
[Federal Register Volume 77, Number 124 (Wednesday, June 27, 2012)]
[Rules and Regulations]
[Pages 38421-38455]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15408]



[[Page 38421]]

Vol. 77

Wednesday,

No. 124

June 27, 2012

Part III





 Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Parts 229 and 240





 Listing Standards for Compensation Committees; Final Rule

  Federal Register / Vol. 77 , No. 124 / Wednesday, June 27, 2012 / 
Rules and Regulations  

[[Page 38422]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 240

[Release Nos. 33-9330; 34-67220; File No. S7-13-11]
RIN 3235-AK95


Listing Standards for Compensation Committees

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: We are adopting a new rule and amendments to our proxy 
disclosure rules to implement Section 952 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010, which added Section 10C to 
the Securities Exchange Act of 1934. Section 10C requires the 
Commission to adopt rules directing the national securities exchanges 
and national securities associations to prohibit the listing of any 
equity security of an issuer that is not in compliance with Section 
10C's compensation committee and compensation adviser requirements. In 
accordance with the statute, new Rule 10C-1 directs the national 
securities exchanges to establish listing standards that, among other 
things, require each member of a listed issuer's compensation committee 
to be a member of the board of directors and to be ``independent,'' as 
defined in the listing standards of the national securities exchanges 
adopted in accordance with the final rule. In addition, pursuant to 
Section 10C(c)(2), we are adopting amendments to our proxy disclosure 
rules concerning issuers' use of compensation consultants and related 
conflicts of interest.

DATES: Effective Date: July 27, 2012.
    Compliance Dates: Each national securities exchange and national 
securities association must provide to the Commission, no later than 
September 25, 2012, proposed rule change submissions that comply with 
the requirements of Exchange Act Rule 10C-1. Further, each national 
securities exchange and national securities association must have final 
rules or rule amendments that comply with Rule 10C-1 approved by the 
Commission no later than June 27, 2012. Issuers must comply with the 
disclosure changes in Item 407 of Regulation S-K in any proxy or 
information statement for an annual meeting of shareholders (or a 
special meeting in lieu of the annual meeting) at which directors will 
be elected occurring on or after January 1, 2013.

FOR FURTHER INFORMATION CONTACT: N. Sean Harrison, Special Counsel, 
Office of Rulemaking, at (202) 551-3430, or Heather Maples, Senior 
Special Counsel, Office of Chief Counsel, at (202) 551-3520, in the 
Division of Corporation Finance, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting new Rule 10C-1 under the 
Securities Exchange Act of 1934 \1\ and amendments to Item 407 \2\ of 
Regulation S-K.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78a et seq.
    \2\ 17 CFR 229.407.
    \3\ 17 CFR 229.10 through 229.1208.
---------------------------------------------------------------------------

Table of Contents

I. Background and Summary
II. Discussion of the Final Rules
    A. Exchange Listing Standards
    1. Applicability of Listing Standards
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    2. Independence Requirements
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    3. Authority To Retain Compensation Advisers; Responsibilities; 
and Funding
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    4. Compensation Adviser Independence Factors
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    5. Opportunity To Cure Defects
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    B. Implementation of Listing Requirements
    1. Exchanges and Securities Affected
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    2. Exemptions
    a. Proposed Rule
    i. Issuers Not Subject to Compensation Committee Independence 
Requirements
    ii. Exemption of Relationships and Other Categories of Issuers
    b. Comments on the Proposed Rule
    c. Final Rule
    C. Compensation Consultant Disclosure and Conflicts of Interest
    1. Proposed Rule
    2. Comments on the Proposed Rule
    3. Final Rule
    a. Disclosure Requirements
    b. Disclosure Exemptions
    c. Disclosure Regarding Director Compensation
    D. Transition and Timing
III. Paperwork Reduction Act
    A. Background
    B. Summary of the Final Rules
    C. Summary of Comment Letters and Revisions to Proposals
    D. Revisions to PRA Reporting and Cost Burden Estimates
IV. Economic Analysis
    A. Background and Summary of the Rule Amendments
    B. Benefits and Costs, and Impact on Efficiency, Competition and 
Capital Formation
    1. Section 10C of the Exchange Act, as Added by Section 952 of 
the Act
    2. Discretionary Amendments
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Rules
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority and Text of the Amendments

I. Background And Summary

    On March 30, 2011, we proposed a new rule and rule amendments \4\ 
to implement Section 10C of the Securities Exchange Act of 1934 (the 
``Exchange Act''),\5\ as added by Section 952 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (the ``Act'').\6\ 
Section 10C requires the Commission to direct the national securities 
exchanges \7\ (the ``exchanges'') and national securities associations 
\8\ to prohibit the listing of any equity

[[Page 38423]]

security of an issuer, with certain exceptions, that does not comply 
with Section 10C's compensation committee and compensation adviser 
requirements.\9\
---------------------------------------------------------------------------

    \4\ See Release No. 33-9199 (Mar. 30, 2011) [76 FR 18966] (the 
``Proposing Release'').
    \5\ 15 U.S.C. 78j-3.
    \6\ Public Law 111-203, 124 Stat. 1900 (2010).
    \7\ A ``national securities exchange'' is an exchange registered 
as such under Section 6 of the Exchange Act [15 U.S.C. 78f]. There 
are currently sixteen national securities exchanges registered under 
Section 6(a) of the Exchange Act: NYSE Amex (formerly the American 
Stock Exchange), BATS Exchange, BATS Y-Exchange, BOX Options 
Exchange, C2 Options Exchange, Chicago Board Options Exchange, 
Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, International 
Securities Exchange, NASDAQ OMX BX (formerly the Boston Stock 
Exchange), The NASDAQ Stock Market, National Stock Exchange, New 
York Stock Exchange, NYSE Arca and NASDAQ OMX PHLX (formerly 
Philadelphia Stock Exchange). Certain exchanges are registered with 
the Commission through a notice filing under Section 6(g) of the 
Exchange Act for the purpose of trading security futures. See 
Section II.B.1, below, for a discussion of these types of exchanges.
    \8\ A ``national securities association'' is an association of 
brokers and dealers registered as such under Section 15A of the 
Exchange Act [15 U.S.C. 78o-3]. The Financial Industry Regulatory 
Authority (``FINRA'') is the only national securities association 
registered with the Commission under Section 15A of the Exchange 
Act. FINRA does not list equity securities; therefore, we refer only 
to national securities exchanges in this release. In addition, 
Section 15A(k) of the Exchange Act [15 U.S.C. 78o-3(k)] provides 
that a futures association registered under Section 17 of the 
Commodity Exchange Act [7 U.S.C. 21] shall be registered as a 
national securities association for the limited purpose of 
regulating the activities of members who are registered as broker-
dealers in security futures products pursuant to Section 15(b)(11) 
of the Exchange Act [15 U.S.C. 78o(b)(11)]. See Section II.B.1, 
below, for a discussion regarding security futures products.
    \9\ See Exchange Act Sections 10C(a) and (f).
---------------------------------------------------------------------------

    Specifically, Section 10C(a)(1) of the Exchange Act requires the 
Commission to adopt rules directing the exchanges to establish listing 
standards that require each member of a listed issuer's compensation 
committee to be a member of the board of directors and to be 
``independent.'' \10\ The term ``independent'' is not defined in 
Section 10C. Instead, Section 10C(a)(3) provides that ``independence'' 
is to be defined by the exchanges after taking into consideration 
``relevant factors,'' which are required to include (1) a director's 
source of compensation, including any consulting, advisory or other 
compensatory fee paid by the issuer to such director, and (2) whether a 
director is affiliated with the issuer, a subsidiary of the issuer, or 
an affiliate of a subsidiary of the issuer. Section 10C(a)(4) of the 
Exchange Act requires our rules to permit the exchanges to exempt 
particular relationships from the independence requirements, as each 
exchange determines is appropriate, taking into consideration the size 
of an issuer and any other relevant factors.
---------------------------------------------------------------------------

    \10\ Five categories of issuers are excluded from this 
requirement: controlled companies, limited partnerships, companies 
in bankruptcy proceedings, open-end management investment companies 
registered under the Investment Company Act of 1940 (the 
``Investment Company Act''), and foreign private issuers that 
disclose in their annual reports the reasons why they do not have an 
independent compensation committee.
---------------------------------------------------------------------------

    In addition to the independence requirements set forth in Section 
10C(a), Section 10C(f) of the Exchange Act requires the Commission to 
adopt rules directing the exchanges to establish listing standards that 
provide for the following requirements relating to compensation 
committees and compensation consultants, independent legal counsel and 
other advisers (collectively, ``compensation advisers''), as set forth 
in paragraphs (b)-(e) of Section 10C:
     Each compensation committee must have the authority, in 
its sole discretion, to retain or obtain the advice of compensation 
advisers; \11\
---------------------------------------------------------------------------

    \11\ Exchange Act Sections 10C(c)(1)(A) and 10C(d)(1).
---------------------------------------------------------------------------

     Before selecting any compensation adviser, the 
compensation committee must take into consideration specific factors 
identified by the Commission that affect the independence of 
compensation advisers; \12\
---------------------------------------------------------------------------

    \12\ Exchange Act Section 10C(b).
---------------------------------------------------------------------------

     The compensation committee must be directly responsible 
for the appointment, compensation and oversight of the work of 
compensation advisers; \13\ and
---------------------------------------------------------------------------

    \13\ Exchange Act Sections 10C(c)(1)(B) and 10C(d)(2).
---------------------------------------------------------------------------

     Each listed issuer must provide appropriate funding for 
the payment of reasonable compensation, as determined by the 
compensation committee, to compensation advisers.\14\
---------------------------------------------------------------------------

    \14\ Exchange Act Section 10C(e).

Finally, Section 10C(c)(2) requires each issuer to disclose in any 
proxy or consent solicitation material for an annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting), in 
accordance with Commission regulations, whether the issuer's 
compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed.
    We proposed new Exchange Act Rule 10C-1 to implement the 
compensation committee listing requirements of Sections 10C(a)-(g) \15\ 
of the Exchange Act. We proposed rule amendments to Item 407 of 
Regulation S-K to require the disclosures mandated by Section 
10C(c)(2), which are to be provided in any proxy or information 
statement relating to an annual meeting of shareholders at which 
directors are to be elected (or special meeting in lieu of the annual 
meeting). In connection with these amendments, we also proposed to 
revise the current disclosure requirements with respect to the 
retention of compensation consultants.
---------------------------------------------------------------------------

    \15\ Section 10C(g) of the Exchange Act exempts controlled 
companies from the requirements of Section 10C.
---------------------------------------------------------------------------

    The comment period for the Proposing Release closed on May 19, 
2011.\16\ We received 58 comment letters from 56 different 
commentators, including pension funds, corporations, compensation 
consulting firms, professional associations, trade unions, 
institutional investors, investment advisory firms, law firms, 
academics, individual investors and other interested parties. 
Commentators generally supported the proposed implementation of the new 
requirements. Some commentators urged us to adopt additional 
requirements not mandated by the Act. Other commentators opposed some 
aspects of the proposed rule and rule amendments and suggested 
modifications to the proposals.
---------------------------------------------------------------------------

    \16\ We extended the original comment period deadline from April 
29, 2011 to May 19, 2011. See Listing Standards for Compensation 
Committees, Release No. 33-9203 (Apr. 29, 2011) [76 FR 25273].
---------------------------------------------------------------------------

    We have reviewed and considered all of the comments that we 
received on the proposals. The final rules reflect a number of changes 
made in response to these comments. We discuss our revisions with 
respect to the proposed rule and rule amendments in more detail 
throughout this release.

II. Discussion of the Final Rules

A. Exchange Listing Standards

1. Applicability of Listing Standards
    We proposed to direct the exchanges to adopt listing standards that 
would apply Section 10C's independence requirements to members of a 
listed issuer's compensation committee as well as any committee of the 
board that performs functions typically performed by a compensation 
committee. We are adopting this aspect of the rule substantially as 
proposed, but with one change reflecting comments we received.
a. Proposed Rule
    In enacting Section 10C of the Exchange Act, Congress intended to 
require that ``board committees that set compensation policy will 
consist only of directors who are independent.'' \17\ In addition, 
Congress sought to provide ``shareholders in a public company'' with 
``additional disclosures involving compensation practices.'' \18\ 
Although Section 10C includes numerous provisions applicable to the 
``compensation committees'' of listed issuers, it does not require a 
listed issuer to have a compensation committee or a committee that 
performs functions typically assigned to a compensation committee. 
Moreover, Section 10C does not provide that, in the absence of a 
compensation committee, the entire board of directors will be 
considered to be the compensation committee, nor does it include 
provisions that have the effect of requiring a compensation committee 
as a practical matter.
---------------------------------------------------------------------------

    \17\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of 
the Committee of Conference, Title IX, Subtitle E ``Accountability 
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29, 
2010).
    \18\ Id.
---------------------------------------------------------------------------

    Neither the Act nor the Exchange Act defines the term 
``compensation committee.'' \19\ Our rules do not

[[Page 38424]]

currently require that a listed issuer establish a compensation 
committee. Current exchange listing standards, however, generally 
require listed issuers either to have a compensation committee or to 
have independent directors determine, recommend or oversee specified 
executive compensation matters.\20\ For example, the New York Stock 
Exchange (``NYSE'') requires a listed issuer to have a compensation 
committee composed solely of independent directors and to assign 
various executive compensation-related tasks to that committee.\21\ On 
the other hand, the NASDAQ Stock Market (``Nasdaq'') does not mandate 
that a listed issuer have a compensation committee, but requires that 
executive compensation be determined or recommended to the board for 
determination either by a compensation committee composed solely of 
independent directors or by a majority of the board's independent 
directors in a vote in which only independent directors 
participate.\22\ Some of the other exchanges have standards comparable 
to the NYSE's and require their listed issuers to have independent 
compensation committees.\23\ Other exchanges have standards comparable 
to Nasdaq's and, in the absence of a compensation committee, require 
executive compensation determinations to be made or recommended by a 
majority of independent directors on the listed issuer's board.\24\
---------------------------------------------------------------------------

    \19\ By contrast, Section 3(a)(58) of the Exchange Act defines 
an ``audit committee'' as ``a committee (or equivalent body) 
established by and amongst the board of directors of an issuer for 
the purpose of overseeing the accounting and financial reporting 
processes of the issuer and audits of the financial statements of 
the issuer; and * * * if no such committee exists with respect to an 
issuer, the entire board of directors of the issuer.''
    \20\ There are some exchanges registered under Section 6(a) of 
the Exchange Act that have not adopted listing standards that 
require executive compensation determinations for listed issuers to 
be made or recommended by an independent compensation committee or 
independent directors. However, these exchanges, which include the 
BOX Options Exchange, International Securities Exchange, EDGA 
Exchange, EDGX Exchange, BATS Y-Exchange, and C2 Options Exchange, 
currently either trade securities only pursuant to unlisted trading 
privileges or trade only standardized options. In addition, the 
listing standards of certain exchanges that are registered with the 
Commission for the purpose of trading security futures do not 
address executive compensation matters. See Section II.B.1, below, 
for a discussion of these types of exchanges.
    \21\ See NYSE Listed Company Manual Section 303A.05. Section 
303A.05 permits a listed issuer's board to allocate the 
responsibilities of the compensation committee to another committee, 
provided that the committee is composed entirely of independent 
directors and has a committee charter. The NYSE exempts certain 
issuers from this requirement, including controlled companies, 
limited partnerships, companies in bankruptcy, and closed-end and 
open-end management investment companies registered under the 
Investment Company Act. See NYSE Listed Company Manual Section 
303A.00.
    \22\ See Nasdaq Rule 5605(d). Based on data supplied by Nasdaq, 
we understand that fewer than 2% of its listed issuers utilize the 
alternative of having independent board members, and not a 
committee, oversee compensation. See also Nasdaq IM 5605-6 (stating 
that the Nasdaq rule ``is intended to provide flexibility for a 
[c]ompany to choose an appropriate board structure and to reduce 
resource burdens, while ensuring [i]ndependent [d]irector control of 
compensation decisions.''). Nasdaq exempts certain issuers from this 
requirement, including asset-backed issuers and other passive 
issuers, cooperatives, limited partnerships, management investment 
companies registered under the Investment Company Act, and 
controlled companies. See Nasdaq Rules 5615(a) and 5615(c)(2).
    \23\ See NYSE Arca Rule 5.3(k)(4); National Stock Exchange Rule 
15.5(d)(5); and NASDAQ OMX PHLX Rule 867.05.
    \24\ See NASDAQ OMX BX Rule 4350(c)(3); NYSE Amex Company Guide 
Section 805; Chicago Board Options Exchange Rule 31.10; Chicago 
Stock Exchange Article 22, Rules 19(d) and 21; and BATS Exchange 
Rule 14.10(c)(4).
---------------------------------------------------------------------------

    Proposed Rule 10C-1(b) would direct the exchanges to adopt listing 
standards that would apply to a listed issuer's compensation committee 
or, in the absence of such a committee, any other board committee that 
performs functions typically performed by a compensation committee, 
including oversight of executive compensation. Proposed Rule 10C-1(b), 
however, would not require the independence listing requirements to 
apply to members of the board who oversee executive compensation in the 
absence of a board committee.\25\
---------------------------------------------------------------------------

    \25\ As noted, to the extent no board committee is authorized to 
oversee executive compensation, under applicable listing standards, 
board determinations with respect to executive compensation matters 
may be made by the full board with only independent directors 
participating. In such situations, under state corporate law, we 
understand that action by the independent directors would generally 
be considered action by the full board, not action by a committee.
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Comments on this proposal were generally favorable. Many 
commentators supported the functional approach of the proposed rule, 
which would require compensation committee independence listing 
standards to apply to any board committee charged with oversight of 
executive compensation, regardless of its formal title.\26\ In response 
to our request for comment on whether we should direct the exchanges to 
apply the proposed rule's requirements to directors who oversee 
executive compensation matters in the absence of a formal committee 
structure, several commentators recommended that we do so,\27\ and two 
of these commentators suggested that such a requirement would help 
ensure that companies could not rely on technicalities or loopholes to 
avoid independent director oversight of executive compensation.\28\ 
Another commentator, however, argued that the final rule should not 
apply to independent directors who determine, or recommend to the 
board, executive compensation matters in the absence of a formal 
committee structure.\29\ This commentator believed that broadening the 
scope of the rule to apply to a group of directors who determine 
executive compensation in lieu of a formal committee is not clearly 
mandated by Section 10C and would burden listed issuers that do not 
have a board committee overseeing executive compensation, without 
necessarily improving their oversight of executive compensation.\30\
---------------------------------------------------------------------------

    \26\ See, e.g., letters from Chris Barnard (``Barnard''), the 
Chartered Financial Analyst Institute (``CFA'') and Railpen 
Investments (``Railpen'').
    \27\ See, e.g., letters from Barnard, Better Markets Inc. 
(``Better Markets''), CFA, Georg Merkl (``Merkl''), National 
Association of Corporate Directors (``NACD'') and Railpen.
    \28\ See letters from NACD and Railpen.
    \29\ See letter from the American Bar Association, Business Law 
Section (``ABA'').
    \30\ This commentator also noted that, ``[a]s a practical 
matter, we understand that most listed companies that are 
accelerated filers under the Exchange Act, and many listed companies 
that are smaller reporting companies, already have compensation 
committees or committees performing the functions of compensation 
committees.'' Id.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether the 
exchanges should be prohibited from listing issuers that do not have 
compensation committees. Several commentators supported the concept of 
mandatory compensation committees for listed issuers, on the basis that 
executive compensation deserves special, ongoing attention by a 
dedicated working group of the board; a committee structure may promote 
increased board expertise on compensation; and having a formal 
committee would help promote accountability to shareholders.\31\ 
Several other commentators opposed such requirements, arguing that the 
exchanges should be allowed broad discretion on how listed issuers 
determine compensation matters.\32\
---------------------------------------------------------------------------

    \31\ See letters from the American Federation of Labor and 
Congress of Industrial Organizations (``AFL-CIO''), the Council of 
Institutional Investors (``CII''), Merkl and the Ohio Public 
Employees' Retirement System (``OPERS'').
    \32\ See letters from ABA, CFA and NACD.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are adopting Rule 10C-1(b) 
substantially as proposed. Under the final rule, the exchanges will be 
directed to adopt listing standards that apply to any committee of the 
board that performs functions typically performed by a compensation 
committee, including oversight of executive compensation, whether or 
not such committee also

[[Page 38425]]

performs other functions or is formally designated as a compensation 
committee.\33\ In addition, the listing standards adopted by the 
exchanges must also apply the director independence requirements of 
Rule 10C-1(b)(1), the requirements relating to consideration of a 
compensation adviser's independence in Rule 10C-1(b)(4), and the 
requirements relating to responsibility for the appointment, 
compensation and oversight of compensation advisers in Rules 10C-
1(b)(2)(ii) and (iii) to the members of a listed issuer's board of 
directors who, in the absence of a board committee, oversee executive 
compensation matters on behalf of the board of directors. We believe 
this approach is an appropriate way to implement Section 10C. The 
listing standards are intended to benefit investors by requiring that 
the independent directors of a listed issuer oversee executive 
compensation matters, consider independence criteria before retaining 
compensation advisers and have responsibility for the appointment, 
compensation and oversight of these advisers. We believe it would 
benefit investors to implement Section 10C in a manner that does not 
allow listed issuers to avoid these listing standards by simply not 
having a compensation committee or another board committee oversee 
executive compensation matters.
---------------------------------------------------------------------------

    \33\ For example, if a listed issuer has a ``corporate 
governance committee'' or a ``human resources committee,'' the 
responsibilities of which include, among other matters, oversight of 
executive compensation, such committee will be subject to the 
compensation committee listing requirements of the applicable 
exchange.
---------------------------------------------------------------------------

    We have determined not to require the exchanges to apply the 
listing standards relating to the compensation committee's authority to 
retain compensation advisers, Rule 10C-1(b)(2)(i), or required funding 
for payment of such advisers to directors who oversee executive 
compensation matters outside of the structure of a formal board 
committee, Rule 10C-1(b)(3). As noted above, we understand that action 
by independent directors acting outside of a formal committee structure 
would generally be considered action by the full board of directors. As 
a result, we believe it is unnecessary to apply these requirements to 
directors acting outside of a formal committee structure, as they 
retain all the powers of the board of directors in making executive 
compensation determinations.
    We are implementing this change by defining the term ``compensation 
committee'' so that it includes, for all purposes other than the 
requirements relating to the authority to retain compensation advisers 
in Rule 10C-1(b)(2)(i) and required funding for payment of such 
advisers in Rule 10C-1(b)(3), the members of the board of directors who 
oversee executive compensation matters on behalf of the board of 
directors in the absence of a formal committee. For ease of reference 
throughout this release, in our discussion of the final rules we are 
adopting, references to an issuer's ``compensation committee'' include 
any committee of the board that performs functions typically performed 
by a compensation committee, including oversight of executive 
compensation, whether or not formally designated as a ``compensation 
committee,'' as well as, to the extent applicable, those members of a 
listed issuer's board of directors who oversee executive compensation 
matters on behalf of the board of directors in the absence of such a 
committee.
    The 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. We believe this aspect of the 
final rule is consistent with the requirements of Section 10C, which 
does not direct us to require such a committee. Moreover, in light of 
our determination to apply the requirements for director independence, 
consideration of adviser independence, and responsibility for the 
appointment, compensation and oversight of compensation advisers to 
those members of a listed issuer's board of directors who oversee 
executive compensation matters on behalf of the board of directors in 
the absence of a formal committee, there will be little difference 
between the requirements applicable to listed issuers that do not have 
compensation committees as compared to those applicable to issuers that 
do have compensation committees.
2. Independence Requirements
    Proposed Rule 10C-1(b)(1) would require each member of a listed 
issuer's compensation committee to be a member of the board of 
directors and to be independent. We proposed to require that the 
exchanges develop a definition of independence applicable to 
compensation committee members after considering relevant factors, 
including, but not limited to, the two factors enumerated in Section 
10C(a)(3). We are adopting these requirements as proposed, except that, 
as discussed above, this aspect of the final rule will also apply to 
those members of a listed issuer's board of directors who oversee 
executive compensation matters on behalf of the board of directors in 
the absence of a board committee.
a. Proposed Rule
    Most exchanges that list equity securities already require 
directors on compensation committees or directors determining or 
recommending executive compensation matters to be ``independent'' under 
their general independence standards. Although independence 
requirements and standards vary somewhat among the different exchanges, 
listing standards generally prescribe certain bright-line independence 
tests (including restrictions on compensation, employment and familial 
or other relationships with the listed issuer or the executive officers 
of the listed issuer that could interfere with the exercise of 
independent judgment) that directors must meet in order to be 
considered independent.\34\ For example, both NYSE and Nasdaq rules 
preclude a finding of independence if the director is or recently was 
employed by the listed issuer, the director's immediate family member 
is or recently was employed as an executive officer of the listed 
issuer, or the director or director's family member received 
compensation from the listed issuer in excess of specified limits.\35\ 
In addition, under both NYSE and Nasdaq rules, directors may be 
disqualified based on their or their family members' relationships with 
a listed issuer's auditor, affiliation with entities that have material 
business relationships with the listed issuer, or employment at a 
company whose compensation committee includes any of the listed 
issuer's executive officers.\36\ We note, however, that with the 
exception of audit committee membership requirements, stock ownership 
alone will not automatically preclude a director from being considered 
independent under either NYSE or Nasdaq listing standards.\37\ The NYSE 
and Nasdaq also require their listed issuers' boards to affirmatively 
determine that each independent director either, in NYSE's case, has no 
material relationship with the issuer \38\ or, in Nasdaq's case, has no 
relationship which, in the opinion of the issuer's board of directors, 
would interfere with the director's exercise of independent judgment in 
carrying out his or her

[[Page 38426]]

responsibilities.\39\ The other exchanges have similar 
requirements.\40\
---------------------------------------------------------------------------

    \34\ See NYSE Listed Company Manual Section 303A.02(b); Nasdaq 
Rule 5605(a)(2).
    \35\ See id.
    \36\ See id.
    \37\ See Commentary to NYSE Listed Company Manual Section 
303A.02(a); Nasdaq Rule 5605; Nasdaq IM-5605.
    \38\ See NYSE Rule 303A.02(a).
    \39\ See Nasdaq Rule 4200(a)(15).
    \40\ See, e.g., NYSE Arca Rule 5.3(k)(1) and NYSE AMEX Company 
Guide Section 803.A.02.
---------------------------------------------------------------------------

    In addition to meeting exchange listing standards, there are other 
reasons for members of the compensation committee to be independent. 
For example, in order for a securities transaction between an issuer 
and one of its officers or directors to be exempt from short-swing 
profit liability under Section 16(b) of the Exchange Act, the 
transaction must be approved by the full board of directors or by a 
committee of the board that is composed solely of two or more ``Non-
Employee Directors,'' as defined in Exchange Act Rule 16b-3(b)(3).\41\ 
We understand that many issuers use their independent compensation 
committees to avail themselves of this exemption.\42\ Similarly, if an 
issuer wishes to preserve the tax deductibility of the amounts of 
certain awards paid to executive officers, among other things, the 
performance goals of such awards must be determined by a compensation 
committee composed of two or more ``outside directors,'' as defined in 
Section 162(m) of the Internal Revenue Code.\43\ The definitions of 
``Non-Employee Director'' and ``outside director'' are similar to the 
exchanges' definitions of independent director.
---------------------------------------------------------------------------

    \41\ As defined in Exchange Act Rule 16b-3(b)(3)(i) [17 CFR 
240.16b-3(b)(3)(i)], a ``Non-Employee Director'' is a director who 
is not currently an officer (as defined in Rule 16a-1(f)) of the 
issuer or a parent or subsidiary of the issuer, or otherwise 
currently employed by the issuer or a parent or subsidiary of the 
issuer; does not receive compensation, either directly or 
indirectly, from the issuer or a parent or subsidiary of the issuer 
for services rendered as a consultant or in any capacity other than 
as a director, except for an amount that does not exceed the dollar 
amount for which disclosure would be required pursuant to Item 
404(a) of Regulation S-K; and does not possess an interest in any 
other transaction for which disclosure would be required pursuant to 
Item 404(a) of Regulation S-K. In addition, Rule 16b-3(b)(3)(ii) 
provides that a Non-Employee Director of a closed-end investment 
company is a director who is not an ``interested person'' of the 
issuer, as that term is defined in Section 2(a)(19) of the 
Investment Company Act [15 U.S.C. 80a-2(a)(19)].
    \42\ See letter from Sullivan & Cromwell LLP to Facilitating 
Shareholder Director Nominations, Release No. 34-60089, available at 
http://www.sec.gov/comments/s7-10-09/s71009-430.pdf. (``In our 
experience, many compensation committee charters require their 
members to meet the requirements of Rule 16b-3 and Section 
162(m).''); Ira G. Bogner & Michael Krasnovsky, ``Exchange Rules 
Impact Compensation Committee Composition,'' The Metropolitan 
Corporate Counsel, Apr. 2004, at 17 (``Most compensation committees 
of public companies include at least two directors that are `outside 
directors' under Section 162(m) of the Internal Revenue Code * * * 
and `non-employee directors' under Rule 16b-3 of the Securities 
Exchange Act * * *.'').
    \43\ A director is an ``outside director'' if the director (A) 
is not a current employee of the publicly held corporation; (B) is 
not a former employee of the publicly held corporation who receives 
compensation for prior services (other than benefits under a tax-
qualified retirement plan) during the taxable year; (C) has not been 
an officer of the publicly held corporation; and (D) does not 
receive remuneration from the publicly held corporation, either 
directly or indirectly, in any capacity other than as a director. 
For this purpose, remuneration includes any payment in exchange for 
goods or services. Section 162(m) of the Internal Revenue Code of 
1986, as amended. Treas. Reg. Section 1.162-27(e)(3).
---------------------------------------------------------------------------

    The proposed rule would direct the exchanges to develop a 
definition of independence applicable to compensation committee members 
after considering relevant factors, including, but not limited to, a 
director's source of compensation, including any consulting, advisory 
or other compensatory fee paid by the issuer to such director, and 
whether a director is affiliated with the issuer, a subsidiary of the 
issuer, or an affiliate of a subsidiary of the issuer. We did not 
propose to specify any additional factors that the exchanges must 
consider in determining independence requirements for members of 
compensation committees.
    In proposing Rule 10C-1(b)(1), we considered the similarities and 
differences between Section 952 of the Act and Section 301 of the 
Sarbanes-Oxley Act of 2002.\44\ Section 301 of the Sarbanes-Oxley Act 
added Section 10A(m)(1) to the Exchange Act,\45\ which required the 
Commission to direct the exchanges to prescribe independence 
requirements for audit committee members. Although the independence 
factors in Section 10C(a)(1) are similar to those in Section 
10A(m)(1)--and indeed, Section 952 of the Act essentially provides the 
compensation committee counterpart to the audit committee requirements 
of Section 301 of the Sarbanes-Oxley Act--one significant difference is 
that Section 10C(a) requires only that the exchanges ``consider 
relevant factors'' (emphasis added), which include the source of 
compensation and any affiliate relationship, in developing independence 
standards for compensation committee members, whereas Section 10A(m) 
expressly states that certain relationships preclude independence: An 
audit committee member ``may not, other than in his or her capacity as 
a member of the audit committee * * * [a]ccept any consulting, 
advisory, or other compensatory fee from the issuer; or [b]e an 
affiliated person of the issuer or any subsidiary thereof'' (emphasis 
added).\46\
---------------------------------------------------------------------------

    \44\ Public Law 107-204, 116 Stat. 745 (2002).
    \45\ 15 U.S.C. 78j-1(m)(1).
    \46\ See Section 10A(m) of the Exchange Act. Exchange Act Rule 
10A-3 states that in order to be considered ``independent,'' an 
audit committee member ``may not, other than in his or her capacity 
as a member of the audit committee, the board of directors, or any 
other board committee * * * [a]ccept directly or indirectly any 
consulting, advisory, or other compensatory fee from the issuer or 
any subsidiary thereof * * *.'' For non-investment company issuers, 
the audit committee member also cannot be an affiliated person of 
the issuer or its subsidiaries. For investment company issuers, the 
audit committee member cannot be an ``interested person'' of the 
issuer as defined in Section 2(a)(19) of the Investment Company Act.
---------------------------------------------------------------------------

    As a result, we interpret Section 10C as providing the exchanges 
more discretion to determine the standards of independence that 
compensation committee members are required to meet than they are 
provided under Section 10A with respect to audit committee members. 
Section 10A(m) prescribes minimum criteria for the independence of 
audit committee members. In contrast, Section 10C gives the exchanges 
the flexibility to establish their own minimum independence criteria 
for compensation committee members after considering relevant factors, 
including the two enumerated in Section 10C(a)(3). Accordingly, the 
proposed rule would allow each exchange to establish its own 
independence definition, subject to Commission review and approval 
pursuant to Section 19(b) of the Exchange Act, provided the exchange 
considers relevant factors in establishing its own standards, including 
those specified in Section 10C(a)(3).
b. Comments on the Proposed Rule
    Comments on this proposal were generally favorable. Many 
commentators supported permitting the exchanges to establish their own 
independence criteria for compensation committee members, provided they 
consider the statutorily-required factors.\47\ One commentator claimed 
that this approach would utilize the relative strengths and experiences 
of the exchanges by avoiding a ``one size fits all'' approach and could 
be more conducive to responding quickly to changes in corporate 
governance.\48\ Another commentator noted that the proposal permitted 
each exchange to develop more finely tuned listing rules that

[[Page 38427]]

reflect the particular characteristics of each exchange's listed 
companies.\49\
---------------------------------------------------------------------------

    \47\ See, e.g., letters from ABA, Barnard, Sanjai Bhagat, et al. 
(``Bhagat''), the Center on Executive Compensation (``CEC''), CFA, 
Davis Polk & Wardwell LLP (``Davis Polk''), MarkWest Energy 
Partners, L.P. (``MarkWest''), NYSE Euronext (``NYSE''), Pfizer Inc. 
(``Pfizer'') and Sullivan & Cromwell LLP (``S&C'').
    \48\ See letter from MarkWest.
    \49\ See letter from ABA (noting that ``the average board size 
of an S&P 100 company (which are primarily listed on the NYSE) is 
approximately 50% larger than the average board size of a Silicon 
Valley 150 company (which are primarily listed on Nasdaq'' and that 
``[i]nvestors in these disparate categories of companies have 
meaningfully different expectations and interests in the governance 
context'').
---------------------------------------------------------------------------

    Allowing the exchanges the latitude to establish their own 
independence criteria concerned some commentators, however.\50\ These 
commentators cautioned against permitting the exchanges to establish 
their own independence criteria and argued in support of a uniform 
definition of independence across all exchanges.\51\ One of these 
commentators claimed that uniform requirements would serve as a 
deterrent to engaging in a ``race to the bottom.'' \52\ Another 
commentator recommended that the exchanges' independence criteria 
should preclude a finding of independence if a director fails to meet 
the definitions of an ``outside'' director under Section 162(m) of the 
Internal Revenue Code or a ``non-employee'' director under Exchange Act 
Rule 16b-3(b)(3); is a party to a related party transaction that must 
be disclosed pursuant to Item 404 of Regulation S-K; or has an 
immediate family member who is employed by the company.\53\
---------------------------------------------------------------------------

    \50\ See, e.g., letters from the American Federation of State, 
County and Municipal Employees (``AFSCME''), California Public 
Employees' Retirement System (``CalPERS''), the Colorado Public 
Employees' Retirement Association (``COPERA''), OPERS and USS.
    \51\ See letters from CalPERS, Railpen and USS.
    \52\ See letter from USS.
    \53\ See letter from AFL-CIO.
---------------------------------------------------------------------------

    Some commentators urged us to require the exchanges to consider 
additional factors in developing a definition of independence.\54\ 
Several commentators advocated that we should require the exchanges to 
include business or personal relationships between a compensation 
committee member and executive officers of the issuer as factors for 
consideration,\55\ as well as board interlocks.\56\ Another commentator 
believed that mandatory factors for consideration should include 
linkages between a director's family members and the company or its 
affiliates and a director's relationships with other directors.\57\ One 
commentator believed that, in setting independence standards for 
compensation committee members, the exchanges should be required to 
consider all factors relevant to assessing the independence of a board 
member, including personal, family and business relationships, and all 
other factors that might compromise a board member's judgment on 
matters relating to executive compensation.\58\
---------------------------------------------------------------------------

    \54\ See, e.g., letters from AFSCME, Better Markets, CFA, CII, 
the State Board of Administration of Florida (``FLSBA'') and UAW 
Retiree Medical Benefits Trust (``UAW'').
    \55\ See, e.g., letters from AFL-CIO, AFSCME, CFA, CII, FLSBA 
and UAW.
    \56\ See, e.g., letters from AFSCME, CII, FLSBA and UAW.
    \57\ See letter from CII.
    \58\ See letter from Better Markets.
---------------------------------------------------------------------------

    Three commentators, including the NYSE, stated that we should not 
specify additional mandatory factors that the exchanges must consider 
in developing a definition of independence applicable to compensation 
committee members.\59\ In particular, the NYSE expressed concern that 
if the final rule specifies additional mandatory factors for 
consideration, such factors would be understood by the exchanges and by 
many boards of directors as the Commission's determination that such 
relationships compromise director independence, which would thereby 
effectively preempt the review of compensation committee independence 
standards that the exchanges would be required to undertake under the 
rule.\60\
---------------------------------------------------------------------------

    \59\ See letters from ABA, NYSE and the Society of Corporate 
Secretaries and Governance Professionals (``SCSGP'').
    \60\ See letter from NYSE.
---------------------------------------------------------------------------

    In the Proposing Release, we noted the concern of several 
commentators \61\ that our rules implementing Section 10C not prohibit 
directors affiliated with significant investors (such as private equity 
funds and venture capital firms) from serving on compensation 
committees. We requested comment on whether a director affiliated with 
a shareholder with a significant ownership interest who is otherwise 
independent would be sufficiently independent for the purpose of 
serving on the compensation committee. Many commentators advocated that 
a significant shareholder's stock ownership alone should not preclude 
directors affiliated with the significant shareholder from serving on 
an issuer's compensation committee.\62\ A number of these commentators 
noted that equity ownership by directors serves to align the directors' 
interests with those of the shareholders with respect to compensation 
matters.\63\ According to one commentator, private equity funds 
typically have a strong institutional belief in the importance of 
appropriately structured and reasonable compensation arrangements, and 
the directors elected by such funds are highly incentivized to 
rigorously oversee compensation arrangements because the funds' income, 
success and reputations are dependent on creating value for 
shareholders.\64\ This commentator also noted that, while private 
equity funds may seek to create shareholder value by strengthening or 
replacing the management team of a portfolio company, such funds rarely 
appoint partners or employees of their affiliated private equity firms 
to serve as executives of portfolio companies.\65\
---------------------------------------------------------------------------

    \61\ To facilitate public input on the Act, the Commission has 
provided a series of email links, organized by topic, on its Web 
site at http://www.sec.gov/spotlight/regreformcomments.shtml. The 
public comments we received on Section 952 of the Act before we 
issued the Proposing Release are available on our Web site at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. Several of those commentators suggested that 
stock ownership alone should not automatically disqualify a board 
member from serving as an independent director on the compensation 
committee. See, e.g., letters from ABA, Brian Foley & Company, Inc., 
Compensia, Davis Polk and Frederic W. Cook & Co., Inc. (``Frederic 
Cook'').
    \62\ See, e.g., letters from ABA, AFSCME, Bhagat, CEC, Davis 
Polk, Debevoise, Robert J. Jackson (``Jackson''), the Private Equity 
Growth Capital Council (``PEGCC'') and SCSGP.
    \63\ See, e.g., letters from CEC and Davis Polk.
    \64\ See letter from PEGCC.
    \65\ See id.
---------------------------------------------------------------------------

    One commentator did not believe that directors affiliated with 
large shareholders should be permitted to serve on compensation 
committees, noting that situations could arise where the director's 
obligation to act in the best interest of all shareholders would 
conflict with the director's or large shareholder's own interest.\66\ 
Two additional commentators noted that private equity and venture 
capital firms may engage in significant transactions with an issuer, 
and urged that all ties to the company be considered in evaluating the 
independence of directors affiliated with significant shareowners.\67\
---------------------------------------------------------------------------

    \66\ See letter from Barnard.
    \67\ See letters from AFSCME and UAW.
---------------------------------------------------------------------------

    Our proposed rule would require the exchanges to consider current 
relationships between the issuer and the compensation committee member, 
and we requested comment on whether relationships prior to a director's 
appointment to the compensation committee or, for directors already 
serving as compensation committee members when the new listing 
standards take effect, prior to the effective date of the new listing 
standards, should also be considered. Only two commentators expressed 
support for establishing any such ``look-back'' period.\68\ One 
commentator, although not supporting a look-back period, believed that 
the decision of whether to require one should be determined not by the 
Commission but

[[Page 38428]]

by the exchanges.\69\ Other commentators argued that a look-back period 
was not necessary because the two largest exchanges (NYSE and Nasdaq) 
currently impose look-back requirements on listed issuers in their 
standards regarding director independence.\70\
---------------------------------------------------------------------------

    \68\ See letters from Better Markets and CFA.
    \69\ See letter from Davis Polk.
    \70\ See letters from ABA and CEC.
---------------------------------------------------------------------------

c. Final Rule
    After consideration of the comments, we are adopting the 
requirements as proposed, except that we are also extending them to 
apply to those members of a listed issuer's board of directors who 
oversee executive compensation matters on behalf of the board of 
directors in the absence of a board committee. Under the final rule, 
the exchanges will be directed to establish listing standards requiring 
each member of a listed issuer's compensation committee to be a member 
of the board of directors and to be independent. The final rule does 
not require that exchanges establish a uniform definition of 
independence. We believe this approach is consistent with the mandate 
in Section 10C(a)(3). Further, given the wide variety of issuers that 
are listed on exchanges, we believe that the exchanges should be 
provided with flexibility to develop independence requirements 
appropriate for the issuers listed on each exchange and consistent with 
the requirements of Rule 10C-1(b)(1). Although this provides the 
exchanges with flexibility to develop the appropriate independence 
requirements, as discussed below, the independence requirements 
developed by the exchanges will be subject to review and final 
Commission approval pursuant to Section 19(b) of the Exchange Act.
    In developing their own definitions of independence applicable to 
compensation committee members, the exchanges will be required to 
consider relevant factors, including, but not limited to:
     A director's source of compensation, including any 
consulting, advisory or compensatory fee paid by the issuer; and
     Whether a director is affiliated with the issuer, a 
subsidiary of the issuer, or an affiliate of a subsidiary of the 
issuer.
    The final rule does not specify any additional factors that the 
exchanges must consider in determining independence requirements for 
compensation committee members, nor does the final rule prescribe any 
standards or relationships that will automatically preclude a finding 
of independence. Because the rule's relevant factors cover the same 
matters as the prohibitions in Section 10A(m)'s definition of audit 
committee independence, we expect the exchanges to consider whether 
those prohibitions should also apply to compensation committee members. 
However, consistent with Section 10C, the exchanges are not required to 
adopt those prohibitions in their requirements and will have 
flexibility to consider other factors in developing their requirements.
    As noted above and in the Proposing Release, Section 10C of the 
Exchange Act does not require that the exchanges prohibit all 
affiliates from serving on a compensation committee. In establishing 
their independence requirements, the exchanges may determine that, even 
though affiliated directors are not allowed to serve on audit 
committees, such a blanket prohibition would be inappropriate for 
compensation committees, and certain affiliates, such as 
representatives of significant shareholders, should be permitted to 
serve. However, in response to concerns noted by some commentators that 
significant shareholders may have other relationships with listed 
companies that would result in such shareholders' interests not being 
aligned with those of other shareholders, we emphasize that it is 
important for exchanges to consider other ties between a listed issuer 
and a director, in addition to share ownership, that might impair the 
director's judgment as a member of the compensation committee. For 
example, the exchanges might conclude that personal or business 
relationships between members of the compensation committee and the 
listed issuer's executive officers should be addressed in the 
definition of independence.\71\
---------------------------------------------------------------------------

    \71\ As the NYSE Listed Company Manual observes, ``the concern 
is independence from management.'' See Commentary to NYSE Rule 
303A.02(a). See also the Commentary to NYSE Rule 303A.02(a), which 
discusses the wide range of circumstances that could signal 
conflicts of interest or that might bear on the materiality of the 
relationship between the director and the issuer.
---------------------------------------------------------------------------

    Although each exchange must consider affiliate relationships in 
establishing a definition of compensation committee independence, there 
is no requirement to adopt listing standards precluding compensation 
committee membership based on any specific relationships. Accordingly, 
we do not believe it is necessary to separately define the term 
``affiliate'' for purposes of Rule 10C-1. In addition, the final rule 
does not impose any required look-back periods that must be 
incorporated in exchange listing standards relating to the independence 
of compensation committee members. We agree with commentators that the 
determination of whether to impose a look-back period in evaluating 
compensation committee member independence should be left to the 
exchanges and note that the exchanges already incorporate various look-
back periods in their general criteria for director independence. In 
this respect, the final rule is similar to Exchange Act Rule 10A-3, 
which did not impose a mandatory look-back period for evaluating audit 
committee member independence in light of look-back periods already 
required by the exchanges for evaluating director independence 
generally.
    Consistent with the proposal, the exchanges' definitions of 
independence for compensation committee members will be implemented 
through proposed rule changes that the exchanges will be required to 
file pursuant to Section 19(b) of the Exchange Act, which are subject 
to the Commission's review and approval.\72\ Consistent with the 
proposal, Rule 10C-1(a)(4) will require that each proposed rule change 
submission include, in addition to any other information required under 
Section 19(b) of the Exchange Act and the rules thereunder: a review of 
whether and how the proposed listing standards satisfy the requirements 
of the final rule; a discussion of the exchange's consideration of 
factors relevant to compensation committee independence; and the 
definition of independence applicable to compensation committee members 
that the exchange proposes to adopt or retain in light of such 
review.\73\ The Commission will then consider,

[[Page 38429]]

prior to final approval, whether the exchanges considered the relevant 
factors outlined in Section 10C(a) and whether the exchanges' proposed 
rule changes are consistent with the requirements of Section 6(b) and 
Section 10C of the Exchange Act.
---------------------------------------------------------------------------

    \72\ The standard of review for approving proposed exchange 
listing standards is found in Section 19(b)(2)(C) of the Exchange 
Act, which provides that ``[t]he Commission shall approve a proposed 
rule change of a self-regulatory organization if it finds that such 
proposed rule change is consistent with the requirements of this 
title and the rules and regulations issued under this title that are 
applicable to such organization.'' Under Section 6(b) of the 
Exchange Act, the rules of an exchange must be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.''
    \73\ A submission would be required even if an exchange believes 
that its existing rules satisfy the requirements of Rule 10C-1. In 
such a circumstance, the exchange's rule submission would explain 
how the exchange's existing rules satisfy the requirements of Rule 
10C-1, and the submission would be subject to the Commission's 
review and approval.
---------------------------------------------------------------------------

3. Authority To Retain Compensation Advisers; Responsibilities; and 
Funding
    Section 10C(c)(1) of the Exchange Act provides that the 
compensation committee of a listed issuer may, in its sole discretion, 
retain or obtain the advice of a ``compensation consultant,'' \74\ and 
Section 10C(d) extends this authority to ``independent legal counsel 
and other advisers.'' \75\ Both sections also provide that the 
compensation committee shall be directly responsible for the 
appointment, compensation and oversight of the work of compensation 
advisers. Sections 10C(c)(1)(C) and 10C(d)(3) provide that the 
compensation committee's authority to retain, and responsibility for 
overseeing the work of, compensation advisers may not be construed to 
require the compensation committee to implement or act consistently 
with the advice or recommendations of a compensation adviser or to 
affect the ability or obligation of the compensation committee to 
exercise its own judgment in fulfillment of its duties. To ensure that 
the listed issuer's compensation committee has the necessary funds to 
pay for such advisers, Section 10C(e) provides that a listed issuer 
shall provide ``appropriate funding,'' as determined by the 
compensation committee, for payment of ``reasonable compensation'' to 
compensation advisers.\76\
---------------------------------------------------------------------------

    \74\ See Exchange Act Section 10C(c)(1).
    \75\ See Exchange Act Section 10C(d)(1).
    \76\ See Exchange Act Section 10C(e).
---------------------------------------------------------------------------

    We proposed Rules 10C-1(b)(2) and (3) to implement these statutory 
requirements. We are adopting these requirements substantially as 
proposed.
a. Proposed Rule
    Proposed Rule 10C-1(b)(2) would implement Sections 10C(c)(1) and 
(d) by repeating the provisions set forth in those sections regarding 
the compensation committee's authority to retain or obtain a 
compensation adviser, its direct responsibility for the appointment, 
compensation and oversight of the work of any compensation adviser, and 
the related rules of construction. In addition, proposed Rule 10C-
1(b)(3) would implement Section 10C(e) by repeating the provisions set 
forth in that section regarding the requirement to provide appropriate 
funding for the payment of reasonable compensation, as determined by 
the compensation committee, to compensation advisers.
    In the Proposing Release, we noted that while the statute provides 
that compensation committees of listed issuers shall have the express 
authority to hire ``independent legal counsel,'' the statute does not 
require that they do so. Similar to our interpretation \77\ of Section 
10A(m) of the Exchange Act, which gave the audit committee authority to 
engage ``independent legal counsel,'' \78\ we do not construe the 
requirements related to independent legal counsel and other advisers as 
set forth in Section 10C(d)(1) of the Exchange Act as requiring a 
compensation committee to retain independent legal counsel or as 
precluding a compensation committee from retaining non-independent 
legal counsel or obtaining advice from in-house counsel or outside 
counsel retained by the issuer or management.
---------------------------------------------------------------------------

    \77\ See Standards Relating to Listed Company Audit Committees, 
Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788], n. 114 (``As 
proposed, the requirement does not preclude access to or advice from 
the company's internal counsel or regular outside counsel. It also 
does not require an audit committee to retain independent 
counsel.'').
    \78\ See Exchange Act Section 10A(m)(5)(``Each audit committee 
shall have the authority to engage independent counsel and other 
advisers, as it determines necessary to carry out its duties.'').
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Many commentators expressed general support for the proposed 
requirements.\79\ While several commentators suggested that 
compensation committees should use, or be permitted to use, only 
independent compensation advisers,\80\ other commentators agreed with 
the interpretive position expressed in the Proposing Release that the 
statute does not require a compensation committee to retain independent 
legal counsel or preclude the compensation committee from retaining 
non-independent legal counsel or obtaining advice from in-house counsel 
or counsel retained by the issuer or management.\81\ One commentator 
noted that the proposed rule should not be interpreted to ``apply to or 
interfere with a compensation committee's dealings with legal counsel 
from whom it may obtain advice, but which was not retained or selected 
by the committee, such as in-house and company counsel. Thus, the 
proposed language * * * should be clear that the requirement that 
independent legal counsel and other advisers be subject to the direct 
oversight of the compensation committee applies only to such counsel 
and advisors who are specifically and separately retained by the 
compensation committee.'' \82\ This commentator thought it would be 
helpful to include the Commission's interpretation of the statute in 
the text of the rule,\83\ although one commentator viewed such 
clarification as unnecessary.\84\ One commentator asked that we clarify 
whether the interpretive view expressed in the Proposing Release would 
apply equally to compensation consultants--i.e., whether a compensation 
committee could obtain advice from compensation consultants retained by 
management.\85\
---------------------------------------------------------------------------

    \79\ See, e.g., letters from Barnard, CalSTRS, Davis Polk, 
Pfizer and SCSGP.
    \80\ See letters from AFL-CIO, Better Markets, CalPERS, CFA 
Institute, CII, FLSBA and Railpen.
    \81\ See, e.g., letters from ABA, CEC (noting that ``the 
compensation committee is in the best position to determine whether 
a particular advisor would be an appropriate advisor following a 
review of all factors and subject to appropriate disclosure'') and 
Merkl.
    \82\ See letter from ABA.
    \83\ See id.
    \84\ See letter from Merkl.
    \85\ See letter from Carl Struby.
---------------------------------------------------------------------------

    We asked for comment on whether we should define what constitutes 
an ``independent legal counsel.'' One commentator stated, without 
explanation, that it would not be necessary for us to define what 
constitutes an ``independent legal counsel.'' \86\ Another commentator 
believed that we should provide more guidance for issuers to determine 
whether legal counsel is ``independent,'' so that listed issuers would 
have greater assurance that they are in compliance with Exchange Act 
Section 10C(d)(1).\87\
---------------------------------------------------------------------------

    \86\ See letter from Merkl.
    \87\ See letter from Robert M. Fields (Apr. 6, 
2011)(``Fields'').
---------------------------------------------------------------------------

c. Final Rule
    We are adopting the rule substantially as proposed, with 
modifications to clarify that the scope of the requirements is limited 
to only those compensation advisers retained by the compensation 
committee and to apply the requirement that the compensation committee 
be directly responsible for the appointment, compensation and oversight 
of the work of any compensation adviser retained by the compensation 
committee to those members of a listed issuer's board of directors who 
oversee executive compensation matters on behalf of the board of 
directors in the absence of a board committee. Under the final rules, 
the exchanges will be directed to adopt listing standards that provide 
that:
     The compensation committee may, in its sole discretion, 
retain or obtain the advice of a compensation adviser;

[[Page 38430]]

     The compensation committee, which for this purpose 
includes those members of a listed issuer's board of directors who 
oversee executive compensation matters on behalf of the board of 
directors in the absence of a board committee, shall be directly 
responsible for the appointment, compensation and oversight of the work 
of any compensation adviser retained by the compensation committee; and
     Each listed issuer must provide for appropriate funding 
for payment of reasonable compensation, as determined by the 
compensation committee, to any compensation adviser retained by the 
compensation committee.

Consistent with Sections 10C(c)(1)(c) and 10C(d)(3), the final rule may 
not be construed to require the compensation committee to implement or 
act consistently with the advice or recommendations of any adviser to 
the compensation committee or to affect the ability or obligation of a 
compensation committee to exercise its own judgment in fulfillment of 
the duties of the compensation committee.
    Consistent with our interpretation of Section 10C, the final rule 
does not require compensation committees to retain or obtain advice 
only from independent advisers. A listed issuer's compensation 
committee may receive advice from non-independent counsel, such as in-
house counsel or outside counsel retained by management, or from a non-
independent compensation consultant or other adviser, including those 
engaged by management. The final rule does not require a compensation 
committee to be directly responsible for the appointment, compensation 
or oversight of compensation advisers that are not retained by the 
compensation committee, such as compensation consultants or legal 
counsel retained by management. Rather, the direct responsibility to 
oversee compensation advisers applies only to those advisers retained 
by a compensation committee, and the obligation of the issuer to 
provide for appropriate funding applies only to those advisers so 
retained. Finally, in light of the provisions of our final rule and the 
fact that commentators did not urge us to define ``independent legal 
counsel,'' we do not believe such a definition is needed. \88\ We note 
that the final rule requires the payment of reasonable compensation not 
only to independent legal counsel but also to ``any other adviser'' to 
the compensation committee, which includes any compensation advisers 
retained by the compensation committee, such as attorneys and 
consultants, whether or not they are independent.
---------------------------------------------------------------------------

    \88\ Similarly, Exchange Act Rule 10A-3 provides that audit 
committees must have the authority to engage ``independent counsel'' 
and that listed issuers must provide for appropriate funding of such 
advisers. Independent counsel is not further defined in Rule 10A-3, 
and we do not believe that there has been any uncertainty arising 
from the absence of such a definition.
---------------------------------------------------------------------------

4. Compensation Adviser Independence Factors
    Section 10C(b) of the Exchange Act provides that the compensation 
committee of a listed issuer may select a compensation adviser only 
after taking into consideration the five independence factors specified 
in Section 10C(b) as well as any other factors identified by the 
Commission. In accordance with Section 10C(b), these factors would 
apply to the selection of compensation consultants, legal counsel and 
other advisers to the committee. The statute does not require a 
compensation adviser to be independent, only that the compensation 
committee of a listed issuer consider the enumerated independence 
factors before selecting a compensation adviser. Section 10C(b)(2) 
specifies that the independence factors identified by the Commission 
must be competitively neutral \89\ and include, at minimum:
---------------------------------------------------------------------------

    \89\ Although there is no relevant legislative history, we 
assume this requirement is intended to address the concern expressed 
by the multi-service compensation consulting firms that the 
disclosure requirements the Commission adopted in 2009 are not 
competitively neutral because they do not address potential 
conflicts of interest presented by boutique consulting firms that 
are dependent on the revenues of a small number of clients. See 
letter from Towers Perrin, commenting on Proxy Disclosure and 
Solicitation Enhancements, Release No. 33-9052 (July 10, 2009), 
available at http://www.sec.gov/comments/s7-13-09/s71309-90.pdf. The 
list of independence factors in Section 10C(b)(2), which addresses 
both multi-service firm ``other services'' conflicts and boutique 
firm ``revenue concentration'' conflicts, is consistent with this 
assumption.
---------------------------------------------------------------------------

     The provision of other services to the issuer by the 
person that employs the compensation consultant, legal counsel or other 
adviser;
     The amount of fees received from the issuer by the person 
that employs the compensation consultant, legal counsel or other 
adviser, as a percentage of the total revenue of the person that 
employs the compensation consultant, legal counsel or other adviser;
     The policies and procedures of the person that employs the 
compensation consultant, legal counsel or other adviser that are 
designed to prevent conflicts of interest;
     Any business or personal relationship of the compensation 
consultant, legal counsel or other adviser with a member of the 
compensation committee; and
     Any stock of the issuer owned by the compensation 
consultant, legal counsel or other adviser.
    We proposed to direct the exchanges to adopt listing standards 
requiring the compensation committee of a listed issuer to consider the 
five factors enumerated in Section 10C(b) of the Exchange Act prior to 
selecting a compensation adviser. We are adopting the rule 
substantially as proposed, but with some changes in response to 
comments.
a. Proposed Rule
    Proposed Rule 10C-1(b)(4) would direct the exchanges to adopt 
listing standards that require the compensation committee of a listed 
issuer to take into account the five factors identified in Section 
10C(b)(2), in addition to any other factors identified by the relevant 
exchange, before selecting a compensation adviser. Under the proposed 
rule, the exchanges would have the ability to add other independence 
factors that must be considered by compensation committees. In the 
Proposing Release, we stated that we did not propose any additional 
factors because we believed that the factors set forth in Section 
10C(b) are ``generally comprehensive,'' although we solicited comment 
as to whether there are any additional independence factors that should 
be taken into consideration by a listed issuer's compensation 
committee.\90\
---------------------------------------------------------------------------

    \90\ See Proposing Release, 76 FR at 18972.
---------------------------------------------------------------------------

    As noted above and in the Proposing Release, Section 10C does not 
require compensation advisers to be independent--only that the 
compensation committee consider factors that may bear upon 
independence. As a result, we did not believe that it would be 
appropriate to establish bright-line or numerical thresholds that would 
affect whether or when the factors listed in Section 10C, or any 
additional factors, must be considered by a compensation committee. For 
example, we did not believe that our rules should provide that a 
compensation committee must consider stock owned by an adviser only if 
ownership exceeds a specified minimum percentage of the issuer's stock, 
or that a committee must consider the amount of revenues that the 
issuer's business represents for an adviser only if the percentage 
exceeds a certain percentage of the adviser's revenues. Accordingly, 
proposed Rule 10C-1(b)(4) would require the listing standards developed 
by the exchanges to include

[[Page 38431]]

the independence factors set forth in the statute and incorporated into 
the rule without any materiality or bright-line thresholds or 
cutoffs.\91\
---------------------------------------------------------------------------

    \91\ As noted above, the exchanges would have the ability to add 
other independence factors that must be considered by compensation 
committees, and these additional factors could include materiality 
or bright-line thresholds or cutoffs.
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Comments on this proposal were mixed. A number of commentators 
supported directing the exchanges to adopt listing standards that 
require the compensation committee to take into account the five 
factors enumerated in Section 10C, in addition to any other factors 
identified by the exchanges.\92\ One multi-service compensation 
consulting firm believed that the five factors listed in Section 
10C(b)(2) were, in total, competitively neutral, but that, on an 
individual basis, some of the factors were not competitively 
neutral.\93\ This commentator suggested that we should provide an 
instruction to the final rules to emphasize that the factors should be 
considered in their totality and that no one factor should be viewed as 
a determinative factor of independence. Another commentator argued that 
the full effects of any independence factor on competition in the 
rapidly evolving advisory industry are not entirely knowable, and that 
the Commission should generally recommend factors that, when applied 
equally across the full spectrum of existing firms, help in achieving 
the goal of adviser independence.\94\
---------------------------------------------------------------------------

    \92\ See, e.g., letters from ABA, Pfizer, SCSGP and USS.
    \93\ See letter from Aon Hewitt (``AON'').
    \94\ See letter from Hodak Value Advisors.
---------------------------------------------------------------------------

    Several commentators argued that some or all of the five factors 
identified in Section 10C(b)(2) and included in the proposed rule were 
not competitively neutral.\95\ Multi-service consulting firms argued 
that the consideration of other services provided to the issuer by the 
person that employs the compensation consultant was not competitively 
neutral as this factor would affect only multi-service firms. For their 
part, smaller consulting firms argued that the consideration of the 
amount of fees received from the issuer as a percentage of a firm's 
total revenues was not competitively neutral because the likelihood of 
revenue concentration would be greater in smaller firms.\96\ Three 
commentators argued that our existing compensation consultant fee 
disclosure requirements disproportionately affect multi-service 
consulting firms, and suggested that we could improve the competitive 
neutrality of our rules by requiring competitively neutral disclosure 
of fees paid to all compensation consultants or advisers.\97\
---------------------------------------------------------------------------

    \95\ See, e.g., letters from Frederic Cook, Longnecker & 
Associates (``Longnecker''), Mercer, Steven Hall & Partners 
(``Steven Hall'') and Towers Watson (``Towers'').
    \96\ See letters from Frederic Cook and Longnecker.
    \97\ See letters from AON, Mercer and Towers.
---------------------------------------------------------------------------

    Many commentators urged us to add more independence factors to the 
list of factors that could affect the independence of a compensation 
adviser.\98\ Several commentators argued that we should include a 
comparison of the amount of fees received for providing executive 
compensation consulting services to the amount of fees received for 
providing non-executive compensation consulting services.\99\ Other 
commentators expressed support for requiring compensation committees to 
consider any business or personal relationship between an executive 
officer of the issuer and an adviser or the person employing the 
compensation adviser.\100\ Some commentators, however, opposed adding 
new factors to the list of factors identified in the proposed 
rule,\101\ although one of these commentators acknowledged that it 
would advise any compensation committee evaluating the independence of 
a potential adviser to consider the business and personal relationships 
between the issuer's executive officers and the adviser or adviser's 
firm.\102\
---------------------------------------------------------------------------

    \98\ See, e.g., letters from ABA, AFL-CIO, AFSCME and USS.
    \99\ See letters from AFL-CIO, AFSCME, Frederic Cook and UAW. 
See also letter from Steven Hall (noting that the ``requirement that 
a compensation committee consider the company's fees paid to a firm 
as a percentage of the firm's overall fees seems to overlook the 
more significant issue of the amount of fees the consulting firm 
receives for services to the compensation committee as a percentage 
of the total fees the firm receives including fees for other 
services to the company'').
    \100\ See, e.g., letters from ABA (supporting consideration of 
relationships between adviser's employer and issuer's executive 
officers), Better Markets, Merkl (supporting consideration of 
relationships between either adviser or adviser's employer and 
issuer's executive officers), and USS (supporting consideration of 
relationships between adviser and issuer's executive officers). One 
commentator supported requiring consideration of business or 
personal relationships between an issuer's executive officers and 
the compensation adviser, but not the adviser's employer. See letter 
from Towers.
    \101\ See, e.g., letters from AON, Meridian Compensation 
Partners (``Meridian''), SCSGP and Steven Hall.
    \102\ See letter from Steven Hall.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on the application 
of the independence factors to different categories of advisers. 
Several commentators requested that we stipulate that a compensation 
committee conferring with or soliciting advice from the issuer's in-
house or outside legal counsel would not be required to consider the 
independence factors with respect to such counsels.\103\ These 
commentators believed that a compensation committee should be required 
to consider the independence factors only when the committee itself 
selects a compensation adviser, but not when it receives advice from, 
but does not select, an adviser.\104\ Moreover, two of these 
commentators questioned the usefulness of the independence assessment 
as it relates to in-house legal counsel, outside legal counsel to an 
issuer or a compensation adviser retained by management, as they are 
not held out, or considered by the compensation committee, to be 
independent.\105\
---------------------------------------------------------------------------

    \103\ See letters from ABA, Davis Polk, McGuire Woods and S&C.
    \104\ See letters from ABA and McGuire Woods.
    \105\ See letters from ABA and S&C.
---------------------------------------------------------------------------

    On the other hand, a number of commentators argued that the 
compensation adviser independence requirements should apply to any 
legal counsel that provides advice to the compensation committee.\106\ 
One of these commentators argued that the language of Section 10C(b)(1) 
is unambiguous and that the final rules should clarify that exchange 
listing standards must require compensation committees to consider the 
independence factors whenever a committee receives advice from legal 
counsel, regardless of whether or not the committee selected 
counsel.\107\
---------------------------------------------------------------------------

    \106\ See, e.g., letters from Better Markets, Robert M. Fields 
(Apr. 29, 2011), Richard Thalheimer and Towers.
    \107\ See letter from Towers.
---------------------------------------------------------------------------

    We also requested comment on whether we should include materiality, 
numerical or other thresholds that would limit the circumstances in 
which a compensation committee is required to consider the independence 
factors. Several commentators opposed including such materiality, 
numerical or other bright-line thresholds in the rule.\108\ These 
commentators expressed concern that such thresholds may not be 
competitively neutral and could reduce the flexibility compensation 
committees have to select advisers best-suited to the issuer. A number 
of commentators supported a materiality threshold with respect to the 
stock ownership factor. One commentator suggested that consideration of 
this factor should be required only if an individual beneficially owns 
in excess of 5% of an outstanding class of an issuer's equity

[[Page 38432]]

securities.\109\ Another commentator suggested a threshold of $50,000 
in fair market value or 5,000 shares of a listed issuer's stock, below 
which an adviser's stock ownership would not be deemed to affect his or 
her independence.\110\ Other commentators suggested that compensation 
committees should be required to consider only stock owned by the lead 
adviser and not stock owned by other employees on the adviser's 
team.\111\
---------------------------------------------------------------------------

    \108\ See letters from Longnecker, McGuireWoods, Meridian, SCSGP 
and Towers.
    \109\ See letter from Steven Hall.
    \110\ See letter from ABA.
    \111\ See letters from AON and Mercer.
---------------------------------------------------------------------------

    Comments were mixed as to whether the final rule should clarify the 
phrases ``provision of other services'' or ``business or personal 
relationships,'' as used in proposed Rule 10C-1(b)(4). Some 
commentators thought no further clarification of the phrase ``provision 
of other services'' was necessary,\112\ and another commented that it 
``is better to have a general principle than to have exhaustive 
detailed rules that may leave loopholes for services that may impair 
the independence of an advisory firm.'' \113\ Two commentators 
suggested defining the phrase to expressly exclude certain 
services.\114\ For example, one commentator suggested excluding advice 
related to broad-based, non-discriminatory plans or surveys.\115\
---------------------------------------------------------------------------

    \112\ See letters from AON and Towers.
    \113\ See letter from Merkl.
    \114\ See letters from Hodak and Mercer.
    \115\ See letter from Mercer.
---------------------------------------------------------------------------

    Some commentators urged that we further define the phrase 
``business or personal relationship.'' \116\ One commentator suggested 
that we should define ``business relationship'' to expressly exclude 
any non-commercial relationship between an adviser and a member of the 
issuer's compensation committee, provided that such relationship does 
not result in significant monetary or economic gain to either party, 
and that we should define ``personal relationship'' to include only 
familial relationships.\117\ Another commentator argued that business 
or personal relationships that are more casual in nature may not be 
relevant to adviser independence and suggested limiting consideration 
of such relationships to those that would ``more likely than not'' have 
a ``material adverse effect'' on an individual's independence.\118\ Two 
commentators thought it would be helpful if we provided examples of the 
types of relationships to be considered, in order to guide compensation 
committees as they consider the breadth of possible relationships that 
might impair adviser independence.\119\ Another commentator thought it 
was unnecessary for us to further define the phrase because the 
``myriad possible definitions and considerations are unlikely to be 
fully encompassed by such a definition.'' \120\
---------------------------------------------------------------------------

    \116\ See, e.g., letters from AON and Meridian.
    \117\ See letter from Meridian.
    \118\ See letter from AON.
    \119\ See letters from Merkl and Towers.
    \120\ See letter from Mercer.
---------------------------------------------------------------------------

    A few commentators also urged that we clarify the scope of 
individuals whose relationships would need to be considered in the 
context of evaluating adviser independence. One commentator recommended 
limiting the required consideration to the individual adviser who 
renders services to the compensation committee,\121\ and another 
commentator similarly recommended limiting the required consideration 
to the lead consultant, counsel or adviser to the committee, but not to 
other members of the adviser's team serving the compensation 
committee.\122\
---------------------------------------------------------------------------

    \121\ See letter from Meridian.
    \122\ See letter from Mercer (noting that the more junior 
members of the team rarely interact directly with the compensation 
committee).
---------------------------------------------------------------------------

    We requested comment on whether we should require disclosure of a 
compensation committee's process for selecting advisers. Many 
commentators criticized this idea, citing concerns about extending 
already lengthy proxy statement discussions of executive compensation 
and expressing doubt that additional disclosure of the process for 
selecting advisers would provide any useful information to 
investors.\123\ However, some commentators thought such disclosure 
could be useful in providing transparency as to whether compensation 
committees were following the required process for selecting 
advisers.\124\
---------------------------------------------------------------------------

    \123\ See, e.g., letters from CFA Institute and Frederic Cook.
    \124\ See, e.g., letter from Better Markets.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are adopting the requirements 
substantially as proposed, but with some revisions. As discussed above, 
this aspect of the final rule will also apply to those members of a 
listed issuer's board of directors who oversee executive compensation 
matters on behalf of the board of directors in the absence of a board 
committee. We have also decided to include one additional independence 
factor that compensation committees must consider before selecting a 
compensation adviser. Under the final rule, the exchanges will be 
directed to adopt listing standards that require a compensation 
committee to take into account the five factors enumerated in Section 
10C(b)(2), as well as any business or personal relationships between 
the executive officers of the issuer and the compensation adviser or 
the person employing the adviser. This would include, for example, 
situations where the chief executive officer of an issuer and the 
compensation adviser have a familial relationship or where the chief 
executive officer and the compensation adviser (or the adviser's 
employer) are business partners. We agree with commentators who stated 
that business and personal relationships between an executive officer 
and a compensation adviser or a person employing the compensation 
adviser may potentially pose a significant conflict of interest that 
should be considered by the compensation committee before selecting a 
compensation adviser.\125\
---------------------------------------------------------------------------

    \125\ See, e.g., letters from ABA, Better Markets, Merkl and 
USS.
---------------------------------------------------------------------------

    As was proposed, the final rule does not expand the stock ownership 
factor to require consideration of stock owned by the person employing 
a compensation adviser. As we noted in the Proposing Release, we 
interpret ``any stock of the issuer owned by the compensation 
consultant, legal counsel, or other adviser'' to include shares owned 
by the individuals providing services to the compensation committee and 
their immediate family members.
    Other than the additional factor described above, the final rules 
will not require the listing standards to mandate consideration of 
independence factors beyond those set forth in Section 10C(b)(2). We 
believe that these six factors, when taken together, are competitively 
neutral, as they will require compensation committees to consider a 
variety of factors that may bear upon the likelihood that a 
compensation adviser can provide independent advice to the compensation 
committee, but will not prohibit committees from choosing any 
particular adviser or type of adviser. We agree with the commentator 
who suggested that the factors should be considered in their totality 
and that no one factor should be viewed as a determinative factor of 
independence.\126\ We do not believe it is necessary, however, to 
provide an instruction to this effect, as the final rule directs the 
exchanges to require consideration of all of the specified factors. In 
response to concerns echoed by a number of commentators, we emphasize 
that neither the Act nor our final rule requires a compensation adviser 
to be independent, only that the

[[Page 38433]]

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 final rule.\127\
---------------------------------------------------------------------------

    \126\ See letter from AON.
    \127\ The listing standards do not, of course, override any 
duties imposed on directors by applicable state law relating to the 
selection of compensation advisers.
---------------------------------------------------------------------------

    In response to comments,\128\ we are including an instruction to 
the final rule to provide that a compensation committee need not 
consider the six independence factors before consulting with or 
obtaining advice from in-house counsel. Commentators noted that it is 
routine for in-house counsel to consult with, and provide advice to, 
the compensation committee on a variety of issues, such as, for 
example, the terms of an existing benefit plan or how a proposed 
employment contract would interrelate with other company 
agreements.\129\ We agree with these commentators that, as in-house 
legal counsel are company employees, they are not held out to be 
independent. In addition, we do not believe compensation committees 
consider that in-house counsel serve in the same role or perform a 
similar function as a compensation consultant or outside legal counsel.
---------------------------------------------------------------------------

    \128\ See letters from ABA, Davis Polk and S&C.
    \129\ See letters from Davis Polk and S&C.
---------------------------------------------------------------------------

    This instruction will not affect the obligation of a compensation 
committee to consider the independence of outside legal counsel or 
compensation consultants or other advisers retained by management or by 
the issuer. We believe that information gathered from an independence 
assessment of these categories of advisers will be useful to the 
compensation committee as it considers any advice that may be provided 
by these advisers. In addition, excluding outside legal counsel or 
compensation consultants retained by management or by the issuer from 
the required independence assessment may not be competitively neutral, 
since, as some commentators pointed out, they often perform the same 
types of services as the law firms and compensation consultants 
selected by the compensation committee.\130\ Accordingly, we are 
including an instruction to the final rule that provides that a listed 
issuer's compensation committee is required to conduct the independence 
assessment outlined in Rule 10C-1(b)(4) with respect to any 
compensation consultant, legal counsel or other adviser that provides 
advice to the compensation committee, other than in-house legal 
counsel.
---------------------------------------------------------------------------

    \130\ See letters from Jackson and Towers.
---------------------------------------------------------------------------

    The final rule, like our proposal, does not include any 
materiality, numerical or other thresholds that would narrow the 
circumstances in which a compensation committee is required to consider 
the independence factors specified in the rule. We are concerned that 
adding materiality or other bright-line thresholds may not be 
competitively neutral. The absence of any such thresholds means that 
all facts and circumstances relevant to the six factors will be 
presented to the compensation committee for its consideration of the 
independence of a compensation adviser, and not just those factors that 
meet a prescribed threshold. For similar reasons, the final rule does 
not further define the phrases ``provision of other services'' or 
``business or personal relationship.''
    Consistent with the proposed rule, the final rule does not require 
listed issuers to describe the compensation committee's process for 
selecting compensation advisers pursuant to the new listing standards. 
We are sensitive to the concerns of commentators that adding such 
disclosure would increase the length of proxy statement disclosures on 
executive compensation without necessarily providing additional 
material information to investors.
5. Opportunity To Cure Defects
    Section 10C(f)(2) of the Exchange Act specifies that our rules must 
provide for appropriate procedures for an issuer to have a reasonable 
opportunity to cure any defects that would be the basis for a 
prohibition of the listing of an issuer's securities as a result of its 
failure to meet the requirements set forth in Section 10C, before 
imposition of such prohibition.\131\ To implement this requirement, we 
proposed Rule 10C-1(a)(3), which would require the exchanges to 
establish such procedures if their existing procedures are not 
adequate. We are adopting the rule as proposed.
---------------------------------------------------------------------------

    \131\ See Exchange Act Section 10C(f)(2).
---------------------------------------------------------------------------

a. Proposed Rule
    Proposed Rule 10C-1(a)(3) would provide that the exchange listing 
standards required by Rule 10C-1 must allow issuers a reasonable 
opportunity to cure violations of the compensation committee listing 
requirements. The proposed rule did not set forth specific procedures 
for curing violations of compensation committee listing requirements, 
but specified that the listing standards may provide that if a member 
of a compensation committee ceases to be independent for reasons 
outside the member's reasonable control, that person, with notice by 
the issuer to the applicable exchange, may remain a compensation 
committee member of the listed issuer until the earlier of the next 
annual shareholders' meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent. Proposed Rule 10C-1(a)(3) was patterned after similar 
provisions contained in Exchange Act Rule 10A-3(a)(3).\132\
---------------------------------------------------------------------------

    \132\ 17 CFR 240.10A-3(a)(3).
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Commentators generally supported proposed Rule 10C-1(a)(3). Two 
commentators favored requiring the exchanges to provide issuers the 
same opportunity to cure non-compliance with the compensation committee 
listing requirements as they have with respect to audit committee 
requirements.\133\ In response to our request for comment on whether we 
should direct the exchanges to adopt specific procedures for curing 
non-compliance, several commentators were opposed to requiring the 
exchanges to establish any such specific procedures.\134\ One 
commentator, however, urged us to direct the exchanges to establish 
more limited procedures for curing defects.\135\
---------------------------------------------------------------------------

    \133\ See letters from Debevoise and CalPERS.
    \134\ See, e.g., letters from Davis Polk and Merkl.
    \135\ See letter from Better Markets.
---------------------------------------------------------------------------

    We also requested comment as to whether listed issuers that have 
just completed initial public offerings should be given additional time 
to comply with the compensation committee independence requirements, as 
is permitted by Exchange Act Rule 10A-3(b)(1)(iv)(A) with respect to 
audit committee independence requirements. Several commentators 
supported providing newly listed issuers with additional time to comply 
with the compensation committee listing requirements.\136\ The NYSE 
argued that the exchanges should have the flexibility to permit an 
issuer applying for listing in connection with an initial public 
offering to have additional time to comply with compensation committee 
requirements.\137\ The NYSE also requested that we clarify that the 
authority the exchanges would have under Rule 10C-1(a)(3) to provide 
issuers an opportunity to cure defects is

[[Page 38434]]

not limited to situations where a previously independent compensation 
committee member loses his or her independent status for reasons 
outside his or her control.\138\
---------------------------------------------------------------------------

    \136\ See, e.g., letters from ABA, Davis Polk, Merkl and NYSE.
    \137\ See letter from NYSE.
    \138\ See id.
---------------------------------------------------------------------------

c. Final Rule
    After consideration of the comments, we are adopting Rule 10C-
1(a)(3) as proposed. Similar to Exchange Act Rule 10A-3(a)(3), the 
final rule requires the exchanges to provide appropriate procedures for 
listed issuers to have a reasonable opportunity to cure any 
noncompliance with the compensation committee listing requirements that 
could result in the delisting of an issuer's securities. The exchanges' 
rules may also provide that if a member of a listed issuer's 
compensation committee ceases to be independent for reasons outside the 
member's reasonable control, that person, with notice by the issuer to 
the applicable exchange, may remain a compensation committee member of 
the listed issuer until the earlier of the next annual shareholders' 
meeting of the listed issuer or one year from the occurrence of the 
event that caused the member to be no longer independent. The 
exchanges' authority to provide issuers an opportunity to cure defects 
is not limited to situations where a previously independent 
compensation committee member loses his or her independent status for 
reasons outside his or her control.
    As we noted in the Proposing Release, we believe that existing 
listing standards and delisting procedures of most of the exchanges 
satisfy the requirement for there to be reasonable procedures for an 
issuer to have an opportunity to cure any defects on an ongoing basis. 
Most exchanges have already adopted procedures to provide issuers with 
notice and opportunity for a hearing, an opportunity for an appeal and 
an opportunity to cure defects before their securities are 
delisted.\139\ Nonetheless, we expect that the rules of each exchange 
would provide for definite procedures and time periods for compliance 
with the final rule requirements to the extent they do not already do 
so.
---------------------------------------------------------------------------

    \139\ See, e.g., NYSE Listed Company Manual Section 801-805; 
Nasdaq Equity Rules 5800 Series; NYSE AMEX Company Guide Section 
1009 and Part 12; Chicago Board Options Exchange Rule 31.94; Chicago 
Stock Exchange Article 22, Rules 4, 17A, and 22; Nasdaq OMX BX Rule 
4800 series; Nasdaq OMX PHLX Rule 811. Neither NYSE Arca nor the 
National Stock Exchange has a rule that specifically requires listed 
companies to be given an opportunity to submit a plan to regain 
compliance with corporate governance listing standards other than 
audit committee requirements; issuers listed on these exchanges, 
however, are provided notice, an opportunity for a hearing, and an 
opportunity for an appeal prior to delisting. See NYSE Arca Rule 
5.5(m); National Stock Exchange Rule 15.7 and Chapter X.
---------------------------------------------------------------------------

    We have not made any modifications to Rule 10C-1(a)(3) with respect 
to newly listed issuers. As discussed in more detail in Section II.B.2 
of this release, in accordance with Exchange Act Section 10C(f)(3), our 
final rule will authorize the exchanges to exempt categories of issuers 
from the requirements of Section 10C. We believe this authority will 
allow the exchanges to craft appropriate limited exceptions from the 
required compensation committee listing standards for newly listed and 
other categories of listed issuers, subject to Commission review and 
approval pursuant to Section 19(b) of the Exchange Act.

 B. Implementation of Listing Requirements

1. Exchanges and Securities Affected
    We proposed to apply the requirements of Section 10C only to 
exchanges that list equity securities. In addition, the proposed rule 
would require that the exchanges adopt listing standards in compliance 
with the rule only with respect to issuers with listed equity 
securities. Along with the exemptions contained in Section 10C, the 
proposed rule would also exempt security futures products and 
standardized options. We are adopting the rule as proposed.
a. Proposed Rule
    Section 10C(a) provides that the Commission shall direct the 
exchanges to prohibit the listing of any ``equity security'' of an 
issuer (other than several types of exempted issuers) that does not 
comply with the compensation committee member independence 
requirements. In contrast, Section 10C(f)(1), which states generally 
the scope of the compensation committee and compensation adviser 
listing requirements, provides that the Commission shall direct the 
national securities exchanges and national securities associations ``to 
prohibit the listing of any security of an issuer that is not in 
compliance with the requirements of this section'' (emphasis added).
    The Senate-passed version of the bill did not distinguish between 
equity and non-equity securities, referencing only the prohibition 
against the listing of ``any security'' of an issuer not in compliance 
with the independence requirements.\140\ The initial House-passed 
version would have required the Commission to adopt rules to direct the 
exchanges to prohibit the listing of ``any class of equity security'' 
of an issuer that is not in compliance with the compensation committee 
independence standards, as well as with any of the other provisions of 
that section, including the provisions relating to compensation 
advisers.\141\ According to a press release issued by the House 
Financial Services Committee, this language was added during 
deliberations by that committee to clarify that the compensation 
committee independence standards would apply only to ``public 
companies, not to companies that have only an issue of publicly-
registered debt.'' \142\ Because the Senate-passed version of the bill 
(which did not specify ``equity'' securities) was used as the base for 
the conference draft, it appears that addition of ``equity'' securities 
in Section 10C(a) of the conference draft was deliberate. Unlike the 
House-passed bill, however, the final bill specifically references 
equity securities only in connection with compensation committee member 
independence requirements.
---------------------------------------------------------------------------

    \140\ See H.R. 4173, 111th Cong. Sec.  952 (as passed, with 
amendments, by the Senate on May 20, 2010).
    \141\ See H.R. 4173, 111th Cong. Sec.  2003 (as passed by the 
House of Representatives on Dec. 11, 2009).
    \142\ See Press Release, Financial Services Committee Passes 
Executive Compensation Reform, July 28, 2009, available at: http://democrats.financialservices.house.gov/press/PRArticle.aspx?NewsID=520.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the NYSE currently exempts 
issuers whose only listed securities are debt securities from the 
compensation committee listing requirements that apply to issuers 
listing equity securities.\143\ In addition, Exchange Act Rule 3a12-11 
exempts listed debt securities from most of the requirements in our 
proxy and information statement rules.\144\ Finally, most, if not all, 
issuers with only listed debt securities, other than foreign private 
issuers, are privately held.\145\ In light of the

[[Page 38435]]

legislative history and our and the exchanges' historical approach to 
issuers with only listed debt securities, we noted in the Proposing 
Release that we view the requirements of Section 10C as intended to 
apply only to issuers with listed equity securities.\146\
---------------------------------------------------------------------------

    \143\ See NYSE Listed Company Manual Section 303A.00.
    \144\ In adopting this rule, the Commission determined that debt 
holders would receive sufficient protection from the indenture, the 
Trust Indenture Act, the proxy rules' antifraud proscriptions, and 
the Exchange Act rules that facilitate the transmission of materials 
to beneficial owners. See Exemptive Relief and Simplification of 
Filing Requirements for Debt Securities To Be Listed on a National 
Securities Exchange, Release No. 34-34922 (Nov. 1, 1994) [59 FR 
55342].
    \145\ Based on a review of information reported on Forms 10-K, 
20-F and 40-F and current public quotation and trade data on issuers 
whose debt securities are listed on an exchange, such as the NYSE 
Listed and Traded Bonds and NYSE Amex Listed Bonds, we estimate that 
there are approximately 83 issuers that list only debt securities on 
an exchange. Of these 83 issuers, approximately 45 are wholly-owned 
subsidiaries that would be exempt from proposed Exchange Act Rule 
10C-1 pursuant to Section 10C(g) of the Act. None of these 83 
issuers has a class of equity securities registered under Section 12 
of the Exchange Act.
    \146\ Although Section 10C is, in many respects, similar to the 
audit committee independence requirements contained in Section 
10A(m), there are differences in some of the statutory language. In 
this regard, we note that the requirements included in Section 
10A(m) of the Exchange Act, as set forth in Section 301 of the 
Sarbanes-Oxley Act, are applicable generally to ``listed 
securities,'' and no reference is made to equity securities. 
Therefore, although Section 10A(m) applies to issuers whether they 
have listed debt or equity, we do not believe this should 
necessarily prescribe the scope of Section 10C.
---------------------------------------------------------------------------

    Accordingly, we proposed to apply Rule 10C-1 only to exchanges that 
list equity securities, and to direct these exchanges to adopt listing 
standards implementing our rule only as to issuers that are seeking to 
list or have listed equity securities. We noted in the Proposing 
Release that proposed Rule 10C-1 would not currently apply to FINRA, 
the only existing national securities association registered under 
Section 15A(a) of the Exchange Act, as FINRA does not list any 
securities and does not have listing standards under its rules.\147\ 
Nevertheless, as Section 10C specifically references national 
securities associations, proposed Rule 10C-1 would apply to any 
registered national securities association that lists equity securities 
in the future.\148\
---------------------------------------------------------------------------

    \147\ Similarly, we stated that we did not expect the National 
Futures Association, which is a national securities association 
registered under Section 15A(k) for the limited purpose of 
regulating the activities of members who are registered as broker-
dealers in security futures products, see note 8, above, to develop 
listing standards regarding compensation committees in compliance 
with proposed Rule 10C-1. See Proposing Release, 76 FR at 18974, n. 
73.
    \148\ The OTC Bulletin Board (OTCBB) and the OTC Markets Group 
(previously known as the Pink Sheets and Pink OTC Markets) will not 
be affected by Rule 10C-1, and therefore issuers whose securities 
are quoted on these interdealer quotation systems similarly will not 
be affected, unless their securities also are listed on a national 
securities exchange. The OTCBB is an ``interdealer quotation 
system'' for over-the-counter securities that is operated by FINRA. 
(Exchange Act Rule 15c2-11 defines the term ``interdealer quotation 
system.'' 17 CFR 240.15c2-11.) It does not, however, have a listing 
agreement or arrangement with the issuers whose securities are 
quoted on the system and are not considered listed, as that term is 
defined and used in Rule 10C-1. See Rules 10C-1(a)(2) and (c)(3). 
Although market makers may be required to review and maintain 
specified information about an issuer and to furnish that 
information to FINRA, the issuers whose securities are quoted on the 
OTCBB are not required to submit any information to the system. The 
OTC Markets Group is not a registered national securities exchange 
or association, nor is it operated by a registered national 
securities exchange or association, and thus is not covered by the 
terms of the final rule.
---------------------------------------------------------------------------

    Under proposed Rule 10C-1(a), exchanges would be required, to the 
extent that their listing standards did not conform with Rule 10C-1, to 
issue or amend their listing rules, subject to Commission review, to 
comply with the new rule. As noted in the Proposing Release, an 
exchange that lists or trades security futures products (as defined in 
Exchange Act Section 3(a)(56)) \149\ may register as an exchange under 
Section 6(g) of the Exchange Act solely for the purpose of trading 
those products. As the Exchange Act definition of ``equity security'' 
includes security futures on equity securities,\150\ exchanges whose 
only listed equity securities are security futures products \151\ would 
be required to comply with Rule 10C-1 absent an applicable exemption. 
Given that Section 10C(f) of the Exchange Act makes no distinction 
between exchanges registered pursuant to Section 6(a)--such as the NYSE 
and Nasdaq--and those registered pursuant to Section 6(g), we did not 
propose a wholesale exemption from the requirements of Rule 10C-1 for 
those exchanges registered solely pursuant to Section 6(g).
---------------------------------------------------------------------------

    \149\ Exchange Act Section 3(a)(56) defines the term ``security 
futures product'' to mean ``a security future or any put, call, 
straddle, option, or privilege on any security future.'' 15 U.S.C. 
78c(a)(56).
    \150\ Section 3(a)(11) of the Exchange Act defines the term 
``equity security'' as any stock or similar security; or any 
security future on any such security; or any security convertible, 
with or without consideration, into such a security, or carrying any 
warrant or right to subscribe to or purchase such a security; or any 
such warrant or right; or any other security which the Commission 
shall deem to be of similar nature and consider necessary or 
appropriate, by such rules and regulations as it may prescribe in 
the public interest or for the protection of investors, to treat as 
an equity security.
    \151\ Exchanges currently registered solely pursuant to Section 
6(g) of the Exchange Act include the Board of Trade of the City of 
Chicago, Inc.; the CBOE Futures Exchange, LLC; the Chicago 
Mercantile Exchange, Inc.; One Chicago, LLC; the Island Futures 
Exchange, LLC; and NQLX LLC.
---------------------------------------------------------------------------

    However, as discussed below, we proposed to exempt security futures 
products from the scope of proposed Rule 10C-1. Accordingly, we noted 
in the Proposing Release that, to the extent the final rule exempted 
the listing of security futures products from the scope of Rule 10C-1, 
any exchange registered solely pursuant to Section 6(g) of the Exchange 
Act and that lists and trades only security futures products would not 
be required to file a rule change in order to comply with Rule 10C-1.
    We proposed to exempt security futures products and standardized 
options from the requirements of Rule 10C-1. Although the Exchange Act 
defines ``equity security'' to include any security future on any stock 
or similar security, the Commodity Futures Modernization Act of 2000 
(the ``CFMA'') \152\ permits the exchanges to trade futures on 
individual securities and on narrow-based security indices (``security 
futures'') \153\ without such securities being subject to the 
registration requirements of the Securities Act of 1933 (the 
``Securities Act'') and the Exchange Act so long as they are cleared by 
a clearing agency that is registered under Section 17A of the Exchange 
Act \154\ or that is exempt from registration under Section 
17A(b)(7)(A) of the Exchange Act. In December 2002, we adopted rules 
that provide comparable regulatory treatment for standardized 
options.\155\
---------------------------------------------------------------------------

    \152\ Public Law 106-554, 114 Stat. 2763 (2000).
    \153\ Exchange Act Section 3(a)(56) [15 U.S.C. 78c(a)(56)], and 
Commodities Exchange Act Section 1a(32) [7 U.S.C. la(32)] define 
``security futures product'' as a security future or any put, call, 
straddle, option, or privilege on any security future.
    \154\ 15 U.S.C. 78q-1.
    \155\ See Release No. 33-8171 (Dec. 23, 2002) [68 FR 188]. In 
that release, we exempted standardized options issued by registered 
clearing agencies and traded on a registered national securities 
exchange or on a registered national securities association from all 
provisions of the Securities Act, other than the antifraud provision 
of Section 17, as well as the Exchange Act registration 
requirements. Standardized options are defined in Exchange Act Rule 
9b-1(a)(4) [17 CFR 240.9b-1(a)(4)] as option contracts trading on a 
national securities exchange, an automated quotation system of a 
registered securities association, or a foreign securities exchange 
which relate to option classes the terms of which are limited to 
specific expiration dates and exercise prices, or such other 
securities as the Commission may, by order, designate.
---------------------------------------------------------------------------

    The clearing agency for security futures products and standardized 
options is the issuer of these securities,\156\ but its role as issuer 
is fundamentally different from an issuer of equity securities of an 
operating company. The purchasers of security futures products and 
standardized options do not, except in the most formal sense, make an 
investment decision based on the issuer. As a result, information about 
the clearing agency's business, its officers and directors and its 
financial statements is much less

[[Page 38436]]

relevant to investors in these securities than information about the 
issuer of the underlying security. Similarly, the investment risk in 
these securities is determined by the market performance of the 
underlying security rather than the results of operations or 
performance of the clearing agency, which is a self-regulatory 
organization subject to regulatory oversight. Furthermore, unlike a 
conventional issuer, the clearing agency does not receive the proceeds 
from the sales of security futures products or standardized 
options.\157\
---------------------------------------------------------------------------

    \156\ See Fair Administration and Governance of Self-Regulatory 
Organizations; Disclosure and Regulatory Reporting by Self-
Regulatory Organizations; Recordkeeping Requirements for Self-
Regulatory Organizations; Ownership and Voting Limitations for 
Members of Self-Regulatory Organizations; Ownership Reporting 
Requirements for Members of Self-Regulatory Organizations; Listing 
and Trading of Affiliated Securities by a Self-Regulatory 
Organization, Release No. 34-50699 (Nov. 18, 2004) [69 FR 71126], at 
n. 260 (``Standardized options and security futures products are 
issued and guaranteed by a clearing agency. Currently, all 
standardized options and security futures products are issued by the 
Options Clearing Corporation (`OCC').'').
    \157\ However, the clearing agency may receive a clearing fee 
from its members.
---------------------------------------------------------------------------

    In recognition of these fundamental differences, we provided 
exemptions for security futures products and standardized options from 
the audit committee listing requirements in Exchange Act Rule 10A-
3.\158\ Specifically, Rule 10A-3(c) exempts the listing of a security 
futures product cleared by a clearing agency that is registered 
pursuant to Section 17A of the Exchange Act or that is exempt from 
registration pursuant to Section 17A(b)(7)(A) and the listing of a 
standardized option issued by a clearing agency that is registered 
pursuant to Section 17A of the Exchange Act. For the same reasons that 
we exempted these securities from Rule 10A-3, we proposed to exempt 
these securities from Rule 10C-1.
---------------------------------------------------------------------------

    \158\ See Exchange Act Rules 10A-3(c)(4) and (5).
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Commentators generally agreed that Section 10C should apply only to 
issuers with listed equity securities.\159\ Some commentators argued 
that the proposed rule should apply to all domestic exchanges and 
public companies without exception.\160\ These commentators did not 
specifically comment on whether the statute is intended to apply only 
to issuers with listed equity securities. One commentator recommended 
that we exempt only exchanges that do not list equity securities and 
agreed that our proposed exemption for security futures products and 
standardized options is necessary or appropriate in the public interest 
and consistent with the protection of investors.\161\
---------------------------------------------------------------------------

    \159\ See, e.g., letters from Debevoise and PEGCC.
    \160\ See letters from CII and FLSBA.
    \161\ See letter from Merkl.
---------------------------------------------------------------------------

c. Final Rule
    After consideration of the comments, we are adopting the proposals 
without change. As adopted, the final rule will:
     Require all exchanges that list equity securities, to the 
extent that their listing standards do not already comply with the 
final rule, to issue or amend their listing rules to comply with the 
new rule;
     Provide that exchange listing standards required by the 
new rule need apply only to issuers with listed equity securities; and
     Exempt security futures products cleared by a clearing 
agency that is registered pursuant to Section 17A of the Exchange Act 
or that is exempt from registration pursuant to Section 17A(b)(7)(A) 
and standardized options that are issued by a clearing agency that is 
registered pursuant to Section 17A of the Exchange Act.
2. Exemptions
    Section 10C of the Exchange Act has four different provisions 
relating to exemptions from some or all of the requirements of Section 
10C:
     Section 10C(a)(1) provides that our rules shall direct the 
exchanges to prohibit the listing of any equity security of an issuer 
that is not in compliance with the compensation committee member 
independence requirements of Section 10C(a)(2), other than an issuer 
that is in one of five specified categories--controlled companies, 
limited partnerships, companies in bankruptcy proceedings, open-end 
management investment companies registered under the Investment Company 
Act \162\ and foreign private issuers that disclose in their annual 
reports the reasons why they do not have an independent compensation 
committee;
---------------------------------------------------------------------------

    \162\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------

     Section 10C(a)(4) provides that our rules shall authorize 
the exchanges to exempt a particular relationship from the independence 
requirements applicable to compensation committee members, as each 
exchange determines is appropriate, taking into consideration the size 
of the issuer and any other relevant factors;
     Section 10C(f)(3) provides that our rules shall authorize 
the exchanges to exempt any category of issuer from the requirements of 
Section 10C as the exchanges determine is appropriate, and that, in 
making such determinations, the exchanges must take into account the 
potential impact of the requirements on smaller reporting issuers; and
     Section 10C(g) specifically exempts controlled companies, 
as defined in Section 10C(g), from all of the requirements of Section 
10C.
    We proposed Rule 10C-1(b)(1)(iii)(A) to exempt the five categories 
of issuers enumerated in Section 10C(a)(1); Rule 10C-1(b)(1)(iii)(B) to 
authorize the exchanges to exempt a particular relationship from the 
independence requirements applicable to compensation committee members, 
as each exchange determines is appropriate, taking into consideration 
the size of the issuer and other relevant factors; Rule 10C-1(b)(5)(i) 
to permit the exchanges to exempt any category of issuer from the 
requirements of Section 10C, as each exchange determines is 
appropriate, taking into consideration the potential impact of such 
requirements on smaller reporting issuers; and Rule 10C-1(b)(5)(ii) to 
exempt controlled companies from the requirements of Rule 10C-1. We are 
adopting the proposals with changes made in response to comments.
a. Proposed Rule
i. Issuers Not Subject to Compensation Committee Independence 
Requirements
    As noted above, Exchange Act Section 10C(a)(1) provides that our 
rules shall direct the exchanges to prohibit the listing of any equity 
security of an issuer, other than an issuer that is in one of five 
specified categories, that is not in compliance with the compensation 
committee member independence requirements of Section 10C(a)(2). 
Accordingly, we proposed to exempt controlled companies, limited 
partnerships, companies in bankruptcy proceedings, open-end management 
investment companies registered under the Investment Company Act and 
foreign private issuers that provide annual disclosures to shareholders 
of the reasons why the foreign private issuer does not have an 
independent compensation committee from these requirements.
    Under Section 10C(g)(2) of the Exchange Act, a ``controlled 
company'' is defined as an issuer that is listed on an exchange and 
that holds an election for the board of directors of the issuer in 
which more than 50% of the voting power is held by an individual, a 
group or another issuer. We proposed to incorporate this definition 
into Rule 10C-1(c)(2). Section 10C did not define the terms ``limited 
partnerships'' or ``companies in bankruptcy proceedings.'' As noted in 
the Proposing Release, we believe that a limited partnership is 
generally understood to mean a form of business ownership and 
association consisting of one or more general partners who are fully 
liable for the debts and obligations of the partnership and one or more 
limited partners whose liability is limited to the amount 
invested.\163\ We also noted in

[[Page 38437]]

the Proposing Release that the phrase ``companies in bankruptcy 
proceedings'' is used in several Commission rules without 
definition.\164\ Accordingly, we did not further define either term in 
proposed Rule 10C-1(c).
---------------------------------------------------------------------------

    \163\ See Unif. Ltd. P'ship Act Sec. Sec.  102, 303 and 404 
(2001).
    \164\ See, e.g., Section 55(a)(3)(A) of the Investment Company 
Act [15 U.S.C. 80a-54(a)(3)(A)]; Item 1107(k) of Regulation AB [17 
CFR 229.1107(k)]; and Rule 457 under the Securities Act [17 CFR 
230.457].
---------------------------------------------------------------------------

    Section 10C does not define the term ``open-end management 
investment company.'' As discussed in the Proposing Release, under the 
Investment Company Act, an open-end management investment company is an 
investment company, other than a unit investment trust or face-amount 
certificate company, that offers for sale or has outstanding any 
redeemable security of which it is the issuer.\165\ We proposed to 
define this term in proposed Rule 10C-1(c) by referencing Section 
5(a)(1) of the Investment Company Act.
---------------------------------------------------------------------------

    \165\ See Sections 4 and 5(a)(1) of the Investment Company Act 
[15 U.S.C. 80a-4 and 80a-5(a)(1)]. Open-end and closed-end 
management investment companies registered under the Investment 
Company Act are generally exempt from current exchange listing 
standards that require listed issuers to either have a compensation 
committee or to have independent directors determine, recommend, or 
oversee specified executive compensation matters. See, e.g., NYSE 
Listed Company Manual Section 303A.00; Nasdaq Rule 5615(a)(5); NYSE 
Arca Rule 5.3; NYSE AMEX Company Guide Section 801.
---------------------------------------------------------------------------

    Under Section 10C(a)(1), a foreign private issuer that provides 
annual disclosure to shareholders of the reasons why the foreign 
private issuer does not have an independent compensation committee 
would be exempt from the compensation committee member independence 
requirements. Exchange Act Rule 3b-4 defines ``foreign private issuer'' 
as ``any foreign issuer other than a foreign government, except for an 
issuer that has more than 50% of its outstanding voting securities held 
of record by U.S. residents and any of the following: a majority of its 
officers and directors are citizens or residents of the United States, 
more than 50% of its assets are located in the United States, or its 
business is principally administered in the United States.'' \166\ 
Since this definition applies to all Exchange Act rules, we did not 
believe it was necessary to include a cross-reference to Rule 3b-4 in 
our proposed rules.
---------------------------------------------------------------------------

    \166\ 17 CFR 240.3b-4(c).
---------------------------------------------------------------------------

    In the Proposing Release, we noted that certain foreign private 
issuers have a two-tier board, with one tier designated as the 
management board and the other tier designated as the supervisory or 
non-management board. Similar to our approach to Rule 10A-3, proposed 
Rule 10C-1(b)(1)(iii) would clarify that in the case of foreign private 
issuers with two-tier boards of directors, the term ``board of 
directors'' means the supervisory or non-management board. Accordingly, 
to the extent the supervisory or non-management board forms a separate 
compensation committee, proposed Rule 10C-1 would apply to that 
committee, with the exception of the committee member independence 
requirements, assuming the foreign private issuer discloses why it does 
not have an independent compensation committee in its annual report.
ii. Exemption of Relationships and Other Categories of Issuers
    As noted above, Section 10C(a)(4) of the Exchange Act provides that 
the Commission's rules shall permit an exchange to exempt a particular 
relationship from the compensation committee independence requirements, 
as such exchange deems appropriate, taking into consideration the size 
of the issuer and any other relevant factors. In addition, as noted 
above, Section 10C(f)(3) provides that our rules shall authorize an 
exchange to exempt a category of issuers from the requirements of 
Section 10C, as the exchange determines is appropriate, taking into 
account the potential impact of the Section 10C requirements on smaller 
reporting issuers. To implement these provisions, we proposed Rule 10C-
1(b)(1)(iii)(B), which would authorize the exchanges to establish 
listing standards that exempt particular relationships between members 
of the compensation committee and listed issuers that might otherwise 
impair the member's independence, taking into consideration the size of 
an issuer and any other relevant factors, and Rule 10C-1(b)(5)(i), 
which would allow the exchanges to exempt categories of listed issuers 
from the requirements of Section 10C, as each exchange determines is 
appropriate. In determining the appropriateness of categorical issuer 
exemptions, the exchanges would be required, in accordance with the 
statute, to consider the potential impact of the requirements of 
Section 10C on smaller reporting issuers.\167\
---------------------------------------------------------------------------

    \167\ See Exchange Act Section 10C(f)(3)(B). Section 10C of the 
Exchange Act includes no express exemptions for smaller reporting 
companies. Some exchanges currently have limited exemptions from 
requirements to have a majority independent board or a three-member 
audit committee for smaller issuers--for example, NYSE Amex and the 
Chicago Stock Exchange permit smaller issuers to have a 50% 
independent board and a minimum of two members on the issuer's audit 
committee. See NYSE Amex Company Guide Section 801(h); Chicago Stock 
Exchange Article 22, Rules 19(a), 19(b)(1)(C)(iii), and 21(a). 
Section 10C(f)(3) expressly requires the exchanges to take into 
account the potential impact of the listing requirements on smaller 
reporting issuers when exercising the exemptive authority provided 
to them by our rules.
---------------------------------------------------------------------------

    Other than the five categories of issuers in Section 10C(a)(1), we 
did not propose to exempt any relationship or any category of issuer 
from the compensation committee member independence requirements under 
Section 10C(a)(1). Instead of including specific exemptions, the 
proposed rule generally would leave the determination of whether to 
exempt particular relationships or categories of issuers to the 
discretion of the exchanges, subject to our review in the rule filing 
process. Because listed issuers frequently consult the exchanges 
regarding independence determinations and committee responsibilities, 
in the proposal we explained that we believed that the exchanges are in 
the best position to identify any relationships or categories of 
issuers that may merit exemption from the compensation committee 
listing requirements.
b. Comments on the Proposed Rule
    Comments on the proposals were generally favorable. Commentators 
generally supported the proposed approach of deferring to the exchanges 
any decisions to exempt any categories of issuers or particular 
relationships that might compromise committee member independence.\168\ 
One commentator expressed concern that the proposed definition of 
``controlled companies'' would not exempt some listed issuers that are 
controlled companies under applicable listing standards, but do not 
actually hold director elections, such as some limited liability 
companies.\169\ This commentator recommended that we revise the 
definition of ``controlled companies'' in proposed Rule 10C-1(c)(2) so 
that it would encompass companies that do not actually hold director 
elections but have more than 50% of the voting power for the election 
of directors held by an individual, a group or another company.
---------------------------------------------------------------------------

    \168\ See, e.g., letters from NYSE and S&C.
    \169\ See letter from Vinson & Elkins LLP (``V&E'').
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether we should 
exempt any types of issuers, such as registered management investment 
companies, foreign private issuers or smaller reporting companies,\170\ 
from some or all of the requirements of Section 10C. The NYSE stated 
its view that the express exclusion of certain types of issuers in

[[Page 38438]]

Section 10C(a)(1) should not prevent an exchange from exempting other 
types of issuers, and urged us to clarify that the general exemptive 
authority exchanges would have under Rule 10C-1 is not limited to 
smaller reporting companies.\171\
---------------------------------------------------------------------------

    \170\ See Exchange Act Rule 12b-2 for the definition of 
``smaller reporting company.''
    \171\ See letter from NYSE.
---------------------------------------------------------------------------

    Several commentators urged us to exempt all foreign private issuers 
from the requirements of Section 10C.\172\ Another commentator urged us 
to exempt smaller reporting companies from the requirements of Section 
10C because smaller reporting companies may experience more difficulty 
than other issuers in finding independent directors who are willing to 
serve on their boards.\173\ Other commentators, however, believed that 
we should not exempt foreign private issuers or smaller reporting 
companies from the requirements of Section 10C.\174\ Several of these 
commentators supported uniform application of compensation committee 
independence requirements to all public companies.\175\ One commentator 
believed that domestic companies should not face a stricter regime than 
foreign companies and suggested that foreign companies could be given a 
time frame within which they would be required to meet the listing 
standards that apply to domestic companies.\176\
---------------------------------------------------------------------------

    \172\ See letters from ABA, Davis Polk and SAP AG.
    \173\ See letter from ABA.
    \174\ See letters from CalPERS, CII, FLSBA, the Local Authority 
Pension Fund Forum (``LAPFF''), Merkl, Railpen and USS.
    \175\ See letters from CII, FLSBA and USS.
    \176\ See letter from LAPFF.
---------------------------------------------------------------------------

    One commentator urged us to exempt all registered investment 
companies from the requirements of Section 10C.\177\ This commentator 
noted that registered investment companies are subject to the 
requirements of the Investment Company Act, including, in particular, 
requirements concerning potential conflicts of interest related to 
investment adviser compensation. The commentator also noted that most 
registered investment companies are externally managed, do not have 
compensated executives and, therefore, do not need compensation 
committees to oversee executive compensation.
---------------------------------------------------------------------------

    \177\ See letter from the Investment Company Institute 
(``ICI'').
---------------------------------------------------------------------------

c. Final Rule
    After consideration of the comments, we are adopting the rule with 
revisions in response to comments. Rule 10C-1(b)(1)(iii) will exempt 
from the compensation committee member independence listing standards 
required under Rule 10C-1(a) limited partnerships, companies in 
bankruptcy proceedings, registered open-end management investment 
companies and foreign private issuers that provide annual disclosures 
to shareholders of the reasons why the foreign private issuer does not 
have an independent compensation committee.
    As we proposed, we are also exempting controlled companies from the 
requirements of Rule 10C-1. In light of Section 10C(g)'s general 
exemption for controlled companies, we have eliminated the specific 
exemption for controlled companies from the compensation committee 
member independence listing standards in final Rule 10C-1(b)(1)(iii). 
We believe this specific exemption from the compensation committee 
member independence listing standards for controlled companies is 
unnecessary in light of the broader exemption for controlled companies 
provided by final Rule 10C-1(b)(5)(ii).
    In response to comments that our proposed definition of controlled 
company would not exempt listed issuers that would otherwise be 
controlled companies but for the fact that they do not hold director 
elections, we are modifying the definition of controlled company in the 
final rule. Under the final rule, a controlled company will be defined 
as a listed company in which more than 50% of the voting power for the 
election of directors is held by an individual, a group or another 
company. We have removed from the definition the phrase ``holds an 
election for the board of directors.'' The revised definition of 
``controlled company'' will more closely follow the definition of the 
term currently used by the NYSE and Nasdaq.\178\ Although the 
definition in the final rule is slightly broader than the definition of 
``controlled company'' in Section 10C(g)(2), we believe this 
modification is consistent with the statutory intent to exempt from the 
requirements of Section 10C those companies that are in fact controlled 
by a shareholder or group of shareholders, regardless of whether 
director elections are actually held.
---------------------------------------------------------------------------

    \178\ See NYSE Listed Company Manual Section 303A.00 and Nasdaq 
Rule 5615(c).
---------------------------------------------------------------------------

    In addition to controlled companies, we are exempting smaller 
reporting companies, as defined in Exchange Act Rule 12b-2, from the 
requirements of Rule 10C-1.\179\ As noted above, one commentator urged 
us to exempt smaller reporting companies from the requirements of 
Section 10C because smaller reporting companies may experience more 
difficulty than other issuers in finding independent directors who are 
willing to serve on their boards.\180\ This commentator also noted that 
the compensation committees of smaller reporting companies often do not 
hire outside compensation consultants, both because their compensation 
programs tend to be ``relatively simple'' and also because smaller 
reporting companies ``often cannot afford to hire outside experts.'' 
\181\
---------------------------------------------------------------------------

    \179\ Approximately 1%, 25% and 53% of the operating companies 
listed on the NYSE, the Nasdaq Stock Market, and NYSE Amex, 
respectively, are smaller reporting companies. See Memorandum to 
File No. S7-13-11, dated May 8, 2012, concerning information on 
listed smaller reporting companies, which is available at http://www.sec.gov/comments/s7-13-11/s71311-60.pdf.
    \180\ See letter from ABA.
    \181\ See id.
---------------------------------------------------------------------------

    We recognize that some commentators opposed such an exemption,\182\ 
but we believe, on balance, that an exemption is appropriate. In 2006, 
when we substantially revised our executive compensation disclosure 
rules, we adopted new scaled executive compensation disclosure 
requirements for smaller companies in recognition of the fact that the 
``executive compensation arrangements of small business issuers 
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 small business issuers and related 
regulatory burdens that could be disproportionate for small business 
issuers.'' \183\ In light of those findings with respect to smaller 
reporting companies' less complex executive compensation arrangements, 
we are not persuaded that the additional burdens of complying with Rule 
10C-1 are warranted for smaller reporting companies.
---------------------------------------------------------------------------

    \182\ See letters from CalPERS, CII, FLSBA, Merkl and Railpen. 
These commentators did not provide specific reasons for their 
opposition, other than two commentators noting that the matters 
addressed in Section 10C are relevant to all public companies. See 
letters from CII and FLSBA.
    \183\ See Executive Compensation and Related Person Disclosure, 
Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158], at 53192 (``2006 
Executive Compensation Release''). In 2007, we adopted a new 
eligibility standard for ``smaller reporting companies'' to replace 
the ``small business issuer'' definition then found in Item 10 of 
Regulation S-B. See Smaller Reporting Company Regulatory Relief and 
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934].
---------------------------------------------------------------------------

    We appreciate that these burdens for listed smaller reporting 
companies may not be significant given that such issuers are already 
subject to listing standards requiring directors on compensation 
committees or directors determining or recommending executive 
compensation

[[Page 38439]]

matters to be ``independent'' under the exchanges' general independence 
standards. We do believe, however, that exempting smaller reporting 
companies from the listing standards mandated by Rule 10C-1 can offer 
cost savings to these listed issuers to the extent that an exchange, in 
connection with the listing standards review required by Rule 10C-1, 
chooses to create a new independence standard for compensation 
committee members that is more rigorous than its existing standards--
for example, a new standard could address personal or business 
relationships between members of the compensation committee and the 
listed issuer's executive officers. Issuers subject to the exchange's 
new standard may need to replace existing compensation committee 
members, and incur the associated costs, if the existing members do not 
qualify as independent under the new standard. In addition, although 
listed smaller reporting companies do not often engage outside 
compensation consultants, there would be cost savings to these listed 
issuers from not having to comply with the listing standards involving 
the compensation committee's engagement and oversight of compensation 
advisers. For example, the exchanges are required to adopt listing 
standards that require the compensation committee to consider the six 
independence factors listed in Rule 10C-1(b)(4) before selecting a 
compensation adviser. To comply with these listing standards, 
compensation committees will likely need to create procedures for 
collecting and analyzing information about potential compensation 
advisers before they can receive advice from such advisers, which would 
require the listed issuers to incur costs. We expect, however, that a 
portion of these cost savings would likely be offset by the costs that 
smaller reporting companies may incur to comply with the new 
requirement to disclose compensation consultants' conflicts of 
interest, which is described in Section II.C below. In light of these 
considerations, we do not believe it is necessary to require the 
exchanges to go through the process of proposing to exempt smaller 
reporting companies in the Section 19(b) rule filing process, since we 
have concluded that it is appropriate to provide this exemption in any 
event. Accordingly, we are exempting smaller reporting companies from 
the requirements of Rule 10C-1.\184\
---------------------------------------------------------------------------

    \184\ When an issuer loses its smaller reporting company status, 
it will be required to comply with the listing standards applicable 
to non-smaller reporting companies. We anticipate that the exchanges 
will provide for a transition period for issuers that lose smaller 
reporting company status, similar to what they currently have for 
issuers that lose controlled company status. See, e.g., NYSE Listed 
Company Manual Section 303A.00; Nasdaq Rule 5615(c)(3).
---------------------------------------------------------------------------

    We are adopting Rules 10C-1(b)(1)(iii)(B) and 10C-1(b)(5)(i) 
substantially as proposed. Rule 10C-1(b)(1)(iii)(B) authorizes the 
exchanges to exempt a particular relationship from the compensation 
committee member independence requirements, as the exchanges deem 
appropriate, taking into consideration the size of the issuer and any 
other relevant factors. Rule 10C-1(b)(5)(i) authorizes the exchanges to 
exempt any category of issuers from the requirements of Section 
10C,\185\ as each exchange determines is appropriate, taking into 
consideration the potential impact of the requirements on smaller 
reporting issuers. In response to comment, we are clarifying that the 
final rule does not prohibit the exchanges from considering other 
relevant factors as well. The final rule will allow the exchanges 
flexibility to propose transactions or categories of issuers to exempt, 
subject to our review and approval under the Exchange Act Section 19(b) 
rule filing process. As we noted in the Proposing Release, we believe 
that relying on the exchanges in this manner to exercise the exemptive 
authority expressly granted to them under the final rules is consistent 
with the requirements of Section 10C and will result in more effective 
determinations as to the types of relationships and the types of 
issuers that merit an exemption.\186\
---------------------------------------------------------------------------

    \185\ As noted in the Proposing Release, Rule 10C-1(b)(5)(i) 
does not provide the authority for the exchanges to exempt listed 
issuers from the disclosure requirements under Item 407 of 
Regulation S-K, which include Section 10C(c)(2)'s compensation 
consultant disclosure requirements.
    \186\ We note that the Jumpstart Our Business Startups Act, 
Public Law 112-106, 126 Stat. (2012) (the ``JOBS Act''), which was 
enacted on April 5, 2012, creates a new category of issuer, an 
``emerging growth company,'' under the Securities Act and the 
Exchange Act. See Section 2(a)(19) of the Securities Act [15 U.S.C. 
77b(a)(19)]; Section 3(a)(80) of the Exchange Act [15 U.S.C. 
78c(a)(80)]. An emerging growth company is defined as an issuer that 
had total annual gross revenues of less than $1 billion during its 
most recently completed fiscal year. Existing listing standards 
provide no accommodation for this category of issuer, and the JOBS 
Act does not require that exchanges do so. The rules we are adopting 
will permit the exchanges to consider, subject to the Commission's 
review and approval, whether any exemptions from the listing 
standards required by Rule 10C-1 are appropriate for emerging growth 
companies or any other category of issuer.
---------------------------------------------------------------------------

    As noted by one commentator, most registered investment companies 
do not have compensated employees or compensation committees.\187\ 
Therefore, the requirements of Rule 10C-1, which does not itself 
require any issuer to have a compensation committee, will not affect 
most registered investment companies or impose any compliance 
obligations on them.\188\ This commentator did not explain why, in the 
infrequent case where a registered investment company has compensated 
executives and a compensation committee (which are not addressed by 
Investment Company Act requirements related to investment adviser 
compensation), the registered investment company should be exempt from 
the requirements that apply to all other listed issuers with 
compensation committees. We believe that the exchanges are in a better 
position to determine the appropriate treatment of registered 
investment companies that have compensated executives and compensation 
committees, if any.
---------------------------------------------------------------------------

    \187\ See letter from ICI.
    \188\ We do not believe that any board committee or members of 
the board of a registered investment company or business development 
company would be a ``compensation committee'' under Rule 10C-1 
solely as a result of carrying out the board's responsibilities 
under Rule 38a-1 under the Investment Company Act to approve the 
designation and compensation of the fund's chief compliance officer. 
Under Rule 38a-1, the approval of a majority of the board's 
independent directors is required. See 17 CFR 270.38a-1(a)(4).
---------------------------------------------------------------------------

C. Compensation Consultant Disclosure and Conflicts of Interest

    Section 10C(c)(2) of the Exchange Act requires that, in any proxy 
or consent solicitation material for an annual meeting (or a special 
meeting in lieu of the annual meeting), each issuer must disclose, in 
accordance with regulations of the Commission, whether:
     The compensation committee has retained or obtained the 
advice of a compensation consultant; and
     The work of the compensation consultant has raised any 
conflict of interest and, if so, the nature of the conflict and how the 
conflict is being addressed.
    We proposed amendments to Item 407 of Regulation S-K to require 
issuers to include the disclosures required by Section 10C(c)(2) in any 
proxy or information statement for an annual meeting (or special 
meeting in lieu of an annual meeting) at which directors are to be 
elected. After consideration of the comments, we are adopting a 
modified version of the proposal.
1. Proposed Rule
    Item 407 of Regulation S-K currently requires Exchange Act 
registrants that are subject to the proxy rules, other than registered 
investment companies, to provide certain disclosures concerning their 
compensation committees and the use of compensation consultants. Item 
407(e)(3)(iii) generally requires

[[Page 38440]]

registrants to disclose ``any role of compensation consultants in 
determining or recommending the amount or form of executive and 
director compensation,'' including:
     Identifying the consultants;
     Stating whether such consultants were engaged directly by 
the compensation committee or any other person;
     Describing the nature and scope of the consultants' 
assignment, and the material elements of any instructions given to the 
consultants under the engagement; and
     Disclosing the aggregate fees paid to a consultant for 
advice or recommendations on the amount or form of executive and 
director compensation and the aggregate fees for additional services if 
the consultant provided both and the fees for the additional services 
exceeded $120,000 during the fiscal year.\189\

    \189\ See current Items 407(e)(3)(iii)(A) and (B) [17 CFR 
229.407(e)(3)(iii)(A) and 229.407(e)(3)(iii)(B)]. Fee disclosure, 
however, is not required for compensation consultants that work with 
management if the compensation committee has retained a separate 
consultant. In promulgating these requirements, we recognized that, 
in this situation, the compensation committee may not be relying on 
the compensation consultant used by management, and therefore 
potential conflicts of interest are less of a concern. See Proxy 
Disclosure Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 
68334] (``Proxy Disclosure Enhancements Release'').

The current item excludes from the disclosure requirement any role of 
compensation consultants limited to consulting on any broad-based plan 
that does not discriminate in scope, terms or operation in favor of 
executive officers or directors of the registrant and that is available 
generally to all salaried employees, or limited to providing 
information that either is not customized for a particular registrant 
or is customized based on parameters that are not developed by the 
compensation consultant, and about which the compensation consultant 
does not provide advice.\190\
---------------------------------------------------------------------------

    \190\ See Item 407(e)(3)(iii). In adopting this exclusion, the 
Commission determined (based on comments it received on the rule 
proposal) that the provision of such work by a compensation 
consultant does not raise conflict of interest concerns that warrant 
disclosure of the consultant's selection, terms of engagement or 
fees. See Proxy Disclosure Enhancements Release.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the trigger for disclosure 
about compensation consultants under Section 10C(c)(2) is worded 
differently from the existing disclosure trigger under Item 
407(e)(3)(iii). Under Section 10C(c)(2), an issuer must disclose 
whether the ``compensation committee retained or obtained the advice of 
a compensation consultant.'' By contrast, existing Item 407 requires 
disclosure, with limited exceptions, whenever a compensation consultant 
plays ``any role'' in determining or recommending the amount or form of 
executive or director compensation. Given the similarities between the 
disclosure required by Section 10C(c)(2) and the disclosure required by 
Item 407(e)(3)(iii), we proposed amendments to integrate Section 
10C(c)(2)'s disclosure requirements with the existing disclosure rule. 
Specifically, as proposed, revised Item 407(e)(3)(iii) would include a 
disclosure trigger consistent with the statutory language and would, 
therefore, require issuers to disclose whether the compensation 
committee had ``retained or obtained'' the advice of a compensation 
consultant during the issuer's last completed fiscal year. If so, the 
issuer would also be required to provide related disclosures describing 
the consultant's assignment, any conflicts of interest raised by the 
consultant's work, and how such conflicts were being addressed. In 
addition, our proposed rule would alter the existing consultant fee 
disclosure requirements to include the same disclosure trigger. We 
noted in the Proposing Release that we believed the practical effect of 
this change would be minimal, as it would be unusual for a consultant 
to play a role in determining or recommending the amount of executive 
compensation without the compensation committee also retaining or 
obtaining the consultant's advice.
    Our proposed integrated disclosure requirement would no longer 
provide an exception from the requirement to disclose the role of a 
compensation consultant where that role is limited to consulting on any 
broad-based plan that does not discriminate in scope, terms or 
operation in favor of executive officers or directors of the registrant 
and that is available generally to all salaried employees, or limited 
to providing information that either is not customized for a particular 
issuer or is customized based on parameters that are not developed by 
the consultant and about which the consultant does not provide advice. 
As we explained in the Proposing Release, we believed this would be 
``consistent with the purposes of Section 10C(c)(2), which is to 
require disclosure about compensation consultants and any conflicts of 
interest they have in a competitively neutral fashion.'' \191\ Under 
the proposed amendments, disclosure about the compensation consultant's 
role and conflicts of interest would be required even if the consultant 
provided only advice on broad-based plans or non-customized benchmark 
data. We proposed, however, that the compensation consultant fee 
disclosure requirements currently included in Item 407(e)(3) would 
continue to include exceptions for cases where a consultant's role is 
limited to providing these types of services.
---------------------------------------------------------------------------

    \191\ See Proposing Release, 76 FR at 18980.
---------------------------------------------------------------------------

    In order to clarify certain terms contained in Section 10C(c)(2) 
and used in the proposed rules, we proposed to add an instruction to 
Item 407(e)(3) to clarify the meaning of the phrase ``obtained the 
advice.'' The proposed instruction would provide that a compensation 
committee or management will have ``obtained the advice'' of a 
compensation consultant if it ``has requested or received advice from a 
compensation consultant, regardless of whether there is a formal 
engagement of the consultant or a client relationship between the 
compensation consultant and the compensation committee or management or 
any payment of fees to the consultant for its advice.'' In addition, we 
proposed an instruction that identified the five independence factors 
that Section 10C requires a listed issuer's compensation committee to 
consider before selecting a compensation adviser as among the factors 
that issuers should consider in determining whether there is a conflict 
of interest that may need to be disclosed.
    Finally, under the proposed amendments, these disclosures would be 
required only in a proxy or information statement for an annual meeting 
(or special meeting in lieu of an annual meeting) at which directors 
are to be elected and would apply to issuers subject to our proxy 
rules, whether listed or not, and whether they are controlled companies 
or not.
2. Comments on the Proposed Rule
    Comments on the proposed amendments were mixed, with the exception 
of our proposal to require the disclosures called for by Section 
10C(c)(2) only in proxy or information statements for meetings at which 
directors are to be elected, which commentators generally 
supported.\192\
---------------------------------------------------------------------------

    \192\ See, e.g., letters from ABA, AON and Debevoise.
---------------------------------------------------------------------------

    Several commentators expressed general support for our proposal to 
require disclosure about compensation consultants' conflicts of 
interest.\193\ Some of these commentators noted that timely disclosure 
of conflicts is needed to allow investors to adequately monitor

[[Page 38441]]

compensation committee performance.\194\ For this reason, another 
commentator noted that disclosure concerning compensation consultant 
conflicts of interest ``is most appropriately required in the context 
of other corporate governance disclosures that are most relevant in the 
context of making voting decisions with respect to the election of 
directors.'' \195\
---------------------------------------------------------------------------

    \193\ See, e.g., letters from AFSCME, CII, FLSBA, Hermes, OPERS 
and UAW.
    \194\ See letters from CII and FLSBA.
    \195\ See, e.g., letter from ABA.
---------------------------------------------------------------------------

    Several commentators expressed general support for integrating the 
Section 10C(c)(2) disclosure requirements into the existing 
compensation consultant disclosure requirements contained in Item 
407(e)(3)(iii) of Regulation S-K.\196\ One of these commentators 
believed that a combined rule with a single trigger for disclosure 
would benefit issuers and investors by simplifying the disclosure 
requirement and enhancing the clarity of the disclosure.\197\ One 
commentator opposed integrating the disclosure requirements of Section 
10C(c)(2) into Item 407(e)(3)(iii), and believed that a better approach 
would be to retain the existing disclosure trigger in Item 
407(e)(3)(iii) and include a separate disclosure item within Item 407 
to address conflict of interest disclosure requirements.\198\ This 
commentator also criticized our proposed amendments because they would 
narrow the disclosure currently required by Item 407(e)(3)(iii) by 
excluding those compensation consultants that may have participated in 
executive compensation determinations but were not actually retained by 
the compensation committee.\199\ Another commentator supported our 
proposal to integrate the disclosure requirements, but believed it was 
unnecessary to modify the wording of Item 407(e)(3)(iii) to include the 
``retain or obtain the advice'' disclosure trigger included in the 
Act.\200\ This commentator noted that issuers and consulting firms had 
already made significant adjustments to their business practices in 
light of the existing Item 407(e)(3) requirements and that it would be 
costly and unnecessary to make additional adjustments if the wording of 
the existing rules is changed simply to mirror the language included in 
the Act.\201\
---------------------------------------------------------------------------

    \196\ See, e.g., letters from Davis Polk, Debevoise, Meridian, 
Pfizer and UAW.
    \197\ See letter from Meridian.
    \198\ See letter from ABA.
    \199\ See id.
    \200\ See letter from AON.
    \201\ See id.
---------------------------------------------------------------------------

    A significant number of commentators expressed concern over the 
proposed instruction to clarify the phrase ``obtained the advice.'' 
\202\ These commentators believed that the proposed instruction was too 
broad and could potentially cover director education programs, 
unsolicited survey results and publications that contain executive 
compensation data, which they believed were not intended to be covered 
by Section 10C(c)(2).\203\ A number of these commentators recommended 
modifications to the instruction, including:
---------------------------------------------------------------------------

    \202\ See, e.g., letters from AON, CEC, Davis Polk, Mercer, 
Meridian, Pearl Meyer & Partners (``Pearl Meyer''), McGuireWoods, 
NACD, Pfizer, SCSGP and Towers.
    \203\ See, e.g., letters from Davis Polk, Meridian, NACD and 
Towers.
---------------------------------------------------------------------------

     Excluding insubstantial or unsolicited interaction with a 
compensation committee; \204\
---------------------------------------------------------------------------

    \204\ See, e.g., letters from Davis Polk and Meridian.
---------------------------------------------------------------------------

     Clarifying that the phrase ``obtained the advice'' 
excludes materials prepared for management by a compensation consultant 
engaged by management, even if such materials are made available to the 
compensation committee; \205\ and
---------------------------------------------------------------------------

    \205\ See letters from Davis Polk and Towers.
---------------------------------------------------------------------------

     Clarifying that ``advice'' has not been obtained unless 
the compensation consultant provides a recommendation to the committee 
regarding the amount or form of executive compensation.\206\
---------------------------------------------------------------------------

    \206\ See letters from Pfizer and SCSGP.
---------------------------------------------------------------------------

    A few commentators supported our proposal to require disclosure 
about the role of compensation consultants even where that role is 
limited to consulting on broad-based plans or providing non-customized 
benchmark information.\207\ Many more commentators, however, opposed 
eliminating the current disclosure exclusions under Item 407(e)(3) and 
recommended that we extend those disclosure exclusions to the new 
disclosure requirements.\208\ Some of these commentators noted that, 
when the disclosure exemptions in Item 407(e)(3)(iii) were adopted in 
December 2009, the Commission stated that consulting on broad-based 
plans or providing non-customized benchmark data did not raise conflict 
of interest concerns that would warrant disclosure of the consultant's 
selection, terms of engagement or fees.\209\ Another commentator 
believed that retaining the existing disclosure exclusions in Item 
407(e)(3)(iii) would be consistent with the purposes of Section 
10C(c)(2) because a consulting firm that provided only non-customized 
benchmark data to a compensation committee would not be providing 
``advice'' to the compensation committee.\210\
---------------------------------------------------------------------------

    \207\ See, e.g., letters from AFSCME and UAW.
    \208\ See, e.g., letters from ABA, AON, CEC, Davis Polk, 
Debevoise, Meridian, SCSGP, Towers and U.S. Chamber of Commerce 
(Apr. 28, 2011) (``Chamber'').
    \209\ See, e.g., letter from ABA and Davis Polk.
    \210\ See letter from SCSGP.
---------------------------------------------------------------------------

    Commentators generally supported our proposal to identify the five 
factors in proposed Rule 10C-1(b)(4)(i) through (v) as among the 
factors that should be considered in determining whether a conflict of 
interest exists,\211\ though some commentators suggested additional 
factors that they believed should be considered.\212\ In the Proposing 
Release, we requested comment on whether we should include the 
appearance of a conflict of interest in our interpretation of what 
constitutes a ``conflict of interest'' that must be disclosed under the 
proposed amendments. A few commentators believed that we should require 
disclosure of the appearance of a conflict of interest or potential 
conflicts of interest.\213\ One of these commentators argued that 
including potential conflicts is necessary because actual conflicts of 
interest can be difficult to identify with precision.\214\ Other 
commentators believed that we should not require disclosure of either 
an appearance of a conflict of interest or a potential conflict of 
interest, for various reasons, such as: potential conflicts were not 
covered by the text of Section 10C(c)(2); \215\ potential conflicts 
would be difficult to define and would not provide investors with 
additional material information regarding the compensation consultant 
relationship; \216\ and compensation committees are not reluctant or 
unable to conclude that a conflict of interest exists.\217\
---------------------------------------------------------------------------

    \211\ See letters from AON and Towers.
    \212\ See, e.g., letters from AFSCME (urging consideration of 
the ratio between fees paid for executive compensation and non-
executive compensation consulting work, as well as equity ownership 
and incentive compensation arrangements of consultants) and Merkl 
(urging consideration of private and business relationships between 
the person employing the adviser and executive officers or members 
of the compensation committee, as well as stock ownership by the 
person that employs the adviser, if it is material).
    \213\ See letters from Better Markets, OPERS, and Towers.
    \214\ See letter from Better Markets.
    \215\ See letters from ABA, AON, and Mercer.
    \216\ See letter from ABA.
    \217\ See letter from AON.
---------------------------------------------------------------------------

    Many commentators requested that we clarify that the amendments to 
Item 407(e)(3)(iii) apply only to board committees that are charged 
with determining executive compensation, and not to any committee of 
the board, if separate, that oversees the compensation of non-employee

[[Page 38442]]

directors.\218\ Several of these commentators noted that in many 
instances, a committee other than the company's compensation committee, 
such as a governance committee, determines the compensation of the 
company's non-executive directors.\219\
---------------------------------------------------------------------------

    \218\ See, e.g., letters from CEC, Chamber, Davis Polk, Pfizer, 
and SCSGP.
    \219\ See letters from CEC and Chamber.
---------------------------------------------------------------------------

    We requested comment on whether we should extend the Section 
10C(c)(2) disclosure requirements to compensation advisers other than 
compensation consultants. Comments were mixed. A number of commentators 
believed we should require conflicts of interest disclosure for all 
types of advisers, including legal counsel.\220\ One commentator stated 
that extending the disclosure requirements to legal counsel would 
benefit the investing public in its consideration of compensation 
issues.\221\ Another commentator noted that requiring such disclosure 
would allow investors to determine whether the compensation committee 
had the benefit of independent legal advice in making compensation 
determinations.\222\ Other commentators felt that conflicted 
compensation advisers of any kind could not be relied upon to serve the 
best interests of the issuer and its shareholders.\223\ Two 
commentators opposed extending the proposed disclosure requirements to 
legal counsel.\224\ One of these commentators believed that the 
specific statutory reference in Section 10C(c)(2) to ``compensation 
consultants'' reflects a deliberate policy choice by Congress to limit 
the additional required disclosures to compensation consultants 
alone.\225\
---------------------------------------------------------------------------

    \220\ See, e.g., letters from Better Markets, CII, Fields, 
FLSBA, Jackson, and Towers.
    \221\ See letter from Fields.
    \222\ See letter from Jackson.
    \223\ See letters from CII and FLSBA.
    \224\ See letters from ABA and McGuire Woods.
    \225\ See letter from McGuire Woods.
---------------------------------------------------------------------------

    The proposed rule would apply to issuers that are required to 
comply with the proxy rules. One commentator supported our proposal to 
require controlled companies to provide disclosures relating to 
compensation consultants and conflicts of interest raised by the 
consultants' work.\226\ Three commentators were opposed to this 
proposed requirement,\227\ and one of them questioned the value of 
requiring disclosure of a compensation consultant's conflicts of 
interest in cases where the composition of the board of directors and 
compensation committee is subject to the direction of a control person 
or group.\228\ One commentator supported our proposal to require 
smaller reporting companies to provide disclosures relating to 
compensation consultant conflicts of interest, noting that ``[w]e are 
not aware of any particular problems smaller reporting companies have 
had with the existing rules, and we do not believe the additional rules 
mandated by Dodd-Frank will be any more burdensome on smaller reporting 
companies.'' \229\
---------------------------------------------------------------------------

    \226\ See letter from AON.
    \227\ See letters from ABA, Debevoise, and Merkl.
    \228\ See letter from Debevoise.
    \229\ See letter from AON.
---------------------------------------------------------------------------

    We received few comments on our proposal to extend the disclosure 
requirements to Exchange Act registrants that are not listed issuers. 
Two commentators supported our proposal.\230\ One commentator who 
opposed the proposal believed that extending the disclosure 
requirements of Section 10C(c)(2) to non-listed issuers is not required 
by Section 10C or for the protection of investors.\231\
---------------------------------------------------------------------------

    \230\ See letters from AON and Merkl.
    \231\ See letter from Debevoise.
---------------------------------------------------------------------------

    Several commentators agreed that we should not amend Forms 20-F or 
40-F to require foreign private issuers that are not subject to our 
proxy rules to provide annual disclosure of the type required by 
Section 10C(c)(2).\232\ Two of these commentators noted that imposing 
such requirements would be inconsistent with the current disclosure 
paradigm for compensation matters, which generally defers to a foreign 
private issuer's home country rules.\233\ One commentator, however, 
expressed the view that foreign private issuers should have to comply 
with the same compensation consultant disclosure requirements as 
domestic issuers.\234\
---------------------------------------------------------------------------

    \232\ See letters from ABA, AON, Debevoise, and SAP.
    \233\ See letters from Debevoise and SAP.
    \234\ See letter from Merkl.
---------------------------------------------------------------------------

3. Final Rule
    After consideration of the comments, we are adopting a modified 
version of the proposed amendments. The amendments we are adopting 
implement the disclosure requirements of Section 10C(c)(2) while 
preserving the existing disclosure requirements under Item 407(e)(3).
a. Disclosure Requirements
    Rather than integrating the new disclosure requirements with the 
existing compensation consultant disclosure provisions, as proposed, we 
are retaining the existing disclosure trigger and requirements of Item 
407(e)(3)(iii) and adding a new subparagraph to Item 407(e)(3) to 
require the disclosures mandated by Section 10C(c)(2)(B). With respect 
to Section 10C(c)(2)(A), which requires an issuer to disclose whether 
its compensation committee retained or obtained the advice of a 
compensation consultant, we believe existing Item 407(e)(3)(iii) 
implements this disclosure requirement, as it requires disclosure, with 
certain exceptions discussed more fully below, of any role compensation 
consultants played in determining or recommending the amount or form of 
executive and director compensation. As we noted in the Proposing 
Release, we believe it would be unusual for a compensation consultant 
to play ``any role'' in determining or recommending the amount of 
executive compensation without the compensation committee also 
retaining or obtaining the compensation consultant's advice.
    With respect to the disclosures mandated by Section 10C(c)(2)(B), 
we are persuaded by comments noting that our proposal to use the 
``retain or obtain the advice'' disclosure trigger included in Section 
10C could result in unnecessary, and potentially costly, adjustments by 
issuers and consulting firms that have adapted their business practices 
in light of the existing Item 407(e)(3)(iii) disclosure requirements. 
In addition, we note the comment pointing out that our proposal would 
eliminate the existing requirement to disclose the role of compensation 
consultants retained by management rather than the compensation 
committee. Consequently, we have concluded that this change to the 
existing requirement is not appropriate. In lieu of our proposal to 
integrate the Section 10C(c)(2) disclosure requirements with the 
existing disclosure rule, we have determined to adopt a new disclosure 
provision, new Item 407(e)(3)(iv), to implement Section 10C(c)(2).
    Under Item 407(e)(3)(iii), registrants will continue to be required 
to disclose ``any role of compensation consultants in determining or 
recommending the amount or form of executive and director 
compensation.'' Specifically, registrants will continue to be required 
to:
     Identify the consultants;
     State whether such consultants were engaged directly by 
the compensation committee or any other person;
     Describe the nature and scope of the consultant's 
assignment and the material elements of any instructions given to the 
consultants under the engagement; and
     Disclose the aggregate fees paid to a consultant for 
advice or recommendations on the amount or form of executive and 
director

[[Page 38443]]

compensation and the aggregate fees for additional services if the 
consultant provided both and the fees for the additional services 
exceeded $120,000 during the fiscal year.\235\
---------------------------------------------------------------------------

    \235\ The rule will continue not to require fee disclosure for 
compensation consultants that work with management if the 
compensation committee has retained a separate compensation 
consultant. As we noted in the Proxy Disclosure Enhancements 
Release, in this situation, the compensation committee may not be 
relying on the compensation consultant retained by management and 
potential conflicts of interest are therefore less of a concern.
---------------------------------------------------------------------------

    With respect to the new requirement in Item 407(e)(3)(iv) to 
disclose compensation consultant conflicts of interest, we have decided 
to use the ``any role'' disclosure trigger rather than the ``obtained 
or retained the advice'' trigger included in Section 10C. Hence, the 
new requirement will apply to any compensation consultant whose work 
must be disclosed pursuant to Item 407(e)(3)(iii), regardless of 
whether the compensation consultant was retained by management or the 
compensation committee or any other board committee. We believe that 
this approach is consistent with the meaning of the words ``retained or 
obtained'' (emphasis added) in Section 10C, as there will be little 
practical difference in the application of the two disclosure triggers 
as they relate to consultants advising on executive compensation 
matters. Based on the comments on this aspect of the proposal, we also 
believe that the existing disclosure trigger is well-understood by 
issuers. Because we are not changing the disclosure trigger, we no 
longer find it necessary to include an instruction to clarify when a 
compensation committee has ``obtained'' advice. We are persuaded by 
commentators who expressed the view that the instruction, as proposed, 
was overly broad.
    As is the case with our existing requirement to disclose the role 
of compensation consultants in determining or recommending the amount 
or form of executive and director compensation, issuers will be 
required to comply with the new disclosure requirement relating to 
compensation consultant conflicts of interest in a proxy or information 
statement for an annual meeting (or special meeting in lieu of an 
annual meeting) at which directors are to be elected. Although Section 
10C(c)(2) is not explicitly limited to proxy statements for meetings at 
which directors will be elected, we believe this approach is 
appropriate in light of the approach in our rules to disclosure of 
compensation consultant matters generally.
    This new subparagraph will apply to issuers subject to our proxy 
rules, including controlled companies, non-listed issuers and smaller 
reporting companies.\236\ Although Section 10C(c)(2) does not mandate 
this disclosure for issuers that will not be subject to the listing 
standards required by Rule 10C-1, we believe that investors are better 
served by requiring all issuers subject to our proxy rules to provide 
timely disclosure of compensation consultants' conflicts of interests, 
which will enable investors to adequately monitor compensation 
committee performance and will help investors make better informed 
voting decisions with respect to the election of directors, including 
members of the compensation committee. Under the final amendments, 
issuers subject to our proxy rules will be required to disclose, with 
respect to any compensation consultant that is identified pursuant to 
Item 407(e)(3)(iii) as having played a role in determining or 
recommending the amount or form of executive and director compensation, 
whether the work of the compensation consultant has raised any conflict 
of interest and, if so, the nature of the conflict and how the conflict 
is being addressed. As commentators generally supported our proposal to 
identify the independence factors that a compensation committee must 
consider before selecting a compensation adviser as among the factors 
that should be considered in determining whether a consultant conflict 
of interest exists, the final amendments will include an instruction to 
Item 407(e)(3) noting that, in deciding whether there is a conflict of 
interest that may need to be disclosed, issuers should, at a minimum, 
consider the six factors set forth in Rule 10C-1(b)(4)(i) through (vi).
---------------------------------------------------------------------------

    \236\ Foreign private issuers that are not subject to our proxy 
rules will not be required to provide this disclosure. Registered 
investment companies are subject to separate proxy disclosure 
requirements set forth in Item 22 of Schedule 14A, which do not 
include the compensation consultant disclosure requirement in Item 
407(e)(3) of Regulation S-K. See Item 7(g) of Schedule 14A. As we 
proposed, registered investment companies will continue to provide 
disclosure under Item 22 and will not be subject to the amendments 
to Item 407(e) adopted in this release.
---------------------------------------------------------------------------

    We are sensitive to the additional burdens placed on issuers from 
the expansion of disclosure obligations under our rules. In light of 
those concerns, the final rule will not require disclosure of potential 
conflicts of interest or an appearance of a conflict of interest, nor 
will it require disclosure with respect to compensation advisers other 
than compensation consultants. These additional disclosures are not 
mandated by Section 10C, and we are not persuaded that the additional 
burdens of requiring this disclosure are justified by the potential 
benefit to investors.
b. Disclosure Exemptions
    We proposed to eliminate the disclosure exemption in Item 407(e)(3) 
for compensation consulting services involving only broad-based, non-
discriminatory plans and the provision of non-customized survey data. 
Several commentators opposed to the proposed elimination noted that, 
when the disclosure exemptions in Item 407(e)(3)(iii) were adopted in 
December 2009, we stated that consulting on broad-based plans or 
providing non-customized benchmark data did not raise conflict of 
interest concerns that would warrant disclosure of the consultant's 
selection, terms of engagement, or fees.\237\ We continue to believe 
that compensation consulting work limited to these activities does not 
raise conflict of interest concerns. Accordingly, consulting on broad-
based plans and providing non-customized benchmark data will continue 
to be exempted from the compensation consultant disclosure requirements 
under Item 407(e)(3), including the new conflicts of interest 
disclosure required in our rules implementing Section 10C(c)(2).
---------------------------------------------------------------------------

    \237\ See letters from ABA, Davis Polk and SCSGP.
---------------------------------------------------------------------------

c. Disclosure Regarding Director Compensation
    Several commentators requested that we clarify that the proposed 
amendments to Item 407(e)(3)(iii) apply only to board committees that 
are charged with determining executive compensation and not to other 
committees that oversee the compensation of non-employee 
directors.\238\ We believe these comments were prompted by our 
proposal, described above, to replace the existing disclosure trigger 
in Item 407(e)(3)(iii) with our proposed trigger, which referenced 
compensation consultants retained by the compensation committee. As 
discussed above, we have determined to retain the existing disclosure 
trigger in Item 407(e)(3), which requires disclosure of the role played 
by compensation consultants in determining or recommending ``executive 
and director compensation'' (emphasis added).
---------------------------------------------------------------------------

    \238\ See, e.g., letters from CEC, Chamber, Davis Polk, Pfizer, 
and SCSGP.
---------------------------------------------------------------------------

    Issuers are currently required to discuss in proxy and information 
statements the role played by

[[Page 38444]]

compensation consultants in determining or recommending the amount or 
form of director compensation, including the nature and scope of their 
assignment and any material instructions or directions governing their 
performance under the engagement and to provide fee disclosure, all to 
the same extent that the disclosure is required regarding executive 
compensation. In light of the approach we are taking to the new 
disclosure requirement generally, which is to add the new requirement 
to the existing disclosure requirements using the existing triggers, we 
believe it is appropriate to apply the compensation consultant conflict 
of interest disclosure requirement to director compensation in the same 
manner as executive compensation. We believe this will benefit 
investors by providing for more complete and consistent disclosures on 
how the board manages compensation-related conflicts of interest. 
Accordingly, to the extent consulting on director compensation raises a 
conflict of interest on the part of the compensation consultant, 
disclosure would be required in response to new Item 407(e)(3)(iv).

D. Transition and Timing

    The Act did not establish a specific deadline by which the listing 
standards promulgated by the exchanges must be in effect. To facilitate 
timely implementation of the proposals, we proposed that each exchange 
must provide to the Commission, no later than 90 days after publication 
of our final rule in the Federal Register, proposed listing rules or 
rule amendments that comply with our final rule. Further, we proposed 
that each exchange would need to have final rules or rule amendments 
that comply with our final rule approved by the Commission no later 
than one year after publication of our final rule in the Federal 
Register.
    Comments were mixed on these proposals. One commentator did not 
believe that the 90-day period would afford the exchanges enough time 
to draft the proposed rules or rule amendments or to work through 
related concerns or issues.\239\ The only comment letter we received 
from an exchange, however, indicated that the 90-day period would be 
adequate.\240\ The exchange recommended, however, that instead of 
obligating exchanges to have rules approved by the Commission within 
any set timeframe, we should instead require exchanges to respond to 
any written comments issued by the Commission or its staff within 90 
days.
---------------------------------------------------------------------------

    \239\ See letter from Debevoise.
    \240\ See letter from NYSE.
---------------------------------------------------------------------------

    Two commentators requested that we clarify that the exchanges may 
provide their listed issuers a transition period to come into 
compliance with the listing standards required by Rule 10C-1.\241\ Two 
other commentators requested that the Commission include a transition 
period for newly listed issuers directly in Rule 10C-1.\242\ One of 
these commentators also recommended a two-year delayed phase-in period 
for smaller reporting companies, if they are not exempted entirely from 
the compensation committee and independence requirements and consultant 
disclosures.\243\ Another commentator requested that we establish a 
specific time period by which all listed issuers must comply with an 
exchange's new or amended rules meeting the requirements of our final 
rules.\244\ This commentator believed that a longer time frame, such as 
a year, would give listed issuers sufficient time to comply with the 
new standards.
---------------------------------------------------------------------------

    \241\ See letters from NYSE and S&C.
    \242\ See letters from ABA and Davis Polk.
    \243\ See letter from ABA.
    \244\ See letter from Debevoise.
---------------------------------------------------------------------------

    After consideration of the comments, we are adopting the 
implementation period as proposed. We believe that retaining the 
requirement for each exchange to have final rules or rule amendments 
that comply with our final rule approved by the Commission no later 
than one year after publication of our final rule in the Federal 
Register will ensure that the exchanges work expeditiously and in good 
faith to meet the requirements of the new rule. We also note that Rule 
10A-3 included a similar requirement with a significantly shorter 
compliance period.\245\ Although the final rule does not provide an 
extended transition period for newly listed issuers, we note that the 
exemptive authority provided to the exchanges under the final rule 
permits them to propose appropriate transition periods. As noted above, 
we are exempting smaller reporting companies from the requirements of 
Rule 10C-1.
---------------------------------------------------------------------------

    \245\ The release adopting Rule 10A-3 was published in the 
Federal Register on April 16, 2003. The exchanges were required to 
have final rules or rule amendments that complied with Rule 10A-3 
approved by the Commission no later than December 1, 2003.
---------------------------------------------------------------------------

    Section 10C(c)(2) provides that the compensation consultant 
conflict of interest disclosure would be required with respect to 
meetings occurring on or after the date that is one year after the 
enactment of Section 10C, which was July 21, 2011; however, the statute 
also requires these disclosures to be ``in accordance with regulations 
of the Commission,'' and, prior to the adoption of these new rules, our 
regulations have not required such disclosures to be made. We recognize 
that issuers will need to implement disclosure controls and procedures 
to collect and analyze information relevant to whether their 
compensation consultants have a conflict of interest. As a result, we 
have decided to require compliance with new Item 407(e)(3)(iv) in any 
proxy or information statement for an annual meeting of shareholders 
(or a special meeting in lieu of the annual meeting) at which directors 
will be elected occurring on or after January 1, 2013.

III. Paperwork Reduction Act

A. Background

    Certain provisions of the final rule and rule amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\246\ We published a notice 
requesting comment on the collection of information requirements in the 
Proposing Release for the rule amendments, and we submitted these 
requirements to the Office of Management and Budget (``OMB'') for 
review in accordance with the PRA.\247\ The titles for the collection 
of information are:
---------------------------------------------------------------------------

    \246\ 44 U.S.C. 3501 et seq.
    \247\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-
0059);
    (2) ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-
0057); and
    (3) ``Regulation S-K'' (OMB Control No. 3235-0071).\248\
---------------------------------------------------------------------------

    \248\ The paperwork burden from Regulation S-K is imposed 
through the forms that are subject to the disclosure requirements in 
Regulation S-K and is reflected in the analysis of these forms. To 
avoid a Paperwork Reduction Act inventory reflecting duplicative 
burdens, for administrative convenience we estimate the burden 
imposed by Regulation S-K to be a total of one hour.
---------------------------------------------------------------------------

    Regulation S-K was adopted under the Securities Act and Exchange 
Act; Regulations 14A and 14C and the related schedules were adopted 
under the Exchange Act. The regulations and schedules set forth the 
disclosure requirements for proxy and information statements filed by 
companies to help investors make informed investment and voting 
decisions. The hours and costs associated with preparing, filing and 
sending the schedules constitute reporting and cost burdens imposed by 
each collection of information. An agency may not conduct or sponsor, 
and a person is not required to respond to,

[[Page 38445]]

a collection of information unless it displays a currently valid OMB 
control number. Compliance with the new rule and rule amendments will 
be mandatory. Responses to the information collections will not be kept 
confidential, and there is no mandatory retention period for the 
information disclosed.

B. Summary of the Final Rules

    As discussed in more detail above, we are adopting new Rule 10C-1 
under the Exchange Act and amendments to Item 407(e)(3) of Regulation 
S-K. Rule 10C-1 will direct the exchanges to prohibit the listing of 
any equity security of an issuer, subject to certain exceptions, that 
is not in compliance with several enumerated standards relating to the 
issuer's compensation committee and the process for selecting a 
compensation adviser to the compensation committee. Rule 10C-1 will not 
impose any collection of information requirements on the exchanges or 
on listed issuers.
    The amendments to Item 407(e)(3) will require issuers, other than 
registered investment companies,\249\ to disclose, in any proxy or 
information statement relating to an annual meeting of shareholders (or 
a special meeting in lieu of an annual meeting) at which directors are 
to be elected, whether the work of any compensation consultant that has 
played any role in determining or recommending the amount or form of 
executive and director compensation (other than any role limited to 
consulting on any broad-based plan that does not discriminate in scope, 
terms, or operation, in favor of executive officers of the registrant, 
and that is available generally to all salaried employees; or providing 
information that either is not customized for a particular registrant 
or that is customized based on parameters that are not developed by the 
compensation consultant, and about which the compensation consultant 
does not provide advice) has raised a conflict of interest. If so, the 
issuer must also disclose the nature of the conflict and how the 
conflict is being addressed.
---------------------------------------------------------------------------

    \249\ Registered investment companies are subject to separate 
proxy disclosure requirements set forth in Item 22 of Schedule 14A, 
which do not include the compensation consultant disclosure 
requirement in Item 407(e)(3) of Regulation S-K. See Item 7(g) of 
Schedule 14A. As we proposed, registered investment companies will 
continue to provide disclosure under Item 22 and will not be subject 
to the amendments to Item 407(e) adopted in this release.
---------------------------------------------------------------------------

C. Summary of Comment Letters and Revisions to Proposals

    In the Proposing Release, we requested comment on our PRA burden 
hour and cost estimates and the analysis used to derive such estimates. 
Only one commentator specifically addressed our PRA analysis and burden 
estimates of the proposed amendments.\250\ This commentator asserted 
that some of the estimates we used to calculate the burden hours of the 
proposed amendments may be inaccurate, which could result in our 
underestimating the actual burden of the amendments. This commentator, 
however, did not provide any alternative burden hour or cost estimates 
for us to consider and did not identify any particular estimates 
included in the Proposing Release that it believed to be inaccurate.
---------------------------------------------------------------------------

    \250\ See letter from Chamber.
---------------------------------------------------------------------------

    In response to comments on the proposals, we have made 
modifications to the rule proposals that will reduce the compliance 
burden on issuers. First, the final rule amendments leave intact the 
existing exemption from the requirement to disclose the role of a 
compensation consultant where that role is limited to providing advice 
on broad-based plans and information that either is not customized for 
a particular issuer or is customized based on parameters that are not 
developed by the consultant and about which the consultant does not 
provide advice. Accordingly, issuers will be required to provide less 
disclosure than would have been required under the proposed amendments. 
Second, we have retained the existing disclosure trigger in Item 
407(e)(3) and eliminated the proposed instruction regarding whether a 
compensation committee has ``obtained the advice'' of a compensation 
consultant. Based on comments received that issuers are already 
familiar with and have adopted business practices to comply with the 
existing disclosure trigger, we believe retaining the existing 
disclosure trigger will make it easier for issuers to determine whether 
conflict of interest disclosure is required for a particular 
compensation consultant.

D. Revisions to PRA Reporting and Cost Burden Estimates

    As a result of the changes described above, we have reduced our 
reporting and cost burden estimates for the collection of information 
under the final amendments. The final rule amendments to Item 407(e)(3) 
of Regulation S-K will require additional disclosure in proxy or 
information statements filed on Schedule 14A or Schedule 14C of whether 
the work of a compensation consultant that has played any role in 
determining or recommending the amount or form of executive and 
director compensation, with certain exceptions, has raised a conflict 
of interest, and, if so, the nature of the conflict and how the 
conflict is being addressed. The instruction to Item 407(e)(3)(iv) 
provides that an issuer, in determining whether there is any such 
conflict, should consider the same six independence factors that the 
compensation committee of a listed issuer is required to consider 
before selecting a compensation adviser. For purposes of the PRA, we 
now estimate that the total annual increase in the paperwork burden for 
all companies to prepare the disclosure that would be required under 
the proposed amendments will be approximately 11,970 hours of in-house 
personnel time and approximately $1,596,000 for the services of outside 
professionals.\251\ We estimate that the amendments to Item 407(e)(3) 
of Regulation S-K would impose on average a total of two incremental 
burden hours per issuer. These estimates include the time and the cost 
of collecting the required information, preparing and reviewing 
responsive disclosure, and retaining records. We continue to believe it 
is appropriate to assume that the burden hours associated with the 
amendments will be comparable to the burden hours related to similar 
disclosure requirements under our current rules regarding compensation 
consultants. Our estimates, as well as their reasonableness, were 
presented to the public for consideration, and we received no 
alternative burden hour or cost estimates in response.\252\
---------------------------------------------------------------------------

    \251\ Our estimates represent the average burden for all 
issuers, both large and small.
    \252\ See Proxy Disclosure Enhancements Release (in which the 
Commission estimated the average incremental disclosure burden for 
the rule amendments to Item 407(e)(3) relating to compensation 
consultants to be three hours).
---------------------------------------------------------------------------

    The table below shows the total annual compliance burden, in hours 
and in costs, of the collection of information pursuant to the final 
amendments to Item 407(e)(3) of Regulation S-K.\253\ The burden 
estimates were calculated by multiplying the estimated number of 
responses by the estimated average amount of time it would take an 
issuer to prepare and review the adopted disclosure requirements. The 
portion of the burden carried by outside professionals is reflected as 
a cost, while the portion of the burden carried by the issuer 
internally is reflected in hours. For purposes of the PRA, we estimate 
that 75% of the burden of preparation of Schedules 14A and 14C is 
carried by

[[Page 38446]]

the issuer internally and that 25% of the burden of preparation is 
carried by outside professionals retained by the issuer at an average 
cost of $400 per hour. There is no change to the estimated burden of 
the collections of information under Regulation S-K because the burdens 
that this regulation imposes are reflected in our burden estimates for 
Schedules 14A and 14C.
---------------------------------------------------------------------------

    \253\ For convenience, the estimated hour and cost burdens in 
the table have been rounded to the nearest whole number.

                             Table 1--Estimated Incremental Paperwork Burden Under the Final Rules for Schedules 14A and 14C
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Total
                                                             Number of      Incremental     incremental      Internal        External      Professional
                                                          responses  (A)   burden hours/   burden hours    company time    professional        costs
                                                               \254\         form  (B)      (C)=(A)*(B)         (D)          time  (E)     (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sch. 14A................................................           7,300               2          14,600          10,950           3,650      $1,460,000
Sch. 14C................................................             680               2           1,360           1,020             340         136,000
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................           7,980  ..............          15,960          11,970           3,990      $1,596,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

IV. Economic Analysis
---------------------------------------------------------------------------

    \254\ The information in this column is based on the number of 
responses for these schedules as reported in the OMB's Inventory of 
Currently Approved Information Collections, available at http://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65.
---------------------------------------------------------------------------

A. Background and Summary of the Rule Amendments

    As discussed above, we are adopting a new rule and rule amendments 
to implement Section 10C of the Exchange Act, as added by Section 952 
of the Act. Section 10C of the Exchange Act requires us to adopt rules 
directing the exchanges to prohibit the listing of any equity security 
of an issuer, with certain exceptions, that is not in compliance with 
several enumerated standards regarding compensation committees. In 
addition, Section 10C(c)(2) requires each listed issuer to disclose in 
any proxy or consent solicitation material for an annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting), in 
accordance with Commission regulations, whether the issuer's 
compensation committee retained or obtained the advice of a 
compensation consultant; whether the work of the compensation 
consultant has raised any conflict of interest; and, if so, the nature 
of the conflict and how the conflict is being addressed. The rule and 
rule amendments we are adopting implement these mandates, and also 
include the following provisions:
     New Rule 10C-1 will direct the exchanges to adopt listing 
standards that apply to any board committee that oversees executive 
compensation, whether or not such committee performs other functions or 
is formally designated as a ``compensation committee.''
     The exchanges will be directed to apply the required 
listing standards, other than those relating to the authority to retain 
compensation advisers in Rule 10C-1(b)(2)(i) and required funding for 
payment of such advisers in Rule 10C-1(b)(3), also to those members of 
a listed issuer's board of directors who, in the absence of a board 
committee performing such functions, oversee executive compensation 
matters on behalf of the board of directors.
     With respect to the factors required by Section 10C(b) of 
the Exchange Act, we are adopting one additional independence factor 
that compensation committees must consider before engaging a 
compensation adviser.
     An instruction to final Rule 10C-1(b)(4) will provide that 
the compensation committee of a listed issuer is not required to 
consider the independence factors before consulting with or receiving 
advice from in-house counsel.
     We are exempting security futures products, standardized 
options, and smaller reporting companies from the scope of Rule 10C-1.
     For purposes of Rule 10C-1, we are modifying the 
definition of a controlled company, which is exempt from Rule 10C-1, to 
be a listed company in which more than 50% of the voting power for the 
election of directors is held by an individual, a group or another 
company, which is consistent with the definition used by the NYSE and 
Nasdaq.
     The final rules will require the disclosures relating to 
compensation consultant conflicts of interest called for by Section 
10C(c)(2) only in proxy or information statements for meetings at which 
directors are to be elected.
     The compensation consultant conflicts of interest 
disclosure requirement will apply when a compensation consultant plays 
``any role'' in ``determining or recommending the amount or form of 
executive and director compensation,'' other than any role limited to 
consulting on broad-based plans or providing non-customized benchmark 
data, which is consistent with the existing Item 407(e)(3)(iii) of 
Regulation S-K standard.
     The compensation consultant conflicts of interest 
disclosure requirement will apply to all issuers subject to our proxy 
rules, including controlled companies, smaller reporting companies and 
non-listed issuers.
     The compensation consultant conflicts of interest 
disclosure requirement will require disclosure of compensation 
consultant conflicts of interest that relate to director compensation, 
in addition to executive compensation.
     The instruction to the compensation consultant conflicts 
of interest disclosure requirement provides that an issuer, in 
determining whether there is a conflict of interest, should consider 
the same six independence factors that the compensation committee of a 
listed issuer is required to consider before selecting a compensation 
adviser.
    We are sensitive to the costs and benefits imposed by our rules. 
The discussion below attempts to address both the costs and benefits of 
Section 10C, as well as the incremental costs and benefits of the rule 
and rule amendments we are adopting within our discretion to implement 
Section 10C. These two types of costs and benefits may not be entirely 
separable to the extent our discretion is exercised to realize the 
benefits that we believe were intended by Section 952 of the Act. 
Section 23(a)(2) of the Exchange Act requires us, when adopting rules 
under the Exchange Act, to consider the impact that any new rule would 
have on competition.\255\ In addition, Section 23(a)(2) prohibits us 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Section 2(b) of the Securities Act \256\ and Section 3(f) of the 
Exchange Act \257\ require us, when engaging in rulemaking where we

[[Page 38447]]

are required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation. We have integrated our consideration 
of those issues into this economic analysis.
---------------------------------------------------------------------------

    \255\ 15 U.S.C. 78w(a)(2).
    \256\ 15 U.S.C. 77b(b).
    \257\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    In the Proposing Release, we solicited comment on the costs and 
benefits of the proposed rules, whether the proposed rule and rule 
amendments would place a burden on competition, and the effect of the 
proposal on efficiency, competition, and capital formation. Only one 
commentator specifically addressed the cost-benefit analysis we 
included in the Proposing Release or our analysis of whether the 
proposals would burden competition or impact efficiency, competition, 
and capital formation.\258\ This commentator argued that the proposals 
would impose additional compensation disclosure and director 
independence requirements that could be burdensome and result in 
additional disclosure of an issuer's use of compensation consultants, 
without in every case providing meaningful benefit to issuers or 
investors, and that could also confuse investors or deter investors 
from ``reading proxy materials by increasing their length and density 
without pruning other, less pertinent, or dated disclosures.'' \259\ As 
discussed throughout this release, we have made numerous revisions to 
the proposed rules in order to address these concerns and reduce 
compliance burdens where consistent with investor protection. Other 
commentators addressed specific aspects of the proposed rule amendments 
that identified possible costs, benefits, or effects on efficiency, 
competition or capital formation, which we discuss in more detail 
below.
---------------------------------------------------------------------------

    \258\ See letter from Chamber.
    \259\ Id.
---------------------------------------------------------------------------

B. Benefits and Costs, and Impact on Efficiency, Competition and 
Capital Formation

1. Section 10C of the Exchange Act, as Added by Section 952 of the Act
    New Rule 10C-1 implements the listing standard requirements of 
Section 10C by directing the exchanges to prohibit the listing of any 
equity security of an issuer that is not in compliance with the 
following standards:
     Each member of the compensation committee of the issuer 
must be a member of the issuer's board of directors and independent 
according to independence criteria determined by each exchange 
following consideration of specified factors;
     The compensation committee of each issuer must be directly 
responsible for the appointment, compensation, retention and oversight 
of the work of any compensation adviser retained by the committee, and 
each such compensation adviser must report directly to the compensation 
committee;
     Each compensation committee must have the authority to 
retain independent legal counsel and other compensation advisers;
     The compensation committee of each issuer may select a 
compensation adviser only after assessing the adviser's independence 
using specified factors; and
     Each issuer must provide appropriate funding, as 
determined by the compensation committee, for payment of reasonable 
compensation to compensation advisers retained by the compensation 
committee.

    Under the final rule, subject to our review in accordance with 
Section 19(b) of the Exchange Act, an exchange may exempt any category 
of issuers from the compensation committee listing requirements and any 
particular relationships from the compensation committee member 
independence requirements, as the exchange determines is appropriate, 
after consideration of the impact of the requirements on smaller 
reporting issuers and other relevant factors.
    The rules we are adopting are intended to benefit both issuers and 
investors. The final rules are expected to help achieve Congress's 
intent that listed issuers' board committees that set compensation 
policy consist only of directors who are independent. By requiring 
compensation committees to consider the independence of potential 
compensation advisers before they are selected, the final rules should 
also help assure that compensation committees of affected listed 
issuers are better informed about potential conflicts, which could 
reduce the likelihood that they are unknowingly influenced by 
conflicted compensation advisers. The provisions of the listing 
standards that will require compensation committees to be given the 
authority to engage, oversee and compensate independent compensation 
advisers should bolster the access of board committees of affected 
listed issuers that are charged with oversight of executive 
compensation to the resources they need to make better informed 
compensation decisions. Taken as a whole, these requirements could 
benefit issuers and investors to the extent they enable compensation 
committees to make better informed decisions regarding the amount or 
form of executive compensation.
    The listing standard provisions of the rule and rule amendments 
will also result in certain costs to exchanges and affected listed 
issuers. Final Rule 10C-1 directs the exchanges to prohibit the listing 
of any equity security of an issuer that is not in compliance with 
Section 10C's compensation committee and compensation adviser 
requirements. Exchanges will incur direct costs to comply with the 
rule, as they will need to review their existing rules and propose 
appropriate rule changes to implement the requirements of Rule 10C-1. 
Once the exchanges have adopted listing standards required by Rule 10C-
1, listed issuers will incur costs in assessing and demonstrating their 
compliance with the new listing standards. We note that these costs are 
primarily imposed by statute.
    The adoption of new listing standards may have some distributional 
effects as some listed issuers may seek to list on foreign exchanges or 
other markets to avoid compliance with listing requirements that an 
exchange develops. To the extent they do so, listed issuers would incur 
costs in seeking to transfer their listings, and exchanges that lose 
issuer listings would, as a result, lose related fees and trading 
volume. We believe that any such effect would be minimal as the 
exchanges already require directors on compensation committees or 
directors determining or recommending executive compensation matters 
for domestic issuers to be ``independent'' under their general 
independence standards.\260\
---------------------------------------------------------------------------

    \260\ See, e.g., NYSE Listed Company Manual Section 303A.05(a) 
and Nasdaq Rule 5605(d). Foreign private issuers are permitted under 
these listing standards to follow home country practice with respect 
to executive compensation oversight.
---------------------------------------------------------------------------

    As required by Section 10C, Rule 10C-1 directs the exchanges to 
develop a definition of independence applicable to compensation 
committee members after considering the relevant factors set forth in 
Exchange Act Section 10C(a)(3). These factors include:
     A director's source of compensation, including any 
consulting, advisory or compensatory fee paid by the issuer; and
     whether a director is affiliated with the issuer, a 
subsidiary of the issuer, or an affiliate of a subsidiary of the 
issuer.
    We are not adopting any additional factors that the exchanges must 
consider in determining independence requirements for compensation 
committee members. Instead, Rule 10C-1 affords the exchanges latitude 
in

[[Page 38448]]

determining the required independence standards. Several commentators 
indicated that the proposed rule would permit the exchanges to 
determine listing standards that take into account the characteristics 
of each exchange's listed issuers.\261\ We believe that affording the 
exchanges flexibility in determining the required independence 
standards, subject to our review pursuant to Section 19(b) of the 
Exchange Act, will result in more efficient and effective 
determinations as to the types of relationships that should preclude a 
finding of independence with respect to membership on a board committee 
that oversees executive compensation. We believe that because listed 
issuers frequently consult the exchanges regarding independence 
determinations, the exchanges will be in the best position to identify 
the types of relationships that are likely to compromise the ability of 
an issuer's compensation committee to make impartial determinations on 
executive compensation.
---------------------------------------------------------------------------

    \261\ See letters from ABA and NYSE.
---------------------------------------------------------------------------

    We acknowledge, however, that because exchanges compete for 
listings, they may have an incentive to propose standards that issuers 
will find less onerous. This could affect investor confidence in the 
degree of independent oversight of executive compensation at issuers 
listed on exchanges with less onerous standards and could also result 
in costs to exchanges that adopt relatively more rigorous standards, to 
the extent they lose issuer listings as a result.
    In accordance with Section 10C(a)(1), Rule 10C-1(b)(1)(iii) exempts 
limited partnerships, companies in bankruptcy proceedings, registered 
open-end management investment companies and foreign private issuers 
that provide annual disclosures to shareholders of the reasons why the 
foreign private issuer does not have an independent compensation 
committee from the compensation committee member independence listing 
standards required under Rule 10C-1(a). With respect to the 
independence requirements of Rule 10C-1, we have not provided any 
exemptions for categories of issuers beyond those specified in Section 
10C(a)(1). The final rule, however, exempts smaller reporting 
companies, controlled companies, security futures products and 
standardized options from all of the requirements of Rule 10C-1, 
including the independence requirements. Under Rule 10C-1, exchanges 
are provided the authority to propose additional exemptions for 
appropriate categories of issuers. An exchange that exercises this 
authority will incur costs to evaluate what exemptions to propose and 
to make any required rule filings pursuant to Section 19(b) of the 
Exchange Act.
    We are implementing the disclosure requirements of Section 10C by 
adopting amendments to Item 407(e)(3) of Regulation S-K. Given the 
number of discretionary choices that we have made in implementing this 
provision of Section 10C, we discuss the amendments to Item 407 as a 
whole below.
2. Discretionary Amendments
    As adopted, new Rule 10C-1 will direct the exchanges to adopt 
listing standards that apply to any committee of the board that 
oversees executive compensation, whether or not such committee performs 
other functions or is formally designated as a ``compensation 
committee.'' Some exchange listing standards currently require issuers 
to form compensation or equivalent committees, and others permit 
independent directors to oversee specified compensation matters in lieu 
of the formation of a compensation or equivalent committee. The final 
rule will also direct the exchanges to apply the required listing 
standards relating to director independence, consideration of a 
compensation adviser's independence and responsibility for the 
appointment, compensation and oversight of compensation advisers to 
those members of a listed issuer's board of directors who, in the 
absence of a board committee performing such functions, oversee 
executive compensation matters on behalf of the board of 
directors.\262\ Several commentators supported our proposal to apply 
the Section 10C requirements to all board committees that oversee 
executive compensation, and also recommended that the requirements also 
apply to those independent directors who oversee executive compensation 
in lieu of a board committee.\263\ We believe these aspects of the rule 
will help achieve the objectives of the statute and benefit listed 
issuers by providing clarity and reducing any uncertainty about the 
application of Section 10C. Moreover, this should benefit investors 
because it will limit the ability of listed issuers to avoid the 
compensation committee independence requirements under Section 10C 
simply by delegating oversight of executive compensation to a board 
committee that is not formally designated as the ``compensation 
committee,'' but performs that function or to directors acting outside 
of a formal committee structure.
---------------------------------------------------------------------------

    \262\ With respect to these aspects of the rule, we have defined 
``compensation committee'' to include those board members who 
oversee executive compensation matters on behalf of the board of 
directors in the absence of a board committee. In our discussion of 
the final rule throughout this release, references to an issuer's 
``compensation committee'' include, unless the context otherwise 
requires, any committee of the board that performs functions 
typically performed by a compensation committee, including oversight 
of executive compensation, whether or not formally designated as a 
``compensation committee,'' as well as, to the extent applicable, 
those members of a listed issuer's board of directors who oversee 
executive compensation matters on behalf of the board of directors 
in the absence of such a committee.
    \263\ See, e.g., letters from Barnard, CFA and Railpen.
---------------------------------------------------------------------------

    If we did not apply Rule 10C-1 to apply the requirements relating 
to director independence, consideration of the independence of 
compensation advisers and responsibility for the appointment, 
compensation and oversight of compensation advisers to directors who 
oversee executive compensation matters in the absence of a board 
committee, issuers could be incentivized to seek to list on exchanges 
that do not require the formation of a compensation or equivalent 
committee in order to avoid having to comply with the compensation 
committee independence standards that would otherwise apply. Our 
decision to apply the requirements relating to director independence, 
consideration of the independence of compensation advisers and 
responsibility for the appointment, compensation and oversight of 
compensation advisers to these directors should minimize any such 
incentive. As a result, we believe this application also minimizes any 
potential costs that issuers might incur to alter their existing 
committee structure or seek to list on a different exchange to avoid 
having to comply with the new standards, as well as any related costs 
that exchanges would incur from any resulting loss of issuer listings, 
related fees, and trading volume. These impacts may not be significant, 
however, since the exchanges' existing requirements already impose 
independence requirements on directors who oversee executive 
compensation matters. Finally, we note that, in overseeing executive 
compensation matters, these independent directors are acting as the 
board of directors, and the same board processes that attend to other 
types of board decisions--e.g., scheduling meetings, preparing review 
materials, attending meetings, preparing and reviewing meeting 
minutes--also presumably attend to board decisions about executive 
compensation. Accordingly, we do not believe that the application of 
the requirements relating

[[Page 38449]]

to director independence, consideration of the independence of 
compensation advisers and responsibility for the appointment, 
compensation and oversight of compensation advisers to directors who 
oversee executive compensation matters in the absence of a board 
committee will result in any disproportionate incremental burdens for 
issuers that do not have a compensation committee or any other board 
committee that oversees executive compensation.
    As required by Section 10C(g), controlled companies are exempt from 
all requirements of Rule 10C-1 pursuant to final Rule 10C-1(b)(5)(ii). 
Rule 10C-1 as adopted includes a slightly broader definition of 
``controlled company'' than the definition provided in Section 10C. 
Under Section 10C(g)(2) of the Exchange Act, a ``controlled company'' 
is defined as an issuer that is listed on an exchange and that holds an 
election for the board of directors of the issuer in which more than 
50% of the voting power is held by an individual, a group or another 
issuer. We proposed to incorporate this definition into Rule 10C-
1(c)(2). In response to comments that our proposed definition would not 
exempt listed issuers that would otherwise be controlled companies but 
for the fact that they do not hold director elections,\264\ we have 
removed from the definition the phrase ``holds an election for the 
board of directors'' in order to align the definition in Rule 10C-1 
more closely to the definition of controlled company currently used by 
the NYSE and Nasdaq. This change will eliminate any unnecessary 
compliance burdens for listed issuers that do not hold director 
elections but satisfy the definition of ``controlled company'' pursuant 
to listing standards of the NYSE, Nasdaq and other exchanges with a 
similar definition.
---------------------------------------------------------------------------

    \264\ See letter from V&E.
---------------------------------------------------------------------------

    Under Rule 10C-1(b)(4), the exchanges are directed to adopt listing 
standards that require a compensation committee to take into account 
the five independence factors enumerated in Section 10C(b)(2) before 
selecting a compensation adviser. In addition to these five factors, we 
are including in the final rule one additional independence factor that 
must be considered before a compensation adviser is selected: any 
business or personal relationships between the executive officers of 
the issuer and the compensation adviser or the person employing the 
adviser. Several commentators supported requiring compensation 
committees to consider any business or personal relationship between an 
executive officer of the issuer and an adviser or the person employing 
the compensation adviser.\265\ This would include, for example, 
situations where the chief executive officer of a listed issuer and the 
compensation adviser have a familial relationship or where the chief 
executive officer and the compensation adviser (or the adviser's 
employer) are business partners. We agree with commentators that such 
relationships would be relevant to an assessment of the independence of 
the compensation adviser and believe that adding this factor 
complements the five independence factors enumerated in Section 
10C(b)(2). Adding this factor should help compensation committees reach 
better informed decisions in selecting compensation advisers since any 
business or personal relationship that a compensation adviser, or the 
person employing the adviser, may have with an executive officer may be 
relevant to assessing whether there is a conflict of interest. Section 
10C(b) mandates that the independence factors to be considered must be 
competitively neutral among categories of compensation advisers and 
that compensation committees must be able to retain the services of 
members of any such category. We believe that the six factors included 
in the final rule, when considered as a whole, are competitively 
neutral and that this requirement will therefore not inhibit 
competition among categories of compensation advisers.
---------------------------------------------------------------------------

    \265\ See, e.g., letters from ABA, Better Markets, Merkl and 
USS.
---------------------------------------------------------------------------

    We have included an instruction to Rule 10C-1(b)(4) that provides 
that the compensation committee of a listed issuer is not required to 
consider the independence factors with respect to in-house counsel with 
whom the compensation committee consults or obtains advice. Several 
commentators noted that, as in-house legal counsel are employees of the 
issuer, they are not held out to be independent.\266\ As such, the 
benefits of requiring the compensation committee to consider the 
independence factors with respect to in-house counsel would seem to be 
minimal. We do not believe that our determination to exclude in-house 
counsel from this required consideration will negatively impact 
competition among compensation advisers, as we do not believe 
compensation committees consider that in-house counsel serve in the 
same role as a compensation consultant or outside legal counsel.
---------------------------------------------------------------------------

    \266\ See letters from Davis Polk and S&C.
---------------------------------------------------------------------------

    As adopted, the final rule exempts security futures products and 
standardized options from the scope of Rule 10C-1. We believe that 
exempting security futures products and standardized options is 
appropriate because these securities are fundamentally different than 
the equity securities of an operating company. This exemption will 
benefit the issuers of these securities and the exchanges on which such 
securities trade by providing clarity and eliminating any regulatory 
uncertainty about the application of Section 10C to these products.
    In addition, we are exempting smaller reporting companies from the 
requirements of Rule 10C-1. We appreciate that the burdens of complying 
with the listing standards mandated by Rule 10C-1 for listed smaller 
reporting companies may not be significant given that such issuers are 
already subject to listing standards requiring directors on 
compensation committees or directors determining or recommending 
executive compensation matters to be ``independent'' under the 
exchanges' general independence standards. We do believe, however, that 
exempting smaller reporting companies from the listing standards 
mandated by Rule 10C-1 can offer cost savings to these issuers to the 
extent that an exchange, in connection with the listing standards 
review required by Rule 10C-1, chooses to create a new independence 
standard for compensation committee members that is more rigorous than 
its existing standards--for example, a new standard could address 
personal or business relationships between members of the compensation 
committee and the listed issuer's executive officers. Issuers subject 
to the exchange's new standard may need to replace existing 
compensation committee members, and incur the associated costs, if they 
do not qualify as independent under the new standard. In addition, 
although listed smaller reporting companies do not often engage outside 
compensation consultants, there would be cost savings to these listed 
issuers from not having to comply with the listing standards involving 
the compensation committee's engagement and oversight of compensation 
advisers. For example, the exchanges are required to adopt listing 
standards that require the compensation committee to consider the six 
independence factors listed in Rule 10C-1(b)(4) before selecting a 
compensation adviser. To comply with these listing standards, 
compensation committees will likely need to create

[[Page 38450]]

procedures for collecting and analyzing information about potential 
compensation advisers before they can receive advice from such 
advisers, which would require the listed issuers to incur costs. We 
expect, however, that a portion of these cost savings would likely be 
offset by the costs that smaller reporting companies may incur in order 
to comply with the new disclosure requirements in Item 407(e)(3)(iv) of 
Regulation S-K relating to compensation consultants' conflicts of 
interest.
    We are adopting amendments to Item 407(e)(3) of Regulation S-K to 
implement the disclosure requirements of Section 10C(c)(2). Under these 
amendments, issuers subject to our proxy rules will be required to 
disclose whether the work of any compensation consultant that has 
played any role in determining or recommending the form or amount of 
executive and director compensation has raised a conflict of interest, 
and, if so, the nature of the conflict and how the conflict is being 
addressed. Issuers subject to our existing proxy disclosure rules must 
already discuss the role played by compensation consultants in 
determining or recommending the amount or form of executive and 
director compensation, including the nature and scope of their 
assignment and any material instructions or directions governing their 
performance under the engagement. The current item excludes from the 
disclosure requirement any role of compensation consultants limited to 
consulting on any broad-based plan that does not discriminate in scope, 
terms or operation in favor of executive officers or directors of the 
registrant and that is available generally to all salaried employees, 
or limited to providing information that either is not customized for a 
particular registrant or is customized based on parameters that are not 
developed by the compensation consultant, and about which the 
compensation consultant does not provide advice. We believe the 
amendments complement our existing disclosure requirements by 
increasing the transparency of issuers' policies regarding compensation 
consultant conflicts of interest for all issuers subject to the 
existing disclosure requirement.
    The final amendments preserve the existing disclosure requirements 
under Item 407(e)(3), including the disclosure trigger in Item 
407(e)(3)(iii) of ``any role'' played by the consultant and the 
disclosure exemption for compensation consulting services involving 
only broad-based, non-discriminatory plans and the provision of non-
customized survey data. Some commentators suggested that retaining the 
existing disclosure trigger in Item 407(e)(3)(iii) and including a 
separate disclosure item within Item 407 to address the conflict of 
interest disclosure requirements of Section 10C(c)(2)(B) would be the 
better approach to implement Section 10C(c)(2) requirements.\267\ 
Additionally, commentators contended that eliminating the disclosure 
exemptions in Item 407(e)(3)(iii) would be inconsistent with our past 
determination that consulting on broad-based plans or providing non-
customized benchmark data did not raise conflict of interest concerns 
that warrant disclosure of the consultant's selection, terms of 
engagement or fees.\268\ We agree with these commentators and believe 
that the amendment to Item 407(e)(3) that we are adopting, which 
retains the existing disclosure exemptions, is the better approach to 
implementing Section 10C(c)(2)'s requirements. By retaining the 
existing disclosure trigger and disclosure exemptions under Item 
407(e)(3)(iii), the final amendments will require disclosure of 
conflicts of interest only when a compensation consultant's role is 
otherwise required to be disclosed. We believe this will promote 
efficiency by mitigating an issuer's compliance burden in situations 
where a compensation consultant does not provide ``analytical input, 
discretionary judgment or advice.'' \269\
---------------------------------------------------------------------------

    \267\ See, e.g., letter from ABA.
    \268\ See letters from ABA, Chamber and SCSGP.
    \269\ See letter from SCSGP.
---------------------------------------------------------------------------

    To promote comprehensive disclosure about compensation consultants, 
the amendments to Item 407(e)(3) extend the disclosure requirements of 
Section 10C(c)(2) to proxy and information statements where action is 
to be taken with respect to an election of directors, as well as to 
conflicts of interests for compensation consultants who play any role 
in determining or recommending the amount or form of director 
compensation. Existing Item 407(e)(3) already requires these proxy and 
information statements to include disclosure about any role of 
compensation consultants in determining or recommending the amount or 
form of executive compensation and director compensation, including the 
nature and scope of their assignment, any material instructions or 
directions governing their performance under the engagement, and 
specified information with respect to fees paid to the compensation 
consultants.
    Several commentators supported applying the new disclosure 
requirements to all Exchange Act issuers subject to our proxy 
rules.\270\ However, other commentators believed that this is not 
required by Section 10C and opposed extending the disclosure 
requirements to non-listed issuers.\271\ We are expanding the statutory 
disclosure requirement to those categories of issuers that will not be 
subject to the listing standards adopted by the exchanges pursuant to 
Rule 10C-1, including non-listed issuers, smaller reporting companies 
and controlled companies, because we believe that timely disclosure of 
compensation consultants' conflicts of interests will enable investors 
in these categories of issuers to better monitor compensation committee 
performance and will help investors make better informed voting 
decisions with respect to the election of directors, including members 
of the compensation committee. In addition, this would promote 
consistent disclosure on these topics among reporting companies and 
should benefit investors by fostering comparability of disclosure of 
compensation practices across companies.
---------------------------------------------------------------------------

    \270\ See, e.g., letters from AON and Merkl.
    \271\ See letter from Debevoise.
---------------------------------------------------------------------------

    Non-listed issuers, smaller reporting companies and controlled 
companies may incur additional costs to develop more formalized 
selection processes than they otherwise would have absent such a 
disclosure requirement. For example, even though they will not be 
subject to the listing standard requiring compensation committees to 
consider independence factors before selecting a compensation adviser, 
in light of this disclosure requirement, at the time any compensation 
consultant is selected, compensation committees of non-listed issuers, 
smaller reporting companies and controlled companies may devote time 
and resources to analyzing and assessing the independence of the 
compensation consultant and addressing and resolving any conflicts of 
interest.\272\ Although the disclosure

[[Page 38451]]

requirement does not prohibit a compensation committee from selecting a 
compensation consultant of its choosing, some committees may elect to 
engage new, alternative or additional compensation consultants after 
considering what disclosure might be required under our final rules. 
Such decisions could result in additional costs to issuers, including 
costs related to termination of existing services and search and 
engagement costs to retain new consultants. In addition, costs may 
increase if an issuer decides to engage multiple compensation 
consultants for services that had previously been provided by a single 
consultant. We believe these potential costs are likely to be limited 
because our existing disclosure rules already require disclosure of any 
role played by compensation consultants in determining or recommending 
the amount or form of executive and director compensation, including 
the nature and scope of their assignment, any material instructions or 
directions governing their performance under the engagement, and 
specified information with respect to fees paid to the compensation 
consultants. To the extent the new requirement to disclose compensation 
consultant conflicts of interest results in an issuer significantly 
modifying its consultant selection processes, we believe it would also 
likely result in such issuer making better-informed choices regarding 
compensation consultant selection.
---------------------------------------------------------------------------

    \272\ For purposes of the PRA, we estimated that the total 
annual increase in the paperwork burden for all companies to prepare 
the disclosure that would be required under the proposed amendments 
will be approximately 11,970 hours of in-house personnel time and 
approximately $1,596,000 for the services of outside professionals. 
One commentator asserted that some of the estimates we used to 
calculate the burden hours of the proposed amendments may be 
inaccurate, which could result in our underestimating the PRA burden 
of the final amendments. See letter from Chamber. As described in 
the discussion of the PRA, we received no alternative paperwork 
burden hour or cost estimates in response to our estimate of the 
paperwork burden in the Proposing Release. We believe our reduced 
paperwork burden estimate is reasonable in light of the 
modifications we have made to the proposals to reduce the compliance 
burden on issuers.
---------------------------------------------------------------------------

    To the extent that providing advice on director compensation raises 
a conflict of interest on the part of a compensation consultant, 
disclosure would be required in response to new Item 407(e)(3)(iv). 
Issuers are currently required to discuss in proxy and information 
statements the role played by compensation consultants in determining 
or recommending the amount or form of director compensation to the same 
extent that the disclosure is required regarding executive 
compensation. In light of the approach we are taking to the new 
disclosure requirement generally, which is to add the new requirement 
to the existing disclosure requirements using the existing triggers, we 
determined that the compensation consultant conflict of interest 
disclosure requirement should apply to director compensation in the 
same manner as executive compensation. We believe this will benefit 
investors by providing for more complete and consistent disclosures on 
how the board manages compensation-related conflicts of interest.
    The amendments to Regulation S-K may promote efficiency and 
competitiveness of the U.S. capital markets by increasing the 
transparency of executive compensation decision-making processes. 
Increased transparency may improve the ability of investors to make 
better informed voting and investment decisions, which may encourage 
more efficient capital allocation and formation. Some commentators 
asserted that the increased disclosure should improve the ability of 
investors to monitor performance of directors responsible for 
overseeing compensation consultants, thus enabling them to make more 
informed voting and investment decisions.\273\
---------------------------------------------------------------------------

    \273\ See, e.g., letters from CalSTRS and FLSBA.
---------------------------------------------------------------------------

    The amendments also may affect competition among compensation 
consultants. By requiring disclosure of the existence of compensation 
consultant conflicts of interest and how those conflicts of interest 
are addressed, the new disclosure requirement may lead compensation 
committees to engage in more thorough and deliberative analyses of 
adviser independence. This could result in the selection of 
compensation advisers that are more independent or impartial than might 
otherwise be chosen, which, in turn, could promote more effective 
executive compensation practices. The amendments may also incentivize 
compensation consultants to adopt policies that serve to minimize any 
conflicts of interest and for compensation committees to avoid hiring 
consultants perceived as having a conflict of interest.

V. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act.\274\ This 
FRFA relates to new Exchange Act Rule 10C-1, which will require the 
exchanges to prohibit the listing of an equity security of an issuer 
that is not in compliance with several enumerated requirements relating 
to the issuer's compensation committee, and to amendments to Item 
407(e)(3) of Regulation S-K, which will require new disclosure from 
issuers regarding any conflict of interest raised by the work of a 
compensation consultant that has played a role in determining or 
recommending the form or amount of executive and director compensation.
---------------------------------------------------------------------------

    \274\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Need for the Amendments

    We are adopting the new rule and rule amendments to implement 
Section 10C of the Exchange Act. Exchange Act Rule 10C-1 directs the 
exchanges to prohibit the listing of the equity securities of any 
issuer that does not comply with Section 10C's compensation committee 
and compensation adviser requirements. The amendments to Regulation S-K 
will require issuers to provide certain disclosures regarding their use 
of compensation consultants and how they address compensation 
consultant conflicts of interest.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on any aspect of the 
IRFA, including the number of small entities that would be affected by 
the proposed rules, the nature of the impact, how to quantify the 
number of small entities that would be affected, and how to quantify 
the impact of the proposed rule and amendments. We did not receive 
comments specifically addressing the IRFA. However, some commentators 
addressed aspects of the proposed rules that could potentially affect 
small entities. In particular, one commentator expressed concern that 
smaller issuers may experience difficulty in locating qualified 
candidates to serve on compensation committees who could meet the 
independence standards that will be developed by the exchanges.\275\ 
This commentator advocated that smaller companies should be exempted 
from all or parts of the amendments.
---------------------------------------------------------------------------

    \275\ See letter from ABA.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Rules

    The final rules will affect some companies that are small entities. 
The Regulatory Flexibility Act defines ``small entity'' to mean ``small 
business,'' ``small organization,'' or ``small governmental 
jurisdiction.'' \276\ The Commission's rules define ``small business'' 
and ``small organization'' for purposes of the Regulatory Flexibility 
Act for each of the types of entities regulated by the Commission. 
Exchange Act Rule 0-10(e) \277\ provides that the term ``small 
business'' or ``small organization,'' when referring to an exchange, 
means any exchange that: (1) Has been exempted from the reporting 
requirements of Exchange Act Rule

[[Page 38452]]

601; \278\ and (2) is not affiliated with any person (other than a 
natural person) that is not a small business or small organization, as 
defined under Exchange Act Rule 0-10. No exchanges are small entities 
because none meet these criteria. Securities Act Rule 157 \279\ and 
Exchange Act Rule 0-10(a) \280\ define a company, other than an 
investment company, to be a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year. The final rules will affect small 
entities that have a class of equity securities that are registered 
under Section 12 of the Exchange Act. We estimate that there are 
approximately 457 such registrants, other than registered investment 
companies, that may be considered small entities. An investment 
company, including a business development company, is considered to be 
a ``small business'' if it, together with other investment companies in 
the same group of related investment companies, has net assets of $50 
million or less as of the end of its most recent fiscal year.\281\ We 
believe that the amendments to Regulation S-K will affect some small 
entities that are business development companies that have a class of 
securities registered under Section 12 of the Exchange Act. We estimate 
that there are approximately 28 business development companies that may 
be considered small entities.
---------------------------------------------------------------------------

    \276\ 5 U.S.C. 601(6).
    \277\ 17 CFR 240.0-10(e).
    \278\ 17 CFR 242.601.
    \279\ 17 CFR 230.157.
    \280\ 17 CFR 240.0-10(a).
    \281\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping and Other Compliance Requirements

    Under new Exchange Act Rule 10C-1, the exchanges will be directed 
to prohibit the listing of an equity security of an issuer that is not 
in compliance with Section 10C's compensation committee and 
compensation adviser requirements. These requirements relate to:
     The independence of compensation committee members;
     The authority of the compensation committee to retain 
compensation advisers;
     The compensation committee's responsibility to assess 
factors that affect the independence of compensation advisers before 
their selection by the compensation committee; and
     The compensation committee's responsibility for the 
appointment, compensation, and oversight of the work of compensation 
advisers retained by the compensation committee; and funding for 
consultants and other advisers retained by the compensation committee.
    Rule 10C-1 will not impose any reporting or recordkeeping 
obligations on the exchanges, or any issuers with equity securities 
listed on an exchange. Furthermore, the rule does not require a listed 
issuer to establish or maintain a compensation committee. As discussed 
in more detail below, we have exempted smaller reporting companies from 
the requirements of Rule 10C-1. We do not believe the new rule will 
have a significant impact on small entities because the listing 
requirements will apply only to issuers that have equity securities 
listed on an exchange and that are not smaller reporting 
companies.\282\ All of the exchanges generally impose a combination of 
quantitative requirements such as market capitalization, minimum 
revenue, and shareholder equity thresholds that an issuer must satisfy 
in order to be listed on the exchange. Consequently, the substantial 
majority of small entities are not listed on an exchange but are quoted 
on the OTC Bulletin Board or the OTC Markets Group.\283\ Rule 10C-1 
will not apply to the OTC Bulletin Board or the OTC Markets Group, and 
therefore small entities whose securities are quoted on these 
interdealer quotation systems would not need to comply with any listing 
standards developed under the rule by the exchanges. Small entities 
that are listed on an exchange and that are not smaller reporting 
companies would generally need to comply with the standards adopted by 
the exchange pursuant to Rule 10C-1 if they wish to have their equity 
securities listed on the exchange. Small entities subject to these 
listing standards may need to spend additional time and incur 
additional costs to comply with these standards. Consistent with 
Section 10C(f)(3), the final rule will allow the exchanges flexibility 
to propose exemptions for small entities, subject to our review and 
approval under the Exchange Act Section 19(b) rule filing process.
---------------------------------------------------------------------------

    \282\ Based on data obtained from the Thomson Financial's 
Worldscope database, we estimate that as of December 31, 2010, there 
were two exchange-listed small entities that would not qualify as a 
smaller reporting company.
    \283\ Based on information retrieved from the Thomson 
Financial's Worldscope database, we estimate that as of December 31, 
2010, there were less than twelve issuers that had total assets of 
$5 million or less listed on an exchange.
    In 2011, the Commission approved a proposal from NASDAQ OMX BX 
to create a new listing market, the BX Venture Market, which allows 
issuers meeting minimal quantitative requirements--including those 
with fewer than $5 million in assets--to list on that exchange. A BX 
Venture Market-listed company is required to meet qualitative 
requirements that are, in many respects, similar to those required 
for listing on Nasdaq or other exchanges, including a requirement to 
have independent directors make decisions regarding the compensation 
of executive officers. See Self-Regulatory Organizations; NASDAQ OMX 
BX, Inc.; Order Granting Approval of Proposed Rule Change and 
Amendment No. 1 Thereto and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 2 Thereto to Create a Listing 
Market on the Exchange, Release No. 34-64437 (May 6, 2011) [76 FR 
27710]. We understand that this new market has not yet listed any 
issuers or become operational. Small entities eligible to list on 
this market that are not smaller reporting companies would be 
subject to the listing standards required by Rule 10C-1.
---------------------------------------------------------------------------

    The amendments to Item 407(e)(3) of Regulation S-K will impose some 
reporting and recordkeeping obligations on small entities. Under the 
amendments, an issuer will be required to disclose whether the work of 
any compensation consultant that has played a role in determining or 
recommending the amount or form of executive and director compensation 
has raised any conflict of interest and, if so, the nature of the 
conflict and how the conflict is being addressed. This disclosure 
requirement will apply equally to both large and small issuers. One 
commentator has noted that many small entities do not use the services 
of a compensation consultant,\284\ which should significantly minimize 
the impact of the reporting and recordkeeping requirements under the 
amendments on small entities.
---------------------------------------------------------------------------

    \284\ See letter from ABA.
---------------------------------------------------------------------------

E. Agency Action to Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposals, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    In connection with Exchange Act Rule 10C-1, we considered, but did 
not establish, different compliance requirements, or an exemption, for 
small entities. As noted above, very few small entities list their 
securities on an exchange. The substantial majority of small entities 
with publicly held equity

[[Page 38453]]

securities are quoted on the OTC Bulletin Board and the OTC Markets 
Group. As these interdealer quotation systems are not affected by Rule 
10C-1, the substantial majority of small entities will not be affected 
by the requirements under the rule.
    In addition, we are providing an exemption from the requirements in 
Rule 10C-1 for smaller reporting companies. We estimate that as of 
December 31, 2010, the most recent data available, most of the small 
entities that were listed on an exchange would qualify as a smaller 
reporting company.\285\ Smaller reporting companies that are listed on 
an exchange are already subject to listing standards requiring 
directors on compensation committees or directors determining or 
recommending executive compensation matters to be ``independent'' under 
the exchanges' general independence standards. Accordingly, we do not 
believe that the additional burdens of complying with Rule 10C-1 are 
warranted for smaller reporting companies.
---------------------------------------------------------------------------

    \285\ Based on data obtained from the Thomson Financial's 
Worldscope database, we estimate that as of December 31, 2010, there 
were two exchange-listed small entities that would not qualify as a 
smaller reporting company.
---------------------------------------------------------------------------

    In addition, under Rule 10C-1, the exchanges will be expressly 
authorized to exempt particular categories of issuers from the 
requirements of Section 10C and particular relationships from the 
compensation committee membership requirements of Section 10C(a), 
taking into account the potential impact of the requirements on smaller 
reporting issuers. Because of the close relationship and frequent 
interaction between the exchanges and their listed issuers, we believe 
the exchanges will be in the best position to determine additional 
types of issuers, including any small entities that are not smaller 
reporting companies, that should be exempted from the listing 
requirements under the rule.
    In connection with the amendments to Regulation S-K, we considered 
alternatives, including establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities, clarifying or simplifying compliance and reporting 
requirements under the amendments for small entities, using performance 
rather than design standards, and exempting small entities from all or 
part of the amendments. We considered, but did not establish, different 
compliance requirements, or an exemption, for small entities. Although 
we believe it is appropriate to exempt smaller reporting companies from 
Rule 10C-1 because we do not believe that the additional burdens of 
complying with Rule 10C-1 are warranted for smaller reporting 
companies, we are unable to reach the same conclusion with respect to 
the disclosure requirements of amended Item 407(e)(3).
    In our view, mandating uniform and comparable disclosures for all 
issuers subject to our proxy rules is consistent with the statute and 
will promote investor protection. We believe that investors have an 
interest in, and would benefit from disclosure regarding, conflicts of 
interest involving compensation consultants, to the extent that they 
are used by small entities. Several commentators opposed providing an 
exemption to small issuers and noted that the required disclosure would 
provide investors with additional information that would allow them to 
make better informed investment and voting decisions.\286\ Different 
compliance requirements or an exemption from the amendments to 
Regulation S-K for small entities would interfere with achieving the 
goal of enhancing the information provided to all investors.
---------------------------------------------------------------------------

    \286\ See, e.g., letters from CalPERS, FLSBA and RailPen.
---------------------------------------------------------------------------

    The amendments to Regulation S-K clarify, consolidate and simplify 
the compliance and reporting requirements for all entities, including 
small entities. Under the amendments, disclosure will only be required 
if a compensation consultant plays a role in determining or 
recommending the form or amount of executive and director compensation 
and the compensation consultant's work raises a conflict of interest. 
Although we believe the disclosure requirements are clear and 
straightforward, we have attempted to further clarify, consolidate and 
simplify the compliance and reporting requirements, by including an 
instruction to the amendments to provide guidance to issuers as to when 
a conflict of interest may be present that would require disclosure.
    Final Rule 10C-1 uses a mix of performance and design standards. We 
are not specifying the procedures or arrangements an issuer or 
compensation committee must develop to comply with the listing 
standards required by Rule 10C-1, but compensation committees will be 
required to consider the factors specified in Rule 10C-1(b)(4) when 
conducting the required independence assessments. The amendments to 
Regulation S-K employ design standards rather than performance 
standards, as Section 10C(c)(2) mandates the specific disclosures that 
must be provided. Moreover, based on our past experience, we believe 
specific disclosure requirements will promote consistent and comparable 
disclosure among all companies, and the amendments are intended to 
result in more comprehensive and clear disclosure.

VI. Statutory Authority and Text of the Amendments

    The amendments contained in this release are being adopted under 
the authority set forth in Sections 6, 7, 10, and 19(a) of the 
Securities Act and Sections 3(b), 10C, 12, 14, 23(a) and 36 of the 
Exchange Act.

List of Subjects in 17 CFR Parts 229 and 240

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

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

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

0
1. The general authority citation for part 229 is revised and the 
sectional authorities are removed to read as follows:

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


0
2. Section 229.407 is amended by adding paragraph (e)(3)(iv) and an 
instruction to paragraph (e)(3)(iv) to read as follows:


Sec.  229.407  (Item 407) Corporate governance.

* * * * *
    (e) * * *
    (3) * * *
    (iv) With regard to any compensation consultant identified in 
response to Item 407(e)(3)(iii) whose work has raised any conflict of 
interest, disclose the nature of the conflict and how the conflict is 
being addressed.
    Instruction to Item 407(e)(3)(iv).
    For purposes of this paragraph (e)(3)(iv), the factors listed in 
Sec.  240.10C-1(b)(4)(i) through (vi) of this chapter are

[[Page 38454]]

among the factors that should be considered in determining whether a 
conflict of interest exists.
* * * * *

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

0
3. The general authority citation for Part 240 is revised to read as 
follows:

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

0
4. Add an undesignated center heading following Sec.  240.10A-3 to read 
as follows:

Requirements Under Section 10C

0
5. Add Sec.  240.10C-1 immediately following the new undesignated 
center heading to read as follows:


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

    (a) Pursuant to section 10C(a) of the Act (15 U.S.C. 78j-3(a)) and 
section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1900):
    (1) National securities exchanges. The rules of each national 
securities exchange registered pursuant to section 6 of the Act (15 
U.S.C. 78f), to the extent such national securities exchange lists 
equity securities, must, in accordance with the provisions of this 
section, prohibit the initial or continued listing of any equity 
security of an issuer that is not in compliance with the requirements 
of any portion of paragraph (b) or (c) of this section.
    (2) National securities associations. The rules of each national 
securities association registered pursuant to section 15A of the Act 
(15 U.S.C. 78o-3), to the extent such national securities association 
lists equity securities in an automated inter-dealer quotation system, 
must, in accordance with the provisions of this section, prohibit the 
initial or continued listing in an automated inter-dealer quotation 
system of any equity security of an issuer that is not in compliance 
with the requirements of any portion of paragraph (b) or (c) of this 
section.
    (3) Opportunity to cure defects. The rules required by paragraphs 
(a)(1) and (a)(2) of this section must provide for appropriate 
procedures for a listed issuer to have a reasonable opportunity to cure 
any defects that would be the basis for a prohibition under paragraph 
(a) of this section, before the imposition of such prohibition. Such 
rules may provide that if a member of a compensation committee ceases 
to be independent in accordance with the requirements of this section 
for reasons outside the member's reasonable control, that person, with 
notice by the issuer to the applicable national securities exchange or 
national securities association, may remain a compensation committee 
member of the listed issuer until the earlier of the next annual 
shareholders meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent.
    (4) Implementation. (i) Each national securities exchange and 
national securities association that lists equity securities must 
provide to the Commission, no later than 90 days after publication of 
this section in the Federal Register, proposed rules or rule amendments 
that comply with this section. Each submission must include, in 
addition to any other information required under section 19(b) of the 
Act (15 U.S.C. 78s(b)) and the rules thereunder, a review of whether 
and how existing or proposed listing standards satisfy the requirements 
of this rule, a discussion of the consideration of factors relevant to 
compensation committee independence conducted by the national 
securities exchange or national securities association, and the 
definition of independence applicable to compensation committee members 
that the national securities exchange or national securities 
association proposes to adopt or retain in light of such review.
    (ii) Each national securities exchange and national securities 
association that lists equity securities must have rules or rule 
amendments that comply with this section approved by the Commission no 
later than one year after publication of this section in the Federal 
Register.
    (b) Required standards. The requirements of this section apply to 
the compensation committees of listed issuers.
    (1) Independence. (i) Each member of the compensation committee 
must be a member of the board of directors of the listed issuer, and 
must otherwise be independent.
    (ii) Independence requirements. In determining independence 
requirements for members of compensation committees, the national 
securities exchanges and national securities associations shall 
consider relevant factors, including, but not limited to:
    (A) The source of compensation of a member of the board of 
directors of an issuer, including any consulting, advisory or other 
compensatory fee paid by the issuer to such member of the board of 
directors; and
    (B) Whether a member of the board of directors of an issuer is 
affiliated with the issuer, a subsidiary of the issuer or an affiliate 
of a subsidiary of the issuer.
    (iii) Exemptions from the independence requirements. (A) The 
listing of equity securities of the following categories of listed 
issuers is not subject to the requirements of paragraph (b)(1) of this 
section:
    (1) Limited partnerships;
    (2) Companies in bankruptcy proceedings;
    (3) Open-end management investment companies registered under the 
Investment Company Act of 1940; and
    (4) Any foreign private issuer that discloses in its annual report 
the reasons that the foreign private issuer does not have an 
independent compensation committee.
    (B) In addition to the issuer exemptions set forth in paragraph 
(b)(1)(iii)(A) of this section, a national securities exchange or a 
national securities association, pursuant to section 19(b) of the Act 
(15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the 
requirements of paragraph (b)(1) of this section a particular 
relationship with respect to members of the compensation committee, as 
each national securities exchange or national securities association 
determines is appropriate, taking into consideration the size of an 
issuer and any other relevant factors.
    (2) Authority to retain compensation consultants, independent legal 
counsel and other compensation advisers. (i) The compensation committee 
of a listed issuer, in its capacity as a committee of the board of 
directors, may, in its sole discretion, retain or obtain the advice of 
a compensation consultant, independent legal counsel or other adviser.
    (ii) The compensation committee shall be directly responsible for 
the appointment, compensation and oversight of the work of any 
compensation consultant, independent legal counsel and other adviser 
retained by the compensation committee.
    (iii) Nothing in this paragraph (b)(2) shall be construed:
    (A) To require the compensation committee to implement or act 
consistently with the advice or recommendations of the compensation 
consultant, independent legal counsel

[[Page 38455]]

or other adviser to the compensation committee; or
    (B) To affect the ability or obligation of a compensation committee 
to exercise its own judgment in fulfillment of the duties of the 
compensation committee.
    (3) Funding. Each listed issuer must provide for appropriate 
funding, as determined by the compensation committee, in its capacity 
as a committee of the board of directors, for payment of reasonable 
compensation to a compensation consultant, independent legal counsel or 
any other adviser retained by the compensation committee.
    (4) Independence of compensation consultants and other advisers. 
The compensation committee of a listed issuer may select a compensation 
consultant, legal counsel or other adviser to the compensation 
committee only after taking into consideration the following factors, 
as well as any other factors identified by the relevant national 
securities exchange or national securities association in its listing 
standards:
    (i) The provision of other services to the issuer by the person 
that employs the compensation consultant, legal counsel or other 
adviser;
    (ii) The amount of fees received from the issuer by the person that 
employs the compensation consultant, legal counsel or other adviser, as 
a percentage of the total revenue of the person that employs the 
compensation consultant, legal counsel or other adviser;
    (iii) The policies and procedures of the person that employs the 
compensation consultant, legal counsel or other adviser that are 
designed to prevent conflicts of interest;
    (iv) Any business or personal relationship of the compensation 
consultant, legal counsel or other adviser with a member of the 
compensation committee;
    (v) Any stock of the issuer owned by the compensation consultant, 
legal counsel or other adviser; and
    (vi) Any business or personal relationship of the compensation 
consultant, legal counsel, other adviser or the person employing the 
adviser with an executive officer of the issuer.
    Instruction to paragraph (b)(4) of this section: A listed issuer's 
compensation committee is required to conduct the independence 
assessment outlined in paragraph (b)(4) of this section with respect to 
any compensation consultant, legal counsel or other adviser that 
provides advice to the compensation committee, other than in-house 
legal counsel.
    (5) General exemptions. (i) The national securities exchanges and 
national securities associations, pursuant to section 19(b) of the Act 
(15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the 
requirements of this section certain categories of issuers, as the 
national securities exchange or national securities association 
determines is appropriate, taking into consideration, among other 
relevant factors, the potential impact of such requirements on smaller 
reporting issuers.
    (ii) The requirements of this section shall not apply to any 
controlled company or to any smaller reporting company.
    (iii) The listing of a security futures product cleared by a 
clearing agency that is registered pursuant to section 17A of the Act 
(15 U.S.C. 78q-1) or that is exempt from the registration requirements 
of section 17A(b)(7)(A) (15 U.S.C. 78q-1(b)(7)(A)) is not subject to 
the requirements of this section.
    (iv) The listing of a standardized option, as defined in Sec.  
240.9b-1(a)(4), issued by a clearing agency that is registered pursuant 
to section 17A of the Act (15 U.S.C. 78q-1) is not subject to the 
requirements of this section.
    (c) Definitions. Unless the context otherwise requires, all terms 
used in this section have the same meaning as in the Act and the rules 
and regulations thereunder. In addition, unless the context otherwise 
requires, the following definitions apply for purposes of this section:
    (1) In the case of foreign private issuers with a two-tier board 
system, the term board of directors means the supervisory or non-
management board.
    (2) The term compensation committee means:
    (i) A committee of the board of directors that is designated as the 
compensation committee; or
    (ii) In the absence of a committee of the board of directors that 
is designated as the compensation committee, a committee of the board 
of directors performing functions typically performed by a compensation 
committee, including oversight of executive compensation, even if it is 
not designated as the compensation committee or also performs other 
functions; or
    (iii) For purposes of this section other than paragraphs (b)(2)(i) 
and (b)(3), in the absence of a committee as described in paragraphs 
(c)(2)(i) or (ii) of this section, the members of the board of 
directors who oversee executive compensation matters on behalf of the 
board of directors.
    (3) The term controlled company means an issuer:
    (i) That is listed on a national securities exchange or by a 
national securities association; and
    (ii) Of which more than 50 percent of the voting power for the 
election of directors is held by an individual, a group or another 
company.
    (4) The terms listed and listing refer to equity securities listed 
on a national securities exchange or listed in an automated inter-
dealer quotation system of a national securities association or to 
issuers of such securities.
    (5) The term open-end management investment company means an open-
end company, as defined by Section 5(a)(1) of the Investment Company 
Act of 1940 (15 U.S.C. 80a-5(a)(1)), that is registered under that Act.

    By the Commission.

    Dated: June 20, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-15408 Filed 6-26-12; 8:45 am]
BILLING CODE 8011-01-P


