Document ID: SEC-2016-2217-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange LLC
Posted Date: 2016-12-16T05:00Z

[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Notices]
[Pages 91211-91215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30255]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79527; File No. SR-IEX-2016-19]

Self-Regulatory Organizations: Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change 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

December 12, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on December 5, 2016, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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

    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4

[[Page 91212]]

thereunder,\5\ Investors Exchange LLC (``IEX'' or ``Exchange'') is 
filing with the Securities and Exchange Commission (``Commission'') a 
proposed rule change 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 Exchange has 
designated this proposal as non-controversial and provided the 
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\6\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.iextrading.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 self-regulatory organization 
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 statement may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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
    On June 17, 2016 the Commission granted IEX's application for 
registration as a national securities exchange under Section 6 of the 
Act including approval of rules applicable to the qualification, 
listing and delisting of companies on the Exchange. The Exchange plans 
to begin a listing program in 2017 and is proposing additional rules 
applicable to companies listing on the Exchange in this proposed rule 
change.
    IEX 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.\7\ A listed 
company is also required to file required periodic reports with the 
Commission.\8\ 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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    \7\ See Rules 14.207(b)(1), 14.407(c)(2), 14.405(c)(2)(B), 
14.405(d)(2)(B) and 14.405(e)(3).
    \8\ See Rule 14.207(c).
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    However, based on press reports and information from market 
participants, IEX understands there is one area where investors may not 
have complete or timely information. This is when third parties 
compensate directors in connection with their candidacy for and/or 
service on company Board 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.\9\
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    \9\ See, discussion generally in Securities Exchange Act Release 
No. 78223 (July 1, 2016), 81 FR 44400 (July 7, 2016) (Order Granting 
Approval of SR-NASDAQ-2016-13).
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    IEX 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. IEX 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. 
IEX 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.\10\
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    \10\ See, note 9.
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    Accordingly, IEX is proposing to adopt Rule 14.207(b)(3) to require 
listed companies to publicly disclose on or through the companies' Web 
site or proxy statement or information statement for any shareholders' 
meeting at which directors are elected (or, if they do not file proxy 
or information statements, in Form 10-K or Form 20-F),\11\ the material 
terms of all agreements and arrangements between any director or 
nominee and any person or entity other than the company (the ``Third 
Party'') relating to compensation or other payment in connection with 
that person's candidacy or service as a director.12 13 A 
company may make this disclosure through its Web site by hyperlinking 
to another Web site, which must be continuously accessible. If that Web 
site subsequently becomes inaccessible or that hyperlink inoperable, 
the company must promptly restore it or make other disclosure in 
accordance with this proposed rule.
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    \11\ This disclosure method is consistent with the method under 
Rule 14.405(d)(2)(B) for disclosure of the appointment of a non-
independent compensation committee member under exceptional and 
limited circumstances.
    \12\ The proposal is intended to apply to agreements and 
arrangements whether or not the right to nominate a director legally 
belongs to a third party. See Supplementary Material .07 to Rule 
14.405 (Independent Director Oversight of Director Nominations).
    \13\ If the Company provides disclosure in a proxy or 
information statement, including to satisfy the SEC's proxy 
disclosure requirements, sufficient to comply with this rule, its 
obligation to satisfy this rule is fulfilled regardless of the 
reason for which such disclosure was made.
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    Consistent with other exemptions afforded certain types of 
companies, the Exchange is also proposing to amend Rule 14.407(a)(3) to 
provide that a foreign private issuer may follow home country practice 
in lieu of the requirements of the proposed rule. A Foreign Private 
Issuer may follow its home country practice in lieu of the requirements 
of Rule 14.207(b)(3) by utilizing the process described in Rule 
14.407(a)(3), including but not limited to the requirement to submit to 
IEX a written statement from an independent counsel in such Company's 
home country certifying that the Company's practices are not prohibited 
by the home country's laws.
    Companies listed at the time this proposed rule becomes effective 
or initially listed thereafter must disclose all agreements and 
arrangements in accordance with this proposed rule by no later than the 
date on which the Company files or furnishes a proxy or information 
statement subject to Regulation 14A or 14C under the Act in connection 
with the Company's next shareholders' meeting at which directors are 
elected (or, if they do not file proxy or information statements, no 
later than when the Company files next Form 10-K or Form 20-F). 
Thereafter, a listed company must make this disclosure at least 
annually until the earlier of the resignation of the director or one 
year following the termination of

[[Page 91213]]

the agreement or arrangement.\14\ The proposed rule does not separately 
require the initial disclosure of newly entered into agreements or 
arrangements, provided that disclosure is made pursuant to this rule 
for the next shareholder meeting at which directors are elected.
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    \14\ A Company posting the requisite disclosure on or through 
its Web site must make it publicly available no later than the date 
on which the Company files a proxy or information statement in 
connection with a shareholders' meeting at which directors are 
elected (or, if they do not file proxy or information statements, no 
later than when the Company files its next Form 10-K or Form 20-F).
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    If a Company discovers an agreement or arrangement that should have 
been disclosed pursuant to subparagraph (A) of the proposed rule but 
was not, the Company must promptly make the required disclosure in 
accordance with this proposed rule.\15\ In addition, for agreements and 
arrangements not required to be disclosed in accordance with 
subparagraph (A)(ii) of the proposed rule, such as employment with a 
third party that existed prior to the nominee's candidacy and is 
otherwise disclosed, but where the director or nominee's remuneration 
is thereafter materially increased specifically in connection with such 
person's candidacy or service as a director of the company, only the 
difference between the new and previous level of compensation or other 
payment obligation need be disclosed.
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    \15\ See infra discussion on remedial disclosure.
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    The terms ``compensation'' and ``other payment'' as used in this 
proposed rule are intended to be construed broadly and apply to 
agreements and arrangements that provide for non-cash compensation and 
other payment obligations, such as health insurance premiums or 
indemnification, 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 relating to compensation.
    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 the nominee's relationship with the Third 
Party has been otherwise publicly disclosed, for example, pursuant to 
Items 402(a)(2) 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 
or venture capital firm, or a fund established by such firm, 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 a [sic] 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 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. Further, 
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 disclosure requirements of the proposed Rule 
14.207(b)(3)(A) where an agreement or arrangement for a director or a 
nominee has been disclosed under Item 5(b) of Schedule 14A of the Act 
in the current fiscal year. However, such an agreement or arrangement 
is subject to the continuous disclosure requirements of the proposed 
Rule 14.207(b)(3)(B) on an annual basis. Similarly, a Company that 
provides disclosure in the current fiscal year pursuant to the 
requirement in Item 5.02(d)(2) of Form 8-K requiring ``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 a 
separate disclosure under the proposed Rule 14.207(b)(3)(A). Such 
disclosure under Commission rules, however, shall not relieve a company 
of its ongoing obligation under the proposed Rule 14.207(b)(3)(B) to 
make annual disclosure.
    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 
disclosure requirements if it has undertaken reasonable efforts to 
identify all such agreements and arrangements, including by asking each 
director or nominee in a 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. However, such remedial 
disclosure, regardless of its timing, does not satisfy the ongoing 
annual disclosure requirements under subparagraph (B).
    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,\16\ IEX proposes to allow companies deficient under the 
proposed rule 45 calendar days to submit a plan sufficient to satisfy 
IEX 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 14.502.
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    \16\ Pursuant to Rule 14.501(c)(2)(A), a company is provided 45 
days to submit a plan to regain compliance with Rules 14.408(c) 
(Quorum), 14.411 (Review of Related Party Transactions, 14.412 
(Shareholder Approval), 14.207(c)(3) (Auditor Registration), 
14.208(a) (Direct Registration Program), 14.406 (Code of Conduct), 
14.407(a)(4)(E) (Quorum of Limited Partnerships), 14.407(a)(4)(G) 
(Related Party Transactions of Limited Partnerships), and 14.413 
(Voting Rights). A company is generally provided 60 days to submit a 
plan to regain compliance with the requirements to timely file 
periodic reports contained in Rule 14.207(c)(1).
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2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
Section 6(b) \17\ of the Act in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\18\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. 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

[[Page 91214]]

directors and call into question their ability to satisfy fiduciary 
duties.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that it is consistent with the protection of 
investors and the public interest, and not unfairly discriminatory, to 
permit foreign private issuers to comply with home country practice in 
lieu of the requirements of the proposed rule. This approach is 
consistent with an existing structure for foreign private issuers 
whereby such companies may follow home country practice in lieu of 
certain listing rules, subject to an established process which includes 
disclosure obligations and submission to IEX of a written statement 
from an independent counsel in such Company's home country certifying 
that the Company's practices are not prohibited by the home country's 
laws.
    Further, the Exchange notes that a substantially identical proposed 
rule change by the Nasdaq Stock Market LLC (``Nasdaq'') was recently 
approved by the Commission, pursuant to which the Commission found that 
the Nasdaq proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\19\ In particular, the Commission found 
that the Nasdaq proposed rule change is ``consistent with the 
requirements of Section 6(b)(5) of the Act, which requires, among other 
things, that the Exchange's rules 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; and not be 
designed to permit, among other things, unfair discrimination between 
issuers.'' Accordingly, the Exchange believes that the same 
considerations apply to this proposed rule change since the proposed 
changes are substantially identical to the Nasdaq rules.
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    \19\ See Securities Exchange Act Release No. 78223 (July 1, 
2016), 81 FR 44400 (July 7, 2016).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    IEX 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 Act. 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 arrangements without creating unnecessary 
burdens on directors or those making the payments.
    Further, the proposed rule change is intended to promote 
transparency and protect investors. To the extent that a competitor 
marketplace believes that the proposed rule change places it at a 
competitive disadvantage, it of course 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

    Written comments were neither solicited nor received.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \22\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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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 No. SR-IEX-2016-19 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 No. SR-IEX-2016-19. 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 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 No. SR-IEX-2016-19, and should be 
submitted on or before January 6, 2017.
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    \23\ 17 CFR 200.30-3(a)(12).

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30255 Filed 12-15-16; 8:45 am]
 BILLING CODE 8011-01-P