced independence requirements for compensation committee
members (relating to compensatory fees and affiliation) as follows: (i)
One member must satisfy the requirements by six months from the Start
Date; (ii) a majority of members must satisfy the requirements by nine
months from the Start Date; and (iii) all members must satisfy the
requirements by one year from the Start Date.\92\
---------------------------------------------------------------------------

    \92\ During the phase-in schedule, a company that has ceased to
be a Smaller Reporting Company will be required to continue to
comply with the rules previously applicable to it.
---------------------------------------------------------------------------

    However, because a Smaller Reporting Company is required to have a
compensation committee and such committee is required to be comprised
of at least two Independent Directors, a company that has ceased to be
a Smaller Reporting Company will not be permitted to use the phase-in
schedule for these requirements.
7. Conforming Changes and Correction of Typographical Errors
    Finally, BX proposes to make minor conforming changes to its
requirements relating to audit and nominations committees and to
correct certain typographical errors in its current corporate
governance requirements.\93\
---------------------------------------------------------------------------

    \93\ See Exhibit 5 of the proposed rule change.
---------------------------------------------------------------------------

III. Discussion

    After careful review, the Commission finds that the BX proposal, as
amended, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\94\ In
particular, the Commission finds that the amended proposed rule change
is consistent with the requirements of Section 6(b) of the Act,\95\ as
well as with Section 10C of the Act \96\ and Rule 10C-1 thereunder.\97\
Specifically, the Commission finds that the proposed rule change, as
amended, is consistent with Section 6(b)(5) of the Act,\98\ which
requires that the rules of a national securities exchange be designed,
among other things, to prevent fraudulent and manipulative acts and
practices; to promote just and equitable principles of trade; to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest; and not be designed to permit, among other things,
unfair discrimination between issuers.
---------------------------------------------------------------------------

    \94\ In approving the BX proposed rule change, as amended, the
Commission has considered its impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
    \95\ 15 U.S.C. 78f(b).
    \96\ 15 U.S.C. 78j-3.
    \97\ 17 CFR 240.10C-1.
    \98\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The development and enforcement of meaningful listing standards for
a national securities exchange is of substantial importance to
financial markets and the investing public. Meaningful listing
standards are especially important given investor expectations
regarding the nature of companies that have achieved an exchange
listing for their securities. The corporate governance standards
embodied in the listing rules of national securities exchanges, in
particular, play an important role in assuring that companies listed
for trading on the exchanges' markets observe good governance
practices, including a reasoned, fair, and impartial approach for
determining the compensation of corporate executives. The Commission
believes that the BX proposal will foster greater transparency,
accountability, and objectivity in the oversight of compensation
practices of listed issuers and in the decision-making processes of
their compensation committees.
    In enacting Section 10C of the Act as one of the reforms of the
Dodd-Frank Act,\99\ Congress resolved to require that ``board
committees that set compensation policy will consist only of directors
who are independent.'' \100\ In June 2012, as required by this
legislation, the Commission adopted Rule 10C-1 under the Act, which
directs the national securities exchanges to prohibit, by rule, the
initial or continued listing of any equity security of an issuer (with
certain exceptions) that is not in compliance with the rule's
requirements regarding issuer compensation committees and compensation
advisers.
---------------------------------------------------------------------------

    \99\ See supra note 7.
    \100\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of
the Committee of Conference, Title IX, Subtitle E ``Accountability
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29,
2010).
---------------------------------------------------------------------------

    In response, BX submitted the proposed rule change, which includes
rules intended to comply with the requirements of Rule 10C-1 and
additional provisions designed to strengthen the Exchange's listing
standards relating to compensation committees. The Commission believes
that the proposed rule change, as amended, satisfies the mandate of
Rule 10C-1 and otherwise will promote effective oversight of its listed
issuers' executive compensation practices, for the following reasons:

A. Compensation Committee Composition and Charter

    The Commission believes that it is reasonable for BX to require
each company listed on its market to have a compensation committee.
Although the Alternative Option to a formal committee in the Exchange's
current rules could be useful to a small number of companies, the
Commission agrees that the heightened importance of compensation
decisions and oversight of executive compensation in today's
environment, as well as the benefits that can result for investors of
having a standing committee overseeing compensation matters, makes it
appropriate and consistent with investor protection and the public
interest under Section 6(b)(5) of the Act for BX to raise its standards
in this regard. In making this determination the Commission is aware
that Rule 10C-1 does not require listed companies of national
securities exchanges to have a committee dedicated to compensation
matters. Nevertheless, it is consistent with Section 6(b)(5) of the Act
for BX to require all its listed companies to have an independent
compensation committee overseeing executive compensation matters
because of the importance and accountability to investors that such a
formal structure can provide.\101\ The Commission also notes that some
of the other requirements of Rule 10C-1 apply only when a company has a
committee overseeing compensation matters.\102\ Thus, the requirement
to have a compensation committee will trigger the additional
protections for shareholders created by these requirements.
---------------------------------------------------------------------------

    \101\ See, e.g., Section 303A.05 of the New York Stock Exchange
(``NYSE'') Listed Company Manual, which does not provide for an
Alternative Option as is currently allowed under BX rules.
    \102\ Under Rule 10C-1, the provisions of Rule 10C-1(b)(2)(i)
(concerning the authority to retain or obtain the advice of a
compensation adviser) and Rule 10C-1(b)(3) (concerning funding for
compensation advisers) do not apply to members of the board of
directors who oversee executive compensation matters on behalf of
the board of directors outside a committee structure.
---------------------------------------------------------------------------

    Similarly, the Commission believes that it is appropriate for BX to
raise its standards to require the compensation committee of each
issuer to have at least two members, instead of permitting a sole
individual to be responsible for compensation policy, and that this
furthers investor protection and the public interest in accordance with
Section 6(b)(5). In light of the importance of compensation matters,
the added thought and objectivity that is

likely to result when two or more individuals deliberate over how much
a listed company should pay its executives, and what form such
compensation should take, is consistent with the goal of promoting more
accountability to shareholders on executive compensation matters.
Moreover, given the complexity of executive compensation packages for
corporate executives, it is reasonable for BX to require listed
companies to have the input of more than one committee member on such
matters. The Commission believes that the two-member requirement will
not be an onerous burden for companies and should actually strengthen
their review of compensation matters.
    The proposal by the Exchange to require a compensation committee to
have a written charter detailing the committee's authority and
responsibility is also consistent with Section 6(b)(5) of the Act and
will help listed companies to comply with the rules being adopted by BX
to fulfill its mandate under Rule 10C-1. For example, as noted above,
under BX's proposal the charter must set forth the compensation
committee's responsibilities as well as the specific authority
concerning compensation advisers as required under Rule 10C-1.\103\ A
written charter will also provide added transparency for shareholders
regarding how a company determines compensation and may clarify and
improve the process itself. In this regard, the Commission notes that
BX's requirement that listed companies review and reassess the adequacy
of the compensation's committee charter on an annual basis will also
help to ensure accountability and transparency on an on-going basis.
The Commission also notes that several exchanges already require their
compensation committees to have written charters.\104\
---------------------------------------------------------------------------

    \103\ The Commission notes that the provision that is required
in the charter regarding the authority of the committee to retain
compensation advisers, the requirement that the company fund such
advisers, and the requirement that the committee consider
independence factors before selecting such advisers does not apply
under the BX proposal to Smaller Reporting Companies. See supra
notes 62-65 and accompanying text.
    \104\ See, e.g., NYSE Listed Company Manual, Section 303A.05.
---------------------------------------------------------------------------

    As discussed above, under Rule 10C-1 the exchanges must adopt
listing standards that require each member of a compensation committee
to be independent, and to develop a definition of independence after
considering, among other relevant factors, the source of compensation
of a director, including any consulting, advisory or other compensatory
fee paid by the issuer to the director as well as whether the director
is affiliated with the issuer or any of its subsidiaries or their
affiliates.
    The Commission notes, however, that Rule 10C-1 leaves it to each
exchange to formulate a final definition of independence for these
purposes, subject to review and final Commission approval pursuant to
Section 19(b) of the Act. As the Commission stated in the Rule 10C-1
Adopting Release, ``given the wide variety of issuers that are listed
on exchanges, we believe that the exchanges should be provided with
flexibility to develop independence requirements appropriate for the
issuers listed on each exchange and consistent with the requirements of
the independence standards set forth in Rule 10C-1(b)(1).'' \105\ This
discretion comports with the Act, which gives the exchanges the
authority, as self-regulatory organizations, to propose the standards
they wish to set for companies that seek to be listed on their markets,
consistent with the Act and the rules and regulations thereunder, and,
in particular, Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \105\ As explained further in the Rule 10C-1 Adopting Release,
prior to final approval, the Commission will consider whether the
exchanges' proposed rule changes are consistent with the
requirements of Section 6(b) and Section 10C of the Exchange Act.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence
standards that currently apply to board and compensation committee
members, which include certain bright-line tests, BX has determined to
adopt a definition that prohibits a director who receives compensation
or fees from a listed company (other than, among other things, director
compensation) from serving on the company's compensation
committee.\106\
---------------------------------------------------------------------------

    \106\ See supra note 33-36 and accompanying text.
---------------------------------------------------------------------------

    As the Exchange noted in its proposal, under the bright-line tests
of its general rules for director independence, directors can still be
considered independent and serve on listed companies' compensation
committees if they receive fees that do not exceed certain
thresholds.\107\ This is in contrast to BX's requirements to serve on a
listed company's audit committee, which bar a director who receives any
compensatory fees from the company. In considering the Fees Factor
under Rule 10C-1, BX stated that it did not see any compelling
justification to set a different standard with respect to the
acceptance of compensatory fees for members of the compensation
committee than for members of audit committees.
---------------------------------------------------------------------------

    \107\ See BX Listing Rules 5605(a)(2)(B) and (D).
---------------------------------------------------------------------------

    The Commission believes that the Exchange has complied with Rule
10C-1 and Section 10C and that the proposed compensatory fee
restriction, which is designed to protect investors and the public
interest, is consistent with the requirements of Section 6(b)(5) of the
Act. The Commission notes that the compensatory fee restriction will
help to ensure that compensation committee members cannot receive
directly or indirectly fees that could potentially influence their
decisions on compensation matters.\108\
---------------------------------------------------------------------------

    \108\ See Nasdaq Approval Order, supra note 5, for a discussion
of the comments received on Nasdaq's substantially similar proposal
on compensatory fees for compensation committee members.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, BX has
concluded that an outright bar from service on a company's compensation
committee of any director with an affiliation with the company, its
subsidiaries, and their affiliates is inappropriate for compensation
committees. BX's existing independence standards will also continue to
apply to those directors serving on the compensation committee. BX
maintains that it may be appropriate for certain affiliates, such as
representatives of significant stockholders, to serve on compensation
committees ``since their interests are likely aligned with those of
other stockholders in seeking an appropriate executive compensation
program.'' The Commission believes that BX's approach of requiring
boards only to consider such affiliations, rather than an outright ban
on them, is reasonable and consistent with the requirements of the Act.
    The Commission notes that Congress, in requiring the Commission to
direct the exchanges to consider the Affiliation Factor, did not
declare that an absolute bar was necessary. Moreover, as the Commission
stated in the Rule 10C-1 Adopting Release, ``In establishing their
independence requirements, the exchanges may determine that, even
though affiliated directors are not allowed to serve on audit
committees, such a blanket prohibition would be inappropriate for
compensation committees, and certain affiliates, such as
representatives of significant shareholders, should be permitted to
serve.'' \109\ In determining that BX's

affiliation standard is consistent with Sections 6(b)(5) and 10C under
the Act, the Commission notes that BX's proposal requires a company's
board, in selecting compensation committee members, to consider whether
any such affiliation would impair a director's judgment as a member of
the compensation committee. We believe that this should give companies
the flexibility to assess whether a director who is an affiliate,
including a significant shareholder, should or should not serve on the
company's compensation committee, depending on the director's
particular affiliations with the company.
---------------------------------------------------------------------------

    \109\ Rule 10C-1 Adopting Release. At the same time, the
Commission noted that significant shareholders may have other
relationships with the listed company that would result in such
shareholders' interests not being aligned with those of other
shareholders and that the exchanges may want to consider these other
ties between a listed issuer and a director. While the Exchange did
not adopt any additional factors, the current affiliation standard
would still allow a company to prohibit a director whose
affiliations ``impair the director's judgment'' as a member of the
committee.
---------------------------------------------------------------------------

    As to consideration by BX of whether it should adopt any additional
relevant independence factors, the Exchange stated that it reviewed its
rules in the light of Rule 10C-1, but concluded that its existing rules
together with its proposed rules are sufficient to ensure committee
member independence. The Commission believes that, through this review,
the Exchange has complied with the requirement that it consider
relevant factors, including, but not limited to, the Fees and
Affiliation Factors in determining its definition of independence for
compensation committee members.
    The Commission notes that BX discussed in its proposal why it did
not include, specifically, personal and business relationships as a
factor. BX cites its standards for Independent Directors, generally,
which require the board of directors of a listed issuer to make an
affirmative determination that each such director has no relationship
that, in the opinion of the board, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director.\110\ All compensation committee members must meet the general
independence standards under BX's rules in addition to the two new
criteria being adopted herein. The Commission therefore expects that
boards, in fulfilling their obligations, will apply this standard to
each such director's individual responsibilities as a board member,
including specific committee memberships such as the compensation
committee. The Commission further notes that compliance with BX's rules
and the provision noted above would demand that a board consider
personal and business relationships and related party transactions,
among other factors that may be relevant, when evaluating the
independence of compensation committee members and, for that matter,
all Independent Directors on the board.
---------------------------------------------------------------------------

    \110\ See BX Rule 5605(a)(2).
---------------------------------------------------------------------------

    BX proposes that the ``Exceptional and Limited Circumstances''
provision in its current rules, which allows one director who fails to
meet the Exchange's Independent Director definition to serve on a
compensation committee under certain conditions, apply to the enhanced
independence standards discussed above that the Exchange is adopting to
comply with Rule 10C-1. The Commission believes that the discretion
granted to each exchange by Rule 10C-1, generally, to determine the
independence standards it adopts to comply with the Rule includes the
leeway to carve out exceptions to those standards, as long as they are
consistent with the Act. BX also cites, in justifying the exception,
the provision of Rule 10C-1 that permits an exchange to exempt a
particular relationship with respect to members of the compensation
committee as the exchange determines is appropriate, taking into
consideration the size of an issuer and any other relevant factors. In
this respect, BX states that the flexibility afforded by the exception
is particularly important for a smaller company.
    Moreover, the Commission approved as consistent with the Act the
same exception and concept in the context of BX's current rules
requiring each member of a compensation committee to be an Independent
Director under Exchange Rule 5605(a)(2), as well in the context of the
independence requirements for nominations committees and audit
committees. Although the additional independence standards required by
Rule 10A-3 for audit committees are not subject to this exception, the
Commission notes that Rule 10C-1 grants exchanges more discretion than
Rule 10A-3 when considering independence standards for compensation
committee membership. The Commission also notes that a member appointed
under the Exceptional and Limited Circumstances provision may not serve
longer than two years. As BX notes, the additional change to allow a
company to rely on the exception for a non-Independent Director who is
a family member of a non-executive employee of the company--which the
Exchange is proposing to adopt with respect to the Exceptional and
Limited Circumstances provisions in both its compensation and audit
committee rules--has already been approved by the Commission for the
Nasdaq market as an allowance in the corporate governance listing
standards of that exchange for both types of committees.\111\ The
Commission therefore finds that applying this additional change in the
BX rules for both committees is consistent with Section 6(b)(5).
---------------------------------------------------------------------------

    \111\ Nasdaq's rules regarding the independence of audit,
nominations, and compensation committee members have included an
allowance for Exceptional and Limited Circumstances when a member
ceases to be independent since 2003. See Securities Exchange Act
Release No. 48745 (November 4, 2003), 68 FR 64154 (November 12,
2003). (The allowance did not apply to the audit committee standards
required by Rule 10A-3. See id.) In June 2012, when Nasdaq amended
its rules to allow the provision to be used when a family member of
the director is an employee of the company, as long as the family
member is not an executive officer, see supra note 48, the change
was made to the rules for compensation committees in tandem with the
similar change for the other two committees and the Commission found
these changes consistent with Section 6(b)(5) of the Act. The
Commission notes that, when Nasdaq recently proposed additional
independence standards for compensation committees to comply with
Rule 10C-1, it proposed to extend the Exceptional and Limited
Circumstances allowance, including the change regarding family
members of non-executive officers, to the new requirements.
---------------------------------------------------------------------------

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

    As discussed above, BX proposes to set forth explicitly in its
rules the requirements of Rule 10C-1 regarding a compensation
committee's authority to retain compensation advisers, its
responsibilities with respect to such advisers, and the listed
company's obligation to provide appropriate funding for payment of
reasonable compensation to a compensation adviser retained by the
committee.\112\ As such, the Commission believes these provisions meet
the mandate of Rule 10C-1 and are consistent with the Act.
---------------------------------------------------------------------------

    \112\ The Commission notes that, in Amendment No. 1, BX revised
its proposed rule text to set forth these requirements in full.
---------------------------------------------------------------------------

    As discussed above, the proposed rule change requires the
compensation committee of a listed company to consider the six factors
relating to independence that are enumerated in the proposal before
selecting a compensation consultant, legal counsel or other adviser to
the compensation committee. The Commission believes that this provision
is consistent with Rule 10C-1 and Section 6(b)(5) of the Act.
    The Commission notes that Rule 10C-1 includes an instruction that
specifically requires a compensation committee to conduct the
independence assessment with respect to ``any compensation consultant,
legal counsel or other adviser that provides advice to the compensation
committee, other than

in-house counsel,'' \113\ and thus requires an independence assessment
with respect to regular outside legal counsel. To avoid any confusion,
BX, in Amendment No. 1, added rule text that reflects this instruction
in its own rules.\114\
---------------------------------------------------------------------------

    \113\ See Instruction to paragraph (b)(4) of Rule 10C-1.
    \114\ See supra note 54 and accompanying text.
---------------------------------------------------------------------------

    In approving this aspect of the proposal, the Commission notes that
compliance with the rule requires an independence assessment of any
compensation consultant, legal counsel, or other adviser that provides
advice to the compensation committee, and is not limited to advice
concerning executive compensation. However, BX has proposed, in
Amendment No. 1, to add language to the provision regarding the
independence assessment of compensation advisers \115\ to state that
the compensation committee is not required to conduct an independence
assessment for a compensation adviser that acts in a role limited to
the following activities for which no disclosure is required under Item
407(e)(3)(iii) of Regulation S-K: (a) Consulting on any broad-based
plan that does not discriminate in scope, terms, or operation, in favor
of executive officers or directors of the company, and that is
available generally to all salaried employees; and/or (b) providing
information that either is not customized for a particular issuer or
that is customized based on parameters that are not developed by the
adviser, and about which the adviser does not provide advice. BX states
that this exception is based on Item 407(e)(3)(iii) of Regulation S-K,
which provides a limited exception to the Commission's requirement for
a registrant to disclose any role of compensation consultants in
determining or recommending the amount and form of a registrant's
executive and director compensation.\116\
---------------------------------------------------------------------------

    \115\ See proposed Rule 5605(d)(3), as amended by Amendment No.
1.
    \116\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views BX's proposed exception as reasonable, as the
Commission determined, when adopting the compensation consultant
disclosure requirements in Item 407(e)(3)(iii), that the two excepted
categories of advice do not raise conflict of interest concerns.\117\
The Commission also made similar findings when it noted it was
continuing such exceptions in the Rule 10C-1 Adopting Release,
including excepting such roles from the new conflict of interest
disclosure rule required to implement Section 10C(c)(2). The Commission
also believes that the exception should allay some of the concerns
raised by the commenters on other filings regarding the scope of the
independence assessment requirement.\118\ Based on the above, the
Commission believes these limited exceptions are consistent with the
investor protection provisions of Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \117\ See Proxy Disclosure Enhancements, Securities Act Release
No. 9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348
(``We are persuaded by commenters who noted that surveys that
provide general information regarding the form and amount of
compensation typically paid to executive officers and directors
within a particular industry generally do not raise the potential
conflicts of interest that the amendments are intended to
address.'').
    \118\ See Nasdaq Approval Order and NYSE Approval Order, supra
note 5.
---------------------------------------------------------------------------

    As already discussed, nothing in the proposed rule prevents a
compensation committee from selecting any adviser that it prefers,
including ones that are not independent, after considering the six
factors. In this regard, the Commission notes that, in Amendment No. 1,
BX added specific rule language to clarify, among other things, that
the rule does not require a compensation adviser to be independent,
only that the compensation committee must consider the six independence
factors before selecting or receiving advice from a compensation
adviser.\119\
---------------------------------------------------------------------------

    \119\ See supra notes 56-58 and accompanying text.
---------------------------------------------------------------------------

    As previously stated by the Commission in adopting Rule 10C-1, the
requirement that compensation committees consider the independence of
potential compensation advisers before they are selected should help
assure that compensation committees of affected listed companies are
better informed about potential conflicts, which could reduce the
likelihood that they are unknowingly influenced by conflicted
compensation advisers.\120\ The changes to BX's rules on compensation
advisers should therefore benefit investors in BX listed companies and
are consistent with the requirements in Section 6(b)(5) of the Act that
rules of the exchange further investor protection and the public
interest.
---------------------------------------------------------------------------

    \120\ See Rule 10C-1 Adopting Release, supra note 9.
---------------------------------------------------------------------------

    Finally, one commenter on the substantially similar proposal
relating to the Rule 10C-1 requirements submitted by Nasdaq \121\
requested guidance ``on how often the required independence assessment
should occur.'' \122\ This commenter observed that it ``will be
extremely burdensome and disruptive if prior to each compensation
committee meeting, the committee had to conduct a new assessment.'' The
Commission anticipates that compensation committees will conduct such
an independence assessment at least annually.\123\
---------------------------------------------------------------------------

    \121\ See Nasdaq Approval Order, supra note 5.
    \122\ See id.
    \123\ See id.
---------------------------------------------------------------------------

C. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting
Companies, like all other listed companies, to have a compensation
committee, composed solely of Independent Directors, with at least two
members is reasonable and consistent with the protection of investors.
The Commission notes that BX's rules for compensation committees have
not made a distinction for Smaller Reporting Companies in the past.
However, consistent with the exemption of Smaller Reporting Companies
from Rule 10C-1, the Exchange has decided not to require Smaller
Reporting Companies to meet its proposed new independence requirements
as to compensatory fees and affiliation as well as the requirements
concerning compensation advisers.
    BX will also require a Smaller Reporting Company to adopt a formal
written compensation committee charter or board resolution that
specifies the compensation committee's responsibilities and authority,
but the company will not be required to review and reassess the
adequacy of the charter or board resolution on an annual basis. This is
different from the rules for other listed companies, which will be
required to include the committee's responsibilities and authority
specifically in a formal written charter and to review the charter's
adequacy on an annual basis.
    The Commission believes that these provisions are consistent with
the Act and do not unfairly discriminate between issuers. The
Commission believes that, for similar reasons to those for which
Smaller Reporting Companies are exempted from the Rule 10C-1
requirements, it makes sense for BX to provide some flexibility to
Smaller Reporting Companies regarding whether the compensation
committee's responsibilities should be set forth in a formal charter or
through board resolution. Further, because a Smaller Reporting Company
does not need to include in its charter or board resolution the
additional provisions regarding compensation advisers that BX is
requiring all other listed companies to

include to comply with Rule 10C-1,\124\ and in view of the potential
additional costs of an annual review, it is reasonable not to require a
Smaller Reporting Company to conduct an annual assessment of its
charter or board resolution.
---------------------------------------------------------------------------

    \124\ As discussed supra notes 64-65 and accompanying text, the
charter or board resolution of a Smaller Reporting Company will not
be required to include, like the charters of other listed companies,
a grant of authority to the committee to retain compensation
advisers, a requirement that the company fund such advisers, and a
requirement that the committee consider independence factors before
selecting such advisers, because Smaller Reporting Companies are not
subject to these requirements.
---------------------------------------------------------------------------

D. Opportunity to Cure Defects

    Rule 10C-1 requires the rules of an exchange to provide for
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any defects that would be the basis for the
exchange, under Rule 10C-1, to prohibit the issuer's listing. Rule 10C-
1 also specifies that, with respect to the independence standards
adopted in accordance with the requirements of the Rule, an exchange
may provide a cure period until the earlier of the next annual
shareholders meeting of the listed issuer or one year from the
occurrence of the event that caused the member to be no longer
independent.
    The Commission notes that the cure period that BX proposes for
companies that fail to comply with the enhanced independence
requirements designed to comply with Rule 10C-1 is not exactly the same
as the cure period that the Rule sets forth as an option.\125\ The BX
proposal adds the proviso that, if the annual shareholders meeting
occurs no later than 180 days following the event that caused the
noncompliance, the company instead has 180 days from the event to
regain compliance.
---------------------------------------------------------------------------

    \125\ See supra notes 42-44 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that, although the cure period proposed by
BX gives a company more leeway in certain circumstances than the cure
period suggested under Rule 10C-1, the accommodation is fair and
reasonable. As a general matter, it allows all companies at least 180
days to cure noncompliance. To give a specific example, the proposal
would afford a company additional time to comply, than the Rule 10C-1
option, where a member of the compensation committee ceases to be
independent two weeks before the company's next annual meeting. The
Commission further notes BX already has a similar cure period with
respect to other BX corporate governance requirements.\126\
---------------------------------------------------------------------------

    \126\ See supra note 42. The existing and proposed cure
provisions in BX's rules mirror similar accommodations in Nasdaq's
rules for issuers that lose an independent director or audit
committee member. See Securities Exchange Act Release No. 54421
(September 11, 2006), 71 FR 54698 (September 18, 2006) (Commission
approval of File No. SR-NASDAQ-2006-011).
---------------------------------------------------------------------------

    The Commission notes that Rule 10C-1 requires that an exchange
provide a company an opportunity to cure any defects in compliance with
any of the new requirements. The Commission believes that BX's general
due process procedures for the delisting of companies that are out of
compliance with the Exchange's rules satisfy this requirement.\127\ In
particular, BX's rules provide that, unless continued listing of the
company raises a public interest concern, when a company is deficient
in compliance with, among other rules, Rule 5605, which includes the
Exchange's standards for compensation committees, the listed company
may submit a plan for compliance. The rules permit the Exchange's staff
to extend the deadline for regaining compliance, under established
parameters, and, if the company does not regain compliance within the
time period provided by all applicable staff extensions--at which point
the staff will immediately issue a determination indicating the date on
which the company's securities will be suspended--a company can still
request review by a hearings panel.
---------------------------------------------------------------------------

    \127\ See, generally, BX Rule 5810.
---------------------------------------------------------------------------

    The Commission believes that these general procedures for companies
out of compliance with listing requirements, in addition to the
particular cure provisions for failing to meet the new independence
standards, adequately meet the mandate of Rule 10C-1 and also are
consistent with investor protection and the public interest since they
give a company a reasonable time period to cure non-compliance with
these important requirements before they will be delisted.

E. Exemptions

    As discussed above, asset-backed issuers and other passive issuers,
limited partnerships, and registered management investment companies
are exempt from BX's existing rules relating to compensation, and BX
proposes to extend the exemptions for these entities to the new
requirements of the proposed rule change. The Commission notes that
Rule 10C-1 allows exchanges to exempt from the listing rules adopted
pursuant to Rule 10C-1 certain categories of issuers, as the national
securities exchange determines is appropriate.\128\ The Commission
believes that, given the specific characteristics of the aforementioned
types of issuers,\129\ it is reasonable and consistent with Section
6(b)(5) of the Act for the Exchange to exempt them from the new
requirements. Similarly, the specific characteristics of cooperatives
and controlled companies make it reasonable for BX to adopt the
proposed exemptions for these entities.\130\ The Commission notes, in
addition, that other exchanges already have exemptions for these kinds
of issuers.\131\
---------------------------------------------------------------------------

    \128\ The Commission notes, moreover, that, in the case of
limited partnerships and open-end registered management investment
companies, Rule 10C-1 itself provides exemptions from the
independence requirements of the Rule.
    \129\ See supra Section II.B.4.
    \130\ The Commission notes that controlled companies are
provided an automatic exemption from the application of the entirety
of Rule 10C-1 by Rule 10C-1(b)(5). The additional BX provisions
requiring listed companies to have a two-member compensation
committee and a written committee charter, will, of course, not
apply to the exempted entities, which are currently required to have
neither a compensation committee nor the Alternative Option.
    \131\ See supra note 72.
---------------------------------------------------------------------------

    Specifically with regard to BX's proposed exemption for registered
management investment companies, the Commission notes that, although
Rule 10C-1 exempts certain entities, including registered open-end
management investment companies, from the enhanced independence
requirements for members of compensation committees, it does not
explicitly exempt other types of registered management investment
companies, including closed-end funds, from any of the requirements of
Rule 10C-1. Under the BX proposal, both closed-end and open-end funds
would be exempt from all the requirements of the rule.
    The Commission believes that it is reasonable to extend its
exemption to all registered investment companies, including closed-end
funds, because the Investment Company Act of 1940 already assigns
important duties of investment company governance, such as approval of
the investment advisory contract, to independent directors, and because
such entities were already generally exempt from BX's existing
compensation committee requirements. The Commission notes that almost
all registered investment companies do not employ executives or
employees or have compensation committees.
    The Commission notes that BX proposes, however, to amend its
current rule for foreign private issuers, which allows such issuers to
follow their home country practice in lieu of the

Exchange's standards regarding a company's compensation decision-making
process. The current rule includes the proviso that the issuer must
disclose its reliance on the exemption. BX proposes to conform its
rules in this regard with the provision of Rule 10C-1 permitting a
foreign private issuer to follow home country practice only when it
meets the additional condition that the issuer disclose the reasons why
it does not have an independent compensation committee.

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

    The Commission believes that the deadlines for compliance with the
proposal's various provisions are reasonable and should afford
companies that may be listed on BX as of the effective date adequate
time to make the changes, if any, necessary to meet the new standards.
The Commission notes that the provision in the original proposal
requiring companies to comply with certain of the requirements
immediately has been revised in Amendment No. 1 to allow companies
until July 1, 2013 to satisfy these requirements.\132\ The Commission
also believes that the revised deadline proposed in Amendment No. 1,
which gives companies until the earlier of their first annual meeting
after January 15, 2014, or October 31, 2014, to comply with the
remaining provisions is more clear-cut than the deadline in the
original proposal and also matches the deadline set forth by the New
York Stock Exchange in its proposed rule change to comply with Rule
10C-1.\133\
---------------------------------------------------------------------------

    \132\ See supra notes 73-74 for the provisions to which the new
transition date applies.
    \133\ See Securities Exchange Act Release No. 68011 (October 9,
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49).
---------------------------------------------------------------------------

G. Phase-In Schedules: IPOs; Companies That Lose Their Exemptions;
Companies Transferring From Other Markets

    The Commission believes that it is reasonable for BX to allow, with
respect to IPOs, companies emerging from bankruptcy, companies ceasing
to be controlled companies, and companies transferring from other
markets, the same phase-in schedule for compliance with the new
requirements as is permitted under its current compensation-related
rules.
    The Commission also believes that the phase-in schedule for
companies that cease to be Smaller Reporting Companies, as revised in
Amendment No. 1, affords such companies ample time to come into
compliance with the full panoply of rules that apply to other
companies. In the Commission's view, the revised schedule also offers
such companies more clarity in determining when they will be subject to
the heightened requirements.

IV. Accelerated Approval of Amendment No. 1 to the Proposed Rule Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\134\ for approving the proposed rule change, as modified by
Amendment No. 1, prior to the 30th day after the date of publication of
notice in the Federal Register. The change made to the proposal by
Amendment No. 1 to set forth in detail the requirements of Rule 10C-
1(b)(2)-(4) explicitly in the Exchange's rules, rather than
incorporating these details by reference as in the original
proposal,\135\ is not a substantive one and merely codifies the
original intent of that provision. Moreover, the change improves the
proposal because it brings together the full set of the Exchange's
rules on compensation committees in one place, thereby easing
compliance for listed companies and benefiting investors seeking an
understanding of an issuer's obligations with regard to determining
executive compensation.
---------------------------------------------------------------------------

    \134\ 15 U.S.C. 78s(b)(2).
    \135\ See supra note 49 and accompanying text.
---------------------------------------------------------------------------

    The change made by Amendment No. 1 to require companies listed on
BX as of the effective date of the proposal to comply with certain of
the new rules by July 1, 2013 rather than immediately, as originally
proposed,\136\ reasonably affords companies more time to take the steps
necessary for compliance. The change to require such companies to
comply with the remaining provisions by the earlier of their first
annual meeting after January 15, 2014, or October 31, 2014, rather than
by the deadline originally proposed,\137\ still allows ample time for
companies to adjust to the new rules, and accords with the deadline set
by NYSE in its proposed rule change to comply with Rule 10C-1, which
was published at the same time as the BX proposal.\138\
---------------------------------------------------------------------------

    \136\ See supra note 77 and accompanying text.
    \137\ See supra note 81 and accompanying text.
    \138\ The Commission received one comment letter relating to
this provision in the NYSE proposal, in which the commenter
supported this transition period for compliance with the new
compensation committee independence standards but believed that a
longer period should be provided to implement the other listing
standards that NYSE proposed. See Letter to Elizabeth M. Murphy,
Secretary, Commission, from Robert B. Lamm, Chair, Securities Law
Committee, The Society of Corporate Secretaries & Governance
Professionals, concerning File No. SR-NYSE-2012-49, dated December
7, 2012.
---------------------------------------------------------------------------

    The revision made by Amendment No. 1 to the phase-in rules for
companies that cease to be Smaller Reporting Companies \139\
establishes a schedule that is easier to understand, while still
affording such companies adequate time to come into compliance. The
Commission notes that the Start Date of the phase-in period for such a
company is six months after the Determination Date, and the company is
given no less than another six months from the Start Date to gain
compliance with the rules from which it had been previously exempt.
Moreover, with respect to the enhanced independence standards for
compensation committee members (relating to fees and affiliation with
the company), only one member must meet these standards within six
months after the Start Date. The company is given nine months from the
Start Date (i.e., fifteen months from the Determination Date) to have a
majority of committee members meeting the standards, and a full year
from the Start Date (i.e., eighteen months from the Determination Date)
to fully comply with the standards.
---------------------------------------------------------------------------

    \139\ See supra note 89 and accompanying text.
---------------------------------------------------------------------------

    The addition by Amendment No. 1 of a preamble to proposed Rule
5605(d) to set forth the obligations of a company during the transition
period until the new rules apply introduces no substantive change.\140\
It merely mirrors the instructions in the preamble to the Sunsetting
Provisions, providing clarity for listed companies.
---------------------------------------------------------------------------

    \140\ See supra note 76.
---------------------------------------------------------------------------

    The inclusion in Amendment No. 1 of language in BX's rules that
requires a compensation committee to conduct the independence
assessment with respect to ``any compensation consultant, legal counsel
or other adviser that provides advice to the compensation committee,
other than in-house counsel'' merely reflects an instruction in Rule
10C-1 itself.\141\ The addition of further guidance by Amendment No. 1
merely clarifies that nothing in the Exchange's rules requires a
compensation adviser to be independent, only that the compensation
committee consider the independence factors before selecting or
receiving advice from a compensation adviser,\142\ and is not a
substantive change.
---------------------------------------------------------------------------

    \141\ See supra note 113 and accompanying text.
    \142\ See supra note 56 and accompanying text.
---------------------------------------------------------------------------

    Amendment No. 1 also excluded advisers that provide certain types
of services from the independence assessment.\143\ As discussed above,
the Commission has already determined to exclude such advisers from the

disclosure requirement regarding compensation advisers in Regulation S-
K because these types of services do not raise conflict of interest
concerns. For all the reasons discussed above, the Commission finds
good cause to accelerate approval of the proposed changes made by
Amendment No. 1.
---------------------------------------------------------------------------

    \143\ See supra notes 59-60 and accompanying text.
---------------------------------------------------------------------------

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing and whether Amendment No. 1 are
consistent with the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-BX-2012-063 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2012-063. This file
number should be included on the subject line if email is used.
    To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of such filing also will be available for inspection and copying
at the principal office of BX. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-BX-2012-063, and should be submitted on or before
February 12, 2013.

VI. Conclusion

    In summary, and for the reasons discussed in more detail above, the
Commission believes that the rules being adopted by BX, taken as whole,
should benefit investors by helping listed companies make informed
decisions regarding the amount and form of executive compensation. BX's
new rules will help to meet Congress's intent that compensation
committees that are responsible for setting compensation policy for
executives of listed companies consist only of independent directors.
    BX's rules also, consistent with Rule 10C-1, require compensation
committees of listed companies to assess the independence of
compensation advisers, taking into consideration six specified factors.
This should help to assure that compensation committees of BX-listed
companies are better informed about potential conflicts when selecting
and receiving advice from advisers. Similarly, the provisions of BX's
standards that require compensation committees to be given the
authority to engage and oversee compensation advisers, and require the
listed company to provide for appropriate funding to compensate such
advisers, should help to support the compensation committee's role to
oversee executive compensation and help provide compensation committees
with the resources necessary to make better informed compensation
decisions.
    For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with the Act
and the rules and regulations thereunder applicable to a national
securities exchange, and, in particular, with Section 6(b)(5) of the
Act.\144\
---------------------------------------------------------------------------

    \144\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\145\ that the proposed rule change, SR-BX-2012-063, as modified by
Amendment No. 1, is approved.
---------------------------------------------------------------------------

    \145\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\146\
---------------------------------------------------------------------------

    \146\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01108 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P