Document ID: SEC-2016-0581-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq Stock Market, LLC
Posted Date: 2016-04-05T04:00Z

[Federal Register Volume 81, Number 65 (Tuesday, April 5, 2016)]
[Notices]
[Pages 19678-19680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07688]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77481; File No. SR-NASDAQ-2016-013]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Require Listed Companies to 
Publicly Disclose Compensation or Other Payments by Third Parties to 
Board of Director's Members or Nominees

March 30, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 15, 2016, The Nasdaq Stock Market LLC (``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to require listed companies to publicly 
disclose compensation or other payments by third parties to any nominee 
for director or sitting director in connection with their candidacy for 
or service on the companies' Board of Directors.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these

[[Page 19679]]

statements may be examined at the places specified in Item IV below. 
The Exchange has prepared summaries, set forth in sections A, B, and C 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq Rules require listed companies to make public disclosure in 
several areas. For example, a listed company is required to publicly 
disclose material information that would reasonably be expected to 
affect the value of its securities or influence investors' decisions as 
well as when non-independent directors serve on a committee that 
generally requires only independent directors, such as for a controlled 
company or under exceptional and limited circumstances.\3\ A listed 
company is also required to file required periodic reports with the 
Commission.\4\ A principal purpose of these disclosure requirements is 
to protect investors and ensure these investors have necessary 
information to make informed investment and voting decisions.
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    \3\ See Rules 5250(b)(1), 5615(c)(2), 5605(c)(2)(B), 
5605(d)(2)(B) and 5605(e)(3).
    \4\ See Rule 5250(c).
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    In recent years, Nasdaq has observed one area where investors may 
not have complete information. This is when third parties compensate 
directors in connection with their candidacy for and/or service on 
company Boards of Directors. This third-party compensation, which may 
not be publicly disclosed, arises when a shareholder privately offers 
to compensate nominee directors in connection with those nominees' 
candidacy or service as directors. These arrangements vary but may 
include compensating directors based on achieving benchmarks such as an 
increase in share price over a fixed term.\5\
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    \5\ The Commission notes that various provisions of the federal 
securities laws already require the disclosure of compensation 
arrangements between third parties and directors or director 
nominees. See, e.g., Items 401(a) and 402(a)(2) of Regulation S-K; 
Item 5(b) of Schedule 14A; and Item 5.02(d) of Form 8-K.
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    Nasdaq believes these undisclosed compensation arrangements 
potentially raise several concerns, including that they may lead to 
conflicts of interest among directors and call into question the 
directors' ability to satisfy their fiduciary duties. These 
arrangements may also tend to promote a focus on short-term results at 
the expense of long-term value creation. Nasdaq believes that enhancing 
transparency around third-party board compensation would help address 
these concerns and would benefit investors by making available 
information potentially relevant to investment and voting decisions. 
Nasdaq further believes that the proposed disclosure would not create 
meaningful burdens on directors or those making these payments nor on 
the companies required to make the disclosure.
    Accordingly, Nasdaq is proposing to adopt Rule 5250(c) to require 
listed companies \6\ to publicly disclose on or through the companies' 
Web site or proxy statement for the next annual meeting at which 
directors are elected (or, if they do not file proxy statements, in 
Form 10-K or Form 20-F),\7\ all agreements and arrangements between any 
director or nominee and any person or entity (other than the company) 
that provide for compensation or other payment in connection with that 
person's candidacy or service as a director.\8\
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    \6\ Pursuant to Listing Rule 5615(a)(3), a foreign private 
issuer may follow home country practice in lieu of the requirements 
of the proposed rule.
    \7\ This disclosure method is consistent with the method under 
Listing Rule 5605(d)(2)(B) for disclosure of the appointment of a 
non-independent compensation committee member under exceptional and 
limited circumstances. A Company that provides disclosure under 
Commission rules--including the requirement in Item 5.02(d)(2) of 
Form 8-K to provide ``a brief description of any arrangement or 
understanding between the new director and any other persons, naming 
such persons, pursuant to which such director was selected as a 
director''--would not have to make separate disclosure under the 
proposed rule if the disclosure identifies the material terms of the 
agreement or arrangement and the Commission disclosure document 
(i.e., Form 8-K) is posted on the company's Web site. However, such 
an agreement or arrangement is subject to the continuous disclosure 
requirements of the proposed rule on an annual basis.
    \8\ The proposal is intended to apply to agreements and 
arrangements whether or not the right to nominate a director legally 
belongs to the third party. See IM 5605-7 (Independent Director 
Oversight of Director Nominations).
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    A listed company's obligation under the proposed rule to publicly 
disclose such arrangements is continuous and will terminate at the 
earlier of the resignation of the director subject to the arrangement 
or one year following the termination of the arrangement. The proposed 
rule is intended to be construed broadly and apply to both compensation 
and other forms of payment such as health insurance premiums that are 
made in connection with a person's candidacy or service as a director. 
Further, at a minimum, the disclosure should identify the parties to 
and the material terms of the agreement or arrangement. To allow listed 
companies affected by the proposed rule a transition period, the rule 
will be effective on June 30, 2016.\9\
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    \9\ The Commission notes that the proposed effective date of 
June 30, 2016 is contingent on Commission approval of the rule 
proposal under Section 19(b) of the Act by that date.
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    In recognition of circumstances that do not raise the concerns 
noted above or where such disclosure may be duplicative, the proposed 
rule would not apply to agreements and arrangements that existed before 
the nominee's candidacy and have been otherwise publicly disclosed, for 
example, pursuant to Items 402(a)(2) or 402(k) of Regulation S-K or in 
a director's biographical summary included in periodic reports filed 
with the Commission. An example of an agreement or arrangement falling 
under this exception is a director or a nominee for director being 
employed by a private equity fund where employees are expected to and 
routinely serve on the boards of the fund's portfolio companies and 
their remuneration is not materially affected by such service. If such 
a director or a nominee's remuneration is materially increased in 
connection with such person's candidacy or service as a director of the 
company, only the difference between the new and the previous level of 
compensation needs to be disclosed under the proposed rule.
    Additionally, the proposed rule would not apply to agreements and 
arrangements that relate only to reimbursement of expenses incurred in 
connection with candidacy as a director, whether or not such 
reimbursement arrangement has been publicly disclosed. Finally, 
Commission Rule 14a-12(c) subjects persons soliciting proxies in 
opposition to companies' proxy solicitation to certain disclosure 
requirements of Schedule 14A of the Act. The proposed rule relieves the 
company from the initial disclosure requirements of the proposed rule 
where an agreement or arrangement for a director or a nominee has been 
disclosed under Item 5(b) of Schedule 14A of the Act. However, such an 
agreement or arrangement is subject to the continuous disclosure 
requirements of the proposed rule on an annual basis.
    Further, in recognition that a company, despite reasonable efforts, 
may not be able to identify all such agreements and arrangements, the 
proposed rule provides that a company shall not be deficient with the 
proposed requirement if it has undertaken reasonable efforts to 
identify all such agreements and arrangements, including by asking each 
director or nominee in a

[[Page 19680]]

manner designed to allow timely disclosure, and upon discovery of a 
non-disclosed arrangement, promptly makes the required disclosure by 
filing a Form 8-K or 6-K, where required by Commission rules, or by 
issuing a press release.
    In cases where a company is considered deficient, the company must 
provide a plan to regain compliance. Consistent with deficiencies from 
most other rules that allow a company to submit a plan to regain 
compliance,\10\ Nasdaq proposes to allow companies deficient under the 
proposed rule 45 calendar days to submit a plan sufficient to satisfy 
Nasdaq staff that the company has adopted processes and procedures 
designed to identify and disclose relevant agreements and arrangements 
in the future. If the company does not do so, it would be issued a 
Staff Delisting Determination, which the company could appeal to a 
Hearings Panel pursuant to Rule 5815.\11\
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    \10\ Pursuant to Rule 5810(c)(2)(A), a company is provided 45 
days to submit a plan to regain compliance with Rules 5620(c) 
(Quorum), 5630 (Review of Related Party Transactions), 5635 
(Shareholder Approval), 5250(c)(3) (Auditor Registration), 5255(a) 
(Direct Registration Program), 5610 (Code of Conduct), 5615(a)(4)(E) 
(Quorum of Limited Partnerships), 5615(a)(4)(G) (Related Party 
Transactions of Limited Partnerships), and 5640 (Voting Rights). A 
company is generally provided 60 days to submit a plan to regain 
compliance with the requirement to timely file periodic reports 
contained in Rule 5250(c)(1).
    \11\ Separate from this proposed rule change, Nasdaq is 
surveying interested parties as to whether Nasdaq should propose 
additional requirements surrounding directors and candidates that 
receive third party payments, including whether such directors 
should be prohibited from being considered independent under Nasdaq 
rules or prohibited from serving on the board altogether. Nasdaq has 
made no decision about whether to propose additional rules. If 
Nasdaq does determine to propose additional rules, any proposal 
would be subject to a separate rule filing. Listing Rule 5605(a)(2) 
excludes from the definition of Independent Director any 
``individual having a relationship which, in the opinion of the 
Company's board of directors, would interfere with the exercise of 
independent judgment in carrying out the responsibilities of a 
director.''
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. The proposal accomplishes these objectives by enhancing 
transparency around third party compensation and payments made in 
connection with board service. The Exchange believes such disclosure 
has several benefits: It would provide information to investors to help 
them make meaningful investing and voting decisions. It would also 
address potential concerns that undisclosed third party compensation 
arrangements may lead to conflicts of interest among directors and call 
into question their ability to satisfy fiduciary duties.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. The proposed rule 
to require listed companies to disclose third party compensation and 
payments in connection with board service is intended to provide 
meaningful information to investors and to address potential concerns 
with undisclosed compensation schemes without creating unnecessary 
burdens on directors or those making the payments.
    Further, the proposed rule change is intended to promote 
transparency and protect investors and is not being adopted for 
competitive purposes. To the extent a competitor marketplace believes 
that the proposed rule change places them at a competitive 
disadvantage, it may file with the Commission a proposed rule change to 
adopt the same or similar rule.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2016-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-013. This 
file number should be included on the subject line if email is used. To 
help the Commission 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/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2016-013 and should 
be submitted on or before April 26, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07688 Filed 4-4-16; 8:45 am]
 BILLING CODE 8011-01-P