[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Proposed Rules]
[Pages 18966-18990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7948]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 240

[Release Nos. 33-9199; 34-64149; File No. S7-13-11]
RIN 3235-AK95


Listing Standards for Compensation Committees

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

DATES: Comments should be received on or before April 29, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#a4d6d1c8c189c7cbc9c9c1cad0d7e4d7c1c78ac3cbd2"><span class="__cf_email__" data-cfemail="2351564f460e404c4e4e464d5750635046400d444c55">[email protected]</span></a>; or
    <bullet> Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number S7-13-11. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. All comments received will be posted without change; we 
do not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Nandini A. Acharya, Attorney-Adviser, 
or N. Sean Harrison, Special Counsel, at (202) 551-3430, in the Office 
of Rulemaking, Division of Corporation Finance, U.S. Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.

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

I. Background and Summary
II. Discussion of the Proposals
    A. Proposed Listing Requirements
    1. Applicability of Listing Requirements
    2. Independence Requirements
    3. Authority to Engage Compensation Advisers; Responsibilities; 
and Funding
    4. Compensation Adviser Independence Factors
    5. Opportunity to Cure Defects
    B. Implementation of Listing Requirements
    1. Exchanges Affected
    2. Securities Affected
    a. Listed Equity Securities
    b. Securities Futures Products and Standardized Options
    3. Exemptions
    a. General Approach to Exemptions
    b. Issuers Not Subject to Independence Requirements
    c. Relationships Exempt from Independence Requirements
    C. Compensation Consultant Disclosure and Conflicts of Interest
    D. Transition and Timing
III. Paperwork Reduction Act
    A. Background
    B. Summary of Proposed Rule and Rule Amendments
    C. Burden and Cost Estimates Related to Proposed Amendments
    D. Request for Comment
IV. Cost-Benefit Analysis
    A. Introduction and Objectives of Proposals
    B. Benefits
    C. Costs
    D. Request for Comment
V. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation
VI. Small Business Regulatory Enforcement Fairness Act
VII. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Action
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comments

[[Page 18967]]

VIII. Statutory Authority and Text of the Proposed Amendments

I. Background and Summary

    We are proposing a new rule and rule amendments to implement the 
provisions of Section 952 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (the ``Act''),\4\ which adds Section 
10C to the Securities Exchange Act of 1934 (the ``Exchange Act''). 
Section 10C requires the Commission to direct the national securities 
exchanges \5\ (the ``exchanges'') and national securities associations 
\6\ to prohibit the listing of any equity) \7\ security of an issuer, 
with certain exemptions, that does not comply with Section 10C's 
compensation committee and compensation adviser requirements.\8\
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    \4\ Public Law 111-203, 124 Stat. 1900 (2010).
    \5\ A ``national securities exchange'' is an exchange registered 
as such under Section 6 of the Exchange Act [15 U.S.C. 78f]. There 
are currently fifteen national securities exchanges registered under 
Section 6(a) of the Exchange Act: NYSE Amex (formerly the American 
Stock Exchange), BATS Exchange, BATS Y-Exchange, NASDAQ OMX BX 
(formerly the Boston Stock Exchange), C2 Options Exchange, Chicago 
Board Options Exchange, Chicago Stock Exchange, EDGA Exchange, EDGX 
Exchange, International Securities Exchange, The NASDAQ Stock 
Market, National Stock Exchange, New York Stock Exchange, NYSE Arca 
and NASDAQ OMX PHLX (formerly Philadelphia Stock Exchange). Certain 
exchanges are registered with the Commission through a notice filing 
under Section 6(g) of the Exchange Act for the purpose of trading 
security futures. See Section II.B.1, below, for a discussion of 
these types of exchanges.
    \6\ A ``national securities association'' is an association of 
brokers and dealers registered as such under Section 15A of the 
Exchange Act [15 U.S.C. 78o-3]. The Financial Industry Regulatory 
Authority (``FINRA'') is the only national securities association 
registered with the Commission under Section 15A(a) of the Exchange 
Act. Because FINRA does not list equity securities, we refer only to 
the exchanges in this release.
    In addition, Section 15A(k) of the Exchange Act [15 U.S.C. 78o-
3(k)] provides that a futures association registered under Section 
17 of the Commodity Exchange Act [7 U.S.C. 21] shall be registered 
as a national securities association for the limited purpose of 
regulating the activities of members who are registered as broker-
dealers in security futures products pursuant to Section 15(b)(11) 
of the Exchange Act [15 U.S.C. 78o(b)(11)]. See Section II.B.2, 
below, for a discussion regarding security futures products.
    \7\ See Section II.B.2, below, for a discussion of the scope of 
Section 10C, including our conclusion that it does not apply to 
issuers with only listed debt securities. That section also proposes 
an exemption for securities futures products and standardized 
options, and clarifies that national securities and futures 
associations that do not list securities do not have to adopt 
specific rules in accordance with this rulemaking and Section 10C of 
the Exchange Act.
    \8\ See Exchange Act Sections 10C(a) and (f).
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    Specifically, Section 10C(a)(1) of the Exchange Act requires the 
Commission to adopt rules directing the exchanges to prohibit the 
listing of any equity security of an issuer, with certain exemptions, 
that is not in compliance with the independence requirements for 
members of the compensation committee of the board of directors of an 
issuer. In accordance with the statute, the rules, once adopted, would 
require the exchanges to establish listing standards that require each 
member of a listed issuer's compensation committee to be a member of 
the board of directors and to be ``independent.'' The term 
``independent'' is not defined in Section 10C(a)(1). Instead, the 
section provides that ``independent'' is to be defined by the exchanges 
after taking into consideration ``relevant factors.'' As provided in 
Section 10C(a)(1), the ``relevant factors'' are required to include (1) 
the source of compensation of a member of the board of directors of an 
issuer, including any consulting, advisory, or other compensatory fee 
paid by the issuer to such member of the board of directors, and (2) 
whether a member of the board of directors of an issuer is affiliated 
with the issuer, a subsidiary of the issuer, or an affiliate of a 
subsidiary of the issuer. Section 10C(a)(4) of the Exchange Act 
requires our rules to permit the exchanges to exempt particular 
relationships from the independence requirements, as each exchange 
determines is appropriate, taking into consideration the size of an 
issuer and any other relevant factors.
    In addition to the independence requirements set forth in Section 
10C(a), Section 10C(f) of the Exchange Act requires the Commission to 
adopt rules directing the exchanges to prohibit the listing of any 
security of an issuer that is not in compliance with the following 
requirements relating to compensation committees and compensation 
advisers, as set forth in paragraphs (b)-(e) of Section 10C:
    <bullet> Each compensation committee must have the authority, in 
its sole discretion, to retain or obtain the advice of compensation 
consultants, independent legal counsel and other advisers 
(collectively, ``compensation advisers''); \9\
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    \9\ Exchange Act Sections 10C(c)(1)(A) and 10C(d)(1).
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    <bullet> Before selecting any compensation adviser, the 
compensation committee must take into consideration specific factors 
identified by the Commission that affect the independence of 
compensation advisers;) \10\
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    \10\ Exchange Act Section 10C(b).
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    <bullet> The compensation committee must be directly responsible 
for the appointment, compensation and oversight of the work of any 
compensation adviser; \11\ and
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    \11\ Exchange Act Sections 10C(c)(1)(B) and 10C(d)(2).
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    <bullet> Each listed issuer must provide appropriate funding for 
the payment of reasonable compensation, as determined by the 
compensation committee, to compensation advisers.\12\
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    \12\ Exchange Act Section 10C(e).
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    Finally, Section 10C(c)(2) requires each issuer to disclose in any 
proxy or consent solicitation material for an annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting), in 
accordance with Commission regulations, whether the issuer's 
compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed.
    We are proposing new Exchange Act Rule 10C-1 to implement the 
compensation committee listing requirements of Sections 10C(a)-(g) \13\ 
of the Exchange Act. To implement Section 10C(c)(2) of the Exchange 
Act, we are proposing rule amendments to Regulation S-K to require 
disclosure, in any proxy or information statement relating to an annual 
meeting of shareholders at which directors are to be elected (or 
special meeting in lieu of the annual meeting), of whether the issuer's 
compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed. In connection 
with these amendments, we also propose to revise the current disclosure 
requirements with respect to the retention of compensation 
consultants.\14\
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    \13\ Section 10C(g) of the Exchange Act exempts controlled 
companies from the requirements of Section 10C.
    \14\ See Item 407(e) of Regulation S-K; Proxy Disclosure 
Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334].
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II. Discussion of the Proposals

A. Proposed Listing Requirements

1. Applicability of Listing Requirements
    In enacting Section 10C of the Exchange Act, Congress intended to 
require that ``board committees that set compensation policy will 
consist only of directors who are independent.'' \15\ In addition, 
Congress sought to provide ``shareholders in a public company'' with 
``additional disclosures involving

[[Page 18968]]

compensation practices.'' \16\ Although Section 10C includes numerous 
provisions applicable to the ``compensation committees'' of listed 
issuers, it does not require a listed issuer to have a compensation 
committee or a committee that performs functions typically assigned to 
a compensation committee. Nor does Section 10C include provisions that 
have the effect of requiring a compensation committee as a practical 
matter. For example, it does not require that the compensation of 
executives be approved by a compensation committee.
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    \15\ 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).
    \16\ Id.
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    Neither the Act nor the Exchange Act defines the term 
``compensation committee.'' \17\ Our rules do not currently require, 
and our proposed rules would not mandate, that an issuer establish a 
compensation committee. However, current exchange listing standards 
generally require listed issuers either to have a compensation 
committee or to have independent directors determine, recommend or 
oversee specified executive compensation matters.\18\ For example, the 
New York Stock Exchange (``NYSE'') requires a listed issuer to have a 
compensation committee composed solely of independent directors and to 
assign various executive compensation-related tasks to that 
committee.\19\ On the other hand, the NASDAQ Stock Market (``Nasdaq'') 
does not mandate that a listed issuer have a compensation committee, 
but requires that executive compensation be determined or recommended 
to the board for determination either by a compensation committee 
composed solely of independent directors or by a majority of the 
board's independent directors in a vote in which only independent 
directors participate.\20\ Some of the other exchanges have standards 
comparable to the NYSE's and require their listed issuers to have 
independent compensation committees.\21\ Other exchanges have standards 
comparable to Nasdaq's and, in the absence of an independent 
compensation committee, permit executive compensation determinations to 
be made or recommended by a majority of independent directors on the 
listed issuer's board.\22\
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    \17\ By contrast, Section 3(a)(58) of the Exchange Act defines 
an ``audit committee'' as a committee (or equivalent body) 
established by and amongst the board of directors of an issuer for 
the purpose of overseeing the accounting and financial reporting 
processes of the issuer and audits of the financial statements of 
the issuer; and if no such committee exists with respect to an 
issuer, the entire board of directors of the issuer. Our proposed 
rules would not preclude the exchanges from defining ``compensation 
committee.''
    \18\ There are some exchanges registered under Section 6(a) of 
the Exchange Act that have not adopted listing standards that 
require executive compensation determinations for listed issuers to 
be made or recommended by an independent compensation committee or 
independent directors. However, these exchanges, which include the 
International Securities Exchange, LLC, EDGA Exchange, Inc., EDGX 
Exchange, Inc., BATS Exchange, Inc., BATS Y-Exchange, Inc. and C2 
Options Exchange, Inc., currently either trade securities only 
pursuant to unlisted trading privileges or trade only standardized 
options. In addition, the listing standards of certain exchanges 
that are registered with the Commission for the purpose of trading 
security futures do not address executive compensation matters. See 
Section II.B.1, below, for a discussion of these types of exchanges.
    \19\ See NYSE Listed Company Manual Section 303A.05. Section 
303A.05 permits a listed issuer's board to allocate the 
responsibilities of the compensation committee to another committee, 
provided that the committee is composed entirely of independent 
directors and has a committee charter. The NYSE exempts certain 
issuers from this requirement, including controlled companies, 
limited partnerships, companies in bankruptcy, and closed-end and 
open-end management investment companies registered under the 
Investment Company Act of 1940 (``Investment Company Act''). See 
NYSE Listed Company Manual Section 303A.00.
    \20\ See Nasdaq Rule 5605(d). We understand that less than 2% of 
Nasdaq listed issuers utilize the alternative of having independent 
board members, and not a committee, oversee compensation. See also 
Nasdaq IM 5605-6, stating that the Nasdaq structure is intended to 
provide flexibility for a company to choose an appropriate board 
structure and to reduce resource burdens, while ensuring independent 
director control of compensation decisions. Nasdaq exempts certain 
issuers from this requirement, including asset-backed issuers and 
other passive issuers, cooperatives, limited partnerships, and 
management investment companies registered under the Investment 
Company Act. See Nasdaq Rule 5615(a).
    \21\ NYSE Arca, Inc., National Stock Exchange, Inc., and NASDAQ 
OMX PHLX, Inc. See NYSE Arca Rule 5.3(k)(4); National Stock Exchange 
Rule 15.5(d)(5); and NASDAQ OMX PHLX Rule 867.05.
    \22\ NASDAQ OMX BX, Inc., NYSE Amex LLC, Chicago Board Options 
Exchange, Incorporated, and Chicago Stock Exchange, Inc. See NASDAQ 
OMX BX Rule 4350(c)(3); NYSE Amex Company Guide Section 805; Chicago 
Board Options Exchange Rule 31.10; and Chicago Stock Exchange 
Article 22, Rules 19(d) and 21.
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    Proposed Rule 10C-1(b) would direct the exchanges to adopt listing 
standards that would be applicable to any committee of the board that 
oversees executive compensation, whether or not the committee performs 
multiple functions and/or is formally designated as a ``compensation 
committee.'' We believe this is appropriate in order to capture board 
committees that perform these functions and to avoid the possibility 
that a listed issuer might avoid the proposed requirements merely by 
assigning a different name to a committee that is functionally 
equivalent to a compensation committee. For example, if a listed issuer 
has a designated ``corporate governance committee'' whose 
responsibilities include, among other matters, oversight of executive 
compensation, such committee would be subject to the compensation 
committee listing standards to be adopted pursuant to our new rules, as 
would a committee designated as a ``human resources committee'' whose 
responsibilities include oversight of executive compensation. However, 
proposed Rule 10C-1(b) would not require the listing standards to apply 
to those independent directors who oversee executive compensation in 
lieu of a board committee, since Section 10C refers only to 
compensation committees.\23\
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    \23\ To the extent no board committee is authorized to oversee 
executive compensation, board determinations with respect to 
executive compensation matters may be made by the full board with 
only independent directors participating. In such cases, under state 
corporate law, we understand that action by the independent 
directors would generally be considered action by the full board, 
not action by a committee.
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Request for Comment
    <bullet> Should the exchanges be required to only list issuers with 
compensation committees?
    <bullet> Our proposed rules would apply to a listed issuer's 
compensation committee, or in the absence of such a committee, any 
other board committee that performs functions typically performed by a 
compensation committee, including oversight of executive compensation. 
Is this proposed functional approach appropriate and workable? If not, 
why not?
    <bullet> As noted above, the listing standards of some exchanges 
permit a listed issuer to have its executive compensation matters be 
determined, or recommended to the board for determination, either by a 
compensation committee composed solely of independent directors or, in 
the absence of such a committee, by a majority of independent directors 
in a vote in which only independent directors participate. Should our 
rules implementing Section 10C require the exchanges to mandate that 
independent directors performing this function in the absence of a 
formal committee structure also be subject to our new rules? Would so 
doing be consistent with the mandate of Section 10C of the Exchange 
Act?
2. Independence Requirements
    Most exchanges that list equity securities require that the board 
of directors of a listed issuer be composed of a majority of directors 
that qualify as ``independent'' under their listing standards.\24\ As 
noted above, most

[[Page 18969]]

exchanges that list equity securities require directors on compensation 
committees or directors determining or recommending executive 
compensation matters to be ``independent'' under their general 
independence standards. Although independence requirements and 
standards for determining independence vary somewhat among the 
different exchanges, listing standards prescribe certain bright-line 
independence tests (including restrictions on compensation, employment 
and familial or other relationships with the listed issuer that could 
interfere with the exercise of independent judgment) that directors 
must meet in order to be considered independent. For example, both NYSE 
and Nasdaq rules preclude a finding of independence if the director is 
or recently was employed by the listed issuer,\25\ the director's 
immediate family member is or recently was employed as an executive 
officer of the listed issuer,\26\ or the director or director's family 
member received compensation from the listed issuer in excess of 
specified limits.\27\ In addition, under both NYSE and Nasdaq rules, 
directors may be disqualified based on their or their family members' 
relationships with a listed issuer's auditor,\28\ affiliation with 
entities that have material business relationships with the listed 
issuer,\29\ or employment at a company whose compensation committee 
includes any of the listed issuer's executive officers.\30\ We note, 
however, that with the exception of audit committee membership 
requirements, stock ownership alone will not automatically preclude a 
director from being considered independent under either NYSE or Nasdaq 
listing standards.\31\
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    \24\ See NYSE Listed Company Manual Section 303A.01; Nasdaq Rule 
5605(b)(1); NYSE AMEX LLC Company Guide Section 802(a); Chicago 
Board Options Exchange Rule 31.10(a); Chicago Stock Exchange Article 
22, Rules 19(a) and 21(a); NASDAQ OMX BX Rule 4350(c)(1); NASDAQ OMX 
PHLX Rule 867.01; National Stock Exchange Rule 15.5(d)(1). NYSE Amex 
and the Chicago Stock Exchange permit smaller issuers to have a 50% 
independent board. See NYSE Amex Company Guide Section 801(h); 
Chicago Stock Exchange Article 22, Rules 19(a), 19(b)(1)(C)(iii), 
and 21(a).
    \25\ See NYSE Listed Company Manual Section 303A.02(b)(i); 
Nasdaq Rule 5605(a)(2)(A).
    \26\ See NYSE Listed Company Manual Section 303A.02(b)(i); 
Nasdaq Rule 5605(a)(2)(C).
    \27\ See NYSE Listed Company Manual Section 303A.02(b)(ii); 
Nasdaq Rule 5605(a)(2)(B).
    \28\ See NYSE Listed Company Manual Section 303A.02(b)(iii); 
Nasdaq Rule 5605(a)(2)(F).
    \29\ See NYSE Listed Company Manual Section 303A.02(b)(v); 
Nasdaq Rule 5605(a)(2)(D).
    \30\ See NYSE Listed Company Manual Section 303A.02(b)(iv); 
Nasdaq Rule 5605(a)(2)(E).
    \31\ See Commentary to NYSE Listed Company Manual Section 
303A.02(a); Nasdaq Rule 5605; Nasdaq IM-5605.
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    In addition to requiring directors to meet objective criteria of 
independence, the NYSE and Nasdaq also require their listed issuers' 
boards to affirmatively determine that each independent director 
either, in NYSE's case, has no material relationship with the company 
\32\ or, in Nasdaq's case, has no relationship which, in the opinion of 
the issuer's board of directors, would interfere with the director's 
exercise of independent judgment in carrying out his or her 
responsibilities.\33\ The other exchanges have similar 
requirements.\34\
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    \32\ See NYSE Rule 303A.02.a
    \33\ See Nasdaq Rule 4200(a)(15).
    \34\ See, e.g., NYSE Arca Rule 5.3(k)(1) or NYSE AMEX LLC 
Company Guide Section 803.A.02.
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    Under current Commission rules, listed issuers are required to 
identify each director who is independent, using the same definition of 
independence used for determining whether a majority of the board of 
directors is independent.\35\ If an exchange has independence 
requirements for members of the compensation committee, then listed 
issuers are required to identify each member of the compensation 
committee who is not independent under those requirements.\36\ If a 
listed issuer does not have a separately designated compensation 
committee or committee performing similar functions, then the issuer 
must identify all members of the board who do not meet the independence 
requirements for compensation committee members.\37\
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    \35\ Item 407(a) of Regulation S-K.
    \36\ Id.
    \37\ Id.
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    In addition to meeting exchange listing standards, there are other 
reasons for members of the compensation committee to be independent. 
For example, in order for a securities transaction between an issuer 
and one of its officers or directors to be exempt from short-swing 
profit liability under Section 16(b) of the Exchange Act, the 
transaction must be approved by the full board of directors or by a 
committee of the board that is composed solely of two or more ``Non-
Employee Directors,'' as defined in Exchange Act Rule 16b-3(b)(3).\38\ 
We understand that many issuers use their independent compensation 
committees to avail themselves of this exemption.\39\ Similarly, if an 
issuer wishes to preserve the tax deductibility of the amounts of 
certain awards paid to executive officers, among other things, the 
performance goals of such awards must be determined by a compensation 
committee composed of two or more ``outside directors,'' as defined in 
Section 162(m) of the Internal Revenue Code.\40\ The definitions of 
``Non-Employee Director'' and ``outside director'' are similar to the 
exchanges' definitions of director independence.
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    \38\ As defined in Exchange Act Rule 16b-3(b)(3)(i) [17 CFR 
240.16b-3(b)(3)(i)], a ``Non-Employee Director'' is a director who 
is not currently an officer (as defined in Rule 16a-1(f)) of the 
issuer or a parent or subsidiary of the issuer, or otherwise 
currently employed by the issuer or a parent or subsidiary of the 
issuer; does not receive compensation, either directly or 
indirectly, from the issuer or a parent or subsidiary of the issuer, 
for services rendered as a consultant or in any capacity other than 
as a director, except for an amount that does not exceed the dollar 
amount for which disclosure would be required pursuant to Item 
404(a) of Regulation S-K; and does not possess an interest in any 
other transaction for which disclosure would be required pursuant to 
Item 404(a) of Regulation S-K. In addition, Rule 16b-3(b)(3)(ii) 
provides that a Non-Employee Director of a closed-end investment 
company is a director who is not an ``interested person'' of the 
issuer, as that term is defined in Section 2(a)(19) of the 
Investment Company Act [15 U.S.C. 80a-2(a)(19)].
    \39\ See letter from Sullivan and Cromwell LLP to Facilitating 
Shareholder Director Nominations, Release No. 34-60089, available at 
http://www.sec.gov/comments/s7-10-09/s71009-430.pdf (``In our 
experience, many compensation committee charters require their 
members to meet the requirements of Rule 16b-3 and Section 
162(m).''); Ira G. Bogner & Michael Krasnovsky, Exchange Rules 
Impact Compensation Committee Composition, Metropolitan Corp. 
Couns., April 2004, at 17 (``Most compensation committees of public 
companies include at least two directors that are `outside 
directors' under Section 162(m) of the Internal Revenue Code * * * 
and `non-employee directors' under Rule 16b-3 of the Securities 
Exchange Act * * * .'').
    \40\ A director is an ``outside director'' if the director (A) 
is not a current employee of the publicly held corporation; (B) is 
not a former employee of the publicly held corporation who receives 
compensation for prior services (other than benefits under a tax-
qualified retirement plan) during the taxable year; (C) has not been 
an officer of the publicly held corporation; and (D) does not 
receive remuneration from the publicly held corporation, either 
directly or indirectly, in any capacity other than as a director. 
For this purpose, remuneration includes any payment in exchange for 
goods or services. Section 162(m) of the Internal Revenue Code of 
1986, as amended. Treas. Reg. Section 1.162-27(e)(3).
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    In order to implement the requirements of Section 10C(a)(1) of the 
Exchange Act, proposed Rule 10C-1(b)(1)(i) would require each member of 
a listed issuer's compensation committee to be a member of the issuer's 
board of directors and to be independent. As required by Section 
10C(a)(1), proposed Rule 10C-1(b)(1)(ii) would direct the exchanges to 
develop a definition of independence applicable to compensation 
committee members after considering relevant factors, including, but 
not limited to, the source of compensation of a director, including any 
consulting, advisory or other compensatory fee paid by the issuer to 
such director, and whether the director is affiliated with the issuer, 
a subsidiary of the issuer, or an affiliate of a

[[Page 18970]]

subsidiary of the issuer. Other than the factors set out in Section 
10C(a)(1), we do not propose to specify any additional factors that the 
exchanges must consider in determining independence requirements for 
members of compensation committees, although we request comment 
regarding whether there are any other such factors that should be 
included in our rule.
    In proposing Rule 10C-1(b)(1), we considered the similarities and 
differences between Section 952 of the Act and Section 301 of the 
Sarbanes-Oxley Act of 2002.\41\ Section 301 of the Sarbanes-Oxley Act 
added Section 10A(m)(1) to the Exchange Act,\42\ which required the 
Commission to direct the exchanges to prescribe independence 
requirements for audit committee members. Although the independence 
factors in Section 10C(a)(1) are similar to those in Section 
10A(m)(1)--and indeed, Section 952 of the Act essentially provides the 
compensation committee counterpart to the audit committee requirements 
of Section 301 of the Sarbanes-Oxley Act--there is one significant 
difference. Section 10C(a) requires only that the exchanges ``consider 
relevant factors'' (emphasis added), which include the source of 
compensation and any affiliate relationship, in developing independence 
standards for compensation committee members, whereas Section 10A(m) 
expressly states that certain relationships preclude independence: an 
audit committee member ``may not, other than in his or her capacity as 
a member of the audit committee * * * [a]ccept any consulting, 
advisory, or other compensatory fee from the issuer; or [b]e an 
affiliated person of the issuer or any subsidiary thereof'' (emphasis 
added).\43\
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    \41\ Public Law 107-204, 116 Stat. 745 (2002).
    \42\ 15 U.S.C. 78j-1(m)(1).
    \43\ See Section 10A(m) of the Exchange Act. Exchange Act Rule 
10A-3 states that in order to be considered ``independent,'' an 
audit committee member cannot accept any consulting, advisory or 
other compensatory fee (other than receipt of fixed amounts under a 
retirement plan for prior service with the listed issuer) and, for 
non-investment company issuers, cannot be an affiliated person of 
the issuer or its subsidiaries. For investment company issuers, the 
audit committee member cannot be an ``interested person'' of the 
issuer as defined in Section 2(a)(19) of the Investment Company Act.
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    As a result, the exchanges have more discretion to determine the 
standards of independence that audit committee and compensation 
committee members are required to meet. Section 10A(m) prescribes 
minimum criteria for the independence of audit committee members and 
permits the exchanges to adopt more stringent independence criteria as 
they deem appropriate, subject to approval pursuant to Section 19(b) of 
the Exchange Act. In contrast, Section 10C gives the exchanges the 
flexibility to establish their own minimum independence criteria for 
compensation committee members after considering the relevant factors 
enumerated in Section 10C(a)(3)(A)-(B). The exchanges may add other 
factors, as each such exchange deems appropriate, subject to approval 
pursuant to Section 19(b) of the Exchange Act.
    To comply with proposed Rule 10C-1, the exchanges' definitions of 
independence for compensation committee members would be implemented 
through proposed rule changes that the exchanges would file pursuant to 
Section 19(b) of the Exchange Act, which are subject to the 
Commission's approval.\44\ Proposed Rule 10C-1(a)(4) would require that 
each proposed rule change submission include, in addition to any 
information required under Section 19(b) of the Exchange Act and the 
rules thereunder: a review of whether and how existing or proposed 
listing standards satisfy the requirements of this rule; a discussion 
of the exchange's consideration of factors relevant to compensation 
committee member independence; and the definition of independence 
applicable to compensation committee members that the exchange proposes 
to adopt in light of such review.\45\ The Commission would then 
consider, prior to final approval, whether the exchanges considered the 
relevant factors outlined in Section 10C(a) and whether the exchanges' 
proposed rule changes are consistent with the requirements of Section 
6(b) of the Exchange Act.
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    \44\ The standard of review for approving proposed exchange 
listing standards is found in Section 19(b)(2)(C) of the Exchange 
Act, which provides that ``[t]he Commission shall approve a proposed 
rule change of a self-regulatory organization if it finds that such 
proposed rule change is consistent with the requirements of this 
title and the rules and regulations issued under this title that are 
applicable to such organization.'' Under Section 6(b) of the 
Exchange Act, the rules of an exchange must be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.''
    \45\ A filing would be required even if an exchange finds that 
its existing rules satisfy the requirements of proposed Rule 10C-1.
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    Because these relevant factors cover the same matters as the 
prohibitions in Section 10A(m)'s definition of audit committee 
independence, we believe the exchanges would likely consider whether 
those prohibitions should also be applicable to compensation committee 
members. The exchanges would not be required to adopt those 
prohibitions in their definitions and will have flexibility to consider 
other factors in developing their definitions. For example, we 
understand that there are concerns, as expressed by several 
commentators,\46\ about a prohibition against allowing directors 
affiliated with significant investors (such as private equity funds or 
venture capital firms) to serve on compensation committees.\47\ Some 
commentators have noted that such directors are highly motivated to 
rigorously oversee compensation and are well-positioned to exercise 
independent judgment regarding compensation.\48\ In addition, some 
commentators have noted that, although there is a need for audit 
committee members to be able to exercise objective oversight of an 
issuer's financial reporting, with respect to the oversight of 
executive compensation, the interests of representatives of major 
shareholders are generally aligned with those of other 
shareholders.\49\
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    \46\ To facilitate public input on the Act, the Commission has 
provided a series of e-mail links, organized by topic, on its Web 
site at http://www.sec.gov/spotlight/regreformcomments.shtml. The 
public comments we received are available on our Web site at http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specializeddisclosures-8.pdf. The public comments we have received 
on Section 952 of the Act are available on our Web site at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.
    Several commentators have suggested that stock ownership alone 
should not automatically disqualify a board member from serving as 
an independent director on the compensation committee. See, e.g., 
letters from American Bar Association, Brian Foley & Company, Inc, 
Compensia, Davis Polk & Wardwell, LLP and Frederick W. Cook & Co., 
Inc.
    \47\ One of these commentators noted that one or more venture 
capital firms sometimes hold significant equity positions and also 
have one of their partners serving as a director and member of the 
board's compensation committee. In this commentator's experience, 
these individuals, by virtue of their ongoing history with the 
listed company as well as their familiarity and experience with 
executive compensation practices in their industry sector, are 
valuable members of the compensation committee who can offer 
perspective and expertise which are largely in line with that of the 
company's shareholders. See letter from Compensia.
    \48\ See letter from Frederic W. Cook & Co., Inc. (stating that 
venture capital and private equity firms ``will often have a more 
demanding pay-for-performance orientation than any other category of 
investor'').
    \49\ See, e.g., letters from Davis Polk & Wardwell LLP, American 
Bar Association, Compensia and Frederic W. Cook & Co., Inc.
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    The exchanges may determine that, even though affiliated directors 
are not allowed to serve on audit committees,

[[Page 18971]]

such a blanket prohibition would be inappropriate for compensation 
committees, and certain affiliates, such as representatives of 
significant shareholders, should be permitted to serve. The exchanges 
might also conclude that other relationships or factors linked more 
closely to executive compensation matters, such as relationships 
between the members of the compensation committee and the listed 
issuer's executive management, should be addressed in the definition of 
independence.
    Because the compensation committee independence requirements of 
Section 10C, unlike the audit committee independence requirements of 
Section 10A(m), do not require that the exchanges prohibit all 
affiliates from serving on a compensation committee, we do not believe 
it is necessary to separately define the term ``affiliate'' for 
purposes of proposed Rule 10C-1. As our proposed rule does not 
establish required independence standards, we also believe it is 
unnecessary to create any safe harbors for particular relationships, as 
we did when we adopted our audit committee independence 
requirements.\50\ Although each exchange must consider the affiliate 
relationships specified in the rule in establishing compensation 
committee independence standards, there is no requirement to adopt 
listing standards precluding compensation committee membership based on 
all such relationships. Accordingly, we do not propose a separate 
definition of ``affiliate'' for use in connection with proposed Rule 
10C-1.
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    \50\ See Exchange Act Rule 10A-3(e)(1)(ii) [17 CFR 240.10A-
3(e)(1)(ii)] (providing that a person will be deemed not to be in 
control of a specified person for purposes of this section if the 
person ``is not the beneficial owner, directly or indirectly, of 
more than 10% of any class of voting equity securities of the 
specified person; and is not an executive officer of the specified 
person'').
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Request for Comment
    <bullet> Rather than establishing minimum independence standards 
that the exchanges must apply to compensation committee members, our 
proposed rule would permit each exchange to establish its own 
independence criteria, provided the exchange considers the relevant 
factors specified in Section 10C relating to affiliate relationships 
and sources of compensation. Is this approach appropriate? Is there a 
better approach that would be consistent with the requirements of 
Section 10C?
    <bullet> The proposed independence factors that must be considered 
relate to current relationships between the issuer and the compensation 
committee member, which is consistent with the approach in Rule 10A-
3(b)(1) for audit committee members. Should the required factors also 
extend to a ``look back'' period before the appointment of the member 
to the compensation committee? (We note that the exchanges currently 
have look-back periods for their definitions of independence for 
purposes of determining whether a majority of the board of directors is 
independent.) For members already serving on compensation committees 
when the new listing standards take effect, should the required factors 
also extend to a ``look back'' period before the effective date of the 
new listing standards? If so, what period (e.g., three years or five 
years) would be appropriate? Should there be different look-back 
periods for different relationships or different parties? If so, what 
should they be, and why?
    <bullet> Should there be additional factors apart from the two 
proposed factors required to be considered? For example, should the 
exchanges be required to include business or personal relationships 
between a compensation committee member and an executive officer of the 
issuer as mandatory factors for consideration? Should the exchanges be 
required to include board interlocks or employment of a director at a 
company included in the listed issuer's compensation peer group as 
mandatory factors for consideration? Would any such requirements unduly 
restrain a company in setting the composition of its board of 
directors?
    <bullet> Large shareholders may be deemed affiliates by virtue of 
the percentage of their shareholdings. As noted above, some 
commentators have expressed the view that directors affiliated with 
large shareholders should continue to be permitted to serve on 
compensation committees because their interests are aligned with other 
shareholders with respect to compensation matters. Would a director 
affiliated with a shareholder with a significant ownership interest who 
is otherwise independent be sufficiently independent for the purpose of 
serving on the compensation committee? Would the interests of all 
shareholders be aligned with the interests of large shareholders with 
respect to oversight of executive compensation? Should our rules 
implementing Section 10C provide additional or different guidance or 
standards for the consideration of the affiliated person factor?
3. Authority To Engage Compensation Advisers; Responsibilities; and 
Funding
    Section 10C(c)(1) of the Exchange Act provides that the 
compensation committee of a listed issuer may, in its sole discretion, 
retain or obtain the advice of a ``compensation consultant,'' \51\ and 
Section 10C(d)(1) extends this authority to ``independent legal counsel 
and other advisers'' \52\ (collectively, ``compensation advisers''). 
Both sections also provide that the compensation committee shall be 
directly responsible for the appointment, compensation, and oversight 
of the work of compensation advisers. Sections 10C(c)(1)(C) and 
10C(d)(3) provide that the compensation committee's authority to 
retain, and responsibility for overseeing the work of, compensation 
advisers may not be construed to require the compensation committee to 
implement or act consistently with the advice or recommendations of a 
compensation adviser or to affect the ability or obligation of the 
compensation committee to exercise its own judgment in fulfillment of 
its duties. To ensure that the listed issuer's compensation committee 
has the necessary funds to pay for such advisers, Section 10C(e) 
provides that a listed issuer shall provide ``appropriate funding,'' as 
determined by the compensation committee, for payment of ``reasonable 
compensation'' to compensation consultants, independent legal counsel 
and other advisers to the compensation committee.\53\
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    \51\ See Exchange Act Section 10C(c)(1).
    \52\ See Exchange Act Section 10C(d)(1).
    \53\ See Exchange Act Section 10C(e).
---------------------------------------------------------------------------

    Proposed Rule 10C-1(b)(2) implements Sections 10C(c)(1) and (d)(1) 
by repeating the provisions set forth in those sections regarding the 
compensation committee's authority to retain or obtain a compensation 
adviser, its direct responsibility for the appointment, compensation 
and oversight of the work of any compensation adviser, and the related 
rules of construction. In addition, proposed Rule 10C-1(b)(3) 
implements Section 10C(e) by repeating the provisions set forth in that 
section regarding the requirement that listed issuers provide for 
appropriate funding for payment of reasonable compensation to 
compensation advisers.
    We note that while the statute provides that compensation 
committees of listed issuers shall have the express authority to hire 
``independent legal counsel,'' the statute does not require that they 
do so. Similar to our interpretation \54\ of Section 10A(m) of

[[Page 18972]]

the Exchange Act, which gave the audit committee authority to engage 
``independent legal counsel,'' \55\ we do not construe the requirements 
related to independent legal counsel and other advisers as set forth in 
Section 10C(d)(1) of the Exchange Act as requiring a compensation 
committee to retain independent legal counsel or as precluding a 
compensation committee from retaining non-independent legal counsel or 
obtaining advice from in-house counsel or outside counsel retained by 
the issuer or management.
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    \54\ See Standards Relating to Listed Company Audit Committees, 
Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788], at fn. 114 (``As 
proposed, the requirement does not preclude access to or advice from 
the company's internal counsel or regular outside counsel. It also 
does not require an audit committee to retain independent 
counsel.'').
    \55\ See Exchange Act Section 10A(m)(5)(``Each audit committee 
shall have the authority to engage independent counsel and other 
advisers, as it determines necessary to carry out its duties.'').
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Request for Comment
    <bullet> Is additional specificity in the proposed rule needed to 
provide clearer guidance to listed issuers? For example, should we 
define what constitutes an ``independent legal counsel''? If so, how?
    <bullet> Should we clarify more explicitly in the implementing rule 
that this provision is not intended to preclude the compensation 
committee from conferring with in-house legal counsel or the company's 
outside counsel or from retaining non-independent counsel?
    <bullet> Our audit committee rules implementing Section 10A(m) 
provide that each listed issuer must provide funding for ordinary 
administrative expenses of the audit committee that are necessary or 
appropriate in carrying out its duties.\56\ Would such a provision be 
helpful with respect to the compensation committee? Do compensation 
committees have administrative expenses? If so, are they significant?
---------------------------------------------------------------------------

    \56\ See Exchange Act Rule 10A-3(b)(5)(iii).
---------------------------------------------------------------------------

4. Compensation Adviser Independence Factors
    Section 10C(b) of the Exchange Act provides that the compensation 
committee may select a compensation adviser only after taking into 
consideration the factors identified by the Commission. In accordance 
with Section 10C(b), these factors would apply not only to the 
selection of compensation consultants, but also to the selection of 
legal counsel and other advisers to the committee. The statute does not 
require a compensation adviser to be independent, only that the 
compensation committee consider the enumerated independence factors 
before selecting a compensation adviser. Section 10C(b) specifies that 
the independence factors identified by the Commission must be 
competitively neutral \57\ and include, at minimum:
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    \57\ Although there is no relevant legislative history, we 
assume this is intended to address the concern expressed by the 
multi-service compensation consulting firms that the disclosure 
requirements the Commission adopted last year are not competitively 
neutral because they do not address potential conflicts of interest 
presented by boutique consulting firms that are dependent on the 
revenues of a small number of clients. See letter from Towers 
Perrin, commenting on Proxy Disclosure and Solicitation 
Enhancements, Release No. 33-9052 (July 10, 2009), available at 
http://www.sec.gov/comments/s7-13-09/s71309-90.pdf. The list in 
Section 10C, which covers both multi-service firm ``other services'' 
conflicts and boutique firm ``revenue concentration'' conflicts, is 
consistent with this assumption.
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    <bullet> The provision of other services to the issuer by the 
person that employs the compensation consultant, legal counsel or other 
adviser;
    <bullet> The amount of fees received from the issuer by the person 
that employs the compensation consultant, legal counsel or other 
adviser, as a percentage of the total revenue of the person that 
employs the compensation consultant, legal counsel, or other adviser;
    <bullet> 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;
    <bullet> Any business or personal relationship of the compensation 
consultant, legal counsel, or other adviser with a member of the 
compensation committee; and
    <bullet> Any stock of the issuer owned by the compensation 
consultant, legal counsel or other adviser.
    Because Exchange Act Section 10C does not require compensation 
advisers to be independent--only that the compensation committee 
consider factors that may bear upon independence--we do not believe 
that this provision contemplates that the Commission would necessarily 
establish materiality or bright-line numerical thresholds that would 
determine whether or when the factors listed in Section 10C of the 
Exchange Act, or any other factors added by the Commission or by the 
exchanges, must be considered germane by a compensation committee. For 
example, we do not believe that our rules should provide that a 
committee must consider stock owned by an adviser only if ownership 
exceeds a specified minimum percentage of the issuer's stock, or that a 
committee must consider the amount of revenues that the issuer's 
business represents for an adviser only if the percentage exceeds a 
certain percentage of the adviser's revenues. Therefore, proposed Rule 
10C-1(b)(4) would require the listing standards developed by the 
exchanges to include the independence factors set forth in the statute 
and incorporated into the rule without any materiality or bright-line 
thresholds or cut-offs. Under the proposed rules, the exchanges may add 
other independence factors that must be considered by compensation 
committees of listed issuers.
    We believe the factors set forth in Section 10C(b) are generally 
comprehensive. We are not proposing any additional compensation adviser 
independence factors at this time, although we are soliciting comment 
as to whether there are any additional independence factors that should 
be taken into consideration by a listed issuer's compensation committee 
when selecting a compensation adviser. We are also soliciting comment 
as to whether the factors set forth in Section 10C(b) and proposed Rule 
10C-1(b)(4) are competitively neutral.
    We have already received several comment letters with respect to 
the compensation adviser independence factors.\58\ Commentators are 
generally supportive of the five factors listed in Section 10C(b), but 
believe that the factors should be used only in guiding the 
compensation committee in its selection process, not as an outright bar 
or prohibition against any one category of compensation adviser.\59\ 
One commentator stated that in requiring the factors to be 
``competitively neutral,'' Congress sought to ensure that companies 
``have the flexibility to select the types of adviser[s] that best meet 
their particular needs.'' \60\ Several commentators suggested that the 
stock ownership independence factor should relate only to shares of the 
listed issuer owned directly by the consulting firm or by advisers 
immediately engaged by the compensation committee.\61\ Other 
commentators sought clarification on what constitutes a ``business'' or 
``personal'' relationship between the compensation adviser and a member 
of the compensation committee.\62\ In light of our overall approach to 
implementing the independence factors as provided in Section 10C(b), we 
are not proposing to address these points, but solicit comment below on 
whether we should.
---------------------------------------------------------------------------

    \58\ See, e.g., letters from Mercer, Meridian Compensation 
Partners, LLC, Pay Governance LLC and Frederick W. Cook & Co., Inc.
    \59\ See, e.g., letter from Pay Governance LLC.
    \60\ See letter from Towers Watson.
    \61\ See, e.g., letters from Frederick W. Cook & Co., Inc and 
Mercer.
    \62\ See, e.g., letters from Mercer and Pay Governance LLC.

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[[Page 18973]]

Request for Comment
    <bullet> Section 10C(b) specifies that the independence factors 
identified by the Commission must be competitively neutral, but does 
not state how we should determine whether a factor is competitively 
neutral. Are there any issues that should be considered to determine or 
assess whether a factor is competitively neutral?
    <bullet> Are the five factors identified in Section 10C(b) of the 
Exchange Act competitively neutral among different types of 
compensation advisers? If not, what modifications or adjustments should 
be made in order to make these factors competitively neutral? Are there 
specific categories of compensation advisers that would be adversely 
affected by the compensation committee's use of these factors to assess 
independence?
    <bullet> Are there any factors affecting independence that we 
should add to the list of factors identified in proposed Rule 10C-
1(b)(4)? If so, what are they and why should they be included?
    <bullet> Would the existence of a business or personal relationship 
between a compensation adviser and an executive officer of the issuer 
be relevant in considering whether to engage the compensation adviser? 
If so, why? Should we add this to the required list of factors that 
must be considered?
    <bullet> Based on the language in Section 10C(b)(2), which 
distinguishes between the adviser and the person that employs the 
adviser, a personal or business relationship between the person 
employing the adviser and a member of the compensation committee would 
not be covered by the proposed rule (which, like Section 10C(b)(2)(D), 
only refers to relationships between the adviser and the compensation 
committee). Should the required list of factors also include a business 
or personal relationship between the person employing the compensation 
adviser and a member of the compensation committee? Along those lines, 
should it also cover a business or personal relationship between the 
person employing the adviser and an executive officer of the issuer?
    <bullet> Should we provide materiality, numerical or other 
thresholds that would apply to whether or when the independence factors 
must be considered by a compensation committee? If so, what should they 
be? For example, should we require consideration of stock ownership 
only if the amount of stock owned constitutes a significant portion of 
an adviser's net worth, such as 10%?
    <bullet> Would law firms be affected by the requirement to consider 
independence factors in a way that would be materially different than 
how compensation consultants would be affected?
    <bullet> Should we clarify what is covered by ``provision of other 
services'' in proposed Rule 10C-1(b)(4)(i)?
    <bullet> We interpret ``any stock of the issuer owned by the 
compensation consultant, independent legal counsel or other adviser'' 
in proposed Rule 10C-1(b)(4)(v) to include shares owned by the 
individuals providing services to the compensation committee and their 
immediate family members. We do not believe this factor is intended to 
extend to the person that employs the adviser since Section 10C(b) is 
specific when factors extend to the employer and that language is not 
included for stock ownership. Is this an appropriate interpretation of 
this factor? If not, why and how should this phrase be interpreted? 
Should it also cover the person that employs the adviser?
    <bullet> Should we define or clarify the meaning of the phrase 
``business or personal relationship,'' as used in proposed Rule 10C-
1(b)(4)(iv), and if so, how?
    <bullet> Would the proposed requirements have any unintended 
effects on the compensation committee or its process to select a 
compensation adviser? If so, please explain.
    <bullet> Should we adopt rule amendments to Regulation S-K to 
require listed issuers to describe the compensation committee's process 
for selecting compensation advisers pursuant to the new listing 
standards? Would information about the compensation committee's 
selection process--how it works, what it requires, who is involved, 
when it takes place, whether it is followed--provide transparency to 
the compensation adviser selection process and provide investors with 
information that may be useful to them as they consider the 
effectiveness of the selection process? Or, would such a requirement 
result in too much detail about this process in the context of 
disclosure regarding executive compensation?
5. Opportunity To Cure Defects
    Section 10C(f)(2) of the Exchange Act specifies that our rules must 
provide for appropriate procedures for an issuer to have a reasonable 
opportunity to cure any defects that would be the basis for a 
prohibition of the listing of an issuer's securities as a result of its 
failure to meet the requirements set forth in Section 10C, before 
imposition of such a prohibition.\63\ To implement this requirement, 
proposed Rule 10C-1(a)(3) would require the exchanges to establish such 
procedures (if their existing procedures are not adequate) before they 
prohibit the listing of, or delist, any security of an issuer.
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    \63\ See Exchange Act Section 10C(f)(2).
---------------------------------------------------------------------------

    As a preliminary matter, we believe that existing continued listing 
or maintenance standards and delisting procedures of most of the 
exchanges would satisfy the requirement for there to be reasonable 
procedures for an issuer to have an opportunity to cure any defects on 
an ongoing basis. Most exchanges have already adopted procedures to 
provide issuers with notice and opportunity for a hearing, an 
opportunity for an appeal and an opportunity to cure defects before 
their securities are delisted.\64\ Nonetheless, we expect that the 
rules of each exchange would provide for definite procedures and time 
periods for compliance with the proposed requirements to the extent 
they do not already do so.
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    \64\ See, e.g., NYSE Listed Company Manual Section 801-805; 
Nasdaq Equity Rules 5800 Series; NYSE AMEX LLC Company Guide Section 
1009 and Part 12; Chicago Board Options Exchange Rule 31.94; Chicago 
Stock Exchange Article 22, Rules 4, 17A, and 22; Nasdaq OMX BX Rule 
4800 series; Nasdaq OMX PHLX Rule 811. Neither NYSE Arca nor the 
National Stock Exchange has a rule that specifically requires listed 
companies to be given an opportunity to submit a plan to regain 
compliance with corporate governance listing standards other than 
audit committee requirements; issuers listed on these exchanges, 
however, are provided notice, an opportunity for a hearing, and an 
opportunity for an appeal prior to delisting. See NYSE Arca Rule 
5.5(m); National Stock Exchange Rule 15.7 and Chapter X.
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    When we adopted Exchange Act Rule 10A-3(a)(3), which requires that 
issuers be given an opportunity to cure violations of the audit 
committee listing requirements, we noted that several commentators to 
the proposing release for those rules expressed concern regarding rare 
situations that may occur where an audit committee member ceases to be 
independent for reasons outside the member's reasonable control.\65\ 
For example, a listed issuer's audit committee member could be a 
partner in a law firm that provides no services to the listed issuer, 
but the listed issuer could acquire another company that is one of the 
law firm's clients. Without an opportunity to cure such a defect, the 
audit committee member would cease to be independent. Additional time 
may be necessary to cure such defects, such as ceasing the issuer's 
relationship with the audit committee member's firm or replacing

[[Page 18974]]

the audit committee member. Accordingly, in our final rule, we provided 
that the exchanges' rules may provide that if a member of an audit 
committee ceases to be independent for reasons outside the member's 
reasonable control, that person, with notice by the issuer to the 
applicable national securities exchange or national securities 
association, may remain an audit committee member of the listed issuer 
until the earlier of the next annual meeting of the listed issuer or 
one year from the occurrence of the event that caused the member to be 
no longer independent.\66\
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    \65\ See Standards Relating to Listed Company Audit Committees, 
Release No. 33-8220 (Apr. 9, 2003).
    \66\ See Exchange Act Rule 10A-3(a)(3) [17 CFR 240.10A-3(a)(3)].
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    We are proposing that there should be the same opportunity to cure 
violations of the independence requirements for compensation committee 
members, for the same reasons we adopted such provisions for curing 
violations of the independence requirements for audit committee 
members. Accordingly, consistent with Rule 10A-3(a)(3), proposed Rule 
10C-1(a)(3) provides that the exchanges' rules may provide that if a 
member of a compensation committee ceases to be independent for reasons 
outside the member's reasonable control, that person, with notice by 
the issuer to the applicable exchange, may remain a compensation 
committee member of the listed issuer until the earlier of the next 
annual meeting of the listed issuer or one year from the occurrence of 
the event that caused the member to be no longer independent.
Request for Comment
    <bullet> Should the exchanges be required to establish specific 
procedures for curing defects regarding compliance with compensation 
committee listing requirements apart from those proposed? If so, what 
should these procedures be? Should there be a specific course for 
redress other than the delisting process?
    <bullet> Should our rule, as proposed, allow exchange rules that 
would permit the continued service of a compensation committee member 
who ceases to be independent for reasons outside the member's 
reasonable control? If so, should our rule impose a maximum time limit 
for such continued service? Should our rule require that the issuer use 
reasonable efforts to replace the member who is no longer independent 
as promptly as practicable?
    <bullet> Should our rule include specific provisions that set time 
limits for an opportunity to cure defects other than for instances 
where a compensation committee member ceases to be independent for 
reasons outside the member's reasonable control? If so, what time 
limits would be appropriate?
    <bullet> Should companies that have just completed initial public 
offerings be given additional time to comply with the requirements, as 
is permitted by Exchange Act Rule 10A-3(b)(1)(iv)(A) with respect to 
audit committee independence requirements?

B. Implementation of Listing Requirements

1. Exchanges Affected
    Section 10C of the Exchange Act by its terms applies to all 
national securities exchanges and national securities associations.\67\ 
These entities, to the extent that their listing standards do not 
already comply with the rules we adopt under Section 10C, will be 
required to issue or modify their rules, subject to Commission review, 
to conform their listing standards to our new rules. An exchange that 
lists or trades security futures products (as defined in Exchange Act 
Section 3(a)(56)) \68\ may register as a national securities exchange 
under Section 6(g) of the Exchange Act solely for the purpose of 
trading security futures products.\69\ Because the Exchange Act 
definition of ``equity security'' includes security futures on equity 
securities,\70\ we believe it is necessary to clarify the application 
of proposed Rule 10C-1 to those national securities exchanges 
registered solely pursuant to Section 6(g).
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    \67\ The OTC Bulletin Board (OTCBB) and the OTC Markets Group 
(previously known as the Pink Sheets and Pink OTC Markets) would not 
be affected by the proposed requirements, and therefore issuers 
whose securities are quoted on these interdealer quotation systems 
similarly would not be affected, unless their securities also are 
listed on an exchange. The OTCBB is an interdealer quotation system 
for the over-the-counter securities market operated by FINRA that 
collects and distributes market maker quotes to subscribers. It does 
not, however, have a listing agreement or arrangement with the 
issuers whose securities are quoted on the system. Although market 
makers may be required to review and maintain specified information 
about the issuer and to furnish that information to the OTCBB, the 
issuers whose securities are quoted on it are not required to file 
any information with the system. The OTC Markets Group is not a 
registered national securities exchange or association, nor is it 
operated by a registered national securities exchange or 
association, and thus is not covered by the terms of the proposed 
rule.
    \68\ Exchange Act Section 3(a)(56) defines the term ``security 
futures product'' to mean ``a security future or any put, call, 
straddle, option, or privilege on any security future.'' 15 U.S.C. 
78c(a)(56).
    \69\ Exchanges currently registered solely pursuant to Section 
6(g) of the Exchange Act include the Board of Trade of the City of 
Chicago, Inc.; the CBOE Futures Exchange, LLC; the Chicago 
Mercantile Exchange, Inc.; One Chicago, LLC; the Island Futures 
Exchange, LLC; and NQLX LLC.
    \70\ Under Section 3(a)(11) of the Exchange Act, the term 
``equity security'' is defined as any stock or similar security; or 
any security future on any such security; or any security 
convertible, with or without consideration, into such a security, or 
carrying any warrant or right to subscribe to or purchase such a 
security; or any such warrant or right; or any other security which 
the Commission shall deem to be of similar nature and consider 
necessary or appropriate, by such rules and regulations as it may 
prescribe in the public interest or for the protection of investors, 
to treat as an equity security.
---------------------------------------------------------------------------

    Given that Section 10C(f) of the Act makes no distinction between 
exchanges registered pursuant to Section 6(a) and those registered 
pursuant to Section 6(g), we have not proposed a wholesale exemption 
from the requirements of Rule 10C-1 for those exchanges registered 
solely pursuant to Section 6(g). However, as discussed below, we are 
proposing to exempt security futures products from the scope of 
proposed Rule 10C-1. Accordingly, to the extent our final rule exempts 
the listing of security futures products from the scope of Rule 10C-1, 
any national securities exchange registered as such solely pursuant to 
Section 6(g) of the Exchange Act and that lists and trades only 
security futures products would not be required to file a rule change 
in order to comply with Rule 10C-1.
    Currently, the only registered national securities association 
under Section 15A(a) of the Exchange Act is FINRA.\71\ However, FINRA 
does not list securities.\72\ While we recognize that Section 10C of 
the Act specifically requires national securities associations to 
prohibit the listing of any equity security of an issuer that does not 
comply with the requirements of Section 10C, as FINRA does not list any 
securities and does not have listing standards under its rules, we do 
not expect FINRA to have to develop listing standards regarding 
compensation committees in compliance with proposed Rule 10C-1.\73\ 
Nevertheless, as Section 10C specifically references national 
securities associations, proposed Rule 10C-1 would apply to any 
registered national securities association that lists equity securities 
in the future.
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    \71\ Regarding the National Futures Association (NFA), see note 
6, above, and note 73, below.
    \72\ See note 6, above.
    \73\ Similarly, we do not expect the NFA, which is registered 
under Section 15A(k) for the limited purpose of regulating the 
activities of members who are registered as broker-dealers in 
security futures products, see note 6, above, to develop listing 
standards regarding compensation committees in compliance with 
proposed Rule 10C-1.
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Request for Comment
    <bullet> Should we exempt certain exchanges or associations from 
Section 10C of the Exchange Act? If so, why,

[[Page 18975]]

and which exchanges or associations should we exempt and why?
    <bullet> Would we need to exempt an exchange from Section 10C if we 
also exempt the class of securities listed on such exchange?
2. Securities Affected
a. Listed Equity Securities
    Section 10C of the Exchange Act specifies in one subsection that 
the compensation committee listing requirements are intended to apply 
to issuers with listed equity securities, but another subsection may 
suggest that it applies to issuers with any listed securities. Section 
10C(a) provides that the Commission shall direct the exchanges to 
prohibit the listing of any ``equity security'' of an issuer (other 
than several types of exempted issuers) that does not comply with the 
compensation committee member independence requirements. Section 
10C(f)(1), which states generally the scope of the compensation 
committee and compensation adviser listing requirements, provides that, 
``[n]ot later than 360 days after the date of enactment of this 
section, the Commission shall, by rule, direct the national securities 
exchanges and national securities associations to prohibit the listing 
of any security of an issuer that is not in compliance with the 
requirements of this section'' (emphasis added).
    The Senate-passed version of the bill did not distinguish between 
equity and non-equity securities, referencing only the prohibition 
against the listing of ``any security'' of an issuer not in compliance 
with the independence requirements. The House-passed version would have 
required the Commission to adopt rules to direct the exchanges to 
prohibit the listing of ``any class of equity security'' of an issuer 
that is not in compliance with the compensation committee independence 
standards, as well as with any of the other provisions of that section, 
including the provisions relating to compensation advisers. According 
to a press release from the House Financial Services Committee, this 
language was added during final House deliberations to clarify that the 
compensation committee independence standards would apply only to 
``public companies, not to companies that have only an issue of 
publicly-registered debt.'' \74\
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    \74\ See http://www.house.gov/apps/list/press/financialsvcs_dem/press_072809.shtml.
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    Because the Senate-passed version of the bill (which did not 
specify ``equity'' securities) was used as the base for the conference 
draft, it appears that addition of ``equity'' securities in Section 
10C(a) of the conference draft is deliberate. Unlike the House-passed 
bill, however, the final bill specifically references equity securities 
only in connection with compensation committee independence 
requirements.
    Based on this legislative history, we believe that the compensation 
committee and other requirements in Section 10C are intended to apply 
only to issuers with listed equity securities.\75\ As noted above, the 
provision governing compensation committee independence is specifically 
limited to issuers of equity securities. Against this backdrop, in our 
view, it is unlikely that Congress intended the remaining compensation 
committee provisions (compensation adviser independence factors, 
authority to retain compensation advisers, and responsibility for the 
appointment, compensation and oversight of the work of the compensation 
advisers) to apply to issuers with only listed debt securities. We note 
that the NYSE currently exempts debt-only listed issuers from the 
compensation committee listing requirements that apply to issuers 
listing equity securities.\76\ In addition, Exchange Act Rule 3a12-11 
exempts listed debt securities from most of the requirements in our 
proxy and information statement rules.\77\ Finally, most, if not all, 
issuers with only listed debt securities, other than foreign private 
issuers, are privately held.\78\ Thus, subjecting issuers of such 
securities to the requirements of proposed Rule 10C-1 would not serve 
the general intent of the Act's executive compensation provisions of 
protecting ``shareholders in a public company.'' \79\ In light of the 
legislative history and our and the exchanges' historical approach to 
issuers with only listed debt securities, we believe the new listing 
standards required by Section 10C are intended to apply only to issuers 
with listed equity securities.
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    \75\ Although Section 10C is, in many respects, similar to 
Section 10A(m), there are differences in some of the statutory 
language. In this regard, we note that the audit committee 
independence requirements included in Section 10A(m) of the Exchange 
Act, as set forth in Section 301 of the Sarbanes-Oxley Act, are 
applicable generally to ``listed securities,'' and no reference is 
made to equity securities. Therefore, although Section 10A(m) 
applies to issuers whether they have listed debt or equity, we do 
not believe this should necessarily prescribe the scope of Section 
10C.
    \76\ See NYSE Listed Company Manual Section 303A.00.
    \77\ In adopting this rule, the Commission determined that debt 
holders would receive sufficient protection from the indenture 
contract, the Trust Indenture Act, the proxy rules' antifraud 
proscriptions, and the Exchange Act rules that facilitate the 
transmission of materials to beneficial owners. See Exemptive Relief 
and Simplification of Filing Requirements for Debt Securities To Be 
Listed on a National Securities Exchange, Release No. 34-34922 (Nov. 
1, 1994) [59 FR 55342].
    \78\ Based on information reported in the most recent annual 
reports on Forms 10-K, 20-F and 40-F that are available on EDGAR, 
and current public quotation and trade data on issuers whose debt 
securities are listed on an exchange, such as the NYSE Listed and 
Traded Bonds and NYSE Amex Listed Bonds, we estimate that there are 
approximately 76 issuers that list only debt securities on an 
exchange. Of these 76 issuers, approximately 21 are wholly-owned 
subsidiaries that would be exempt from proposed Exchange Act Rule 
10C-1 pursuant to Section 10C(g) of the Act. None of these 76 
issuers has a class of equity securities registered under Section 12 
of the Exchange Act.
    \79\ 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 (Conf. Rep.) (June 29, 2010) 
(``In this subtitle, Congress provides shareholders in a public 
company with a vote on executive compensation and additional 
disclosures regarding compensation practices.'').
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Request for Comment
    <bullet> We read Section 10C as applying only to issuers with 
listed equity securities, and our proposed rules are consistent with 
that view. Should we instead mandate that the requirements of Sections 
10C(b) through (e) be applied to a broader range of issuers, including 
issuers with only listed debt securities or issuers with other types of 
listed securities? Why or why not?
b. Securities Futures Products and Standardized Options
    The Exchange Act's definition of ``equity security'' includes any 
security future on any stock or similar security.\80\ The Commodity 
Futures Modernization Act of 2000 (the ``CFMA'') \81\ permits national 
securities exchanges registered under Section 6 of the Exchange Act 
\82\ and national securities associations registered under Section 
15A(a) of the Exchange Act \83\ to trade futures on individual 
securities and on narrow-based security indices (``security futures'') 
\84\ without such securities being subject to the registration 
requirements of the Securities Act of 1933 (the ``Securities Act'') and 
Exchange Act so long as they are cleared by a clearing agency that is 
registered under Section 17A of the Exchange Act \85\ or that is exempt 
from registration under Section 17A(b)(7)(A) of the Exchange Act. In 
December 2002, we

[[Page 18976]]

adopted rules to provide comparable regulatory treatment for 
standardized options.\86\
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    \80\ Exchange Act Section 3(a)(11).
    \81\ Public Law 106-554, 114 Stat. 2763 (2000).
    \82\ 15 U.S.C. 78f.
    \83\ 15 U.S.C. 78o-3(a).
    \84\ Exchange Act Section 3(a)(56) [15 U.S.C. 78c(a)(56)], and 
Commodities Exchange Act Section 1a(32) [7 U.S.C. 1a(32)] define 
``security futures product'' as a security future or any put, call, 
straddle, option, or privilege on any security future.
    \85\ 15 U.S.C. 78q-1.
    \86\ See Release No. 33-8171 (Dec. 23, 2002) [68 FR 188]. In 
that release, we exempted standardized options issued by registered 
clearing agencies and traded on a registered national securities 
exchange or on a registered national securities association from all 
provisions of the Securities Act, other than the antifraud provision 
of Section 17, as well as the Exchange Act registration 
requirements. Standardized options are defined in Exchange Act Rule 
9b-1(a)(4) [17 CFR 240.9b-1(a)(4)] as option contracts trading on a 
national securities exchange, an automated quotation system of a 
registered securities association, or a foreign securities exchange 
which relate to option classes the terms of which are limited to 
specific expiration dates and exercise prices, or such other 
securities as the Commission may, by order, designate.
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    The clearing agency for security futures products and standardized 
options is the issuer of these securities,\87\ but its role as issuer 
is fundamentally different from an issuer of common stock of an 
operating company. The purchaser of these securities does not, except 
in the most formal sense, make an investment decision regarding the 
clearing agency. As a result, information about the clearing agency's 
business, its officers and directors and its financial statements is 
less relevant to investors in these securities than information about 
the issuer of the underlying security. Similarly, the investment risk 
in these securities is determined by the market performance of the 
underlying security rather than the performance of the clearing agency, 
which is a self-regulatory organization subject to regulatory 
oversight. Furthermore, unlike a conventional issuer, the clearing 
agency does not receive the proceeds from sales of security futures 
products or standardized options.\88\
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    \87\ See Fair Administration and Governance of Self-Regulatory 
Organizations; Disclosure and Regulatory Reporting by Self-
Regulatory Organizations; Recordkeeping Requirements for Self-
Regulatory Organizations; Ownership and Voting Limitations for 
Members of Self-Regulatory Organizations; Ownership Reporting 
Requirements for Members of Self-Regulatory Organizations; Listing 
and Trading of Affiliated Securities by a Self-Regulatory 
Organization, Release No. 34-50699 (Nov. 18, 2004) [69 FR 71126], at 
n. 260 (``Standardized options and security futures products are 
issued and guaranteed by a clearing agency. Currently, all 
standardized options and security futures products are issued by the 
Options Clearing Corporation (`OCC').'').
    \88\ However, the clearing agency may receive a clearing fee 
from its members.
---------------------------------------------------------------------------

    In recognition of these fundamental differences, the Commission 
provided exemptions for security futures products and standardized 
options when it adopted the audit committee listing requirements in 
Exchange Act Rule 10A-3.\89\ Specifically, Rule 10A-3(c) exempts the 
listing of a security futures product cleared by a clearing agency that 
is registered pursuant to Section 17A of the Exchange Act or that is 
exempt from registration pursuant to Section 17A(b)(7)(A) and the 
listing of a standardized option issued by a clearing agency that is 
registered pursuant to Section 17A of the Exchange Act. For the same 
reasons that we exempted these securities from Rule 10A-3, we propose 
to exempt these securities from Rule 10C-1, as we believe that there 
would be no benefit to investors or to the public interest in 
subjecting the issuers of these securities to the requirements of 
proposed Rule 10C-1.
---------------------------------------------------------------------------

    \89\ See Exchange Act Rules 10A-3(c)(4) and (5).
---------------------------------------------------------------------------

Request for Comment
    <bullet> Is our proposed exemption for securities futures products 
and standardized options necessary or appropriate in the public 
interest and consistent with the protection of investors?
    <bullet> Alternatively, would it further the goal of investor 
protection to adopt Rule 10C-1 without the proposed exemption for 
securities futures products and standardized options?
3. Exemptions
a. General Approach to Exemptions
    Section 10C of the Exchange Act has four different provisions 
relating to exemptions from some or all of the requirements of Section 
10C:
    <bullet> Section 10C(a)(1) provides that our rules shall direct the 
exchanges to prohibit the listing of any equity security of an issuer, 
other than an issuer that is in one of five specified categories, that 
is not in compliance with the compensation committee member 
independence requirements of Section 10C(a)(2);
    <bullet> Section 10C(a)(4) provides that our rules shall authorize 
the exchanges to exempt a particular relationship from the independence 
requirements applicable to compensation committee members, as each 
exchange determines is appropriate, taking into consideration the size 
of the issuer and other relevant factors;
    <bullet> Section 10C(f)(3) provides that our rules shall authorize 
the exchanges to exempt any category of issuer from the requirements of 
Section 10C, taking into account the potential impact of the 
requirements on smaller reporting companies; \90\ and
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    \90\ Exchange Act Rule 12b-2 defines ``smaller reporting 
company'' as ``an issuer that is not an investment company, an 
asset-backed issuer * * *, or a majority-owned subsidiary of a 
parent that is not a smaller reporting company and that: (1) Had a 
public float of less than $75 million as of the last business day of 
its most recently completed second fiscal quarter, computed by 
multiplying the aggregate worldwide number of shares of its voting 
and non-voting common equity held by non-affiliates by the price at 
which the common equity was last sold, or the average of the bid and 
asked prices of common equity, in the principal market for the 
common equity; or (2) In the case of an initial registration 
statement under the Securities Act or Exchange Act for shares of its 
common equity, had a public float of less than $75 million as of a 
date within 30 days of the date of the filing of the registration 
statement, computed by multiplying the aggregate worldwide number of 
such shares held by non-affiliates before the registration plus, in 
the case of a Securities Act registration statement, the number of 
such shares included in the registration statement by the estimated 
public offering price of the shares; or (3) In the case of an issuer 
whose public float as calculated under paragraph (1) or (2) of this 
definition was zero, had annual revenues of less than $50 million 
during the most recently completed fiscal year for which audited 
financial statements are available.'' Whether or not an issuer is a 
smaller reporting company is determined on an annual basis.
---------------------------------------------------------------------------

    <bullet> Section 10C(g) specifically exempts controlled companies, 
as defined in Section 10C(g), from all of the requirements of Section 
10C.
    We can exempt any person, security or transaction, or any class or 
classes of person, securities or transactions, from any of the 
requirements of the Exchange Act, to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors.\91\ In addition, as noted above, Section 
10C(f)(3) provides that our rules shall authorize the exchanges to 
exempt any category of issuers from the requirements of Section 
10C.\92\ As with any listing standards, listing standards implementing 
this provision would be subject to Commission review pursuant to 
Section 19(b) of the Exchange Act. In view of this statutory approach, 
we are preliminarily of the view that it should be up to the exchanges 
to propose the categories of issuers to be exempted from Section 10C's 
requirements, subject to our review in the rule filing process. Because 
issuers frequently consult the exchanges regarding independence 
determinations and committee responsibilities, the exchanges may be in 
the best position to identify the types of common relationships that 
are likely to compromise the ability of an issuer's

[[Page 18977]]

compensation committee to make impartial determinations on executive 
compensation and the types of issuers that should be exempted from the 
other compensation committee listing requirements. Accordingly, relying 
on the exchanges to exercise their exemptive authority under our rules 
may result in more efficient and effective determinations as to the 
types of relationships and the types of issuers that merit an 
exemption, whether in whole or in part, from the requirements of 
Section 10C.
---------------------------------------------------------------------------

    \91\ See Exchange Act Section 36.
    \92\ We are proposing to implement Section 10C(c)(2)'s 
compensation consultant disclosure requirements by amending Item 
407(e)(3) of Regulation S-K. See Section II.C., below, for a 
discussion of these proposed amendments. Because Item 407 of 
Regulation S-K is not part of Section 10C, Section 10C(f)(3) would 
not permit exchanges to exempt any category of issuers from our 
proposed revisions to Item 407, if adopted. We request comment below 
on whether smaller reporting companies should be exempt from our 
proposed disclosure requirements in the event the exchanges exempt 
such companies from the listing standards required by Section 10C.
---------------------------------------------------------------------------

    We note that Section 10C of the Exchange Act makes no distinction 
between domestic and foreign issuers, other than to exempt from the 
independence requirements foreign private issuers that disclose in 
their annual reports the reasons why they do not have independent 
compensation committees. Many listed foreign private issuers maintain 
compensation committees, and other than the committee member 
independence requirements in proposed Rule 10C-1(b)(1), the proposed 
rule and rule amendments, therefore, would apply to foreign private 
issuers as well as domestic issuers.
    Because the exchanges will be permitted to propose exemptions to 
the listing standards required by Section 10C and our rules, we do not 
propose to exempt any category of issuer or any relationship from rules 
implementing Section 10C, other than the five categories of issuers not 
subject to the compensation committee independence requirements, as 
directed by Section 10C(a)(1), securities futures products and 
standardized options, as discussed above in Section II.B.2.b, and the 
equity securities of controlled companies, as directed by Section 
10C(g).
    Instead of providing exemptions in our rules, consistent with 
Section 10C(f)(3), proposed Rule 10C-1(b)(5)(i) permits the exchanges 
to exempt a category of issuers from the requirements of Section 10C, 
as each exchange determines is appropriate. In determining appropriate 
exemptions, the exchanges are required by the statute to take into 
account the potential impact of the requirements of Section 10C on 
smaller reporting issuers.\93\
---------------------------------------------------------------------------

    \93\ See Exchange Act Section 10C(f)(3)(B). Section 10C of the 
Exchange Act includes no express exemptions for smaller reporting 
companies. We note that neither NYSE nor Nasdaq currently exempts 
smaller reporting companies from their corporate governance 
requirements. Other than limited exemptions from requirements to 
have a majority independent board or three-member audit committee--
for example, NYSE Amex and the Chicago Stock Exchange permit smaller 
issuers to have a 50% independent board and a minimum of two members 
on the issuer's audit committee--we are unaware of any corporate 
governance listing standards or related exemptions that are tailored 
to smaller reporting companies. See NYSE Amex Company Guide Section 
801(h); Chicago Stock Exchange Article 22, Rules 19(a), 
19(b)(1)(C)(iii), and 21(a). Section 10C(f)(3) requires the 
exchanges to take into account the potential impact of the listing 
requirements on smaller reporting issuers when exercising the 
exemptive authority permitted by our rules. Any such exemptions, 
rule changes and any other new listing requirements would be subject 
to Commission approval through the rule submission process under 
Section 19(b) of the Exchange Act.
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Request for Comment
    <bullet> Should the Commission exempt any types of issuers, such as 
registered management investment companies, foreign private issuers or 
smaller reporting companies, from some or all of the requirements of 
Section 10C? If so, why? Instead, should the Commission, as proposed, 
defer to the exchanges for exemptions from Section 10C's requirements, 
rather than propose and adopt exemptions in our rules?
    <bullet> Should the Commission issue additional guidance to the 
exchanges as to the factors that should weigh in favor of granting 
exemptions? What concerns, if any, should the Commission be aware of in 
reviewing exemptions proposed by the exchanges?
    <bullet> Rather than exempt any category of issuers, should the 
Commission require the exchanges to give additional time to certain 
types of issuers to comply with the requirements of Section 10C, such 
as companies that have just completed initial public offerings? Or, 
should we defer to the exchanges to provide temporary exemptions, as 
proposed?
b. Issuers Not Subject to Independence Requirements
    As noted above, Exchange Act Section 10C(a)(1) provides that our 
rules shall direct the exchanges to prohibit the listing of any equity 
security of an issuer, other than an issuer that is in one of five 
specified categories, that is not in compliance with the compensation 
committee member independence requirements of Section 10C(a)(2). These 
five categories include controlled companies, limited partnerships, 
companies in bankruptcy proceedings, open-end management investment 
companies registered under the Investment Company Act \94\ and foreign 
private issuers that provide annual disclosures to shareholders of the 
reasons why the foreign private issuer does not have an independent 
compensation committee. Accordingly, proposed Rule 10C-1(b)(1)(iii) 
provides that these five categories of issuers are not subject to an 
exchange's compensation committee independence requirements and, 
therefore, an issuer that is in one of these categories cannot be 
delisted for not complying with such requirements.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------

Controlled Companies
    Section 10C(g)(2) of the Exchange Act defines ``controlled 
company'' as an issuer that is listed on an exchange and holds an 
election for the board of directors of the issuer in which more than 50 
percent of the voting power is held by an individual, a group or 
another issuer. Proposed Rule 10C-1(c)(2) would incorporate this 
definition of ``controlled company.''
Limited Partnerships
    Section 10C does not define the term ``limited partnerships.'' In 
general, a limited partnership is a form of business ownership and 
association consisting of one or more general partners who are fully 
liable for the debts and obligations of the partnership and one or more 
limited partners whose liability is limited to the amount invested.\95\ 
We do not propose to define this term in proposed Rule 10C-1(c), 
although we solicit comment on whether we should do so.
---------------------------------------------------------------------------

    \95\ See Unif. Ltd. P'ship Act Sec. Sec.  102, 303 and 404 
(2001).
---------------------------------------------------------------------------

Companies in Bankruptcy Proceedings
    Section 10C does not define the scope of ``companies in bankruptcy 
proceedings.'' This term is used in Commission rules without 
definition.\96\ We do not propose to define the scope of ``companies in 
bankruptcy proceedings,'' although we solicit comment on whether we 
should do so.
---------------------------------------------------------------------------

    \96\ See, e.g., Section 55(a)(3)(A) of the Investment Company 
Act [15 U.S.C. 80a-54(a)(3)(A)]; Item 1107(k) of Regulation AB [17 
CFR 229.1107(k)]; and Rule 457 under the Securities Act [17 CFR 
230.457].
---------------------------------------------------------------------------

Open-End Management Investment Companies
    Section 10C does not define the term ``open-end management 
investment company.'' Under the Investment Company Act, an open-end 
management investment company is an investment company, other than a 
unit investment trust or face-amount certificate company, that offers 
for sale or has outstanding any redeemable security of which it is the 
issuer.\97\ We propose to

[[Page 18978]]

define this term by referencing Section 5(a)(1) of the Investment 
Company Act.
---------------------------------------------------------------------------

    \97\ See Sections 4 and 5(a)(1) of the Investment Company Act 
[15 U.S.C. 80a-4 and 80a-5(a)(1)]. Open-end and closed-end 
management investment companies registered under the Investment 
Company Act are generally exempt from current exchange listing 
standards that require listed issuers to either have a compensation 
committee or to have independent directors determine, recommend, or 
oversee specified executive compensation matters. See, e.g., NYSE 
Listed Company Manual Section 303A.00; Nasdaq Rule 5615(a)(5); NYSE 
Arca Rule 5.3; NYSE AMEX LLC Company Guide Section 801.
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Foreign Private Issuers
    Under Section 10C(a), a foreign private issuer that provides annual 
disclosure to shareholders of the reasons why the foreign private 
issuer does not have an independent compensation committee would be 
exempt from the compensation committee independence requirements. 
Exchange Act Rule 3b-4 defines ``foreign private issuer'' as ``any 
foreign issuer other than a foreign government, except for an issuer 
that has more than 50% of its outstanding voting securities held of 
record by U.S. residents and any of the following: a majority of its 
officers and directors are citizens or residents of the United States, 
more than 50% of its assets are located in the United States, or its 
business is principally administered in the United States.'' \98\ Since 
this definition applies to all Exchange Act rules, we do not believe it 
is necessary to provide a cross-reference to Rule 3b-4 in our proposed 
rules.
---------------------------------------------------------------------------

    \98\ 17 CFR 240.3b-4(c).
---------------------------------------------------------------------------

    We note that certain foreign private issuers have a two-tier board, 
with one tier designated as the management board and the other tier 
designated as the supervisory or non-management board. In this 
circumstance, we believe that the supervisory or non-management board 
would be the body within the company best equipped to comply with the 
proposed requirements. Consistent with our approach to Rule 10A-3, we 
propose to clarify that in the case of foreign private issuers with 
two-tier boards of directors, the term ``board of directors'' means the 
supervisory or non-management board. As such, to the extent the 
supervisory or non-management board forms a separate compensation 
committee, proposed Rule 10C-1 would apply to that committee, with the 
exception of the committee member independence requirements, assuming 
the foreign private issuer discloses why it does not have an 
independent compensation committee in its annual report.
Request for Comment
    <bullet> Should we provide a definition of ``limited partnership'' 
in our proposed rules? If so, what should it be?
    <bullet> Should we define the scope of ``companies in bankruptcy 
proceedings''? If so, what should that scope be?
    <bullet> Do we need to clarify, as proposed, that in the case of 
foreign private issuers with two-tier boards of directors, the term 
``board of directors'' means the supervisory or non-management board?
c. Relationships Exempt From Independence Requirements
    As noted above, Section 10C(a)(4) of the Exchange Act provides that 
the Commission's rules shall permit an exchange to exempt a particular 
relationship from the compensation committee independence requirements, 
as such exchange deems appropriate, taking into consideration the size 
of the issuer and any other relevant factors.\99\ To implement this 
provision, proposed Rule 10C-1(b)(1)(iii)(B) would authorize the 
exchanges to establish listing standards under the Section 19(b) 
process that exempt particular relationships between members of the 
compensation committee and listed issuers that might otherwise impair 
the member's independence, taking into consideration the size of an 
issuer and any other relevant factors.
---------------------------------------------------------------------------

    \99\ See Exchange Act Section 10C(a)(4).
---------------------------------------------------------------------------

    We do not propose to exempt any particular relationships from the 
independence requirements at this time. As with the authority to exempt 
particular categories of issuers, we are preliminarily of the view that 
it should be up to the exchanges to identify and propose the types of 
particular relationships that should be exempted from the independence 
requirements.
Request for Comment
    <bullet> Should the Commission, as proposed, defer to the exchanges 
to identify and propose the types of particular relationships to be 
exempted from the independence requirements? If not, why not?
    <bullet> Should we give guidance to the exchanges on how they 
should analyze relationships to determine whether an exemption is 
warranted or not?
    <bullet> Some of the exchanges, in their existing compensation 
committee listing standards, permit a listed issuer with a compensation 
committee comprised of at least three members to include one director 
who is not independent and is not a current officer or employee, or 
immediate family member of a current officer or employee, on the 
compensation committee for no more than two years if the issuer's 
board, under exceptional and limited circumstances, determines that 
such individual's membership on the committee is required in the best 
interests of the company and its shareholders.\100\ Should our proposed 
rule expressly permit the exchanges to continue this practice by 
exempting certain relationships from the independence requirements, 
based on the conditions outlined above? Should our proposed rule 
expressly prohibit the exchanges from continuing this practice?
---------------------------------------------------------------------------

    \100\ See NYSE Amex LLC Company Guide, Section 805(b); NYSE Arca 
Rule 5.3(k)(4); Nasdaq Rule 5605(d)(3); NASDAQ OMX BX Rule 
4350(c)(3)(C); Chicago Board Options Exchange Rule 31.10(c)(3); and 
Chicago Stock Exchange Article 22, Rule 19(d)(3).
---------------------------------------------------------------------------

    <bullet> What issues should an exchange consider in proposing an 
exemption?
    <bullet> Exchange Act Rule 10A-3 requires listed issuers that avail 
themselves of an exemption from the audit committee independence 
requirements to disclose such reliance on an exemption in the listed 
issuer's proxy statement and Form 10-K or, in the case of a registered 
management investment company, Form N-CSR. Should we similarly require 
any issuer availing itself of any of the exemptions set forth directly 
in Section 10C(a)(1) of the Exchange Act or any exemption granted by 
the relevant exchange to disclose that fact in its proxy statement and 
Form 10-K or, in the case of a registered management investment 
company, Form N-CSR or another form? Under current rules, an issuer is 
required to identify any compensation committee members who are not 
independent. In light of this requirement, is a specific requirement to 
note reliance on an exemption unnecessary?
    <bullet> If a listed issuer's board of directors determines, in 
accordance with applicable listing standards, to appoint a director to 
the compensation committee who is not independent, including as a 
result of exceptional or limited or similar circumstances, should we 
require the issuer to disclose the nature of the relationship that 
makes that individual not independent and the reasons for the board of 
directors' determination, as we do with respect to audit committee 
members in Item 407(d)(2) of Regulation S-K?

C. Compensation Consultant Disclosure and Conflicts of Interest

    Section 10C(c)(2) of the Exchange Act requires that, in any proxy 
or consent solicitation material for an annual meeting (or a special 
meeting in lieu of the annual meeting), each issuer must disclose, in 
accordance with regulations of the Commission, whether:
    <bullet> The compensation committee has retained or obtained the 
advice of a compensation consultant; and
    <bullet> The work of the compensation consultant has raised any 
conflict of interest and, if so, the nature of the

[[Page 18979]]

conflict and how the conflict is being addressed.
    Item 407 of Regulation S-K currently requires Exchange Act 
registrants that are subject to the proxy rules to provide certain 
disclosures concerning their compensation committees and the use of 
compensation consultants.\101\ Item 407(e)(3)(iii) generally requires 
registrants to disclose ``any role of compensation consultants in 
determining or recommending the amount or form of executive and 
director compensation,'' including:
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    \101\ Registered investment companies are subject to separate 
proxy disclosure requirements set forth in Item 22 of Schedule 14A, 
which do not include the compensation committee disclosure described 
in Item 407(e) of Regulation S-K. See Item 7(g) of Schedule 14A. 
Consistent with our current regulations, registered investment 
companies would continue to provide disclosure under Item 22 and 
would not be subject to the amendments to Item 407(e) proposed in 
this release.
---------------------------------------------------------------------------

    <bullet> Identifying the consultants;
    <bullet> Stating whether such consultants were engaged directly by 
the compensation committee or any other person;
    <bullet> Describing the nature and scope of the consultants' 
assignment, and the material elements of any instructions given to the 
consultants under the engagement; and
    <bullet> Disclosing the aggregate fees paid to a consultant for 
advice or recommendations on the amount or form of executive and 
director compensation and the aggregate fees for additional services if 
the consultant provided both and the fees for the additional services 
exceeded $120,000 during the fiscal year.\102\
---------------------------------------------------------------------------

    \102\ See current Items 407(e)(3)(iii)(A) and (B) [17 CFR 
229.407(e)(3)(iii)(A) and 229.407(e)(3)(iii)(B)]. Fee disclosure, 
however, is not required for compensation consultants that work with 
management if the compensation committee has retained a separate 
consultant. In promulgating these requirements, we recognized that 
in this situation the compensation committee may not be relying on 
the compensation consultant used by management, and, therefore, 
potential conflicts of interest are less of a concern.
---------------------------------------------------------------------------

    The current item excludes from the disclosure requirement any role 
of compensation consultants limited to consulting on any broad-based 
plan that does not discriminate in scope, terms or operation in favor 
of executive officers or directors of the registrant and that is 
available generally to all salaried employees, or limited to providing 
information that either is not customized for a particular registrant 
or is customized based on parameters that are not developed by the 
compensation consultant, and about which the compensation consultant 
does not provide advice.\103\
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    \103\ See Proxy Disclosure Enhancements, Release No. 33-9089 
(Dec. 16, 2009) [74 FR 68334]. The Commission determined (based on 
comments it received on the rule proposal) that the provision of 
such work by a compensation consultant does not raise conflict of 
interest concerns that warrant disclosure of the consultant's 
selection, terms of engagement or fees.
---------------------------------------------------------------------------

    Given the similarities between the disclosure required by Section 
10C(c)(2) and the disclosure required by Item 407 of Regulation S-K for 
registrants subject to our proxy rules, we propose to integrate Section 
10C(c)(2)'s disclosure requirements with the existing disclosure rule, 
rather than simply ``tacking on'' the new requirements to the existing 
ones. Section 10C(c)(2) specifies that these disclosures are to be 
required ``in any proxy or consent solicitation material for an annual 
meeting of the shareholders (or a special meeting in lieu of the annual 
meeting).'' By contrast, our proxy rules currently require issuers to 
provide disclosure relating to the retention of a compensation 
consultant and fees paid to consultants only in proxy or information 
statements for annual meetings at which directors are to be elected, 
and not for all annual meetings. However, Section 10C(c)(2) also 
provides that the compensation consultant disclosures be made ``in 
accordance with regulations of the Commission.'' Because we view this 
disclosure as being most relevant in the context of a meeting at which 
directors will be elected, consistent with our current rules, we 
propose to require Section 10C(c)(2)'s compensation consultant and 
conflict of interest disclosure only for proxy and information 
statements for annual meetings (or a special meeting in lieu of an 
annual meeting) at which directors are to be elected.
    Section 10C(f) of the Exchange Act requires us to adopt rules 
directing the exchanges to prohibit the listing of any security of an 
issuer that is not in compliance with the requirements of Section 10C, 
which include Section 10C(c)(2)'s disclosure requirements. 
Consequently, we are required to extend these disclosure requirements 
to listed issuers other than controlled companies,\104\ but we are not 
required to extend them to all Exchange Act registrants subject to our 
proxy rules. However, given the similar nature of the disclosure 
required by current Item 407(e) and Section 10C(c)(2) and the apparent 
common purpose of these disclosure requirements, and to avoid any 
potential confusion that could arise from having different disclosure 
requirements on the same topic for listed issuers on one hand and for 
unlisted issuers and controlled companies on the other, we propose to 
combine the current Item 407(e) and Section 10C(c)(2) into one 
disclosure requirement that would apply to Exchange Act registrants 
subject to our proxy rules, whether listed or not, whether they are 
controlled companies or not.
---------------------------------------------------------------------------

    \104\ Section 10C(g) specifically exempts controlled companies, 
as defined in Section 10C(g), from all of the requirements of 
Section 10C. Controlled companies are subject to our existing Item 
407(e)(3) disclosure requirements.
---------------------------------------------------------------------------

    We note that the trigger for disclosure about compensation 
consultants under Section 10C(c)(2) of the Exchange Act is worded 
differently from the trigger for disclosure under the amendments to 
Item 407 that we adopted in 2009.\105\ Specifically, Section 10C(c)(2) 
states that the issuer must disclose whether the ``compensation 
committee retained or obtained the advice of a compensation 
consultant.'' By contrast, as noted above, our current rule refers to 
whether compensation consultants played ``any role'' in the 
registrant's process for determining or recommending the amount or form 
of executive or director compensation. Once disclosure is required, the 
specifics of what must be disclosed are also different. With regard to 
conflicts of interest, our current rule requires detailed disclosure 
about fees in certain circumstances in which there may be a conflict of 
interest, whereas Section 10C(c)(2) is more open-ended and requires 
disclosure of any conflict of interest, the nature of the conflict and 
how the conflict is being addressed, which our existing rules do not 
require.
---------------------------------------------------------------------------

    \105\ Id.
---------------------------------------------------------------------------

    As proposed, revised Item 407(e)(3)(iii) would have a disclosure 
trigger that is consistent with the statutory language and would, 
therefore, require the registrant to disclose whether the compensation 
committee has ``retained or obtained'' the advice of a compensation 
consultant during the registrant's last completed fiscal year. We 
anticipate that the practical effect of the proposed change would be 
minimal, as we believe it would be unusual for a consultant to play a 
role in determining or recommending the amount of executive 
compensation without the compensation committee also retaining or 
obtaining the consultant's advice. And, we believe having a consistent 
trigger for disclosure would benefit issuers and investors by reducing 
potential confusion about the disclosure requirements.
    Consistent with Section 10C(c)(2), disclosure of whether the 
compensation committee obtained or retained the advice of a 
compensation consultant during the registrant's last completed

[[Page 18980]]

fiscal year and whether the consultant's work raised any conflict of 
interest and, if so, the nature of the conflict and how it is being 
addressed, would be required without regard to the existing exceptions 
in Item 407(e)(3). For example, disclosure about the compensation 
consultant would be required even if the consultant provides only 
advice on broad-based plans or provides only non-customized benchmark 
data. In this regard, we would be broadening the scope of disclosure 
currently required by Item 407(e)(3)(iii). We believe this is 
consistent with the purposes of Section 10C(c)(2), which is to require 
disclosure about compensation consultants and any conflicts of interest 
they have in a competitively neutral fashion. We solicit comment, 
however, on whether any of the current exclusions should extend to this 
new disclosure requirement or, conversely, whether we should eliminate 
the exclusions with respect to the existing disclosure requirements. We 
also solicit comment on whether it would be preferable to retain the 
existing requirements without modification and add the new requirements 
without integrating them into the existing ones.
    The other existing disclosure requirements of Item 407(e)(3) would 
remain the same, aside from amending the fee disclosure requirements to 
link the disclosure of fees to the compensation committee ``retaining 
or obtaining the advice of a compensation consultant'' and to 
management ``retaining or obtaining the advice of a compensation 
consultant.'' \106\ The disclosure of the aggregate fees paid to a 
compensation consultant is intended to enable security holders to 
assess the potential for conflicts of interest resulting from the 
compensation consultant's financial incentive to provide services to 
the issuer in addition to executive compensation consulting services. 
We believe that this disclosure benefits investors and complements the 
required Section 10C(c)(2) disclosures, and therefore propose to retain 
this existing disclosure requirement, modified as noted above.
---------------------------------------------------------------------------

    \106\ See proposed Items 407(e)(3)(iii)(A) and (B). The fee 
disclosure requirements would continue to include the existing 
exclusions for consulting on any non-discriminatory, broad-based 
plan or providing non-customized information.
---------------------------------------------------------------------------

    To provide guidance to issuers as to whether the compensation 
committee or management has ``obtained the advice'' of a compensation 
consultant,\107\ we are proposing an instruction to clarify this 
statutory language. This instruction would provide that the phrase 
``obtained the advice'' relates to whether a compensation committee or 
management has requested or received advice from a compensation 
consultant, regardless of whether there is a formal engagement of the 
consultant or a client relationship between the compensation consultant 
and the compensation committee or management or any payment of fees to 
the consultant for its advice.
---------------------------------------------------------------------------

    \107\ See letter from Compensia.
---------------------------------------------------------------------------

    Currently, Item 407(e)(3) focuses on the conflicts of interest that 
may arise from a compensation consultant also providing other non-
executive compensation consulting services to an issuer, which may lead 
the consultant to provide executive compensation advice favored by 
management in order to obtain or retain such other assignments. Section 
10C(c)(2) is more open-ended about conflicts of interest in that it 
requires issuers to disclose whether the work of a compensation 
consultant raised ``any conflict of interest'' and, if so, the nature 
of the conflict and how the conflict is being addressed. The term 
``conflict of interest'' is not defined in Section 10C(c)(2), and our 
proposed rule would not supply a definition.
    As discussed above, Sections 10C(f) and 10C(b) of the Exchange Act 
require the Commission to adopt rules directing the exchanges to 
prohibit the listing of the securities of an issuer whose compensation 
committee does not consider the independence factors identified by the 
Commission when retaining compensation advisers. Section 10C(b)(2) 
identifies specific factors that must be included in these listing 
standards, and, as described above, we are proposing to include them in 
proposed Rule 10C-1(b)(4)(i) through (v).\108\
---------------------------------------------------------------------------

    \108\ See Section II.A.4, above, for a description of proposed 
Rule 10C-1(b)(4)(i) through (v).
---------------------------------------------------------------------------

    In light of the link between the requirement that the compensation 
committees of listed issuers consider independence factors before 
retaining compensation advisers and the disclosure requirements about 
compensation consultants and their conflicts of interest, we believe it 
would be appropriate to provide some guidance to issuers as to the 
factors that should be considered in determining whether there is a 
conflict of interest that would trigger disclosure under the proposed 
amendments. Therefore, we propose to include an instruction that 
identifies the factors set forth in proposed Rule 10C-1(b)(4)(i) 
through (v) as among the factors that issuers should consider in 
determining whether there is a conflict of interest that may need to be 
disclosed in response to our proposed amendments to Item 
407(e)(3)(iii). Although only listed issuers will be required to 
consider the five independence factors before selecting a compensation 
consultant, we believe that these five factors will be helpful to all 
Exchange Act registrants subject to the proxy rules in assessing 
potential conflicts of interest.
    We have not concluded that the presence or absence of any of these 
individual factors indicates that a compensation consultant has a 
conflict of interest that would require disclosure under the proposed 
amendments, nor have we concluded that there are no other circumstances 
or factors that might present a conflict of interest for a compensation 
consultant retained by a compensation committee. Moreover, if, under 
our rules, disclosure of fees paid to a compensation consultant is 
required, this does not reflect a conclusion that a conflict of 
interest is present.\109\ In addition to considering the factors 
enumerated above and any other factors that the exchanges may highlight 
in applicable listing standards, the issuer would need to consider the 
specific facts and circumstances relating to a consultant's engagement 
to determine whether there may be a conflict of interest that would be 
required to be disclosed under our new rules.
---------------------------------------------------------------------------

    \109\ See Proxy Disclosure Enhancements, Release No. 33-9089 
(Dec. 16, 2009) [74 FR 68334] (``Our amendments as adopted are 
intended to facilitate investors' consideration of whether, in 
providing advice, a compensation consultant may have been influenced 
by a desire to retain other engagements from the company. This does 
not reflect a conclusion that we believe that a conflict of interest 
is present when disclosure is required under our new rule, or that a 
compensation committee or a company could not reasonably conclude 
that it is appropriate to engage a consultant that provides other 
services to the company requiring disclosure under our new rule.'').
---------------------------------------------------------------------------

    If a compensation committee determines that there is a conflict of 
interest with the compensation consultant based on the relevant facts 
and circumstances, the issuer would be required to provide a clear, 
concise and understandable description of the specific conflict and how 
the issuer has addressed it. A general description of an issuer's 
policies and procedures to address conflicts of interest or the 
appearance of conflicts of interest would not suffice.
Request for Comment
    <bullet> We request comment on our proposed implementation of the 
requirements of Section 10C(c)(2). Is it appropriate to limit Section 
10C(c)(2)'s disclosure requirement to proxy and information statements 
for meetings at

[[Page 18981]]

which directors are to be elected? If not, why not? Is it appropriate 
to extend Section 10C(c)(2)'s disclosure requirement to controlled 
companies and those Exchange Act registrants that are not listed 
issuers, as proposed? If not, why not?
    <bullet> Should we amend Forms 20-F and 40-F to require foreign 
private issuers that are not subject to our proxy rules to provide 
annual disclosure of the type required by Section 10C(c)(2)? Why or why 
not?
    <bullet> Is it preferable to integrate the Section 10C(c)(2) 
disclosure requirements with the existing requirements of Item 
407(e)(3), as proposed, or, instead, should we add the new requirements 
without modifying the existing requirements of the item?
    <bullet> Should we extend any of the current exclusions under Item 
407(e)(3) to the new Section 10C(c)(2) disclosures? Conversely, should 
we eliminate altogether the exclusions under Item 407(e)(3)?
    <bullet> Are there any additional disclosures concerning conflicts 
of interest involving the activities of compensation consultants that 
would be beneficial to investors?
    <bullet> Is additional clarification necessary regarding the phrase 
``obtained the advice''? Does our proposed instruction provide adequate 
guidance to issuers on how to interpret that phrase?
    <bullet> Do the five factors in proposed Rule 10C-1(b)(4)(i) 
through (v) help issuers determine whether there is a ``conflict of 
interest''? Should we define the term ``conflict of interest''? If so, 
how? Are there other factors that should be considered in determining 
whether there is a conflict of interest? If so, should these factors 
also be identified in the proposed instruction?
    <bullet> Because a compensation committee may be reluctant or 
unable to definitively conclude whether a conflict of interest exists, 
should we also include the appearance of a conflict of interest in our 
interpretation of what constitutes a ``conflict of interest'' that must 
be disclosed under our proposed rules? Why or why not? Should we 
include potential conflicts of interest in our interpretation? Why or 
why not? We note that our 2009 amendments to Item 407(e) did not 
conclude that there was a conflict of interest posed by a consultant 
providing additional services to the issuer, only that there was a 
potential conflict of interest.
    <bullet> Should we should require fee disclosure for other types of 
potential conflicts of interest, such as revenue concentration, in 
light of Section 10C(c)(2)'s requirement that the factors considered by 
the compensation committee before engaging compensation advisers be 
``competitively neutral''? For example, to address revenue 
concentration, we could require disclosure of an adviser's fees 
received from the issuer (in percentage terms) if such fees comprise 
more than 10% of the adviser's annual revenues. Would this be 
appropriate?
    <bullet> Although a listed issuer's compensation committee is 
required to consider independence factors before selecting any 
compensation adviser, Section 10C(c)(2) requires conflict of interest 
disclosure only as to compensation consultants. Should we also extend 
this disclosure requirement to other types of advisers to the 
compensation committee, such as legal counsel? Why or why not?
    <bullet> As proposed, and consistent with current rules, Item 
407(e)(3) would apply to smaller reporting companies. Should we exempt 
such companies from these disclosure requirements? Do many smaller 
reporting companies' compensation committees retain or obtain the 
advice of compensation consultants? Should an exemption be provided if 
the exchanges exempt such companies from the listing standards required 
by Section 10C?

D. Transition and Timing

    The Act requires us to issue rules directing the exchanges to 
prohibit the listing of issuers not in compliance with Section 10C 
``not later than 360 days after'' the enactment of Section 10C, or by 
July 16, 2011.\110\ The Act did not establish a specific deadline by 
which the listing standards promulgated by the exchanges must be in 
effect. To facilitate timely implementation of the proposals, we 
propose that each exchange must provide to the Commission, no later 
than 90 days after publication of our final rule in the Federal 
Register, proposed rules or rule amendments that comply with our final 
rule. Further, each exchange would need to have final rule or rule 
amendments that comply with our final rule approved by the Commission 
no later than one year after publication of our final rule in the 
Federal Register. We request comment below on the appropriateness of 
these periods.
---------------------------------------------------------------------------

    \110\ See Section 10C(f)(1) of the Exchange Act [15 U.S.C. 78j-
3(f)(1)]. The Act was enacted on July 21, 2010. The 360th day 
following enactment would be July 16, 2011.
---------------------------------------------------------------------------

    Section 10C(c)(2) requires that each issuer disclose in any proxy 
or consent solicitation material for an annual meeting of shareholders 
(or a special meeting in lieu of the annual meeting) whether the 
issuer's compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed. Although the 
statute specifies that this disclosure would be required with respect 
to meetings occurring on or after the date that is one year after the 
enactment of Section 10C, which would be July 21, 2011, the statute 
also requires these disclosures to be ``in accordance with regulations 
of the Commission,'' and our regulations do not currently require such 
disclosures to be made. Consequently, Section 10C(c)(2)'s compensation 
consultant and conflict of interest disclosures would not be required 
for proxy or information statements filed in definitive form before the 
effective date of our rules implementing Section 10C(c)(2).
Request for Comment
    <bullet> Do the proposed implementation dates provide sufficient 
time for exchanges to propose and obtain Commission approval for new or 
amended rules to meet the requirements of our proposed rules? If not, 
what other dates would be appropriate, and why?
    <bullet> What factors should the Commission consider in determining 
these dates?
    <bullet> Should our rules also specify the dates by which listed 
issuers must comply with an exchange's new or amended rules meeting the 
requirements of our proposed rules? If so, what dates would be 
appropriate? Should there be uniformity among the exchanges with 
respect to the dates by which their listed issuers must comply with the 
exchanges' new or amended rules?
    <bullet> Would a period beyond the proposed date be necessary or 
appropriate for compliance by smaller reporting companies? Are there 
special considerations that we should take into account for foreign 
private issuers?
General Request for Comment
    We request and encourage any interested person to submit comments 
on any aspect of our proposals, other matters that might have an impact 
on the amendments, and any suggestions for additional changes. With 
respect to any comments, we note that they are of greatest assistance 
to our rulemaking initiative if accompanied by supporting data and 
analysis of the issues addressed in those comments and by alternatives 
to our proposals where appropriate.

[[Page 18982]]

III. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rule and rule amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (PRA).\111\ We are submitting the 
proposed rule and rule amendments to the Office of Management and 
Budget (OMB) for review in accordance with the PRA.\112\ The titles for 
the collection of information are:
---------------------------------------------------------------------------

    \111\ 44 U.S.C. 3501 et seq.
    \112\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-
0059);
    (2) ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-
0057); and
    (3) ``Regulation S-K'' (OMB Control No. 3235-0071).\113\
---------------------------------------------------------------------------

    \113\ The paperwork burden from Regulation S-K is imposed 
through the forms that are subject to the disclosure requirements in 
Regulation S-K and is reflected in the analysis of these forms. To 
avoid a Paperwork Reduction Act inventory reflecting duplicative 
burdens, for administrative convenience we estimate the burden 
imposed by Regulation S-K to be a total of one hour.
---------------------------------------------------------------------------

    Regulation S-K was adopted under the Securities Act and Exchange 
Act; Regulations 14A and 14C and the related schedules were adopted 
under the Exchange Act. The regulations and schedules set forth the 
disclosure requirements for proxy and information statements filed by 
companies to help investors make informed investment and voting 
decisions. The hours and costs associated with preparing, filing and 
sending the schedules constitute reporting and cost burdens imposed by 
each collection of information. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number. Compliance 
with the proposed rule and rule amendments would be mandatory. 
Responses to the information collections would not be kept confidential 
and there would be no mandatory retention period for the information 
disclosed.

B. Summary of Proposed Rule and Rule Amendments

    As discussed in more detail above, we are proposing new Rule 10C-1 
under the Exchange Act and amendments to Item 407(e) of Regulation S-K. 
Proposed Rule 10C-1 would implement the requirements of Section 10C of 
the Exchange Act, as added by Section 952 of the Act. Specifically, 
proposed Rule 10C-1 would direct the exchanges to prohibit the listing 
of any equity security of an issuer, with certain exemptions, that is 
not in compliance with Section 10C's compensation committee and 
compensation adviser requirements. We are proposing to adopt several 
limited exemptions from the requirements of proposed Rule 10C-1 and to 
authorize the exchanges to include other exemptions in their listing 
standards, pursuant to the rule filing process under Section 19(b) of 
the Exchange Act, as each exchange determines is appropriate, taking 
into consideration the size of the issuer and any other relevant 
factors.
    To implement Section 10C(c)(2), we are proposing to amend Item 
407(e)(3) of Regulation S-K to require disclosure, in any proxy or 
information statement relating to an annual meeting of shareholders (or 
a special meeting in lieu of an annual meeting) at which directors are 
to be elected, of whether the issuer's compensation committee (or 
another board committee performing similar functions) retained or 
obtained the advice of a compensation consultant; whether the work of 
the compensation consultant has raised any conflict of interest; and, 
if so, the nature of the conflict and how the conflict is being 
addressed.\114\ We also propose to combine and streamline these 
disclosure requirements with the existing disclosure requirements of 
Item 407(e)(3).
---------------------------------------------------------------------------

    \114\ Section 10C(c)(2) requires listed issuers to provide this 
disclosure; we propose to extend this disclosure requirement to non-
listed issuers as well. We have not, however, proposed to require 
comparable disclosure from foreign private issuers, as foreign 
private issuers are not subject to Exchange Act Sections 14(a) and 
14(c). See Exchange Act Rule 3a12-3.
---------------------------------------------------------------------------

C. Burden and Cost Estimates Related to the Proposed Amendments

    The proposed amendments to Item 407(e)(3) of Regulation S-K would 
require, if adopted, additional disclosure in proxy or information 
statements filed on Schedule 14A or Schedule 14C relating to an annual 
meeting of shareholders (or a special meeting in lieu of an annual 
meeting) at which directors are to be elected and would increase the 
burden hour and cost estimates for each of those forms. For purposes of 
the PRA, we estimate the total annual increase in the paperwork burden 
for all affected issuers to comply with our proposed collection of 
information requirements to be approximately 23,940 hours of in-house 
personnel time and approximately $3,192,000 for the services of outside 
professionals.\115\ These estimates include the time and the cost of 
collecting the information, preparing and reviewing disclosure, filing 
documents, and retaining records. In deriving our estimates, we assumed 
that the burden hours of the proposed disclosure requirements would be 
comparable to the burden hours related to similar disclosure 
requirements under our current rules regarding compensation 
consultants.\116\ Based on our assumptions, we estimated that the 
proposed amendments to Item 407(e)(3)(iii) of Regulation S-K would 
impose on average four incremental burden hours.\117\
---------------------------------------------------------------------------

    \115\ Our estimates represent the average burden for all 
issuers, both large and small.
    \116\ See Proxy Disclosure Enhancements, Release No. 33-9089 
(Dec. 16, 2009) [74 FR 68334] (in which the Commission estimated the 
average incremental disclosure burden for the rule amendments to 
Item 407(e)(3) relating to compensation consultants to be three 
hours).
    \117\ These four incremental burden hours would be in addition 
to the three incremental burden hours relating to our current 
compensation consultant disclosure rules. Id.
---------------------------------------------------------------------------

    The table below shows the total annual compliance burden, in hours 
and in costs, of the collection of information pursuant to the proposed 
amendments to proxy and information statements and to Regulation S-
K.\118\ The burden estimates were calculated by multiplying the 
estimated number of responses by the estimated average amount of time 
it would take an issuer to prepare and review the proposed disclosure 
requirements. The portion of the burden carried by outside 
professionals is reflected as a cost, while the portion of the burden 
carried by the issuer internally is reflected in hours. For purposes of 
the PRA, we estimate that 75% of the burden of preparation of Schedules 
14A and 14C is carried by the issuer internally and that 25% of the 
burden of preparation is carried by outside professionals retained by 
the issuer at an average cost of $400 per hour. There is no change to 
the estimated burden of the collections of information under Regulation 
S-K because the burdens that this regulation imposes are reflected in 
our burden estimates for Schedules 14A and 14C.
---------------------------------------------------------------------------

    \118\ For convenience, the estimated hour and cost burdens in 
the table have been rounded to the nearest whole number.

[[Page 18983]]



                             Table 1--Incremental Paperwork Burden Under the Proposed Amendments for Schedules 14A and 14C.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Total
                                                             Number of      Incremental     incremental      Internal        External      Professional
                                                           responses (A)   burden hours/   burden hours    company time    professional        costs
                                                               \119\         form (B)       (C)=(A)*(B)         (D)          time (E)      (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sch. 14A................................................           7,300               4          29,200          21,900           7,300      $2,920,000
Sch. 14C................................................             680               4           2,720           2,040             680        $272,000
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................           7,980  ..............          31,920          23,940           7,980      $3,192,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Request for Comment

    Pursuant  to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
---------------------------------------------------------------------------

    \119\ The number of responses reflected in the table equals the 
actual number of schedules filed with the Commission during the 2010 
fiscal year.
---------------------------------------------------------------------------

    <bullet> Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility;
    <bullet> Evaluate the accuracy of our assumptions and estimates of 
the burden of the proposed collections of information;
    <bullet> Determine whether there are ways to enhance the quality, 
utility and clarity of the information to be collected;
    <bullet> Evaluate whether there are ways to minimize the burden of 
the collections of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
    <bullet> Evaluate whether the proposed amendments will have any 
effects on any other collections of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the U.S. Securities 
and Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and send a copy to Elizabeth M. Murphy, 
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, with reference to File No. S7-13-11. 
Requests for materials submitted to OMB by the Commission with regard 
to these collections of information should be in writing, refer to File 
No. S7-13-11 and be submitted to the U.S. Securities and Exchange 
Commission, Office of Investor Education and Advocacy, 100 F Street, 
NE, Washington DC 20549-0213. Because the OMB is required to make a 
decision concerning the collections of information between 30 and 60 
days after publication of this release, your comments are best assured 
of having their full effect if the OMB receives them within 30 days of 
publication.

IV. Cost-Benefit Analysis

A. Introduction and Objectives of Proposals

    We are proposing rulemaking to implement and supplement the 
provisions of the Act relating to compensation committees and 
compensation advisers. Section 952 of the Act amends the Exchange Act 
by adding new Section 10C. Section 10C(a)(1) requires the Commission to 
adopt rules directing the exchanges to prohibit the listing of any 
equity security of an issuer, with certain exemptions, that is not in 
compliance with the independence requirements for members of the 
compensation committee. In accordance with the statute, the rules, once 
adopted, would require the exchanges to establish listing standards 
that require each member of a listed issuer's compensation committee to 
be a member of the board of directors and to be ``independent.'' The 
term ``independent'' is not defined in Section 10C(a)(1). Instead, the 
section provides that ``independent'' is to be defined by the exchanges 
after taking into consideration relevant factors, including, but not 
limited to, the source of compensation of a director, including any 
consulting, advisory or other compensatory fee paid by the issuer to 
the director, and whether the director is affiliated with the issuer, a 
subsidiary of the issuer, or an affiliate of a subsidiary of the 
issuer.
    In addition to the independence requirements set forth in Section 
10C(a), Section 10C(f) requires the Commission to adopt rules directing 
the exchanges to prohibit the listing of any security of an issuer that 
is not in compliance with the following requirements relating to 
compensation committees and compensation advisers, as set forth in 
paragraphs (b) through (e) of Section 10C:
    <bullet> Each compensation committee must have the authority, in 
its sole discretion, to retain or obtain the advice of compensation 
consultants, independent legal counsel and other advisers 
(collectively, ``compensation advisers''); \120\
---------------------------------------------------------------------------

    \120\ Exchange Act Sections 10C(c)(1)(A) and 10C(d)(1) [15 
U.S.C. 78j-3(c)(1)(A) and (d)(1)].
---------------------------------------------------------------------------

    <bullet> Before selecting any compensation adviser, the 
compensation committee must take into consideration specific factors 
identified by the Commission that affect the independence of 
compensation advisers; \121\
---------------------------------------------------------------------------

    \121\ Exchange Act Section 10C(b) [15 U.S.C. 78j-3(b)].
---------------------------------------------------------------------------

    <bullet> The compensation committee must be directly responsible 
for the appointment, compensation and oversight of the work of any 
compensation adviser; \122\ and
---------------------------------------------------------------------------

    \122\ Exchange Act Sections 10C(c)(1)(B) and 10C(d)(2) [15 
U.S.C. 78j-3(c)(1)(B) and (d)(2)].
---------------------------------------------------------------------------

    <bullet> Each listed issuer must provide appropriate funding for 
the payment of reasonable compensation, as determined by the 
compensation committee, to compensation advisers.\123\
---------------------------------------------------------------------------

    \123\ Exchange Act Section 10C(e) [15 U.S.C. 78j-3(e)].

Finally, Section 10C(c)(2) requires each listed issuer to disclose in 
any proxy or consent solicitation material for an annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting), in 
accordance with Commission regulations, whether the issuer's 
compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed.
    Under Section 10C, our rules must permit the exchanges to exempt 
particular categories of issuers from the requirements of Section 10C 
and particular relationships from the compensation committee 
independence requirements of Section 10C(a). Our rules must also 
provide for appropriate procedures for an issuer to have a reasonable 
opportunity to cure any defects that might otherwise result in the 
delisting of the issuer's securities.

[[Page 18984]]

    We are proposing new Exchange Act Rule 10C-1 to implement the 
compensation committee listing requirements of Sections 10C(a)-(g) of 
the Exchange Act. Proposed Rule 10C-1 closely tracks the statutory 
requirements of Section 10C. To implement Section 10C(c)(2) of the 
Exchange Act, we are proposing rule amendments to Regulation S-K to 
require disclosure, in any proxy or information statement relating to 
an annual meeting of shareholders at which directors are to be elected 
(or special meeting in lieu of the annual meeting), of whether the 
issuer's compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed. In connection 
with these amendments, we also propose to revise the current disclosure 
requirements relating to the retention of compensation consultants by 
providing a uniform trigger for when compensation consultant 
disclosures will be required. In addition, our proposed amendments 
would eliminate the existing exception from the requirement to identify 
compensation consultants and describe their engagements for those cases 
in which a consultant's role is limited to consulting on a broad-based 
plan or providing information that either is not customized for a 
particular registrant 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.
    The Commission is sensitive to the costs and benefits imposed by 
the proposed rule and rule amendments. The discussion below focuses on 
the costs and benefits of the proposals made by the Commission to 
implement the Act within its permitted discretion, rather than the 
costs and benefits of the Act itself.

B. Benefits

    The proposed rulemaking is intended to implement and supplement the 
requirements of Section 10C of the Exchange Act as set forth in Section 
952 of the Act.
Required Listing Standards
    Under proposed Rule 10C-1, the exchanges would be directed to adopt 
listing standards that would apply to any committee of the board that 
oversees executive compensation, whether or not such committee performs 
other functions or is formally designated as a ``compensation 
committee.'' We believe this aspect of the rule proposal may help 
achieve the objectives of the Act by providing clarity and reducing any 
uncertainty about the application of Section 10C. Moreover, this may 
benefit investors because it would limit the ability of listed issuers 
to circumvent the compensation committee independence requirements 
under Section 10C by delegating oversight of executive compensation to 
a board committee that is not formally designated as the ``compensation 
committee,'' but performs that function.
    As directed by Section 10C, proposed Rule 10C-1 directs the 
exchanges to develop a definition of independence applicable to 
compensation committee members after considering the relevant factors 
set forth in Exchange Act Section 10C(a)(3). We do not propose to 
specify any additional factors that the exchanges must consider in 
determining independence requirements for compensation committee 
members. We believe that permitting exchanges greater latitude in 
crafting the required independence standards, subject to Commission 
review pursuant to Section 19(b) of the Exchange Act, may result in 
more efficient and effective determinations as to what types of 
relationships should preclude a finding of independence with respect to 
membership on a board committee that oversees executive compensation. 
Because issuers frequently consult the exchanges regarding independence 
determinations, the exchanges may be in the best position to identify 
the types of common relationships that are likely to compromise the 
ability of an issuer's compensation committee to make impartial 
determinations on executive compensation.
Disclosure Amendments
    Our proposed amendments to Item 407(e)(3) of Regulation S-K would 
require the specific disclosures mandated by Section 10C(c)(2). While 
no other disclosures are proposed to be required, our proposed 
amendments would extend the disclosure requirement of Section 10C(c)(2) 
to issuers, whether listed or not, that file proxy or information 
statements relating to an election of directors. Although controlled 
companies are exempt from the requirements of Section 10C, we propose 
to extend the disclosure requirements of Section 10C(c)(2) to 
controlled companies in order to have uniform compensation consultant 
disclosure requirements for all issuers subject to our proxy rules. 
Under the proposed amendments, in addition to the disclosure currently 
required by Item 407(e)(3), issuers would be required to disclose 
whether the compensation committee has retained or obtained the advice 
of a compensation consultant, whether the work of the compensation 
consultant has raised any conflict of interest, and, if so, the nature 
of the conflict and how the conflict is being addressed.
    We believe that requiring these disclosures of issuers subject to 
the proxy rules will benefit investors by providing them with easily 
understandable and uniform disclosure regarding compensation consultant 
conflicts of interest. Under our existing disclosure rules, these 
issuers must already discuss the selection of compensation consultants 
and disclose the nature and scope of their assignment, including any 
material instructions or directions governing their performance under 
the engagement. We believe the proposed amendment would complement 
these existing disclosure requirements by increasing the transparency 
of issuers' policies regarding compensation consultant conflicts of 
interest. To the extent that the relationships between an issuer and a 
compensation consultant are more transparent under the proposed 
amendments, investors should benefit through their ability to better 
monitor the process of recommending and determining executive and 
director pay. The increased disclosure should improve the ability of 
investors to monitor performance of directors responsible for 
overseeing compensation consultants, thus enabling them to make more 
informed voting and investment decisions.
    We also propose to harmonize current Item 407(e)(3)(iii)'s 
disclosure triggers with the requirements of Section 10C(c)(2). Our 
goal in proposing uniform disclosure triggers is to prevent the 
adoption of potentially duplicative or overlapping disclosure 
requirements; we also believe that providing a uniform standard for 
when these disclosures will be required will benefit issuers by 
allowing them to streamline their procedures for ensuring proper 
disclosure compliance.
    The proposed amendments also include an instruction that provides 
guidance to issuers as to whether the compensation committee has 
``obtained the advice'' of a compensation consultant. This instruction 
should benefit issuers by providing clarity and reducing any 
uncertainty about whether disclosure under the new rules is required. 
In addition, we propose to include an instruction that identifies the 
factors set forth in proposed Rule 10C-

[[Page 18985]]

1(b)(4)(i) through (v) as among the factors to be considered in 
determining whether there is a conflict of interest that may need to be 
disclosed in response to our proposed amendments to Item 
407(e)(3)(iii). Although only listed issuers will be required to 
consider the five independence factors before selecting a compensation 
consultant, we believe that identifying these five factors as factors 
that should be considered in determining whether conflict of interest 
disclosure is required will aid all Exchange Act registrants subject to 
the proxy rules in complying with their proxy disclosure obligations.

C. Costs

Required Listing Standards
    Under our proposed rules, exchanges would be required to adopt 
independence requirements that apply to members of listed issuer 
compensation committees or committees performing equivalent functions, 
but not to directors who oversee executive compensation matters in the 
absence of such committees. Some exchange listing standards currently 
require issuers to form compensation or equivalent committees; others 
require independent directors to oversee specified compensation matters 
but do not require the formation of a compensation or equivalent 
committee. Exchanges that do not require the formation of a 
compensation or equivalent committee could, on their own initiative, 
determine to apply the same independence standards to directors who 
oversee compensation matters in the absence of a compensation committee 
as they do to formally organized compensation committees. In the event 
they do not, however, issuers could seek to list on such exchanges in 
order to avoid having to comply with the compensation committee 
independence standards that would apply at the exchanges that require 
the formation of a compensation or equivalent committee. Further, to 
the extent exchanges compete for listings, they may have an incentive 
to propose standards that issuers may find less onerous. This could 
result in costs to exchanges to the extent they lose issuer listings, 
as well as costs to issuers to the extent they choose to alter their 
existing committee structure to avoid having to comply with the new 
standards.
    Our decision not to exempt additional categories of issuers, beyond 
those specified in Section 10C(a)(1), from the independence 
requirements of our proposed rule and instead to rely on the various 
exchanges to propose additional exemptions for appropriate categories 
of issuers, may also result in certain direct or indirect costs. For 
example, the exchanges will bear the direct cost of evaluating whether 
additional exemptions would be appropriate and including such 
exemptions in the rule filings that they are required to make in order 
to comply with our proposed rule.
Disclosure Amendments
    As noted above, our proposal implements the requirements of Section 
10C(c)(2). In addition, although not required by Section 10C(c)(2), we 
propose to require all issuers subject to our proxy rules, rather than 
only listed issuers, to provide the disclosures called for by Section 
10C(c)(2). We also propose to combine and streamline the new disclosure 
requirements with the existing compensation consultant disclosure 
requirements. Specifically, we propose to provide a uniform trigger for 
when compensation consultant disclosures will be required and eliminate 
the existing exception from the requirement to identify compensation 
consultants and describe their engagements for those cases in which a 
consultant's role is limited to consulting on a broad-based plan or 
providing non-customized benchmark compensation information.
    As a result, controlled companies and non-listed issuers will incur 
costs in disclosing all compensation consultant engagements and in 
determining and disclosing whether the work of any compensation 
consultant has raised any conflict of interest, the nature of the 
conflict, and how the conflict is being addressed. These costs, which 
would not be required to be incurred by Section 10C(c)(2), may be 
mitigated to an extent because our existing rules already require 
issuers subject to our proxy rules to disclose, with limited 
exceptions, any role of compensation consultants in determining or 
recommending the amount or form of executive and director compensation. 
As a result, these issuers will already have developed procedures for 
collecting and analyzing information about the use of compensation 
consultants.
    For purposes of the PRA, we estimate the aggregate annual cost of 
the proposed compensation consultant and related conflicts of interest 
disclosure to be approximately 23,940 hours of company personnel time 
and approximately $3,192,000 for the services of outside professionals. 
However, this amount includes the costs associated with the disclosure 
requirements of Section 10C(c)(2) of the Exchange Act, as well as our 
proposed extension of the disclosure requirement to controlled 
companies and non-listed issuers and the revisions proposed for the 
purpose of integrating the new disclosure requirements with existing 
Item 407(e)(3). As a result, a portion of the reporting costs are 
attributable to the requirements of the Act rather than to our proposed 
amendments to Item 407.
    We have not proposed that compensation committees of non-listed 
issuers be required to consider the independence of compensation 
consultants or other compensation advisers before they are selected; 
nonetheless, in light of our proposal that issuers subject to our proxy 
rules will be required to identify and disclose how they manage any 
conflicts of interest raised by the work of compensation consultants 
that serve as advisers to the compensation committee, non-listed 
issuers may incur additional costs to develop more formalized selection 
processes than they otherwise would have absent such a disclosure 
requirement. For example, to prepare for the disclosure requirement, at 
the time any compensation consultant is selected, compensation 
committees of non-listed issuers may devote additional time and 
resources to analyzing and assessing the independence of the 
compensation consultant and addressing and resolving potential 
conflicts of interest. Although our proposed disclosure requirement 
will not preclude compensation committees from selecting the 
compensation consultant of their choosing, such committees may elect to 
engage new, alternative or additional compensation advisers after 
considering what disclosure might be required under our proposed rules. 
Such decisions could result in additional costs to issuers, including 
costs related to termination of existing services and search and 
engagement costs to retain new advisers. In addition, costs may 
increase if an issuer decides to engage multiple compensation 
consultants for services that had previously been provided by a single 
consultant.
    As a mitigating factor, our proposed rules would require issuers to 
provide narrative disclosure regarding the management of conflicts of 
interest. To the extent a non-listed issuer's compensation committee 
determines to retain a compensation consultant, despite potential 
conflicts of interest, this provision provides the issuer a means to 
communicate to investors both the reasons why the committee believes 
that retaining the consultant and managing the potential conflict of 
interest is the best approach and the methods employed by the issuer to 
manage or address the potential conflict.

[[Page 18986]]

D. Request for Comment

    We request data to quantify the costs and the value of the benefits 
described above. We seek estimates of these costs and benefits, as well 
as any costs and benefits not already defined, that may result from the 
adoption of these proposed amendments. We also request qualitative 
feedback on the nature of the benefits and costs described above and 
any benefits and costs we may have overlooked.

V. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act requires us, when adopting 
rules under the Exchange Act, to consider the impact that any new rule 
would have on competition.\124\ In addition, Section 23(a)(2) prohibits 
us from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
---------------------------------------------------------------------------

    \124\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Section 2(b) of the Securities Act \125\ and Section 3(f) of the 
Exchange Act \126\ require us, when engaging in rulemaking where we are 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 77b(b).
    \126\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Our proposed rule and rule amendments would implement the 
requirements of Section 952 of the Act, which added Section 10C to the 
Exchange Act. Among other provisions, Section 10C requires us to direct 
the exchanges to prohibit the listing of any equity security of an 
issuer that is not in compliance with Section 10C's compensation 
committee and compensation adviser requirements. It is possible that 
some listed issuers might find the proposed requirements too onerous 
and seek to list on foreign exchanges or other markets to avoid 
compliance. This could cause U.S. exchanges to lose trading volume. We 
do not believe our proposed rules are likely to have this effect, as 
issuers listed on U.S. exchanges must, for the most part, already 
provide for executive compensation oversight by independent 
directors.\127\ It is also possible that, in competing for listings, 
the exchanges could adopt different definitions of independence for 
compensation committee members, which could affect an issuer's decision 
about where to list its securities.
---------------------------------------------------------------------------

    \127\ See, e.g., NYSE Listed Company Manual Section 303A.05(a) 
and Nasdaq Rule 5605(d).
---------------------------------------------------------------------------

    Section 10C also requires disclosure from listed issuers, other 
than controlled companies, as to their use and oversight of 
compensation consultants. We propose to require companies subject to 
our proxy rules, including controlled companies, to provide this 
disclosure, whether listed or not. We believe this expansion of the 
statutory disclosure requirement will promote uniform disclosure on 
these topics among reporting companies and may allow investors to 
better understand the process by which compensation committees select 
compensation consultants and manage conflicts of interest.
    Our proposals may promote efficiency and competitiveness of the 
U.S. capital markets by increasing the transparency of executive 
compensation decision-making processes and by improving the ability of 
investors to make informed voting and investment decisions, which may 
encourage more efficient capital formation. The proposals also may 
affect competition among compensation consultants. By requiring 
disclosure of the existence and management of potential compensation 
consultant conflicts of interest, our proposed rules may lead 
compensation committees to engage in more thorough and deliberative 
analyses of adviser independence. If this results in the selection of 
compensation advisers that are more independent or impartial than might 
otherwise be chosen, this could in turn promote more efficient 
executive compensation determinations. The proposed disclosure also 
could incent consultants to compete on the basis of their policies that 
serve to minimize any potential conflicts of interest or, to the extent 
other consultants are available, lead compensation committees to avoid 
hiring consultants perceived as having a conflict of interest.
    We request comment on whether the proposed amendments, if adopted, 
would promote efficiency, competition and capital formation or have an 
impact or burden on competition. Commentators are requested to provide 
empirical data and other factual support for their views, to the extent 
possible.

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\128\ we solicit data to determine whether the 
proposed rule amendments constitute a ``major'' rule. Under SBREFA, a 
rule is considered ``major'' where, if adopted, it results or is likely 
to result in:
---------------------------------------------------------------------------

    \128\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

    <bullet> An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
    <bullet> A major increase in costs or prices for consumers or 
individual industries; or
    <bullet> Significant adverse effects on competition, investment or 
innovation.
    Commentators should provide empirical data on (1) The potential 
annual effect on the economy; (2) any increase in costs or prices for 
consumers or individual industries; and (3) any potential effect on 
competition, investment or innovation.

VII. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis (IRFA) has been 
prepared in accordance with the Regulatory Flexibility Act.\129\ This 
IRFA involves proposals to direct the national securities exchanges and 
national securities associations to prohibit the listing of an equity 
security of an issuer that is not in compliance with several 
requirements relating to the issuer's compensation committee, and to 
revise the disclosure requirements of Regulation S-K Item 407 related 
to compensation consultants.
---------------------------------------------------------------------------

    \129\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Proposed Action

    We are proposing amendments to implement Section 10C of the 
Exchange Act as added by Section 952 of the Act. The proposals would 
direct the exchanges to prohibit the listing of equity securities of 
any issuer that does not comply with Section 10C's compensation 
committee and compensation adviser requirements. Our proposed 
amendments would also require issuers to provide certain disclosures 
regarding their use of compensation consultants and management of 
compensation consultant conflicts of interest.

B. Legal Basis

    We are proposing the amendments pursuant to Sections 6, 7, 10, and 
19(a) of the Securities Act; and Sections 10C, 12, 13, 14, 15(d), 23(a) 
and 36 of the Exchange Act.

C. Small Entities Subject to the Proposed Action

    The proposals would affect exchanges that list equity securities 
and issuers subject to our proxy rules. The Regulatory Flexibility Act 
defines ``small

[[Page 18987]]

entity'' to mean ``small business,'' ``small organization,'' or ``small 
governmental jurisdiction.'' \130\ The Commission's rules define 
``small business'' and ``small organization'' for purposes of the 
Regulatory Flexibility Act for each of the types of entities regulated 
by the Commission. Exchange Act Rule 0-10(e) provides that the term 
``small business'' or ``small organization,'' when referring to an 
exchange, means any exchange that: (1) Has been exempted from the 
reporting requirements of Exchange Act Rule 601; \131\ and (2) is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization, as defined under Exchange Act 
Rule 0-10. No exchanges are small entities because none meet these 
criteria. Securities Act Rule 157 \132\ and Exchange Act Rule 0-10(a) 
\133\ define a company, other than an investment company, to be a 
``small business'' or ``small organization'' if it had total assets of 
$5 million or less on the last day of its most recent fiscal year. We 
estimate that there are approximately 1,207 registrants, other than 
registered investment companies, that may be considered small entities. 
The proposed amendments would affect small entities that have a class 
of securities that are registered under Section 12 of the Exchange Act. 
An investment company, including a business development company, is 
considered to be a ``small business'' if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\134\ We believe that the amendments to Item 407(e) of 
Regulation S-K would affect small entities that are business 
development companies that have a class of securities registered under 
Section 12 of the Exchange Act. We estimate that there are 
approximately 31 business development companies that may be considered 
small entities.
---------------------------------------------------------------------------

    \130\ 5 U.S.C. 601(6).
    \131\ 17 CFR 242.601.
    \132\ 17 CFR 230.157.
    \133\ 17 CFR 240.0-10(a).
    \134\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping and Other Compliance Requirements

    Under the proposals, the exchanges will be directed to prohibit the 
listing of an equity security of an issuer that does not comply with 
Section 10C's compensation committee and compensation adviser 
requirements. These requirements relate to: the independence of 
compensation committee members; the authority of the compensation 
committee to engage compensation advisers; the compensation committee's 
responsibility for considering factors that affect the independence of 
compensation advisers prior to their selection; the compensation 
committee's responsibility for the appointment, compensation, and 
oversight of the work of compensation advisers; funding for advisers 
engaged by the compensation committee; and the opportunity to cure 
defects.
    The proposals would also require additional disclosure about the 
use of compensation consultants and conflicts of interest. Large and 
small entities would be subject to the same disclosure requirements. 
The proposals would require small entities subject to the proxy rules 
to provide disclosure of whether:
    <bullet> The compensation committee has retained or obtained the 
advice of a compensation consultant; and
    <bullet> The work of a compensation consultant has raised any 
conflict of interest and, if so, the nature of the conflict and how the 
conflict is being addressed.
    The proposals will impose additional costs on small entities in 
order to comply with the new listing standards and to collect, record 
and report the disclosures that we propose to require. Our existing 
disclosure rules require small entities to disclose information 
regarding any compensation consultant that plays a role in determining 
or recommending the amount and form of executive and director 
compensation in proxy and information statements. The additional 
information concerning compensation consultants that would be required 
under the proposals should be readily available to these small 
entities. Also, we believe that many small entities do not use the 
services of a compensation consultant, which would significantly 
minimize the impact of the reporting and recordkeeping requirements 
under the proposals on small entities. In addition, we believe that the 
impact of the proposals on small entities will be lessened because most 
aspects of the proposals apply only to listed issuers, and the 
quantitative listing standards applicable to issuers listing securities 
on an exchange, such as market capitalization, minimum revenue, and 
shareholder equity requirements, will serve to limit the number of 
small entities that would be affected.

E. Duplicative, Overlapping or Conflicting Federal Rules

    We believe the proposed amendments would not duplicate, overlap, or 
conflict with other Federal rules.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed disclosure amendments, we considered the following 
alternatives:
    <bullet> Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rules for small entities;
    <bullet> Using performance rather than design standards;
    <bullet> Exempting small entities from all or part of the 
requirements; and
    <bullet> Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities.
    We believe that our proposed amendments would require clear and 
straightforward disclosure of the use of compensation consultants and 
the management of compensation consultant conflicts of interest. We 
believe that our proposed rules will promote consistent disclosure 
among all companies without creating a significant new burden for small 
entities.
    The proposals attempt to clarify, consolidate and simplify the 
compliance and reporting requirements for all entities, including small 
entities, by including instructions to the amendments to clarify the 
circumstances under which disclosure is required. We have used a mix of 
design and performance standards in developing the proposed disclosure 
requirements. Based on our past experience, we believe the amendments 
will be more useful to investors if there are specific disclosure 
requirements; however, we have not proposed specific procedures or 
arrangements that an issuer must develop to comply with the proposed 
amendments. The additional disclosure requirements are intended to 
result in more comprehensive and clear disclosure.
    Although we preliminarily believe that an exemption for small 
entities from coverage of the proposals would not be appropriate at 
this time, we seek comment on whether we should exempt small entities 
from any of the proposed disclosure requirements or scale the proposed 
amendments to reflect the characteristics of small entities and the 
needs of their investors. Further, as

[[Page 18988]]

directed by Exchange Act Section 10C, our proposed rules would permit 
the exchanges to exempt particular categories of issuers from the 
requirements of Section 10C and particular relationships from the 
compensation committee membership requirements of Section 10C(a), 
taking into account the potential impact of the requirements on smaller 
reporting companies. To the extent exchanges adopt such exemptions for 
small entities, the compliance burden would be reduced.
    At this time, we do not believe that different compliance methods 
or timetables for small entities would be appropriate. The proposals 
are intended to improve the accountability for and transparency of 
executive compensation determinations. The specific disclosure 
requirements in the proposals will promote consistent disclosure among 
all issuers, including small entities. Separate compliance requirements 
or timetables for small entities could interfere with achieving the 
goals of the statute and our proposals. Nevertheless, we solicit 
comment on whether different compliance requirements or timetables for 
small entities would be appropriate, and consistent with the purposes 
of Section 952 of the Dodd-Frank Act.

G. Solicitation of Comments

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding:
    <bullet> How the proposed amendments can achieve their objective 
while lowering the burden on small entities;
    <bullet> The number of small entities that may be affected by the 
proposed amendments;
    <bullet> Whether small entities should be exempt from the rules;
    <bullet> The existence or nature of the potential impact of the 
proposed amendments on small entities discussed in the analysis; and
    <bullet> How to quantify the impact of the proposed amendments.
    Respondents are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rule amendments are adopted, and 
will be placed in the same public file as comments on the proposed 
amendments themselves.

VIII. Statutory Authority and Text of the Proposed Amendments

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 6, 7, 10, and 19(a) of the 
Securities Act and Sections 10C, 12, 13, 14, 15(d), 23(a), and 36 of 
the Exchange Act.

List of Subjects in 17 CFR Parts 229 and 240

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II, of the Code of Federal Regulations as 
follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    1. The authority citation for part 229 is revised to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 
80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.

    2. In Sec.  229.407, revise paragraph (e)(3)(iii) and add 
instructions 1 and 2 to item 407(e)(3) to read as follows:


Sec.  229.407  (Item 407) Corporate governance.

* * * * *
    (e) * * *
    (3) * * *
    (iii) Whether the compensation committee (or another board 
committee performing equivalent functions) retained or obtained the 
advice of a compensation consultant during the registrant's last 
completed fiscal year, identifying such consultants, stating whether 
such consultants were engaged directly by the compensation committee 
(or another board committee performing equivalent functions), 
describing the nature and scope of the consultant's assignment and the 
material elements of the instructions or directions given to the 
consultant with respect to the performance of the consultant's duties 
under the engagement, and discussing whether the work of the consultant 
has raised any conflict of interest and, if so, the nature of the 
conflict and how the conflict is being addressed:
    (A) If the compensation committee (or another board committee 
performing equivalent functions) retained or obtained the advice of a 
compensation consultant and the consultant's services were not limited 
to consulting on any broad-based plan that does not discriminate in 
scope, terms, or operation, in favor of executive officers or directors 
of the registrant, and that is available generally to all salaried 
employees, or providing information that either is not customized for a 
particular registrant 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, and the compensation 
consultant or its affiliates also provided additional services to the 
registrant or its affiliates in an amount in excess of $120,000 during 
the registrant's last completed fiscal year, then disclose the 
aggregate fees for determining or recommending the amount or form of 
executive and director compensation and the aggregate fees for such 
additional services. Disclose whether the decision to engage the 
compensation consultant or its affiliates for these other services was 
made, or recommended, by management, and whether the compensation 
committee (or another board committee performing equivalent functions) 
or the board approved such other services of the compensation 
consultant or its affiliates.
    (B) If the compensation committee (or another board committee 
performing equivalent functions) has not retained or obtained the 
advice of a compensation consultant, but management has retained or 
obtained the advice of a compensation consultant and the consultant's 
services were not limited to consulting on any broad-based plan that 
does not discriminate in scope, terms, or operation, in favor of 
executive officers or directors of the registrant, and that is 
available generally to all salaried employees, or providing information 
that either is not customized for a particular registrant 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, and such compensation consultant or its 
affiliates has provided additional services to the registrant in an 
amount in excess of $120,000 during the registrant's last completed 
fiscal year, then disclose the aggregate fees for determining or 
recommending the amount or form of executive and director compensation 
and the aggregate fees for any additional services provided

[[Page 18989]]

by the compensation consultant or its affiliates.
    Instruction 1 to Item 407(e)(3). For purposes of this paragraph, a 
compensation committee (or another board committee performing 
equivalent functions) or management has ``obtained the advice'' of a 
compensation consultant if such committee or management has requested 
or received advice from a compensation consultant, regardless of 
whether there is a formal engagement of the consultant or a client 
relationship between the compensation consultant and the compensation 
committee or management or any payment of fees to the consultant for 
its advice.
    Instruction 2 to Item 407(e)(3). For purposes of this paragraph, 
the factors outlined in Sec.  240.10C-1(b)(4)(i) through (v) of this 
chapter are among the factors that should be considered in determining 
whether a conflict of interest exists.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    3. The general authority citation for part 240 is revised to read 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78j-3, 78k, 78k-1,78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 
78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, and 
12 U.S.C. 5221(e)(3), unless otherwise noted.
* * * * *
    4. Add an undesignated center heading following Sec.  240.10A-3 to 
read as follows:

Requirements Under Section 10C

    5. Add Sec.  240.10C-1 to read as follows:


Sec.  240.10C-1  Listing standards relating to compensation committees.

    (a) Pursuant to section 10C(a) of the Act (15 U.S.C. 78j-3(a)) and 
section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1900):
    (1) National securities exchanges. The rules of each national 
securities exchange registered pursuant to section 6 of the Act (15 
U.S.C. 78f), to the extent such national securities exchange lists 
equity securities, must, in accordance with the provisions of this 
section, prohibit the initial or continued listing of any equity 
security of an issuer that is not in compliance with the requirements 
of any portion of paragraph (b) or (c) of this section.
    (2) National securities associations. The rules of each national 
securities association registered pursuant to section 15A of the Act 
(15 U.S.C. 78o-3), to the extent such national securities association 
lists equity securities in an automated inter-dealer quotation system, 
must, in accordance with the provisions of this section, prohibit the 
initial or continued listing in an automated inter-dealer quotation 
system of any equity security of an issuer that is not in compliance 
with the requirements of any portion of paragraph (b) or (c) of this 
section.
    (3) Opportunity to cure defects. The rules required by paragraphs 
(a)(1) and (a)(2) of this section must provide for appropriate 
procedures for a listed issuer to have a reasonable opportunity to cure 
any defects that would be the basis for a prohibition under paragraph 
(a) of this section, before the imposition of such prohibition. Such 
rules may provide that if a member of a compensation committee ceases 
to be independent in accordance with the requirements of this section 
for reasons outside the member's reasonable control, that person, with 
notice by the issuer to the applicable national securities exchange or 
national securities association, may remain a compensation committee 
member of the listed issuer until the earlier of the next annual 
shareholders meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent.
    (4) Implementation. (i) Each national securities exchange and 
national securities association that lists equity securities must 
provide to the Commission, no later than 90 days after publication of 
this section in the Federal Register, proposed rules or rule amendments 
that comply with this section. Each submission must include, in 
addition to any other information required under section 19(b) of the 
Act (15 U.S.C. 78s(b)) and the rules thereunder, a review of whether 
and how existing listing standards satisfy the requirements of this 
rule, a discussion of the consideration of factors relevant to 
compensation committee independence conducted by the national 
securities exchange or national securities association, and the 
definition of independence applicable to compensation committee members 
that the national securities exchange or national securities 
association proposes to adopt in light of such review.
    (ii) Each national securities exchange and national securities 
association that lists equity securities must have rules or rule 
amendments that comply with this section approved by the Commission no 
later than one year after publication of this section in the Federal 
Register.
    (b) Required standards. The requirements of this section apply to 
the compensation committees of listed issuers. If a listed issuer has a 
committee of the board performing functions typically performed by a 
compensation committee, including oversight of executive compensation, 
then such committee, even if it is not designated as a compensation 
committee or performs other functions, shall be fully subject to the 
requirements of this section.
    (1) Independence. (i) Each member of the compensation committee 
must be a member of the board of directors of the listed issuer, and 
must otherwise be independent.
    (ii) Independence requirements. In determining independence 
requirements for members of compensation committees, the national 
securities exchanges and national securities associations shall 
consider relevant factors, including, but not limited to:
    (A) The source of compensation of a member of the board of 
directors of an issuer, including any consulting, advisory or other 
compensatory fee paid by the issuer to such member of the board of 
directors; and
    (B) Whether a member of the board of directors of an issuer is 
affiliated with the issuer, a subsidiary of the issuer or an affiliate 
of a subsidiary of the issuer.
    (iii) Exemptions from the independence requirements. (A) The 
listing of equity securities of the following categories of listed 
issuers are not subject to the requirements of paragraph (b)(1) of this 
section:
    (1) Controlled companies;
    (2) Limited partnerships;
    (3) Companies in bankruptcy proceedings;
    (4) Open-end management investment companies registered under the 
Investment Company Act of 1940; and
    (5) Any foreign private issuer that discloses in its annual report 
the reasons that the foreign private issuer does not have an 
independent compensation committee.
    (B) In addition to the issuer exemptions set forth in paragraph 
(b)(1)(iii)(A) of this section, a national securities exchange or a 
national securities association, pursuant to section 19(b) of the Act 
(15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the 
requirements of paragraph (b)(1) of this section a particular 
relationship with respect to members of the compensation committee, as 
each national securities exchange or national securities

[[Page 18990]]

association determines is appropriate, taking into consideration the 
size of an issuer and any other relevant factors.
    (2) Authority to engage compensation consultants, independent legal 
counsel and other compensation advisers. The compensation committee of 
a listed issuer, in its capacity as a committee of the board of 
directors, may, in its sole discretion, retain or obtain the advice of 
a compensation consultant, independent legal counsel or other adviser. 
The compensation committee shall be directly responsible for the 
appointment, compensation and oversight of the work of any compensation 
consultant, independent legal counsel and other adviser to the 
compensation committee. Nothing in this paragraph (b) shall be 
construed:
    (i) 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
    (ii) To affect the ability or obligation of a compensation 
committee to exercise its own judgment in fulfillment of the duties of 
the compensation committee.
    (3) Funding. Each listed issuer must provide for appropriate 
funding, as determined by the compensation committee, in its capacity 
as a committee of the board of directors, for payment of reasonable 
compensation to a compensation consultant, independent legal counsel or 
any other adviser to the compensation committee.
    (4) Independence of compensation consultants and other advisers. 
The compensation committee of a listed issuer may select a compensation 
consultant, legal counsel, or other adviser to the compensation 
committee only after taking into consideration the following factors, 
as well as any other factors identified by the relevant national 
securities exchange or national securities association in its listing 
standards:
    (i) The provision of other services to the issuer by the person 
that employs the compensation consultant, legal counsel or other 
adviser;
    (ii) The amount of fees received from the issuer by the person that 
employs the compensation consultant, legal counsel or other adviser, as 
a percentage of the total revenue of the person that employs the 
compensation consultant, legal counsel, or other adviser;
    (iii) The policies and procedures of the person that employs the 
compensation consultant, legal counsel or other adviser that are 
designed to prevent conflicts of interest;
    (iv) Any business or personal relationship of the compensation 
consultant, legal counsel, or other adviser with a member of the 
compensation committee; and
    (v) Any stock of the issuer owned by the compensation consultant, 
legal counsel or other adviser.
    (5) General exemptions. (i) The national securities exchanges and 
national securities associations, pursuant to section 19(b) of the Act 
(15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the 
requirements of this section certain categories of issuers, as the 
national securities exchange or national securities association 
determines is appropriate, taking into consideration the potential 
impact of such requirements on smaller reporting issuers.
    (ii) The requirements of this section shall not apply to any 
controlled company.
    (iii) The listing of a security futures product cleared by a 
clearing agency that is registered pursuant to section 17A of the Act 
(15 U.S.C. 78q-1) or that is exempt from the registration requirements 
of section 17A(b)(7)(A) (15 U.S.C. 78q-1(b)(7)(A)) is not subject to 
the requirements of this section.
    (iv) The listing of a standardized option, as defined in Sec.  
240.9b-1(a)(4), issued by a clearing agency that is registered pursuant 
to section 17A of the Act (15 U.S.C. 78q-1) is not subject to the 
requirements of this section.
    (c) Definitions. Unless the context otherwise requires, all terms 
used in this section have the same meaning as in the Act. In addition, 
unless the context otherwise requires, the following definitions apply 
for purposes of this section:
    (1) In the case of foreign private issuers with a two-tier board 
system, the term board of directors means the supervisory or non-
management board.
    (2) The term controlled company means an issuer:
    (i) That is listed on a national securities exchange or by a 
national securities association; and
    (ii) That holds an election for the board of directors of the 
issuer in which more than 50 percent of the voting power is held by an 
individual, a group or another issuer.
    (3) The terms listed and listing refer to equity securities listed 
on a national securities exchange or listed in an automated inter-
dealer quotation system of a national securities association or to 
issuers of such securities.
    (4) The term open-end management investment company means an open-
end company, as defined by Section 5(a)(1) of the Investment Company 
Act of 1940 (15 U.S.C. 80a-5(a)(1)), that is registered under that Act.

    Dated: March 30, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-7948 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P


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