[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4508-4524]
[FR Doc No: 2013-01105]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68638; File No. SR-NYSEArca-2012-105]

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

January 11, 2013.

I. Introduction

    On September 25, 2012, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to modify the Exchange's rules for compensation
committees of listed issuers to comply with Rule 10C-1 under the Act
and make other related changes. The proposed rule change was published
for comment in the Federal Register on October 15, 2012.\3\ The
Commission subsequently extended the time period in which to either
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change, to January 13, 2013.\4\ The Commission received
one comment letter on the proposed rule change,\5\ as well as a

response to the comment letter from NYSE Euronext, Inc. regarding the
NYSE Arca proposal.\6\ On December 4, 2012, the Exchange filed
Amendment No. 1 to the proposed rule change, which was later
withdrawn.\7\ On January 8, 2013, the Exchange filed Amendment No. 2 to
the proposed rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68006 (October 9,
2012), 77 FR 62587 (October 15, 2012) (``Notice'').
    \4\ See Securities Exchange Act Release No. 68313 (November 28,
2012), 77 FR 71853 (December 4, 2012).
    \5\ See Letter from Jeff Mahoney, General Counsel, Council of
Institutional Investors to Elizabeth M. Murphy, Secretary,
Commission, dated November 1, 2012 (``CII Letter'').
    In addition, the Commission received seven comments on a
substantially similar proposal by New York Stock Exchange LLC
(``NYSE'') by parties that did not specifically comment on the NYSE
Arca filing. See Securities Exchange Act Release No. 68011 (October
9, 2012), 77 FR 62541 (October 15, 2012) (SR-NYSE-2012-49). The
comment letters received on the NYSE filing were letters to
Elizabeth M. Murphy, Secretary, Commission, from: Thomas R. Moore,
Vice President, Corporate Secretary and Chief Governance Officer,
Ameriprise Financial, Inc., dated October 18, 2012 (``Ameriprise
Letter''); J. Robert Brown, Jr., Director, Corporate & Commercial
Law Program, University of Denver Sturm College of Law, dated
October 30, 3012 (``Brown Letter''); Dorothy Donohue, Deputy General
Counsel, Securities Regulation, Investment Company Institute, dated
November 1, 2012 (``ICI Letter''); Brandon J. Rees, Acting Director,
Office of Investment, AFL-CIO, dated November 5, 2012 (``AFL-CIO
Letter''); Carin Zelenko, Director, Capital Strategies Department,
International Brotherhood of Teamsters, dated November 5, 2012
(``Teamsters Letter''); Wilson Sonsini Goodrich & Rosati,
Professional Corporation, dated November 14, 2012 (``Wilson Sonsini
Letter''); and Robert B. Lamm, Chair, Securities Law Committee, The
Society of Corporate Secretaries & Governance Professionals, dated
December 7, 2012 (``Corporate Secretaries Letter''). Since the
comment letters received on the NYSE filing discuss issues directly
related to the NYSE Arca filing, the Commission has included them in
its discussion of this filing.
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet McGinness, Executive Vice President and Corporate
Secretary, NYSE Euronext, Inc., dated January 10, 2013 (``NYSE
Response Letter''). In the NYSE Response Letter, NYSE Euronext,
Inc., the parent company of NYSE Arca, states that, as the comments
made by the letters submitted on the NYSE and NYSE Arca proposals
are applicable in substance to NYSE, NYSE Arca and NYSE MKT LLC, its
response will address the comments on behalf of all three exchanges.
    \7\ Amendment No. 1, dated December 4, 2012, was withdrawn on
January 8, 2013.
    \8\ In Amendment No. 2 to SR-NYSEArca-2012-105, NYSE Arca: (a)
Revised the transition period for companies that cease to be Smaller
Reporting Companies to comply with the full range of new
requirements, see infra notes 73-76 and accompanying text; (b)
changed references in the rule text from Regulation S-K, Item
10(f)(1) to Exchange Act Rule 12b-2 and made other non-substantive
revisions to proposed rule text; (c) added commentary to state that
the independence assessment of compensation advisers required of
compensation committees does not need to be conducted for advisers
whose roles are limited to those entitled to an exception from the
compensation adviser disclosure rules under Item 407(e)(3)(iii) of
Regulation S-K, see infra notes 49-52 and accompanying text; (d)
added commentary to state that the independence assessment of
compensation advisers required of compensation committees does not
require the adviser to be independent, only that the compensation
committee consider the enumerated factors before selecting or
receiving advice from the adviser, see infra notes 53-55 and
accompanying text; and (e) clarified that a foreign private issuer
is required to provide a reason why it does not have an independent
compensation committee. See infra note 70.
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    This order approves the proposed rule change, as modified by
Amendment No. 2 thereto, on an accelerated basis.

II. Description of the Proposed Rule Change

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

    On March 30, 2011, to implement Section 10C of the Act, as added by
Section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''),\9\ the Commission proposed
Rule 10C-1 under the Act,\10\ which directs each national securities
exchange (hereinafter, ``exchange'') to prohibit the listing of any
equity security of any issuer, with certain exceptions, that does not
comply with the rule's requirements regarding compensation committees
of listed issuers and related requirements regarding compensation
advisers. On June 20, 2012, the Commission adopted Rule 10C-1.\11\
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    \9\ Public Law 111-203, 124 Stat. 1900 (2010).
    \10\ See Securities Act Release No. 9199, Securities Exchange
Act Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011)
(``Rule 10C-1 Proposing Release'').
    \11\ See Securities Act Release No. 9330, Securities Exchange
Act Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012)
(``Rule 10C-1 Adopting Release'').
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    Rule 10C-1 requires, among other things, each exchange to adopt
rules providing that each member of the compensation committee \12\ of
a listed issuer must be a member of the board of directors of the
issuer, and must otherwise be independent.\13\ In determining the
independence standards for members of compensation committees of listed
issuers, Rule 10C-1 requires the exchanges to consider relevant
factors, including, but not limited to: (a) The source of compensation
of the director, including any consulting, advisory or other
compensatory fee paid by the issuer to the director (hereinafter, the
``Fees Factor''); and (b) whether the director is affiliated with the
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of
the issuer (hereinafter, the ``Affiliation Factor'').\14\
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    \12\ For a definition of the term ``compensation committee'' for
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \13\ See Rule 10C-1(a) and (b)(1).
    \14\ See id. See also Rule 10C-1(b)(1)(iii)(A), which sets forth
exemptions from the independence requirements for certain categories
of issuers. In addition, an exchange may exempt a particular
relationship with respect to members of a compensation committee
from these requirements as it deems appropriate, taking into
consideration the size of an issuer and any other relevant factors.
See Rule 10C-1(b)(1)(iii)(B).
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    In addition, Rule 10C-1 requires the listing rules of exchanges to
mandate that compensation committees be given the authority to retain
or obtain the advice of a compensation adviser, and have direct
responsibility for the appointment, compensation and oversight of the
work of any compensation adviser they retain.\15\ The exchange rules
must also provide that each listed issuer provide for appropriate
funding for the payment of reasonable compensation, as determined by
the compensation committee, to any compensation adviser retained by the
compensation committee.\16\ Finally, among other things, Rule 10C-1
requires each exchange to provide in its rules that the compensation
committee of each listed issuer may select a compensation consultant,
legal counsel or other adviser to the compensation committee only after
taking into consideration six factors specified in Rule 10C-1,\17\ as
well as any other factors identified by the relevant exchange in its
listing standards.\18\
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    \15\ See Rule 10C-1(b)(2).
    \16\ See Rule 10C-1(b)(3).
    \17\ See Rule 10C-1(b)(4). The six factors, which NYSE Arca
proposes to set forth in its rules, are specified in the text
accompanying note 47, infra.
    \18\ Other provisions in Rule 10C-1 relate to exemptions from
the rule and a requirement that each exchange provide for
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any defects that would be the basis for the
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. NYSE Arca's Proposed Rule Change, as Amended

    To comply with Rule 10C-1, NYSE Arca, through its wholly-owned
corporation, NYSE Arca Equities, proposes to amend two of its rules
concerning corporate governance requirements for companies listed on
the Exchange: NYSE Arca Equities Rule (``Equities Rule'') 5.3(k),
``Independent Directors/Board Committees;'' and Equities Rule 5.3(n),
``Listed Foreign Private Issuers.'' In addition, NYSE Arca proposes to
make some other changes to its rules regarding compensation committees.
To accomplish these changes, the Exchange proposes to replace current
Equities Rules 5.3(k)(4) and 5.3(n) with new operative text that will
be effective on July 1, 2013.
    Current Equities Rule 5.3(k)(4) provides that each listed company
have a compensation committee, and that such compensation committee be
composed entirely of ``Independent Directors'' \19\ and have a written
charter.\20\
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    \19\ ``Independent Directors'', as defined in Equities Rule
5.3(k)(1) and used herein, includes a two-part test for
independence. The rule sets forth specific categories of directors
who cannot be considered independent because of certain discrete
relationships (``bright-line tests''); and also provides that a
listed company's board make an affirmative determination that each
independent director has no material relationship that, in the
opinion of the board, would raise concerns about independence from
management. Id.
    \20\ See Equities Rule 5.3(k)(4).
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    Under its proposal, NYSE Arca will retain its existing requirement
that each listed company be required to have a compensation committee
composed entirely of Independent Directors, as defined in NYSE Arca's
Equities Rules.\21\ Under the proposed

amendment, however, each compensation committee member must also
satisfy additional independence requirements, as described in Section
II.B.1 below.\22\
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    \21\ See Equities Rules 5.3(k)(1) and 5.3(k)(4). Proposed
Equities Rule 5.3(k)(4)(i)(a) reflects a renumbering of the existing
requirement of Equities Rule 5.3(k)(4).
    \22\ See proposed Equities Rule 5.3(k)(4)(ii) (concerning the
consideration of director compensation and affiliation).
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    NYSE Arca will also retain the existing requirement that a listed
issuer adopt a formal written compensation committee charter \23\ that
specifies the scope of the committee's responsibilities and how it
carries out those responsibilities, including structure, operations and
membership requirements.\24\ The proposed amendment to the rule, which
continues to require a charter to address the committee's duties and
responsibilities, requires the issuer to specify additional
responsibilities and authority for the compensation committee 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 them, which are discussed in detail
in Section II.B.2 below and set forth in proposed Equities Rule
5.3(k)(4).\25\
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    \23\ See proposed Equities Rule 5.3(k)(4)(iii). Rule 10C-1
requires a compensation committee to have certain specified
authority and responsibilities. See supra notes 15-17 and
accompanying text. The existing NYSE Arca Equities rule already
requires compensation committees of listed companies to have a
charter setting forth specified responsibilities, and the proposed
rule updates the language concerning this authority and set of
responsibilities and adds the required content discussed infra at
text accompanying notes 44-46.
    \24\ See current Equities Rule 5.3(k)(4)(A)-(E). Existing
Equities Rule 5.3(k)(4)(E), which NYSE Arca proposed to replace in
relevant part with a comparable provision in proposed Equities Rule
5.3(k)(4)(iv)(I)-(III), currently provides that a written charter
must address ``[t]he committee's authority to retain and terminate a
consultant to assist in the evaluation of a director, CEO or senior
executive compensation. The committee shall have the sole authority
to approve the consultant's fees and other retention items.'' See
discussion infra at text accompanying notes 43-45.
    \25\ See proposed NYSE Arca Equities Rule 5.3(k)(4)(iv)-(v).
Because smaller reporting companies are not required to comply with
the new compensation adviser independence considerations in proposed
NYSE Arca Equities Rule 5.3(k)(4)(v), see infra notes 56-62 and
accompanying text, such issuers would not be required to specify
this consideration. See also proposed Commentary .02 to NYSE Arca
Equities Rule 5.3(k)(4).
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1. Compensation Committee Composition and Independence Standards
    NYSE Arca proposes to retain Equities Rule 5.3(k)(1), which would
continue to provide that no director qualifies as ``independent''
unless the board of directors of the listed company affirmatively
determines that the director has no material relationship with the
listed company. As noted above, NYSE Arca's rules currently require
each member of a listed company's compensation committee to be an
Independent Director, as defined in Equities Rule 5.3(k)(1).\26\ Rule
10C-1, as discussed above, provides that exchange standards must
require compensation committee members to be independent, and further
provides that each exchange, in determining independence for this
purpose, must consider relevant factors, including the Fees Factor and
Affiliation Factor described above. In its proposal, NYSE Arca
discussed its consideration of these factors,\27\ and proposed the
following: \28\
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    \26\ See supra note 19.
    \27\ See Notice, supra note 3.
    \28\ See Notice, supra note 3, for the Exchange's explanation of
its reasons for the proposed change. See infra Sections II.B.3 and
II.B.4 concerning entities that would be exempt from this
requirement.
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    With respect to the Fees and Affiliation Factors, NYSE Arca
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 listed
company which is material to that director's ability to be independent
from management in connection with the duties of a compensation
committee member, including, but not limited to: (A) The source of
compensation of such director, including any consulting, advisory or
other compensatory fee paid by the listed company to such director; and
(B) whether such director is affiliated with the listed company, a
subsidiary of the listed company or an affiliate of a subsidiary of the
listed company.\29\
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    \29\ See proposed Equities Rule 5.3(k)(4)(ii). See also Notice,
supra note 3.
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    With respect to the Fees Factor, NYSE Arca also proposes to amend
the rule to provide that the board should consider whether the director
receives compensation from any person or entity that would impair his
ability to make independent judgments about the listed company's
executive compensation.\30\
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    \30\ See proposed Equities Rule 5.3(k)(4)(ii).
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    With respect to the Affiliation Factor, NYSE Arca proposes,
similarly, to amend the commentary to provide that the board should
consider whether an affiliate relationship places the director under
the direct or indirect control of the listed company or its senior
management, or creates a direct relationship between the director and
members of senior management, `` * * * in each case of a nature that
would impair his ability to make independent judgments about the listed
company's executive compensation.'' \31\
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    \31\ See id.
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    Although Rule 10C-1 requires that exchanges consider ``relevant
factors'' not limited to the Fees and Affiliation Factors, NYSE Arca
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 Equities Rule 5.3(k)(4)(ii) or to
adopt a requirement to consider any other specific factors. In its
proposal, NYSE Arca stated that it did not intend to adopt an absolute
prohibition on a board making an affirmative finding that a director is
independent solely on the basis that the director or any of the
director's affiliates are shareholders owning more than some specified
percentage of the listed company.\32\ Further, as stated in its filing,
NYSE Arca believes that its existing ``bright-line'' independence
standards, as set forth in Equities Rule 5.3(k)(1), are sufficiently
broad to encompass the types of relationships which would generally be
material to a director's independence for compensation committee
service.\33\ Additionally,

NYSE Arca stated that Equities Rule 5.3(k)(1) already requires the
board to consider any other material relationships between the director
and the listed company or its management that are not the subject of
``bright-line'' tests from Equities Rule 5.3(k)(1)(A)-(F).\34\ NYSE
Arca believes that these requirements with respect to general director
independence, when combined with the specific considerations required
by proposed Equities Rule 5.3(k)(4)(ii), represent an appropriate
standard for compensation committee independence.\35\
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    \32\ See Notice, supra note 3.
    \33\ See Notice, supra note 3. The following are the ``bright-
line'' tests set forth in Equities Rule 5.3(k)(1): (A) A director
who is or has been within the last three years, an employee of the
listed company, or whose immediate family member is or has been
within the last three years an executive officer of the listed
company; (B) (i) A director or a director who has an immediate
family member who is a current partner of a firm that is the
company's internal or external auditor; (ii) A director who is a
current employee of such a firm; (iii) A director who has an
immediate family member who is a current employee of such a firm and
who participates in the firm's audit, assurance or tax compliance
(but not tax planning) practice; or (iv) A director or a director
who has an immediate family member who was within the last three
years (but is no longer) a partner or employee of such a firm and
personally worked on the listed company's audit within that time;
(C) A director or a director who has an immediate family member who
is, or in the past three years has been, part of an interlocking
directorate in which an executive officer of the listed company
serves or served on the compensation committee of another company
that concurrently employs or employed the director; (D) A director
who is an executive officer or an employee, or whose immediate
family member is an executive officer, of a company that makes
payments to, or receives payments from, the listed company for
property or services in an amount which, in any single fiscal year,
exceeds the greater of $200,000 or 5% of such other company's
consolidated gross revenues, is not ``independent'' until three
years after falling below such threshold; (E) A director who
received, or whose immediate family member is an executive officer
who received, during any twelve-month period within the last three
years, more than $100,000 in direct compensation from the listed
company, other than director and committee fees and pension or other
forms of deferred compensation for prior service (provided such
compensation is not contingent in any way on continued service); (F)
In the case of an investment company, in lieu of paragraphs (A)-(E)
above, 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.
    \34\ See Notice, supra note 3.
    \35\ See id.
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    NYSE Arca proposes a cure period for a failure of a listed company
to meet its committee composition requirements for independence. Under
the provision, if a listed company fails to comply with the
compensation committee composition requirements because a member of the
compensation committee ceases to be independent for reasons outside the
member's reasonable control, that person, only so long as a majority of
the members of the compensation committee continue to be independent,
may remain a member of the compensation committee until the earlier of
the next annual shareholders' meeting of the listed company or one year
from the occurrence of the event that caused the member to be no longer
independent.\36\ The proposed rule also requires a company relying on
this provision to provide notice to NYSE Arca promptly.\37\
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    \36\ See proposed Equities Rule 5.3(k)(4)(ii).
    \37\ See id.
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    NYSE Arca modified the suggested cure period language contained in
Rule 10C-1(a)(3) by limiting the cure period's use to circumstances
where the committee continues to have a majority of independent
directors, as NYSE Arca believes this would ensure that the applicable
committee could not take an action without the agreement of one or more
independent directors.\38\
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    \38\ See Notice, supra note 3. The Commission notes that while
NYSE Arca does not provide any new procedures for an issuer to have
an opportunity to cure any other defects with respect to its
proposed compensation committee requirements, current NYSE Arca
Equities rules provide issuers with an opportunity to cure defects,
and appeal, before their securities are delisted for rule
violations. See Equities Rule 5.5(a) (``Maintenance Requirements and
Delisting Procedures'') and Equities Rule 5.5(m) (``Delisting
Procedures'').
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    NYSE Arca's current rules relating to compensation committees
include an exception that allows a director who is not an Independent
Director to be appointed to such a committee under exceptional and
limited circumstances, as long as that director is not currently an
executive officer, an employee, or the family member of an executive
officer.\39\ The exception applies, however, only if the committee is
comprised of at least three members and the board determines that the
individual's membership on the committee is required by the best
interests of the company and its shareholders.\40\
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    \39\ See current Equities Rule 5.3(k)(4).
    \40\ See id.
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    NYSE Arca proposes to amend Equities Rule 5.3(k)(4) to remove,
except for smaller reporting companies, the availability of this
exception for a director who fails the current requirements or the new
enhanced director independence requirements proposed by NYSE Arca.\41\
In effect, NYSE Arca proposes to retain the exception only for smaller
reporting companies. Under the exception, a compensation committee
member of a smaller reporting company may not serve longer than two
years with this exception. In addition, a smaller reporting company
relying on the exception must make certain disclosures in its proxy
statement regarding the nature of the relationship and the reasons for
the determination.\42\
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    \41\ See proposed Equities Rule 5.3(k)(4)(i)(b). As noted below,
smaller reporting companies are not subject to enhanced director
independence requirements.
    \42\ See id. See also Notice, supra note 3.
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2. Authority of Committees To Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers
    In its proposed rule change, NYSE Arca 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 issuers to provide these new rights and
responsibilities to their compensation committees.\43\ Thus, proposed
Equities Rule 5.3(k)(4)(iv) proposes to adopt the requirements that
NYSE Arca believes are required by Rule 10C-1(b)(2)-(3) that: (i) The
compensation committee may, in its sole discretion, retain or obtain
the advice of a compensation consultant, independent legal counsel or
other adviser; (ii) the compensation committee shall be directly
responsible for the appointment, compensation and oversight of the work
of any compensation consultant, independent legal counsel or other
adviser retained by the compensation committee; \44\ and (iii) the
listed company must provide for appropriate funding, as determined by
the compensation committee, for payment of reasonable compensation to a
compensation consultant, independent legal counsel or any other adviser
retained by the compensation committee.\45\
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    \43\ Rule 10C-1(b)(4), does not include the word ``independent''
before ``legal counsel'' and requires an independence assessment for
any legal counsel to a compensation committee, other than in-house
counsel. In providing Commentary .05 to proposed Equities Rule
5.3(k)(4), as modified by Amendment No. 2, NYSE Arca provides for
two limited exceptions. See infra notes 49-52 and accompanying text.
    \44\ The proposal also includes a provision, derived from Rule
10C-1, stating that nothing in the rule may be construed: (A) To
require the compensation committee to implement or act consistently
with the advice or recommendations of the compensation consultant,
independent legal counsel or other adviser to the compensation
committee; or (B) to affect the ability or obligation of the
compensation committee to exercise its own judgment in fulfillment
of the duties of the compensation committee. See Commentary .06 to
Equities Rule 5.3(k)(4).
    \45\ See Notice, supra note 3.
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    Proposed Equities Rule 5.3(k)(4)(v), as amended, also sets forth
explicitly, in accordance with Rule 10C-1, that the compensation
committee may select, or receive advice from, a compensation
consultant, legal counsel or other adviser to the compensation
committee, other than in-house legal counsel, only after taking into
consideration all factors relevant to that person's independence from
management, including the following six factors set forth in Rule 10C-1
regarding independence assessments of compensation advisers.\46\
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    \46\ Rule 10C-1(b)(4).
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    The six factors, which are set forth in full in the proposed rule,
are: (I) The provision of other services to the listed company by the
person that employs the compensation consultant, legal counsel or other
adviser; (II) the amount of fees received from the listed company by
the person that employs the compensation consultant, legal counsel or
other adviser, as a percentage of the total revenue of the person that
employs the compensation consultant, legal counsel or other adviser;
(III) the policies and procedures of the person that employs the
compensation consultant, legal counsel or other adviser that are
designed to prevent conflicts of interest; (IV) any business or
personal relationship of the compensation

consultant, legal counsel or other adviser with a member of the
compensation committee; (V) any stock of the listed company owned by
the compensation consultant, legal counsel or other adviser; and (VI)
any business or personal relationship of the compensation consultant,
legal counsel, other adviser or the person employing the adviser with
an executive officer of the listed company.\47\
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    \47\ See also Rule 10C-1(b)(4)(i)-(vi).
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    As proposed, Equities Rule 5.3(k)(4)(v) would not include any
specific additional factors for consideration, as NYSE Arca stated that
it believes the list included in Rule 10C-1(b)(4) is very comprehensive
and the proposed listing standard would also require the compensation
committee to consider any other factors that would be relevant to the
adviser's independence from management.\48\
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    \48\ See Notice, supra note 3.
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    Proposed Commentary .05 to Equities Rule 5.3(k)(4), as modified by
Amendment No. 2,\49\ further states that, as provided in Rule 10C-1, a
compensation committee is required to conduct the independence
assessment outlined in proposed Equities Rule 5.3(k)(4)(v) 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 \50\ 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.\51\ NYSE Arca noted that this second exception is based
on Item 407(e)(3)(iii) of Regulation S-K, which provides a limited
exception to the Commission's requirement for a registrant to disclose
any role of compensation advisers in determining or recommending the
amount or form of a registrant's executive and director
compensation.\52\
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    \49\ See supra note 8. NYSE Arca'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.
    \50\ See proposed Commentary .02 to Equities Rule 5.3(k)(4).
    \51\ See Exhibit 5 to Amendment No. 2 (amending, in part, the
proposed Commentary .02).
    \52\ See Amendment No. 2; see also 17 CFR 229.407(e)(3)(iii).
The Exchange believes that its proposed exception from the
independence assessment requirement is appropriate because the types
of services excepted do not raise conflict of interest concerns, and
noted that this is the same reason for which the Commission excluded
these types of services from the disclosure requirement in Item
407(e)(3)(iii) of Regulation S-K.
---------------------------------------------------------------------------

    Proposed Commentary .06 to Equities Rule 5.3(k)(4), as modified by
Amendment No. 2, 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.\53\ 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 Equities Rule
5.3(k)(4)(v)(I)-(VI).\54\ 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.\55\
---------------------------------------------------------------------------

    \53\ See Exhibit 5 to Amendment No. 2, supra note 8.
    \54\ See id.
    \55\ See Amendment No. 2, supra note 8.
---------------------------------------------------------------------------

3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies
from all the requirements included within the rule.\56\ Consistent with
this Rule 10C-1 provision, NYSE Arca, as a general matter, proposes
that a smaller reporting company, as defined in Rule 12b-2 \57\ 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.\58\ Thus, NYSE Arca proposes not to require
Smaller Reporting Companies to comply with either the enhanced
independence standards for members of compensation committees relating
to compensatory fees and affiliation or the compensation adviser
independence considerations.\59\
---------------------------------------------------------------------------

    \56\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \57\ 17 CFR 240.12b-2.
    \58\ See proposed Commentary .02 to Equities Rule 5.3(k)(4).
    \59\ See supra text accompanying notes 29 and 47.
---------------------------------------------------------------------------

    NYSE Arca proposes in Commentary .02 to Equities Rule 5.3(k)(4)
that Smaller Reporting Companies are not required to comply with
Equities Rule 5.3(k)(4)(ii) concerning the additional independence
factors for members serving on the compensation committee.\60\ A
Smaller Reporting Company will be required to comply with proposed
Equities Rule 5.3(k)(4)(iv) regarding the requirements concerning the
compensation committee's authority, responsibility and funding of
compensation advisers.\61\ However, NYSE Arca proposes an exception
from the proposed Equities Rule 5.3(k)(4)(v) that would otherwise
require the Smaller Reporting Company's compensation committee to
consider independence factors before selecting such advisers, which
goes beyond NYSE Arca's existing requirements.\62\ Finally, as noted
above, NYSE Arca proposes to amend Equities Rule 5.3(k)(4)(i)(b) to
clarify that only Smaller Reporting Companies will be eligible to
continue to avail themselves of the ability of the board, under
exceptional and limited circumstances, to appoint a non-independent
director to the compensation committee.
---------------------------------------------------------------------------

    \60\ See Notice, supra note 3.
    \61\ See id.
    \62\ See id. As noted above, NYSE Arca currently requires such
authority, responsibility and funding be provided by all listed
companies to compensation committees, including by Smaller Reporting
Companies. See supra text accompanying note 24. As Smaller Reporting
Companies will not be required to comply with the consideration of
certain independence factors when selecting an adviser, such issuers
will not be required to specify this provision.
---------------------------------------------------------------------------

4. Exemptions
    NYSE Arca proposes that its existing exemptions from the Exchange's
compensation-related listing rules currently in place, which are set
forth in Equities Rules 5.3 and 5.3(k), apply also to the new
requirements of the proposed rule change and thereby will continue to
provide a general exemption from all of the compensation committee
requirements of Equities Rule 5.3(k)(4).\63\ These include exemptions
to the following issuers: any listed company of which more than 50% of
the voting power for the election of directors is held by an
individual, a group or another company (in other words, a controlled
company); limited partnerships; companies in bankruptcy; closed-end and
open-end management investment companies that are

registered under the Investment Company Act of 1940; passive business
organizations in the form of trusts (such as royalty trusts) or
derivatives and special purpose securities; and issuers whose only
listed equity stock is a preferred stock.\64\ NYSE Arca states that
these categories of issuers typically: (i) Are externally managed and
do not directly employ executives; (ii) do not by their nature have
employees; or (iii) have executive compensation policy set by a body
other than the board.\65\ In light of these structural reasons why
these categories of issuers generally do not have compensation
committees, the Exchange believes that it would be a significant and
unnecessarily burdensome alteration in their governance structures to
require them to comply with the proposed new requirements and that it
is appropriate to grant them an exemption.\66\
---------------------------------------------------------------------------

    \63\ See Notice, supra note 3. In addition, such exempt
companies would also thereby be exempt from the enhanced
independence requirements for compensation committee composition
described in proposed Equities Rule 5.3(k)(4)(ii).
    \64\ See Equities Rules 5.3 and 5.3(k).
    \65\ See Notice, supra note 3.
    \66\ See id.
---------------------------------------------------------------------------

    Concerning foreign private issuers,\67\ NYSE Arca's current
Equities Rule 5.3(n) permit any such issuer to follow its home country
practice in lieu of many of NYSE Arca's corporate governance listing
standards, including the Exchange's compensation-related listing rules.
Rule 5.3(n) currently provides that listed companies that are foreign
private issuers are permitted to follow home country practice in lieu
of the provisions of Equities Rule 5.3, but this allowance is granted
on condition that the issuer discloses in its annual report any
significant ways in which its corporate governance practices differ
from those followed by domestic companies under NYSE Arca listing
standards.\68\ NYSE Arca proposes that this allowance continue to
apply, generally, to the Exchange's compensation committee rules as
revised by the instant proposal on the same condition, namely that the
issuer discloses any significant ways in which its corporate governance
practices differ from those followed by domestic companies under NYSE
Arca listing standards in its annual report.\69\ NYSE Arca also
proposes an additional requirement to the disclosure requirement
applicable to foreign private issuers--that the foreign private issuer
explain the reason as to why the company does not comply with the
compensation committee rules.\70\
---------------------------------------------------------------------------

    \67\ Under NYSE Arca's listing rules, ``foreign private issuer''
has the same meaning and is defined in accordance with the SEC's
definition of foreign private issuer set out in Rule 3b-4(c) (17 CFR
240.3b-4). See Equities Rule 5.1(b)(3).
    \68\ See Equities Rule 5.3(n). A foreign private issuer may
provide this disclosure either on its Web site and/or in its annual
report as distributed in shareholders to the United States.
    \69\ See Notice, supra note 3.
    \70\ See Exhibit 5 to the Notice, supra note 3 and Amendment No.
2, supra note 8; see also Commentary .03 to Equities Rule 5.3(k)(4).
---------------------------------------------------------------------------

5. Transition to the New Rules for Companies Listed as of the Effective
Date
    The proposed rule change provides that certain of the new
requirements for listed companies will be effective on July 1,
2013.\71\ NYSE Arca does not propose to provide any other transition
periods by which listed companies would be required to comply with the
new Equities Rule 5.3(k)(4)(ii) compensation committee director
independence standards. NYSE Arca proposes that all proposed sections
of the proposal would become effective on July 1, 2013 for purposes of
compliance by currently listed issuers that are not otherwise
exempted.\72\
---------------------------------------------------------------------------

    \71\ Existing compensation committee independence standards
would continue to apply until that time.
    \72\ As noted above, current NYSE Arca Equities rules require
that the compensation committee charter give that committee sole
authority to retain and terminate a consultant to assist in the
evaluation of director, CEO or executive officer compensation,
including sole authority to approve the firm's fees and other
retention terms.
---------------------------------------------------------------------------

6. Compliance Schedule: Companies That Cease To Qualify as Smaller
Reporting Companies
    NYSE Arca's existing rules do not permit companies listing on the
Exchange to phase-in compliance with all of the Exchange's applicable
independence requirements for compensation committees after the date
that the company's securities first trade on NYSE Arca. NYSE Arca
proposes to create a compliance schedule for companies that cease to be
a Smaller Reporting Company. For a company that was, but has ceased to
be, a Smaller Reporting Company, 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.\73\ Pursuant to Rule
12b-2 under the Act, a company tests its status as a Smaller Reporting
Company on an annual basis as of the last business day of its most
recently completed second fiscal quarter (the ``Smaller Reporting
Company Determination Date''). A company with a public float of $75
million or more as of the Smaller Reporting Company Determination Date
will cease to be a Smaller Reporting Company as of the beginning of the
fiscal year following the Smaller Reporting Company Determination Date.
Under NYSE Arca's proposal, the day of this change in status is the
beginning of the compliance period (``Start Date'').\74\
---------------------------------------------------------------------------

    \73\ See proposed Commentary .02 to Equities Rule 5.3(k)(4), as
amended. In the proposal as originally submitted, the compliance
schedule was to require compliance with the enhanced standards for
director independence six months after the company ceases to be a
Smaller Reporting Company, but immediate compliance with all other
requirements. In Amendment No. 2, NYSE Arca states that while the
revised compliance schedule is different from what it originally
proposed, the amended version will allow companies sufficient time
to adjust to the differences, as many companies will likely not
become aware of their change in status until significantly after the
determination date and would therefore not utilize the transition
period as originally proposed to bring themselves into compliance
with the enhanced requirements, and that such companies would have
significant difficulty in becoming compliant within the transition
period as originally proposed.
    \74\ See Amendment No. 2.
---------------------------------------------------------------------------

    By six months from the Start Date, the company will be required to
comply with Equities Rule 5.3(k)(4)(v), which sets forth the provision
described above relating to the requirement that the committee consider
independence factors before selecting compensation advisers.\75\ Six
months from the Start Date, the company will begin to comply with the
additional requirements in Equities Rule 5.3(k)(4)(ii) regarding member
independence on the compensation committee. Under the proposal, as
amended, a company that has ceased to be a Smaller Reporting Company
will be permitted to phase in its compliance with the enhanced
independence requirements for compensation committee members (relating
to compensatory fees and affiliation) as follows: (i) One member must
satisfy the requirements by six months from the Start Date; (ii) a
majority of members must satisfy the requirements by nine months from
the Start Date; and (iii) all members must satisfy the requirements by
one year from the Start Date.\76\
---------------------------------------------------------------------------

    \75\ In addition, this will require the company to act in order
to reflect this additional requirement for the compensation
committee. See proposed Equities Rule 5.3(k)(4)(iii).
    \76\ During the compliance schedule, a company that has ceased
to be a Smaller Reporting Company will be required to continue to
comply with the rules previously applicable to it.
---------------------------------------------------------------------------

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

    As stated previously, the Commission received one comment letter on
the NYSE Arca proposal,\77\ and seven comment letters on a related NYSE
proposal.\78\ The Commission is treating the comment letter submitted
on the NYSE filing, for which a comparable letter was not submitted on
the NYSE Arca filing, as also being applicable to

the NYSE Arca filing since the NYSE and NYSE Arca filings address the
same substantive issues. NYSE Euronext, Inc., on behalf of NYSE Arca,
responds to these comment letters for the NYSE Arca proposal.\79\
---------------------------------------------------------------------------

    \77\ See supra note 5.
    \78\ See id.
    \79\ See supra note 6. NYSE Euronext, Inc.'s response addresses
comments received on both the NYSE and NYSE Arca proposals.
---------------------------------------------------------------------------

    Three commenters expressed general support for the proposal,
although two believed that it needed to be amended before being
approved.\80\ Some commenters supported specific provisions of the
proposal,\81\ some opposed specific provisions,\82\ and some sought
clarification of certain aspects of the proposal.\83\ Some commenters
believed that the proposal fell short of meeting the requirements of
Rule 10C-1 and believed that it should have been more stringent.\84\
These and other comments, as well as NYSE Arca's responses to some of
the comments that raised issues with the proposal, are summarized
below.
---------------------------------------------------------------------------

    \80\ See Ameriprise Letter, which supported the proposal but
believed that certain aspects were not sufficiently clear such that
the proposal needed to be amended to provide additional clarity; ICI
Letter, which urged approval of the proposal; and Corporate
Secretaries Letter, which generally supported the proposal, but
believed that certain of its aspects were unnecessarily burdensome
or not sufficiently clear such that the proposal needed to be
amended before being approved by the Commission.
    \81\ See Brown Letter, CII Letter, and ICI Letter.
    \82\ See AFL-CIO Letter, Brown Letter, and Wilson Sonsini
Letter. See also CII Letter, which stated that it believed that
specific aspects of the proposal were lacking.
    \83\ See Ameriprise Letter and Corporate Secretaries Letter.
    \84\ See AFL-CIO Letter, Brown Letter, CII Letter, and Teamsters
Letter.
---------------------------------------------------------------------------

A. Definition of Independence

1. Consideration of Director Compensation
    Three commenters believed that the proposal falls short of the
requirements of Rule 10C-1, which, in their view, requires that fees
paid to a director for service on the company's board also be
considered.\85\ Two of these commenters, after noting that the proposal
did not require boards of directors to also consider the compensation
paid to the directors for their service on the board in determining the
independence of directors serving on the compensation committee, argued
that the proposal falls short of the requirements of Rule 10C-1, which,
in their view, requires that fees paid to a director for service on the
company's board also be considered.\86\ The other commenter argued that
the language of Section 10C of the Act itself, as well as its
legislative history, indicates Congress's intent that such fees be
considered.\87\ These commenters believed that compensation for board
service can result in ``the impairment of independence as a result of
excessive fees,'' \88\ because ``[h]igh director fees relative to other
sources of income can compromise director objectivity,'' \89\ and
``[h]ighly paid directors also may be inclined to approve large
executive pay packages.'' \90\ One of these commenters believed that
the requirement of Section 10C of the Act and Rule 10C-1 to consider
the source of compensation of a director goes further, and applies to
all types of compensation that a director may receive, including
compensation paid by any person, including non-issuers.\91\
---------------------------------------------------------------------------

    \85\ See Brown Letter; AFL-CIO Letter; and Teamsters Letter. As
noted above, the comment letters refer specifically to NYSE, but
apply equally to the NYSE Arca proposal.
    \86\ See AFL-CIO Letter and Teamsters Letter, noting that Rule
10C-1 requires the exchanges to consider a director's ``source of
compensation,'' and arguing that this phrase includes director fees.
    \87\ See Brown Letter.
    \88\ Id.
    \89\ See AFL-CIO Letter and eamsters Letter.
    \90\ Id.
    \91\ See Brown Letter.
---------------------------------------------------------------------------

    In its response to comments, NYSE Arca stated that, as all non-
management directors of a listed company are eligible to receive the
same fees for service as a director or board committee member, NYSE
Arca does not believe that it is likely that director compensation
would be a relevant consideration for compensation committee
independence.\92\ NYSE Arca noted that, however, the proposed rules
require the board to consider all relevant factors in making
compensation committee independence determinations.\93\ Therefore, NYSE
Arca believes that, to the extent that excessive board compensation
might affect a director's independence, the proposed rules would
require the board to consider that factor in its determination.\94\
---------------------------------------------------------------------------

    \92\ See NYSE Response Letter.
    \93\ See id.
    \94\ See id.
---------------------------------------------------------------------------

2. Personal or Business Relationships Between Directors and Officers
    Some commenters believed that the proposed rules should explicitly
require the board of a listed company, when considering affiliations of
a director in determining eligibility for compensation committee
membership, to consider personal or business relationships between the
director and the company's executive officers.\95\ As expressed by two
of these commenters, ``too many corporate directors have significant
personal, financial or business ties to the senior executives that they
are responsible for compensating.'' \96\
---------------------------------------------------------------------------

    \95\ See AFL-CIO Letter, Brown Letter, CII Letter, Teamsters
Letter. As noted above, several of these comment letters refer
specifically to NYSE, but apply equally to the NYSE Arca proposal.
    \96\ AFL-CIO Letter and Teamsters Letter.
---------------------------------------------------------------------------

    Some commenters believed that related party transactions should
explicitly be included as a relevant factor in determining independence
for members of compensation committees.\97\ The additional requirements
Disclosure suggested by commenters also included, for example,
disqualification of a director from membership on the compensation
committee if an immediate family member of the director received
compensation in excess of $120,000 a year from the company even if that
family member was not an executive officer of the company; \98\ or if
the director has, or in the past five years has had, a personal
contract with the company, with an executive officer of the company, or
with any affiliate of the company.\99\
---------------------------------------------------------------------------

    \97\ See AFL-CIO Letter and Teamsters Letter.
    \98\ See id.. NYSE's definition of Independent Director already
disqualifies a director from membership on the compensation
committee if an immediate family member of the director receives in
excess of $120,000 from the company or was an executive officer of
the company.
    \99\ See CII Letter. The commenter acknowledged, however, that
NYSE Arca's existing director requirements implicitly require this
consideration, but similarly recommended that the importance of the
factor requires it be explicit in the proposal. Outside the scope of
this proposal, the commenter also suggested NYSE Arca consider, at
some future date, developing a more comprehensive and robust
definition of independent directors that could be applicable to all
board committees and provided a proposed definition for NYSE Arca's
consideration.
---------------------------------------------------------------------------

    One commenter acknowledged that the proposal would require
consideration of all factors specifically relevant to determining
whether a director has a relationship which is material to that
director's ability to be independent from management, but argued that
such requirement is not sufficient to ensure that boards weigh personal
or business relationships between directors and executive
officers.\100\ In support, the commenter argued that: (1) Such
relationships were not technically with the ``listed company'' and
therefore would at least create confusion as to whether it should be
considered; (2) the omission of an explicit reference to this
relationship was inconsistent with other approaches taken in the
proposal that made reference to certain other relationships; and (3)
legislative history makes it clear that Congress expected these

relationships to be explicitly considered in determining director
independence.\101\
---------------------------------------------------------------------------

    \100\ See Brown Letter.
    \101\ See id.
---------------------------------------------------------------------------

    In response, NYSE Arca noted that the existing independence
standards of NYSE Arca require the board to make an affirmative
determination that there is no material relationship between the
director and the company which would affect the director's
independence.\102\ NYSE Arca further stated that commentary to Section
303A.02(a) of the NYSE Listed Company Manual explicitly notes with
respect to the board's affirmative determination of a director's
independence that the concern is independence from management, and NYSE
MKT LLC and NYSE Arca have always interpreted their respective director
independence requirements in the same way.\103\ Consequently, NYSE Arca
stated that it did not believe that any further clarification of this
requirement is necessary.\104\
---------------------------------------------------------------------------

    \102\ See NYSE Response Letter.
    \103\ See id.
    \104\ See id.
---------------------------------------------------------------------------

    As to a requirement to consider related party transactions, NYSE
Arca responded that it believes that this is unnecessary as the
existing director independence standards require boards to consider all
material factors relevant to an independence determination, as do the
specific compensation committee independence requirements of the
proposed rules.\105\
---------------------------------------------------------------------------

    \105\ See id.
---------------------------------------------------------------------------

3. Sufficiency of Single Factor and Additional Comments on Independence
    Two commenters explicitly sought clarification that a single factor
can result in the loss of independence.\106\ In its response letter,
NYSE Arca confirmed that it has interpreted the existing general board
independence standards as providing that a single relationship could be
sufficiently material that it would render a director non-independent.
NYSE Arca stated it was not aware that there has been any confusion
with respect to this interpretation.\107\ Consequently, NYSE Arca did
not believe it is necessary to include in the proposed rules a
statement that a single factor may be sufficiently material to render a
director non-independent, as this is clearly the intention of the rules
as drafted.\108\
---------------------------------------------------------------------------

    \106\ See AFL-CIO Letter; Teamsters Letter. As noted above, the
comment letters refer specifically to NYSE, but apply equally to the
NYSE Arca proposal.
    \107\ See NYSE Response Letter.
    \108\ See id.
---------------------------------------------------------------------------

    Some of the above commenters expressed the belief, in general, that
the definition of an independent director should be more narrowly
drawn, that the bright-line tests of independence should be
strengthened, and that the standards of independence should be uniform
for all committees requiring independent directors.\109\
---------------------------------------------------------------------------

    \109\ See CII Letter, AFL-CIO Letter, Teamsters Letter.
---------------------------------------------------------------------------

    One commenter believed that the requirement that the board ``must
consider all factors specifically relevant to determining whether a
director has a relationship to the listed company which is material to
that director's ability to be independent from management in connection
with the duties of a compensation committee member'' was vague and
unnecessary in light of the comprehensive factors already
required.\110\ In responding to this commenter, NYSE Arca disagreed,
noting that the requirement to consider all material relationships, not
just those enumerated, was essential, as it is impossible to foresee
all relationships that may be material.\111\
---------------------------------------------------------------------------

    \110\ See Corporate Secretaries Letter.
    \111\ See NYSE Response Letter.
---------------------------------------------------------------------------

B. Compensation Adviser Independence Factors

    The Commission received letters from four commenters relating to
the provision of the proposed rule change that requires a compensation
committee to take into consideration the factors set forth in the
proposal in the selection of a compensation consultant, legal counsel,
or other adviser to the committee.\112\
---------------------------------------------------------------------------

    \112\ See Ameriprise Letter, Wilson Sonsini Letter, CII Letter,
and Corporate Secretaries Letter. As noted above, several of these
comment letters refer specifically to NYSE, but apply equally to the
NYSE Arca proposal.
---------------------------------------------------------------------------

1. Additional Factors for Consideration
    One commenter generally supported the proposal's requirement that a
board consider six independence factors before engaging an adviser, but
believed that at least one additional factor should be considered:
``Whether the compensation committee consultants, legal counsel or
other advisers require that their clients contractually agree to
indemnify or limit their liability.'' \113\ The commenter believed that
such contractual provisions, which the commenter indicated have become
standard practice for many consultants, ``raise conflict of interest
red flags'' that every compensation committee should consider in
determining the independence of the consultant.\114\
---------------------------------------------------------------------------

    \113\ See CII Letter.
    \114\ See id.
---------------------------------------------------------------------------

    In response, NYSE Arca stated that it did not believe that this is
an appropriate addition because a relationship would affect an
adviser's independence from management only if it gave rise to a
concern that it would subject the adviser to influence by
management.\115\ It was not apparent to NYSE Arca why the existence of
contractual indemnification and limitation of liability provisions
would subject an adviser to any influence by management and, therefore,
it is not clear how they are relevant to an independence
determination.\116\ NYSE Arca expressed no view on the desirability of
such agreements.\117\
---------------------------------------------------------------------------

    \115\ See NYSE Response Letter.
    \116\ See id.
    \117\ See id.
---------------------------------------------------------------------------

2. Non-Independent Consultants
    One commenter suggested that, although the portion of the proposal
which relates to the compensation committee's use of a compensation
consultant was thoughtfully drafted and accurately reflects the
substance of Rule 10C-1, there was a possibility that a reader may not
properly interpret the intended meaning of proposed Section 303A.05(c)
of the NYSE Listed Company Manual concerning the use of compensation
consultants, legal counsel and advisers that are not independent.\118\
First, the commenter suggested the use of the example ``independent
legal counsel'' might be read to require the compensation committee to
only use independent legal counsel, when Rule 10C-1 would otherwise
permit a compensation committee to receive advice from non-independent
counsel, such as in-house counsel or outside counsel retained by
management.\119\ Second, the commenter suggested that the proposal
could be revised to emphasize that a compensation committee is not
responsible for advisers retained by management or other parties.\120\
Third, the commenter suggested that the section addressing the funding
of consultants should be revised to make clear that: (a) Retained legal
counsel need not be independent: And (b) expenses of an adviser, in
addition to its compensation, would also be provided for by the
issuer.\121\ Fourth, the commenter suggested that the proposal be
clarified to require a compensation committee to take into account the
independence requirements only when selecting a consultant for matters
related

to executive compensation, rather than for consultants selected to
assist with any other responsibilities the committee may have in
addition to executive compensation.\122\ In response, NYSE Arca noted
that Amendment No. 2 amended the proposed rule text to provide that:
(i) Nothing in the proposed rules requires a compensation consultant,
legal counsel or other compensation adviser to be independent, only
that the compensation committee consider the enumerated independence
factors before selecting a compensation adviser; and (ii) the
compensation committee may select any compensation adviser they prefer
including ones that are not independent, after considering the six
independence factors outlined in the proposed rules.\123\ In addition,
NYSE Arca noted that Rule 10C-1 and the SEC's adopting release refer
only to compensation advisers generally without carving out
compensation advisers retained by the compensation committee with
respect to matters other than executive compensation.\124\
---------------------------------------------------------------------------

    \118\ See Ameriprise Letter.
    \119\ See id.
    \120\ See id.
    \121\ See id.
    \122\ See id. See also Corporate Secretaries Letter.
    \123\ See NYSE Response Letter.
    \124\ See NYSE Response Letter.
---------------------------------------------------------------------------

    One commenter believed that the proposed rule could be read as
requiring a compensation committee to consider the independence factors
set forth in Rule 10C-1 when selecting any consultant providing advice
to the compensation committee, including any outside legal counsel that
might provide legal advice to a compensation committee.\125\ The
commenter argued that outside legal counsel often provides advice to
compensation committees on matters other than how much a company should
pay an executive.\126\ The commenter suggested it would not be
``necessary or a good use of resources for compensation committees to
review independence factors for such attorneys providing advice to the
compensation committee.'' \127\ The commenter stated that no other rule
requires a board committee to consider the independence of its regular
legal counsel,\128\ and noted that, while it may, at times, be
appropriate for a board or a committee to consider independence
factors, such a consideration should not be made part of a listing
standard that singles out the compensation committee.\129\ The
commenter suggested that different language originally proposed by The
NASDAQ Stock Market LLC reflected a more balanced rule that only
required the compensation committee to consider the independence when
selecting independent legal counsel, not every outside attorney that
provides advice to the compensation committee.\130\
---------------------------------------------------------------------------

    \125\ See Wilson Sonsini Letter.
    \126\ See id.
    \127\ See id.
    \128\ See id.
    \129\ See id.
    \130\ See id. The Commission notes that The NASDAQ Stock Market
LLC has since revised its proposed rule language and added
commentary that makes clear its original intent that the
compensation committee of an issuer listed on The NASDAQ Stock
Market LLC, absent an exemption, must consider the independence of
every adviser, other than in-house legal counsel, that provides
advice to the compensation committee, including non-independent
legal counsel. See SR-NASDAQ-2012-109, Amendment No. 1.
---------------------------------------------------------------------------

    In response, NYSE Arca stated that it believes that its proposal is
dictated by Rule 10C-1, which excludes only in-house legal counsel from
the requirement to conduct an independence analysis with respect to any
legal counsel consulted by the compensation committee, including the
company's regular securities or tax counsel.\131\ NYSE Arca noted that
the Rule 10C-1 Adopting Release provides that ``[t]he exemption of in-
house counsel from the independence analysis will not affect the
obligation of a compensation committee to consider the independence of
outside legal counsel or compensation consultants or other advisers
retained by management or by the issuer.'' \132\
---------------------------------------------------------------------------

    \131\ See NYSE Response Letter.
    \132\ See id.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the proposal,
maintained that the required independence assessment will be ``time-
consuming and burdensome'' due to the scope of information that will
need to be gathered in order to conduct the required independence
assessment.\133\ This commenter believed that uncertainty over the
scope of the requirement could have a counterproductive effect of
discouraging compensation committees from obtaining the advice of
advisers subject to the rule, particularly in situations where quick
action is required of the compensation committee, and further
identified a number of specific issues that it believed NYSE should
address to provide greater clarity regarding the standard.\134\
---------------------------------------------------------------------------

    \133\ See Corporate Secretaries Letter.
    \134\ The Commission notes that NYSE Arca addressed some of the
commenter's concerns in Amendment No. 2.
---------------------------------------------------------------------------

    In response, NYSE Arca disagreed with the commenter, arguing that
it was impossible to specifically enumerate every category of
relationship which might be material to a compensation committee
adviser's independence.\135\ NYSE Arca believes that it is therefore
necessary for a compensation committee to conduct a more flexible
analysis.\136\ NYSE Arca believes that it would not be appropriate for
it to identify additional relevant factors in the rule, as it would be
impossible to predict every category of relationship that might be
material.\137\
---------------------------------------------------------------------------

    \135\ See NYSE Response Letter.
    \136\ See id.
    \137\ See id.
---------------------------------------------------------------------------

C. Opportunity To Cure Defects

    One commenter supported the rule proposed to permit issuers a
period of time, under specified conditions, to cure failures to comply
with the independence requirements for compensation committee
members.\138\ The commenter was concerned, however, that the proposed
rules did not specify a cure period for any other form of non-
compliance with the new rules.\139\ The commenter believed that a
company should be allowed to take corrective action within a reasonable
time after the company's senior executives learn of the non-compliance.
---------------------------------------------------------------------------

    \138\ See Corporate Secretaries Letter. As noted above, the
comment letter refers specifically to NYSE, but applies equally to
the NYSE Arca proposal.
    \139\ See id. The commenter mentioned, in particular, the
requirement that the committee may obtain advice from a consultant
or adviser only after assessing that individual's independence. The
commenter believed that inadvertent violations of this requirement
could arise, for example, if a person is appearing before a
compensation committee solely to provide information or other
services, and the individual then on a solicited or unsolicited
basis makes a statement that could be viewed as providing advice on
executive compensation. In the absence of a cure mechanism, the
commenter believed, the company would be in violation of the listing
standard and have no recourse.
---------------------------------------------------------------------------

    In response, NYSE Arca noted that it had existing policies and
procedures that govern non-compliance with rules generally and that
these provisions would apply to any events of non-compliance under the
proposed rules.\140\ NYSE Arca believes these provisions provide it
with the ability to grant a discretionary period for an issuer to
return to compliance, and noted that the determination of a reasonable
cure period can only be made in light of specific facts and
circumstances.\141\
---------------------------------------------------------------------------

    \140\ See NYSE Response Letter.
    \141\ See id.
---------------------------------------------------------------------------

D. Exemptions

    The Commission received one comment letter supporting the proposal
to exempt investment companies from the Rule 10C-1 requirements.\142\
As the commenter noted, although Rule 10C-1 exempts certain entities,
including

registered open-end management investment companies, from the enhanced
independence requirements for members of compensation committees, it
did not explicitly exempt other types of investment companies
registered under the Investment Company Act of 1940 (``Investment
Company Act''), including closed-end funds, from any of the
requirements of Rule 10C-1. Under the proposal, both closed-end and
open-end funds would be exempt from all the requirements of the rule.
The commenter supported this aspect of the proposal, stating that both
open-end and closed-end funds typically are externally managed and do
not employ executives or, by their nature, have employees. The
commenter agreed with the proposal that it would be significantly and
unnecessarily burdensome to require such entities to comply with the
proposed requirements, and further noted that any conflicts with
respect to compensation of investment advisers are governed by the
Investment Company Act.\143\
---------------------------------------------------------------------------

    \142\ See ICI Letter. As noted above, the comment letter refers
specifically to NYSE, but applies equally to the NYSE Arca proposal.
    \143\ See ICI Letter.
---------------------------------------------------------------------------

E. Transition Period

    As noted above, NYSE Arca does not propose a transition period. One
commenter voiced support for the transition period proposed by NYSE for
compliance with the new compensation committee independence standard,
but believed that NYSE should provide a longer period for companies to
satisfy proposed Section 303A.05 of the NYSE Listed Company Manual,
relating to the authority of a compensation committee to retain
compensation consultants, legal counsel, and other compensation
advisers; the authority to fund such advisers; and the responsibility
of the committee to consider independence factors before selecting such
advisers.\144\
---------------------------------------------------------------------------

    \144\ See Corporate Secretaries Letter. Here, the comment letter
refers specifically to NYSE, and does not apply to the NYSE Arca
filing, as NYSE Arca provides no transition period for currently
listed companies.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the NYSE Arca
proposal, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\145\ In particular, the Commission finds that the amended
proposed rule change is consistent with the requirements of Section
6(b) of the Act,\146\ as well as with Section 10C of the Act \147\ and
Rule 10C-1 thereunder.\148\ Specifically, the Commission finds that the
proposed rule change, as amended, is consistent with Section 6(b)(5) of
the Act,\149\ 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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    \145\ In approving the NYSE Arca proposed rule change, as
amended, the Commission has considered its impact on efficiency,
competition and capital formation. 15 U.S.C. 78c(f).
    \146\ 15 U.S.C. 78f(b).
    \147\ 15 U.S.C. 78j-3.
    \148\ 17 CFR 240.10C-1.
    \149\ 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 NYSE Arca 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,\150\ Congress resolved to require that ``board
committees that set compensation policy will consist only of directors
who are independent.'' \151\ 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.
---------------------------------------------------------------------------

    \150\ See supra note 9.
    \151\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of
the Committee of Conference, Title IX, Subtitle E ``Accountability
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29,
2010).
---------------------------------------------------------------------------

    In response, NYSE Arca submitted the proposed rule change, which
includes rules intended to comply with the requirements of Rule 10C-1
and additional provisions designed to strengthen the Exchange's listing
standards relating to compensation committees. The Commission believes
that the proposed rule change satisfies the mandate of Rule 10C-1 and
otherwise will promote effective oversight of its listed issuers'
executive compensation practices.
    The Commission notes that a number of the commenters generally
supported substantially similar proposed rule changes, although some
commenters offered suggestions to clarify or improve various provisions
NYSE Arca's proposal or NYSE's substantially similar proposal. The
Commission believes that the proposed rule change, as modified by
Amendment No. 2, appropriately revises NYSE Arca'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).'' \152\ 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.
---------------------------------------------------------------------------

    \152\ As explained further in the Rule 10C-1 Adopting Release,
prior to final approval, the Commission will consider whether the
exchanges' proposed rule changes are consistent with the
requirements of Section 6(b) and Section 10C of the Exchange Act.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence
standards that currently apply to board and compensation committee
members, which include certain bright-line tests, NYSE Arca has
enhanced its listing requirements regarding compensation committees by
adopting additional standards for independence to comply with the Fees
Factor and Affiliation Factor, as well as the other standards set forth
in Rule 10C-1. The NYSE Arca's proposal also adopts the cure procedures
required in Rule 10C-1(a)(3) for compensation committee members who
cease to be independent for reasons outside their reasonable control,
so long as the majority of the members of the compensation committee
continue to be independent, and retains the requirement that listed
issuers have a compensation committee composed entirely of independent
directors as required by Rule 10C-1.
    In addition, as noted above, NYSE Arca eliminates, for all
companies other than Smaller Reporting Companies, the ability of the
board under exceptional and limited circumstances to appoint a non
independent director to the compensation committee.
    Further, as discussed in more detail below, the NYSE Arca proposal
retains the requirement that the compensation committee have a written
charter 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. Finally, to help in assuring that companies comply with
these provisions, Exchange rules will continue to require that the
compensation committee charter address an annual performance evaluation
of the compensation committee. Taken as a whole, the Commission
believes that these changes will strengthen the oversight of executive
compensation in NYSE Arca-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 rule
text states when considering the source of a director's compensation in
determining independence for compensation committee service, the board
should consider whether the director receives compensation from any
person or entity that would impair his ability to make independent
judgments about the listed company's executive compensation. In
addition to the continued application of the NYSE Arca's current
bright-line tests, NYSE Arca'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 NYSE Arca Equities Rule 5.3(k)(4)(ii), 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.\153\ The
Commission, therefore, believes that the proposed compensatory fee
requirements comply with Rule 10C-1 and are designed to protect
investors and the public interest, consistent with Section 6(b)(5) of
the Act. The Commission notes that the compensatory fee consideration
may help ensure that compensation committee members are less likely to
have received fees, from either the issuer or another entity, that
could potentially influence their decisions on compensation matters.
---------------------------------------------------------------------------

    \153\ See supra note 33, setting forth the existing bright-line
tests.
---------------------------------------------------------------------------

    The Commission recognizes that some commenters did not believe that
the proposal went far enough because the NYSE Arca did not adequately
consider the compensation that directors receive for board or committee
service in formulating its standards of independence for service on the
compensation committee, and, in particular, the levels to which such
compensation may rise,\154\ or otherwise favored additional
requirements.\155\ The Commission notes, however, that to the extent a
conflict of interest exists because directors set their own
compensation, companies must disclose director compensation, and
investors will become aware of excessive or non-customary director
compensation through this means. In addition, as NYSE Arca states, a
company's board of directors must consider all relevant factors in
making compensation committee independence determinations, and if
director fees could, in the opinion of the board, impair the director's
independent judgment with respect to compensation-related matters, the
board could therefore consider director compensation in that
context.\156\ The Commission believes that, based on the NYSE Arca's
argument and the disclosure requirements noted above, these arguments
are sufficient to find that NYSE Arca has complied with the
requirements of Rule 10C-1 in this regard.
---------------------------------------------------------------------------

    \154\ See AFL-CIO Letter, Brown Letter, and Teamsters Letter,
maintaining that NYSE's proposal ``falls short'' of the Rule 10C-1
provision requiring exchanges to consider a director's source of
compensation. See also supra notes 95-99 and accompanying text. As
stated by commenters, ``[h]igh director fees relative to other
sources of income can compromise director objectivity'' and
``[h]ighly paid directors also may be more inclined to approve large
executive pay packages.'' AFL-CIO Letter. See also Teamsters Letter.
As noted above, the comment letters refer specifically to NYSE, but
apply equally to the NYSE Arca proposal.
    \155\ See, e.g., CII Letter.
    \156\ See NYSE Response letter, supra note 6. The Commission
also notes that in the NYSE Response Letter, the Exchange states
that to the extent that excessive board compensation might affect a
director's independence, the new rules would require the board to
consider that factor in its independence determination.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, NYSE Arca has
concluded that an outright bar from service on a company's compensation
committee of any director with an affiliation with the company, its
subsidiaries, and their affiliates is inappropriate for compensation
committees. NYSE Arca's existing independence standards will also
continue to apply to those directors

serving on the compensation committee. NYSE Arca maintains that it may
be appropriate for certain affiliates, such as representatives of
significant stockholders, to serve on compensation committees as
``share ownership in the listed company aligns the director's interests
with those of unaffiliated shareholders, as their stock ownership gives
them the same economic interest in ensuring that the listed company's
executive compensation is not excessive.'' In spite of the argument of
two commenters in favor of an outright ban on affiliations with the
company,\157\ the Commission believes that NYSE Arca's approach of
requiring boards only to consider such affiliations is reasonable and
consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \157\ See Teamsters Letter and AFL-CIO Letter. As noted above,
the comment letters refer specifically to NYSE, but apply equally to
the NYSE Arca proposal.
---------------------------------------------------------------------------

    The Commission notes that Congress, in requiring the Commission to
direct the exchanges to consider the Affiliation Factor, did not
declare that an absolute bar was necessary. Moreover, as the 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.'' \158\ In determining that NYSE Arca's affiliation standard is
consistent with Sections 6(b)(5) and 10C under the Act, the Commission
notes that NYSE Arca's proposal requires a company's board, in
selecting compensation committee members, to consider whether any such
affiliation would impair a director's judgment as a member of the
compensation committee. The NYSE Arca Equities 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.\159\
---------------------------------------------------------------------------

    \158\ 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 31-35 and
accompanying text.
    \159\ The Commission notes that one commenter suggested there
was ambiguity as to whether boards must consider business or
personal relationships between directors and senior management. See
Brown Letter. In response, NYSE Arca noted that its existing
independence standards require the board to make an affirmative
determination that there is no material relationship between the
director and the company which would affect the director's
independence. NYSE Arca noted that Commentary to Section 303A.02(a)
of the NYSE Listed Company Manual explicitly notes with respect to
the board's affirmative determination of a director's independence
that the concern is independence from management, and NYSE Arca has
always interpreted their director independence requirements in the
same way. Consequently, NYSE Arca does not believe that any further
clarification of this requirement is necessary. See NYSE Response
Letter.
---------------------------------------------------------------------------

    As to whether NYSE Arca should adopt any additional relevant
independence factors, the Exchange stated that it reviewed its rules in
light of Rule 10C-1, and concluded that its existing rules together
with its proposed rules are sufficient to ensure committee member
independence. The Commission believes that, through this review, the
Exchange has complied with the requirement that it consider relevant
factors, including, but not limited to, the Fees and Affiliation
Factors in determining its definition of independence for compensation
committee members. The Commission does not agree with the commenters
who argued that the NYSE's substantially similar proposal falls short
of ``the requirements or intent'' of Section 10C of the Act and Rule
10C-1. The Commission notes that Rule 10C-1 requires each exchange to
consider relevant factors in determining independence requirements for
members of a compensation committee, but does not require the
exchange's proposal to reflect any such additional factors.
    As noted above, several commenters argued that the proposal should
require other ties between directors and the company, including
business and personal relationships with executives of the company, be
considered by boards in making independence determinations.\160\ The
Commission did emphasize in the Rule 10C-1 Adopting Release that ``it
is important for exchanges to consider other ties between a listed
issuer and a director * * * that might impair the director's judgment
as a member of the compensation committee,'' \161\ and noted that ``the
exchanges might conclude that personal or business relationships
between members of the compensation committee and the listed issuer's
executive officers should be addressed in the definition of
independence.'' However, the Commission did not require exchanges to
reach this conclusion and thus NYSE Arca's decision that such ties need
not be included explicitly in its definition of independence does not
render its proposal insufficient.
---------------------------------------------------------------------------

    \160\ See supra notes 95-105 and accompanying text. As noted
above, several of the comment letters refer specifically to NYSE,
but apply equally to the NYSE Arca proposal.
    \161\ See supra note 11.
---------------------------------------------------------------------------

    In explaining why it did not include, specifically, personal and
business relationships as a factor, NYSE Arca cites its standards for
Independent Directors, generally, which require the board of directors
of a listed issuer to make an affirmative determination that each such
director has no material relationship with the listed company with
respect to their independence from management.\162\ All compensation
committee members must meet the general independence standards under
NYSE Arca's rules in addition to the two new criteria being adopted
herein. The Commission therefore expects that boards, in fulfilling
their obligations, will apply this standard to each such director's
individual responsibilities as a board member, including specific
committee memberships such as the compensation committee. Although
personal and business relationships, related party transactions, and
other matters suggested by commenters are not specified either as
bright-line disqualifications or explicit factors that must be
considered in evaluating a director's independence, the Commission
believes that compliance with NYSE Arca's rules and the provision noted
above would demand consideration of such factors with respect to
compensation committee members, as well as to all Independent Directors
on the board.
---------------------------------------------------------------------------

    \162\ See Equities Rule 5.3(k)(1). See also NYSE Response
Letter.
---------------------------------------------------------------------------

    Notwithstanding the concern of some commenters, the Commission
confirms that Rule 10C-1 does not mean that a director cannot be
disqualified on the basis of one factor alone. Although NYSE Arca does
not state this explicitly in its rules, in response to comments,

the Exchange confirmed that they have interpreted their current rules
as providing that a single relationship could be sufficiently material
that it would render a director non-independent. The Commission
believes that nothing in Rule 10C-1 or in NYSE Arca's current or
proposed rules implies otherwise.
    Finally, the Commission does not believe that NYSE Arca is required
in the current proposed rule change to consider further revisions of
its independence rules as suggested by some commenters, although it may
wish to do so in the future after it has experience with its rules. The
Commission notes that the NYSE Arca provision requires a board to
further exercise appropriate discretion to consider all factors
specifically relevant in determining whether a director has a
relationship to the listed company which is material to that director's
ability to be independent from management in connection with the duties
of a compensation committee member. The Commission notes that one
commenter argues this provision is vague and unnecessary and should be
deleted from the proposal.\163\ The Commission does not agree with the
commenter, however, that the consideration of the explicitly enumerated
factors will be sufficient in all cases to achieve the objectives of
Section 10C(a)(3), because it is not possible to foresee all possible
kinds of relationships that might be material to a compensation
committee member's independence. We therefore believe the flexibility
provided in NYSE Arca's new compensation committee independence
standards provides companies with guidance, while allowing them to
identify those relationships that might raise questions of independence
for service on the compensation committee. For these reasons, we
believe the director independence standards are consistent with the
investor protection provision of Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \163\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

    Under NYSE Arca's proposal, only Smaller Reporting Companies will
be able to avail themselves of the ``Exceptional and Limited
Circumstances'' provision that permits the board to appoint one non-
independent director serve on a compensation committee under certain
circumstances. Accordingly, all listed companies, except Smaller
Reporting Companies, will be required to have a compensation committee
comprised of members that all meet the existing and enhanced
independence requirements. We note that this change will ensure that,
for all NYSE Arca-listed companies that are not Smaller Reporting
Companies, executive compensation will only be considered by
independent directors, which should help to ensure impartial executive
compensation decisions.
    The Commission believes that the discretion granted to each
exchange by Rule 10C-1, generally, to determine the independence
standards it adopts to comply with the Rule includes the leeway to
carve out exceptions to those standards, as long as they are consistent
with the Act. Regarding the justification for retaining this exception
only for Smaller Reporting Companies, the Commission notes that it long
ago approved as consistent with the Act the broader exception and
concept in the context of NYSE Arca's definition of Independent
Director under Equities Rule 5.3(k)(1) with respect to compensation
committees. For these reasons, the Commission believes that retaining
this provision for Smaller Reporting Companies is reasonable and
consistent with Section 6(b)(5) of the Act and with Rule 10C-1. We note
that Smaller Reporting Companies are already exempted out of the
enhanced independence standards under NYSE Arca's proposal and Rule
10C-1. The provision was previously approved by the Commission as
consistent with the Act, and finally, the Commission notes that a
member appointed to a Smaller Reporting Company's compensation
committee under this Exceptional and Limited Circumstances provision
may not serve longer than two years.

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

    As discussed above, NYSE Arca 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 \164\ and are consistent with the Act.\165\
---------------------------------------------------------------------------

    \164\ 17 CFR 240.10C-1.
    \165\ 15 U.S.C. 78j-3.
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to
specify the enhanced compensation committee responsibilities through
official board action will help to assure that there is adequate
transparency as to the rights and responsibilities of compensation
committee members. As discussed above, the proposed rule change
requires the compensation committee of a listed company to consider the
six factors relating to independence that are enumerated in the
proposal before selecting a compensation consultant, legal counsel or
other adviser to the compensation committee. The Commission believes
that this provision is consistent with Rule 10C-1 and Section 6(b)(5)
of the Act.
    As noted above, one commenter believed that Rule 10C-1 could be
read as not requiring a compensation committee to consider the
enumerated independence factors with respect to regular outside legal
counsel and sought to have NYSE revise its substantially similar
proposal.\166\ This reading is incorrect, and NYSE Arca's rule language
reflects the appropriate reading. The Commission notes that Rule 10C-1
includes an instruction that specifically requires a compensation
committee to conduct the independence assessment with respect to ``any
compensation consultant, legal counsel or other adviser that provides
advice to the compensation committee, other than in-house counsel.''
\167\ To avoid any confusion, NYSE Arca added rule text that reflects
this instruction in its own rules.\168\
---------------------------------------------------------------------------

    \166\ See Wilson Sonsini Letter and supra notes 125-130 and
accompanying text.
    \167\ See Instruction to paragraph (b)(4) of Rule 10C-1.
    \168\ See supra note 50 and accompanying text.
---------------------------------------------------------------------------

    In approving this aspect of the proposal, the Commission notes that
compliance with the rule requires an independence assessment of any
compensation consultant, legal counsel, or other adviser that provides
advice to the compensation committee, and is not limited to advice
concerning executive compensation. However, NYSE Arca has proposed, in
Amendment No. 2, to add language to the provision regarding the
independence assessment of compensation advisers \169\ to state that
the compensation committee is not required to conduct an independence
assessment for a compensation adviser that acts in a role limited to
the following activities for which no disclosure is required under Item
407(e)(3)(iii) of Regulation S-K: (a) Consulting on any broad-based
plan that does not discriminate in scope, terms, or operation, in favor
of executive officers or directors of the company, and that is
available generally to all salaried employees; and/or (b) providing

information that either is not customized for a particular issuer or
that is customized based on parameters that are not developed by the
adviser, and about which the adviser does not provide advice. NYSE Arca
states that this exception is based on Item 407(e)(3)(iii) of
Regulation S-K, which provides a limited exception to the Commission's
requirement for a registrant to disclose any role of compensation
consultants in determining or recommending the amount and form of a
registrant's executive and director compensation.\170\
---------------------------------------------------------------------------

    \169\ See proposed Commentary .05 to Equities Rule 5.3(k)(4), as
amended by Amendment No. 2.
    \170\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views NYSE Arca'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.\171\
The Commission also made similar findings when it noted it was
continuing such exceptions in the Rule 10C-1 Adopting Release,
including excepting such roles from the new conflict of interest
disclosure rule required to implement Section 10C(c)(2). The Commission
also believes that the exception should allay some of the concerns
raised by the commenters regarding the scope of the independence
assessment requirement. Based on the above, the Commission believes
these limited exceptions are consistent with the investor protection
provisions of Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \171\ 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.'').
---------------------------------------------------------------------------

    Regarding the belief of another commenter that the independence
assessment requirement could discourage compensation committees from
obtaining the advice of advisers,\172\ 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. 2, NYSE Arca 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.\173\ Regarding the
commenter's concern over the burdens that the Exchange proposal
imposes, the Commission notes that Rule 10C-1 explicitly requires
exchanges to require consideration of these six factors.\174\ Moreover,
five of the six factors were dictated by Congress itself in the Dodd-
Frank Act. As previously stated by the Commission in adopting Rule 10C-
1, the requirement that compensation committees consider the
independence of potential compensation advisers before they are
selected should help assure that compensation committees of affected
listed companies are better informed about potential conflicts, which
could reduce the likelihood that they are unknowingly influenced by
conflicted compensation advisers.\175\
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    \172\ See Corporate Secretaries Letter and supra note 133 and
accompanying text.
    \173\ See supra notes 53-54 and accompanying text.
    \174\ The Commission also does not agree with the argument of
one commenter that NYSE Arca's proposal must require compensation
committees to specifically consider, among the independence factors
relating to compensation advisers, whether such an adviser requires
that clients contractually agree to indemnify or limit their
liability. See CII Letter. The Commission views as reasonable the
Exchange's belief that the six factors set forth in Rule 10C-1 are
sufficient for the required independence assessment.
    \175\ See Rule 10C-1 Adopting Release, supra note 11.
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    Finally, one commenter requested guidance ``on how often the
required independence assessment should occur.'' \176\ This commenter
observed that it ``will be extremely burdensome and disruptive if prior
to each such [compensation committee] meeting, the committee had to
conduct a new assessment.'' The Commission anticipates that
compensation committees will conduct such an independence assessment at
least annually.
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    \176\ See Corporate Secretaries Letter.
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    The changes to NYSE Arca's rules on compensation advisers should
therefore benefit investors in NYSE Arca-listed companies and are
consistent with the requirements in Section 6(b)(5) of the Act that
rules of the exchange further investor protection and the public
interest.

C. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting
Companies, like all other listed companies, to have a compensation
committee, composed solely of Independent Directors is reasonable and
consistent with the protection of investors.\177\ The Commission notes
that NYSE Arca's rules for compensation committees have not made a
distinction for Smaller Reporting Companies in the past. However,
consistent with the exemption of Smaller Reporting Companies from Rule
10C-1, the NYSE Arca proposal would: (i) Exempt Smaller Reporting
Companies from having to consider the additional independence
requirements as to compensatory fees and affiliation; and (ii) exempt
their compensation committees from having to consider the additional
independence factors for compensation advisers. Under this approach,
Smaller Reporting Companies will effectively be subject to the same
requirements as is currently the case under the existing requirements
of Equities Rule 5.3(k)(4) for all companies with respect to providing
the compensation committee with the authority and funding for the
retention of compensation advisers.
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    \177\ As discussed above, the Commission believes that providing
an exception to this requirement for Smaller Reporting Companies in
limited and exceptional circumstances is appropriate.
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    The Commission believes that these provisions are consistent with
the Act and do not unfairly discriminate between issuers. The
Commission believes that, for similar reasons to those for which
Smaller Reporting Companies are exempted from the Rule 10C-1
requirements, it makes sense for NYSE Arca to provide some flexibility
to Smaller Reporting Companies. Further, because a Smaller Reporting
Company does not need to include the additional provision regarding the
independence of compensation advisers that NYSE Arca is requiring all
other listed companies to include to comply with Rule 10C-1,\178\ and
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.
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    \178\ As discussed supra note 62 and accompanying text, a
Smaller Reporting Company will not be required to include, like
other listed companies, a requirement that the committee consider
independence factors before selecting such advisers, because Smaller
Reporting Companies are not subject to that requirement.
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D. Opportunity To Cure Defects

    Rule 10C-1 requires the rules of an exchange to provide for
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any defects that would be the basis for the
exchange, under Rule 10C-1, to prohibit the issuer's listing. Rule 10C-
1 also specifies that, with respect to the independence standards
adopted in accordance with the requirements of the Rule, an exchange
may provide a cure period until the earlier of the next annual
shareholders meeting of the

listed issuer or one year from the occurrence of the event that caused
the member to be no longer independent.
    The Commission notes that the cure period that NYSE Arca proposes
for companies that fail to comply with the enhanced independence
requirements designed to comply with Rule 10C-1 is the same as the cure
period suggested under Rule 10C-1, but NYSE Arca limits the cure
period's use to circumstances where the committee continues to have a
majority of independent directors, as NYSE Arca believes this would
ensure that the applicable committee could not take an action without
the agreement of one or more independent directors. The Commission
believes that the accommodation, including the proposed period and
limitation, although it gives a company less leeway in certain
circumstances than the cure period provided as an option by Rule 10C-1,
is fair and reasonable and consistent with investor protection under
Rule 6(b)(5) by ensuring that a compensation committee cannot take
action without a majority of independent directors even when a member
ceases to be independent and the committee is entitled to a period to
cure that situation.
    The Commission agrees with the understanding of the commenter who
believed that Rule 10C-1 requires that an exchange provide a company an
opportunity to cure any defects in compliance with any of the new
requirements. The Commission believes that NYSE Arca's general due
process procedures for the delisting of companies that are out of
compliance with the Exchange's rules satisfy this requirement. For
example, NYSE Arca's rules provide that, unless continued listing of
the company raises a public interest concern,\179\ when a company is
deficient in compliance with listing standards, the Exchange will
request the issuer to take action to remedy any identified deficiency.
If the issuer fails to remedy the deficiency, NYSE Arca will hold a
meeting to hear any reasons why the issuer believes its security should
not be delisted, including reviewing any written response. If, after
such meeting, NYSE Arca determines that the security should be
delisted, the issuer may appeal the decision to the Board of Directors
and request a hearing.\180\
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    \179\ See Equities Rule 7.13 (Trading Suspensions).
    \180\ See supra text accompanying notes 140-141. See also NYSE
Response Letter, supra note 6.
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    The Commission believes that these general procedures for companies
out of compliance with listing requirements, in addition to the
particular cure provisions for failing to meet the new independence
standards, adequately meet the mandate of Rule 10C-1 and also are
consistent with investor protection and the public interest, since they
give a company a reasonable time period to cure non-compliance with
these important requirements before they will be delisted.\181\
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    \181\ The Commission notes that the general procedures to cure
non-compliance adequately address the comments made in the Corporate
Secretaries Letter.
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E. Exemptions

    The Commission believes that it is appropriate for NYSE Arca to
exempt from the new requirements established by the proposed rule
change the same categories of issuers that are exempt from its existing
standards for oversight of executive compensation for listed companies.
Although Rule 10C-1 does not explicitly exempt some of these categories
of issuers from its requirements, it does grant discretion to exchanges
to provide additional exemptions. NYSE Arca states that the reasons it
adopted the existing exemptions apply equally to the new requirements,
and the Commission believes that this assertion is reasonable.
    NYSE Arca proposed to exempt limited partnerships, companies in
bankruptcy proceedings and open-end management investment companies
that are registered under the Investment Company Act from all of the
requirements of Rule 10C-1. The Commission believes such exemptions are
reasonable, and notes that such entities, which were already generally
exempt from NYSE Arca's existing compensation committee requirements,
also are exempt from the compensation committee independence
requirements specifically under Rule 10C-1. NYSE Arca also proposes to
exempt closed-end management investment companies registered under the
Investment Company Act from the requirements of Rule 10C-1. The
Commission believes that this exemption is reasonable because the
Investment Company Act already assigns important duties of investment
company governance, such as approval of the investment advisory
contract, to independent directors, and because such entities were
already generally exempt from NYSE Arca's existing compensation
committee requirements. The Commission notes that, as one commenter
stated, typically registered investment companies do not employ
executives or employees or have compensation committees. The Commission
notes that the existing language of these exemptive provisions is not
changed, but that the provisions, which go beyond Rule 10C-1's
exemptions, are consistent with Rule 10C-1.
    The Commission further believes that other proposed exemption
provisions relating to controlled companies,\182\ asset-backed issuers
and other passive issuers, and issuers whose only listed equity stock
is a preferred stock are reasonable, given the specific characteristics
of these entities. As noted by the Exchange, many of these issuers are
externally managed and do not directly employ executives; do not, by
their nature, have employees, or have executive compensation policy set
by a body other than their board.
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    \182\ The Commission notes that controlled companies are
provided an automatic exemption from the application of the entirety
of Rule 10C-1 by Rule 10C-1(b)(5).
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    The NYSE Arca 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 a 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 NYSE Arca'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.

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

    The Commission believes that the NYSE Arca's deadline for
compliance with the proposal's provisions, July 1, 2013, is reasonable
and should afford listed companies adequate time to make the changes,
if any, necessary to meet the new standards. The Commission believes
that the deadline proposed is clear-cut.

G. Compliance Schedule: Companies That Cease To Be a Smaller Reporting
Company

    The Commission believes that the compliance schedule for companies
that cease to be Smaller Reporting

Companies, as revised in Amendment No. 2, affords such companies ample
time to come into compliance with the full panoply of rules that apply
to other companies. In the Commission's view, the revised schedule also
offers such companies more clarity in determining when they will be
subject to the heightened requirements.

V. Accelerated Approval of Amendment No. 2 to the Proposed Rule Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\183\ for approving the proposed rule change, as modified by
Amendment No. 2, prior to the 30th day after the date of publication of
notice in the Federal Register.
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    \183\ 15 U.S.C. 78s(b)(2).
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    The change made to the proposal by Amendment No. 2 to change a
reference from Item 10(f)(1) of Regulation S-K to a reference to
Exchange Act Rule 12b-2 is not a substantive one and merely references
an otherwise identical definition.
    The revision made by Amendment No. 2 to the compliance rules for
companies that cease to be Smaller Reporting Companies \184\
establishes a schedule that is easier to understand, while still
affording such companies adequate time to come into compliance with the
applicable requirements. The Commission notes that the Start Date of
the compliance period for such a company is six months after the
Smaller Reporting Company Determination Date, and the company is given
no less than another six months from the Start Date to gain compliance
with the rules from which it had been previously exempt. As originally
proposed a Smaller Reporting Company had to comply within six months of
the Smaller Reporting Company Determination Date, and for the adviser
assessment at the Smaller Reporting Company Determination Date. The
Commission believes the amendments to the transitions for issuers that
lose their status as a Smaller Reporting Company will afford such
companies additional time to comply and avoid issues involving
inadvertent non-compliance because of the provision that originally
applied immediately on the Smaller Reporting Company Determination