[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4570-4585]
[FR Doc No: 2013-01106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68639; File No. SR-NYSE-2012-49]

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

January 11, 2013.

I. Introduction

    On September 25, 2012, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to modify the Exchange's rules for compensation
committees of listed issuers to comply with Rule 10C-1 under the Act
and make other related changes. On October 1, 2012, NYSE filed
Amendment No. 1 to the proposed rule change. The proposed rule change,
as modified by Amendment No. 1 thereto, was published for comment in
the Federal Register on October 15, 2012.\3\ The Commission
subsequently extended the time period in which to either approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change, to January 13, 2013.\4\ The Commission received seven comment
letters on the proposed rule change,\5\ as well as a response to the
comment letters from NYSE Euronext, Inc. regarding the NYSE
proposal.\6\ On December 4, 2012, the Exchange filed Amendment No. 2 to
the proposed rule change, which was later withdrawn.\7\ On January 8,
2013, the Exchange filed Amendment No. 3 to the proposed rule
change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68011 (October 9,
2012), 77 FR 62541 (``Notice'').
    \4\ See Securities Exchange Act Release No. 68313 (November 28,
2012), 77 FR 71853 (December 4, 2012).
    \5\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from: Thomas R. Moore, Vice President, Corporate Secretary and Chief
Governance Officer, Ameriprise Financial, Inc., dated October 18,
2012 (``Ameriprise Letter''); J. Robert Brown, Jr., Director,
Corporate & Commercial Law Program, University of Denver Sturm
College of Law, dated October 30, 3012 (``Brown Letter''); Dorothy
Donohue, Deputy General Counsel, Securities Regulation, Investment
Company Institute, dated November 1, 2012 (``ICI Letter''); Brandon
J. Rees, Acting Director, Office of Investment, AFL-CIO, dated
November 5, 2012 (``AFL-CIO Letter''); Carin Zelenko, Director,
Capital Strategies Department, International Brotherhood of
Teamsters, dated November 5, 2012 (``Teamsters Letter''); Wilson
Sonsini Goodrich & Rosati, Professional Corporation, dated November
14, 2012 (``Wilson Sonsini Letter''); and Robert B. Lamm, Chair,
Securities Law Committee, The Society of Corporate Secretaries &
Governance Professionals, dated December 7, 2012 (``Corporate
Secretaries Letter'').
    In addition, the Commission received one comment on a
substantially similar proposal by NYSE Arca, Inc. (``NYSE Arca'') by
a party that did not specifically comment on the NYSE filing. See
Securities Exchange Act Release No. 68006 (October 9, 2012), 77 FR
62587 (October 15, 2012) (SR-NYSEArca-2012-105). The comment letter
received on the NYSE Arca filing is a letter from Jeff Mahoney,
General Counsel, Council of Institutional Investors to Elizabeth M.
Murphy, Secretary, Commission, dated November 1, 2012 (``CII
Letter''). Since the comment letter received on the NYSE Arca filing
discusses issues directly related to the NYSE filing, the Commission
has included it in its discussion of this filing.
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet McGinness, Executive Vice President and Corporate
Secretary, NYSE Euronext, Inc., dated January 10, 2013 (``NYSE
Response Letter''). In the NYSE Response Letter, NYSE Euronext,
Inc., the parent company of NYSE, states that, as the comments made
by the letters submitted on the NYSE and NYSE Arca proposals are
applicable in substance to NYSE, NYSE Arca and NYSE MKT LLC, its
response will address the comments on behalf of all three exchanges.
    \7\ Amendment No. 2, dated December 4, 2012, was withdrawn on
January 7, 2013.
    \8\ In Amendment No. 3 to SR-NYSE-2012-49, NYSE: (a) Revised the
transition period for companies that cease to be Smaller Reporting
Companies to comply with the full range of new requirements, see
infra notes 70-73 and accompanying text; (b) changed references in
the rule text from Regulation S-K, Item 10(f)(1) to Exchange Act
Rule 12b-2; (c) added commentary to state that the independence
assessment of compensation advisers required of compensation
committees does not need to be conducted for advisers whose roles
are limited to those entitled to an exception from the compensation
adviser disclosure rules under Item 407(e)(3)(iii) of Regulation S-
K, see infra notes 45-48 and accompanying text; and (d) added
commentary to state that the independence assessment of compensation
advisers required of compensation committees does not require the
adviser to be independent, only that the compensation committee
consider the enumerated factors before selecting or receiving advice
from the adviser. See infra notes 49-51 and accompanying text.

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    This order approves the proposed rule change, as modified by
Amendment Nos. 1 and 3 thereto, on an accelerated basis.

II. Description of the Proposed Rule Change

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

    On March 30, 2011, to implement Section 10C of the Act, as added by
Section 952 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''),\9\ the Commission proposed
Rule 10C-1 under the Act,\10\ which directs each national securities
exchange (hereinafter, ``exchange'') to prohibit the listing of any
equity security of any issuer, with certain exceptions, that does not
comply with the rule's requirements regarding compensation committees
of listed issuers and related requirements regarding compensation
advisers. On June 20, 2012, the Commission adopted Rule 10C-1.\11\
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    \9\ Public Law 111-203, 124 Stat. 1900 (2010).
    \10\ See Securities Act Release No. 9199, Securities Exchange
Act Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011)
(``Rule 10C-1 Proposing Release'').
    \11\ See Securities Act Release No. 9330, Securities Exchange
Act Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012)
(``Rule 10C-1 Adopting Release'').
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    Rule 10C-1 requires, among other things, each exchange to adopt
rules providing that each member of the compensation committee \12\ of
a listed issuer must be a member of the board of directors of the
issuer, and must otherwise be independent.\13\ In determining the
independence standards for members of compensation committees of listed
issuers, Rule 10C-1 requires the exchanges to consider relevant
factors, including, but not limited to: (a) The source of compensation
of the director, including any consulting, advisory or other
compensatory fee paid by the issuer to the director (hereinafter, the
``Fees Factor''); and (b) whether the director is affiliated with the
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of
the issuer (hereinafter, the ``Affiliation Factor'').\14\
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    \12\ For a definition of the term ``compensation committee'' for
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \13\ See Rule 10C-1(a) and (b)(1).
    \14\ See id. See also Rule 10C-1(b)(1)(iii)(A), which sets forth
exemptions from the independence requirements for certain categories
of issuers. In addition, an exchange may exempt a particular
relationship with respect to members of a compensation committee
from these requirements as it deems appropriate, taking into
consideration the size of an issuer and any other relevant factors.
See Rule 10C-1(b)(1)(iii)(B).
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    In addition, Rule 10C-1 requires the listing rules of exchanges to
mandate that compensation committees be given the authority to retain
or obtain the advice of a compensation adviser, and have direct
responsibility for the appointment, compensation and oversight of the
work of any compensation adviser they retain.\15\ The exchange rules
must also provide that each listed issuer provide for appropriate
funding for the payment of reasonable compensation, as determined by
the compensation committee, to any compensation adviser retained by the
compensation committee.\16\ Finally, among other things, Rule 10C-1
requires each exchange to provide in its rules that the compensation
committee of each listed issuer may select a compensation consultant,
legal counsel or other adviser to the compensation committee only after
taking into consideration six factors specified in Rule 10C-1,\17\ as
well as any other factors identified by the relevant exchange in its
listing standards.\18\
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    \15\ See Rule 10C-1(b)(2).
    \16\ See Rule 10C-1(b)(3).
    \17\ See Rule 10C-1(b)(4). The six factors, which NYSE proposes
to set forth in its rules, are specified in the text accompanying
note 43, infra.
    \18\ Other provisions in Rule 10C-1 relate to exemptions from
the rule and a requirement that each exchange provide for
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any defects that would be the basis for the
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. NYSE's Proposed Rule Change, as Amended

    To comply with Rule 10C-1, NYSE proposes to amend three sections of
its rules concerning corporate governance requirements for companies
listed on the Exchange: NYSE Listed Company Manual (``Manual'') Section
303A.00, ``Corporate Governance Standards;'' Section 303A.02,
``Independence Tests;'' and Section 303A.05, ``Compensation
Committee.'' In addition, NYSE proposes to make some other changes to
its rules regarding compensation committees. To accomplish these
changes, the Exchange proposes to replace current Sections 303A.00,
303A.02 and 303A.05 of the Manual with new operative text that will be
effective on July 1, 2013.
    Current Section 303A.05 of the Manual provides that each listed
company have a compensation committee, and that such compensation
committee be composed entirely of ``Independent Directors'' \19\ and
have a written charter.\20\
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    \19\ ``Independent Directors'', as defined in Section
303A.02(a)-(b) of the Manual and used herein, includes a two-part
test for independence. The rule sets forth specific categories of
directors who cannot be considered independent because of certain
discrete relationships (``bright-line tests''); and also provides
that a listed company's board make an affirmative determination that
each independent director has no material relationship that, in the
opinion of the board, would raise concerns about independence from
management. Id. See also the Commentary to Section 303A.02(a) of the
Manual.
    \20\ See Section 303A.05(b) of the Manual.
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    Under its proposal, NYSE will retain its existing requirement that
each listed company be required to have a compensation committee
composed entirely of Independent Directors, as defined in NYSE's
rules.\21\ Under the proposed amendment, however, each compensation
committee member must also satisfy additional independence
requirements, as described in Section II.B.1 below.\22\
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    \21\ See id.
    \22\ See proposed Section 303A.02(a)(ii) of the Manual
(concerning the consideration of director compensation and
affiliation).
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    NYSE will also retain the existing requirement that a listed issuer
adopt a formal written compensation committee charter \23\ that
specifies the scope of the committee's responsibilities and how it
carries out those responsibilities, including structure, operations and
membership requirements.\24\ The proposed amendment to the rule would
require the charter to specify additional responsibilities and
authority with respect to retaining its own advisers; appointing,
compensating, and overseeing such advisers; considering certain
independence factors before selecting and receiving advice from
advisers; and receiving funding from the company to engage them, which
are discussed in detail in Section II.B.2

below and set forth in proposed Section 303A.05(c) of the Manual.\25\
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    \23\ Rule 10C-1 requires a compensation committee to have
certain specified authority and responsibilities. See supra notes
15-17 and accompanying text. The existing NYSE rule already requires
compensation committees of listed companies to have a charter
setting forth specified responsibilities, and the proposed rule
updates the language concerning this authority and set of
responsibilities and adds the required content discussed infra at
text accompanying notes 40-42.
    \24\ See Section 303A.05(b) of the Manual. The existing
Commentary to Section 303A.05, which NYSE proposed to replace with a
comparable provision, currently provides that ``if a compensation
consultant is to assist in the evaluation of director, CEO or
executive officer compensation, the compensation committee charter
should give that committee sole authority to retain and terminate
the consulting firm, including sole authority to approve the firm's
fees and other retention terms.'' See discussion infra at text
accompanying notes 39-41.
    \25\ See proposed Section 303A.05(b) of the Manual. Because
smaller reporting companies are not required to comply with the new
compensation adviser independence considerations in proposed Section
303A.05(c)(iv), see infra notes 52-56 and accompanying text, their
charters are not required to reflect this requirement. See also
proposed Section 303A.00 (Smaller Reporting Companies) of the
Manual.
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1. Compensation Committee Composition and Independence Standards
    NYSE proposes to amend Section 303A.02(a) of the Manual, which
would continue to provide that no director qualifies as ``independent''
unless the board of directors of the listed company affirmatively
determines that the director has no material relationship with the
listed company. As noted above, NYSE's rules currently require each
member of a listed company's compensation committee to be an
Independent Director, as defined in Section 303A.02(a) of the
Manual.\26\ Rule 10C-1, as discussed above, provides that exchange
standards must require compensation committee members to be
independent, and further provides that each exchange, in determining
independence for this purpose, must consider relevant factors,
including the Fees Factor and Affiliation Factor described above. In
its proposal, NYSE discussed its consideration of these factors,\27\
and proposed the following:\28\
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    \26\ See supra note 19.
    \27\ See Notice, supra note 3.
    \28\ See Notice, supra note 3, for the Exchange's explanation of
its reasons for the proposed change. See infra Sections II.B.3 and
II.B.4 concerning entities that would be exempt from this
requirement.
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    With respect to the Fees and Affiliation Factors, NYSE proposes to
adopt a provision stating that the board of directors of the listed
company would be required, in affirmatively determining the
independence of any director who will serve on the compensation
committee of the board, to consider all factors specifically relevant
to determining whether a director has a relationship to the listed
company which is material to that director's ability to be independent
from management in connection with the duties of a compensation
committee member, including, but not limited to: (A) The source of
compensation of such director, including any consulting, advisory or
other compensatory fee paid by the listed company to such director; and
(B) whether such director is affiliated with the listed company, a
subsidiary of the listed company or an affiliate of a subsidiary of the
listed company.\29\
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    \29\ See proposed Section 303A.02(a)(ii) of the Manual. See also
Notice, supra note 3.
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    With respect to the Fees Factor, NYSE also proposes to amend the
commentary to provide that the board should consider whether the
director receives compensation from any person or entity that would
impair his ability to make independent judgments about the listed
company's executive compensation.\30\
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    \30\ See proposed Commentary to Section 303A.02(a)(ii) of the
Manual.
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    With respect to the Affiliation Factor, NYSE proposes, similarly,
to amend the commentary to provide that the board should consider
whether an affiliate relationship places the director under the direct
or indirect control of the listed company or its senior management, or
creates a direct relationship between the director and members of
senior management, ``* * * in each case of a nature that would impair
his ability to make independent judgments about the listed company's
executive compensation.''\31\
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    \31\ See id.
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    Although Rule 10C-1 requires that exchanges consider ``relevant
factors'' not limited to the Fees and Affiliation Factors, NYSE states
that, after reviewing its current and proposed listing rules, it
concluded not to propose any specific numerical tests with respect to
the factors specified in proposed Section 303A.02(a)(ii) or to adopt a
requirement to consider any other specific factors. In its proposal,
NYSE stated that it did not intend to adopt an absolute prohibition on
a board making an affirmative finding that a director is independent
solely on the basis that the director or any of the director's
affiliates are shareholders owning more than some specified percentage
of the listed company.\32\ Further, as stated in its filing, NYSE
believes that its existing ``bright-line'' independence standards, as
set forth in Section 303A.02(b) of the Manual, are sufficiently broad
to encompass the types of relationships which would generally be
material to a director's independence for compensation committee
service.\33\ Additionally, NYSE stated that Section 303A.02(a) already
requires the board to consider any other material relationships between
the director and the listed company or its management that are not the
subject of ``bright-line'' tests from Section 303A.02(b) of the
Manual.\34\ NYSE believes that these requirements with respect to
general director independence, when combined with the specific
considerations required by proposed Section 303A.02(a)(ii), represent
an appropriate standard for compensation committee independence.\35\
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    \32\ See Notice, supra note 3.
    \33\ See id. The following are the ``bright-line'' tests set
forth in Section 303A.02(b): (i) The director is, or has been within
the last three years, an employee of the listed company, or an
immediate family member is, or has been within the last three years,
an executive officer, of the listed company; (ii) The director has
received, or has an immediate family member who has received, during
any twelve month period within the last three years, more than
$120,000 in direct compensation from the listed company, other than
director and committee fees and pension or other forms of deferred
compensation for prior service (provided such compensation is not
contingent in any way on continued service); (iii) (A) The director
is a current partner or employee of a firm that is the listed
company's internal or external auditor; (B) the director has an
immediate family member who is a current partner of such a firm; (C)
the director has an immediate family member who is a current
employee of such a firm and personally works on the listed company's
audit; or (D) the director or an immediate family member was within
the last three years a partner or employee of such a firm and
personally worked on the listed company's audit within that time;
(iv) The director or an immediate family member is, or has been
within the last three years, employed as an executive officer of
another company where any of the listed company's present executive
officers at the same time serves or served on that company's
compensation committee; (v) The director is a current employee, or
an immediate family member is a current executive officer, of a
company that has made payments to, or received payments from, the
listed company for property or services in an amount which, in any
of the last three fiscal years, exceeds the greater of $1 million,
or 2% of such other company's consolidated gross revenues. For
purposes of Sections 303A.01, 303A.03, 303A.04, 303A.05 and 303A.09,
a director of a business development company is considered to be
independent if he or she is not an ``interested person'' of the
company, as defined in Section 2(a)(19) of the Investment Company
Act of 1940.
    \34\ See Notice, supra note 3.
    \35\ See id.
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    NYSE proposes a cure period for a failure of a listed company to
meet its committee composition requirements for independence. Under the
provision, if a listed company fails to comply with the compensation
committee composition requirements because a member of the compensation
committee ceases to be independent for reasons outside the member's
reasonable control, that person, only so long as a majority of the
members of the compensation committee continue to be independent, may
remain a member of the compensation committee until the earlier of the
next annual shareholders' meeting of the listed company or one year
from the occurrence of the event that caused the member to be no longer
independent.\36\ The proposed rule also requires a company relying on
this provision to provide notice to NYSE promptly.\37\
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    \36\ See proposed Section 303A.00 ``Cure Period for Compensation
Committee Independence Non-Compliance'' of the Manual.
    \37\ See id.

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    NYSE modified the suggested cure period language contained in Rule
10C-1(a)(3) by limiting the cure period's use to circumstances where
the committee continues to have a majority of independent directors, as
NYSE believes this would ensure that the applicable committee could not
take an action without the agreement of one or more independent
directors.\38\
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    \38\ See Notice, supra note 3. The Commission notes that while
NYSE does not provide any new procedures for an issuer to have an
opportunity to cure any other defects with respect to its proposed
compensation committee requirements, current NYSE rules provide
issuers with an opportunity to cure defects, and appeal, before
their securities are delisted for rule violations. See NYSE Listed
Company Manual, Sections 802.02 (``Continued Listing--Evaluation and
Follow-up Procedures for Domestic Companies'') and 804.00
(``Procedure for Delisting'').
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2. Authority of Committees to Retain Compensation Advisers; Funding;
and Independence of Compensation Advisers
    In its proposed rule change, NYSE proposes to fulfill the
requirements imposed by Rule 10C-1(b)(2)-(4) under the Act concerning
compensation advisers by setting forth those requirements in its own
rules and requiring these new rights and responsibilities to be
included in the compensation committee's charter.\39\ Thus, proposed
Section 303A.05(c)(i)-(iii) of the Manual proposes to adopt the
requirements that NYSE believes are required by Rule 10C-1(b)(2)-(3)
that: (i) The compensation committee may, in its sole discretion,
retain or obtain the advice of a compensation consultant, independent
legal counsel or other adviser; (ii) the compensation committee shall
be directly responsible for the appointment, compensation and oversight
of the work of any compensation consultant, independent legal counsel
or other adviser retained by the compensation committee;\40\ and (iii)
the listed company must provide for appropriate funding, as determined
by the compensation committee, for payment of reasonable compensation
to a compensation consultant, independent legal counsel or any other
adviser retained by the compensation committee.\41\
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    \39\ Rule 10C-1(b)(4), does not include the word ``independent''
before ``legal counsel'' and requires an independence assessment for
any legal counsel to a compensation committee, other than in-house
counsel. In providing commentary to proposed Section
303A.05(b)(iii), as modified by Amendment No. 3, NYSE provides for
two limited exceptions. See infra notes 45-48 and accompanying text.
    \40\ The proposal also includes a provision, derived from Rule
10C-1, stating that nothing in the rule may be construed: (A) To
require the compensation committee to implement or act consistently
with the advice or recommendations of the compensation consultant,
independent legal counsel or other adviser to the compensation
committee; or (B) to affect the ability or obligation of the
compensation committee to exercise its own judgment in fulfillment
of the duties of the compensation committee. See Commentary to
Section 303A.05 to the Manual.
    \41\ See Notice, supra note 3.
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    Proposed Section 303A.05(c)(iv) of the Manual, as amended, also
sets forth explicitly, in accordance with Rule 10C-1, that the
compensation committee may select, or receive advice from, a
compensation consultant, legal counsel or other adviser to the
compensation committee, other than in-house legal counsel, only after
taking into consideration all factors relevant to that person's
independence from management, including the following six factors set
forth in Rule 10C-1 regarding independence assessments of compensation
advisers.\42\
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    \42\ See Rule 10C-1(b)(4).
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    The six factors, which are set forth in full in the proposed rule,
are: (A) The provision of other services to the listed company by the
person that employs the compensation consultant, legal counsel or other
adviser; (B) the amount of fees received from the listed company by the
person that employs the compensation consultant, legal counsel or other
adviser, as a percentage of the total revenue of the person that
employs the compensation consultant, legal counsel or other adviser;
(C) 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; (D) any business or personal
relationship of the compensation consultant, legal counsel or other
adviser with a member of the compensation committee; (E) any stock of
the listed company owned by the compensation consultant, legal counsel
or other adviser; and (F) any business or personal relationship of the
compensation consultant, legal counsel, other adviser or the person
employing the adviser with an executive officer of the listed
company.\43\
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    \43\ See also Rule 10C-1(b)(4)(i)-(vi).
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    As proposed, Section 303A.05(c)(iv) of the Manual would not include
any specific additional factors for consideration, as NYSE stated that
it believes the list included in Rule 10C-1(b)(4) is very comprehensive
and the proposed listing standard would also require the compensation
committee to consider any other factors that would be relevant to the
adviser's independence from management.\44\
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    \44\ See Notice, supra note 3.
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    The proposed commentary to proposed Section 303A.05 of the Manual,
as modified by Amendment No. 3,\45\ further states that, as provided in
Rule 10C-1, a compensation committee is required to conduct the
independence assessment outlined in proposed Section 303A.05(c)(iv)
with respect to any compensation consultant, legal counsel or other
adviser that provides advice to the compensation committee, other than
(i) in-house legal counsel \46\ and (ii) any compensation consultant,
legal counsel or other adviser whose role is limited to the following
activities for which no disclosure would be required under Item
407(e)(3)(iii) of Regulation S-K: Consulting on any broad-based plan
that does not discriminate in scope, terms, or operation, in favor of
executive officers or directors of the listed company, and that is
available generally to all salaried employees; or providing information
that either is not customized for a particular company or that is
customized based on parameters that are not developed by the
compensation consultant, and about which the compensation consultant
does not provide advice.\47\ NYSE noted that this second exception is
based on Item 407(e)(3)(iii) of Regulation S-K, which provides a
limited exception to the Commission's requirement for a registrant to
disclose any role of compensation advisers in determining or
recommending the amount or form of a registrant's executive and
director compensation.\48\
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    \45\ See supra note 8. NYSE's proposal as submitted originally
only contained an exception for in-house legal counsel. As described
below, the Exchange amended its proposal to add an exception for
advisers whose role is limited to certain broad-based plans or to
providing non-customized information.
    \46\ See proposed Commentary to Section 303A.05 of the Manual.
    \47\ See Exhibit 5 to Amendment No. 3 (amending, in part, the
proposed Commentary to Section 303A.05 of the Manual).
    \48\ See Amendment No. 3; see also 17 CFR 229.407(e)(3)(iii).
The Exchange believes that its proposed exception from the
independence assessment requirement is appropriate because the types
of services excepted do not raise conflict of interest concerns, and
noted that this is the same reason for which the Commission excluded
these types of services from the disclosure requirement in Item
407(e)(3)(iii) of Regulation S-K.
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    The proposed commentary to Section 303A.05 of the Manual, as
modified by Amendment No. 3, also clarifies that nothing in the rule
requires a compensation consultant, legal counsel or other compensation
adviser to be independent, only that the compensation committee
consider the enumerated independence factors before selecting or
receiving advice from a compensation adviser.\49\ It further

clarifies that compensation committees may select or receive advice
from any compensation adviser they prefer, including ones that are not
independent, after considering the six independence factors set forth
in Section 303A.05(c)(iv)(A)-(F) of the Manual.\50\ The Exchange
clarified that, while the compensation committee is required to
consider the independence of compensation advisers, the compensation
committee is not precluded from selecting or receiving advice from
compensation advisers that are not independent.\51\
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    \49\ See Exhibit 5 to Amendment No. 3, supra note 8.
    \50\ See id.
    \51\ See Amendment No. 3, supra note 8.
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3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies
from all the requirements included within the rule.\52\ Consistent with
this Rule 10C-1 provision, NYSE, as a general matter, proposes that a
smaller reporting company, as defined in Rule 12b-2 \53\ under the Act
(hereinafter, a ``Smaller Reporting Company''), not be subject to the
new requirements set forth in its proposal specifically to comply with
Rule 10C-1.\54\ Thus, NYSE proposes not to require Smaller Reporting
Companies to comply with either the enhanced independence standards for
members of compensation committees relating to compensatory fees and
affiliation or the compensation adviser independence
considerations.\55\
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    \52\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \53\ 17 CFR 240.12b-2.
    \54\ See proposed Section 303A.00 of the Manual.
    \55\ See supra text accompanying notes 29 and 43.
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    NYSE proposes in Section 303A.00 of the Manual that Smaller
Reporting Companies are not required to comply with Section
303A.02(a)(ii) concerning the additional independence factors for
members serving on the compensation committee. A Smaller Reporting
Company will be required to continue to comply with the pre-existing
portions of proposed Section 303A.05 of the Manual, including the
requirements of Section 303A.05(c) concerning the compensation
committee's authority, responsibility and funding of compensation
advisers. However, NYSE proposes an exception from the new portion of
proposed Section 303A.05(c)(iv) that would otherwise require the
Smaller Reporting Company's compensation committee to consider
independence factors before selecting such advisers, which goes beyond
NYSE's existing requirements.\56\ NYSE argues that, under this
approach, Smaller Reporting Companies will effectively be subject to
the same requirements as is currently the case under the existing
requirements of the Manual, but they will not be subject to any of the
new requirements of proposed Sections 303A.02(a)(ii) and
303A.05(c)(iv).\57\
---------------------------------------------------------------------------

    \56\ As noted above, NYSE currently requires such authority,
responsibility and funding be provided by all listed companies to
compensation committees, including by Smaller Reporting Companies.
See supra text accompanying note 24. As Smaller Reporting Companies
will not be required to comply with the consideration of certain
independence factors when selecting an adviser, their charters will
not be required to reflect this provision.
    \57\ See Notice, supra note 3.
---------------------------------------------------------------------------

4. Exemptions
    NYSE proposes that its existing exemptions from the Exchange's
compensation-related listing rules currently in place, which are set
forth in Section 303A.00 of the Manual, apply also to the new
requirements of the proposed rule change and thereby will continue to
provide a general exemption from all of the compensation committee
requirements of Section 303A.05 of the Manual.\58\ These include
exemptions to the following issuers: Any listed company of which more
than 50% of the voting power for the election of directors is held by
an individual, a group or another company (in other words, a controlled
company); limited partnerships; companies in bankruptcy; closed-end and
open-end management investment companies that are registered under the
Investment Company Act of 1940; passive business organizations in the
form of trusts (such as royalty trusts) or derivatives and special
purpose securities; and issuers whose only listed equity stock is a
preferred stock.\59\ NYSE states that these categories of issuers
typically: (i) Are externally managed and do not directly employ
executives; (ii) do not by their nature have employees; or (iii) have
executive compensation policy set by a body other than the board.\60\
In light of these structural reasons why these categories of issuers
generally do not have compensation committees, the Exchange believes
that it would be a significant and unnecessarily burdensome alteration
in their governance structures to require them to comply with the
proposed new requirements and that it is appropriate to grant them an
exemption.\61\
---------------------------------------------------------------------------

    \58\ See id. In addition, such exempt companies would also
thereby be exempt from the enhanced independence requirements for
compensation committee composition described in proposed Section
303A.02 of the Manual.
    \59\ See Section 303A.00 of the Manual.
    \60\ See Notice, supra note 3.
    \61\ See id.
---------------------------------------------------------------------------

    Concerning foreign private issuers,\62\ NYSE's current rules in
Section 303A.11 of the Manual permit any such issuer to follow its home
country practice in lieu of many of NYSE's corporate governance listing
standards, including the Exchange's compensation-related listing rules.
Section 303A.00 of the Manual currently provides that listed companies
that are foreign private issuers are permitted to follow home country
practice in lieu of the provisions of Section 303A, but this allowance
is granted on condition that the issuer discloses in its annual report
filed with the Commission any significant ways in which its corporate
governance practices differ from those followed by domestic companies
under NYSE listing standards.\63\ NYSE proposes that this allowance
continue to apply, generally, to the Exchange's compensation committee
rules as revised by the instant proposal on the same condition, namely
that the issuer discloses any significant ways in which its corporate
governance practices differ from those followed by domestic companies
under NYSE listing standards in its annual report.\64\ NYSE does not
propose to add any additional requirements to this disclosure
requirement applicable to foreign private issuers, and argues that an
additional statement as to why the company does not comply would likely
simply be that the foreign private issuer was not required to do so by
home country law.\65\
---------------------------------------------------------------------------

    \62\ Under NYSE's listing rules, ``foreign private issuer'' has
the same meaning and is defined in accordance with the SEC's
definition of foreign private issuer set out in Rule 3b-4(c) (17 CFR
240.3b-4). See Section 103.00 of the Manual.
    \63\ See Section 303A.11 of the Manual. If a foreign private
issuer is not required to file its annual report with the Commission
on Form 20-F, it may either make this disclosure in another annual
report filed with the Commission or make this disclosure available
on or through its Web site.
    \64\ See Notice, supra note 3.
    \65\ See id.; see also Commentary to Section 303A.11 of the
Manual.
---------------------------------------------------------------------------

5. Transition to the New Rules for Companies Listed as of the Effective
Date
    The proposed rule change provides that certain of the new
requirements for listed companies will be effective on July 1, 2013 and
others will be effective after that date.\66\ Specifically, NYSE
proposes to amend Section 303A.00 to

provide transition periods by which listed companies would be required
to comply with the new Section 303A.02(a)(ii) compensation committee
director independence standards. Pursuant to the proposal, listed
companies would have until the earlier of their first annual meeting
after January 15, 2014, or October 31, 2014, to comply with the new
standards for compensation committee director independence. Existing
compensation committee independence standards would continue to apply
pending the transition to the new independence standards. NYSE proposes
that all other proposed sections of the proposal would become effective
on July 1, 2013 for purposes of compliance by currently listed issuers
that are not otherwise exempted. On July 1, 2013, such issuers will be
required to comply with the provisions relating to the authority of a
compensation committee to retain compensation consultants, legal
counsel, and other compensation advisers; the authority to fund such
advisers; and the responsibility of the committee to consider
independence factors before selecting or receiving advice from such
advisers.\67\
---------------------------------------------------------------------------

    \66\ During the transition periods described herein, existing
compensation committee independence standards would continue to
apply pending the transition to the new independence standards. The
Exchange believes that its prior use of a similar transition period
was satisfactory and that it is reasonable to follow the same
approach in connection with the proposed changes to the compensation
committee independence standards.
    \67\ As noted above, NYSE already requires that, if a
compensation consultant is to assist in the evaluation of director,
CEO or executive officer compensation, the compensation committee
charter should give that committee sole authority to retain and
terminate the consulting firm, including sole authority to approve
the firm's fees and other retention terms.
---------------------------------------------------------------------------

6. Compliance Schedules: IPOs; Companies that Lose their Exemptions;
Companies Transferring from Other Markets
    NYSE's existing rules permit certain companies listing on the
Exchange to phase-in compliance with all of the Exchange's applicable
independence requirements for compensation committees after the date
that the company's securities first trade on NYSE.\68\ NYSE proposes to
preserve its current compliance periods for those categories of issuers
with respect to the enhanced independence standard for directors
serving on the compensation committee, which means that companies
listing in conjunction with their initial public offerings,\69\
companies listing in connection with a spin-off or carve-out, companies
listing upon emergence from bankruptcy, and companies that cease to
qualify as a controlled company would continue to be entitled to a
transition period under which the company must have: At least one
independent member that meets the enhanced standards (concerning fees
received by members and their affiliations) on its compensation
committee by the listing date; at least a majority of independent
members that meet the enhanced standards on the compensation committee
within 90 days of the listing date; and a fully independent
compensation committee where all members meet the enhanced standards
within one year of the listing date.
---------------------------------------------------------------------------

    \68\ See Section 303A.00 of the Manual (Compliance Dates).
    \69\ NYSE notes that, for purposes of Section 303A other than
Sections 303A.06 and 303A.12(b), a company is considered to be
listing in conjunction with an initial public offering if,
immediately prior to listing, it does not have a class of common
stock registered under the Act.
---------------------------------------------------------------------------

    Companies that cease to qualify as foreign private issuers would
continue to have a transition period under which they must have a fully
independent compensation committee where all members meet the enhanced
standards within six months of that determination.
    Companies listing upon transfer from another market would have one
year from the listing date to satisfy all the requirements of Section
303A to the extent the national securities exchange on which they were
listed did not have the same requirement.
    For a company that was, but has ceased to be, a Smaller Reporting
Company, the proposed rule change, as modified by Amendment No. 3,
establishes a compliance schedule based on certain dates relating to
the company's change in status.\70\ Pursuant to Rule 12b-2 under the
Act, a company tests its status as a Smaller Reporting Company on an
annual basis as of the last business day of its most recently completed
second fiscal quarter (the ``Smaller Reporting Company Determination
Date''). A company with a public float of $75 million or more as of the
Smaller Reporting Company Determination Date will cease to be a Smaller
Reporting Company as of the beginning of the fiscal year following the
Smaller Reporting Company Determination Date. Under NYSE's proposal,
the day of this change in status is the beginning of the compliance
period (``Start Date'').\71\
---------------------------------------------------------------------------

    \70\ See proposed Section 303A.00 (Compliance Dates), as
amended. In the proposal as originally submitted, the compliance
schedule was to require compliance with the enhanced standards for
director independence six months after the company ceases to be a
Smaller Reporting Company, but immediate compliance with all other
requirements. In Amendment No. 3, NYSE states that while the revised
compliance schedule is different from what it originally proposed,
the amended version will allow companies sufficient time to adjust
to the differences, as many companies will likely not become aware
of their change in status until significantly after the
determination date and would therefore not utilize the transition
period as originally proposed to bring themselves into compliance
with the enhanced requirements, and that such companies would have
significant difficulty in becoming compliant within the transition
period as originally proposed.
    \71\ See Amendment No. 3, supra note 8.
---------------------------------------------------------------------------

    By six months from the Start Date, the company will be required to
comply with Section 303A.05(c)(iv) of the Manual, which sets forth the
provision described above relating to the requirement that the
committee consider independence factors before selecting compensation
advisers.\72\ Six months from the Start Date, the company will begin to
comply with the additional requirements in Section 303A.02(ii)
regarding member independence on the compensation committee. Under the
proposal, as amended, a company that has ceased to be a Smaller
Reporting Company will be permitted to phase in its compliance with the
enhanced independence requirements for compensation committee members
(relating to compensatory fees and affiliation) as follows: (i) One
member must satisfy the requirements by six months from the Start Date;
(ii) a majority of members must satisfy the requirements by nine months
from the Start Date; and (iii) all members must satisfy the
requirements by one year from the Start Date.\73\
---------------------------------------------------------------------------

    \72\ In addition, this will require the company to update its
charter to reflect this additional responsibility of the
compensation committee. See Section 303A.05(b)(iii) of the Manual.
    \73\ During the compliance schedule, a company that has ceased
to be a Smaller Reporting Company will be required to continue to
comply with the rules previously applicable to it.
---------------------------------------------------------------------------

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

    As stated previously, the Commission received a total of seven
comment letters on the NYSE proposal,\74\ and one comment letter on a
related proposal by NYSE Arca.\75\ The Commission is treating the
comment letter submitted on the NYSE Arca filing, for which a
comparable letter was not submitted on the NYSE filing, as also being
applicable to the NYSE filing since the NYSE and NYSE Arca filings
address the same substantive issues. NYSE Euronext, Inc., on behalf of
NYSE, responds to these comment letters for the NYSE proposal.\76\
---------------------------------------------------------------------------

    \74\ See supra note 5.
    \75\ See id.
    \76\ See supra note 6.
---------------------------------------------------------------------------

    Three commenters expressed general support for the proposal,
although two believed that it needed to be amended before being
approved.\77\ Some

commenters supported specific provisions of the proposal,\78\ some
opposed specific provisions,\79\ and some sought clarification of
certain aspects of the proposal.\80\ Some commenters believed that the
proposal fell short of meeting the requirements of Rule 10C-1 and
believed that it should have been more stringent.\81\ These and other
comments, as well as NYSE's responses to some of the comments that
raised issues with the proposal, are summarized below.
---------------------------------------------------------------------------

    \77\ See Ameriprise Letter, which supported the proposal but
believed that certain aspects were not sufficiently clear such that
the proposal needed to be amended to provide additional clarity; ICI
Letter, which urged approval of the proposal; and Corporate
Secretaries Letter, which generally supported the proposal, but
believed that certain of its aspects were unnecessarily burdensome
or not sufficiently clear such that the proposal needed to be
amended before being approved by the Commission.
    \78\ See Brown Letter, CII Letter, and ICI Letter.
    \79\ See AFL-CIO Letter, Brown Letter, and Wilson Sonsini
Letter. See also CII Letter, which stated that it believed that
specific aspects of the NYSE Arca proposal were lacking.
    \80\ See Ameriprise Letter and Corporate Secretaries Letter.
    \81\ See AFL-CIO Letter, Brown Letter, CII Letter, and Teamsters
Letter.
---------------------------------------------------------------------------

A. Definition of Independence

1. Consideration of Director Compensation
    Three commenters believed that the proposal falls short of the
requirements of Rule 10C-1, which, in their view, requires that fees
paid to a director for service on the company's board also be
considered.\82\ Two of these commenters, after noting that the proposal
did not require boards of directors to also consider the compensation
paid to the directors for their service on the board in determining the
independence of directors serving on the compensation committee, argued
that the proposal falls short of the requirements of Rule 10C-1, which,
in their view, requires that fees paid to a director for service on the
company's board also be considered.\83\ The other commenter argued that
the language of Section 10C of the Act itself, as well as its
legislative history, indicates Congress's intent that such fees be
considered.\84\ These commenters believed that compensation for board
service can result in ``the impairment of independence as a result of
excessive fees,'' \85\ because ``[h]igh director fees relative to other
sources of income can compromise director objectivity,'' \86\ and
``[h]ighly paid directors also may be more inclined to approve large
executive pay packages.'' \87\ One of these commenters believed that
the requirement of Section 10C of the Act and Rule 10C-1 to consider
the source of compensation of a director goes further, and applies to
all types of compensation that a director may receive, including
compensation paid by any person, including non-issuers.\88\
---------------------------------------------------------------------------

    \82\ See Brown Letter, AFL-CIO Letter, and Teamsters Letter.
    \83\ See AFL-CIO Letter and Teamsters Letter, noting that Rule
10C-1 requires the exchanges to consider a director's ``source of
compensation,'' and arguing that this phrase includes director fees.
    \84\ See Brown Letter.
    \85\ Id.
    \86\ See AFL-CIO Letter and Teamsters Letter.
    \87\ Id.
    \88\ See Brown Letter.
---------------------------------------------------------------------------

    In its response to comments, NYSE stated that, as all non-
management directors of a listed company are eligible to receive the
same fees for service as a director or board committee member, NYSE
does not believe that it is likely that director compensation would be
a relevant consideration for compensation committee independence.\89\
NYSE noted that, however, the proposed rules require the board to
consider all relevant factors in making compensation committee
independence determinations.\90\ Therefore, NYSE believes that, to the
extent that excessive board compensation might affect a director's
independence, the proposed rules would require the board to consider
that factor in its determination.\91\
---------------------------------------------------------------------------

    \89\ See NYSE Response Letter.
    \90\ See id.
    \91\ See id.
---------------------------------------------------------------------------

2. Personal or Business Relationships Between Directors and Officers
    Some commenters believed that the proposed rules should explicitly
require the board of a listed company, when considering affiliations of
a director in determining eligibility for compensation committee
membership, to consider personal or business relationships between the
director and the company's executive officers.\92\ As expressed by two
of these commenters, ``too many corporate directors have significant
personal, financial or business ties to the senior executives that they
are responsible for compensating.'' \93\
---------------------------------------------------------------------------

    \92\ See AFL-CIO Letter, Brown Letter, CII Letter, and Teamsters
Letter.
    \93\ AFL-CIO Letter and Teamsters Letter.
---------------------------------------------------------------------------

    Some commenters believed that related party transactions should
explicitly be included as a relevant factor in determining independence
for members of compensation committees.\94\ The additional requirements
suggested by commenters also included, for example, disqualification of
a director from membership on the compensation committee if an
immediate family member of the director received compensation in excess
of $120,000 a year from the company even if that family member was not
an executive officer of the company; \95\ or if the director has, or in
the past five years has had, a personal contract with the company, with
an executive officer of the company, or with any affiliate of the
company.\96\
---------------------------------------------------------------------------

    \94\ See AFL-CIO Letter and Teamsters Letter.
    \95\ See AFL-CIO Letter and Teamsters Letter. NYSE's definition
of Independent Director already disqualifies a director from
membership on the compensation committee if an immediate family
member of the director receives in excess of $120,000 from the
company or was an executive officer of the company.
    \96\ See CII Letter. The commenter acknowledged, however, that
existing director requirements implicitly require this
consideration, but similarly recommended that the importance of the
factor requires it be explicit in the NYSE Arca's proposal. Outside
the scope of this proposal, the commenter also suggested NYSE Arca
consider, at some future date, developing a more comprehensive and
robust definition of independent directors that could be applicable
to all board committees and provided a proposed definition for NYSE
Arca's consideration. As noted above, the comment letter refers
specifically to NYSE Arca, but applies equally to the NYSE proposal.
---------------------------------------------------------------------------

    One commenter acknowledged that the proposal would require
consideration of all factors specifically relevant to determining
whether a director has a relationship which is material to that
director's ability to be independent from management, but argued that
such requirement is not sufficient to ensure that boards weigh personal
or business relationships between directors and executive officers.\97\
In support, the commenter argued that: (1) Such relationships were not
technically with the ``listed company'' and therefore would at least
create confusion as to whether it should be considered; (2) the
omission of an explicit reference to this relationship was inconsistent
with other approaches taken in the proposal that made reference to
certain other relationships; and (3) legislative history makes it clear
that Congress expected these relationships to be explicitly considered
in determining director independence.\98\
---------------------------------------------------------------------------

    \97\ See Brown Letter.
    \98\ See id.
---------------------------------------------------------------------------

    In response, NYSE noted that the existing independence standards of
NYSE require the board to make an affirmative determination that there
is no material relationship between the director and the company which
would affect the director's independence.\99\ NYSE further stated that
commentary to Section 303A.02(a) explicitly notes with respect to the
board's affirmative determination of a director's independence that the
concern is independence from management, and NYSE MKT LLC and NYSE Arca
have always interpreted their respective director independence
requirements in

the same way.\100\ Consequently, NYSE stated that it did not believe
that any further clarification of this requirement is necessary.\101\
---------------------------------------------------------------------------

    \99\ See NYSE Response Letter.
    \100\ See id.
    \101\ See id.
---------------------------------------------------------------------------

    As to a requirement to consider related party transactions, NYSE
responded that it believes that this is unnecessary as the existing
director independence standards require boards to consider all material
factors relevant to an independence determination, as do the specific
compensation committee independence requirements of the proposed
rules.\102\
---------------------------------------------------------------------------

    \102\ See id.
---------------------------------------------------------------------------

3. Sufficiency of Single Factor and Additional Comments on Independence
    Two commenters explicitly sought clarification that a single factor
can result in the loss of independence.\103\ In its response letter,
NYSE confirmed that it has interpreted the existing general board
independence standards as providing that a single relationship could be
sufficiently material that it would render a director non-independent.
NYSE stated it was not aware that there has been any confusion with
respect to this interpretation.\104\ Consequently, NYSE did not believe
it is necessary to include in the proposed rules a statement that a
single factor may be sufficiently material to render a director non-
independent, as this is clearly the intention of the rules as
drafted.\105\
---------------------------------------------------------------------------

    \103\ See AFL-CIO Letter and Teamsters Letter.
    \104\ See NYSE Response Letter.
    \105\ See id.
---------------------------------------------------------------------------

    Some of the above commenters expressed the belief, in general, that
the definition of an independent director should be more narrowly
drawn, that the bright-line tests of independence should be
strengthened, and that the standards of independence should be uniform
for all committees requiring independent directors.\106\
---------------------------------------------------------------------------

    \106\ See CII Letter, AFL-CIO Letter, and Teamsters Letter.
---------------------------------------------------------------------------

    One commenter believed that the requirement that the board ``must
consider all factors specifically relevant to determining whether a
director has a relationship to the listed company which is material to
that director's ability to be independent from management in connection
with the duties of a compensation committee member'' was vague and
unnecessary in light of the comprehensive factors already
required.\107\ In responding to this commenter, NYSE disagreed, noting
that the requirement to consider all material relationships, not just
those enumerated, was essential, as it is impossible to foresee all
relationships that may be material.\108\
---------------------------------------------------------------------------

    \107\ See Corporate Secretaries Letter.
    \108\ See NYSE Response Letter.
---------------------------------------------------------------------------

B. Compensation Adviser Independence Factors

    The Commission received letters from four commenters relating to
the provision of the proposed rule change that requires a compensation
committee to take into consideration the factors set forth in the
proposal in the selection of a compensation consultant, legal counsel,
or other adviser to the committee.\109\
---------------------------------------------------------------------------

    \109\ See Ameriprise Letter, Wilson Sonsini Letter, CII Letter,
and Corporate Secretaries Letter.
---------------------------------------------------------------------------

1. Additional Factors for Consideration
    One commenter generally supported the proposal's requirement that a
board consider six independence factors before engaging an adviser, but
believed that at least one additional factor should be considered:
``whether the compensation committee consultants, legal counsel or
other advisers require that their clients contractually agree to
indemnify or limit their liability.'' \110\ The commenter believed that
such contractual provisions, which the commenter indicated have become
standard practice for many consultants, ``raise conflict of interest
red flags'' that every compensation committee should consider in
determining the independence of the consultant.\111\
---------------------------------------------------------------------------

    \110\ See CII Letter. As noted above, the comment letter refers
specifically to NYSE Arca, but applies equally to the NYSE proposal.
    \111\ See CII Letter.
---------------------------------------------------------------------------

    In response, NYSE stated that it did not believe that this is an
appropriate addition because a relationship would affect an adviser's
independence from management only if it gave rise to a concern that it
would subject the adviser to influence by management.\112\ It was not
apparent to NYSE why the existence of contractual indemnification and
limitation of liability provisions would subject an adviser to any
influence by management and, therefore, it is not clear how they are
relevant to an independence determination.\113\ NYSE expressed no view
on the desirability of such agreements.\114\
---------------------------------------------------------------------------

    \112\ See NYSE Response Letter.
    \113\ See id.
    \114\ See id.
---------------------------------------------------------------------------

2. Non-Independent Consultants
    One commenter suggested that, although the portion of the proposal
which relates to the compensation committee's use of a compensation
consultant was thoughtfully drafted and accurately reflects the
substance of Rule 10C-1, there was a possibility that a reader may not
properly interpret the intended meaning of proposed Section 303A.05(c)
of the Manual concerning the use of compensation consultants, legal
counsel and advisers that are not independent.\115\ First, the
commenter suggested the use of the example ``independent legal
counsel'' might be read to require the compensation committee to only
use independent legal counsel, when Rule 10C-1 would otherwise permit a
compensation committee to receive advice from non-independent counsel,
such as in-house counsel or outside counsel retained by
management.\116\ Second, the commenter suggested that the proposal
could be revised to emphasize that a compensation committee is not
responsible for advisers retained by management or other parties.\117\
Third, the commenter suggested that the section addressing the funding
of consultants should be revised to make clear that: (a) Retained legal
counsel need not be independent: and (b) expenses of an adviser, in
addition to its compensation, would also be provided for by the
issuer.\118\ Fourth, the commenter suggested that the proposal be
clarified to require a compensation committee to take into account the
independence requirements only when selecting a consultant for matters
related to executive compensation, rather than for consultants selected
to assist with any other responsibilities the committee may have in
addition to executive compensation.\119\ In response, NYSE noted that
Amendment No. 3 amended the proposed rule text to provide that: (i)
Nothing in the proposed rules requires a compensation consultant, legal
counsel or other compensation adviser to be independent, only that the
compensation committee consider the enumerated independence factors
before selecting a compensation adviser; and (ii) the compensation
committee may select any compensation adviser they prefer including
ones that are not independent, after considering the six independence
factors outlined in the proposed rules.\120\ In addition, NYSE noted
that Rule 10C-1 and the SEC's adopting release refer only to
compensation advisers generally without carving out compensation
advisers retained by the compensation

committee with respect to matters other than executive
compensation.\121\
---------------------------------------------------------------------------

    \115\ See Ameriprise Letter.
    \116\ See id.
    \117\ See id.
    \118\ See id.
    \119\ See id. See also Corporate Secretaries Letter.
    \120\ See NYSE Response Letter.
    \121\ See id.
---------------------------------------------------------------------------

    One commenter believed that the proposed rule could be read as
requiring a compensation committee to consider the independence factors
set forth in Rule 10C-1 when selecting any consultant providing advice
to the compensation committee, including any outside legal counsel that
might provide legal advice to a compensation committee.\122\ The
commenter argued that outside legal counsel often provides advice to
compensation committees on matters other than how much a company should
pay an executive.\123\ The commenter suggested it would not be
``necessary or a good use of resources for compensation committees to
review independence factors for such attorneys providing advice to the
compensation committee.'' \124\ The commenter stated that no other rule
requires a board committee to consider the independence of its regular
legal counsel,\125\ and noted that, while it may, at times, be
appropriate for a board or a committee to consider independence
factors, such a consideration should not be made part of a listing
standard that singles out the compensation committee.\126\ The
commenter suggested that different language originally proposed by The
NASDAQ Stock Market LLC reflected a more balanced rule that only
required the compensation committee to consider the independence when
selecting independent legal counsel, not every outside attorney that
provides advice to the compensation committee.\127\
---------------------------------------------------------------------------

    \122\ See Wilson Sonsini Letter.
    \123\ See id.
    \124\ See id.
    \125\ See id.
    \126\ See id.
    \127\ See id. The Commission notes that The NASDAQ Stock Market
LLC has since revised its proposed rule language and added
commentary that makes clear its original intent that the
compensation committee of an issuer listed on The NASDAQ Stock
Market LLC, absent an exemption, must consider the independence of
every adviser, other than in-house legal counsel, that provides
advice to the compensation committee, including non-independent
legal counsel. See SR-NASDAQ-2012-109, Amendment No. 1.
---------------------------------------------------------------------------

    In response, NYSE stated that it believes that its proposal is
dictated by Rule 10C-1, which excludes only in-house legal counsel from
the requirement to conduct an independence analysis with respect to any
legal counsel consulted by the compensation committee, including the
company's regular securities or tax counsel.\128\ NYSE noted that the
Rule 10C-1 Adopting Release provides that ``[t]he exemption of in-house
counsel from the independence analysis will not affect the obligation
of a compensation committee to consider the independence of outside
legal counsel or compensation consultants or other advisers retained by
management or by the issuer.'' \129\
---------------------------------------------------------------------------

    \128\ See NYSE Response Letter.
    \129\ See id.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the proposal,
maintained that the required independence assessment will be ``time-
consuming and burdensome'' due to the scope of information that will
need to be gathered in order to conduct the required independence
assessment.\130\ This commenter believed that uncertainty over the
scope of the requirement could have a counterproductive effect of
discouraging compensation committees from obtaining the advice of
advisers subject to the rule, particularly in situations where quick
action is required of the compensation committee, and further
identified a number of specific issues that it believed the Exchange
should address to provide greater clarity regarding the standard.\131\
---------------------------------------------------------------------------

    \130\ See Corporate Secretaries Letter.
    \131\ The Commission notes that NYSE addressed some of the
commenter's concerns in Amendment No. 3.
---------------------------------------------------------------------------

    In response, NYSE disagreed with the commenter, arguing that it was
impossible to specifically enumerate every category of relationship
which might be material to a compensation committee adviser's
independence.\132\ NYSE believes that it is therefore necessary for a
compensation committee to conduct a more flexible analysis.\133\ NYSE
believes that it would not be appropriate for it to identify additional
relevant factors in the rule, as it would be impossible to predict
every category of relationship that might be material.\134\
---------------------------------------------------------------------------

    \132\ See NYSE Response Letter.
    \133\ See id.
    \134\ See id.
---------------------------------------------------------------------------

C. Opportunity to Cure Defects

    One commenter supported the rule proposed by the Exchange to permit
issuers a period of time, under specified conditions, to cure failures
to comply with the independence requirements for compensation committee
members.\135\ The commenter was concerned, however, that the proposed
rules did not specify a cure period for any other form of non-
compliance with the new rules.\136\ The commenter believed that a
company should be allowed to take corrective action within a reasonable
time after the company's senior executives learn of the non-compliance.
---------------------------------------------------------------------------

    \135\ See Corporate Secretaries Letter.
    \136\ See id. The commenter mentioned, in particular, the
requirement that the committee may obtain advice from a consultant
or adviser only after assessing that individual's independence. The
commenter believed that inadvertent violations of this requirement
could arise, for example, if a person is appearing before a
compensation committee solely to provide information or other
services, and the individual then on a solicited or unsolicited
basis makes a statement that could be viewed as providing advice on
executive compensation. In the absence of a cure mechanism, the
commenter believed, the company would be in violation of the listing
standard and have no recourse.
---------------------------------------------------------------------------

    In response, NYSE noted that it had existing policies and
procedures that govern non-compliance with rules generally and that
these provisions would apply to any events of non-compliance under the
proposed rules.\137\ NYSE believes these provisions provide it with the
ability to grant a discretionary period for an issuer to return to
compliance, and noted that the determination of a reasonable cure
period can only be made in light of specific facts and
circumstances.\138\
---------------------------------------------------------------------------

    \137\ See NYSE Response Letter.
    \138\ See id.
---------------------------------------------------------------------------

D. Exemptions

    The Commission received one comment letter supporting the
Exchange's proposal to exempt investment companies from the Rule 10C-1
requirements.\139\ As the commenter noted, although Rule 10C-1 exempts
certain entities, including registered open-end management investment
companies, from the enhanced independence requirements for members of
compensation committees, it did not explicitly exempt other types of
investment companies registered under the Investment Company Act of
1940 (``Investment Company Act''), including closed-end funds, from any
of the requirements of Rule 10C-1. Under the proposal, both closed-end
and open-end funds would be exempt from all the requirements of the
rule. The commenter supported this aspect of the proposal, stating that
both open-end and closed-end funds typically are externally managed and
do not employ executives or, by their nature, have employees. The
commenter agreed with the proposal that it would be significantly and
unnecessarily burdensome to require such entities to comply with the
proposed requirements, and further noted that any conflicts with
respect to compensation of investment advisers are governed by the
Investment Company Act.\140\
---------------------------------------------------------------------------

    \139\ See ICI Letter.
    \140\ See ICI Letter.

---------------------------------------------------------------------------

E. Transition Period

    One commenter voiced support for the transition period proposed for
compliance with the new compensation committee independence standard,
but believed that the Exchange should provide a longer period for
companies to satisfy proposed Section 303A.05 of the Manual, relating
to the authority of a compensation committee to retain compensation
consultants, legal counsel, and other compensation advisers; the
authority to fund such advisers; and the responsibility of the
committee to consider independence factors before selecting such
advisers.\141\
---------------------------------------------------------------------------

    \141\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

    In response, the Exchange stated that it believes that the
transition periods are sufficient to enable companies to become
compliant on a timely basis in a manner that is not unduly
burdensome.\142\ The Exchange also noted that the proposed transition
period was identical to that used at the time of the initial
implementation of NYSE's current board and committee independence
requirements and that NYSE believes that the transition period was not
unduly burdensome for companies at that time.\143\
---------------------------------------------------------------------------

    \142\ See NYSE Response Letter.
    \143\ See NYSE Response Letter.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the NYSE proposal,
as amended, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\144\ In
particular, the Commission finds that the amended proposed rule change
is consistent with the requirements of Section 6(b) of the Act,\145\ as
well as with Section 10C of the Act \146\ and Rule 10C-1
thereunder.\147\ Specifically, the Commission finds that the proposed
rule change, as amended, is consistent with Section 6(b)(5) of the
Act,\148\ which requires that the rules of a national securities
exchange be designed, among other things, to prevent fraudulent and
manipulative acts and practices; to promote just and equitable
principles of trade; to remove impediments to and perfect the mechanism
of a free and open market and a national market system; and, in
general, to protect investors and the public interest; and not be
designed to permit, among other things, unfair discrimination between
issuers.
---------------------------------------------------------------------------

    \144\ In approving the NYSE proposed rule change, as amended,
the Commission has considered its impact on efficiency, competition
and capital formation. 15 U.S.C. 78c(f).
    \145\ 15 U.S.C. 78f(b).
    \146\ 15 U.S.C. 78j-3.
    \147\ 17 CFR 240.10C-1.
    \148\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The development and enforcement of meaningful listing standards for
a national securities exchange is of substantial importance to
financial markets and the investing public. Meaningful listing
standards are especially important given investor expectations
regarding the nature of companies that have achieved an exchange
listing for their securities. The corporate governance standards
embodied in the listing rules of national securities exchanges, in
particular, play an important role in assuring that companies listed
for trading on the exchanges' markets observe good governance
practices, including a reasoned, fair, and impartial approach for
determining the compensation of corporate executives. The Commission
believes that the NYSE proposal will foster greater transparency,
accountability, and objectivity in the oversight of compensation
practices of listed issuers and in the decision-making processes of
their compensation committees.
    In enacting Section 10C of the Act as one of the reforms of the
Dodd-Frank Act,\149\ Congress resolved to require that ``board
committees that set compensation policy will consist only of directors
who are independent.'' \150\ In June 2012, as required by this
legislation, the Commission adopted Rule 10C-1 under the Act, which
directs the national securities exchanges to prohibit, by rule, the
initial or continued listing of any equity security of an issuer (with
certain exceptions) that is not in compliance with the rule's
requirements regarding issuer compensation committees and compensation
advisers.
---------------------------------------------------------------------------

    \149\ See supra note 9.
    \150\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of
the Committee of Conference, Title IX, Subtitle E ``Accountability
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29,
2010).
---------------------------------------------------------------------------

    In response, NYSE submitted the proposed rule change, which
includes rules intended to comply with the requirements of Rule 10C-1
and additional provisions designed to strengthen the Exchange's listing
standards relating to compensation committees. The Commission believes
that the proposed rule change satisfies the mandate of Rule 10C-1 and
otherwise will promote effective oversight of its listed issuers'
executive compensation practices.
    The Commission notes that a number of the commenters generally
supported the proposed rule change, although some commenters offered
suggestions to clarify or improve various provisions of NYSE's proposal
or NYSE Arca's substantially similar proposal. The Commission believes
that the proposed rule change, as modified by Amendment Nos. 1 and 3,
appropriately revises NYSE's rules for compensation committees of
listed companies, for the following reasons:

A. Compensation Committee Composition

    As discussed above, under Rule 10C-1, the exchanges must adopt
listing standards that require each member of a compensation committee
to be independent, and to develop a definition of independence after
considering, among other relevant factors, the source of compensation
of a director, including any consulting, advisory or other compensatory
fee paid by the issuer to the director, as well as whether the director
is affiliated with the issuer or any of its subsidiaries or their
affiliates.
    The Commission notes that Rule 10C-1 leaves it to each exchange to
formulate a final definition of independence for these purposes,
subject to review and final Commission approval pursuant to Section
19(b) of the Act. As the Commission stated in the Rule 10C-1 Adopting
Release, ``given the wide variety of issuers that are listed on
exchanges, we believe that the exchanges should be provided with
flexibility to develop independence requirements appropriate for the
issuers listed on each exchange and consistent with the requirements of
the independence standards set forth in Rule 10C-1(b)(1).'' \151\ This
discretion comports with the Act, which gives the exchanges the
authority, as self-regulatory organizations, to propose the standards
they wish to set for companies that seek to be listed on their markets
consistent with the Act and the rules and regulations thereunder, and,
in particular, Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \151\ As explained further in the Rule 10C-1 Adopting Release,
prior to final approval, the Commission will consider whether the
exchanges' proposed rule changes are consistent with the
requirements of Section 6(b) and Section 10C of the Act.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence
standards that currently apply to board and compensation committee
members, which include certain bright-line tests, NYSE has enhanced its
listing requirements regarding compensation committees by adopting
additional standards for independence to comply with the Fees Factor
and Affiliation Factor, as well as the other standards set forth in
Rule 10C-1. The NYSE's

proposal also adopts the cure procedures required in Rule 10C-1(a)(3)
for compensation committee members who cease to be independent for
reasons outside their reasonable control, so long as the majority of
the members of the compensation committee continue to be independent,
and retains the requirement that listed issuers have a compensation
committee composed entirely of independent directors as required by
Rule 10C-1.
    Further, as discussed in more detail below, the NYSE proposal
retains the requirement that the compensation committee have a written
charter that addresses the committee's purpose and responsibilities,
and adds requirements to specify the compensation committee's authority
and responsibilities as to compensation advisers as set forth under
Rule 10C-1. Finally, to help in assuring that companies comply with
these provisions, Exchange rules will continue to require that the
compensation committee charter address an annual performance evaluation
of the compensation committee. Taken as a whole, the Commission
believes that these changes will strengthen the oversight of executive
compensation in NYSE-listed companies and further greater
accountability, and will therefore further the protection of investors
consistent with Section 6(b)(5) of the Act.
    The Commission believes that the Exchange's proposal, which
requires the consideration of the additional independence factors for
compensation committee members, is designed to protect investors and
the public interest and is consistent with the requirements of Sections
6(b)(5) and 10C of the Act and Rule 10C-1 thereunder.
    With respect to the Fees Factor of Rule 10C-1, the Exchange
commentary states when considering the source of a director's
compensation in determining independence for compensation committee
service, the board should consider whether the director receives
compensation from any person or entity that would impair his ability to
make independent judgments about the listed company's executive
compensation. In addition to the continued application of the NYSE's
current bright-line tests, NYSE's new rules also require the board to
consider all relevant factors in making independence determinations for
compensation committee membership. The Exchange believes that these
requirements of proposed Section 303A.02(a)(ii) of the Manual, in
addition to the general director independence requirements, represent
an appropriate standard for compensation committee independence that is
consistent with the requirements of Rule 10C-1 and the Fees Factor.
    The Commission believes that the provisions noted above to address
the Fees Factor give a board broad flexibility to consider a wide
variety of fees, including any consulting, advisory or other
compensatory fee paid by the issuer or entity, when considering a
director's independence for compensation committee service. While the
Exchange does not bar all compensatory fees, the approach is consistent
with Rule 10C-1 and provides a basis for a board to prohibit a director
from being a member of the compensation committee, should the director
receive compensation that impairs the ability to make independent
decisions on executive compensation matters, even if that compensation
does not exceed the threshold in the bright-line test.\152\ The
Commission, therefore, believes that the proposed compensatory fee
requirements comply with Rule 10C-1 and are designed to protect
investors and the public interest, consistent with Section 6(b)(5) of
the Act. The Commission notes that the compensatory fee consideration
may help ensure that compensation committee members are less likely to
have received fees, from either the issuer or another entity, that
could potentially influence their decisions on compensation matters.
---------------------------------------------------------------------------

    \152\ See supra note 33, setting forth the existing bright-line
tests.
---------------------------------------------------------------------------

    The Commission recognizes that some commenters did not believe that
the proposal went far enough because the Exchange did not adequately
consider the compensation that directors receive for board or committee
service in formulating its standards of independence for service on the
compensation committee, and, in particular, the levels to which such
compensation may rise,\153\ or otherwise favored additional
requirements.\154\ The Commission notes, however, that to the extent a
conflict of interest exists because directors set their own
compensation, companies must disclose director compensation, and
investors will become aware of excessive or non-customary director
compensation through this means. In addition, as NYSE states, a
company's board of directors must consider all relevant factors in
making compensation committee independence determinations, and if
director fees could, in the opinion of the board, impair the director's
independent judgment with respect to compensation-related matters, the
board could therefore consider director compensation in that
context.\155\ The Commission believes that, based on the NYSE's
argument and the disclosure requirements noted above, these arguments
are sufficient to find that NYSE has complied with the requirements of
Rule 10C-1 in this regard.
---------------------------------------------------------------------------

    \153\ See AFL-CIO Letter, Brown Letter, and Teamsters Letter,
maintaining that NYSE's proposal ``falls short'' of the Rule 10C-1
provision requiring exchanges to consider a director's source of
compensation. See also supra notes 92-96 and accompanying text. As
stated by commenters, ``[h]igh director fees relative to other
sources of income can compromise director objectivity'' and
``[h]ighly paid directors also may be more inclined to approve large
executive pay packages.'' AFL-CIO Letter. See also Teamsters Letter.
    \154\ See, e.g., CII Letter.
    \155\ See NYSE Response letter, supra note 6. The Commission
also notes that in the NYSE Response Letter, the Exchange states
that to the extent that excessive board compensation might affect a
director's independence, the new rules would require the board to
consider that factor in its independence determination.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, NYSE has
concluded that an outright bar from service on a company's compensation
committee of any director with an affiliation with the company, its
subsidiaries, and their affiliates is inappropriate for compensation
committees. NYSE's existing independence standards will also continue
to apply to those directors serving on the compensation committee. NYSE
maintains that it may be appropriate for certain affiliates, such as
representatives of significant stockholders, to serve on compensation
committees as ``share ownership in the listed company aligns the
director's interests with those of unaffiliated shareholders, as their
stock ownership gives them the same economic interest in ensuring that
the listed company's executive compensation is not excessive.'' In
spite of the argument of two commenters in favor of an outright ban on
affiliations with the company,\156\ the Commission believes that NYSE's
approach of requiring boards only to consider such affiliations is
reasonable and consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \156\ See Teamsters Letter and AFL-CIO Letter.
---------------------------------------------------------------------------

    The Commission notes that Congress, in requiring the Commission to
direct the exchanges to consider the Affiliation Factor, did not
declare that an absolute bar was necessary. Moreover, as the Commission
stated in the Rule 10C-1 Adopting Release, ``In establishing their
independence requirements, the exchanges may determine that, even
though affiliated directors are not allowed to serve on audit
committees,

such a blanket prohibition would be inappropriate for compensation
committees, and certain affiliates, such as representatives of
significant shareholders, should be permitted to serve.'' \157\ In
determining that NYSE's affiliation standard is consistent with
Sections 6(b)(5) and 10C under the Act, the Commission notes that
NYSE's proposal requires a company's board, in selecting compensation
committee members, to consider whether any such affiliation would
impair a director's judgment as a member of the compensation committee.
The NYSE rule further states that, in considering affiliate
relationships, a board should consider whether such affiliate
relationship places the director under the direct or indirect control
of the listed company or its senior management such that it would
impair the ability of the director to make independent judgments on
executive compensation. We believe that this should give companies the
flexibility to assess whether a director who is an affiliate, including
a significant shareholder, should or should not serve on the company's
compensation committee, depending on the director's particular
affiliations with the company or its senior management.\158\
---------------------------------------------------------------------------

    \157\ Rule 10C-1 Adopting Release. At the same time, the
Commission noted that significant shareholders may have other
relationships with the listed company that would result in such
shareholders' interests not being aligned with those of other
shareholders and that the exchanges may want to consider these other
ties between a listed issuer and a director. While the Exchange did
not adopt any additional factors, the current affiliation standard
would still allow a company to prohibit a director whose
affiliations ``impair his ability to make independent judgment'' as
a member of the committee. See also supra notes 31-35 and
accompanying text.
    \158\ The Commission notes that one commenter suggested there
was ambiguity as to whether boards must consider business or
personal relationships between directors and senior management. See
Brown Letter. In response, NYSE noted that its existing independence
standards require the board to make an affirmative determination
that there is no material relationship between the director and the
company which would affect the director's independence. NYSE noted
that Commentary to Section 303A.02(a) of the Manual explicitly notes
with respect to the board's affirmative determination of a
director's independence that the concern is independence from
management. Consequently, NYSE does not believe that any further
clarification of this requirement is necessary. See NYSE Response
Letter.
---------------------------------------------------------------------------

    As to whether NYSE should adopt any additional relevant
independence factors, the Exchange stated that it reviewed its rules in
light of Rule 10C-1, and concluded that its existing rules together
with its proposed rules are sufficient to ensure committee member
independence. The Commission believes that, through this review, the
Exchange has complied with the requirement that it consider relevant
factors, including, but not limited to, the Fees and Affiliation
Factors in determining its definition of independence for compensation
committee members. The Commission does not agree with the commenters
who argued that the Exchange's proposal falls short of ``the
requirements and/or intent'' of Section 10C of the Act and Rule 10C-1.
The Commission notes that Rule 10C-1 requires each exchange to consider
relevant factors in determining independence requirements for members
of a compensation committee, but does not require the exchange's
proposal to reflect any such additional factors.
    As noted above, several commenters argued that the proposal should
require that other ties between directors and the company, including
business and personal relationships with executives of the company, be
considered by boards in making independence determinations.\159\ The
Commission did emphasize in the Rule 10C-1 Adopting Release that ``it
is important for exchanges to consider other ties between a listed
issuer and a director * * * that might impair the director's judgment
as a member of the compensation committee,'' \160\ and noted that ``the
exchanges might conclude that personal or business relationships
between members of the compensation committee and the listed issuer's
executive officers should be addressed in the definition of
independence.'' However, the Commission did not require exchanges to
reach this conclusion and thus NYSE's decision that such ties need not
be included explicitly in its definition of independence does not
render its proposal insufficient.
---------------------------------------------------------------------------

    \159\ See supra notes 92-102 and accompanying text. As noted
above, one comment letter refers specifically to NYSE Arca, but
applies equally to the NYSE proposal.
    \160\ See supra note 11.
---------------------------------------------------------------------------

    In explaining why it did not include, specifically, personal and
business relationships as a factor, NYSE cites its standards for
Independent Directors, generally, which require the board of directors
of a listed issuer to make an affirmative determination that each such
director has no material relationship with the listed company with
respect to their independence from management.\161\ All compensation
committee members must meet the general independence standards under
NYSE's rules in addition to the two new criteria being adopted herein.
The Commission therefore expects that boards, in fulfilling their
obligations, will apply this standard to each such director's
individual responsibilities as a board member, including specific
committee memberships such as the compensation committee. Although
personal and business relationships, related party transactions, and
other matters suggested by commenters are not specified either as
bright-line disqualifications or explicit factors that must be
considered in evaluating a director's independence, the Commission
believes that compliance with NYSE's rules and the provision noted
above would demand consideration of such factors with respect to
compensation committee members, as well as to all Independent Directors
on the board.
---------------------------------------------------------------------------

    \161\ See Section 303A.02(a) of the Manual. See also NYSE
Response Letter.
---------------------------------------------------------------------------

    Notwithstanding the concern of some commenters, the Commission
confirms that Rule 10C-1 does not mean that a director cannot be
disqualified on the basis of one factor alone. Although NYSE does not
state this explicitly in its rules, in response to comments, the
Exchange confirmed that they have interpreted their current rules as
providing that a single relationship could be sufficiently material
that it would render a director non-independent. The Commission
believes that nothing in Rule 10C-1 or in NYSE's current or proposed
rules implies otherwise.
    Finally, the Commission does not believe that NYSE is required in
the current proposed rule change to consider further revisions of its
independence rules as suggested by some commenters, although it may
wish to do so in the future after it has experience with its rules. The
Commission notes that the NYSE provision requires a board to further
exercise appropriate discretion to consider all factors specifically
relevant in determining whether a director has a relationship to the
listed company which is material to that director's ability to be
independent from management in connection with the duties of a
compensation committee member. The Commission notes that one commenter
argues this provision is vague and unnecessary and should be deleted
from the proposal.\162\ The Commission does not agree with the
commenter, however, that the consideration of the explicitly enumerated
factors will be sufficient in all cases to achieve the objectives of
Section 10C(a)(3), because it is not possible to foresee all possible
kinds of relationships that might be material to a compensation
committee member's

independence. We therefore believe the flexibility provided in NYSE's
new compensation committee independence standards provides companies
with guidance, while allowing them to identify those relationships that
might raise questions of independence for service on the compensation
committee. For these reasons, we believe the director independence
standards are consistent with the investor protection provision of
Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \162\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

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

    As discussed above, NYSE proposes to set forth explicitly in its
rules the requirements of Rule 10C-1 regarding a compensation
committee's authority to retain compensation advisers, its
responsibilities with respect to such advisers, and the listed
company's obligation to provide appropriate funding for payment of
reasonable compensation to a compensation adviser retained by the
committee. As such, the Commission believes these provisions meet the
mandate of Rule 10C-1 \163\ and are consistent with the Act.\164\
---------------------------------------------------------------------------

    \163\ 17 CFR. 240.10C-1.
    \164\ 15 U.S.C. 78j-3.
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to
specify the enhanced compensation committee responsibilities through
the compensation committee's written charter will help to assure that
there is adequate transparency as to the rights and responsibilities of
compensation committee members. As discussed above, the proposed rule
change requires the compensation committee of a listed company to
consider the six factors relating to independence that are enumerated
in the proposal before selecting a compensation consultant, legal
counsel or other adviser to the compensation committee. The Commission
believes that this provision is consistent with Rule 10C-1 and Section
6(b)(5) of the Act.
    As noted above, one commenter believed that Rule 10C-1 could be
read as not requiring a compensation committee to consider the
enumerated independence factors with respect to regular outside legal
counsel and sought to have NYSE revise its proposal.\165\ This reading
is incorrect, and NYSE's rule language reflects the appropriate
reading. The Commission notes that Rule 10C-1 includes an instruction
that specifically requires a compensation committee to conduct the
independence assessment with respect to ``any compensation consultant,
legal counsel or other adviser that provides advice to the compensation
committee, other than in-house counsel.'' \166\ To avoid any confusion,
NYSE added rule text that reflects this instruction in its own
rules.\167\
---------------------------------------------------------------------------

    \165\ See Wilson Sonsini Letter and supra notes 122-127 and
accompanying text.
    \166\ See Instruction to paragraph (b)(4) of Rule 10C-1.
    \167\ See supra note 46 and accompanying text.
---------------------------------------------------------------------------

    In approving this aspect of the proposal, the Commission notes that
compliance with the rule requires an independence assessment of any
compensation consultant, legal counsel, or other adviser that provides
advice to the compensation committee, and is not limited to advice
concerning executive compensation. However, NYSE has proposed, in
Amendment No. 3, to add language to the provision regarding the
independence assessment of compensation advisers \168\ to state that
the compensation committee is not required to conduct an independence
assessment for a compensation adviser that acts in a role limited to
the following activities for which no disclosure is required under Item
407(e)(3)(iii) of Regulation S-K: (a) Consulting on any broad-based
plan that does not discriminate in scope, terms, or operation, in favor
of executive officers or directors of the company, and that is
available generally to all salaried employees; and/or (b) providing
information that either is not customized for a particular issuer or
that is customized based on parameters that are not developed by the
adviser, and about which the adviser does not provide advice. NYSE
states that this exception is based on Item 407(e)(3)(iii) of
Regulation S-K, which provides a limited exception to the Commission's
requirement for a registrant to disclose any role of compensation
consultants in determining or recommending the amount and form of a
registrant's executive and director compensation.\169\
---------------------------------------------------------------------------

    \168\ See proposed Commentary to Section 303A.05(c), as amended
by Amendment No. 3.
    \169\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views NYSE's proposed exception as reasonable, as
the Commission determined, when adopting the compensation consultant
disclosure requirements in Item 407(e)(3)(iii), that the two excepted
categories of advice do not raise conflict of interest concerns.\170\
The Commission also made similar findings when it noted it was
continuing such exceptions in the Rule 10C-1 Adopting Release,
including excepting such roles from the new conflict of interest
disclosure rule required to implement Section 10C(c)(2). The Commission
also believes that the exception should allay some of the concerns
raised by the commenters regarding the scope of the independence
assessment requirement. Based on the above, the Commission believes
these limited exceptions are consistent with the investor protection
provisions of Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \170\ See Proxy Disclosure Enhancements, Securities Act Release
No. 9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348
(``We are persuaded by commenters who noted that surveys that
provide general information regarding the form and amount of
compensation typically paid to executive officers and directors
within a particular industry generally do not raise the potential
conflicts of interest that the amendments are intended to
address.'').
---------------------------------------------------------------------------

    Regarding the belief of another commenter that the independence
assessment requirement could discourage compensation committees from
obtaining the advice of advisers,\171\ the Commission notes that, as
already discussed, nothing in the proposed rule prevents a compensation
committee from selecting any adviser that it prefers, including ones
that are not independent, after considering the six factors. In this
regard, in Amendment No. 3, NYSE added specific rule language stating,
among other things, that nothing in its rule requires a compensation
adviser to be independent, only that the compensation committee must
consider the six independence factors before selecting or receiving
advice from a compensation adviser.\172\ Regarding the commenter's
concern over the burdens that the Exchange proposal imposes, the
Commission notes that Rule 10C-1 explicitly requires exchanges to
require consideration of these six factors.\173\ Moreover, five of the
six factors were dictated by Congress itself in the Dodd-Frank Act. As
previously stated by the Commission in adopting Rule 10C-1, the
requirement that compensation committees consider the independence of
potential compensation advisers before they are selected should help
assure that compensation committees of affected listed companies are
better informed about potential conflicts, which could reduce the
likelihood that

they are unknowingly influenced by conflicted compensation
advisers.\174\
---------------------------------------------------------------------------

    \171\ See Corporate Secretaries Letter and supra note 130 and
accompanying text.
    \172\ See supra notes 49-50 and accompanying text.
    \173\ The Commission also does not agree with the argument of
one commenter that NYSE Arca's substantially similar proposal must
require compensation committees to specifically consider, among the
independence factors relating to compensation advisers, whether such
an adviser requires that clients contractually agree to indemnify or
limit their liability. See CII Letter. The Commission views as
reasonable the Exchange's belief that the six factors set forth in
Rule 10C-1 are sufficient for the required independence assessment.
    \174\ See Rule 10C-1 Adopting Release, supra note 11.
---------------------------------------------------------------------------

    Finally, one commenter requested guidance ``on how often the
required independence assessment should occur.'' \175\ This commenter
observed that it ``will be extremely burdensome and disruptive if prior
to each such [compensation committee] meeting, the committee had to
conduct a new assessment.'' The Commission anticipates that
compensation committees will conduct such an independence assessment at
least annually.
---------------------------------------------------------------------------

    \175\ See Corporate Secretaries Letter.
---------------------------------------------------------------------------

    The changes to NYSE's rules on compensation advisers should
therefore benefit investors in NYSE-listed companies and are consistent
with the requirements in Section 6(b)(5) of the Act that rules of the
exchange further investor protection and the public interest.

C. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting
Companies, like all other listed companies, to have a compensation
committee, composed solely of Independent Directors is reasonable and
consistent with the protection of investors. The Commission notes that
NYSE's rules for compensation committees have not made a distinction
for Smaller Reporting Companies in the past. However, consistent with
the exemption of Smaller Reporting Companies from Rule 10C-1, the NYSE
proposal would: (i) Exempt Smaller Reporting Companies from having to
consider the additional independence requirements as to compensatory
fees and affiliation; and (ii) exempt their compensation committees
from having to consider the additional independence factors for
compensation advisers. Under this approach, Smaller Reporting Companies
will effectively be subject to the same requirements as is currently
the case under the existing requirements of the Manual for all
companies with respect to having a written charter that provides the
compensation committee with the sole authority and funding for the
retention of compensation consultants.
    The Commission believes that these provisions are consistent with
the Act and do not unfairly discriminate between issuers. The
Commission believes that, for similar reasons to those for which
Smaller Reporting Companies are exempted from the Rule 10C-1
requirements, it makes sense for NYSE to provide some flexibility to
Smaller Reporting Companies. Further, because a Smaller Reporting
Company does not need to include in its charter the additional
provision regarding the independence of compensation advisers that NYSE
is requiring all other listed companies to include to comply with Rule
10C-1,\176\ and in view of the potential additional costs of such
review, it is reasonable not to require a Smaller Reporting Company to
conduct such analysis of compensation advisers.
---------------------------------------------------------------------------

    \176\ As discussed supra notes 56-57 and accompanying text, the
charter of a Smaller Reporting Company will not be required to
include, like the charters of other listed companies, a requirement
that the committee consider independence factors before selecting
such advisers, because Smaller Reporting Companies are not subject
to that requirement.
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D. Opportunity To Cure Defects

    Rule 10C-1 requires the rules of an exchange to provide for
appropriate procedures for a listed issuer to have a reasonable
opportunity to cure any defects that would be the basis for the
exchange, under Rule 10C-1, to prohibit the issuer's listing. Rule 10C-
1 also specifies that, with respect to the independence standards
adopted in accordance with the requirements of the Rule, an exchange
may provide a cure period until the earlier of the next annual
shareholders meeting of the listed issuer or one year from the
occurrence of the event that caused the member to be no longer
independent.
    The Commission notes that the cure period that NYSE proposes for
companies that fail to comply with the enhanced independence
requirements designed to comply with Rule 10C-1 is the same as the cure
period suggested under Rule 10C-1, but NYSE limits the cure period's
use to circumstances where the committee continues to have a majority
of independent directors, as NYSE believes this would ensure that the
applicable committee could not take an action without the agreement of
one or more independent directors. The Commission believes that the
accommodation, including the proposed period and limitation, although
it gives a company less leeway in certain circumstances than the cure
period provided as an option by Rule 10C-1, is fair and reasonable and
consistent with investor protection under Rule 6(b)(5) by ensuring that
a compensation committee cannot take action without a majority of
independent directors even when a member ceases to be independent and
the committee is entitled to a period to cure that situation.
    The Commission agrees with the understanding of the commenter who
believed that Rule 10C-1 requires that an exchange provide a company an
opportunity to cure any defects in compliance with any of the new
requirements. The Commission believes that NYSE's general due process
procedures for the delisting of companies that are out of compliance
with the Exchange's rules satisfy this requirement. For example, NYSE's
rules provide that, unless continued listing of the company raises a
public interest concern, when a company is deficient in compliance with
listing standards, the Exchange will provide the company with an
opportunity to provide NYSE with a plan of definitive action the
company has taken, or is taking, that would bring it into conformity
with continued listing standards within 18 months of receipt of a
notice of a deficiency.\177\
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    \177\ See supra text accompanying notes 137-138. See also NYSE
Response Letter, supra note 6.
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    The Commission believes that these general procedures for companies
out of compliance with listing requirements, in addition to the
particular cure provisions for failing to meet the new independence
standards, adequately meet the mandate of Rule 10C-1 and also are
consistent with investor protection and the public interest, since they
give a company a reasonable time period to cure non-compliance with
these important requirements before they will be delisted.\178\
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    \178\ The Commission notes that the general procedures to cure
non-compliance adequately address the comments made in the Corporate
Secretaries Letter.
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E. Exemptions

    The Commission believes that it is appropriate for NYSE to exempt
from the new requirements established by the proposed rule change the
same categories of issuers that are exempt from its existing standards
for oversight of executive compensation for listed companies. Although
Rule 10C-1 does not explicitly exempt some of these categories of
issuers from its requirements, it does grant discretion to exchanges to
provide additional exemptions. NYSE states that the reasons it adopted
the existing exemptions apply equally to the new requirements, and the
Commission believes that this assertion is reasonable.
    NYSE proposed to exempt limited partnerships, companies in
bankruptcy proceedings and open-end management investment companies
that are registered under the Investment Company Act from all of the
requirements of Rule 10C-1. The

Commission believes such exemptions are reasonable, and notes that such
entities, which were already generally exempt from NYSE's existing
compensation committee requirements, also are exempt from the
compensation committee independence requirements specifically under
Rule 10C-1. NYSE also proposes to exempt closed-end management
investment companies registered under the Investment Company Act from
the requirements of Rule 10C-1. The Commission believes that this
exemption is reasonable because the Investment Company Act already
assigns important duties of investment company governance, such as
approval of the investment advisory contract, to independent directors,
and because such entities were already generally exempt from NYSE's
existing compensation committee requirements. The Commission notes
that, as one commenter stated, typically registered investment
companies do not employ executives or employees or have compensation
committees. The Commission notes that the existing language of these
exemptive provisions is not changed, but that the provisions, which go
beyond Rule 10C-1's exemptions, are consistent with Rule 10C-1.
    The Commission further believes that other proposed exemption
provisions relating to controlled companies,\179\ asset-backed issuers
and other passive issuers, and issuers whose only listed equity stock
is a preferred stock are reasonable, given the specific characteristics
of these entities. As noted by the Exchange, many of these issuers are
externally managed and do not directly employ executives; do not, by
their nature, have employees, or have executive compensation policy set
by a body other than their board.
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    \179\ The Commission notes that controlled companies are
provided an automatic exemption from the application of the entirety
of Rule 10C-1 by Rule 10C-1(b)(5).
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    The NYSE proposal would continue to permit foreign private issuers
to follow home country practice in lieu of the provisions of the new
rules, without requiring any further disclosure from such entities. The
Commission believes that granting exemptions to foreign private issuers
in deference to their home country practices with respect to
compensation committee practices is appropriate, and believes that the
existing disclosure requirements will help investors determine whether
they are satisfied with the alternative standard. The Commission notes
that such entities are exempt from the compensation committee
independence requirements of Rule 10C-1 to the extent such entities
disclose in their annual reports the reasons they do not have
independent compensation committees.

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

    The Commission believes that the deadlines for compliance with the
proposal's various provisions are reasonable and should afford listed
companies adequate time to make the changes, if any, necessary to meet
the new standards. The Commission believes that the deadline proposed
is clear-cut and matches the revised deadline set forth by The NASDAQ
Stock Market.\180\ Accordingly, the deadline gives companies until the
earlier of their first annual meeting after January 15, 2014, or
October 31, 2014, to comply with the remaining provisions.\181\
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    \180\ See Amendment No. 1 to File No. SR-NASDAQ-2012-109; see
also Securities Exchange Act Release No. 68013 (October 9, 2012), 77
FR 62563 (October 15, 2012) (Notice of File No. SR-NASDAQ-2012-109).
    \181\ The proposal is, however, otherwise effective on July 1,
2013, and issuers will be required to comply with the new
compensation committee charter and adviser requirements as of that
date. As noted above, certain existing issuers, such as smaller
reporting companies, are exempt from compliance with the new
independence requirement with respect to compensation committee
service.
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G. Compliance Schedules: IPOs; Companies That Lose Their Exemptions;
Companies Transferring From Other Markets

    The Commission believes that it is reasonable for NYSE to allow,
with respect to IPOs, companies listing in conjunction with a carve-out
or spin-off transaction, companies emerging from bankruptcy, companies
ceasing to be controlled companies, companies ceasing to qualify as a
foreign private issuer, and companies transferring from other markets,
the same phase-in schedule for compliance with the new requirements as
is permitted under its current compensation-related rules.
    The Commission also believes that the compliance schedule for
companies that cease to be Smaller Reporting Companies, as revised in
Amendment No. 3, affords such companies ample time to come into
compliance with the full panoply of rules that apply to other
companies. In the Commission's view, the revised schedule also offers
such companies more clarity in determining when they will be subject to
the heightened requirements.

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

    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\182\ for approving the proposed rule change, as modified by
Amendment Nos. 1 and 3, prior to the 30th day after the date of
publication of notice in the Federal Register.
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    \182\ 15 U.S.C. 78s(b)(2).
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    The change made to the proposal by Amendment No. 3 to change a
reference from Item 10(f)(1) of Regulation S-K to a reference to
Exchange Act Rule 12b-2 is not a substantive one and merely references
an otherwise identical definition.
    The revision made by Amendment No. 3 to the compliance rules for
companies that cease to be Smaller Reporting Companies \183\
establishes a schedule that is easier to understand, while still
affording such companies adequate time to come into compliance with the
applicable requirements. The Commission notes that the Start Date of
the compliance period for such a company is six months after the
Smaller Reporting Company Determination Date, and the company is given
no less than another six months from the Start Date to gain compliance
with the rules from which it had been previously exempt. As originally
proposed a Smaller Reporting Company had to comply within six months of
the Smaller Reporting Company Determination Date, and for the adviser
assessment at the Smaller Reporting Company Determination Date. The
Commission believes the amendments to the transitions for issuers that
lose their status as a Smaller Reporting Company will afford such
companies additional time to comply and avoid issues involving
inadvertent non-compliance because of the provision that originally
applied immediately on the Smaller Reporting Company Determination
Date. The amendments also provide additional clarity on when the time
frames commence, and as such the Commission believes good cause exists
to accelerate approval.
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    \183\ See supra notes 70-73 and accompanying text.
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    The change to commentary made by Amendment No. 3 to exclude
advisers that provide only certain types of services from the
independence assessment is also appropriate. As discussed above, the
Commission has already determined to exclude such advisers from the
disclosure requirement regarding compensation advisers in Regulation S-
K because these types of services do not raise

conflict of interest concerns. Finally, the addition of further
guidance by Amendment No. 3 merely clarifies that nothing in the
Exchange's rules requires a compensation adviser to be independent,
only that the compensation committee consider the independence factors
before selecting or receiving advice from a compensation adviser, and
is not a substantive change, as it was the intent of the rule as
originally proposed.
    For all the reasons discussed above, the Commission finds good
cause to accelerate approval of the proposed changes made by Amendment
No. 3.

VI. Solicitation of Comments

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

Electronic Comments