[Federal Register Volume 77, Number 124 (Wednesday, June 27, 2012)]
[Rules and Regulations]
[Pages 38421-38455]
[FR Doc No: 2012-15408]

Vol. 77

Wednesday,

No. 124

June 27, 2012

Part III

 Securities and Exchange Commission

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17 CFR Parts 229 and 240

 Listing Standards for Compensation Committees; Final Rule

Federal Register / Vol. 77 , No. 124 / Wednesday, June 27, 2012 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 240

[Release Nos. 33-9330; 34-67220; File No. S7-13-11]
RIN 3235-AK95

Listing Standards for Compensation Committees

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting a new rule and amendments to our proxy
disclosure rules to implement Section 952 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, which added Section 10C to
the Securities Exchange Act of 1934. Section 10C requires the
Commission to adopt rules directing the national securities exchanges
and national securities associations to prohibit the listing of any
equity security of an issuer that is not in compliance with Section
10C's compensation committee and compensation adviser requirements. In
accordance with the statute, new Rule 10C-1 directs the national
securities exchanges to establish listing standards that, among other
things, require each member of a listed issuer's compensation committee
to be a member of the board of directors and to be ``independent,'' as
defined in the listing standards of the national securities exchanges
adopted in accordance with the final rule. In addition, pursuant to
Section 10C(c)(2), we are adopting amendments to our proxy disclosure
rules concerning issuers' use of compensation consultants and related
conflicts of interest.

DATES: Effective Date: July 27, 2012.
    Compliance Dates: Each national securities exchange and national
securities association must provide to the Commission, no later than
September 25, 2012, proposed rule change submissions that comply with
the requirements of Exchange Act Rule 10C-1. Further, each national
securities exchange and national securities association must have final
rules or rule amendments that comply with Rule 10C-1 approved by the
Commission no later than June 27, 2012. Issuers must comply with the
disclosure changes in Item 407 of Regulation S-K in any proxy or
information statement for an annual meeting of shareholders (or a
special meeting in lieu of the annual meeting) at which directors will
be elected occurring on or after January 1, 2013.

FOR FURTHER INFORMATION CONTACT: N. Sean Harrison, Special Counsel,
Office of Rulemaking, at<PHONE_NUMBER>, or Heather Maples, Senior
Special Counsel, Office of Chief Counsel, at<PHONE_NUMBER>, in the
Division of Corporation Finance, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting new Rule 10C-1 under the
Securities Exchange Act of 1934 \1\ and amendments to Item 407 \2\ of
Regulation S-K.\3\
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 17 CFR 229.407.
    \3\ 17 CFR 229.10 through 229.1208.
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Table of Contents

I. Background and Summary
II. Discussion of the Final Rules
    A. Exchange Listing Standards
    1. Applicability of Listing Standards
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    2. Independence Requirements
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    3. Authority To Retain Compensation Advisers; Responsibilities;
and Funding
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    4. Compensation Adviser Independence Factors
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    5. Opportunity To Cure Defects
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    B. Implementation of Listing Requirements
    1. Exchanges and Securities Affected
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    2. Exemptions
    a. Proposed Rule
    i. Issuers Not Subject to Compensation Committee Independence
Requirements
    ii. Exemption of Relationships and Other Categories of Issuers
    b. Comments on the Proposed Rule
    c. Final Rule
    C. Compensation Consultant Disclosure and Conflicts of Interest
    1. Proposed Rule
    2. Comments on the Proposed Rule
    3. Final Rule
    a. Disclosure Requirements
    b. Disclosure Exemptions
    c. Disclosure Regarding Director Compensation
    D. Transition and Timing
III. Paperwork Reduction Act
    A. Background
    B. Summary of the Final Rules
    C. Summary of Comment Letters and Revisions to Proposals
    D. Revisions to PRA Reporting and Cost Burden Estimates
IV. Economic Analysis
    A. Background and Summary of the Rule Amendments
    B. Benefits and Costs, and Impact on Efficiency, Competition and
Capital Formation
    1. Section 10C of the Exchange Act, as Added by Section 952 of
the Act
    2. Discretionary Amendments
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Rules
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority and Text of the Amendments

I. Background And Summary

    On March 30, 2011, we proposed a new rule and rule amendments \4\
to implement Section 10C of the Securities Exchange Act of 1934 (the
``Exchange Act''),\5\ as added by Section 952 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the ``Act'').\6\
Section 10C requires the Commission to direct the national securities
exchanges \7\ (the ``exchanges'') and national securities associations
\8\ to prohibit the listing of any equity

security of an issuer, with certain exceptions, that does not comply
with Section 10C's compensation committee and compensation adviser
requirements.\9\
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    \4\ See Release No. 33-9199 (Mar. 30, 2011) [76 FR 18966] (the
``Proposing Release'').
    \5\ 15 U.S.C. 78j-3.
    \6\ Public Law 111-203, 124 Stat. 1900 (2010).
    \7\ A ``national securities exchange'' is an exchange registered
as such under Section 6 of the Exchange Act [15 U.S.C. 78f]. There
are currently sixteen national securities exchanges registered under
Section 6(a) of the Exchange Act: NYSE Amex (formerly the American
Stock Exchange), BATS Exchange, BATS Y-Exchange, BOX Options
Exchange, C2 Options Exchange, Chicago Board Options Exchange,
Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, International
Securities Exchange, NASDAQ OMX BX (formerly the Boston Stock
Exchange), The NASDAQ Stock Market, National Stock Exchange, New
York Stock Exchange, NYSE Arca and NASDAQ OMX PHLX (formerly
Philadelphia Stock Exchange). Certain exchanges are registered with
the Commission through a notice filing under Section 6(g) of the
Exchange Act for the purpose of trading security futures. See
Section II.B.1, below, for a discussion of these types of exchanges.
    \8\ A ``national securities association'' is an association of
brokers and dealers registered as such under Section 15A of the
Exchange Act [15 U.S.C. 78o-3]. The Financial Industry Regulatory
Authority (``FINRA'') is the only national securities association
registered with the Commission under Section 15A of the Exchange
Act. FINRA does not list equity securities; therefore, we refer only
to national securities exchanges in this release. In addition,
Section 15A(k) of the Exchange Act [15 U.S.C. 78o-3(k)] provides
that a futures association registered under Section 17 of the
Commodity Exchange Act [7 U.S.C. 21] shall be registered as a
national securities association for the limited purpose of
regulating the activities of members who are registered as broker-
dealers in security futures products pursuant to Section 15(b)(11)
of the Exchange Act [15 U.S.C. 78o(b)(11)]. See Section II.B.1,
below, for a discussion regarding security futures products.
    \9\ See Exchange Act Sections 10C(a) and (f).
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    Specifically, Section 10C(a)(1) of the Exchange Act requires the
Commission to adopt rules directing the exchanges to establish listing
standards that require each member of a listed issuer's compensation
committee to be a member of the board of directors and to be
``independent.'' \10\ The term ``independent'' is not defined in
Section 10C. Instead, Section 10C(a)(3) provides that ``independence''
is to be defined by the exchanges after taking into consideration
``relevant factors,'' which are required to include (1) a director's
source of compensation, including any consulting, advisory or other
compensatory fee paid by the issuer to such director, and (2) whether a
director is affiliated with the issuer, a subsidiary of the issuer, or
an affiliate of a subsidiary of the issuer. Section 10C(a)(4) of the
Exchange Act requires our rules to permit the exchanges to exempt
particular relationships from the independence requirements, as each
exchange determines is appropriate, taking into consideration the size
of an issuer and any other relevant factors.
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    \10\ Five categories of issuers are excluded from this
requirement: controlled companies, limited partnerships, companies
in bankruptcy proceedings, open-end management investment companies
registered under the Investment Company Act of 1940 (the
``Investment Company Act''), and foreign private issuers that
disclose in their annual reports the reasons why they do not have an
independent compensation committee.
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    In addition to the independence requirements set forth in Section
10C(a), Section 10C(f) of the Exchange Act requires the Commission to
adopt rules directing the exchanges to establish listing standards that
provide for the following requirements relating to compensation
committees and compensation consultants, independent legal counsel and
other advisers (collectively, ``compensation advisers''), as set forth
in paragraphs (b)-(e) of Section 10C:
     Each compensation committee must have the authority, in
its sole discretion, to retain or obtain the advice of compensation
advisers; \11\
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    \11\ Exchange Act Sections 10C(c)(1)(A) and 10C(d)(1).
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     Before selecting any compensation adviser, the
compensation committee must take into consideration specific factors
identified by the Commission that affect the independence of
compensation advisers; \12\
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    \12\ Exchange Act Section 10C(b).
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     The compensation committee must be directly responsible
for the appointment, compensation and oversight of the work of
compensation advisers; \13\ and
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    \13\ Exchange Act Sections 10C(c)(1)(B) and 10C(d)(2).
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     Each listed issuer must provide appropriate funding for
the payment of reasonable compensation, as determined by the
compensation committee, to compensation advisers.\14\
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    \14\ Exchange Act Section 10C(e).

Finally, Section 10C(c)(2) requires each issuer to disclose in any
proxy or consent solicitation material for an annual meeting of
shareholders (or a special meeting in lieu of the annual meeting), in
accordance with Commission regulations, whether the issuer's
compensation committee retained or obtained the advice of a
compensation consultant; whether the work of the compensation
consultant has raised any conflict of interest; and, if so, the nature
of the conflict and how the conflict is being addressed.
    We proposed new Exchange Act Rule 10C-1 to implement the
compensation committee listing requirements of Sections 10C(a)-(g) \15\
of the Exchange Act. We proposed rule amendments to Item 407 of
Regulation S-K to require the disclosures mandated by Section
10C(c)(2), which are to be provided in any proxy or information
statement relating to an annual meeting of shareholders at which
directors are to be elected (or special meeting in lieu of the annual
meeting). In connection with these amendments, we also proposed to
revise the current disclosure requirements with respect to the
retention of compensation consultants.
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    \15\ Section 10C(g) of the Exchange Act exempts controlled
companies from the requirements of Section 10C.
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    The comment period for the Proposing Release closed on May 19,
2011.\16\ We received 58 comment letters from 56 different
commentators, including pension funds, corporations, compensation
consulting firms, professional associations, trade unions,
institutional investors, investment advisory firms, law firms,
academics, individual investors and other interested parties.
Commentators generally supported the proposed implementation of the new
requirements. Some commentators urged us to adopt additional
requirements not mandated by the Act. Other commentators opposed some
aspects of the proposed rule and rule amendments and suggested
modifications to the proposals.
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    \16\ We extended the original comment period deadline from April
29, 2011 to May 19, 2011. See Listing Standards for Compensation
Committees, Release No. 33-9203 (Apr. 29, 2011) [76 FR 25273].
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    We have reviewed and considered all of the comments that we
received on the proposals. The final rules reflect a number of changes
made in response to these comments. We discuss our revisions with
respect to the proposed rule and rule amendments in more detail
throughout this release.

II. Discussion of the Final Rules

A. Exchange Listing Standards

1. Applicability of Listing Standards
    We proposed to direct the exchanges to adopt listing standards that
would apply Section 10C's independence requirements to members of a
listed issuer's compensation committee as well as any committee of the
board that performs functions typically performed by a compensation
committee. We are adopting this aspect of the rule substantially as
proposed, but with one change reflecting comments we received.
a. Proposed Rule
    In enacting Section 10C of the Exchange Act, Congress intended to
require that ``board committees that set compensation policy will
consist only of directors who are independent.'' \17\ In addition,
Congress sought to provide ``shareholders in a public company'' with
``additional disclosures involving compensation practices.'' \18\
Although Section 10C includes numerous provisions applicable to the
``compensation committees'' of listed issuers, it does not require a
listed issuer to have a compensation committee or a committee that
performs functions typically assigned to a compensation committee.
Moreover, Section 10C does not provide that, in the absence of a
compensation committee, the entire board of directors will be
considered to be the compensation committee, nor does it include
provisions that have the effect of requiring a compensation committee
as a practical matter.
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    \17\ 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).
    \18\ Id.
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    Neither the Act nor the Exchange Act defines the term
``compensation committee.'' \19\ Our rules do not

currently require that a listed issuer establish a compensation
committee. Current exchange listing standards, however, generally
require listed issuers either to have a compensation committee or to
have independent directors determine, recommend or oversee specified
executive compensation matters.\20\ For example, the New York Stock
Exchange (``NYSE'') requires a listed issuer to have a compensation
committee composed solely of independent directors and to assign
various executive compensation-related tasks to that committee.\21\ On
the other hand, the NASDAQ Stock Market (``Nasdaq'') does not mandate
that a listed issuer have a compensation committee, but requires that
executive compensation be determined or recommended to the board for
determination either by a compensation committee composed solely of
independent directors or by a majority of the board's independent
directors in a vote in which only independent directors
participate.\22\ Some of the other exchanges have standards comparable
to the NYSE's and require their listed issuers to have independent
compensation committees.\23\ Other exchanges have standards comparable
to Nasdaq's and, in the absence of a compensation committee, require
executive compensation determinations to be made or recommended by a
majority of independent directors on the listed issuer's board.\24\
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    \19\ By contrast, Section 3(a)(58) of the Exchange Act defines
an ``audit committee'' as ``a committee (or equivalent body)
established by and amongst the board of directors of an issuer for
the purpose of overseeing the accounting and financial reporting
processes of the issuer and audits of the financial statements of
the issuer; and * * * if no such committee exists with respect to an
issuer, the entire board of directors of the issuer.''
    \20\ There are some exchanges registered under Section 6(a) of
the Exchange Act that have not adopted listing standards that
require executive compensation determinations for listed issuers to
be made or recommended by an independent compensation committee or
independent directors. However, these exchanges, which include the
BOX Options Exchange, International Securities Exchange, EDGA
Exchange, EDGX Exchange, BATS Y-Exchange, and C2 Options Exchange,
currently either trade securities only pursuant to unlisted trading
privileges or trade only standardized options. In addition, the
listing standards of certain exchanges that are registered with the
Commission for the purpose of trading security futures do not
address executive compensation matters. See Section II.B.1, below,
for a discussion of these types of exchanges.
    \21\ See NYSE Listed Company Manual Section 303A.05. Section
303A.05 permits a listed issuer's board to allocate the
responsibilities of the compensation committee to another committee,
provided that the committee is composed entirely of independent
directors and has a committee charter. The NYSE exempts certain
issuers from this requirement, including controlled companies,
limited partnerships, companies in bankruptcy, and closed-end and
open-end management investment companies registered under the
Investment Company Act. See NYSE Listed Company Manual Section
303A.00.
    \22\ See Nasdaq Rule 5605(d). Based on data supplied by Nasdaq,
we understand that fewer than 2% of its listed issuers utilize the
alternative of having independent board members, and not a
committee, oversee compensation. See also Nasdaq IM 5605-6 (stating
that the Nasdaq rule ``is intended to provide flexibility for a
[c]ompany to choose an appropriate board structure and to reduce
resource burdens, while ensuring [i]ndependent [d]irector control of
compensation decisions.''). Nasdaq exempts certain issuers from this
requirement, including asset-backed issuers and other passive
issuers, cooperatives, limited partnerships, management investment
companies registered under the Investment Company Act, and
controlled companies. See Nasdaq Rules 5615(a) and 5615(c)(2).
    \23\ See NYSE Arca Rule 5.3(k)(4); National Stock Exchange Rule
15.5(d)(5); and NASDAQ OMX PHLX Rule 867.05.
    \24\ See NASDAQ OMX BX Rule 4350(c)(3); NYSE Amex Company Guide
Section 805; Chicago Board Options Exchange Rule 31.10; Chicago
Stock Exchange Article 22, Rules 19(d) and 21; and BATS Exchange
Rule 14.10(c)(4).
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    Proposed Rule 10C-1(b) would direct the exchanges to adopt listing
standards that would apply to a listed issuer's compensation committee
or, in the absence of such a committee, any other board committee that
performs functions typically performed by a compensation committee,
including oversight of executive compensation. Proposed Rule 10C-1(b),
however, would not require the independence listing requirements to
apply to members of the board who oversee executive compensation in the
absence of a board committee.\25\
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    \25\ As noted, to the extent no board committee is authorized to
oversee executive compensation, under applicable listing standards,
board determinations with respect to executive compensation matters
may be made by the full board with only independent directors
participating. In such situations, under state corporate law, we
understand that action by the independent directors would generally
be considered action by the full board, not action by a committee.
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b. Comments on the Proposed Rule
    Comments on this proposal were generally favorable. Many
commentators supported the functional approach of the proposed rule,
which would require compensation committee independence listing
standards to apply to any board committee charged with oversight of
executive compensation, regardless of its formal title.\26\ In response
to our request for comment on whether we should direct the exchanges to
apply the proposed rule's requirements to directors who oversee
executive compensation matters in the absence of a formal committee
structure, several commentators recommended that we do so,\27\ and two
of these commentators suggested that such a requirement would help
ensure that companies could not rely on technicalities or loopholes to
avoid independent director oversight of executive compensation.\28\
Another commentator, however, argued that the final rule should not
apply to independent directors who determine, or recommend to the
board, executive compensation matters in the absence of a formal
committee structure.\29\ This commentator believed that broadening the
scope of the rule to apply to a group of directors who determine
executive compensation in lieu of a formal committee is not clearly
mandated by Section 10C and would burden listed issuers that do not
have a board committee overseeing executive compensation, without
necessarily improving their oversight of executive compensation.\30\
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    \26\ See, e.g., letters from Chris Barnard (``Barnard''), the
Chartered Financial Analyst Institute (``CFA'') and Railpen
Investments (``Railpen'').
    \27\ See, e.g., letters from Barnard, Better Markets Inc.
(``Better Markets''), CFA, Georg Merkl (``Merkl''), National
Association of Corporate Directors (``NACD'') and Railpen.
    \28\ See letters from NACD and Railpen.
    \29\ See letter from the American Bar Association, Business Law
Section (``ABA'').
    \30\ This commentator also noted that, ``[a]s a practical
matter, we understand that most listed companies that are
accelerated filers under the Exchange Act, and many listed companies
that are smaller reporting companies, already have compensation
committees or committees performing the functions of compensation
committees.'' Id.
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    In the Proposing Release, we requested comment on whether the
exchanges should be prohibited from listing issuers that do not have
compensation committees. Several commentators supported the concept of
mandatory compensation committees for listed issuers, on the basis that
executive compensation deserves special, ongoing attention by a
dedicated working group of the board; a committee structure may promote
increased board expertise on compensation; and having a formal
committee would help promote accountability to shareholders.\31\
Several other commentators opposed such requirements, arguing that the
exchanges should be allowed broad discretion on how listed issuers
determine compensation matters.\32\
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    \31\ See letters from the American Federation of Labor and
Congress of Industrial Organizations (``AFL-CIO''), the Council of
Institutional Investors (``CII''), Merkl and the Ohio Public
Employees' Retirement System (``OPERS'').
    \32\ See letters from ABA, CFA and NACD.
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c. Final Rule
    After considering the comments, we are adopting Rule 10C-1(b)
substantially as proposed. Under the final rule, the exchanges will be
directed to adopt listing standards that apply to any committee of the
board that performs functions typically performed by a compensation
committee, including oversight of executive compensation, whether or
not such committee also

performs other functions or is formally designated as a compensation
committee.\33\ In addition, the listing standards adopted by the
exchanges must also apply the director independence requirements of
Rule 10C-1(b)(1), the requirements relating to consideration of a
compensation adviser's independence in Rule 10C-1(b)(4), and the
requirements relating to responsibility for the appointment,
compensation and oversight of compensation advisers in Rules 10C-
1(b)(2)(ii) and (iii) to the members of a listed issuer's board of
directors who, in the absence of a board committee, oversee executive
compensation matters on behalf of the board of directors. We believe
this approach is an appropriate way to implement Section 10C. The
listing standards are intended to benefit investors by requiring that
the independent directors of a listed issuer oversee executive
compensation matters, consider independence criteria before retaining
compensation advisers and have responsibility for the appointment,
compensation and oversight of these advisers. We believe it would
benefit investors to implement Section 10C in a manner that does not
allow listed issuers to avoid these listing standards by simply not
having a compensation committee or another board committee oversee
executive compensation matters.
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    \33\ For example, if a listed issuer has a ``corporate
governance committee'' or a ``human resources committee,'' the
responsibilities of which include, among other matters, oversight of
executive compensation, such committee will be subject to the
compensation committee listing requirements of the applicable
exchange.
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    We have determined not to require the exchanges to apply the
listing standards relating to the compensation committee's authority to
retain compensation advisers, Rule 10C-1(b)(2)(i), or required funding
for payment of such advisers to directors who oversee executive
compensation matters outside of the structure of a formal board
committee, Rule 10C-1(b)(3). As noted above, we understand that action
by independent directors acting outside of a formal committee structure
would generally be considered action by the full board of directors. As
a result, we believe it is unnecessary to apply these requirements to
directors acting outside of a formal committee structure, as they
retain all the powers of the board of directors in making executive
compensation determinations.
    We are implementing this change by defining the term ``compensation
committee'' so that it includes, for all purposes other than the
requirements relating to the authority to retain compensation advisers
in Rule 10C-1(b)(2)(i) and required funding for payment of such
advisers in Rule 10C-1(b)(3), the members of the board of directors who
oversee executive compensation matters on behalf of the board of
directors in the absence of a formal committee. For ease of reference
throughout this release, in our discussion of the final rules we are
adopting, references to an issuer's ``compensation committee'' include
any committee of the board that performs functions typically performed
by a compensation committee, including oversight of executive
compensation, whether or not formally designated as a ``compensation
committee,'' as well as, to the extent applicable, those members of a
listed issuer's board of directors who oversee executive compensation
matters on behalf of the board of directors in the absence of such a
committee.
    The final rule will not require a listed issuer to have a
compensation committee or a committee that performs functions typically
assigned to a compensation committee. We believe this aspect of the
final rule is consistent with the requirements of Section 10C, which
does not direct us to require such a committee. Moreover, in light of
our determination to apply the requirements for director independence,
consideration of adviser independence, and responsibility for the
appointment, compensation and oversight of compensation advisers to
those members of a listed issuer's board of directors who oversee
executive compensation matters on behalf of the board of directors in
the absence of a formal committee, there will be little difference
between the requirements applicable to listed issuers that do not have
compensation committees as compared to those applicable to issuers that
do have compensation committees.
2. Independence Requirements
    Proposed Rule 10C-1(b)(1) would require each member of a listed
issuer's compensation committee to be a member of the board of
directors and to be independent. We proposed to require that the
exchanges develop a definition of independence applicable to
compensation committee members after considering relevant factors,
including, but not limited to, the two factors enumerated in Section
10C(a)(3). We are adopting these requirements as proposed, except that,
as discussed above, this aspect of the final rule will also apply to
those members of a listed issuer's board of directors who oversee
executive compensation matters on behalf of the board of directors in
the absence of a board committee.
a. Proposed Rule
    Most exchanges that list equity securities already require
directors on compensation committees or directors determining or
recommending executive compensation matters to be ``independent'' under
their general independence standards. Although independence
requirements and standards vary somewhat among the different exchanges,
listing standards generally prescribe certain bright-line independence
tests (including restrictions on compensation, employment and familial
or other relationships with the listed issuer or the executive officers
of the listed issuer that could interfere with the exercise of
independent judgment) that directors must meet in order to be
considered independent.\34\ For example, both NYSE and Nasdaq rules
preclude a finding of independence if the director is or recently was
employed by the listed issuer, the director's immediate family member
is or recently was employed as an executive officer of the listed
issuer, or the director or director's family member received
compensation from the listed issuer in excess of specified limits.\35\
In addition, under both NYSE and Nasdaq rules, directors may be
disqualified based on their or their family members' relationships with
a listed issuer's auditor, affiliation with entities that have material
business relationships with the listed issuer, or employment at a
company whose compensation committee includes any of the listed
issuer's executive officers.\36\ We note, however, that with the
exception of audit committee membership requirements, stock ownership
alone will not automatically preclude a director from being considered
independent under either NYSE or Nasdaq listing standards.\37\ The NYSE
and Nasdaq also require their listed issuers' boards to affirmatively
determine that each independent director either, in NYSE's case, has no
material relationship with the issuer \38\ or, in Nasdaq's case, has no
relationship which, in the opinion of the issuer's board of directors,
would interfere with the director's exercise of independent judgment in
carrying out his or her

responsibilities.\39\ The other exchanges have similar
requirements.\40\
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    \34\ See NYSE Listed Company Manual Section 303A.02(b); Nasdaq
Rule 5605(a)(2).
    \35\ See id.
    \36\ See id.
    \37\ See Commentary to NYSE Listed Company Manual Section
303A.02(a); Nasdaq Rule 5605; Nasdaq IM-5605.
    \38\ See NYSE Rule 303A.02(a).
    \39\ See Nasdaq Rule 4200(a)(15).
    \40\ See, e.g., NYSE Arca Rule 5.3(k)(1) and NYSE AMEX Company
Guide Section 803.A.02.
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    In addition to meeting exchange listing standards, there are other
reasons for members of the compensation committee to be independent.
For example, in order for a securities transaction between an issuer
and one of its officers or directors to be exempt from short-swing
profit liability under Section 16(b) of the Exchange Act, the
transaction must be approved by the full board of directors or by a
committee of the board that is composed solely of two or more ``Non-
Employee Directors,'' as defined in Exchange Act Rule 16b-3(b)(3).\41\
We understand that many issuers use their independent compensation
committees to avail themselves of this exemption.\42\ Similarly, if an
issuer wishes to preserve the tax deductibility of the amounts of
certain awards paid to executive officers, among other things, the
performance goals of such awards must be determined by a compensation
committee composed of two or more ``outside directors,'' as defined in
Section 162(m) of the Internal Revenue Code.\43\ The definitions of
``Non-Employee Director'' and ``outside director'' are similar to the
exchanges' definitions of independent director.
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    \41\ As defined in Exchange Act Rule 16b-3(b)(3)(i) [17 CFR
240.16b-3(b)(3)(i)], a ``Non-Employee Director'' is a director who
is not currently an officer (as defined in Rule 16a-1(f)) of the
issuer or a parent or subsidiary of the issuer, or otherwise
currently employed by the issuer or a parent or subsidiary of the
issuer; does not receive compensation, either directly or
indirectly, from the issuer or a parent or subsidiary of the issuer
for services rendered as a consultant or in any capacity other than
as a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item
404(a) of Regulation S-K; and does not possess an interest in any
other transaction for which disclosure would be required pursuant to
Item 404(a) of Regulation S-K. In addition, Rule 16b-3(b)(3)(ii)
provides that a Non-Employee Director of a closed-end investment
company is a director who is not an ``interested person'' of the
issuer, as that term is defined in Section 2(a)(19) of the
Investment Company Act [15 U.S.C. 80a-2(a)(19)].
    \42\ See letter from Sullivan & Cromwell LLP to Facilitating
Shareholder Director Nominations, Release No. 34-60089, available at
http://www.sec.gov/comments/s7-10-09/s71009-430.pdf. (``In our
experience, many compensation committee charters require their
members to meet the requirements of Rule 16b-3 and Section
162(m).''); Ira G. Bogner & Michael Krasnovsky, ``Exchange Rules
Impact Compensation Committee Composition,'' The Metropolitan
Corporate Counsel, Apr. 2004, at 17 (``Most compensation committees
of public companies include at least two directors that are `outside
directors' under Section 162(m) of the Internal Revenue Code * * *
and `non-employee directors' under Rule 16b-3 of the Securities
Exchange Act * * *.'').
    \43\ A director is an ``outside director'' if the director (A)
is not a current employee of the publicly held corporation; (B) is
not a former employee of the publicly held corporation who receives
compensation for prior services (other than benefits under a tax-
qualified retirement plan) during the taxable year; (C) has not been
an officer of the publicly held corporation; and (D) does not
receive remuneration from the publicly held corporation, either
directly or indirectly, in any capacity other than as a director.
For this purpose, remuneration includes any payment in exchange for
goods or services. Section 162(m) of the Internal Revenue Code of
1986, as amended. Treas. Reg. Section 1.162-27(e)(3).
---------------------------------------------------------------------------

    The proposed rule would direct the exchanges to develop a
definition of independence applicable to compensation committee members
after considering relevant factors, including, but not limited to, a
director's source of compensation, including any consulting, advisory
or other compensatory fee paid by the issuer to such director, and
whether a director is affiliated with the issuer, a subsidiary of the
issuer, or an affiliate of a subsidiary of the issuer. We did not
propose to specify any additional factors that the exchanges must
consider in determining independence requirements for members of
compensation committees.
    In proposing Rule 10C-1(b)(1), we considered the similarities and
differences between Section 952 of the Act and Section 301 of the
Sarbanes-Oxley Act of 2002.\44\ Section 301 of the Sarbanes-Oxley Act
added Section 10A(m)(1) to the Exchange Act,\45\ which required the
Commission to direct the exchanges to prescribe independence
requirements for audit committee members. Although the independence
factors in Section 10C(a)(1) are similar to those in Section
10A(m)(1)--and indeed, Section 952 of the Act essentially provides the
compensation committee counterpart to the audit committee requirements
of Section 301 of the Sarbanes-Oxley Act--one significant difference is
that Section 10C(a) requires only that the exchanges ``consider
relevant factors'' (emphasis added), which include the source of
compensation and any affiliate relationship, in developing independence
standards for compensation committee members, whereas Section 10A(m)
expressly states that certain relationships preclude independence: An
audit committee member ``may not, other than in his or her capacity as
a member of the audit committee * * * [a]ccept any consulting,
advisory, or other compensatory fee from the issuer; or [b]e an
affiliated person of the issuer or any subsidiary thereof'' (emphasis
added).\46\
---------------------------------------------------------------------------

    \44\ Public Law 107-204, 116 Stat. 745 (2002).
    \45\ 15 U.S.C. 78j-1(m)(1).
    \46\ See Section 10A(m) of the Exchange Act. Exchange Act Rule
10A-3 states that in order to be considered ``independent,'' an
audit committee member ``may not, other than in his or her capacity
as a member of the audit committee, the board of directors, or any
other board committee * * * [a]ccept directly or indirectly any
consulting, advisory, or other compensatory fee from the issuer or
any subsidiary thereof * * *.'' For non-investment company issuers,
the audit committee member also cannot be an affiliated person of
the issuer or its subsidiaries. For investment company issuers, the
audit committee member cannot be an ``interested person'' of the
issuer as defined in Section 2(a)(19) of the Investment Company Act.
---------------------------------------------------------------------------

    As a result, we interpret Section 10C as providing the exchanges
more discretion to determine the standards of independence that
compensation committee members are required to meet than they are
provided under Section 10A with respect to audit committee members.
Section 10A(m) prescribes minimum criteria for the independence of
audit committee members. In contrast, Section 10C gives the exchanges
the flexibility to establish their own minimum independence criteria
for compensation committee members after considering relevant factors,
including the two enumerated in Section 10C(a)(3). Accordingly, the
proposed rule would allow each exchange to establish its own
independence definition, subject to Commission review and approval
pursuant to Section 19(b) of the Exchange Act, provided the exchange
considers relevant factors in establishing its own standards, including
those specified in Section 10C(a)(3).
b. Comments on the Proposed Rule
    Comments on this proposal were generally favorable. Many
commentators supported permitting the exchanges to establish their own
independence criteria for compensation committee members, provided they
consider the statutorily-required factors.\47\ One commentator claimed
that this approach would utilize the relative strengths and experiences
of the exchanges by avoiding a ``one size fits all'' approach and could
be more conducive to responding quickly to changes in corporate
governance.\48\ Another commentator noted that the proposal permitted
each exchange to develop more finely tuned listing rules that

reflect the particular characteristics of each exchange's listed
companies.\49\
---------------------------------------------------------------------------

    \47\ See, e.g., letters from ABA, Barnard, Sanjai Bhagat, et al.
(``Bhagat''), the Center on Executive Compensation (``CEC''), CFA,
Davis Polk & Wardwell LLP (``Davis Polk''), MarkWest Energy
Partners, L.P. (``MarkWest''), NYSE Euronext (``NYSE''), Pfizer Inc.
(``Pfizer'') and Sullivan & Cromwell LLP (``S&C'').
    \48\ See letter from MarkWest.
    \49\ See letter from ABA (noting that ``the average board size
of an S&P 100 company (which are primarily listed on the NYSE) is
approximately 50% larger than the average board size of a Silicon
Valley 150 company (which are primarily listed on Nasdaq'' and that
``[i]nvestors in these disparate categories of companies have
meaningfully different expectations and interests in the governance
context'').
---------------------------------------------------------------------------

    Allowing the exchanges the latitude to establish their own
independence criteria concerned some commentators, however.\50\ These
commentators cautioned against permitting the exchanges to establish
their own independence criteria and argued in support of a uniform
definition of independence across all exchanges.\51\ One of these
commentators claimed that uniform requirements would serve as a
deterrent to engaging in a ``race to the bottom.'' \52\ Another
commentator recommended that the exchanges' independence criteria
should preclude a finding of independence if a director fails to meet
the definitions of an ``outside'' director under Section 162(m) of the
Internal Revenue Code or a ``non-employee'' director under Exchange Act
Rule 16b-3(b)(3); is a party to a related party transaction that must
be disclosed pursuant to Item 404 of Regulation S-K; or has an
immediate family member who is employed by the company.\53\
---------------------------------------------------------------------------

    \50\ See, e.g., letters from the American Federation of State,
County and Municipal Employees (``AFSCME''), California Public
Employees' Retirement System (``CalPERS''), the Colorado Public
Employees' Retirement Association (``COPERA''), OPERS and USS.
    \51\ See letters from CalPERS, Railpen and USS.
    \52\ See letter from USS.
    \53\ See letter from AFL-CIO.
---------------------------------------------------------------------------

    Some commentators urged us to require the exchanges to consider
additional factors in developing a definition of independence.\54\
Several commentators advocated that we should require the exchanges to
include business or personal relationships between a compensation
committee member and executive officers of the issuer as factors for
consideration,\55\ as well as board interlocks.\56\ Another commentator
believed that mandatory factors for consideration should include
linkages between a director's family members and the company or its
affiliates and a director's relationships with other directors.\57\ One
commentator believed that, in setting independence standards for
compensation committee members, the exchanges should be required to
consider all factors relevant to assessing the independence of a board
member, including personal, family and business relationships, and all
other factors that might compromise a board member's judgment on
matters relating to executive compensation.\58\
---------------------------------------------------------------------------

    \54\ See, e.g., letters from AFSCME, Better Markets, CFA, CII,
the State Board of Administration of Florida (``FLSBA'') and UAW
Retiree Medical Benefits Trust (``UAW'').
    \55\ See, e.g., letters from AFL-CIO, AFSCME, CFA, CII, FLSBA
and UAW.
    \56\ See, e.g., letters from AFSCME, CII, FLSBA and UAW.
    \57\ See letter from CII.
    \58\ See letter from Better Markets.
---------------------------------------------------------------------------

    Three commentators, including the NYSE, stated that we should not
specify additional mandatory factors that the exchanges must consider
in developing a definition of independence applicable to compensation
committee members.\59\ In particular, the NYSE expressed concern that
if the final rule specifies additional mandatory factors for
consideration, such factors would be understood by the exchanges and by
many boards of directors as the Commission's determination that such
relationships compromise director independence, which would thereby
effectively preempt the review of compensation committee independence
standards that the exchanges would be required to undertake under the
rule.\60\
---------------------------------------------------------------------------

    \59\ See letters from ABA, NYSE and the Society of Corporate
Secretaries and Governance Professionals (``SCSGP'').
    \60\ See letter from NYSE.
---------------------------------------------------------------------------

    In the Proposing Release, we noted the concern of several
commentators \61\ that our rules implementing Section 10C not prohibit
directors affiliated with significant investors (such as private equity
funds and venture capital firms) from serving on compensation
committees. We requested comment on whether a director affiliated with
a shareholder with a significant ownership interest who is otherwise
independent would be sufficiently independent for the purpose of
serving on the compensation committee. Many commentators advocated that
a significant shareholder's stock ownership alone should not preclude
directors affiliated with the significant shareholder from serving on
an issuer's compensation committee.\62\ A number of these commentators
noted that equity ownership by directors serves to align the directors'
interests with those of the shareholders with respect to compensation
matters.\63\ According to one commentator, private equity funds
typically have a strong institutional belief in the importance of
appropriately structured and reasonable compensation arrangements, and
the directors elected by such funds are highly incentivized to
rigorously oversee compensation arrangements because the funds' income,
success and reputations are dependent on creating value for
shareholders.\64\ This commentator also noted that, while private
equity funds may seek to create shareholder value by strengthening or
replacing the management team of a portfolio company, such funds rarely
appoint partners or employees of their affiliated private equity firms
to serve as executives of portfolio companies.\65\
---------------------------------------------------------------------------

    \61\ To facilitate public input on the Act, the Commission has
provided a series of email links, organized by topic, on its Web
site at http://www.sec.gov/spotlight/regreformcomments.shtml. The
public comments we received on Section 952 of the Act before we
issued the Proposing Release are available on our Web site at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. Several of those commentators suggested that
stock ownership alone should not automatically disqualify a board
member from serving as an independent director on the compensation
committee. See, e.g., letters from ABA, Brian Foley & Company, Inc.,
Compensia, Davis Polk and Frederic W. Cook & Co., Inc. (``Frederic
Cook'').
    \62\ See, e.g., letters from ABA, AFSCME, Bhagat, CEC, Davis
Polk, Debevoise, Robert J. Jackson (``Jackson''), the Private Equity
Growth Capital Council (``PEGCC'') and SCSGP.
    \63\ See, e.g., letters from CEC and Davis Polk.
    \64\ See letter from PEGCC.
    \65\ See id.
---------------------------------------------------------------------------

    One commentator did not believe that directors affiliated with
large shareholders should be permitted to serve on compensation
committees, noting that situations could arise where the director's
obligation to act in the best interest of all shareholders would
conflict with the director's or large shareholder's own interest.\66\
Two additional commentators noted that private equity and venture
capital firms may engage in significant transactions with an issuer,
and urged that all ties to the company be considered in evaluating the
independence of directors affiliated with significant shareowners.\67\
---------------------------------------------------------------------------

    \66\ See letter from Barnard.
    \67\ See letters from AFSCME and UAW.
---------------------------------------------------------------------------

    Our proposed rule would require the exchanges to consider current
relationships between the issuer and the compensation committee member,
and we requested comment on whether relationships prior to a director's
appointment to the compensation committee or, for directors already
serving as compensation committee members when the new listing
standards take effect, prior to the effective date of the new listing
standards, should also be considered. Only two commentators expressed
support for establishing any such ``look-back'' period.\68\ One
commentator, although not supporting a look-back period, believed that
the decision of whether to require one should be determined not by the
Commission but

by the exchanges.\69\ Other commentators argued that a look-back period
was not necessary because the two largest exchanges (NYSE and Nasdaq)
currently impose look-back requirements on listed issuers in their
standards regarding director independence.\70\
---------------------------------------------------------------------------

    \68\ See letters from Better Markets and CFA.
    \69\ See letter from Davis Polk.
    \70\ See letters from ABA and CEC.
---------------------------------------------------------------------------

c. Final Rule
    After consideration of the comments, we are adopting the
requirements as proposed, except that we are also extending them to
apply to those members of a listed issuer's board of directors who
oversee executive compensation matters on behalf of the board of
directors in the absence of a board committee. Under the final rule,
the exchanges will be directed to establish listing standards requiring
each member of a listed issuer's compensation committee to be a member
of the board of directors and to be independent. The final rule does
not require that exchanges establish a uniform definition of
independence. We believe this approach is consistent with the mandate
in Section 10C(a)(3). Further, 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 Rule 10C-1(b)(1). Although this provides the
exchanges with flexibility to develop the appropriate independence
requirements, as discussed below, the independence requirements
developed by the exchanges will be subject to review and final
Commission approval pursuant to Section 19(b) of the Exchange Act.
    In developing their own definitions of independence applicable to
compensation committee members, the exchanges will be required to
consider relevant factors, including, but not limited to:
     A director's source of compensation, including any
consulting, advisory or compensatory fee paid by the issuer; and
     Whether a director is affiliated with the issuer, a
subsidiary of the issuer, or an affiliate of a subsidiary of the
issuer.
    The final rule does not specify any additional factors that the
exchanges must consider in determining independence requirements for
compensation committee members, nor does the final rule prescribe any
standards or relationships that will automatically preclude a finding
of independence. Because the rule's relevant factors cover the same
matters as the prohibitions in Section 10A(m)'s definition of audit
committee independence, we expect the exchanges to consider whether
those prohibitions should also apply to compensation committee members.
However, consistent with Section 10C, the exchanges are not required to
adopt those prohibitions in their requirements and will have
flexibility to consider other factors in developing their requirements.
    As noted above and in the Proposing Release, Section 10C of the
Exchange Act does not require that the exchanges prohibit all
affiliates from serving on a compensation committee. 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. However, in response to concerns noted by some commentators that
significant shareholders may have other relationships with listed
companies that would result in such shareholders' interests not being
aligned with those of other shareholders, we emphasize that it is
important for exchanges to consider other ties between a listed issuer
and a director, in addition to share ownership, that might impair the
director's judgment as a member of the compensation committee. For
example, 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.\71\
---------------------------------------------------------------------------

    \71\ As the NYSE Listed Company Manual observes, ``the concern
is independence from management.'' See Commentary to NYSE Rule
303A.02(a). See also the Commentary to NYSE Rule 303A.02(a), which
discusses the wide range of circumstances that could signal
conflicts of interest or that might bear on the materiality of the
relationship between the director and the issuer.
---------------------------------------------------------------------------

    Although each exchange must consider affiliate relationships in
establishing a definition of compensation committee independence, there
is no requirement to adopt listing standards precluding compensation
committee membership based on any specific relationships. Accordingly,
we do not believe it is necessary to separately define the term
``affiliate'' for purposes of Rule 10C-1. In addition, the final rule
does not impose any required look-back periods that must be
incorporated in exchange listing standards relating to the independence
of compensation committee members. We agree with commentators that the
determination of whether to impose a look-back period in evaluating
compensation committee member independence should be left to the
exchanges and note that the exchanges already incorporate various look-
back periods in their general criteria for director independence. In
this respect, the final rule is similar to Exchange Act Rule 10A-3,
which did not impose a mandatory look-back period for evaluating audit
committee member independence in light of look-back periods already
required by the exchanges for evaluating director independence
generally.
    Consistent with the proposal, the exchanges' definitions of
independence for compensation committee members will be implemented
through proposed rule changes that the exchanges will be required to
file pursuant to Section 19(b) of the Exchange Act, which are subject
to the Commission's review and approval.\72\ Consistent with the
proposal, Rule 10C-1(a)(4) will require that each proposed rule change
submission include, in addition to any other information required under
Section 19(b) of the Exchange Act and the rules thereunder: a review of
whether and how the proposed listing standards satisfy the requirements
of the final rule; a discussion of the exchange's consideration of
factors relevant to compensation committee independence; and the
definition of independence applicable to compensation committee members
that the exchange proposes to adopt or retain in light of such
review.\73\ The Commission will then consider,

prior to final approval, whether the exchanges considered the relevant
factors outlined in Section 10C(a) and whether the exchanges' proposed
rule changes are consistent with the requirements of Section 6(b) and
Section 10C of the Exchange Act.
---------------------------------------------------------------------------

    \72\ The standard of review for approving proposed exchange
listing standards is found in Section 19(b)(2)(C) of the Exchange
Act, which provides that ``[t]he Commission shall approve a proposed
rule change of a self-regulatory organization if it finds that such
proposed rule change is consistent with the requirements of this
title and the rules and regulations issued under this title that are
applicable to such organization.'' Under Section 6(b) of the
Exchange Act, the rules of an exchange must be ``designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest.''
    \73\ A submission would be required even if an exchange believes
that its existing rules satisfy the requirements of Rule 10C-1. In
such a circumstance, the exchange's rule submission would explain
how the exchange's existing rules satisfy the requirements of Rule
10C-1, and the submission would be subject to the Commission's
review and approval.
---------------------------------------------------------------------------

3. Authority To Retain Compensation Advisers; Responsibilities; and
Funding
    Section 10C(c)(1) of the Exchange Act provides that the
compensation committee of a listed issuer may, in its sole discretion,
retain or obtain the advice of a ``compensation consultant,'' \74\ and
Section 10C(d) extends this authority to ``independent legal counsel
and other advisers.'' \75\ Both sections also provide that the
compensation committee shall be directly responsible for the
appointment, compensation and oversight of the work of compensation
advisers. Sections 10C(c)(1)(C) and 10C(d)(3) provide that the
compensation committee's authority to retain, and responsibility for
overseeing the work of, compensation advisers may not be construed to
require the compensation committee to implement or act consistently
with the advice or recommendations of a compensation adviser or to
affect the ability or obligation of the compensation committee to
exercise its own judgment in fulfillment of its duties. To ensure that
the listed issuer's compensation committee has the necessary funds to
pay for such advisers, Section 10C(e) provides that a listed issuer
shall provide ``appropriate funding,'' as determined by the
compensation committee, for payment of ``reasonable compensation'' to
compensation advisers.\76\
---------------------------------------------------------------------------

    \74\ See Exchange Act Section 10C(c)(1).
    \75\ See Exchange Act Section 10C(d)(1).
    \76\ See Exchange Act Section 10C(e).
---------------------------------------------------------------------------

    We proposed Rules 10C-1(b)(2) and (3) to implement these statutory
requirements. We are adopting these requirements substantially as
proposed.
a. Proposed Rule
    Proposed Rule 10C-1(b)(2) would implement Sections 10C(c)(1) and
(d) by repeating the provisions set forth in those sections regarding
the compensation committee's authority to retain or obtain a
compensation adviser, its direct responsibility for the appointment,
compensation and oversight of the work of any compensation adviser, and
the related rules of construction. In addition, proposed Rule 10C-
1(b)(3) would implement Section 10C(e) by repeating the provisions set
forth in that section regarding the requirement to provide appropriate
funding for the payment of reasonable compensation, as determined by
the compensation committee, to compensation advisers.
    In the Proposing Release, we noted that while the statute provides
that compensation committees of listed issuers shall have the express
authority to hire ``independent legal counsel,'' the statute does not
require that they do so. Similar to our interpretation \77\ of Section
10A(m) of the Exchange Act, which gave the audit committee authority to
engage ``independent legal counsel,'' \78\ we do not construe the
requirements related to independent legal counsel and other advisers as
set forth in Section 10C(d)(1) of the Exchange Act as requiring a
compensation committee to retain independent legal counsel or as
precluding a compensation committee from retaining non-independent
legal counsel or obtaining advice from in-house counsel or outside
counsel retained by the issuer or management.
---------------------------------------------------------------------------

    \77\ See Standards Relating to Listed Company Audit Committees,
Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788], n. 114 (``As
proposed, the requirement does not preclude access to or advice from
the company's internal counsel or regular outside counsel. It also
does not require an audit committee to retain independent
counsel.'').
    \78\ See Exchange Act Section 10A(m)(5)(``Each audit committee
shall have the authority to engage independent counsel and other
advisers, as it determines necessary to carry out its duties.'').
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Many commentators expressed general support for the proposed
requirements.\79\ While several commentators suggested that
compensation committees should use, or be permitted to use, only
independent compensation advisers,\80\ other commentators agreed with
the interpretive position expressed in the Proposing Release that the
statute does not require a compensation committee to retain independent
legal counsel or preclude the compensation committee from retaining
non-independent legal counsel or obtaining advice from in-house counsel
or counsel retained by the issuer or management.\81\ One commentator
noted that the proposed rule should not be interpreted to ``apply to or
interfere with a compensation committee's dealings with legal counsel
from whom it may obtain advice, but which was not retained or selected
by the committee, such as in-house and company counsel. Thus, the
proposed language * * * should be clear that the requirement that
independent legal counsel and other advisers be subject to the direct
oversight of the compensation committee applies only to such counsel
and advisors who are specifically and separately retained by the
compensation committee.'' \82\ This commentator thought it would be
helpful to include the Commission's interpretation of the statute in
the text of the rule,\83\ although one commentator viewed such
clarification as unnecessary.\84\ One commentator asked that we clarify
whether the interpretive view expressed in the Proposing Release would
apply equally to compensation consultants--i.e., whether a compensation
committee could obtain advice from compensation consultants retained by
management.\85\
---------------------------------------------------------------------------

    \79\ See, e.g., letters from Barnard, CalSTRS, Davis Polk,
Pfizer and SCSGP.
    \80\ See letters from AFL-CIO, Better Markets, CalPERS, CFA
Institute, CII, FLSBA and Railpen.
    \81\ See, e.g., letters from ABA, CEC (noting that ``the
compensation committee is in the best position to determine whether
a particular advisor would be an appropriate advisor following a
review of all factors and subject to appropriate disclosure'') and
Merkl.
    \82\ See letter from ABA.
    \83\ See id.
    \84\ See letter from Merkl.
    \85\ See letter from Carl Struby.
---------------------------------------------------------------------------

    We asked for comment on whether we should define what constitutes
an ``independent legal counsel.'' One commentator stated, without
explanation, that it would not be necessary for us to define what
constitutes an ``independent legal counsel.'' \86\ Another commentator
believed that we should provide more guidance for issuers to determine
whether legal counsel is ``independent,'' so that listed issuers would
have greater assurance that they are in compliance with Exchange Act
Section 10C(d)(1).\87\
---------------------------------------------------------------------------

    \86\ See letter from Merkl.
    \87\ See letter from Robert M. Fields (Apr. 6,
2011)(``Fields'').
---------------------------------------------------------------------------

c. Final Rule
    We are adopting the rule substantially as proposed, with
modifications to clarify that the scope of the requirements is limited
to only those compensation advisers retained by the compensation
committee and to apply the requirement that the compensation committee
be directly responsible for the appointment, compensation and oversight
of the work of any compensation adviser retained by the compensation
committee to those members of a listed issuer's board of directors who
oversee executive compensation matters on behalf of the board of
directors in the absence of a board committee. Under the final rules,
the exchanges will be directed to adopt listing standards that provide
that:
     The compensation committee may, in its sole discretion,
retain or obtain the advice of a compensation adviser;

     The compensation committee, which for this purpose
includes those members of a listed issuer's board of directors who
oversee executive compensation matters on behalf of the board of
directors in the absence of a board committee, shall be directly
responsible for the appointment, compensation and oversight of the work
of any compensation adviser retained by the compensation committee; and
     Each listed issuer must provide for appropriate funding
for payment of reasonable compensation, as determined by the
compensation committee, to any compensation adviser retained by the
compensation committee.

Consistent with Sections 10C(c)(1)(c) and 10C(d)(3), the final rule may
not be construed to require the compensation committee to implement or
act consistently with the advice or recommendations of any adviser to
the compensation committee or to affect the ability or obligation of a
compensation committee to exercise its own judgment in fulfillment of
the duties of the compensation committee.
    Consistent with our interpretation of Section 10C, the final rule
does not require compensation committees to retain or obtain advice
only from independent advisers. A listed issuer's compensation
committee may receive advice from non-independent counsel, such as in-
house counsel or outside counsel retained by management, or from a non-
independent compensation consultant or other adviser, including those
engaged by management. The final rule does not require a compensation
committee to be directly responsible for the appointment, compensation
or oversight of compensation advisers that are not retained by the
compensation committee, such as compensation consultants or legal
counsel retained by management. Rather, the direct responsibility to
oversee compensation advisers applies only to those advisers retained
by a compensation committee, and the obligation of the issuer to
provide for appropriate funding applies only to those advisers so
retained. Finally, in light of the provisions of our final rule and the
fact that commentators did not urge us to define ``independent legal
counsel,'' we do not believe such a definition is needed. \88\ We note
that the final rule requires the payment of reasonable compensation not
only to independent legal counsel but also to ``any other adviser'' to
the compensation committee, which includes any compensation advisers
retained by the compensation committee, such as attorneys and
consultants, whether or not they are independent.
---------------------------------------------------------------------------

    \88\ Similarly, Exchange Act Rule 10A-3 provides that audit
committees must have the authority to engage ``independent counsel''
and that listed issuers must provide for appropriate funding of such
advisers. Independent counsel is not further defined in Rule 10A-3,
and we do not believe that there has been any uncertainty arising
from the absence of such a definition.
---------------------------------------------------------------------------

4. Compensation Adviser Independence Factors
    Section 10C(b) of the Exchange Act provides that the compensation
committee of a listed issuer may select a compensation adviser only
after taking into consideration the five independence factors specified
in Section 10C(b) as well as any other factors identified by the
Commission. In accordance with Section 10C(b), these factors would
apply to the selection of compensation consultants, legal counsel and
other advisers to the committee. The statute does not require a
compensation adviser to be independent, only that the compensation
committee of a listed issuer consider the enumerated independence
factors before selecting a compensation adviser. Section 10C(b)(2)
specifies that the independence factors identified by the Commission
must be competitively neutral \89\ and include, at minimum:
---------------------------------------------------------------------------

    \89\ Although there is no relevant legislative history, we
assume this requirement is intended to address the concern expressed
by the multi-service compensation consulting firms that the
disclosure requirements the Commission adopted in 2009 are not
competitively neutral because they do not address potential
conflicts of interest presented by boutique consulting firms that
are dependent on the revenues of a small number of clients. See
letter from Towers Perrin, commenting on Proxy Disclosure and
Solicitation Enhancements, Release No. 33-9052 (July 10, 2009),
available at http://www.sec.gov/comments/s7-13-09/s71309-90.pdf. The
list of independence factors in Section 10C(b)(2), which addresses
both multi-service firm ``other services'' conflicts and boutique
firm ``revenue concentration'' conflicts, is consistent with this
assumption.
---------------------------------------------------------------------------

     The provision of other services to the issuer by the
person that employs the compensation consultant, legal counsel or other
adviser;
     The amount of fees received from the issuer by the person
that employs the compensation consultant, legal counsel or other
adviser, as a percentage of the total revenue of the person that
employs the compensation consultant, legal counsel or other adviser;
     The policies and procedures of the person that employs the
compensation consultant, legal counsel or other adviser that are
designed to prevent conflicts of interest;
     Any business or personal relationship of the compensation
consultant, legal counsel or other adviser with a member of the
compensation committee; and
     Any stock of the issuer owned by the compensation
consultant, legal counsel or other adviser.
    We proposed to direct the exchanges to adopt listing standards
requiring the compensation committee of a listed issuer to consider the
five factors enumerated in Section 10C(b) of the Exchange Act prior to
selecting a compensation adviser. We are adopting the rule
substantially as proposed, but with some changes in response to
comments.
a. Proposed Rule
    Proposed Rule 10C-1(b)(4) would direct the exchanges to adopt
listing standards that require the compensation committee of a listed
issuer to take into account the five factors identified in Section
10C(b)(2), in addition to any other factors identified by the relevant
exchange, before selecting a compensation adviser. Under the proposed
rule, the exchanges would have the ability to add other independence
factors that must be considered by compensation committees. In the
Proposing Release, we stated that we did not propose any additional
factors because we believed that the factors set forth in Section
10C(b) are ``generally comprehensive,'' although we solicited comment
as to whether there are any additional independence factors that should
be taken into consideration by a listed issuer's compensation
committee.\90\
---------------------------------------------------------------------------

    \90\ See Proposing Release, 76 FR at 18972.
---------------------------------------------------------------------------

    As noted above and in the Proposing Release, Section 10C does not
require compensation advisers to be independent--only that the
compensation committee consider factors that may bear upon
independence. As a result, we did not believe that it would be
appropriate to establish bright-line or numerical thresholds that would
affect whether or when the factors listed in Section 10C, or any
additional factors, must be considered by a compensation committee. For
example, we did not believe that our rules should provide that a
compensation committee must consider stock owned by an adviser only if
ownership exceeds a specified minimum percentage of the issuer's stock,
or that a committee must consider the amount of revenues that the
issuer's business represents for an adviser only if the percentage
exceeds a certain percentage of the adviser's revenues. Accordingly,
proposed Rule 10C-1(b)(4) would require the listing standards developed
by the exchanges to include

the independence factors set forth in the statute and incorporated into
the rule without any materiality or bright-line thresholds or
cutoffs.\91\
---------------------------------------------------------------------------

    \91\ As noted above, the exchanges would have the ability to add
other independence factors that must be considered by compensation
committees, and these additional factors could include materiality
or bright-line thresholds or cutoffs.
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Comments on this proposal were mixed. A number of commentators
supported directing the exchanges to adopt listing standards that
require the compensation committee to take into account the five
factors enumerated in Section 10C, in addition to any other factors
identified by the exchanges.\92\ One multi-service compensation
consulting firm believed that the five factors listed in Section
10C(b)(2) were, in total, competitively neutral, but that, on an
individual basis, some of the factors were not competitively
neutral.\93\ This commentator suggested that we should provide an
instruction to the final rules to emphasize that the factors should be
considered in their totality and that no one factor should be viewed as
a determinative factor of independence. Another commentator argued that
the full effects of any independence factor on competition in the
rapidly evolving advisory industry are not entirely knowable, and that
the Commission should generally recommend factors that, when applied
equally across the full spectrum of existing firms, help in achieving
the goal of adviser independence.\94\
---------------------------------------------------------------------------

    \92\ See, e.g., letters from ABA, Pfizer, SCSGP and USS.
    \93\ See letter from Aon Hewitt (``AON'').
    \94\ See letter from Hodak Value Advisors.
---------------------------------------------------------------------------

    Several commentators argued that some or all of the five factors
identified in Section 10C(b)(2) and included in the proposed rule were
not competitively neutral.\95\ Multi-service consulting firms argued
that the consideration of other services provided to the issuer by the
person that employs the compensation consultant was not competitively
neutral as this factor would affect only multi-service firms. For their
part, smaller consulting firms argued that the consideration of the
amount of fees received from the issuer as a percentage of a firm's
total revenues was not competitively neutral because the likelihood of
revenue concentration would be greater in smaller firms.\96\ Three
commentators argued that our existing compensation consultant fee
disclosure requirements disproportionately affect multi-service
consulting firms, and suggested that we could improve the competitive
neutrality of our rules by requiring competitively neutral disclosure
of fees paid to all compensation consultants or advisers.\97\
---------------------------------------------------------------------------

    \95\ See, e.g., letters from Frederic Cook, Longnecker &
Associates (``Longnecker''), Mercer, Steven Hall & Partners
(``Steven Hall'') and Towers Watson (``Towers'').
    \96\ See letters from Frederic Cook and Longnecker.
    \97\ See letters from AON, Mercer and Towers.
---------------------------------------------------------------------------

    Many commentators urged us to add more independence factors to the
list of factors that could affect the independence of a compensation
adviser.\98\ Several commentators argued that we should include a
comparison of the amount of fees received for providing executive
compensation consulting services to the amount of fees received for
providing non-executive compensation consulting services.\99\ Other
commentators expressed support for requiring compensation committees to
consider any business or personal relationship between an executive
officer of the issuer and an adviser or the person employing the
compensation adviser.\100\ Some commentators, however, opposed adding
new factors to the list of factors identified in the proposed
rule,\101\ although one of these commentators acknowledged that it
would advise any compensation committee evaluating the independence of
a potential adviser to consider the business and personal relationships
between the issuer's executive officers and the adviser or adviser's
firm.\102\
---------------------------------------------------------------------------

    \98\ See, e.g., letters from ABA, AFL-CIO, AFSCME and USS.
    \99\ See letters from AFL-CIO, AFSCME, Frederic Cook and UAW.
See also letter from Steven Hall (noting that the ``requirement that
a compensation committee consider the company's fees paid to a firm
as a percentage of the firm's overall fees seems to overlook the
more significant issue of the amount of fees the consulting firm
receives for services to the compensation committee as a percentage
of the total fees the firm receives including fees for other
services to the company'').
    \100\ See, e.g., letters from ABA (supporting consideration of
relationships between adviser's employer and issuer's executive
officers), Better Markets, Merkl (supporting consideration of
relationships between either adviser or adviser's employer and
issuer's executive officers), and USS (supporting consideration of
relationships between adviser and issuer's executive officers). One
commentator supported requiring consideration of business or
personal relationships between an issuer's executive officers and
the compensation adviser, but not the adviser's employer. See letter
from Towers.
    \101\ See, e.g., letters from AON, Meridian Compensation
Partners (``Meridian''), SCSGP and Steven Hall.
    \102\ See letter from Steven Hall.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on the application
of the independence factors to different categories of advisers.
Several commentators requested that we stipulate that a compensation
committee conferring with or soliciting advice from the issuer's in-
house or outside legal counsel would not be required to consider the
independence factors with respect to such counsels.\103\ These
commentators believed that a compensation committee should be required
to consider the independence factors only when the committee itself
selects a compensation adviser, but not when it receives advice from,
but does not select, an adviser.\104\ Moreover, two of these
commentators questioned the usefulness of the independence assessment
as it relates to in-house legal counsel, outside legal counsel to an
issuer or a compensation adviser retained by management, as they are
not held out, or considered by the compensation committee, to be
independent.\105\
---------------------------------------------------------------------------

    \103\ See letters from ABA, Davis Polk, McGuire Woods and S&C.
    \104\ See letters from ABA and McGuire Woods.
    \105\ See letters from ABA and S&C.
---------------------------------------------------------------------------

    On the other hand, a number of commentators argued that the
compensation adviser independence requirements should apply to any
legal counsel that provides advice to the compensation committee.\106\
One of these commentators argued that the language of Section 10C(b)(1)
is unambiguous and that the final rules should clarify that exchange
listing standards must require compensation committees to consider the
independence factors whenever a committee receives advice from legal
counsel, regardless of whether or not the committee selected
counsel.\107\
---------------------------------------------------------------------------

    \106\ See, e.g., letters from Better Markets, Robert M. Fields
(Apr. 29, 2011), Richard Thalheimer and Towers.
    \107\ See letter from Towers.
---------------------------------------------------------------------------

    We also requested comment on whether we should include materiality,
numerical or other thresholds that would limit the circumstances in
which a compensation committee is required to consider the independence
factors. Several commentators opposed including such materiality,
numerical or other bright-line thresholds in the rule.\108\ These
commentators expressed concern that such thresholds may not be
competitively neutral and could reduce the flexibility compensation
committees have to select advisers best-suited to the issuer. A number
of commentators supported a materiality threshold with respect to the
stock ownership factor. One commentator suggested that consideration of
this factor should be required only if an individual beneficially owns
in excess of 5% of an outstanding class of an issuer's equity

securities.\109\ Another commentator suggested a threshold of $50,000
in fair market value or 5,000 shares of a listed issuer's stock, below
which an adviser's stock ownership would not be deemed to affect his or
her independence.\110\ Other commentators suggested that compensation
committees should be required to consider only stock owned by the lead
adviser and not stock owned by other employees on the adviser's
team.\111\
---------------------------------------------------------------------------

    \108\ See letters from Longnecker, McGuireWoods, Meridian, SCSGP
and Towers.
    \109\ See letter from Steven Hall.
    \110\ See letter from ABA.
    \111\ See letters from AON and Mercer.
---------------------------------------------------------------------------

    Comments were mixed as to whether the final rule should clarify the
phrases ``provision of other services'' or ``business or personal
relationships,'' as used in proposed Rule 10C-1(b)(4). Some
commentators thought no further clarification of the phrase ``provision
of other services'' was necessary,\112\ and another commented that it
``is better to have a general principle than to have exhaustive
detailed rules that may leave loopholes for services that may impair
the independence of an advisory firm.'' \113\ Two commentators
suggested defining the phrase to expressly exclude certain
services.\114\ For example, one commentator suggested excluding advice
related to broad-based, non-discriminatory plans or surveys.\115\
---------------------------------------------------------------------------

    \112\ See letters from AON and Towers.
    \113\ See letter from Merkl.
    \114\ See letters from Hodak and Mercer.
    \115\ See letter from Mercer.
---------------------------------------------------------------------------

    Some commentators urged that we further define the phrase
``business or personal relationship.'' \116\ One commentator suggested
that we should define ``business relationship'' to expressly exclude
any non-commercial relationship between an adviser and a member of the
issuer's compensation committee, provided that such relationship does
not result in significant monetary or economic gain to either party,
and that we should define ``personal relationship'' to include only
familial relationships.\117\ Another commentator argued that business
or personal relationships that are more casual in nature may not be
relevant to adviser independence and suggested limiting consideration
of such relationships to those that would ``more likely than not'' have
a ``material adverse effect'' on an individual's independence.\118\ Two
commentators thought it would be helpful if we provided examples of the
types of relationships to be considered, in order to guide compensation
committees as they consider the breadth of possible relationships that
might impair adviser independence.\119\ Another commentator thought it
was unnecessary for us to further define the phrase because the
``myriad possible definitions and considerations are unlikely to be
fully encompassed by such a definition.'' \120\
---------------------------------------------------------------------------

    \116\ See, e.g., letters from AON and Meridian.
    \117\ See letter from Meridian.
    \118\ See letter from AON.
    \119\ See letters from Merkl and Towers.
    \120\ See letter from Mercer.
---------------------------------------------------------------------------

    A few commentators also urged that we clarify the scope of
individuals whose relationships would need to be considered in the
context of evaluating adviser independence. One commentator recommended
limiting the required consideration to the individual adviser who
renders services to the compensation committee,\121\ and another
commentator similarly recommended limiting the required consideration
to the lead consultant, counsel or adviser to the committee, but not to
other members of the adviser's team serving the compensation
committee.\122\
---------------------------------------------------------------------------

    \121\ See letter from Meridian.
    \122\ See letter from Mercer (noting that the more junior
members of the team rarely interact directly with the compensation
committee).
---------------------------------------------------------------------------

    We requested comment on whether we should require disclosure of a
compensation committee's process for selecting advisers. Many
commentators criticized this idea, citing concerns about extending
already lengthy proxy statement discussions of executive compensation
and expressing doubt that additional disclosure of the process for
selecting advisers would provide any useful information to
investors.\123\ However, some commentators thought such disclosure
could be useful in providing transparency as to whether compensation
committees were following the required process for selecting
advisers.\124\
---------------------------------------------------------------------------

    \123\ See, e.g., letters from CFA Institute and Frederic Cook.
    \124\ See, e.g., letter from Better Markets.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are adopting the requirements
substantially as proposed, but with some revisions. As discussed above,
this aspect of the final rule will also apply to those members of a
listed issuer's board of directors who oversee executive compensation
matters on behalf of the board of directors in the absence of a board
committee. We have also decided to include one additional independence
factor that compensation committees must consider before selecting a
compensation adviser. Under the final rule, the exchanges will be
directed to adopt listing standards that require a compensation
committee to take into account the five factors enumerated in Section
10C(b)(2), as well as any business or personal relationships between
the executive officers of the issuer and the compensation adviser or
the person employing the adviser. This would include, for example,
situations where the chief executive officer of an issuer and the
compensation adviser have a familial relationship or where the chief
executive officer and the compensation adviser (or the adviser's
employer) are business partners. We agree with commentators who stated
that business and personal relationships between an executive officer
and a compensation adviser or a person employing the compensation
adviser may potentially pose a significant conflict of interest that
should be considered by the compensation committee before selecting a
compensation adviser.\125\
---------------------------------------------------------------------------

    \125\ See, e.g., letters from ABA, Better Markets, Merkl and
USS.
---------------------------------------------------------------------------

    As was proposed, the final rule does not expand the stock ownership
factor to require consideration of stock owned by the person employing
a compensation adviser. As we noted in the Proposing Release, we
interpret ``any stock of the issuer owned by the compensation
consultant, legal counsel, or other adviser'' to include shares owned
by the individuals providing services to the compensation committee and
their immediate family members.
    Other than the additional factor described above, the final rules
will not require the listing standards to mandate consideration of
independence factors beyond those set forth in Section 10C(b)(2). We
believe that these six factors, when taken together, are competitively
neutral, as they will require compensation committees to consider a
variety of factors that may bear upon the likelihood that a
compensation adviser can provide independent advice to the compensation
committee, but will not prohibit committees from choosing any
particular adviser or type of adviser. We agree with the commentator
who suggested that the factors should be considered in their totality
and that no one factor should be viewed as a determinative factor of
independence.\126\ We do not believe it is necessary, however, to
provide an instruction to this effect, as the final rule directs the
exchanges to require consideration of all of the specified factors. In
response to concerns echoed by a number of commentators, we emphasize
that neither the Act nor our final rule requires a compensation adviser
to be independent, only that the

compensation committee consider the enumerated independence factors
before selecting a compensation adviser. Compensation committees may
select any compensation adviser they prefer, including ones that are
not independent, after considering the six independence factors
outlined in the final rule.\127\
---------------------------------------------------------------------------

    \126\ See letter from AON.
    \127\ The listing standards do not, of course, override any
duties imposed on directors by applicable state law relating to the
selection of compensation advisers.
---------------------------------------------------------------------------

    In response to comments,\128\ we are including an instruction to
the final rule to provide that a compensation committee need not
consider the six independence factors before consulting with or
obtaining advice from in-house counsel. Commentators noted that it is
routine for in-house counsel to consult with, and provide advice to,
the compensation committee on a variety of issues, such as, for
example, the terms of an existing benefit plan or how a proposed
employment contract would interrelate with other company
agreements.\129\ We agree with these commentators that, as in-house
legal counsel are company employees, they are not held out to be
independent. In addition, we do not believe compensation committees
consider that in-house counsel serve in the same role or perform a
similar function as a compensation consultant or outside legal counsel.
---------------------------------------------------------------------------

    \128\ See letters from ABA, Davis Polk and S&C.
    \129\ See letters from Davis Polk and S&C.
---------------------------------------------------------------------------

    This instruction 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. We believe that information gathered from an independence
assessment of these categories of advisers will be useful to the
compensation committee as it considers any advice that may be provided
by these advisers. In addition, excluding outside legal counsel or
compensation consultants retained by management or by the issuer from
the required independence assessment may not be competitively neutral,
since, as some commentators pointed out, they often perform the same
types of services as the law firms and compensation consultants
selected by the compensation committee.\130\ Accordingly, we are
including an instruction to the final rule that provides that a listed
issuer's compensation committee is required to conduct the independence
assessment outlined in Rule 10C-1(b)(4) with respect to any
compensation consultant, legal counsel or other adviser that provides
advice to the compensation committee, other than in-house legal
counsel.
---------------------------------------------------------------------------

    \130\ See letters from Jackson and Towers.
---------------------------------------------------------------------------

    The final rule, like our proposal, does not include any
materiality, numerical or other thresholds that would narrow the
circumstances in which a compensation committee is required to consider
the independence factors specified in the rule. We are concerned that
adding materiality or other bright-line thresholds may not be
competitively neutral. The absence of any such thresholds means that
all facts and circumstances relevant to the six factors will be
presented to the compensation committee for its consideration of the
independence of a compensation adviser, and not just those factors that
meet a prescribed threshold. For similar reasons, the final rule does
not further define the phrases ``provision of other services'' or
``business or personal relationship.''
    Consistent with the proposed rule, the final rule does not require
listed issuers to describe the compensation committee's process for
selecting compensation advisers pursuant to the new listing standards.
We are sensitive to the concerns of commentators that adding such
disclosure would increase the length of proxy statement disclosures on
executive compensation without necessarily providing additional
material information to investors.
5. Opportunity To Cure Defects
    Section 10C(f)(2) of the Exchange Act specifies that our rules must
provide for appropriate procedures for an issuer to have a reasonable
opportunity to cure any defects that would be the basis for a
prohibition of the listing of an issuer's securities as a result of its
failure to meet the requirements set forth in Section 10C, before
imposition of such prohibition.\131\ To implement this requirement, we
proposed Rule 10C-1(a)(3), which would require the exchanges to
establish such procedures if their existing procedures are not
adequate. We are adopting the rule as proposed.
---------------------------------------------------------------------------

    \131\ See Exchange Act Section 10C(f)(2).
---------------------------------------------------------------------------

a. Proposed Rule
    Proposed Rule 10C-1(a)(3) would provide that the exchange listing
standards required by Rule 10C-1 must allow issuers a reasonable
opportunity to cure violations of the compensation committee listing
requirements. The proposed rule did not set forth specific procedures
for curing violations of compensation committee listing requirements,
but specified that the listing standards may provide that if a member
of a compensation committee ceases to be independent for reasons
outside the member's reasonable control, that person, with notice by
the issuer to the applicable exchange, may remain a compensation
committee member of the listed issuer until the earlier of the next
annual shareholders' meeting of the listed issuer or one year from the
occurrence of the event that caused the member to be no longer
independent. Proposed Rule 10C-1(a)(3) was patterned after similar
provisions contained in Exchange Act Rule 10A-3(a)(3).\132\
---------------------------------------------------------------------------

    \132\ 17 CFR 240.10A-3(a)(3).
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Commentators generally supported proposed Rule 10C-1(a)(3). Two
commentators favored requiring the exchanges to provide issuers the
same opportunity to cure non-compliance with the compensation committee
listing requirements as they have with respect to audit committee
requirements.\133\ In response to our request for comment on whether we
should direct the exchanges to adopt specific procedures for curing
non-compliance, several commentators were opposed to requiring the
exchanges to establish any such specific procedures.\134\ One
commentator, however, urged us to direct the exchanges to establish
more limited procedures for curing defects.\135\
---------------------------------------------------------------------------

    \133\ See letters from Debevoise and CalPERS.
    \134\ See, e.g., letters from Davis Polk and Merkl.
    \135\ See letter from Better Markets.
---------------------------------------------------------------------------

    We also requested comment as to whether listed issuers that have
just completed initial public offerings should be given additional time
to comply with the compensation committee independence requirements, as
is permitted by Exchange Act Rule 10A-3(b)(1)(iv)(A) with respect to
audit committee independence requirements. Several commentators
supported providing newly listed issuers with additional time to comply
with the compensation committee listing requirements.\136\ The NYSE
argued that the exchanges should have the flexibility to permit an
issuer applying for listing in connection with an initial public
offering to have additional time to comply with compensation committee
requirements.\137\ The NYSE also requested that we clarify that the
authority the exchanges would have under Rule 10C-1(a)(3) to provide
issuers an opportunity to cure defects is

not limited to situations where a previously independent compensation
committee member loses his or her independent status for reasons
outside his or her control.\138\
---------------------------------------------------------------------------

    \136\ See, e.g., letters from ABA, Davis Polk, Merkl and NYSE.
    \137\ See letter from NYSE.
    \138\ See id.
---------------------------------------------------------------------------

c. Final Rule
    After consideration of the comments, we are adopting Rule 10C-
1(a)(3) as proposed. Similar to Exchange Act Rule 10A-3(a)(3), the
final rule requires the exchanges to provide appropriate procedures for
listed issuers to have a reasonable opportunity to cure any
noncompliance with the compensation committee listing requirements that
could result in the delisting of an issuer's securities. The exchanges'
rules may also provide that if a member of a listed issuer's
compensation committee ceases to be independent for reasons outside the
member's reasonable control, that person, with notice by the issuer to
the applicable exchange, may remain a compensation committee member of
the listed issuer until the earlier of the next annual 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
exchanges' authority to provide issuers an opportunity to cure defects
is not limited to situations where a previously independent
compensation committee member loses his or her independent status for
reasons outside his or her control.
    As we noted in the Proposing Release, we believe that existing
listing standards and delisting procedures of most of the exchanges
satisfy the requirement for there to be reasonable procedures for an
issuer to have an opportunity to cure any defects on an ongoing basis.
Most exchanges have already adopted procedures to provide issuers with
notice and opportunity for a hearing, an opportunity for an appeal and
an opportunity to cure defects before their securities are
delisted.\139\ Nonetheless, we expect that the rules of each exchange
would provide for definite procedures and time periods for compliance
with the final rule requirements to the extent they do not already do
so.
---------------------------------------------------------------------------

    \139\ See, e.g., NYSE Listed Company Manual Section 801-805;
Nasdaq Equity Rules 5800 Series; NYSE AMEX Company Guide Section
1009 and Part 12; Chicago Board Options Exchange Rule 31.94; Chicago
Stock Exchange Article 22, Rules 4, 17A, and 22; Nasdaq OMX BX Rule
4800 series; Nasdaq OMX PHLX Rule 811. Neither NYSE Arca nor the
National Stock Exchange has a rule that specifically requires listed
companies to be given an opportunity to submit a plan to regain
compliance with corporate governance listing standards other than
audit committee requirements; issuers listed on these exchanges,
however, are provided notice, an opportunity for a hearing, and an
opportunity for an appeal prior to delisting. See NYSE Arca Rule
5.5(m); National Stock Exchange Rule 15.7 and Chapter X.
---------------------------------------------------------------------------

    We have not made any modifications to Rule 10C-1(a)(3) with respect
to newly listed issuers. As discussed in more detail in Section II.B.2
of this release, in accordance with Exchange Act Section 10C(f)(3), our
final rule will authorize the exchanges to exempt categories of issuers
from the requirements of Section 10C. We believe this authority will
allow the exchanges to craft appropriate limited exceptions from the
required compensation committee listing standards for newly listed and
other categories of listed issuers, subject to Commission review and
approval pursuant to Section 19(b) of the Exchange Act.

 B. Implementation of Listing Requirements

1. Exchanges and Securities Affected
    We proposed to apply the requirements of Section 10C only to
exchanges that list equity securities. In addition, the proposed rule
would require that the exchanges adopt listing standards in compliance
with the rule only with respect to issuers with listed equity
securities. Along with the exemptions contained in Section 10C, the
proposed rule would also exempt security futures products and
standardized options. We are adopting the rule as proposed.
a. Proposed Rule
    Section 10C(a) provides that the Commission shall direct the
exchanges to prohibit the listing of any ``equity security'' of an
issuer (other than several types of exempted issuers) that does not
comply with the compensation committee member independence
requirements. In contrast, Section 10C(f)(1), which states generally
the scope of the compensation committee and compensation adviser
listing requirements, provides that the Commission shall direct the
national securities exchanges and national securities associations ``to
prohibit the listing of any security of an issuer that is not in
compliance with the requirements of this section'' (emphasis added).
    The Senate-passed version of the bill did not distinguish between
equity and non-equity securities, referencing only the prohibition
against the listing of ``any security'' of an issuer not in compliance
with the independence requirements.\140\ The initial House-passed
version would have required the Commission to adopt rules to direct the
exchanges to prohibit the listing of ``any class of equity security''
of an issuer that is not in compliance with the compensation committee
independence standards, as well as with any of the other provisions of
that section, including the provisions relating to compensation
advisers.\141\ According to a press release issued by the House
Financial Services Committee, this language was added during
deliberations by that committee to clarify that the compensation
committee independence standards would apply only to ``public
companies, not to companies that have only an issue of publicly-
registered debt.'' \142\ Because the Senate-passed version of the bill
(which did not specify ``equity'' securities) was used as the base for
the conference draft, it appears that addition of ``equity'' securities
in Section 10C(a) of the conference draft was deliberate. Unlike the
House-passed bill, however, the final bill specifically references
equity securities only in connection with compensation committee member
independence requirements.
---------------------------------------------------------------------------

    \140\ See H.R. 4173, 111th Cong. Sec.  952 (as passed, with
amendments, by the Senate on May 20, 2010).
    \141\ See H.R. 4173, 111th Cong. Sec.  2003 (as passed by the
House of Representatives on Dec. 11, 2009).
    \142\ See Press Release, Financial Services Committee Passes
Executive Compensation Reform, July 28, 2009, available at: http://democrats.financialservices.house.gov/press/PRArticle.aspx?NewsID=520.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the NYSE currently exempts
issuers whose only listed securities are debt securities from the
compensation committee listing requirements that apply to issuers
listing equity securities.\143\ In addition, Exchange Act Rule 3a12-11
exempts listed debt securities from most of the requirements in our
proxy and information statement rules.\144\ Finally, most, if not all,
issuers with only listed debt securities, other than foreign private
issuers, are privately held.\145\ In light of the

legislative history and our and the exchanges' historical approach to
issuers with only listed debt securities, we noted in the Proposing
Release that we view the requirements of Section 10C as intended to
apply only to issuers with listed equity securities.\146\
---------------------------------------------------------------------------

    \143\ See NYSE Listed Company Manual Section 303A.00.
    \144\ In adopting this rule, the Commission determined that debt
holders would receive sufficient protection from the indenture, the
Trust Indenture Act, the proxy rules' antifraud proscriptions, and
the Exchange Act rules that facilitate the transmission of materials
to beneficial owners. See Exemptive Relief and Simplification of
Filing Requirements for Debt Securities To Be Listed on a National
Securities Exchange, Release No. 34-34922 (Nov. 1, 1994) [59 FR
55342].
    \145\ Based on a review of information reported on Forms 10-K,
20-F and 40-F and current public quotation and trade data on issuers
whose debt securities are listed on an exchange, such as the NYSE
Listed and Traded Bonds and NYSE Amex Listed Bonds, we estimate that
there are approximately 83 issuers that list only debt securities on
an exchange. Of these 83 issuers, approximately 45 are wholly-owned
subsidiaries that would be exempt from proposed Exchange Act Rule
10C-1 pursuant to Section 10C(g) of the Act. None of these 83
issuers has a class of equity securities registered under Section 12
of the Exchange Act.
    \146\ Although Section 10C is, in many respects, similar to the
audit committee independence requirements contained in Section
10A(m), there are differences in some of the statutory language. In
this regard, we note that the requirements included in Section
10A(m) of the Exchange Act, as set forth in Section 301 of the
Sarbanes-Oxley Act, are applicable generally to ``listed
securities,'' and no reference is made to equity securities.
Therefore, although Section 10A(m) applies to issuers whether they
have listed debt or equity, we do not believe this should
necessarily prescribe the scope of Section 10C.
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    Accordingly, we proposed to apply Rule 10C-1 only to exchanges that
list equity securities, and to direct these exchanges to adopt listing
standards implementing our rule only as to issuers that are seeking to
list or have listed equity securities. We noted in the Proposing
Release that proposed Rule 10C-1 would not currently apply to FINRA,
the only existing national securities association registered under
Section 15A(a) of the Exchange Act, as FINRA does not list any
securities and does not have listing standards under its rules.\147\
Nevertheless, as Section 10C specifically references national
securities associations, proposed Rule 10C-1 would apply to any
registered national securities association that lists equity securities
in the future.\148\
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    \147\ Similarly, we stated that we did not expect the National
Futures Association, which is a national securities association
registered under Section 15A(k) for the limited purpose of
regulating the activities of members who are registered as broker-
dealers in security futures products, see note 8, above, to develop
listing standards regarding compensation committees in compliance
with proposed Rule 10C-1. See Proposing Release, 76 FR at 18974, n.
73.
    \148\ The OTC Bulletin Board (OTCBB) and the OTC Markets Group
(previously known as the Pink Sheets and Pink OTC Markets) will not
be affected by Rule 10C-1, and therefore issuers whose securities
are quoted on these interdealer quotation systems similarly will not
be affected, unless their securities also are listed on a national
securities exchange. The OTCBB is an ``interdealer quotation
system'' for over-the-counter securities that is operated by FINRA.
(Exchange Act Rule 15c2-11 defines the term ``interdealer quotation
system.'' 17 CFR 240.15c2-11.) It does not, however, have a listing
agreement or arrangement with the issuers whose securities are
quoted on the system and are not considered listed, as that term is
defined and used in Rule 10C-1. See Rules 10C-1(a)(2) and (c)(3).
Although market makers may be required to review and maintain
specified information about an issuer and to furnish that
information to FINRA, the issuers whose securities are quoted on the
OTCBB are not required to submit any information to the system. The
OTC Markets Group is not a registered national securities exchange
or association, nor is it operated by a registered national
securities exchange or association, and thus is not covered by the
terms of the final rule.
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    Under proposed Rule 10C-1(a), exchanges would be required, to the
extent that their listing standards did not conform with Rule 10C-1, to
issue or amend their listing rules, subject to Commission review, to
comply with the new rule. As noted in the Proposing Release, an
exchange that lists or trades security futures products (as defined in
Exchange Act Section 3(a)(56)) \149\ may register as an exchange under
Section 6(g) of the Exchange Act solely for the purpose of trading
those products. As the Exchange Act definition of ``equity security''
includes security futures on equity securities,\150\ exchanges whose
only listed equity securities are security futures products \151\ would
be required to comply with Rule 10C-1 absent an applicable exemption.
Given that Section 10C(f) of the Exchange Act makes no distinction
between exchanges registered pursuant to Section 6(a)--such as the NYSE
and Nasdaq--and those registered pursuant to Section 6(g), we did not
propose a wholesale exemption from the requirements of Rule 10C-1 for
those exchanges registered solely pursuant to Section 6(g).
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    \149\ Exchange Act Section 3(a)(56) defines the term ``security
futures product'' to mean ``a security future or any put, call,
straddle, option, or privilege on any security future.'' 15 U.S.C.
78c(a)(56).
    \150\ Section 3(a)(11) of the Exchange Act defines the term
``equity security'' as any stock or similar security; or any
security future on any such security; or any security convertible,
with or without consideration, into such a security, or carrying any
warrant or right to subscribe to or purchase such a security; or any
such warrant or right; or any other security which the Commission
shall deem to be of similar nature and consider necessary or
appropriate, by such rules and regulations as it may prescribe in
the public interest or for the protection of investors, to treat as
an equity security.
    \151\ Exchanges currently registered solely pursuant to Section
6(g) of the Exchange Act include the Board of Trade of the City of
Chicago, Inc.; the CBOE Futures Exchange, LLC; the Chicago
Mercantile Exchange, Inc.; One Chicago, LLC; the Island Futures
Exchange, LLC; and NQLX LLC.
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    However, as discussed below, we proposed to exempt security futures
products from the scope of proposed Rule 10C-1. Accordingly, we noted
in the Proposing Release that, to the extent the final rule exempted
the listing of security futures products from the scope of Rule 10C-1,
any exchange registered solely pursuant to Section 6(g) of the Exchange
Act and that lists and trades only security futures products would not
be required to file a rule change in order to comply with Rule 10C-1.
    We proposed to exempt security futures products and standardized
options from the requirements of Rule 10C-1. Although the Exchange Act
defines ``equity security'' to include any security future on any stock
or similar security, the Commodity Futures Modernization Act of 2000
(the ``CFMA'') \152\ permits the exchanges to trade futures on
individual securities and on narrow-based security indices (``security
futures'') \153\ without such securities being subject to the
registration requirements of the Securities Act of 1933 (the
``Securities Act'') and the Exchange Act so long as they are cleared by
a clearing agency that is registered under Section 17A of the Exchange
Act \154\ or that is exempt from registration under Section
17A(b)(7)(A) of the Exchange Act. In December 2002, we adopted rules
that provide comparable regulatory treatment for standardized
options.\155\
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    \152\ Public Law 106-554, 114 Stat. 2763 (2000).
    \153\ Exchange Act Section 3(a)(56) [15 U.S.C. 78c(a)(56)], and
Commodities Exchange Act Section 1a(32) [7 U.S.C. la(32)] define
``security futures product'' as a security future or any put, call,
straddle, option, or privilege on any security future.
    \154\ 15 U.S.C. 78q-1.
    \155\ See Release No. 33-8171 (Dec. 23, 2002) [68 FR 188]. In
that release, we exempted standardized options issued by registered
clearing agencies and traded on a registered national securities
exchange or on a registered national securities association from all
provisions of the Securities Act, other than the antifraud provision
of Section 17, as well as the Exchange Act registration
requirements. Standardized options are defined in Exchange Act Rule
9b-1(a)(4) [17 CFR 240.9b-1(a)(4)] as option contracts trading on a
national securities exchange, an automated quotation system of a
registered securities association, or a foreign securities exchange
which relate to option classes the terms of which are limited to
specific expiration dates and exercise prices, or such other
securities as the Commission may, by order, designate.
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    The clearing agency for security futures products and standardized
options is the issuer of these securities,\156\ but its role as issuer
is fundamentally different from an issuer of equity securities of an
operating company. The purchasers of security futures products and
standardized options do not, except in the most formal sense, make an
investment decision based on the issuer. As a result, information about
the clearing agency's business, its officers and directors and its
financial statements is much less

relevant to investors in these securities than information about the
issuer of the underlying security. Similarly, the investment risk in
these securities is determined by the market performance of the
underlying security rather than the results of operations or
performance of the clearing agency, which is a self-regulatory
organization subject to regulatory oversight. Furthermore, unlike a
conventional issuer, the clearing agency does not receive the proceeds
from the sales of security futures products or standardized
options.\157\
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    \156\ See Fair Administration and Governance of Self-Regulatory
Organizations; Disclosure and Regulatory Reporting by Self-
Regulatory Organizations; Recordkeeping Requirements for Self-
Regulatory Organizations; Ownership and Voting Limitations for
Members of Self-Regulatory Organizations; Ownership Reporting
Requirements for Members of Self-Regulatory Organizations; Listing
and Trading of Affiliated Securities by a Self-Regulatory
Organization, Release No. 34-50699 (Nov. 18, 2004) [69 FR 71126], at
n. 260 (``Standardized options and security futures products are
issued and guaranteed by a clearing agency. Currently, all
standardized options and security futures products are issued by the
Options Clearing Corporation (`OCC').'').
    \157\ However, the clearing agency may receive a clearing fee
from its members.
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    In recognition of these fundamental differences, we provided
exemptions for security futures products and standardized options from
the audit committee listing requirements in Exchange Act Rule 10A-
3.\158\ Specifically, Rule 10A-3(c) exempts the listing of a security
futures product cleared by a clearing agency that is registered
pursuant to Section 17A of the Exchange Act or that is exempt from
registration pursuant to Section 17A(b)(7)(A) and the listing of a
standardized option issued by a clearing agency that is registered
pursuant to Section 17A of the Exchange Act. For the same reasons that
we exempted these securities from Rule 10A-3, we proposed to exempt
these securities from Rule 10C-1.
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    \158\ See Exchange Act Rules 10A-3(c)(4) and (5).
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b. Comments on the Proposed Rule
    Commentators generally agreed that Section 10C should apply only to
issuers with listed equity securities.\159\ Some commentators argued
that the proposed rule should apply to all domestic exchanges and
public companies without exception.\160\ These commentators did not
specifically comment on whether the statute is intended to apply only
to issuers with listed equity securities. One commentator recommended
that we exempt only exchanges that do not list equity securities and
agreed that our proposed exemption for security futures products and
standardized options is necessary or appropriate in the public interest
and consistent with the protection of investors.\161\
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    \159\ See, e.g., letters from Debevoise and PEGCC.
    \160\ See letters from CII and FLSBA.
    \161\ See letter from Merkl.
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c. Final Rule
    After consideration of the comments, we are adopting the proposals
without change. As adopted, the final rule will:
     Require all exchanges that list equity securities, to the
extent that their listing standards do not already comply with the
final rule, to issue or amend their listing rules to comply with the
new rule;
     Provide that exchange listing standards required by the
new rule need apply only to issuers with listed equity securities; and
     Exempt security futures products cleared by a clearing
agency that is registered pursuant to Section 17A of the Exchange Act
or that is exempt from registration pursuant to Section 17A(b)(7)(A)
and standardized options that are issued by a clearing agency that is
registered pursuant to Section 17A of the Exchange Act.
2. Exemptions
    Section 10C of the Exchange Act has four different provisions
relating to exemptions from some or all of the requirements of Section
10C:
     Section 10C(a)(1) provides that our rules shall direct the
exchanges to prohibit the listing of any equity security of an issuer
that is not in compliance with the compensation committee member
independence requirements of Section 10C(a)(2), other than an issuer
that is in one of five specified categories--controlled companies,
limited partnerships, companies in bankruptcy proceedings, open-end
management investment companies registered under the Investment Company
Act \162\ and foreign private issuers that disclose in their annual
reports the reasons why they do not have an independent compensation
committee;
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    \162\ 15 U.S.C. 80a-1 et seq.
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     Section 10C(a)(4) provides that our rules shall authorize
the exchanges to exempt a particular relationship from the independence
requirements applicable to compensation committee members, as each
exchange determines is appropriate, taking into consideration the size
of the issuer and any other relevant factors;
     Section 10C(f)(3) provides that our rules shall authorize
the exchanges to exempt any category of issuer from the requirements of
Section 10C as the exchanges determine is appropriate, and that, in
making such determinations, the exchanges must take into account the
potential impact of the requirements on smaller reporting issuers; and
     Section 10C(g) specifically exempts controlled companies,
as defined in Section 10C(g), from all of the requirements of Section
10C.
    We proposed Rule 10C-1(b)(1)(iii)(A) to exempt the five categories
of issuers enumerated in Section 10C(a)(1); Rule 10C-1(b)(1)(iii)(B) to
authorize the exchanges to exempt a particular relationship from the