Document ID: SEC-2012-1682-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-10-15T04:00Z

[Federal Register Volume 77, Number 199 (Monday, October 15, 2012)]
[Notices]
[Pages 62563-62572]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25281]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68013; File No. SR-NASDAQ-2012-109]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Modify the Listing Rules 
for Compensation Committees To Comply With Rule 10C-1 Under the 
Exchange Act and Make Other Related Changes

October 9, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on September 25, 2012, The NASDAQ Stock Market LLC 
(``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. 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 the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify the listing rules for compensation 
committees to comply with Rule 10C-1 under the Exchange Act and make 
other related changes. The text of the proposed rule change is 
available on Nasdaq's Web site at http://nasdaq.cchwallstreet.com, at 
Nasdaq's principal office, and at the Commission's Public Reference 
Room.
    Nasdaq will implement the proposed rule upon approval. Proposed 
Nasdaq Listing Rule 5605(d)(3), which requires compensation committees 
to have the specific responsibilities and authority necessary to comply 
with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act, 
shall be effective immediately.\3\ To the extent a Company does not 
have a compensation committee, the provisions of this rule shall apply 
to the Independent Directors who determine, or recommend to the board 
for determination, the compensation of the chief executive officer and 
all other Executive Officers of the Company.
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    \3\ The Commission notes that this portion of the proposed rule, 
proposed Nasdaq Listing Rule 5605(d)(3), will be effective upon 
approval by the Commission.
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    Companies must comply with the remaining provisions of the amended 
listing rules by the earlier of: (1) Their second annual meeting held 
after the date of approval of this proposal; or (2) December 31, 2014. 
Until a Company is required to comply with the amended listed rules, it 
must continue to comply with Nasdaq's existing listing rules.

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

    In its filing with the Commission, Nasdaq 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 statements may be examined at the places specified

[[Page 62564]]

in Item IV below. Nasdaq 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
    Section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the ``Dodd-Frank Act'') \4\ added Section 10C 
to the Exchange Act.\5\ Section 10C required the Commission to direct 
the national securities exchanges, including Nasdaq, and national 
securities associations to prohibit the listing of any equity security 
of an issuer, with certain exemptions, that does not comply with 
Section 10C's requirements relating to compensation committees and 
advisers. To effect this requirement, the Commission has adopted Rule 
10C-1 under the Exchange Act, which became effective on July 27, 2012. 
Rule 10C-1 requires each national securities exchange and national 
securities association to provide to the Commission, no later than 
September 25, 2012, proposed rules or rule amendments that comply with 
the requirements of Rule 10C-1.\6\
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    \4\ Public Law 111-203, 124 Stat. 1376 (2010).
    \5\ 15 U.S.C. 78j-3.
    \6\ See 17 CFR 240.10C-1(a)(4)(i).
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    Rule 10C-1 generally requires that:
     Each member of the compensation committee of a listed 
issuer must be an independent member of the board of directors;
     in determining independence requirements for compensation 
committee members, exchanges must consider relevant factors, including, 
but not limited to:
     The source of compensation of a member, including any 
consulting, advisory or other compensatory fee paid by the issuer to 
such member; and
     whether the member is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the issuer;
     the compensation committee must have the authority to 
retain or obtain the advice of a compensation consultant, independent 
legal counsel or other compensation adviser;
     the listed issuer must provide for appropriate funding, as 
determined by the compensation committee, for payment of reasonable 
compensation to such compensation advisers;
     the compensation committee may select such compensation 
advisers only after taking into consideration six independence factors 
that are enumerated in Rule 10C-1, as well as any other factors 
identified by an exchange; and
     certain categories of issuers, including, but not limited 
to, controlled companies and smaller reporting companies, are generally 
exempt from all of Rule 10C-1, while other categories of issuers, 
including, but not limited to, foreign private issuers that provide 
certain disclosures, are specifically exempt from the requirement to 
have a fully independent compensation committee.
General Overview of Nasdaq's Proposals
    Nasdaq is proposing to modify its compensation-related listing 
rules, as required by Rule 10C-1. Generally, Nasdaq's proposals provide 
that:
     Companies \7\ must have a compensation committee 
consisting of at least two members, each of whom must be an Independent 
Director \8\ as defined under Nasdaq's current listing rules;
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    \7\ ``Company'' means ``the issuer of a security listed or 
applying to list on Nasdaq.'' Nasdaq Listing Rule 5005(a)(6).
    \8\ For a discussion of the definition of the term ``Independent 
Director,'' see the section entitled ``Compensation Committee 
Composition--General Independence Definition'' below. 
Notwithstanding any of the proposed changes, and consistent with 
Nasdaq's existing listing rules, a Company's board has the 
responsibility to make an affirmative determination that no 
Independent Director has a relationship that, in the opinion of the 
board, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director.
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     compensation committee members must not accept directly or 
indirectly any consulting, advisory or other compensatory fee, other 
than for board service, from a Company or any subsidiary thereof;
     in determining whether a director is eligible to serve on 
a compensation committee, a Company's board must consider whether the 
director is affiliated with the Company, a subsidiary of the Company or 
an affiliate of a subsidiary of the Company to determine whether such 
affiliation would impair the director's judgment as a member of the 
compensation committee;
     Companies may continue to rely on Nasdaq's existing 
exception that allows certain non-Independent Directors to serve on a 
compensation committee under exceptional and limited circumstances;
     if a Company fails to comply with the compensation 
committee composition requirements in certain circumstances, it may 
rely on a cure period;
     Companies must adopt a formal, written compensation 
committee charter that must specify the compensation committee 
responsibilities and authority in Rule 10C-1 relating to the: (i) 
Authority to retain compensation consultants, independent legal counsel 
and other compensation advisers; (ii) authority to fund such advisers; 
and (iii) responsibility to consider certain independence factors 
before selecting such advisers, other than in-house legal counsel;
     Companies must review and reassess the adequacy of the 
compensation committee charter on an annual basis;
     Nasdaq's existing exemptions from, and phase-in schedules 
for, the compensation-related listing rules remain generally unchanged; 
and
     Smaller Reporting Companies \9\ must have a compensation 
committee comprised of at least two Independent Directors and a formal 
written compensation committee charter or board resolution that 
specifies the committee's responsibilities and authority, but such 
Companies are not required to adhere to the compensation committee 
eligibility requirements relating to compensatory fees and affiliation, 
or the requirements relating to compensation consultants, independent 
legal counsel and other compensation advisers that Nasdaq is proposing 
to adopt under Rule 10C-1.
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    \9\ Smaller Reporting Company is defined in Rule 12b-2 under the 
Exchange Act.
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    Rule 10C-1 requires Nasdaq to include in its submission: (i) A 
review of whether and how its existing or proposed listing rules 
satisfy the requirements of Rule 10C-1; (ii) a discussion of the 
consideration of factors relevant to compensation committee 
independence conducted by Nasdaq; and (iii) the definition of 
independence applicable to compensation committee members that Nasdaq 
proposes to adopt or retain in light of such review.\10\ Nasdaq's 
proposals and its underlying analysis are discussed in depth below.
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    \10\ See 17 CFR 240.10C-1(a)(4)(i).
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Requirement To Have a Compensation Committee
    Nasdaq's current listing rules require that compensation of the 
chief executive officer and all other Executive Officers \11\ of a 
Company must be determined, or recommended to the board for 
determination, either by: (i) A compensation committee comprised solely 
of Independent Directors; or (ii) Independent Directors constituting a 
majority of the board's Independent

[[Page 62565]]

Directors in a vote in which only Independent Directors participate 
(the ``Alternative'').\12\
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    \11\ ``Executive Officer'' is defined as an officer ``covered in 
Rule 16a-1(f) under the [Exchange] Act.'' Nasdaq Listing Rule 
5605(a)(1).
    \12\ See Nasdaq Listing Rules 5605(d)(1) and (2).
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    Although it was not required to do so by Rule 10C-1,\13\ Nasdaq 
considered whether the Alternative remains appropriate given the 
heightened importance of compensation decisions in today's corporate 
governance environment. Since responsibility for executive compensation 
decisions is one of the most important responsibilities entrusted to a 
board of directors, Nasdaq believes that there are benefits from a 
board having a standing committee dedicated solely to oversight of 
executive compensation. Specifically, directors on a standing 
compensation committee may develop expertise in a Company's executive 
compensation program in the same way that directors on a standing audit 
committee develop expertise in a Company's accounting and financial 
reporting processes. In addition, a formal committee structure may help 
promote accountability to stockholders for executive compensation 
decisions.
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    \13\ See Securities Exchange Act Release No. 67220 (June 20, 
2012), 77 FR 38422, 38425 (June 27, 2012) (the ``Adopting Release'') 
(stating that ``[t]he final rule will not require a listed issuer to 
have a compensation committee or a committee that performs functions 
typically assigned to a compensation committee.'')
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    Nasdaq also considered whether eliminating the Alternative would 
pose an undue hardship on Nasdaq-listed Companies. Only a small number 
of Companies rely on the Alternative,\14\ and since the Alternative 
requires certain executive compensation decisions to be determined, or 
recommended to the board for determination, by a majority of the 
board's Independent Directors, these Companies already have some 
directors who focus on executive compensation. In addition, Nasdaq 
would allow a transition period for these Companies to implement a 
standing compensation committee. As a result, Nasdaq does not believe 
that eliminating the Alternative would be unduly burdensome to 
Companies.
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    \14\ As of June 30, 2012, only 25 of 2,636 Nasdaq-listed 
Companies relied on the Alternative in lieu of having a standing 
compensation committee.
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    As a result, Nasdaq proposes to eliminate the Alternative and 
require Nasdaq-listed Companies to have a standing compensation 
committee with the responsibility for determining, or recommending to 
the full board for determination, the compensation of the chief 
executive officer and all other Executive Officers of the Company.
Compensation Committee Size
    Nasdaq's current listing rules do not impose size requirements on 
any board committees, other than the audit committee, which must 
consist of at least three members.\15\ As a result, it is possible to 
have a compensation committee comprised of only one member under 
Nasdaq's current listing rules.
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    \15\ See Nasdaq Listing Rule 5605(c)(2)(A).
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    Although it was not required to do so by Rule 10C-1, Nasdaq 
considered whether it is appropriate to impose a minimum size 
requirement on a compensation committee. Given the importance of 
compensation decisions to stockholders, Nasdaq believes that it is 
appropriate to have more than one director responsible for these 
decisions and that therefore, a compensation committee should consist 
of at least two members. Nasdaq then considered whether to require 
compensation committees to adhere to the same size requirement as audit 
committees and have a minimum of three members. However, Nasdaq was 
concerned that it might be difficult for Companies, especially smaller 
Companies, to comply with a requirement to have a three-member 
compensation committee, in addition to a three-member audit committee.
    Nasdaq also considered whether imposing a minimum size requirement 
on a compensation committee would be unduly burdensome to Nasdaq-listed 
Companies, especially in combination with the proposal to eliminate the 
Alternative, as discussed above. Since only a small number of Companies 
currently have a compensation committee of one member and Nasdaq would 
allow a transition period to add an additional member, Nasdaq does not 
believe that requiring a compensation committee to consist of at least 
two members would be an undue hardship for Nasdaq-listed Companies.\16\
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    \16\ As of June 30, 2012, only 26 of 2,636 Nasdaq-listed 
Companies had a compensation committee of only one member.
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    As a result, Nasdaq proposes to require a compensation committee of 
a Company to consist of at least two members of the board of directors.
Compensation Committee Composition--General Independence Definition
    Nasdaq's current listing rules require a compensation committee to 
be comprised solely of Independent Directors, as defined in Nasdaq 
Listing Rule 5605(a)(2).\17\ This definition includes a two-part test 
for independence. First, there are certain categories of directors who 
cannot be considered independent, including:
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    \17\ See Nasdaq Listing Rules 5605(d)(1) and (2).
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     A director who is an Executive Officer or employee of the 
Company; \18\
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    \18\ See Nasdaq Listing Rule 5605(a)(2). The rule's reference to 
the term ``Company'' includes any parent or subsidiary of the 
Company. The term ``parent or subsidiary'' is intended to cover 
entities the Company controls and consolidates with the Company's 
financial statements as filed with the Commission (but not if the 
Company reflects such entity solely as an investment in its 
financial statements). See IM-5605.
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     a director who is, or at any time during the past three 
years was, employed by the Company; \19\
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    \19\ See Nasdaq Listing Rule 5605(a)(2)(A).
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     A director who accepted or who has a Family Member \20\ 
who accepted any compensation from the Company in excess of $120,000 
during any period of twelve consecutive months within the three years 
preceding the determination of independence; \21\
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    \20\ ``Family Member'' is defined as ``a person's spouse, 
parents, children and siblings, whether by blood, marriage or 
adoption, or anyone residing in such person's home.'' Nasdaq Listing 
Rule 5605(a)(2).
    \21\ See Nasdaq Listing Rule 5605(a)(2)(B). This prohibition 
includes exceptions for: (i) Compensation for board or board 
committee service; (ii) compensation paid to a Family Member who is 
an employee (other than an Executive Officer) of the Company; or 
(iii) benefits under a tax-qualified retirement plan, or non-
discretionary compensation.
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     A director who is a Family Member of an individual who is, 
or at any time during the past three years was, employed by the Company 
as an Executive Officer; \22\
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    \22\ See Nasdaq Listing Rule 5605(a)(2)(C).
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     A director who is, or has a Family Member who is, a 
partner in, or a controlling Shareholder \23\ or an Executive Officer 
of, any organization to which the Company made, or from which the 
Company received, payments for property or services in the current or 
any of the past three fiscal years that exceed 5% of the recipient's 
consolidated gross revenues for that year, or $200,000, whichever is 
more; \24\
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    \23\ ``Shareholder'' is defined as ``a record or beneficial 
owner of a security listed or applying to list. For purposes of 
[Nasdaq's Listing Rules], the term `Shareholder' includes, for 
example, a limited partner, the owner of a depository receipt, or 
unit.'' Nasdaq Listing Rule 5005(a)(38).
    \24\ See Nasdaq Listing Rule 5605(a)(2)(D). This prohibition 
includes exceptions for payments: (i) Arising solely from 
investments in the Company's securities; or (ii) under non-
discretionary charitable contribution matching programs.
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     A director of the Company who is, or has a Family Member 
who is, employed as an Executive Officer of another entity where at any 
time during the past three years any of the Executive Officers of the 
Company serve on the

[[Page 62566]]

compensation committee of such other entity; \25\ or
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    \25\ See Nasdaq Listing Rule 5605(a)(2)(E).
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     a director who is, or has a Family Member who is, a 
current partner of the Company's outside auditor, or was a partner or 
employee of the Company's outside auditor who worked on the Company's 
audit at any time during any of the past three years.\26\
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    \26\ See Nasdaq Listing Rule 5605(a)(2)(F). In the case of an 
investment company, in lieu of the prohibitions in Nasdaq Listing 
Rule 5605(a)(2)(A)-(F), a director cannot be considered independent 
if he or she is an ``interested person'' of the Company as defined 
in Section 2(a)(19) of the Investment Company Act of 1940, other 
than in his or her capacity as a member of the board of directors or 
any board committee.
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    Second, a Company's board of directors must make an affirmative 
determination that each Independent Director has no relationship that, 
in the opinion of the board, would interfere with the exercise of 
independent judgment in carrying out the responsibilities of a 
director.\27\
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    \27\ See Nasdaq Listing Rule 5605(a)(2) and IM-5605.
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    Nasdaq proposes to continue unchanged its existing requirement that 
a compensation committee be comprised solely of Independent Directors, 
as defined in Nasdaq Listing Rule 5605(a)(2).
Compensation Committee Composition--Compensatory Fees
    Rule 10C-1 requires that in determining the independence 
requirements for compensation committee members, Nasdaq must consider 
relevant factors, including, but not limited to, the source of 
compensation of a member, including any consulting, advisory or other 
compensatory fee paid by the issuer to the member.\28\ In considering 
this particular factor, Nasdaq reviewed its current listing rules 
relating to compensatory fees. As outlined above, Nasdaq's current 
listing rules require compensation committee members to be Independent 
Directors. Independent Director is defined to exclude any director who: 
(i) Accepted any compensation from the Company in excess of $120,000 
during any period of twelve consecutive months within the prior three 
years; or (ii) is a partner in, or a controlling Shareholder or an 
Executive Officer of, any organization to which the Company made, or 
from which the Company received, payments for property or services in 
the current or any of the past three fiscal years that exceed 5% of the 
recipient's consolidated gross revenues for that year, or $200,000, 
whichever is more.\29\ As a result, directors who receive compensatory 
fees from a Company below these thresholds may serve on a compensation 
committee under Nasdaq's current listing rules.
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    \28\ See 17 CFR 240.10C-1(b)(1)(ii)(A).
    \29\ See Nasdaq Listing Rules 5605(a)(2)(B) and (D).
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    This is in contrast to Nasdaq's current listing rules relating to 
audit committees, which require audit committee members to meet the 
criteria for independence set forth in Rule 10A-3(b)(1) under the 
Exchange Act, subject to certain exemptions.\30\ Rule 10A-3(b)(1) 
prohibits an audit committee member from accepting directly or 
indirectly any consulting, advisory or other compensatory fee from an 
issuer or any subsidiary, with certain exemptions.
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    \30\ See Nasdaq Listing Rule 5605(c)(2)(A)(ii).
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    After reviewing its current listing rules, Nasdaq concluded that 
there is no compelling justification to have different independence 
standards for audit and compensation committee members with respect to 
the acceptance of compensatory fees from a Company. Accordingly, Nasdaq 
proposes to adopt the same standard for compensation committee members 
that applies to audit committee members under Rule 10A-3 under the 
Exchange Act with respect to compensatory fees. Specifically, Nasdaq's 
proposal prohibits a compensation committee member from accepting 
directly or indirectly any consulting, advisory or other compensatory 
fee from an issuer or any subsidiary. As in Rule 10A-3, compensatory 
fees shall not include: (i) Fees received as a member of the 
compensation committee, the board of directors or any other board 
committee; or (ii) the receipt of fixed amounts of compensation under a 
retirement plan (including deferred compensation) for prior service 
with the Company (provided that such compensation is not contingent in 
any way on continued service).\31\ Also similar to Rule 10A-3, the 
proposed requirement applicable to compensation committee members will 
not include a ``look-back'' period.\32\ Accordingly, the prohibition on 
the receipt of any consulting, advisory or other compensatory fee by a 
compensation committee member begins with the member's term of service 
on the compensation committee.\33\
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    \31\ See 17 CFR 240.10A-3(b)(1).
    \32\ See Securities Exchange Act Release No. 47654 (April 9, 
2003), 68 FR 18788, 18792 (April 16, 2003) (stating that ``[t]he 
final rule, like [the] proposal, applies the prohibitions only to 
current relationships with the audit committee member and related 
persons. They do not extend to a `look back' period before 
appointment to the audit committee * * *.'')
    \33\ Nasdaq notes, however, that as discussed above, 
compensation committee members must be Independent Directors as 
defined in Nasdaq Listing Rule 5605(a)(2). Each of the bright-line 
tests in this definition includes a three-year ``lookback'' period. 
See Nasdaq Listing Rule 5605(a)(2).
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Compensation Committee Composition--Affiliation
    Rule 10C-1 requires that in determining the independence 
requirements for compensation committee members, Nasdaq also must 
consider whether a member is affiliated with the issuer, a subsidiary 
of the issuer or an affiliate of a subsidiary of the issuer.\34\ In 
considering this particular factor, Nasdaq reviewed its current listing 
rules relating to affiliation. As outlined above, Nasdaq's current 
listing rules require compensation committee members to be Independent 
Directors. The definition of the term ``Independent Director'' does not 
refer to affiliation, although the definition does exclude certain 
individuals who may be considered affiliates from being an Independent 
Director. For example, any director who is an Executive Officer of the 
Company cannot be considered an Independent Director.\35\ 
Significantly, the Interpretive Material to Nasdaq's definition of 
Independent Director states that ``[b]ecause Nasdaq does not believe 
that ownership of Company stock by itself would preclude a board 
finding of independence, it is not included in the aforementioned 
objective factors.'' \36\
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    \34\ See 17 CFR 240.10C-1(b)(1)(ii)(B).
    \35\ See Nasdaq Listing Rule 5605(a)(2).
    \36\ IM-5605.
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    Beyond the definition of Independent Director, Nasdaq's current 
listing rules relating to audit committees require audit committee 
members to meet the criteria for independence set forth in Rule 10A-
3(b)(1) under the Exchange Act, subject to certain exemptions.\37\ Rule 
10A-3(b)(1) prohibits an audit committee member from being an 
affiliated person of the issuer or any subsidiary thereof. The term 
``affiliate'' means ``a person that directly, or indirectly through one 
or more intermediaries, controls, or is controlled by, or is under 
common control with, the person specified.'' \38\ However, Rule 10A-3 
includes a safe harbor for a person that is not: (i) The beneficial 
owner, directly or indirectly, of more than 10% of any class of voting 
equity securities of the specified person; and

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(ii) an executive officer of a specified person.\39\
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    \37\ See Nasdaq Listing Rule 5605(c)(2)(A)(ii).
    \38\ See 17 CFR 240.10A-3(e)(1).
    \39\ Id.
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    After reviewing its current listing rules, Nasdaq considered 
whether to propose that compensation committee members must meet the 
same standard applicable to audit committee members under Rule 10A-3 
under the Exchange Act with respect to affiliation, similar to its 
proposal with respect to compensatory fees. However, Nasdaq concluded 
that such a blanket prohibition would be inappropriate for compensation 
committees. In fact, Nasdaq believes that it may be appropriate for 
certain affiliates, such as representatives of significant 
stockholders, to serve on compensation committees since their interests 
are likely aligned with those of other stockholders in seeking an 
appropriate executive compensation program.
    As a result, Nasdaq proposes that Companies' boards of directors 
should consider affiliation in making an eligibility determination for 
compensation committee members, but it does not propose bright-line 
rules around this factor. In making this eligibility determination, a 
Company's board specifically must consider whether the director is 
affiliated with the Company, a subsidiary of the Company or an 
affiliate of a subsidiary of the Company to determine whether such 
affiliation would impair the director's judgment as a member of the 
compensation committee. In performing this analysis, a board of 
directors is not required to apply a ``look-back'' period, and is 
therefore required to consider affiliation only with respect to 
relationships that occur during an individual's term of service as a 
compensation committee member.
    A board may conclude that it is appropriate for a director who is 
an affiliate to serve on the compensation committee. While this differs 
from the requirement applicable to audit committee members, Nasdaq 
could identify no compelling policy justification for precluding all 
affiliates, such as owners of a Company, even those with very large 
stakes, from serving on the compensation committee.
Compensation Committee Composition--Other
    Rule 10C-1 permits Nasdaq to consider other relevant factors in 
determining the independence requirements for compensation committee 
members.\40\ After reviewing its current and proposed listing rules, 
Nasdaq concluded that these rules are sufficient to ensure the 
independence of compensation committee members. Therefore, Nasdaq 
determined not to propose further independence requirements.
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    \40\ See 17 CFR 240.10C-1(b)(1)(ii).
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Exceptional and Limited Circumstances Exception
    With minor edits, Nasdaq proposes to retain its existing exception 
that allows a Company to have a non-Independent Director serve on the 
compensation committee under exceptional and limited circumstances.\41\ 
Under this exception, if a compensation committee consists of at least 
three members, one director who is not an Independent Director and is 
not currently an Executive Officer or employee or a Family Member of an 
Executive Officer, may be appointed to the compensation committee if 
the board, under exceptional and limited circumstances, determines that 
such individual's membership on the committee is required by the best 
interests of the Company and its Shareholders. A Company that relies on 
this exception must disclose either on or through the Company's Web 
site or in the proxy statement for the next annual meeting subsequent 
to such determination (or, if the Company does not file a proxy, in its 
Form 10-K or 20-F), the nature of the relationship and the reasons for 
the determination. In addition, the Company must provide any disclosure 
required by Instruction 1 to Item 407(a) of Regulation S-K regarding 
its reliance on this exception. A member appointed under this exception 
may not serve longer than two years.
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    \41\ See Nasdaq Listing Rule 5605(d)(3).
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    In addition to the existing exception for compensation committees, 
Nasdaq's current listing rules include similar exceptions for audit and 
nominations committees.\42\ While these exceptions are used 
infrequently by Nasdaq-listed Companies,\43\ Nasdaq believes they are 
an important means to allow Companies flexibility as to board and 
committee membership and composition in unusual circumstances, which 
may be particularly important for smaller Companies.
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    \42\ See Nasdaq Listing Rules 5605(c)(2)(B) and 5605(e)(3). 
Nasdaq recently amended the exceptions for all three committees to 
allow a Company to rely on the exception for a non-Independent 
Director who is a Family Member of a non-executive employee of the 
Company. See Securities Exchange Act Release No. 67468 (July 19, 
2012), 77 FR 43618 (July 25, 2012) (SR-NASDAQ-2012-062). Nasdaq 
proposes to retain this aspect of the exception for compensation 
committees, as well as audit and nominations committees.
    \43\ On June 30, 2012, ten of 2,636 Nasdaq-listed Companies were 
using one of these exceptions: six Companies for the audit committee 
and four Companies for the nominations committee. No Companies were 
using this exception for the compensation committee.
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    Nasdaq would allow a Company to avail itself of the exception even 
for a director who fails the new requirements adopted pursuant to Rule 
10C-1.
Cure Period
    Consistent with Rule 10C-1, Nasdaq's proposal provides Companies 
with an opportunity to cure defects in the composition of compensation 
committees.\44\ The proposed cure period is copied from the cure period 
in Nasdaq's current listing rules for noncompliance with the 
requirement to have a majority independent board.\45\
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    \44\ See 17 CFR 240.10C-1(a)(3).
    \45\ See Nasdaq Listing Rule 5605(b)(1)(A).
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    Under Nasdaq's proposal, if a Company fails to comply with the 
compensation committee composition requirements due to one vacancy, or 
one compensation committee member ceases to be independent due to 
circumstances beyond the member's reasonable control, the Company shall 
regain compliance by the earlier of the next annual shareholders 
meeting or one year from the occurrence of the event that caused the 
noncompliance. However, if the annual shareholders meeting occurs no 
later than 180 days following the event that caused the noncompliance, 
the Company shall instead have 180 days from such event to regain 
compliance. This provides a Company at least 180 days to cure 
noncompliance and would typically allow a Company to regain compliance 
in connection with its next annual meeting. A Company relying on this 
provision shall provide notice to Nasdaq immediately upon learning of 
the event or circumstance that caused the noncompliance.
Compensation Committee Charter
    Nasdaq proposes to require each Company to certify that it has 
adopted a formal written compensation committee charter and that the 
compensation committee will review and reassess the adequacy of the 
formal written charter on an annual basis.\46\ This proposal is similar 
to Nasdaq's current requirement for Companies to certify as to the 
adoption of a formal written audit committee charter, except that the 
proposed requirement for annual review and reassessment of the

[[Page 62568]]

adequacy of the compensation committee charter is written 
prospectively, rather than retrospectively.\47\ In other words, the 
proposed compensation committee charter requirement states that the 
compensation committee will review and reassess the adequacy of the 
charter on an annual basis, while the current audit committee charter 
requirement states that the audit committee has reviewed and reassessed 
the adequacy of the charter on an annual basis.\48\
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    \46\ Smaller Reporting Companies may adopt either a formal 
written compensation committee charter or a board resolution that 
specifies the committee's responsibilities and authority, except 
Smaller Reporting Companies are not required to specify the specific 
compensation responsibilities and authority set forth in proposed 
Nasdaq Listing Rule 5605(d)(3). For further discussion, see the 
section entitled ``Smaller Reporting Companies'' below.
    \47\ See Nasdaq Listing Rule 5605(c)(1).
    \48\ Nasdaq proposes to make a conforming change to its audit 
committee charter requirement to clarify that Companies' annual 
review and reassessment of the audit committee charter should be 
prospective. This is consistent with Nasdaq's current interpretation 
of its audit committee charter requirement. By proposing this 
amendment, Nasdaq seeks to minimize differences between the audit 
committee and compensation committee charter requirements and to 
eliminate potential questions as to whether Nasdaq intended a 
discrepancy between these two requirements.
---------------------------------------------------------------------------

    Nasdaq proposes that the compensation committee charter must 
specify:
     the scope of the compensation committee's 
responsibilities, and how it carries out those responsibilities, 
including structure, processes and membership requirements;
     the compensation committee's responsibility for 
determining, or recommending to the board for determination, the 
compensation of the chief executive officer and all other Executive 
Officers of the Company;
     that the chief executive officer of the Company may not be 
present during voting or deliberations by the compensation committee on 
his or her compensation; and
     the specific compensation committee responsibilities and 
authority set forth in proposed Nasdaq Listing Rule 5605(d)(3), which 
implements the requirements of Section 10C(b)-(e) of the Exchange Act 
and Rule 10C-1(b)(2), (3) and (4)(i)-(vi) thereunder.
    The requirement for the charter to specify the scope of the 
compensation committee's responsibilities, and how it carries out those 
responsibilities, including structure, processes and membership 
requirements, is copied from Nasdaq's similar listing rule relating to 
audit committee charters.\49\
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    \49\ See Nasdaq Listing Rule 5605(c)(1)(A).
---------------------------------------------------------------------------

    The requirement for the charter to specify the compensation 
committee's responsibility for determining, or recommending to the 
board for determination, the compensation of the chief executive 
officer and all other Executive Officers of the Company, is based upon 
Nasdaq's current compensation-related listing rules.\50\ These listing 
rules require that the compensation of a Company's chief executive 
officer and all other Executive Officers must be determined by (i) a 
compensation committee comprised solely of Independent Directors or 
(ii) the Independent Directors constituting a majority of the board's 
Independent Directors in a vote in which only Independent Directors 
participate. As discussed above, Nasdaq proposes to eliminate the 
Alternative, and therefore, the compensation of a Company's chief 
executive officer and all other Executive Officers must be determined, 
or recommended to the board for determination, by a compensation 
committee comprised of Independent Directors. Going forward, Nasdaq 
proposes to implement this requirement by requiring Companies to 
include it in their formal written compensation committee charters.
---------------------------------------------------------------------------

    \50\ See Nasdaq Listing Rules 5605(d)(1) and (2).
---------------------------------------------------------------------------

    The requirement for the charter to specify that the chief executive 
officer of the Company may not be present during voting or 
deliberations by the compensation committee on his or her compensation 
is based upon Nasdaq's current compensation-related listing rules.\51\ 
Going forward, Nasdaq proposes to implement this requirement by 
requiring Companies to include it in their formal written compensation 
committee charters.
---------------------------------------------------------------------------

    \51\ See Nasdaq Listing Rule 5605(d)(1).
---------------------------------------------------------------------------

    Finally, the requirement for the charter to specify the specific 
compensation committee responsibilities and authority set forth in 
proposed Nasdaq Listing Rule 5605(d)(3) is modeled after Nasdaq's 
similar listing rule relating to audit committee charters.\52\ Proposed 
Nasdaq Listing Rule 5605(d)(3) implements the requirements of Section 
10C(b)-(e) of the Exchange Act and Rule 10C-1(b)(2), (3) and (4)(i)-
(vi) thereunder. Specifically, the proposed listing rule states that a 
compensation committee must have the specific compensation committee 
responsibilities and authority necessary to comply with Rule 10C-
1(b)(2), (3) and (4)(i)-(vi) relating to the: (i) Authority to retain 
compensation consultants, independent legal counsel and other 
compensation advisers; (ii) authority to fund such advisers; and (iii) 
responsibility to consider certain independence factors before 
selecting such advisers, other than in-house legal counsel.\53\
---------------------------------------------------------------------------

    \52\ See Nasdaq Listing Rule 5605(c)(1)(D), which requires that 
an audit committee charter set forth the specific audit committee 
responsibilities and authority set forth in Nasdaq Listing Rule 
5605(c)(3). Nasdaq Listing Rule 5605(c)(3) states that an audit 
committee must have the specific responsibilities and authority 
necessary to comply with Rule 10A-3(b)(2), (3), (4) and (5) under 
the Exchange Act, with certain exemptions. Rule 10A-3(b)(2), (3), 
(4) and (5) under the Exchange Act concerns responsibilities 
relating to: (i) Registered public accounting firms; (ii) complaints 
relating to accounting, internal accounting controls or auditing 
matters; (iii) authority to engage advisors; and (iv) funding as 
determined by the audit committee.
    \53\ The independence factors include: (i) The provision of 
other services to the issuer by the person that employs the adviser 
(the ``Employer''); (ii) the amount of fees received from the issuer 
by the Employer, as a percentage of the total revenue of the 
Employer; (iii) the policies and procedures of the Employer that are 
designed to prevent conflicts of interest; (iv) any business or 
personal relationship of the adviser with a member of the 
compensation committee; (v) any stock of the issuer owned by the 
adviser; and (vi) any business or personal relationship of the 
adviser or the Employer with an executive officer of the issuer. See 
17 CFR 240.10C-1(b)(4).
---------------------------------------------------------------------------

    Rule 10C-1 permits Nasdaq to identify other relevant independence 
factors that a compensation committee must consider when selecting a 
compensation consultant, legal counsel or other adviser.\54\ Nasdaq 
considered whether to adopt other independence factors, but ultimately 
concluded that the six independence factors enumerated in Rule 10C-1 
will provide compensation committees with a broad and sufficient range 
of facts and circumstances to consider in making an independence 
determination. Like the Commission, Nasdaq seeks to emphasize that a 
compensation committee is not required to retain an independent 
compensation adviser; rather, a compensation committee is required only 
to conduct the independence analysis described in Rule 10C-1 before 
selecting a compensation adviser.\55\
---------------------------------------------------------------------------

    \54\ Id.
    \55\ See the Adopting Release, at 38432-3 (stating that 
``neither the [Dodd-Frank] Act nor [Rule 10C-1] requires a 
compensation adviser to be independent, only that the compensation 
committee consider the enumerated independence factors before 
selecting a compensation adviser. Compensation committees may select 
any compensation adviser they prefer, including ones that are not 
independent, after considering the six independence factors outlined 
in the [Rule 10C-1].'')
---------------------------------------------------------------------------

Exemptions
    Rule 10C-1 allows the national securities exchanges to exempt from 
the listing rules adopted pursuant to Rule 10C-1 certain categories of 
issuers, as the national securities exchange determines is appropriate, 
taking into consideration, among other relevant factors, the potential 
impact of the listing rules on smaller reporting issuers.\56\ Nasdaq 
proposes that its existing exemptions from the compensation-related 
listing rules remain generally unchanged. Nasdaq's current listing 
rules include exemptions for: asset-backed issuers and other

[[Page 62569]]

passive issuers,\57\ cooperatives,\58\ limited partnerships,\59\ 
management investment companies \60\ and Controlled Companies.\61\ For 
the same reasons that these categories of Companies have traditionally 
been exempt from Nasdaq's compensation-related listing rules, Nasdaq 
proposes that they continue to be exempt from its revised listing rules 
relating to compensation committees.
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    \56\ See 17 CFR 240.10C-1(b)(5).
    \57\ See Nasdaq Listing Rule 5615(a)(1). Asset-backed issuers 
and other passive issuers have traditionally been exempt from 
Nasdaq's compensation-related listing rules because these issuers do 
not have a board of directors or persons acting in a similar 
capacity and their activities are limited to passively owning or 
holding (as well as administering and distributing amounts in 
respect of) securities, rights, collateral or other assets on behalf 
of or for the benefit of the holders of the listed securities. See 
IM-5615-1.
    \58\ See Nasdaq Listing Rule 5615(a)(2). Certain member-owned 
cooperatives that list their preferred stock are required to have 
their common stock owned by their members. Because of their unique 
structure and the fact that they do not have a publicly traded class 
of common stock, these entities have traditionally been exempt from 
Nasdaq's compensation-related listing rules. See IM-5615-2.
    \59\ See Nasdaq Listing Rule 5615(a)(4). Nasdaq's compensation-
related listing rules historically have not been applied to limited 
partnerships because the structure of these entities requires that 
public investors have limited rights and that the general partners 
make all significant decisions about the operation of the limited 
partnership. As such, limited partners do not expect to have a voice 
in the operations of the partnership. Limited partnerships also are 
exempt from the independence requirements of Rule 10C-1. See 17 CFR 
240.10C-1(b)(1)(iii)(A)(1).
    \60\ See Nasdaq Listing Rule 5615(a)(5). Management investment 
companies registered under the Investment Company Act of 1940 are 
already subject to a pervasive system of federal regulation in 
certain areas of corporate governance, and as a result, these 
entities have traditionally been exempt from Nasdaq's compensation-
related listing rules. See IM-5615-4. Open-end management investment 
companies registered under the Investment Company Act of 1940 also 
are exempt from the independence requirements of Rule 10C-1. See 17 
CFR 240.10C-1(b)(1)(iii)(A)(3).
    \61\ See Nasdaq Listing Rule 5615(c). This exemption recognizes 
that majority Shareholders, including parent companies, have the 
right to select directors and control certain key decisions, such as 
executive officer compensation, by virtue of their ownership rights. 
See IM-5615-5. A Controlled Company is defined as ``a Company of 
which more than 50% of the voting power for the election of 
directors is held by an individual, a group or another company.'' 
Nasdaq Listing Rule 5615(c)(1). Controlled Companies also are exempt 
from all of the requirements of Rule 10C-1. See 17 CFR 240.10C-
1(b)(5)(ii).
---------------------------------------------------------------------------

    In addition, Nasdaq's current listing rules provide that a Foreign 
Private Issuer may follow its home country practice in lieu of Nasdaq's 
compensation-related listing rules if the Foreign Private Issuer 
discloses in its annual reports filed with the Commission each 
requirement that it does not follow and describes the home country 
practice followed by the Company in lieu of such requirements.\62\ 
Alternatively, a Foreign Private Issuer that is not required to file 
its annual report with the Commission on Form 20-F may make this 
disclosure only on its Web site. Nasdaq proposes that a Foreign Private 
Issuer continue to be allowed to follow its home country practice in 
lieu of Nasdaq's revised listing rules relating to compensation 
committees if the Foreign Private Issuer provides the disclosures 
described above. Nasdaq also proposes to add an additional disclosure 
requirement for any Foreign Private Issuer that follows its home 
country practice in lieu of the requirement to have an independent 
compensation committee to disclose in its annual reports filed with the 
Commission the reasons why it does not have such a committee.\63\
---------------------------------------------------------------------------

    \62\ See Nasdaq Listing Rule 5615(a)(3). Under Nasdaq's listing 
rules, Foreign Private Issuer has the same meaning as under Rule 3b-
4 under the Exchange Act. See Nasdaq Listing Rule 5005(a)(18). 
Nasdaq's listing rules have traditionally provided qualified 
exemptions for foreign private issuers so that such issuers are not 
required to do any act that is contrary to a law, rule or regulation 
of any public authority exercising jurisdiction over such issuer or 
that is contrary to generally accepted business practices in the 
issuer's country of domicile, except to the extent such exemptions 
would be contrary to the public securities laws. See Securities 
Exchange Act Release No. 48745 (November 4, 2003), 68 FR 64154, 
64165 (November 12, 2003) (SR-NASD-2002-138).
    \63\ This proposal adopts the requirements of Rule 10C-
1(b)(1)(iii)(A)(4), which provides an exemption from the 
independence requirements of Rule 10C-1 for a ``foreign private 
issuer that discloses in its annual report the reasons that the 
foreign private issuer does not have an independent compensation 
committee.''
---------------------------------------------------------------------------

Phase-In Schedules
    Nasdaq proposes that its existing phase-in schedules for the 
requirements relating to compensation committee composition remain 
generally unchanged. Nasdaq's current listing rules include phase-in 
schedules for: Companies listing in connection with an initial public 
offering,\64\ Companies emerging from bankruptcy \65\ and Companies 
ceasing to be Controlled Companies.\66\ Since each of these categories 
of Company did not previously have a compensation committee, each is 
allowed to phase in compliance with the compensation committee 
composition requirement as follows: (1) One independent member at the 
time of listing; (2) a majority of independent members within 90 days 
of listing; and (3) all independent members within one year of listing. 
Nasdaq proposes that these phase-in schedules remain unchanged under 
its revised listing rules, except to clarify that a Company may phase 
in compliance with the minimum size requirement and the additional 
eligibility requirements adopted pursuant to Rule 10C-1, as well as the 
requirement for compensation committee members to be Independent 
Directors.\67\
---------------------------------------------------------------------------

    \64\ See Nasdaq Listing Rule 5615(b)(1).
    \65\ See Nasdaq Listing Rule 5615(b)(2).
    \66\ See Nasdaq Listing Rule 5615(c)(3).
    \67\ To provide an illustration of how the compensation 
committee composition requirement will interact with the minimum 
size requirement, consider a Company that at the time of listing has 
a compensation committee consisting of two members, both of whom are 
Independent Directors, but one of whom accepts compensatory fees of 
$50,000 annually from the Company pursuant to a consulting 
agreement. Although only one of these directors is fully eligible to 
serve on the compensation committee, the committee meets the 
requirements of Nasdaq's phase-in schedule because it has one fully 
eligible member at the time of listing. By the 90th day from 
listing, the committee must have a majority of fully eligible 
members, so the Company could: (i) Remove the ineligible member and 
temporarily have a committee of one fully eligible member; (ii) 
replace the ineligible member with a fully eligible member so that 
the committee consists of two members, all of whom are fully 
eligible; or (iii) add a second fully eligible member so that the 
committee consists of three members, a majority of whom are fully 
eligible. By one year from listing, the Company's compensation 
committee must consist of at least two members, and all members must 
by fully eligible under Nasdaq's compensation committee composition 
requirement.
---------------------------------------------------------------------------

    In addition, Nasdaq proposes no changes to the phase-in schedule in 
its current listing rules for Companies transferring from other 
markets.\68\ Companies transferring from other markets with a 
substantially similar requirement shall be afforded the balance of any 
grace period afforded by the other market. Companies transferring from 
other listed markets that do not have a substantially similar 
requirement shall be afforded one year from the date of listing on 
Nasdaq to comply with the compensation committee composition 
requirements.
---------------------------------------------------------------------------

    \68\ See Nasdaq Listing Rule 5615(b)(3).
---------------------------------------------------------------------------

    None of the aforementioned phase-in schedules apply to the 
requirement to adopt a formal written compensation committee charter 
including the content specified in Nasdaq Listing Rule 5605(d)(1)(A)-
(D).\69\
---------------------------------------------------------------------------

    \69\ As discussed below under ``Smaller Reporting Companies,'' 
Nasdaq is proposing a new phase-in schedule for a Company ceasing to 
be a Smaller Reporting Company. Nasdaq proposes to allow such a 
Company 30 days to certify to Nasdaq that it has adopted a formal 
written compensation committee charter including the content 
specified in Nasdaq Listing Rule 5605(d)(1)(A)-(D). See footnote 71, 
infra.
---------------------------------------------------------------------------

Smaller Reporting Companies
    While Rule 10C-1 exempts Smaller Reporting Companies from all of 
its requirements, Nasdaq's current listing rules do not include any 
such exemptions.\70\ Consistent with the

[[Page 62570]]

exemption in Rule 10C-1, however, Nasdaq proposes not to require 
Smaller Reporting Companies to adhere to the new requirements relating 
to compensatory fees and affiliation, which Nasdaq is proposing in 
response to Rule 10C-1, or to incorporate into their formal written 
compensation committee charter or board resolution that specifies the 
committee's responsibilities and authority the language in Rule 10C-1 
regarding compensation advisers. This approach will minimize new costs 
imposed on Smaller Reporting Companies and allow them some flexibility 
not allowed for larger Companies.
---------------------------------------------------------------------------

    \70\ See 17 CFR 240.10C-1(b)(5)(ii).
---------------------------------------------------------------------------

    However, as discussed above, Nasdaq proposes to eliminate the 
Alternative in its current listing rules that allows compensation 
decisions to be made by a majority of the Independent Directors rather 
than by a committee composed entirely of Independent Directors. Nasdaq 
proposes to eliminate the Alternative for Smaller Reporting Companies, 
just like all other Nasdaq-listed Companies. As a result, Smaller 
Reporting Companies would be required to have a compensation committee 
comprised of at least two Independent Directors as defined under 
Nasdaq's existing listing rules.
    In addition, Nasdaq proposes that Smaller Reporting Companies must 
adopt a formal written compensation committee charter or board 
resolution that specifies the committee's responsibilities and 
authority. Unlike other Companies, Smaller Reporting Companies may 
include this content in a board resolution, rather than a compensation 
committee charter, and Smaller Reporting Companies are not required to 
review and reassess the adequacy of the charter or board resolution on 
an annual basis. The charter or board resolution must specify the same 
content as other Companies, except Smaller Reporting Companies are not 
required to specify the specific compensation responsibilities and 
authority set forth in proposed Nasdaq Listing Rule 5605(d)(3) relating 
to the: (i) Authority to retain compensation consultants, independent 
legal counsel and other compensation advisers; (ii) authority to fund 
such advisers; and (iii) responsibility to consider certain 
independence factors before selecting such advisers, other than in-
house legal counsel.\71\
---------------------------------------------------------------------------

    \71\ Nasdaq notes that Smaller Reporting Companies remain 
subject to the disclosure requirements of Item 407(e)(3)(iv) of 
Regulation S-K, which were adopted at the same time as Rule 10C-1. 
See the Adopting Release.
---------------------------------------------------------------------------

    Nasdaq also proposes to apply the same phase-in schedule to a 
Company ceasing to be a Smaller Reporting Company that applies to a 
Company listing in conjunction with its initial public offering. Since 
a Smaller Reporting Company is required to have a compensation 
committee comprised of at least two Independent Directors, a Company 
that has ceased to be a Smaller Reporting Company may use the phase-in 
schedule for the additional eligibility requirements relating to 
compensatory fees and affiliation, but not for the minimum size 
requirement or the requirement that the committee consist only of 
Independent Directors. This phase-in schedule will start to run on the 
due date of the SEC filing in which the Company is required to report 
that it is an issuer other than a Smaller Reporting Company.\72\ During 
the phase-in schedule, a Smaller Reporting Company must continue to 
comply with the requirement to have a compensation committee comprised 
of at least two Independent Directors as defined under Nasdaq's 
existing listing rules.
---------------------------------------------------------------------------

    \72\ Within 30 days after the start of its phase-in schedule, a 
Company that has ceased to be a Smaller Reporting Company must 
certify to Nasdaq that: (i) It has complied with the requirement in 
Nasdaq Listing Rule 5605(d)(1) to have a compensation committee 
charter including the content specified in Nasdaq Listing Rule 
5605(d)(1)(A)-(D); and (ii) it has, or will within the applicable 
phase-in schedule, comply with the requirement in Nasdaq Listing 
Rule 5605(d)(2) regarding compensation committee composition.
---------------------------------------------------------------------------

Effective Dates/Transition
    Nasdaq proposes that Rule 5605(d)(3), relating to compensation 
committee responsibilities and authority, shall be effective 
immediately.\73\ Specifically, this proposed rule states that a 
compensation committee must have the specific compensation committee 
responsibilities and authority necessary to comply with Rule 10C-
1(b)(2), (3) and (4)(i)-(vi) under the Act relating to the: (i) 
Authority to retain compensation consultants, independent legal counsel 
and other compensation advisers; (ii) authority to fund such advisers; 
and (iii) responsibility to consider certain independence factors 
before selecting such advisers, other than in-house legal counsel. To 
the extent a Company does not have a compensation committee, the 
provisions of this rule shall apply to the Independent Directors who 
determine, or recommend to the board for determination, the 
compensation of the chief executive officer and all other Executive 
Officers of the Company. Companies should consider under state 
corporate law whether to grant these specific responsibilities and 
authority through a charter, resolution or other board action; however, 
Nasdaq proposes to require only that compensation committees 
immediately have such responsibilities and authority. While Nasdaq 
proposes that Companies must eventually have a written compensation 
committee charter that includes, among others, these responsibilities 
and authority, Companies may implement such a charter on the schedule 
discussed below.
---------------------------------------------------------------------------

    \73\ See supra note 3.
---------------------------------------------------------------------------

    In order to allow Companies to make necessary adjustments to their 
boards and committees in the course of their regular annual meeting 
schedules, Nasdaq proposes that Companies must comply with the 
remaining provisions of the amended listing rules on compensation 
committees by the earlier of: (1) Their second annual meeting held 
after the date of approval of Nasdaq's amended listing rules; or (2) 
December 31, 2014. This transition period is similar to the transition 
period used when Nasdaq implemented similar requirements for audit 
committees in 2003.\74\
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    \74\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (SR-NASD-2002-141).
---------------------------------------------------------------------------

    A Company must certify to Nasdaq, no later than 30 days after the 
implementation deadline applicable to it, that it has complied with the 
amended listing rules on compensation committees. Nasdaq will provide 
Companies with a form for this certification.
    During the transition period, Companies that are not yet required 
to comply with the amended listing rules on compensation committees 
must continue to comply with Nasdaq's existing listing rules, which 
have been redesignated as Listing Rule 5605A(d) and IM-5605A-6 in 
Nasdaq's proposal.
Conforming Changes and Correction of Typographical Errors
    Finally, Nasdaq proposes to make minor conforming changes to its 
requirements relating to audit and nominations committees. Nasdaq also 
proposes to correct certain typographical errors in its corporate 
governance requirements as set forth in Exhibit 5.\75\
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    \75\ The Commission notes that Exhibit 5 is available at http://nasdaq.cchwallstreet.com.
---------------------------------------------------------------------------

 2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Exchange Act,\76\ in general, and 
with Section 6(b)(5) of the Exchange Act,\77\ in particular. Section 
6(b)(5) requires,

[[Page 62571]]

among other things, that a national securities exchange's rules must be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest. Section 6(b)(5) also requires that a national securities 
exchange's rules not be designed to permit unfair discrimination 
between customers, issuers, brokers or dealers.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78f.
    \77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As required by the Dodd-Frank Act and Rule 10C-1, Nasdaq is 
proposing amendments to its listing rules relating to the independence 
of compensation committees and their advisers. Nasdaq reviewed its 
existing compensation-relating listing rules, in combination with the 
requirements of Rule 10C-1, to develop a set of proposed compensation-
related listing rules. These proposals generally fall into three 
categories: Proposed rule amendments to comply with Rule 10C-1; 
proposals to continue certain rules relatively unchanged; and proposed 
rule amendments not required by Rule 10C-1. Nasdaq believes that 
collectively, these proposals protect investors and the public interest 
by requiring Companies, with certain exemptions, to have a compensation 
committee meeting certain requirements relating to composition, 
responsibilities and authority.
    More specifically, Nasdaq's proposed amendments to its listing 
rules in order to comply with Rule 10C-1 set forth: Additional 
eligibility requirements for compensation committee members relating to 
compensatory fees and affiliation; an opportunity to cure defects in 
compensation committee composition; a requirement that compensation 
committees have the specific responsibilities and authority necessary 
to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange 
Act; and exemptions for limited partnerships, management investment 
companies, Controlled Companies, foreign private issuers that provide 
certain required disclosures, and Smaller Reporting Companies. Nasdaq 
believes that its proposals fairly balance the goal of protecting the 
investing public by ensuring effective deliberation over executive 
compensation with the goal of avoiding the imposition of undue costs on 
Companies.
    Nasdaq's proposals to continue relatively unchanged some of its 
existing exemptions to the compensation-related listing rules for 
certain categories of Companies takes into account the unique 
characteristics of these Companies.\78\ As a result, Nasdaq does not 
believe that continuing these exemptions will discriminate unfairly 
among issuers, consistent with Section 6(b)(5) of the Exchange Act.\79\
---------------------------------------------------------------------------

    \78\ See footnotes 56-61, supra.
    \79\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed rule amendments not required by Rule 10C-1 require 
that: Companies must have a standing compensation committee; the 
committee must consist of a minimum of two members; the committee must 
have a formal written charter (or board resolution, in the case of 
Smaller Reporting Companies) that specifies the committee's 
responsibilities and authority; and Smaller Reporting Companies must 
continue to comply with certain of Nasdaq's compensation-related 
listing rules. As discussed in the ``Purpose'' section, Nasdaq believes 
that these new requirements will facilitate effective oversight of 
executive compensation and promote accountability to investors for 
executive compensation decisions. With regard to Smaller Reporting 
Companies, Nasdaq notes that these Companies continue to be subject to 
the same requirements as all other Companies, except the new 
requirements that Nasdaq is proposing under Rule 10C-1 relating to 
compensatory fees, affiliation and the specific compensation committee 
responsibilities and authority set forth in proposed Nasdaq Listing 
Rule 5605(d)(3). Nasdaq believes that this hybrid approach does not 
discriminate unfairly between issuers because it recognizes the fact 
that the ```executive compensation arrangements of [Smaller Reporting 
Companies] generally are so much less complex than those of other 
public companies that they do not warrant the more extensive disclosure 
requirements imposed on companies that are not [Smaller Reporting 
Companies] and related regulatory burdens that could be 
disproportionate for [Smaller Reporting Companies].' '' \80\ In 
addition, Nasdaq notes that the Commission exempted Smaller Reporting 
Companies from Rule 10C-1.\81\ As a result, this distinction does not 
discriminate unfairly among issuers.
---------------------------------------------------------------------------

    \80\ See the Adopting Release, at 38438 (quoting Securities 
Exchange Act Release No. 54302A (August 29, 2006), 71 FR 53158, 
53192 (September 8, 2006)).
    \81\ See 17 CFR 240.10C-1(b)(5)(ii).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, as amended.

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

    Nasdaq did not solicit comments on the proposed rule change. Nasdaq 
received two written comments, which are attached as Exhibit 2.\82\
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    \82\ The Commission notes that the comments are available at 
http://nasdaq.cchwallstreet.com.
---------------------------------------------------------------------------

    The first commenter recommended that Nasdaq should require 
Companies to disclose: (i) How they are complying with the requirement 
to consider the independence factors enumerated in Rule 10C-1; and (ii) 
the nature of any conflict of interest arising from the engagement of 
legal counsel by a compensation committee. Nasdaq considered these 
recommendations, but it preferred to defer to the judgment of the 
Commission with respect to the appropriate disclosure framework under 
Rule 10C-1. Nasdaq therefore decided not to propose any new disclosure 
requirements for Companies, other than those that are required by Rule 
10C-1.\83\
---------------------------------------------------------------------------

    \83\ Specifically, as required by Rule 10C-1(b)(1)(iii)(A)(4), 
Nasdaq proposes to require a Foreign Private Issuer that follows a 
home country practice in lieu of the requirement to have an 
independent compensation committee to disclose the reasons why it 
does not have such a committee.
---------------------------------------------------------------------------

    The second commenter proffered four recommendations. First, this 
commenter recommended that Nasdaq include director fees within the list 
of relevant factors that must be considered when assessing the 
independence of compensation committee members. Nasdaq does not believe 
that the intent of the Dodd-Frank Act or Rule 10C-1 was to limit 
independence based on director compensation, and therefore, Nasdaq 
proposes to continue to exempt board fees from its prohibition on 
payment of compensatory fees to a compensation committee member. 
Second, this commenter recommended that Nasdaq include in the 
requirements for compensation committee independence a factor relating 
to business or personal relationships between directors and officers. 
As discussed in the ``Purpose'' section above, Nasdaq reviewed its 
current and proposed listing rules and concluded that these rules are 
sufficient to ensure the independence of compensation committee 
members. Therefore, Nasdaq determined not to propose further 
independence requirements, other than those discussed above. Third, 
this commenter recommended that Nasdaq expand the additional factors 
for

[[Page 62572]]

compensation committee eligibility to cover all independent directors, 
not just those serving on the compensation committee. While Nasdaq 
heavily weighed the commenter's concern that multiple definitions of 
independence add to the complexity of board membership, Nasdaq believed 
that the intent of the Dodd-Frank Act and Rule 10C-1 was to address the 
independence of compensation committee members, as well as their 
advisers, specifically. Nasdaq concluded therefore that it is 
inappropriate to expand the additional requirements proposed herein to 
cover all independent directors. Finally, this commenter recommended 
that Nasdaq clarify that, while the factors must be considered in their 
totality, a single factor can result in a loss of director 
independence. Nasdaq confirms that a director cannot be deemed 
independent if he or she fails any one of the bright-line prohibitions 
in Nasdaq Listing Rule 5605(a)(2).

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 will: (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 Exchange 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-2012-109 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2012-109. 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 such filing also will be available 
for inspection and copying at the principal office of Nasdaq. 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2012-109 and should 
be submitted on or before November 5, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
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    \84\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25281 Filed 10-12-12; 8:45 am]
BILLING CODE 8011-01-P