[Federal Register Volume 78, Number 15 (Wednesday, January 23, 2013)]
[Notices]
[Pages 4936-4946]
[FR Doc No: 2013-01220]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68653; File No. SR-CHX-2012-13]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Amendment No. 3, and Order Granting Accelerated
Approval for Proposed Rule Change, as Modified by Amendment Nos. 1, 2
and 3, To Amend the Listing Rules for Compensation Committees To Comply
With Securities Exchange Act Rule 10-C-1 and Make Other Related Changes

January 14, 2013.

I. Introduction

    On September 26, 2012, Chicago Stock Exchange, Inc. (``Exchange''
or ``CHX'') 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. On October 10, 2012, CHX filed
Amendment Nos. 1 and 2 to the proposed rule change.\3\ The proposed
rule change, as modified by Amendment Nos. 1 and 2 thereto, was
published for comment in the Federal Register on October 16, 2012.\4\
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 14, 2013.\5\ The Commission received
no comment letters on the proposal.\6\ On January 7, 2013, the Exchange
filed Amendment No. 3 to the proposed rule change.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 indicated that the proposal had been
approved by CHX's board of directors on September 27, 2012.
Amendment No. 2 replaced the original filing in full.
    \4\ See Securities Exchange Act Release No. 68033 (October 10,
2012), 77 FR 63370 (``Notice'').
    \5\ See Securities Exchange Act Release No. 68311 (November 28,
2012), 77 FR 71852 (December 4, 2012).
    \6\ The Commission notes that comments were received on
substially similar proposals filed by New York Stock Exchange, LLC
and The Nasdaq Stock Market LLC. For a discussion and summary 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''); and 68640
(January 11, 2013) (``Nasdaq Approval Order'').
    \7\ In Amendment No. 3 to SR-CHX-2012-013, CHX: (a) Removed a
proposed amendment to Rule 4 concerning delisting standards, see
infra notes 21-22 and accompanying text; (b) added commentary to
state that the independence assessment of compensation advisers
required of compensation committees does not need to be conducted
for in-house counsel and 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 53-55 and
accompanying text; and (c) added commentary to state that the
independence assessment of compensation advisers required of
compensation committees does not require the adviser to be
independent, only that the compensation committee consider the
enumerated factors before selecting or receiving advise from the
adviser; see infra notes 56-58 and accompanying text; (d) removed a
proposed exemption from the rule; and (e) reincorporated existing
Rules 19(d) and 19(p)(3) as ``sunset provisions'' with text that
would be effective until July 1, 2013, rather than delete them in
their entirety and otherwise modified the transition schedule for
currently listed companies with provisions of the proposed rule. See
infra notes 72-74 and accompanying text.
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    This order approves the proposed rule change, as modified by
Amendment Nos. 1, 2, and 3 thereto, on an accelerated basis.

II. Description of the Proposed Rule Change

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

    On March 30, 2011, to implement Section 10C of the Act, as added by
Section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''),\8\ the Commission proposed
Rule 10C-1 under the Act,\9\ 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.\10\
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    \8\ Public Law 111-203, 124 Stat. 1900 (2010).
    \9\ 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'').
    \10\ 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 \11\ of
a listed issuer must be a member of the board of directors of the
issuer, and must otherwise be independent.\12\ 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'').\13\
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    \11\ For a definition of the term ``compensation committee'' for
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \12\ See Rule 10C-1(a) and (b)(1).
    \13\ 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.\14\ 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.\15\ 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,\16\ as
well as any other factors identified by the relevant exchange in its
listing standards.\17\
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    \14\ See Rule 10C-1(b)(2).
    \15\ See Rule 10C-1(b)(3).
    \16\ See Rule 10C-1(b)(4). The six factors, which CHX proposes
to set forth in its rules, are specified in the text accompanying
note 51, infra.
    \17\ 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. CHX's Proposed Rule Change as Amended

    To comply with Rule 10C-1, CHX proposes to amend three sections of
its rules in Article 22 concerning corporate governance requirements
for companies listed on the Exchange: Rule 2, ``Admittance to
Listing;'' Rule 19(d), ``Corporate Governance--Compensation
Committee;'' and Rule 19(p)(3), ``Corporate Governance--Definitions--
Independent Director.'' In addition, CHX proposes to make some other
changes to its rules regarding compensation committees. To accomplish
these changes, the Exchange proposes to replace current Rules 19(d) and
19(p)(3) with new operative text that will be effective on July 1,
2013. Current Rules 19(d) and 19(p)(3), which would remain effective
until June 30, 2013,\18\ provides that compensation of the executive
officers of a listed company shall 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.\20\
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    \18\ See Amendment No. 3, supra note 7.
    \19\ ``Independent Directors,'' as defined in CHX Rule 19(p)(3)
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.
    \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 19(d)(1).
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1. Admittance to Listing
    CHX proposes to clarify that the Exchange's Board of Governors may
only admit securities for listing ``once the requirements of this
Article are met.'' \21\ The Exchange believes that this modification
largely adopts much of the current Rule 2, while only clarifying this
fact.\22\
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    \21\ See proposed Rule 2.
    \22\ See Notice, supra note 4.
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2. Compensation Committee Composition and Independence Standards
    CHX proposes to retain its existing requirement that each issuer
must have a compensation committee, composed entirely of Independent
Directors, as defined in current Rule 19(p)(3),\23\ to oversee
executive compensation or, in the alternate, a majority of the issuer's
independent directors providing such oversight.\24\ CHX proposes to
modify, however, its definition of compensation committee to include
the following three, rather than two, options: (1) A committee
designated as a compensation committee: (2) in the absence of a
committee designated as a compensation committee, a committee
performing functions typically performed by a compensation committee,
including oversight of executive compensation, even if it performs
other functions; or (3) in the absence of any such committees, the
members of the board of directors who oversee executive compensation on
behalf of the board, who together must comprise a majority of the
board's independent directors.\25\ The existing alternative option to a
formal committee, as described above, would therefore continue to be
available to issuers. In addition, CHX proposes that the Independent
Directors serving on a Compensation Committee must meet the additional
requirements described below.\26\
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    \23\ See proposed Rule 19(d)(1).
    \24\ See id.
    \25\ See proposed Rule 19(d)(1)(A)-(C). For ease of reference
throughout this release, in our discussion of the CHX rules we are
approving, references to an issuer's ``Compensation Committee''
include all three options.
    \26\ See proposed Rule 19(d)(1). For the current definition of
``Independent Director,'' see supra note 19.
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    CHX also proposes that an issuer must adopt a formal written
charter or board resolution related to the Compensation Committee.\27\
The charter or board resolution must address the scope of the
Compensation Committee's responsibilities and how it carries out those
responsibilities, including structure, processes and membership
requirements.\28\ Generally, the proposed rule would require the
charter or board resolution to specify the Compensation Committee's
responsibilities 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 deliberation on his or her own compensation.\29\ In
addition, the charter or board resolution must specify the Compensation
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

and receiving advice from advisers; and receiving funding from the
company to engage such advisers, which are discussed in detail
below.\30\
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    \27\ See proposed Rule 19(d)(2). 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 14-16 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 issuers to
have a charter or board resolution, and to include this authority
and set of responsibilities in addition to the required content
discussed infra at text accompanying notes 46-51.
    \28\ See proposed Rule 19(d)(2)(A).
    \29\ See proposed Rule 19(d)(2)(B); see also proposed Rule
19(d)(3).
    \30\ See proposed Rule 19(d)(2)(C); see also proposed Rule
19(d)(4) and infra notes 47-51 and accompanying text. Because
smaller reporting companies are not required to comply with the
provisions relating to compensation advisers in proposed CHX Rule
19(d)(4), see infra notes 61-62, their charters or board resolutions
are not required to reflect these responsibilities.
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    As noted above, CHX's rules currently require each member of a
listed company's Compensation Committee to be an Independent Director
as defined in CHX Rule 19(p)(3).\31\ CHX will retain Rule 19(p)(3),
which would continue to contain the bright line test and provide that
no director qualifies as ``independent'' unless the board of directors
of the issuer affirmatively determines that the director has no
relationship that would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. 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, CHX discussed its
consideration of these factors,\32\ and proposed the following:\33\
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    \31\ See supra note 19.
    \32\ See Notice, supra note 4.
    \33\ These additional factors would not apply to the selection
of members of the Compensation Committee of a smaller reporting
company.
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    With respect to the Fees Factor and the Affiliation Factor, CHX
proposes to adopt a provision stating that the board of directors of
the listed company would be required, in affirmatively determining the
independence of any director who will serve on the Compensation
Committee of the board, to consider all factors specifically relevant
to determining whether a director has a relationship to the issuer
which is material to that director's ability to be independent from
management in connection with the duties of a Compensation Committee
member, including, but not limited to the following factors: (i) The
source of compensation of such director, including any consulting,
advisory or other compensatory fee paid by the issuer to the director;
and (ii) whether such director is affiliated with the issuer, a
subsidiary of the issuer or an affiliate of a subsidiary of the
issuer.\34\
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    \34\ See proposed Rule 19(p)(3)(B).
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    With respect to the Fees Factor, CHX also proposes additional
guidance that the board, when considering the sources of a director's
compensation, should consider whether the director receives
compensation from any person or entity that would impair the director's
ability to make independent judgments about the issuer's executive
compensation.\35\
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    \35\ See proposed Rule 19(p)(3)(B)(i).
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    With respect to the Affiliation Factor, CHX proposes, similarly, to
provide additional guidance to provide that the board should consider
whether an affiliate relationship places the director under the direct
or indirect control of the listed company or its senior management, or
creates a direct relationship between the director and members of
senior management, `` * * * in each case of a nature that would impair
her ability to make independent judgments about the issuer's executive
compensation.'' \36\
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    \36\ See proposed Rule 19(p)(3)(B)(ii).
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    Although Rule 10C-1 requires that exchanges consider ``relevant
factors'' not limited to the Fees Factor and Affiliation Factor, CHX
states that, after reviewing its current and proposed listing rules, it
concluded not to propose any specific numerical tests with respect to
the factors specified in proposed Rule 19(p)(3)(B) or to adopt a
requirement to consider any other specific factors.\37\ In its
proposal, CHX stated that it did not intend to adopt an absolute
prohibition on a board making an affirmative finding that a director is
independent solely on the basis that the director or any of the
director's affiliates are shareholders owning more than some specified
percentage of the issuer.\38\ Further, as stated in its filing, CHX
believes that its existing ``bright-line'' independence standards, as
set forth in current Rule 19(p)(3)(A)-(G), and the additional
independence requirements proposed in Rule 19(p)(3)(B) are sufficiently
broad to encompass the types of relationships which would generally be
material to a director's independence for compensation committee
service.\39\ Additionally, CHX stated that Rule 19(p)(3) already
requires the board to consider any other material relationships between
the director and the issuer or its management that are not the subject
of ``bright-line'' tests in existing Rule 19(p)(3)(A)-(G).\40\ CHX
believes that these requirements with respect to general director
independence, when combined with the specific considerations required
by proposed Rule 19(p)(3)(B), represent an appropriate standard for
compensation committee independence.\41\
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    \37\ See Notice, supra note 4.
    \38\ See Notice, supra note 4.
    \39\ See Notice, supra note 4. CHX proposes to reorganize the
numbering of its existing bright-line tests to allow for the
inclusion of additional factors specific to compensation committees.
See proposed Rule 19(p)(3)(A)(i)-(vii).
    \40\ See Notice, supra note 4.
    \41\ See Notice, supra note 4.
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    CHX proposes a cure period for a failure of a listed company to
meet its Compensation Committee composition requirements for
independence. Under the provision, if a member of an issuer's
compensation committee or functional equivalent ceases to be an
independent director for reasons outside the member's reasonable
control, that member may remain a member of the compensation committee
or functional equivalent 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.\42\ The proposed rule also requires a company relying on this
provision to provide notice to CHX promptly.\43\
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    \42\ See proposed Rule 19(d)(5)(A)(ii). CHX stated that its
proposed rule outlines the opportunity to cure defects almost
precisely as stated in Rule 10C-1. See Notice, supra note 4.
    \43\ See proposed Rule 19(d)(5)(A)(ii). CHX does not otherwise
propose any new procedures for an issuer to have an opportunity to
cure defects with respect to its proposed requirements, but CHX does
have existing delisting procedures that provide issuers with notice,
opportunity for a hearing, opportunity for appeals, and an
opportunity to cure defects before an issuer's securities are
delisted. See Article 22, Rule 4, ``Removal of Securities.'' For
example, Rule 4(b) provides procedure for providing deficient
companies with notice; Rube 4(c)-(d) provides procedures for an
issuer to avail itself of a hearing; and Rule 4(e) provides
procedures for issuers to appeal to CHX's Executive Committee.
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    CHX also proposes Rule 19(d)(5)(A)(i) to make an exception that
allows a director who is not independent to be temporarily appointed to
such a committee under exceptional and limited circumstances, as long
as that director is not currently an officer, employee or family member
of a current officer or employee. The exception applies, however, only
if the committee is comprised of at least three members and the board
determines that the individual's membership on the committee is
required in the best interests of the company and its shareholders.\44\
CHX believes this exception will allow issuers to efficiently deal with
unforeseen and exceptional circumstances, so as to ensure the smooth
function of its compensation committee or functional equivalent, while
minimizing the risk of abuse.\45\
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    \44\ See proposed Rule 19(d)(5)(A)(i).
    \45\ See Notice, supra note 4.

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3. Authority of Committees To Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers and Factors
    In its proposed rule change, CHX proposes to fulfill the
requirements imposed by Rule 10C-1(b)(2)-(4) under the Act concerning
compensation advisers by setting forth those requirements in its own
rules and requiring these new rights and responsibilities to be
included in the compensation committee's charter or board
resolution.\46\ Thus, proposed Rule 19(d)(4)(A)-(B) and (D) proposes to
adopt the requirements that CHX believes are required by Rule 10C-
1(b)(2)-(3) that: (A) The compensation committee may, in its sole
discretion, retain or obtain the advice of a compensation consultant,
legal counsel or other adviser;\47\ (B) the Compensation Committee
shall be directly responsible for the appointment, compensation and
oversight of the work of any compensation consultant, legal counsel or
other adviser retained by the Compensation Committee;\48\ and (D) 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.\49\
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    \46\ 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 proposed Rule 19(d)(4)(F), as modified by Amendment No.
3, CHX provides for two limited exceptions. See infra notes 53-55
and accompanying text.
    \47\ CHX proposes that this requirement will not apply to
issuers that do not maintain a formal committee of the board of
directors for determining executive compensation. As noted by CHX,
the reason behind this exclusion is that since an action by
independent directors acting outside of a formal committee structure
would generally be considered action by the full board of directors,
it is unnecessary to apply this requirement to directors acting
outside of a formal committee structure, as they retain all the
powers of the board of directors in making executive compensation
determinations. See Notice, supra note 4.
    \48\ The proposal also includes a provision, derived from Rule
10C-1, stating that nothing in the rule may be construed to require
the compensation committee to implement or act consistently with the
advice or recommendations of the compensation consultant,
independent legal counsel or other adviser to the compensation
committee; nor to affect the ability or obligation of the
compensation committee to exercise its own judgment in fulfillment
of the duties of the compensation committee. See proposed Rule
19(d)(4)(C).
    \49\ See Notice, supra note 4. CHX proposes that this
requirement will not apply to issuers that do not maintain a formal
committee of the board of directors for determining executive
compensation. In Amendment No. 3, CHX removed the word
``independent'' from the term ``legal counsel'' used in proposed
Rule 19(d)(4)(A)-(D) to conform the instructions with guidance now
provided in Rule 19(d)(4)(F), as amended. See Amendment No. 3, supra
note 7.
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    Proposed Rule 19(d)(4)(E), 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, other than in-house legal counsel, only after
taking into consideration the following six factors set forth in Rule
10C-1 regarding independence assessments of compensation advisers.\50\
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    \50\ See Rule 10C-1(b)(4).
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    The six factors, which are set forth in full in the proposed rule,
are: (i) The provision of other services to the listed company by the
person that employs the compensation consultant, legal counsel or other
adviser; (ii) the amount of fees received from the 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.\51\
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    \51\ See also Rule 10C-1(b)(4)(i)-(vi).
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    As proposed, Rule 19(d)(4)(F) would not include any specific
additional factors for consideration, as CHX stated that it believes
that this list will require compensation committees and functional
equivalents to consider a variety of factors that may bear upon the
likelihood that a compensation adviser can provide independent advice
to the Compensation Committee, but will not prohibit committees from
choosing any particular adviser or type of adviser.\52\
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    \52\ See Notice, supra note 4.
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    Proposed Rule 19(d)(4)(F), as modified by Amendment No. 3,\53\
further states that, as provided in Rule 10C-1, a Compensation
Committee is required to conduct the independence assessment outlined
in proposed Rule 19(d)(4)(E) with respect to any compensation
consultant, legal counsel or other adviser that provides advice to the
compensation committee, other than (i) in-house legal counsel \54\ and
(ii) any compensation consultant, legal counsel or other adviser whose
role is limited to the following activities for which no disclosure
would be required under Item 407(e)(3)(iii) of Regulation S-K:
Consulting on any broad-based plan that does not discriminate in scope,
terms, or operation, in favor of executive officers or directors of the
listed company, and that is available generally to all salaried
employees; or providing information that either is not customized for a
particular company or that is customized based on parameters that are
not developed by the compensation consultant, and about which the
compensation consultant does not provide advice.\55\
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    \53\ See supra note 7. CHX's proposal as submitted originally
only contained an exception for in-house legal counsel. As described
below, the Exchange amended its proposal to add an exception for
advisers whose role is limited to certain broad-based plans or to
providing non-customized information.
    \54\ See proposed Rule 19(d)(4)(F).
    \55\ See Amendment No. 3, supra note 7, and proposed Rule
19(d)(4)(F).
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    Proposed Rule 19(d)(4)(F), as modified by Amendment No. 3, also
clarifies that nothing in the rule requires a compensation consultant,
legal counsel or other compensation adviser to be independent, only
that the Compensation Committee consider the enumerated independence
factors before selecting or receiving advice from a compensation
adviser.\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 Rule 19(d)(4)(E).\57\ The Exchange
clarified that, while the Compensation Committee is required to
consider the independence of compensation advisers, the Compensation
Committee is not precluded from selecting or receiving advice from
compensation advisers that are not independent.\58\
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    \56\ See Exhibit 5 to Amendment No. 3, supra note 7.
    \57\ See id.
    \58\ See Amendment No. 3, supra note 7.
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4. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies
from all the requirements included within the Rule.\59\ Consistent with
this Rule 10C-1 provision, CHX, as a general matter, proposes that a
smaller reporting

company, as defined in Rule 12b-2 \60\ 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.\61\
Thus, CHX proposes not to require Smaller Reporting Companies to comply
with either the enhanced independence standards for members of
compensation committees relating to compensatory fees and affiliation
or the compensation adviser authority and funding requirements or
adviser independence considerations.
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    \59\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \60\ 17 CFR 240.12b-2.
    \61\ See proposed Rule 19(d)(5)(C).
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    CHX notes that, under current CHX rules, Smaller Reporting
Companies are already subject to the general independence requirements
for compensation committees, and as such, CHX believes that requiring
such issuers to continue to comply with existing standards is not
overly burdensome.\62\
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    \62\ See Notice, supra note 4.
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5. Exemptions
    CHX proposes to exempt six categories of issuers from all of the
compensation committee requirements of Rule 19(d).\63\ These include
exemptions to the following issuers: limited partnerships; \64\
companies in bankruptcy; \65\ closed-end and open-end management
companies that are registered under the Investment Company Act of 1940
(``Investment Company Act''); \66\ passive business organizations (such
as royalty trusts) or derivatives and special purpose entities; \67\
issuers listing only preferred or debt securities; \68\ and controlled
companies.\69\
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    \63\ See id. In addition, such exempt companies would also
thereby be exempt from the enhanced independence requirements for
compensation committee composition described in proposed Rule
19(p)(3)(B). See also proposed Rule 19(d)(5)(B).
    \64\ CHX notes that limited partnerships are already exempt from
the current compensation committee requirements because the Exchange
believes the ownership/management structure renders the independent
director requirements inapplicable and argues the same reasoning
renders the adviser requirements unnecessary. See Notice, supra note
4.
    \65\ CHX believes exempting such companies will avoid
overburdening issuers struggling to emerge from bankruptcy. See
Notice, supra note 4. Like limited partnerships, such companies are
already exempt from existing requirements under paragraph .03(1) of
the Interpretations and Policies of Rule 19.
    \66\ CHX believes that, because investment companies are already
subject to the requirements of the Investment Company Act, including
requirements concerning potential conflicts of interest related to
investment adviser compensation, Rule 19(d) would be duplicative and
unnecessary. See Notice, supra note 4.
    \67\ CHX believes that such entities are structured
fundamentally different from conventional issuers. See Notice, supra
note 4.
    \68\ CHX believes such issuers, which are already exempt from
existing requirements on CHX, should continue to be exempt from the
additional requirements of Rule 10C-1 because they are either often
subject to requirements of the exchange where they are primarily
listed, often provide stockholders with significantly greater
protections, or do not impart ownership interest. See Notice, supra
note 4.
    \69\ CHX notes that controlled companies are already exempt from
existing compensation committee requirements under existing Rule
19(d)(3)(B) and will continue to be exempt from existing and
proposed compensation committee requirements under proposed Rule
19(d)(5)(B)(vi).
---------------------------------------------------------------------------

    Concerning foreign private issuers,\70\ CHX current commentary in
Paragraph .03(4) of the Interpretations and Policies of Rule 19 permits
any such issuer to follow its home country practice in lieu of many of
CHX's corporate governance listing standards, including the Exchange's
compensation-related listing rules. Paragraph .03(4) current provides
that foreign private issuers are permitted to follow home country
practice in lieu of the provisions of Rule 19(d), but this allowance is
granted on condition that the issuer discloses in its annual report
filed with the Commission any significant ways in which its corporate
governance practices differ from those followed by domestic companies
under CHX-listing standards. Under proposed 19(d)(5)(B)(iv), CHX
proposes that this continue to apply to the new compensation related
requirements, so long as the foreign private issuer also discloses in
its annual report the reasons that it does not have an independent
compensation committee. CHX believes that foreign private issuers are
already subject to corporate regulations of their respective home
countries and requiring such issuers to comport with Rule 10C-1 would
be cumulative, if not contradictory.\71\
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    \70\ CHX proposes, in Rule 19(d)(5)(B)(iv), that the term
``foreign private issuer'' will have the same meaning as Rule 3b-4
under the Exchange Act for purposes of Rule 19.
    \71\ See Notice, supra note 4.
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6. Transition to the New Rules for Companies Listed as of the Effective
Date
    The proposed rule change, as amended, provides that certain of the
new requirements for listed companies will be effective on July 1, 2013
and others will be effective after that date.\72\ Specifically, CHX
proposes to amend the Interpretations and Policies .05(6) to Rule 19 to
provide transition periods by which listed companies would be required
to comply with the new Rule 19(p)(3)(B) compensation committee director
independence standards. Pursuant to the proposal, listed companies
would have until the earlier of their first annual meeting after
January 15, 2014, or October 31, 2014, to comply with the new standards
for compensation committee director independence.\73\ Existing
compensation committee independence standards would continue to apply
pending the transition to the new independence standards. CHX proposes
that all other proposed sections would become effective on July 1, 2013
for purposes of compliance by currently listed issuers that are not
otherwise exempt.\74\
---------------------------------------------------------------------------

    \72\ During the transition periods described herein, existing
compensation committee independence standards would continue to
apply pending the transition to the new independence standards.
    \73\ CHX originally proposed that this transition period would
also apply to the charter or board resolution and adviser
independence consideration, but has amended these transition periods
to require that issuers must comply with these requirements by July
1, 2013. See Amendment No. 3, supra note 7.
    \74\ CHX originally proposed that these transitions would become
effective immediately upon approval by the Commission, but has
amended these transition periods to require that issuers must comply
by July 1, 2013. See Amendment No. 3, supra note 7.
---------------------------------------------------------------------------

7. Compliance Schedules: IPOs; Companies Transferring From Other
Markets and Smaller Reporting Companies
    With respect to issuers listing securities on the Exchange in
connection with an initial public offering, existing CHX Interpretation
and Policy .05(3) provides that such issuers will be required to comply
with the new governance standards for each applicable committee that
the issuer establishes. Specifically, under the rule, the compensation
committee for the issuer must have one independent member at the time
of listing, a majority of independent members within 90 days of listing
and all independent members within one year.
    With respect to companies that transfer from other markets,
existing CHX Interpretation and Policy .05(4) to Rule 19 provides that
(1) any issuers transferring during another market's transition period
to new governance standards will be allowed to comply with CHX's
requirements within any transition period that has been provided by the
other marketplace and (2) any issuer transferring from a market that
does not have governance standards substantially similar to CHX shall
have one year from the date of listing to be in compliance. CHX does
not propose to change this rule, and so it will also apply to the newly
adopted portions of Rules 19(d) and 19(p), described above.
    CHX proposes to create a compliance schedule for companies that
cease to be

a Smaller Reporting Company. To the extent a Smaller Reporting Company
ceases to qualify as such, the proposed rule change, as modified by
Amendment No. 2, establishes a compliance schedule based on certain
dates relating to the company's change in status.\75\ Specifically,
such a company would be required, if otherwise applicable, to: (i) Have
a compensation committee of which the members meet the additional
independence requirements of Rule 19(p)(3)(B) within six months of the
date on which the issuer failed to qualify as a smaller reporting
company and (ii) comply with Rule 19(d)(4) concerning compensation
advisers as of the date on which the issuer failed to qualify as a
Smaller Reporting Company.
---------------------------------------------------------------------------

    \75\ See proposed Rule 19(d)(5)(C). In the proposal as
originally submitted, the compliance schedule was to require
compliance immediately with all requirements.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the CHX proposal,
as amended, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\76\ In
particular, the Commission finds that the amended proposed rule change
is consistent with the requirements of Section 6(b) of the Act,\77\ as
well as with Section 10C of the Act \78\ and Rule 10C-1 thereunder.\79\
Specifically, the Commission finds that the proposed rule change, as
amended, is consistent with Section 6(b)(5) of the Act,\80\ 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.
---------------------------------------------------------------------------

    \76\ In approving the CHX proposed rule change, as amended, the
Commission has considered its impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
    \77\ 15 U.S.C. 78f(b).
    \78\ 15 U.S.C. 78j-3.
    \79\ 17 CFR 240.10C-1.
    \80\ 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 CHX 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,\81\ Congress resolved to require that ``board
committees that set compensation policy will consist only of directors
who are independent.'' \82\ 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.
---------------------------------------------------------------------------

    \81\ See supra note 8.
    \82\ 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, CHX 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, as modified
by Amendment Nos. 1, 2 and 3, appropriately revises CHX's rules for
Compensation Committees of listed companies, for the following reasons:

A. Admittance to Listing

    The Commission believes that the clarification to the admittance to
listing standards, which makes explicit the fact that the Exchange's
Board of Governors may only admit securities for listing once the
requirements of Article 22, which contains the Exchange's listing
standards, are met, is reasonable and consistent with the Act. The
Commission agrees with CHX that the modification largely adopts much of
current Rule 2, while only clarifying an existing fact with respect to
listing securities on CHX.\83\
---------------------------------------------------------------------------

    \83\ See Notice, supra note 4.
---------------------------------------------------------------------------

B. 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).'' \84\ 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.
---------------------------------------------------------------------------

    \84\ As explained further in the Rule 10C-1 Adopting Release,
prior to final approval, the Commission will consider whether the
exchanges' proposed rule changes are consistent with the
requirements of Section 6(b) and Section 10C of the Act.
---------------------------------------------------------------------------

    As noted above, CHX proposes to maintain its requirements that an
issuer have a compensation committee, composed entirely of independent
directors, as defined in current Rule 19(p)(3), to oversee executive
compensation, or in the alternate, a majority of the independent
directors providing such oversight.\85\ However, the Exchange proposes
to modify its definition of compensation committee

to include the following three options: (1) A committee designated as a
compensation committee: (2) in the absence of a committee designated as
a compensation committee, a committee performing functions typically
performed by a compensation committee, including oversight of executive
compensation; or (3) in the absence of any such committees, the members
of the board of directors who oversee executive compensation on behalf
of the board, who together must comprise a majority of the board's
independent directors. The alternative option to a formal committee, as
described above, would therefore continue to be available to issuers.
The Commission believes that these three alternatives are consistent
with the definitions provided Rule 10C-1, and should provide issuers
with flexibility while continuing to ensure Independent Director
oversight of executive compensation.
---------------------------------------------------------------------------

    \85\ See Rule 19(d)(1).
---------------------------------------------------------------------------

    In addition to retaining its existing independence standards that
currently apply to board and Compensation Committee members, which
include certain bright-line tests,\86\ CHX has enhanced its listing
requirements regarding Compensation Committees by adopting additional
standards for independence to comply with the Fees Factor and
Affiliation Factor, as well as the other standards set forth in Rule
10C-1. The CHX's proposal also adopts the cure procedures provided as
an option in Rule 10C-1(a)(3) for Compensation Committee members who
cease to be independent for reasons outside their reasonable control.
---------------------------------------------------------------------------

    \86\ See Notice, supra note 4. See also supra note 19.
---------------------------------------------------------------------------

    Further, as discussed in more detail below, the CHX proposal adopts
the requirement that the Compensation Committee have a written charter
or board resolution that addresses the committee's purpose and
responsibilities, and adds requirements to specify the compensation
committee's authority and responsibilities as to compensation advisers
as set forth under Rule 10C-1. Taken as a whole, the Commission
believes that these changes will strengthen the oversight of executive
compensation in CHX-listed companies and further greater
accountability, and will therefore further the protection of investors
consistent with Section 6(b)(5) of the Act.
    The Commission believes that the Exchange's proposal, which
requires the consideration of the additional independence factors for
Compensation Committee members, is designed to protect investors and
the public interest and is consistent with the requirements of Sections
6(b)(5) and 10C of the Act and Rule 10C-1 thereunder.
    With respect to the Fees Factor of Rule 10C-1, the Exchange rules
state when considering the source of a director's compensation in
determining independence for Compensation Committee service, the board
should consider whether the director receives compensation from any
person or entity that would impair his ability to make independent
judgments about the listed company's executive compensation. In
addition to the continued application of the CHX's current independence
standards and bright-line tests, CHX's new rules also require the board
to consider all relevant factors in making independence determinations
for Compensation Committee membership. The Exchange believes that these
requirements of proposed Article 19(p)(3)(B) of the Exchange's Rules,
in addition to the general director independence requirements,
represent an appropriate standard for Compensation Committee
independence that is consistent with the requirements of Rule 10C-1 and
the Fees Factor.
    The Commission believes that the provisions noted above to address
the Fees Factor give a board broad flexibility to consider a wide
variety of fees, including any consulting, advisory or other
compensatory fee paid by the issuer or entity, when considering a
director's independence for compensation committee service. While the
Exchange does not bar all compensatory fees, the approach is consistent
with Rule 10C-1 and provides a basis for a board to prohibit a director
from being a member of the Compensation Committee, should the director
receive compensation that impairs the ability to make independent
decisions on executive compensation matters, even if that compensation
does not exceed the threshold in the bright-line test.\87\ The
Commission, therefore, believes that the proposed compensatory fee
requirements comply with Rule 10C-1 and are designed to protect
investors and the public interest, consistent with Section 6(b)(5) of
the Act. The Commission notes that the compensatory fee consideration
may help ensure that Compensation Committee members are less likely to
have received fees, from either the issuer or another entity, which
could potentially influence their decisions on compensation matters.
---------------------------------------------------------------------------

    \87\ See supra note 39, referencing the seven existing bright-
line tests.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, CHX 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. Under CHX's rules, it may be appropriate for certain
affiliates, such as representatives of significant stockholders, to
serve on Compensation Committees. The Exchange has provided guidance
that the board should consider whether an affiliate relationship places
the director under the direct or indirect control of the listed company
or its senior management, ``in each case of a nature that would impair
her ability to make independent judgments about the issuer's executive
compensation.'' \88\ The Commission believes that CHX's approach of
requiring boards only to consider such affiliations is reasonable and
consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \88\ See proposed Rule 19(p)(3)(B)(ii).
---------------------------------------------------------------------------

    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.'' \89\ In determining that CHX's affiliation standard is
consistent with Sections 6(b)(5) and 10C under the Act, the Commission
notes that CHX's proposal requires a company's board, in selecting
Compensation Committee members, to consider whether any such
affiliation would impair a director's judgment as a member of the
Compensation Committee. The CHX rule further states that, in
considering affiliate relationships, a board should consider whether
such affiliate

relationship places the director under the direct or indirect control
of the listed company or its senior management such that it would
impair the ability of the director to make independent judgments on
executive compensation. We believe that this should give companies the
flexibility to assess whether a director who is an affiliate, including
a significant shareholder, should or should not serve on the company's
Compensation Committee, depending on the director's particular
affiliations with the company or its senior management.
---------------------------------------------------------------------------

    \89\ Rule 10C-1 Adopting Release. At the same time, the
Commission noted that significant shareholders may have other
relationships with the listed company that would result in such
shareholders' interests not being aligned with those of other
shareholders and that the exchanges may want to consider these other
ties between a listed issuer and a director. While the Exchange did
not adopt any additional factors, the current affiliation standard
would still allow a company to prohibit a director whose
affiliations ``impair his ability to make independent judgment'' as
a member of the committee. See also supra notes 36-41 and
accompanying text.
---------------------------------------------------------------------------

    As to whether CHX should adopt any additional relevant independence
factors, the Exchange stated that it reviewed its rules in light of
Rule 10C-1, and concluded that its existing rules together with its
proposed rules are sufficiently broad to encompass the types of
relationships which would generally be material to a director's
independence for Compensation Committee service. 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 Rule 10C-1 requires each exchange to consider
relevant factors in determining independence requirements for members
of a compensation committee, but does not require the exchange's
proposal to reflect any such additional factors.
    CHX also 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.
    Regarding the justification for such an exception, the Commission
notes that it long ago approved as consistent with the Act the same
exception and concept in the context of CHX's current rules with
respect to compensation committees, as well as for nominations
committees and audit committees.\90\ 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.
---------------------------------------------------------------------------

    \90\ See Securities Exchange Act Release No. 49911 (June 24,
2004), 69 FR 39989 (July 1, 2004) (order approving File No. CHX-
2003-19).
---------------------------------------------------------------------------

    In summary, the Commission believes the flexibility provided in
CHX's new Compensation Committee independence standards provides
companies with guidance, while allowing them to identify those
relationships that might raise questions of independence for service on
the compensation committee. It provides further flexibility for
companies in circumstances where one member of the committee ceases to
meet the independence requirements, under specified conditions, for
reasons outside the member's reasonable control. For these reasons, we
believe the independence standards are consistent with the investor
protection provision of Section 6(b)(5) of the Act.

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

    As discussed above, CHX 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 \91\ and are consistent with the Act.\92\
---------------------------------------------------------------------------

    \91\ See Rule 10C-1.
    \92\ 15 U.S.C. 78j-3.
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to
specify the enhanced compensation committee responsibilities through
the Compensation Committee's written charter or board resolution will
help to assure that there is adequate transparency as to the rights and
responsibilities of compensation committee members. As discussed above,
the proposed rule change requires the Compensation Committee of a
listed company to consider the six factors relating to independence
that are enumerated in the proposal before selecting a compensation
consultant, legal counsel or other adviser to the Compensation
Committee. The Commission believes that this provision is consistent
with Rule 10C-1 and Section 6(b)(5) of the Act.
    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, CHX has proposed, in
Amendment No. 3, to add language to the provision regarding the
independence assessment of compensation advisers \93\ 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. 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.\94\
---------------------------------------------------------------------------

    \93\ See proposed Rule 19(d)(4)(F), as amended by Amendment No.
3.
    \94\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views CHX'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.\95\
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 to other filings regarding the scope of the independence
assessment requirement.\96\ 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.
---------------------------------------------------------------------------

    \95\ 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.'').
    \96\ See NYSE Approval Order and Nasdaq Approval Order, supra
note 6.
---------------------------------------------------------------------------

    Regarding the independence assessment requirement, the Commission
notes that, as already discussed, nothing in the proposed rule prevents
a compensation committee from selecting any adviser that it prefers,
including ones that are not independent, after considering the six
factors. In this regard, in Amendment No. 3, CHX added specific rule
language stating, among other things, that nothing in its rule requires
a compensation adviser to be independent, only that the compensation
committee must consider the six independence factors before selecting
or receiving advice from a compensation adviser.\97\
---------------------------------------------------------------------------

    \97\ See supra notes 56-58 and accompanying text.
---------------------------------------------------------------------------

    Finally, one commenter on the New York Stock Exchange LLC's
proposal requested guidance ``on how often the required independence
assessment should occur.'' \98\ This commenter observed that it ``will
be extremely burdensome and disruptive if prior to each such
[compensation committee] meeting, the committee had to conduct a new
assessment.'' The Commission anticipates that compensation committees
will conduct such an independence assessment at least annually.\99\
---------------------------------------------------------------------------

    \98\ See Comment to NYSE Notice by Robert B. Lamm, Chair,
Securities Law Committee, The Society of Corporate Secretaries &
Governance Professionals, dated December 7, 2012.
    \99\ See NYSE Approval Order and Nasdaq Approval Order, supra
note 6 for a discussion of comments.
---------------------------------------------------------------------------

    The changes to CHX's rules on compensation advisers should
therefore benefit investors in CHX-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.

D. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting
Companies, like all other CHX-listed companies, to have a compensation
committee, composed solely of independent directors or to otherwise
have compensation determined by a majority of the independent
directors, is reasonable and consistent with the protection of
investors. The Commission notes that CHX'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.\100\
---------------------------------------------------------------------------

    \100\ See Notice, supra note 4.
---------------------------------------------------------------------------

    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 CHX to provide some flexibility to
Smaller Reporting Companies. Further, in view of the potential
additional costs, it is reasonable not to require a Smaller Reporting
Company to comply with these additional requirements.\101\
---------------------------------------------------------------------------

    \101\ As discussed supra notes 60-62 and accompanying text,
under CHX's proposal, Smaller Reporting Companies are exempted from
all of the compensation adviser requirements, including the
requirement that specified independence factors be considered before
selecting such advisers.
---------------------------------------------------------------------------

E. 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 CHX 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
providing this cure provision as an option for independent directors
who cease to be independent for reasons outside their control is fair
and reasonable and consistent with investor protection under Rule
6(b)(5). In addition, CHX's general rules include delisting procedures
that provide issuers with notice, opportunity for a hearing,
opportunity for appeals, and an opportunity to cure defects before an
issuer's securities are delisted.
    The Commission believes that these general procedures for companies
out of compliance with listing requirements, in addition to the
particular cure provisions for compensation committees 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.

F. Exemptions

    The Commission believes that it is appropriate for CHX 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. CHX states that the reasons it adopted
the existing exemptions apply equally to the new requirements, and the
Commission believes that this assertion is reasonable.
    CHX proposes to exempt limited partnerships, companies in
bankruptcy, and open-end investment management companies registered
under the Investment Company Act from all of the requirements of Rule
10C-1. The Commission believes such exemptions are reasonable, and
notes that such entities, which were already generally exempt from
CHX's existing compensation committee requirements, also are exempt
from the compensation committee independence requirements specifically
under Rule 10C-1. CHX also proposes to exempt closed-end management
investment companies registered under the Investment Company Act from
the requirements of Rule 10C-1. The Commission believes that this
exemption is reasonable because the Investment Company Act already
assigns important duties of investment company governance, such as
approval of the investment advisory contract, to independent directors,
and because such entities were already generally exempt from CHX's
existing compensation committee requirements.
    The Commission further believes that other proposed exemption
provisions

relating to controlled companies,\102\ passive business organizations
or derivative and special purpose entities, and issuers whose only
listed equity stock is a preferred stock or debt security are
reasonable, given the specific characteristics of these entities
identified by CHX.\103\
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    \102\ 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).
    \103\ See supra notes 64-69 and accompanying text.
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    The CHX proposal would continue to permit foreign private issuers
to follow home country practice in lieu of the provisions of the new
rules, but would now require further disclosure from such entities
regarding the reason why they do not have an independent compensation
committee. 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 and proposed disclosure requirements will
help investors determine whether they are satisfied with the
alternative standard. The Commission also notes that CHX's proposal
conforms its rules to Rule 10C-1, which exempts foreign private issuers
from the compensation committee independence requirements of Rule 10C-1
to the extent such entities disclose in their annual reports the
reasons they do not have independent compensation committees.

G. 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, as amended, are reasonable and should
afford listed companies adequate time to make the changes, if any,
necessary to meet the new standards. The Commission believes that the
July 1, 2013 deadline proposed is clear-cut and matches the deadline
set forth by NYSE and The NASDAQ Stock Market, as revised.\104\
Additionally, the amended deadline gives companies until the earlier of
their first annual meeting after January 15, 2014, or October 31, 2014,
to comply with the enhanced independence standards for the members of
compensation committees in Rule 19(p)(3)(B).\105\
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    \104\ See Securities Exchange Act Release Nos. 68011 (October 9,
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49); 68013 (October 9, 2012), 77 FR 62563 (October 15, 2012)
(Notice of File No. SR-NASDAQ-2012-109); see also Amendment No. 1 to
File No. SR-NASDAQ-2012-109.
    \105\ The proposal is, however, otherwise effective on July 1,
2013, and issuers will be required to comply with the new
compensation committee charter (or board resolution) and adviser
requirements as of that date. As noted above, certain existing
issuers, such as Smaller Reporting Companies, are exempt from
compliance with the new independence requirement with respect to
compensation committee service.
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H. Compliance Schedules: Companies Transferring From Other Markets

    The Commission believes that it is reasonable for CHX to allow,
with respect to companies listing in connection with an initial public
offering and companies transferring from other markets, the same phase-
in schedule for compliance with the new requirements as is permitted
under its current compensation related rules.
    The Commission also believes that the compliance schedule for
companies that cease to be Smaller Reporting Companies, as revised in
Amendment No. 2, is adequate time to come into compliance with the
rules that apply to other companies.

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

    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\106\ for approving the proposed rule change, as modified by
Amendment Nos. 1, 2 and 3, prior to the 30th day after the date of
publication of notice in the Federal Register.
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    \106\ 15 U.S.C. 78s(b)(2).
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    The change made to the proposal by Amendment No. 3 to remove a
proposed amendment to Rule 4 is not substantive, as Rule 4's listing
standards will now not be changed. For the same reason, the removal of
the proposed general exemption for clearing agencies clearing futures
or options from the rule is not a substantive change.\107\
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    \107\ The Commission notes that 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)) 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)
are provided an automatic exemption from the application of the
entirety of Rule 10C-1 by Rule 10C-1(b)(5).
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    The additional language in Amendment No. 3 to exclude advisers that
provide only certain types of services from the independence assessment
is also appropriate. As discussed above, the Commission has already
determined to exclude such advisers from the disclosure requirement
regarding compensation advisers in Regulation S-K because these types
of services do not raise conflict of interest concerns. Similarly, the
addition of further guidance by Amendment No. 3 merely clarifies that
the same exception applies for in-house legal counsel, and is not a
substantive changes, as it was the intent of the rule as originally
proposed.
    Next, the addition of further guidance by Amendment No. 3 merely
clarifies that nothing in the Exchange's rules require a compensation
adviser to be independent, only that the compensation committee
consider the independence factors before selecting or receiving advice
from a compensation adviser, and that is not a substantive change, as
it was also the intent of the rule as originally proposed.
    Finally, the change made by Amendment No. 3 to require companies
currently listed on CHX to comply with the majority of the new rules by
July 1, 2013, rather than immediately, as originally proposed,
reasonably affords companies more time to take the steps necessary for
compliance. The change to require such companies to comply with the
charter and compensation adviser consideration provisions by July 1,
2013, rather than, as originally proposed, the earlier of their first
annual meeting after January 15, 2014, or October 31, 2014, still
allows ample time for companies to adjust to the new rules, and accords
with the deadline set by NYSE and Nasdaq in their proposals to comply
with Rule 10C-1. \108\
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    \108\ See Securities Exchange Act Release Nos. 68011 (October 9,
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49); 68013 (October 9, 2012), 77 FR 62563 (October 15, 2012)
(Notice of File No. SR-NASDAQ-2012-109); see also Amendment No. 1 to
File No. SR-NASDAQ-2012-109.
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    Similarly, the conforming insertion of the current rule language as
a sunset provision merely makes clear what issuers will be required to
comply with prior to the effectiveness of the new rule text.
    For all the reasons discussed above, the Commission finds good
cause to accelerate approval of the proposed changes made by Amendment
No. 3.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing and whether Amendment No. 3 is
consistent with the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-CHX-2012-13 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-CHX-2012-13. 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 CHX. 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-CHX-2012-13, and should be submitted on or before
February 13, 2013.

VI. Conclusion

    In summary, and for the reasons discussed in more detail above, the
Commission believes that the rules being adopted by CHX, taken as
whole, should benefit investors by helping listed companies make
informed decisions regarding the amount and form of executive
compensation. CHX'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.
    CHX'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 CHX-listed
companies are better informed about potential conflicts when selecting
and receiving advice from advisers. Similarly, the provisions of CHX'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-CHX-2012-13, as amended, 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.\109\
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    \109\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\110\ that the proposed rule change, SR-CHX-2012-13, as amended,
be, and it hereby is, approved.
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    \110\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\111\
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    \111\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01220 Filed 1-22-13; 8:45 am]
BILLING CODE 8011-01-P