18966 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

1 15 U.S.C. 78a et seq. 

2 17 CFR 229.407. 

3 17 CFR 229.10 et seq. 

failure to comply with a collection of 

information subject to the requirements of 

the Paperwork Reduction Act unless that 

collection of information displays a current 

valid OMB Control Number. The OMB 

Control Number for this information 

collection is 2120–0056. Public reporting for 

this collection of information is estimated to 

be approximately 5 minutes per response, 

including the time for reviewing instructions, 

completing and reviewing the collection of 

information. All responses to this collection 

of information are mandatory. Comments 

concerning the accuracy of this burden and 

suggestions for reducing the burden should 

be directed to the FAA at: 800 Independence 

Ave. SW., Washington, DC 20591, Attn: 

Information Collection Clearance Officer, 

AES–200. 

Related Information 

(h) Refer to MCAI European Aviation 

Safety Agency (EASA) AD No.: 2011–0042, 

dated March 11, 2011; and Costruzioni 

Aeronautiche Tecnam Service Bulletin No. 

SB 036–CS, 1st Edition, Rev 1, dated 

December 15, 2010, for related information. 

For service information related to this AD, 

contact Costruzioni Aeronautiche TECNAM 

Airworthiness Office, Via Maiorise—81043 

Capua (CE) Italy; telephone: +39 0823 

620134; fax: +39 0823 622899; e-mail: 

m.oliva@tecnam.com, 

p.violetti@tecnam.com; Internet: http:// 

www.tecnam.com. You may review copies of 

the referenced service information at the 

FAA, Small Airplane Directorate, 901 Locust, 

Kansas City, Missouri 64106. For information 

on the availability of this material at the 

FAA, call 816–329–4148. 

Issued in Kansas City, Missouri, on March 

29, 2011. 

Earl Lawrence, 

Manager, Small Airplane Directorate, Aircraft 

Certification Service. 

[FR Doc. 2011–8070 Filed 4–5–11; 8:45 am] 

BILLING CODE 4910–13–P 

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. 

SUMMARY: We are proposing a new rule 

and rule amendments to implement the 

provisions of Section 952 of the DoddFrank 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 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); 

• Send an e-mail to rulecomments@sec.gov; or 

• Use the Federal Rulemaking ePortal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• 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

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 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18967 

4Public Law 111–203, 124 Stat. 1900 (2010). 

5A ‘‘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. 

6A ‘‘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. 

7See 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. 

8See Exchange Act Sections 10C(a) and (f). 

9Exchange Act Sections 10C(c)(1)(A) and 

10C(d)(1). 

10Exchange Act Section 10C(b). 

11Exchange Act Sections 10C(c)(1)(B) and 

10C(d)(2). 

12Exchange Act Section 10C(e). 

13Section 10C(g) of the Exchange Act exempts 

controlled companies from the requirements of 

Section 10C. 

14See Item 407(e) of Regulation S–K; Proxy 

Disclosure Enhancements, Release No. 33–9089 

(Dec. 16, 2009) [74 FR 68334]. 

15See 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). 

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 DoddFrank 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

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: 

• 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

• 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

• The compensation committee must 

be directly responsible for the 

appointment, compensation and 

oversight of the work of any 

compensation adviser; 11 and 

• Each listed issuer must provide 

appropriate funding for the payment of 

reasonable compensation, as determined 

by the compensation committee, to 

compensation advisers.12

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

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 


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18968 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

16 Id. 

17By 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.’’ 

18There 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. 

19See 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. 

20See 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). 

21NYSE 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. 

22NASDAQ 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. 

23To 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. 

24See NYSE Listed Company Manual Section 

303A.01; Nasdaq Rule 5605(b)(1); NYSE AMEX LLC 

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. 

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 compensationrelated 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

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

Request for Comment 

• Should the exchanges be required 

to only list issuers with compensation 

committees? 

• 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? 

• 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 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18969 

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). 

25See NYSE Listed Company Manual Section 

303A.02(b)(i); Nasdaq Rule 5605(a)(2)(A). 

26See NYSE Listed Company Manual Section 

303A.02(b)(i); Nasdaq Rule 5605(a)(2)(C). 

27See NYSE Listed Company Manual Section 

303A.02(b)(ii); Nasdaq Rule 5605(a)(2)(B). 

28See NYSE Listed Company Manual Section 

303A.02(b)(iii); Nasdaq Rule 5605(a)(2)(F). 

29See NYSE Listed Company Manual Section 

303A.02(b)(v); Nasdaq Rule 5605(a)(2)(D). 

30See NYSE Listed Company Manual Section 

303A.02(b)(iv); Nasdaq Rule 5605(a)(2)(E). 

31See Commentary to NYSE Listed Company 

Manual Section 303A.02(a); Nasdaq Rule 5605; 

Nasdaq IM–5605. 

32See NYSE Rule 303A.02.a 

33See Nasdaq Rule 4200(a)(15). 

34See, e.g., NYSE Arca Rule 5.3(k)(1) or NYSE 

AMEX LLC Company Guide Section 803.A.02. 

35 Item 407(a) of Regulation S–K. 

36 Id. 

37 Id. 

38As 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)]. 

39See 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 * * * .’’). 

40A 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). 

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

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

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

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 ‘‘NonEmployee Director’’ and ‘‘outside 

director’’ are similar to the exchanges’ 

definitions of director independence. 

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 


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41Public Law 107–204, 116 Stat. 745 (2002). 

42 15 U.S.C. 78j–1(m)(1). 

43See 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. 

44The 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.’’ 

45A filing would be required even if an exchange 

finds that its existing rules satisfy the requirements 

of proposed Rule 10C–1. 

46To 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/dftitle-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. 

47One 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. 

48See letter from Frederic W. Cook & Co., Inc. 

(stating that venture capital and private equity firms 

‘‘will often have a more demanding pay-forperformance orientation than any other category of 

investor’’). 

49See, e.g., letters from Davis Polk & Wardwell 

LLP, American Bar Association, Compensia and 

Frederic W. Cook & Co., Inc. 

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 SarbanesOxley 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

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. 

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

The exchanges may determine that, 

even though affiliated directors are not 

allowed to serve on audit committees, 


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50See 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’’). 

51See Exchange Act Section 10C(c)(1). 

52See Exchange Act Section 10C(d)(1). 

53See Exchange Act Section 10C(e). 

54See 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 

Continued 

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. 

Request for Comment 

• 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? 

• 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? 

• 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? 

• 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

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 


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from the company’s internal counsel or regular 

outside counsel. It also does not require an audit 

committee to retain independent counsel.’’). 

55See 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.’’). 

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

57Although 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 multiservice firm ‘‘other services’’ conflicts and boutique 

firm ‘‘revenue concentration’’ conflicts, is consistent 

with this assumption. 

58See, e.g., letters from Mercer, Meridian 

Compensation Partners, LLC, Pay Governance LLC 

and Frederick W. Cook & Co., Inc. 

59See, e.g., letter from Pay Governance LLC. 

60See letter from Towers Watson. 

61See, e.g., letters from Frederick W. Cook & Co., 

Inc and Mercer. 

62See, e.g., letters from Mercer and Pay 

Governance LLC. 

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 inhouse counsel or outside counsel 

retained by the issuer or management. 

Request for Comment 

• 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? 

• 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? 

• 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? 

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: 

• The provision of other services to 

the issuer by the person that employs 

the compensation consultant, legal 

counsel or other adviser; 

• The amount of fees received from 

the issuer by the person that employs 

the compensation consultant, legal 

counsel or other adviser, as a percentage 

of the total revenue of the person that 

employs the compensation consultant, 

legal counsel, or other adviser; 

• The policies and procedures of the 

person that employs the compensation 

consultant, legal counsel or other 

adviser that are designed to prevent 

conflicts of interest; 

• Any business or personal 

relationship of the compensation 

consultant, legal counsel, or other 

adviser with a member of the 

compensation committee; and 

• Any stock of the issuer owned by 

the compensation consultant, legal 

counsel or other adviser. 

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. 


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63See Exchange Act Section 10C(f)(2). 64See, 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. 

65See Standards Relating to Listed Company 

Audit Committees, Release No. 33–8220 (Apr. 9, 

2003). 

Request for Comment 

• 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? 

• 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? 

• 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? 

• 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? 

• 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? 

• 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%? 

• 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? 

• Should we clarify what is covered 

by ‘‘provision of other services’’ in 

proposed Rule 10C–1(b)(4)(i)? 

• 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? 

• 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? 

• Would the proposed requirements 

have any unintended effects on the 

compensation committee or its process 

to select a compensation adviser? If so, 

please explain. 

• 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. 

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. 

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 


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18974 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

66See Exchange Act Rule 10A–3(a)(3) [17 CFR 

240.10A–3(a)(3)]. 

67The 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. 

68Exchange 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). 

69Exchanges 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. 

70Under 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. 

71Regarding the National Futures Association 

(NFA), see note 6, above, and note 73, below. 

72See note 6, above. 

73Similarly, 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. 

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

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 

• 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? 

• 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? 

• 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? 

• 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). 

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. 

Request for Comment 

• Should we exempt certain 

exchanges or associations from Section 

10C of the Exchange Act? If so, why, 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18975 

74See http://www.house.gov/apps/list/press/ 

financialsvcs_dem/press_072809.shtml. 

75Although 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. 

76See 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]. 

78Based 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. 

79See 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.’’). 

80Exchange Act Section 3(a)(11). 

81Public Law 106–554, 114 Stat. 2763 (2000). 

82 15 U.S.C. 78f. 

83 15 U.S.C. 78o–3(a). 

84Exchange 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. 

and which exchanges or associations 

should we exempt and why? 

• 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

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. 

Request for Comment 

• 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 narrowbased 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 


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18976 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

86See 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. 

87See 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’).’’). 

88However, the clearing agency may receive a 

clearing fee from its members. 

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

90Exchange 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 nonaffiliates 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. 

91See Exchange Act Section 36. 

92We 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. 

adopted rules to provide comparable 

regulatory treatment for standardized 

options.86

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 selfregulatory 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

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. 

Request for Comment 

• 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? 

• 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: 

• 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); 

• 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; 

• 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 

• 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 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18977 

93See 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. 

94 15 U.S.C. 80a–1 et seq. 

95See Unif. Ltd. P’ship Act §§ 102, 303 and 404 

(2001). 

96See, 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]. 

97See 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 

Continued 

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. 

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

Request for Comment 

• 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? 

• 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? 

• 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. 

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. 

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. 

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 


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18978 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

Company Manual Section 303A.00; Nasdaq Rule 

5615(a)(5); NYSE Arca Rule 5.3; NYSE AMEX LLC 

Company Guide Section 801. 98 17 CFR 240.3b–4(c). 

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

100See 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). 

define this term by referencing Section 

5(a)(1) of the Investment Company Act. 

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. 

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 nonmanagement board. As such, to the 

extent the supervisory or nonmanagement 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 

• Should we provide a definition of 

‘‘limited partnership’’ in our proposed 

rules? If so, what should it be? 

• Should we define the scope of 

‘‘companies in bankruptcy 

proceedings’’? If so, what should that 

scope be? 

• 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. 

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 

• 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? 

• Should we give guidance to the 

exchanges on how they should analyze 

relationships to determine whether an 

exemption is warranted or not? 

• 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? 

• What issues should an exchange 

consider in proposing an exemption? 

• 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? 

• 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: 

• The compensation committee has 

retained or obtained the advice of a 

compensation consultant; and 

• The work of the compensation 

consultant has raised any conflict of 

interest and, if so, the nature of the 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18979 

101Registered 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. 

102See 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. 

103See 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. 

104Section 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. 105 Id. 

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: 

• Identifying the consultants; 

• Stating whether such consultants 

were engaged directly by the 

compensation committee or any other 

person; 

• Describing the nature and scope of 

the consultants’ assignment, and the 

material elements of any instructions 

given to the consultants under the 

engagement; and 

• 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

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

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. 

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. 

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 


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18980 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

106See 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. 

107See letter from Compensia. 

108See Section II.A.4, above, for a description of 

proposed Rule 10C–1(b)(4)(i) through (v). 

109See 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.’’). 

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. 

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. 

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

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. 

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 

• 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 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18981 

110See 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. 

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? 

• 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? 

• 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? 

• 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)? 

• Are there any additional disclosures 

concerning conflicts of interest 

involving the activities of compensation 

consultants that would be beneficial to 

investors? 

• 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? 

• 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? 

• 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. 

• 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? 

• 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? 

• 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. 

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 

• 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? 

• What factors should the 

Commission consider in determining 

these dates? 

• 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? 

• 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. 


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18982 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

111 44 U.S.C. 3501 et seq. 

112 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

113The 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. 

114Section 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. 

115Our estimates represent the average burden for 

all issuers, both large and small. 

116See 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). 

117These four incremental burden hours would 

be in addition to the three incremental burden 

hours relating to our current compensation 

consultant disclosure rules. Id. 

118For convenience, the estimated hour and cost 

burdens in the table have been rounded to the 

nearest whole number. 

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: 

(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

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). 

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 inhouse 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

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. 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 18983 

119The number of responses reflected in the table 

equals the actual number of schedules filed with 

the Commission during the 2010 fiscal year. 

120Exchange Act Sections 10C(c)(1)(A) and 

10C(d)(1) [15 U.S.C. 78j–3(c)(1)(A) and (d)(1)]. 

121Exchange Act Section 10C(b) [15 U.S.C. 78j– 

3(b)]. 

122Exchange Act Sections 10C(c)(1)(B) and 

10C(d)(2) [15 U.S.C. 78j–3(c)(1)(B) and (d)(2)]. 

123Exchange Act Section 10C(e) [15 U.S.C. 78j– 

3(e)]. 

TABLE 1—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS FOR SCHEDULES 14A AND 14C. 

Number of 

responses 

(A) 119

Incremental 

burden hours/ 

form 

(B) 

Total 

incremental 

burden hours 

(C)=(A)*(B) 

Internal 

company time 

(D) 

External 

professional 

time 

(E) 

Professional 

costs 

(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: 

• 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; 

• Evaluate the accuracy of our 

assumptions and estimates of the 

burden of the proposed collections of 

information; 

• Determine whether there are ways 

to enhance the quality, utility and 

clarity of the information to be 

collected; 

• 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 

• 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: 

• 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

• 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

• The compensation committee must 

be directly responsible for the 

appointment, compensation and 

oversight of the work of any 

compensation adviser; 122 and 

• Each listed issuer must provide 

appropriate funding for the payment of 

reasonable compensation, as determined 

by the compensation committee, to 

compensation advisers.123

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. 


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18984 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

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– 


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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 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. 


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

125 15 U.S.C. 77b(b). 

126 15 U.S.C. 78c(f). 

127See, e.g., NYSE Listed Company Manual 

Section 303A.05(a) and Nasdaq Rule 5605(d). 128 5 U.S.C. 801 et seq. 129 5 U.S.C. 603. 

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. 

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. 

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. 

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 decisionmaking 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: 

• An annual effect on the economy of 

$100 million or more (either in the form 

of an increase or a decrease); 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• 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. 

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 


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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). 

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. 

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: 

• The compensation committee has 

retained or obtained the advice of a 

compensation consultant; and 

• 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: 

• Clarifying, consolidating or 

simplifying compliance and reporting 

requirements under the rules for small 

entities; 

• Using performance rather than 

design standards; 

• Exempting small entities from all or 

part of the requirements; and 

• 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 


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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 DoddFrank 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: 

• How the proposed amendments can 

achieve their objective while lowering 

the burden on small entities; 

• The number of small entities that 

may be affected by the proposed 

amendments; 

• Whether small entities should be 

exempt from the rules; 

• The existence or nature of the 

potential impact of the proposed 

amendments on small entities discussed 

in the analysis; and 

• 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, 80a8, 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 § 229.407, revise paragraph 

(e)(3)(iii) and add instructions 1 and 2 

to item 407(e)(3) to read as follows: 

§ 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 


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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 § 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 § 240.10A–3 to read 

as follows: 

Requirements Under Section 10C 

5. Add § 240.10C–1 to read as follows: 

§ 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. 78o3), 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 


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18990 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Proposed Rules 

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 § 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 openend 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 

DEPARTMENT OF COMMERCE 

Patent and Trademark Office 

37 CFR Part 1 

[Docket No.: PTO–P–2011–0014] 

RIN 0651–AC56 

Revision of Patent Term Extension and 

Adjustment Provisions Relating to 

Appellate Review and Information 

Disclosure Statements 

AGENCY: United States Patent and 

Trademark Office, Commerce. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The United States Patent and 

Trademark Office (Office) is proposing 

to revise the patent term adjustment and 

extension provisions of the rules of 

practice in patent cases. The patent term 

adjustment provisions of the American 

Inventors Protection Act of 1999 (AIPA) 

and the patent term extension 

provisions of the Uruguay Round 

Agreements Act (URAA) each provide 

for patent term extension or adjustment 

if the issuance of the patent was delayed 

due to appellate review by the Board of 

Patent Appeals and Interferences (BPAI) 

or by a Federal court and the patent was 

issued pursuant to or under a decision 

in the review reversing an adverse 

determination of patentability. The 

Office is proposing to change the rules 

of practice to indicate that in most 

circumstances an examiner reopening 

prosecution of the application after a 

notice of appeal has been filed will be 

considered a decision in the review 

reversing an adverse determination of 

patentability for purposes of patent term 

adjustment or extension purposes. 

Therefore, in such situations, patentees 

would be entitled to patent term 

extension or adjustment. In addition, 

the AIPA provides for a reduction of any 

patent term adjustment if the applicant 

failed to engage in reasonable efforts to 

conclude prosecution of the application. 

The Office is also proposing to change 

the rules of practice pertaining to the 

reduction of patent term adjustment for 

applicant delays to exclude information 

disclosure statements resulting from the 

citation of information by a foreign 

patent office in a counterpart 


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