[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4529-4536]
[FR Doc No: 2013-01109]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68642; File No. SR-CBOE-2012-094]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule Change To Amend the Listing Rules
for Compensation Committees To Comply with Securities Exchange Act Rule
10C-1 and Make Other Related Changes

January 11, 2013.

I. Introduction

    On September 25, 2012, Chicago Board Options Exchange, Inc.
(``Exchange'' or ``CBOE'') 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 Commission
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\
This order approves the CBOE proposed rule change.
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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. 68020 (October 09,
2012), 77 FR 625558 (``Notice'').
    \4\ See Securities Exchange Act Release No. 34-68313 (November
28, 2012), 77 FR 71853 (December 4, 2012).
    \5\ The Commission notes that comments were received on similar
proposals filed by New York Stock Exchange, LLC and Nasdaq Stock
Market LLC. For a synopsis of these comments see Securities Exchange
Act Release Nos. 68011 (October 9, 2012) (``NYSE Notice) (File No.
SR-NYSE-2012-49); 68013 (October 9, 2012) (``Nasdaq Notice'') (File
No. SR-NASDAQ-2012-109); 68639 (January 11, 2013), (``NYSE Approval
Order''); 68640 (January 11, 2013), (``Nasdaq Approval Order'').
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II. Description of the Proposal

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''),\6\ the Commission proposed
Rule 10C-1 under the Act,\7\ 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.\8\
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    \6\ Public Law 111-203, 124 Stat. 1900 (2010).
    \7\ 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'').
    \8\ 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 \9\ of a
listed issuer must be a member of the board of directors of the issuer,
and must otherwise be independent.\10\ 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'').\11\
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    \9\ For a definition of the term ``compensation committee'' for
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \10\ See Rule 10C-1(a) and (b)(1).
    \11\ See id. See also Rule 10C-1(b)(i)(iii)(A), which sets forth
exemptions from the independence requirements for certain categories
of issuers. See Rule 10C-1(b)(1)(iii)(A). In addition, an exchange
may exempt a particular relationship with respect to 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
address the authority of compensation committees to retain or obtain a
compensation adviser, and its direct responsibility for the
appointment, compensation and oversight of the work of any compensation
adviser it retains.\12\ 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.\13\
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,\14\ as well as any
other factors identified by the relevant exchange in its listing
standards.\15\
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    \12\ See Rule 10C-1(b)(2).
    \13\ See Rule 10C-1(b)(3).
    \14\ See Rule 10C-1(b)(4). The six factors, which CBOE proposes
to set forth explicitly in its rules, are specified in the text
accompanying note 35, infra.
    \15\ 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. CBOE Proposal

    To comply with Rule 10C-1, CBOE proposes to amend Exchange Rule
31.10 ``Corporate Governance.'' In particular, to accomplish these
changes, the Exchange proposes to amend paragraph (c) of Rule 31.10,
entitled ``Compensation of Officers.'' CBOE also proposes to amend the
Interpretations and Policies section of Rule 31.10 by adding a new
provision entitled Compensation Consultants, Independent Legal Counsel
and Other Compensation Advisors. Current paragraph (c) of Rule 31.10
provides that compensation of the chief executive officers and all
other executive officers of a listed company must be determined by a
majority of independent directors,\16\ or a compensation

committee comprised solely of independent directors.
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    \16\ ``Independent Director'' is defined in Rule 31.10(h)(2) as:
A person other than an officer or employee of the company or its
subsidiaries or any other individual having a relationship, which,
in the opinion of the company's board of directors, would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director. The following persons shall not be
considered independent: (A) A director who is, or at any time during
the past three years was, employed by the company or by any parent
or subsidiary of the company; (B) a director who accepted or who has
a family member who accepted any payments from the company or any
parent or subsidiary of the company in excess of $60,000 during the
current or any of the past three fiscal years, other than the
following: (i) Compensation for board or board committee service;
(ii) payments arising solely from investments in the company's
securities; (iii) compensation paid to a family member who is a non-
executive employee of the company or a parent or subsidiary of the
company; (iv) benefits under a tax-qualified retirement plan, or
non-discretionary compensation; or (v) loans permitted under
Exchange Act Section 13(k). Provided, however, that audit committee
members are subject to additional, more stringent requirements under
Exchange Act Rule 10A-3, which requirements are incorporated by
reference in the Exchange rules pursuant to Rule 31.10(b); (C) a
director who is a family member of an individual who is, or at any
time during the past three years was, employed by the company or by
any parent or subsidiary of the company as an executive officer; (D)
a director who is, or has a family member who is, a partner in, or a
controlling shareholder or an executive officer of, any organization
to which the company made, or from which the company received,
payments for property or services in the current or any of the past
three fiscal years that exceed 5% of the recipient's consolidated
gross revenues for that year, or $200,000, whichever is more, other
than the following: (i) Payments arising solely from investments in
the company's securities; or (ii) payments under non-discretionary
charitable contribution matching programs; (E) a director of the
listed company who is, or has a family member who is, employed as an
executive officer of another entity where at any time during the
past three years any of the executive officers of the listed company
serve on the compensation committee of such other entity; (F) a
director who is, or has a family member who is, a current partner of
the company's outside auditor, or was a partner or employee of the
company's outside auditor who worked on the company's audit at any
time during any of the past three years; or (G) in the case of an
investment company, in lieu of Rules 31.10(h)(2)(A)-(F), a director
who is an ``interested person'' of the company as defined in Section
2(a)(19) of the Investment Company Act of 1940, other than in his or
her capacity as a member of the board of directors or any board
committee.
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1. Compensation Committee Composition and Independence Standards
    First, the Exchange is proposing to amend text in Rule 31.10 to
require that the compensation of all executive officers must be
determined by, or recommended for determination by a compensation
committee.\17\ The Exchange proposes to define the term compensation
committee as one of the following: (1) A committee of the board of
directors that is designated as the compensation committee; (2) in the
absence of a specifically designated committee, a committee of the
board of directors that performs functions typically performed by a
compensation committee, including oversight of executive compensation,
even if it is not designated as the compensation committee or also
performs other functions; or (3) in the absence of either of the
immediately preceding definitions, the members of the board of
directors who oversee executive compensation matters on behalf of the
board of directors.\18\
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    \17\ See Rule 31.10(c)(1).
    \18\ As CBOE does not require a formal compensation committee,
the term ``Compensation Committee'' for purposes of the CBOE
proposal and as discussed in this release, in addition to describing
a formal compensation committee, also refers to the listed company's
independent directors as a group when dealing with executive
compensation matters. See proposed Rule 31.10(c)(1).
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    The Exchange also proposes to amend Rule 31.10(c) to state that all
members of a Compensation Committee must be ``Independent Directors''
as defined in Rule 31.10(h)(2).\19\ In its proposal, the Exchange
stated that it believes that its current definition of Independent
Director meets the independence requirements of Rule 10C-1.\20\ The
Exchange notes that, as part of existing Rule 31.10(h)(2) defining
independent director, the Exchange has requirements that a director is
not considered ``independent'' if he or a family member has accepted
any payments from the company or any parent or subsidiary of the
company in excess of $60,000 during the current or any of the past
three fiscal years, other than compensation for board or committee
service, payments arising solely from investments in the company's
securities, compensation paid to a family member who is a non-executive
employee of the company or a parent or subsidiary of the company,
benefits under a tax-qualified retirement plan, or non-discretionary
compensation, or loans permitted under Exchange Act Section 13(k).\21\
The Exchange stated it believes that these requirements demonstrate
that the definition of ``independent'' considers the sources of
compensation of a member of the compensation committee.\22\
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    \19\ See Rule 31.10(c)(2). For a definition of independent
directors under Rule 31.10(h)(2) see supra, note 16.
    \20\ See Notice, supra note 3.
    See Rule 10C-1(b)(1)(ii)(A) requiring that in determining the
independence requirements for members of compensation committees,
exchanges must consider all relevant factors, including, but not
limited to, the source of compensation of that director (including
any consulting, advisory, or other compensatory fee paid by the
issuer to the director), and whether the director is affiliated with
the issuer, a subsidiary of the issuer, or an affiliate of a
subsidiary of the issuer.
    \21\ See Rule 31.10(h)(2), and supra note 16.
    \22\ See Notice, supra note 3.
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    The Exchange stated that it believes that its current definition of
Independent Director meets the requirement in Rule 10C-1 that the
Exchange's rules must consider whether the director is affiliated with
the issuer or a subsidiary or affiliate of a subsidiary of the
issuer.\23\ CBOE Rule 31.10(h)(2) states that a director is not
``independent'' if, in the opinion of the issuer's board of directors,
the person has a relationship which would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director. As the Exchange stated, ``any kind of affiliate relationship
could be viewed as a conflict of interest that might interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.'' \24\ In its proposal, the Exchange stated it believes
that its requirement that a board of directors consider whether a
director has a relationship which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director
in order to determine whether or not the director is ``independent''
requires consideration of whether the director is affiliated with the
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of
the issuer.\25\
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    \23\ See Notice, supra note 3. See also Rule 10C-1(b)(1)(ii)(B)
requiring that in determining the independence requirements for
members of compensation committees, exchanges must consider all
relevant factors, including, but not limited to whether a member of
the board of directors of an issuer is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the
issuer.
    \24\ The Commission notes that CBOE's rules provide a definition
of affiliate that states an affiliate of or a person ``affiliated
with'' another person means a person who, directly or indirectly,
controls, is controlled by, or is under common control with, such
other person. See CBOE Rule 1.1(j).
    \25\ See Notice, supra note 3.
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    The Exchange also proposes to add in Rule 31.10(c)(2) language
stating that if a member of a compensation committee ceases to be an
Independent Director for reasons outside of that member's reasonable
control, that person may remain a compensation committee member until
the earlier of the next annual shareholders meeting of the issuer or
one year from the occurrence of the event that caused the member to no
longer be an Independent Director. The Exchange will require that an
issuer relying on this provision must provide notice to the Exchange
immediately upon learning of the event or circumstance that caused the
member to cease to be an Independent Director.\26\
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    \26\ See Rule 31.10(c)(2).
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    Exchange Rule 31.10(c) currently provides an exception to the
independence requirement for compensation committee members. This
exception states that, notwithstanding said independence requirements,
if the compensation committee is comprised of at least three members,
one director, who is not independent as defined in Rule 31.10(h)(2) and
is not a current officer or employee or a family member of an officer
or employee, may be appointed to the compensation committee if the
board, under exceptional and limited circumstances, determines that
such individual's membership on the committee is required by the best
interests of the company and its shareholders, and the board discloses,
in the proxy statement for the next annual meeting subsequent to such
determination (or, if the issuer does not file a proxy, in its Form 10-
K

or 20-F), the nature of the relationship and the reasons for the
determination. A member appointed under this exception may not serve
longer than two years.\27\ CBOE notes that Rule 10C-1 is silent with
respect to such exception to the independence requirements, and
therefore is proposing to delete this exception. As the Exchange
stated, it believes that independence of compensation committee members
is important to ensure that there exist no undue influences in the
compensation of executive officers.\28\
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    \27\ See Rule 31.10(c)(3).
    \28\ See Notice, supra note 3. CBOE is also proposing to extend
to all executive officers the requirement that an executive officer
not be present during the deliberations regarding his or her own
compensation.
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2. Authority of Committees To Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers
    Rule 10C-1 also discusses the retention of compensation
consultants, independent legal counsel and other compensation advisers
to assist the compensation committee of an issuer in determining
compensation for executives.\29\ CBOE Rule 31.10 currently does not
contain provisions regarding the authority to retain compensation
advisers. Therefore, the Exchange proposes to adopt the provisions of
Rule 10C-1 regarding this issue in a substantively identical manner to
that in Rule 10C-1 in new Interpretation and Policy .11 to Rule
31.10.\30\
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    \29\ See Rule 10C-1(b)(2).
    \30\ See id. and Interpretation and Policy .11 to Rule 31.10.
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    The new Interpretation and Policy would state that the Compensation
Committee of an issuer, in its capacity as a committee of the board of
directors, may, in its sole discretion, retain or obtain the advice of
a compensation consultant, independent legal counsel or other
adviser.\31\ The Interpretation and Policy states that the Compensation
Committee shall be directly responsible for the appointment,
compensation and oversight of the work of any compensation consultant,
independent legal counsel and other adviser retained by the
Compensation Committee.\32\ Further, the Interpretation and Policy
states that ``nothing in this Interpretation and Policy .11 to Rule
31.10 shall be construed 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 to affect the ability or obligation of a
Compensation Committee to exercise its own judgment in fulfillment of
the duties of the Compensation Committee.'' \33\ Under the new
Interpretation and Policy .11 to Rule 31.10, each listed issuer must
provide for appropriate funding, as determined by the Compensation
Committee, in its capacity as a committee of the board of directors,
for payment of reasonable compensation to a compensation consultant,
legal counsel or any other adviser retained by the Compensation
Committee.\34\
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    \31\ See proposed Interpretation and Policy .11(a)(1) to Rule
31.10.
    \32\ See proposed Interpretation and Policy .11(a)(2) to Rule
31.10.
    \33\ See proposed Interpretation and Policy .11(a)(3)(A) and (B)
to Rule 31.10.
    \34\ See proposed Interpretation and Policy .11(b) to Rule
31.10.
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    Regarding the independence of compensation advisers, the new
Interpretation and Policy .11 to Rule 31.10 states that the
compensation committee of a listed issuer may select a compensation
consultant, legal counsel or other adviser to the compensation
committee only after taking into consideration the following factors:
(1) The provision of other services to the issuer by the person that
employs the compensation consultant, legal counsel or other adviser,
(2) 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, (3) 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, (4) any business or personal relationship of the
compensation consultant, legal counsel or other adviser with a member
of the compensation committee, (5) any stock of the issuer owned by the
compensation consultant, legal counsel or other adviser, and (6) any
business or personal relationship of the compensation consultant, legal
counsel, other adviser or the person employing the adviser with an
executive office of the issuer.\35\ Pursuant to the new Interpretation
and Policy, a compensation committee must consider these factors with
respect to any compensation consultant, legal counsel or other advisor
that provides advice to the compensation committee other than in-house
legal counsel.\36\
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    \35\ See Interpretation and Policy .11(c)(1)-(6) to Rule 31.10.
    \36\ Id.
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3. Exemptions
    The Exchange proposes that the requirements of Interpretation and
Policy .11 to Rule 31.10, concerning compensation advisers, discussed
above at Section II(B)(2), shall not apply to any controlled company or
to any smaller reporting company.\37\ The Exchange notes that this
exemption complies with exemptions stated in Rule 10C-1.\38\ Under the
new proposal, as the Exchange states, smaller reporting companies will
still be subject to other corporate governance rules, as
applicable.\39\ The Commission notes that this includes the provisions
described above concerning independent oversight of executive
compensation.
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    \37\ See Interpretation and Policy .11(d)(1) to Rule 31.10. See
also Notice, supra note 3.
    \38\ See Rule 10C-1(b)(5) which exempts such entities from the
entire requirements of Rule 10C-1. See also Notice, supra note 3.
    \39\ See Notice, supra note 3.
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    The Exchange proposes that the requirements of Interpretation and
Policy .11 to Rule 31.10, concerning compensation advisers, discussed
above at Section II(B)(2), shall not apply to the listing of a security
futures product cleared by a clearing agency that is registered
pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that is exempt
from the registration requirements of section 17A(b)(7)(A) (15 U.S.C.
78q-1(b)(7)(A)) \40\ or the listing of a standardized option, as
defined in Sec.  240.9b-1(a)(4), issued by a clearing agency that is
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1).\41\
The Exchange stated that these exemptions comply with those stated in
Rule 10C-1.\42\
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    \40\ See Interpretation and Policy .11(d)(2) to Rule 31.10.
    \41\ See Interpretation and Policy .11(d)(3) to Rule 31.10.
    \42\ See Rule 10C-1(b)(5) which exempts such entities from the
requirements of Rule 10C-1.
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    Rule 10C-1 exempts from the independence requirements any limited
partnership, company in bankruptcy proceedings, open end management
investment company registered pursuant to the Investment Company Act of
1940, and foreign private issuer that discloses in its annual report
the reasons that the foreign private issuer does not have an
independent compensation committee.\43\ CBOE thereby proposes to
incorporate these exemptions into proposed Rule 31.10(f)(6) by
reference by stating that the categories of issuers listed in Rule 10C-
1(b)(1)(iii)(A) under the Securities Exchange Act of 1934 are also
exempt from the requirements of Rule

31.10(c)(2) regarding the independence of directors on an issuer's
compensation committee. These entities are exempt from the independent
director requirements of Rule 31.10(c)(2), discussed supra in Section
II(B)(1).
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    \43\ See Rule 10C-1(b)(1)(iii)(A).
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    Finally, as to exemptions, Rule 31.10(f) currently exempts a number
of other categories of issuers from the executive compensation
requirements of Rule 31.10(c).\44\ These types of issuers are
controlled companies, registered management investment companies (which
are similar to open-end management investment companies), and asset-
backed issuers and other passive issuers, cooperatives. The Exchange
determined to exempt these categories of issuers from executive
compensation requirements of Rule 31.10(c) due to their various unique
attributes.\45\ While the Rule 10C-1 changes some of the executive
compensation requirements, CBOE believes that these categories of
issuers should still be exempt from all executive compensation
requirements in Rule 31.10(c) generally.\46\ The Exchange has also
proposed to add language to its rules to make clear that to the extent
the proposed Rule 31.10(f)(6)'s exemption of open-end management
investment companies registered under the Investment Company Act of
1940 from the Compensation Committee director independence requirements
of Rule 31.10(c)(2) conflicts with the more general already-existing
exemption of registered management investment companies from the
requirements of Rule 31.10(c), the more general exemption of registered
management investment companies from the requirements of Rule 31.10(c)
shall be controlling.\47\ As such, the exchange proposes to amend Rule
31.10(f)(2) to state that the exemption of management investment
companies from the requirements of Rule 31.10(c) shall be controlling
over any other potentially-conflicting exemptions that may arise under
Rule 31.10(f)(6).\48\
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    \44\ See Rule 31.10(f).
    \45\ See Notice, supra note 3.
    \46\ See Rule 10C-1(b)(1)(iii)(B) establishing that ``in
addition to the issuer exemptions set forth in paragraph
(b)(1)(iii)(A) of this section, a national securities exchange or a
national securities association, pursuant to section 19(b) of the
Act (15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the
requirements of paragraph (b)(1) of this section a particular
relationship with respect to members of the compensation committee,
as each national securities exchange or national securities
association determines is appropriate, taking into consideration the
size of an issuer and any other relevant factors. Id.
    \47\ See Notice, supra note 3.
    \48\ See Rule 31.10(f)(2).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the CBOE proposal
is consistent with the Act and the rules and regulations thereunder
applicable to a national securities exchange.\49\ In particular, the
Commission finds that the proposed rule change is consistent with the
requirements of Section 6(b) of the Act,\50\ as well as with Section
10C of the Act \51\ and Rule 10C-1 thereunder.\52\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\53\ 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.
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    \49\ In approving the CBOE proposed rule change the Commission
has considered its impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78f(b).
    \51\ 15 U.S.C. 78j-3.
    \52\ 17 CFR 240.10C-1.
    \53\ 15 U.S.C. 78f(b)(5).
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    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 CBOE 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,\54\ Congress resolved to require that ``board
committees that set compensation policy will consist only of directors
who are independent.'' \55\ 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.
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    \54\ See supra note 6.
    \55\ 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).
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    In response, CBOE submitted the proposed rule change, which
includes rules intended to comply with the requirements of Rule 10C-1
and additional provisions designed to strengthen the Exchange's listing
standards relating to compensation committees. The Commission believes
that the proposed rule change satisfies the mandate of Rule 10C-1 and
otherwise will promote effective oversight of its listed issuers'
executive compensation practices.
    The Commission believes that the proposed rule change appropriately
revises CBOE's rules for compensation committees of listed companies,
for the following reasons:

A. Compensation Committee Composition

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

Rule 10C-1(b)(1).'' \56\ 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.
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    \56\ 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.
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    As noted above, in considering the Fees Factor and Affiliation
Factor of Rule 10C-1 CBOE decided its existing independence standards
that currently apply to board and compensation committee members, which
include certain bright line tests, in Rule 31.10(h)(2), are
sufficient.\57\ The CBOE's proposal also adopts: (1) A requirement that
listed issuers have a compensation committee composed entirely of
Independent Directors as required by Rule 10C-1 and (2) the cure
procedures set forth in Rule 10C-1(a)(3) for compensation committee
members who cease to be independent for reasons outside their
reasonable control.
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    \57\ See Rule 31.10(h)(2) and supra footnotes 16-26 and
accompanying text.
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    The Commission notes that CBOE's proposal to require executive
officer compensation to be determined only by Independent Directors, as
defined in CBOE rules, is consistent with the requirements of Rule 10C-
1 and Section 6(b)(5) of the Act. The Commission notes, compensation of
executive officers must be determined only by Independent Directors
even where the board oversees executive compensation without a formal
committee. The Commission also believes that CBOE has met the
requirements of Rule 10C-1 to consider relevant factors including the
Fee Factor and Affiliation Factor. As noted above, after such
consideration, CBOE has determined that its existing independence
standards, including its bright line independence factors, adequately
take into account the additional independence factors for compensation
committee members contained in Rule 10C-1.\58\
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    \58\ See Rule 10C-1(b)(1)(ii).
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    With respect to the Fees Factors of Rule 10C-1,\59\ the Exchange
commentary states that as part of Rule 31.10(h)(2) defining independent
director, the Exchange has requirements that a director is not
considered ``independent'' if he or a family member has accepted any
payments from the company or any parent or subsidiary of the company in
excess of $60,000 during the current or any of the past three fiscal
years, other than compensation for board or committee service, payments
arising solely from investments in the company's securities,
compensation paid to a family member who is a non-executive employee of
the company or a parent or subsidiary of the company, benefits under a
tax-qualified retirement plan, or non-discretionary compensation, or
loans permitted under Exchange Act Section 13(k).\60\ The Exchange
stated it believes that this existing requirement demonstrates that the
definition of ``independent'' considers the sources of compensation of
a member of the compensation committee.\61\
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    \59\ See Rule 10C-1(b)(1)(ii)(A)
    \60\ See Rule 31.10(h)(2).
    \61\ See Notice, supra note 3.
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    The Commission believes that the provisions noted above to address
the Fees Factor give clear guidance when considering a wide variety of
fees, including any consulting, advisory or other compensatory fee paid
by the issuer or entity, when considering a director's independence for
Compensation Committee service. While the Exchange does not bar all
compensatory fees, by providing an aggregate fee cap in their bright
line tests, the approach is consistent with Rule 10C-1. The Exchange's
general independence standards will also provide a basis for a board to
prohibit a director from being a member of the compensation committee,
should the director receive compensation to a degree that impairs the
ability to make independent decisions on executive compensation
matters, even if that compensation does not exceed the threshold in the
bright line test. The Commission, therefore, believes that the proposed
existing compensatory fee requirements comply with Rule 10C-1 and are
designed to protect investors and the public interest, consistent with
Section 6(b)(5) of the Act. The Commission notes that the compensatory
fee consideration may help ensure that compensation committee members
are less likely to have received fees, from either the issuer or
another entity, which could potentially influence their decisions on
compensation matters.
    With respect to the Affiliation Factor of Rule 10C-1,\62\ the
Exchange concluded that it believes that the current definition of
Independent Director meets the requirement in Rule 10C-1 that the
Exchange's rules must consider whether the director is affiliated with
the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary
of the issuer.\63\ CBOE Rule 31.10(h)(2) states that a director is not
``independent'' if, in the opinion of the issuer's board of directors,
the person has a relationship which would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director.\64\ As the Exchange noted, ``any kind of affiliate
relationship, under the Exchange's own definition of affiliate * * *
could be viewed as a conflict of interest that might interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.'' \65\
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    \62\ See Rule 10C-1(b)(1)(ii)(B).
    \63\ See Notice, supra note 3. See also Rule 10C-1(b)(1)(ii)(B)
requiring that in determining the independence requirements for
members of compensation committees, exchanges must consider all
relevant factors, including, but not limited to whether a member of
the board of directors of an issuer is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the
issuer.
    \64\ See Rule 31.10(h)(2).
    \65\ See Notice, supra note 3.
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    In considering whether a has a relationship, which, in the opinion
of the company's board of directors, would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director, the board would necessarily have to consider whether the
director is an affiliate of the issuer, a subsidiary of the issuer, or
an affiliate of a subsidiary of the issuer, as those relationships
necessarily could be relationships that interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director, including the responsibilities as a member of the
Compensation Committee.
    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.'' \66\ In determining that CBOE's

affiliation standard is consistent with Sections 6(b)(5) and 10C under
the Act, the Commission notes that CBOE's proposal requires a company's
board, in selecting compensation committee members, to consider
``whether the person has a relationship which would interfere with the
exercise of independent judgment in carrying out the responsibilities
of a director.'' \67\ The Commission believes the Exchange has
adequately considered the affiliation standard. As such, the Exchange's
decision to retain its current definition of Independent Director is
consistent with Sections 6(b)(5) and 10C under the Act.\68\
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    \66\ See Rule 10C-1 Adopting Release, supra note 8. At the same
time, the Commission noted that significant shareholders may have
other relationships with the listed company that would result in
such shareholders' interests not being aligned with those of other
shareholders and that the exchanges may want to consider these other
ties between a listed issuer and a director. While the Exchange did
not adopt any additional factors, the current affiliation standard
would still allow a company to prohibit a director whose
affiliations impair ``his ability to make independent judgment'' as
a member of the compensation committee. See also supra notes 23-25
and accompanying text.
    \67\ See Interpretation and Policy .01 to Rule 31.10(h)(2)
stating that ``[i]t is important for investors to have confidence
that individuals serving as independent directors do not have a
relationship with the listed company that would impair their
independence. The board has a responsibility to make an affirmative
determination that no such relationships exist through the
application of Rule 31.10(h)(2).''
    \68\ The Commission also believes it is consistent with Section
6(b)(5) for CBOE to prohibit all executive officers, not just the
chief executive officer as currently required, to be barred from all
compensation committee deliberations regarding their own
compensation. We agree this will help prohibit undue influence in
the determination of executive officer compensation.
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B. Authority of Committees to Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers

    As discussed above, CBOE proposes to set forth explicitly in its
rules the requirements of Rule 10C-1 regarding a compensation
committee's authority to retain compensation advisers, its
responsibilities with respect to such advisers, and the listed
company's obligation to provide appropriate funding for payment of
reasonable compensation to a compensation adviser retained by the
committee. As such, the Commission believes these provisions meet the
mandate of Rule 10C-1 \69\ and are consistent with the Act.\70\
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    \69\ 17 CFR 240.10C-1.
    \70\ 15 U.S.C. 78j-3.
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C. Compensation Adviser Independence Factors

    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.\71\ Of these factors, five of the six were
dictated by Congress itself in the Dodd-Frank Act. As previously stated
by the Commission in adopting Rule 10C-1, the requirement that
compensation committees consider the independence of potential
compensation advisers before they are selected should help assure that
compensation committees of affected listed companies are better
informed about potential conflicts, which could reduce the likelihood
that they are unknowingly influenced by conflicted compensation
advisers.\72\ The Commission believes that this provision is consistent
with Rule 10C-1 and Section 6(b)(5) of the Act.
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    \71\ See note 35, supra and accompanying text.
    \72\ See Rule 10C-1 Adopting Release, supra note 8.
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    In approving this aspect of the proposal, the Commission notes that
compliance with the rule requires an independence assessment of any
compensation consultant, legal counsel, or other adviser that provides
advice to the Compensation Committee, and is not limited to advice
concerning executive compensation. Finally, one commenter on the New
York Stock Exchange LLC's proposal requested guidance ``on how often
the required independence assessment should occur.\73\ 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 independent assessment at least
annually.\74\
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    \73\ See Comment to NYSE Notice by Robert B. Lamm, Chair,
Securities Law Committee, The Society of Corporate Secretaries &
Governance Professionals, dated December 7, 2012 (``Corporate
Secretaries Letter'').
    \74\ See NYSE Approval Order and Nasdaq Approval Order, supra
note 5 for a discussion of comments.
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    The changes to CBOE's rules on compensation advisers should
therefore benefit investors of 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.

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 of 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 CBOE proposes for
companies that fail to comply with the enhanced independence
requirements designed to comply with Rule 10C-1 is the same as the cure
period suggested under Rule 10C-1. The Commission believes that the
accommodation is fair and reasonable and consistent with investor
protection under Rule 6(b)(5) by ensuring that when a member ceases to
be independent, the committee is entitled to a period to cure that
situation. CBOE has delisting procedures that provide issuers with
notice, opportunity for a hearing, opportunity for appeals, and
delisting.\75\
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    \75\ See Rule 31.94(G).
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    The Commission believes that these general procedures for companies
out of compliance with listing requirements, in addition to the
particular cure provisions for failing to meet the new independence
standards, adequately meet the mandate of Rule 10C-1 and also are
consistent with investor protection and the public interest, since they
give a company a reasonable time period to cure non-compliance with
these important requirements before they will be delisted.
    As noted above, CBOE is removing its exception that allows members
of a Compensation Committee to not be independent in certain
circumstances. The Commission agrees with CBOE's rationale for
eliminating the exception. As the Exchange noted, independence of
compensation committee members is important to ensure that no undue
influences affect the compensation of executive officers. Given the
heightened importance of executive compensation decisions, we think
that this is consistent with the investor protection provisions of
Section 6(b)(5) of the Act.

E. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting
Companies, like all other listed companies, to have a compensation
committee, composed solely of Independent Directors is reasonable and
consistent with the protection of investors. However, consistent with
the exemption of Smaller Reporting Companies from Rule 10C-1, the CBOE
proposal would exempt smaller reporting companies from the

requirements of Interpretation and Policy .11 to Rule 31.10 concerning
compensation advisers, discussed supra at Section II(B)(2).\76\ Under
the new proposal, as the Exchange states, smaller reporting companies
will still be subject to other corporate governance rules, as
applicable, and are only exempted out of the compensation advisor
provisions.\77\
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    \76\ See Interpretation and Policy .11(d)(1) to Rule 31.10. See
also Rule 10C-1(b)(5).
    \77\ See Notice, supra note 3.
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    The Commission believes that these provisions are consistent with
the Act and do not unfairly discriminate between issuers. The
Commission believes that, for similar reasons to those for which
Smaller Reporting Companies are exempted from the Rule 10C-1
requirements, it makes sense for CBOE to provide some flexibility to
Smaller Reporting Companies. Further, regarding the exemption from
having to consider additional factors regarding compensation advisers,
in view of the potential additional costs of such review, it is
reasonable not to require a Smaller Reporting Company to conduct such
analysis of compensation advisers.

F. Additional Exemptions

    The Commission believes that it is appropriate for CBOE to exempt
from the new requirements established by the proposed rule change the
same categories of issuers that are exempt from its existing standards
for oversight of executive compensation for listed companies. Although
Rule 10C-1 does not explicitly exempt some of these categories of
issuers from its requirements, it does grant discretion to exchanges to
provide additional exemptions. CBOE states that the reasons it adopted
the existing exemptions apply equally to the new requirements, and the
Commission believes that this assertion is reasonable.
    The requirements of Interpretation and Policy .11 to Rule 31.10,
concerning compensation advisers, discussed supra at Section II(B)(2),
exempt security futures products cleared by a clearing agency that is
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that
is exempt from the registration requirements of section 17A(b)(7)(A)
(15 U.S.C. 78q-1(b)(7)(A)) \78\ and the listing of a standardized
option, as defined in Sec.  240.9b-1(a)(4), issued by a clearing agency
that is registered pursuant to section 17A of the Act (15 U.S.C. 78q-
1).\79\ The Commission notes that these exemptions comply with those
stated in the Rule 10C-1.\80\
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    \78\ See Interpretation and Policy .11(d)(2) to Rule 31.10.
    \79\ See Interpretation and Policy .11(d)(3) to Rule 31.10.
    \80\ See Rule 10C-1(b)(5) which exempts such entities from all
of the requirements of Rule 10C-1.
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    Additionally, Rule 10C-1 exempts from the independence requirements
Limited partnerships, companies in bankruptcy proceedings, and open-end
management investment companies registered under the Investment Company
Act of 1940.\81\ The CBOE proposal incorporates these exemptions into
proposed Rule 31.10(f)(6).\82\ The Commission believes such exemptions
are reasonable, and notes that such entities also are exempt from the
compensation committee independence requirements specifically under
Rule 10C-1.
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    \81\ See Rule 10C-1(b)(1)(iii)(A) and Rule 31.10(f)(6).
    \82\ The Commission notes that proposed Rule 31.10(f), open end
management investment companies would also be exempt from all the
requirements of Rule 31.10(c), not just the independence standards.
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    The CBOE proposal would exempt any foreign private issuer that
discloses in its annual report the reasons that the foreign private
issuer does not have an independent compensation committee. \83\ The
Commission believes that granting exemptions to foreign private issuers
in deference to their home country practices with respect to
compensation committee practices is appropriate, and believes that the
existing disclosure requirements will help investors determine whether
they are satisfied with the alternative standard. The Commission notes
that such entities are exempt from the compensation committee
independence requirements of Rule 10C-1 to the extent such entities
disclosure in annual reports the reasons it does not have an
independent compensation committee.
---------------------------------------------------------------------------

    \83\ Rule 10C-1(b)(1)(iii).
---------------------------------------------------------------------------

    The CBOE proposal would retain Rule 31.10(f), which currently
exempts a number of other categories of issuers from all of the
executive compensation requirements of Rule 31.10(c).\84\ These types
of issuers are controlled companies, registered management investment
companies (which are similar to open-end management investment
companies and include closed-end management investment companies),
asset-backed issuers and other passive issuers, and cooperatives. The
Exchange determined to exempt these categories of issuers from
executive compensation requirements of Rule 31.10(c) due to their
various unique attributes. The Commission believes that this exemption
is reasonable because the Investment Company Act already assigns
important duties of investment company governance, such as approval of
the investment advisory contract, to Independent Directors of closed
end management investment companies. The Commission further believes
that other proposed exemption provisions relating to controlled
companies,\85\ asset-backed issuers and other passive issuers, and
cooperatives are reasonable given the specific characteristics of these
entities, and as noted by the Exchange, their various unique
attributes. The Commission believes that exemption of these entities
from the requirements of Rule 10C-1 is consistent with the exemptive
authority granted in Rule 10C-1.\86\
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    \84\ See Rule 31.10(f).
    \85\ 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).
    \86\ See Rule 10C-1(b)(1)(iii)(B) establishing that ``in
addition to the issuer exemptions set forth in paragraph
(b)(1)(iii)(A) of this section, a national securities exchange or a
national securities association, pursuant to section 19(b) of the
Act (15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the
requirements of paragraph (b)(1) of this section a particular
relationship with respect to members of the compensation committee,
as each national securities exchange or national securities
association determines is appropriate, taking into consideration the
size of an issuer and any other relevant factors.'' Id.
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IV. Conclusion

    In summary, and for the reasons discussed in more detail above, the
Commission believes that the rules being adopted by CBOE, taken as
whole, should benefit investors by helping listed companies make
informed decisions regarding the amount and form of executive
compensation. CBOE'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 that meet CBOE's requirements.
    CBOE'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 potential
CBOE-listed companies are better informed about potential conflicts
when selecting and receiving advice from advisers. Similarly, the
provisions of CBOE's standards that require compensation committees to
be given the authority to engage and oversee compensation advisers, and
require the listed company to provide for appropriate funding to
compensate such advisers, should help

to support the compensation committee's role to oversee executive
compensation and help provide compensation committees with the
resources necessary to make better informed compensation decisions.
    For the foregoing reasons, the Commission finds that the proposed
rule change, SR-CBOE-2012-094 is consistent with the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and, in particular, with Section 6(b)(5) of the
Exchange Act.\87\
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    \87\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\88\ that the proposed rule change, SR-CBOE-2012-094 be, and it
hereby is, approved.
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    \88\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\89\
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    \89\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01109 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P