
[Federal Register Volume 77, Number 199 (Monday, October 15, 2012)]
[Notices]
[Pages 62547-62556]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25223]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68018; File No. SR-BX-2012-063]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change To Modify the Listing Rules for 
Compensation Committees To Comply With Rule 10C-1 under the Exchange 
Act and Make Other Related Changes

October 9, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 25, 2012, NASDAQ OMX BX, Inc. (``BX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by BX. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

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

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

    In its filing with the Commission, BX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. BX has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

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

1. Purpose
    Section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the ``Dodd-Frank Act'') \4\ added Section 10C 
to the Exchange Act.\5\ Section 10C required the Commission to direct 
the national securities exchanges, including BX, and national 
securities associations to prohibit the listing of any equity security 
of an issuer, with certain exemptions, that does not comply with 
Section 10C's requirements relating to compensation committees and 
advisers. To effect this requirement, the Commission has adopted Rule 
10C-1 under the Exchange Act, which became effective on July 27, 2012. 
Rule 10C-1 requires each national securities exchange and national 
securities association to provide to the Commission, no later than 
September 25, 2012, proposed rules or rule amendments that comply with 
the requirements of Rule 10C-1.\6\
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    \4\ Public Law 111-203, 124 Stat. 1376 (2010).
    \5\ 15 U.S.C. 78j-3.
    \6\ See 17 CFR 240.10C-1(a)(4)(i).
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    Rule 10C-1 generally requires that:
     Each member of the compensation committee of a listed 
issuer must be an independent member of the board of directors;
     in determining independence requirements for compensation 
committee members, exchanges must consider relevant factors, including, 
but not limited to:
     the source of compensation of a member, including any 
consulting, advisory or other compensatory fee paid by the issuer to 
such member; and

[[Page 62548]]

     whether the member is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the issuer;
     the compensation committee must have the authority to 
retain or obtain the advice of a compensation consultant, independent 
legal counsel or other compensation adviser;
     the listed issuer must provide for appropriate funding, as 
determined by the compensation committee, for payment of reasonable 
compensation to such compensation advisers;
     the compensation committee may select such compensation 
advisers only after taking into consideration six independence factors 
that are enumerated in Rule 10C-1, as well as any other factors 
identified by an exchange; and
     certain categories of issuers, including, but not limited 
to, controlled companies and smaller reporting companies, are generally 
exempt from all of Rule 10C-1, while other categories of issuers, 
including, but not limited to, foreign private issuers that provide 
certain disclosures, are specifically exempt from the requirement to 
have a fully independent compensation committee.
General Overview of BX's Proposals
    While BX does not presently list any securities, the Commission has 
approved listing rules for the Exchange's BX Venture Market.\7\ BX is 
proposing to modify the compensation-related listing rules for the BX 
Venture Market, as required by Rule 10C-1. Generally, BX's proposals 
provide that:
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    \7\ References in this filing to BX's listing rules refer to the 
listing rules for the BX Venture Market.
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     Companies\8\ must have a compensation committee consisting 
of at least two members, each of whom must be an Independent Director 
\9\ as defined under BX's current listing rules;
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    \8\ ``Company'' means ``the issuer of a security listed or 
applying to list on the Exchange.'' BX Venture Market Listing Rule 
5005(a)(4).
    \9\ For a discussion of the definition of the term ``Independent 
Director,'' see the section entitled ``Compensation Committee 
Composition--General Independence Definition'' below. 
Notwithstanding any of the proposed changes, and consistent with 
BX's existing listing rules, a Company's board has the 
responsibility to make an affirmative determination that no 
Independent Director has a relationship that, in the opinion of the 
board, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director.
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     compensation committee members must not accept directly or 
indirectly any consulting, advisory or other compensatory fee, other 
than for board service, from a Company or any subsidiary thereof;
     in determining whether a director is eligible to serve on 
a compensation committee, a Company's board must consider whether the 
director is affiliated with the Company, a subsidiary of the Company or 
an affiliate of a subsidiary of the Company to determine whether such 
affiliation would impair the director's judgment as a member of the 
compensation committee;
     Companies may continue to rely on BX's existing exception 
that allows certain non-Independent Directors to serve on a 
compensation committee under exceptional and limited circumstances;
     if a Company fails to comply with the compensation 
committee composition requirements in certain circumstances, it may 
rely on a cure period;
     Companies must adopt a formal, written compensation 
committee charter that must specify the compensation committee 
responsibilities and authority in Rule 10C-1 relating to the: (i) 
Authority to retain compensation consultants, independent legal counsel 
and other compensation advisers; (ii) authority to fund such advisers; 
and (iii) responsibility to consider certain independence factors 
before selecting such advisers, other than in-house legal counsel;
     Companies must review and reassess the adequacy of the 
compensation committee charter on an annual basis;
     BX's existing exemptions from, and phase-in schedules for, 
the compensation-related listing rules remain generally unchanged, 
other than to add exemptions for cooperatives and Controlled Companies, 
as defined below, as well as a phase-in schedule for Companies ceasing 
to be Controlled Companies; and
     Smaller Reporting Companies \10\ must have a compensation 
committee comprised of at least two Independent Directors and a formal 
written compensation committee charter or board resolution that 
specifies the committee's responsibilities and authority, but such 
Companies are not required to adhere to the compensation committee 
eligibility requirements relating to compensatory fees and affiliation, 
or the requirements relating to compensation consultants, independent 
legal counsel and other compensation advisers that BX is proposing to 
adopt under Rule 10C-1.
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    \10\ Smaller Reporting Company is defined in Rule 12b-2 under 
the Exchange Act.
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    Rule 10C-1 requires BX to include in its submission: (i) A review 
of whether and how its existing or proposed listing rules satisfy the 
requirements of Rule 10C-1; (ii) a discussion of the consideration of 
factors relevant to compensation committee independence conducted by 
BX; and (iii) the definition of independence applicable to compensation 
committee members that BX proposes to adopt or retain in light of such 
review.\11\ BX's proposals and its underlying analysis are discussed in 
depth below.
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    \11\ See 17 CFR 240.10C-1(a)(4)(i).
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Requirement To Have a Compensation Committee
    BX's current listing rules require that compensation of the chief 
executive officer and all other Executive Officers \12\ of a Company 
must be determined, or recommended to the board for determination, 
either by: (i) A compensation committee comprised solely of Independent 
Directors; or (ii) Independent Directors constituting a majority of the 
board's Independent Directors in a vote in which only Independent 
Directors participate (the ``Alternative'').\13\
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    \12\ ``Executive Officer'' is defined as an officer ``covered in 
Rule 16a-1(f) under the [Exchange] Act.'' BX Venture Market Listing 
Rule 5605(a)(1).
    \13\ See BX Venture Market Listing Rules 5605(d)(1) and (2).
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    Although it was not required to do so by Rule 10C-1,\14\ BX 
considered whether the Alternative remains appropriate given the 
heightened importance of compensation decisions in today's corporate 
governance environment. Since responsibility for executive compensation 
decisions is one of the most important responsibilities entrusted to a 
board of directors, BX believes that there are benefits from a board 
having a standing committee dedicated solely to oversight of executive 
compensation. Specifically, directors on a standing compensation 
committee may develop expertise in a Company's executive compensation 
program in the same way that directors on a standing audit committee 
develop expertise in a Company's accounting and financial reporting 
processes. In addition, a formal committee structure may help promote 
accountability to stockholders for executive compensation decisions.
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    \14\ See Securities Exchange Act Release No. 67220 (June 20, 
2012), 77 FR 38422, 38425 (June 27, 2012) (the ``Adopting Release'') 
(stating that ``[t]he final rule will not require a listed issuer to 
have a compensation committee or a committee that performs functions 
typically assigned to a compensation committee.'').
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    BX also considered whether eliminating the Alternative would pose 
an undue hardship on listed Companies. Since BX does not currently have 
any listed Companies, it does not believe

[[Page 62549]]

that eliminating the Alternative would be unduly burdensome.
    As a result, BX proposes to eliminate the Alternative and require 
listed Companies to have a standing compensation committee with the 
responsibility for determining, or recommending to the full board for 
determination, the compensation of the chief executive officer and all 
other Executive Officers of the Company.
Compensation Committee Size
    BX's current listing rules do not impose size requirements on any 
board committees, other than the audit committee, which must consist of 
at least three members.\15\ As a result, it is possible to have a 
compensation committee comprised of only one member under BX's current 
listing rules.
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    \15\ See BX Venture Market Listing Rule 5605(c)(2)(A).
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    Although it was not required to do so by Rule 10C-1, BX considered 
whether it is appropriate to impose a minimum size requirement on a 
compensation committee. Given the importance of compensation decisions 
to stockholders, BX believes that it is appropriate to have more than 
one director responsible for these decisions and that therefore, a 
compensation committee should consist of at least two members. BX then 
considered whether to require compensation committees to adhere to the 
same size requirement as audit committees and have a minimum of three 
members. However, BX was concerned that it might be difficult for 
Companies, especially smaller Companies, to comply with a requirement 
to have a three-member compensation committee, in addition to a three-
member audit committee.
    BX also considered whether imposing a minimum size requirement on a 
compensation committee would be unduly burdensome to listed Companies, 
especially in combination with the proposal to eliminate the 
Alternative, as discussed above. Since BX does not currently have any 
listed Companies, it does not believe that imposing a minimum size 
requirement on a compensation committee would be unduly burdensome.
    As a result, BX proposes to require a compensation committee of a 
Company to consist of at least two members of the board of directors.
Compensation Committee Composition--General Independence Definition
    BX's current listing rules require a compensation committee to be 
comprised solely of Independent Directors, as defined in BX Venture 
Market Listing Rule 5605(a)(2).\16\ This definition includes a two-part 
test for independence. First, there are certain categories of directors 
who cannot be considered independent, including:
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    \16\ See BX Venture Market Listing Rules 5605(d)(1) and (2).
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     A director who is an Executive Officer or employee of the 
Company; \17\
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    \17\ See BX Venture Market Listing Rule 5605(a)(2). The rule's 
reference to the term ``Company'' includes any parent or subsidiary 
of the Company. The term ``parent or subsidiary'' is intended to 
cover entities the Company controls and consolidates with the 
Company's financial statements as filed with the Commission (but not 
if the Company reflects such entity solely as an investment in its 
financial statements). See IM-5605-1.
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     a director who is, or at any time during the past three 
years was, employed by the Company; \18\
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    \18\ See BX Venture Market Listing Rule 5605(a)(2)(A).
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     a director who accepted or who has a Family Member \19\ 
who accepted any compensation from the Company in excess of $120,000 
during any period of twelve consecutive months within the three years 
preceding the determination of independence; \20\
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    \19\ ``Family Member'' is defined as ``a person's spouse, 
parents, children and siblings, whether by blood, marriage or 
adoption, or anyone residing in such person's home.'' BX Venture 
Market Listing Rule 5605(a)(2).
    \20\ See BX Venture Market Listing Rule 5605(a)(2)(B). This 
prohibition includes exceptions for: (i) compensation for board or 
board committee service; (ii) compensation paid to a Family Member 
who is an employee (other than an Executive Officer) of the Company; 
or (iii) benefits under a tax-qualified retirement plan, or non-
discretionary compensation.
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     a director who is a Family Member of an individual who is, 
or at any time during the past three years was, employed by the Company 
as an Executive Officer; \21\
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    \21\ See BX Venture Market Listing Rule 5605(a)(2)(C).
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     a director who is, or has a Family Member who is, a 
partner in, or a controlling Shareholder \22\ or an Executive Officer 
of, any organization to which the Company made, or from which the 
Company received, payments for property or services in the current or 
any of the past three fiscal years that exceed 5% of the recipient's 
consolidated gross revenues for that year, or $200,000, whichever is 
more; \23\
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    \22\ ``Shareholder'' is defined as ``a record or beneficial 
owner of a [s]ecurity listed or applying to list. For purposes of 
[the BX Venture Market Listing Rules], the term `Shareholder' 
includes, for example, a limited partner, the owner of a depository 
receipt, or unit.'' BX Venture Market Listing Rule 5005(a)(26).
    \23\ See BX Venture Market Listing Rule 5605(a)(2)(D). This 
prohibition includes exceptions for payments: (i) Arising solely 
from investments in the Company's securities; or (ii) under non-
discretionary charitable contribution matching programs.
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     a director of the Company who is, or has a Family Member 
who is, employed as an Executive Officer of another entity where at any 
time during the past three years any of the Executive Officers of the 
Company serve on the compensation committee of such other entity; \24\ 
or
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    \24\ See BX Venture Market Listing Rule 5605(a)(2)(E).
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     a director who is, or has a Family Member who is, a 
current partner of the Company's outside auditor, or was a partner or 
employee of the Company's outside auditor who worked on the Company's 
audit at any time during any of the past three years.\25\
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    \25\ See BX Venture Market Listing Rule 5605(a)(2)(F). In the 
case of an investment company, in lieu of the prohibitions in BX 
Venture Market Listing Rule 5605(a)(2)(A)-(F), a director cannot be 
considered independent if he or she is an ``interested person'' of 
the Company as defined in Section 2(a)(19) of the Investment Company 
Act of 1940, other than in his or her capacity as a member of the 
board of directors or any board committee.
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    Second, a Company's board of directors must make an affirmative 
determination that each Independent Director has no relationship that, 
in the opinion of the board, would interfere with the exercise of 
independent judgment in carrying out the responsibilities of a 
director.\26\
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    \26\ See BX Venture Market Listing Rule 5605(a)(2) and IM-5605-
1.
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    BX proposes to continue unchanged its existing requirement that a 
compensation committee be comprised solely of Independent Directors, as 
defined in BX Venture Market Listing Rule 5605(a)(2).
Compensation Committee Composition--Compensatory Fees
    Rule 10C-1 requires that in determining the independence 
requirements for compensation committee members, BX must consider 
relevant factors, including, but not limited to, the source of 
compensation of a member, including any consulting, advisory or other 
compensatory fee paid by the issuer to the member.\27\ In considering 
this particular factor, BX reviewed its current listing rules relating 
to compensatory fees. As outlined above, BX's current listing rules 
require compensation committee members to be Independent Directors. 
Independent Director is defined to exclude any director who: (i) 
Accepted any compensation from the Company in excess of $120,000 during 
any period of twelve consecutive months within the prior three years; 
or (ii) is a partner in, or a controlling Shareholder or an

[[Page 62550]]

Executive Officer of, any organization to which the Company made, or 
from which the Company received, payments for property or services in 
the current or any of the past three fiscal years that exceed 5% of the 
recipient's consolidated gross revenues for that year, or $200,000, 
whichever is more.\28\ As a result, directors who receive compensatory 
fees from a Company below these thresholds may serve on a compensation 
committee under BX's current listing rules.
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    \27\ See 17 CFR 240.10C-1(b)(1)(ii)(A).
    \28\ See BX Venture Market Listing Rules 5605(a)(2)(B) and (D).
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    This is in contrast to BX's current listing rules relating to audit 
committees, which require audit committee members to meet the criteria 
for independence set forth in Rule 10A-3(b)(1) under the Exchange Act, 
subject to certain exemptions.\29\ Rule 10A-3(b)(1) prohibits an audit 
committee member from accepting directly or indirectly any consulting, 
advisory or other compensatory fee from an issuer or any subsidiary, 
with certain exemptions.
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    \29\ See BX Venture Market Listing Rule 5605(c)(2)(A)(ii).
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    After reviewing its current listing rules, BX concluded that there 
is no compelling justification to have different independence standards 
for audit and compensation committee members with respect to the 
acceptance of compensatory fees from a Company. Accordingly, BX 
proposes to adopt the same standard for compensation committee members 
that applies to audit committee members under Rule 10A-3 under the 
Exchange Act with respect to compensatory fees. Specifically, BX's 
proposal prohibits a compensation committee member from accepting 
directly or indirectly any consulting, advisory or other compensatory 
fee from an issuer or any subsidiary. As in Rule 10A-3, compensatory 
fees shall not include: (i) Fees received as a member of the 
compensation committee, the board of directors or any other board 
committee; or (ii) the receipt of fixed amounts of compensation under a 
retirement plan (including deferred compensation) for prior service 
with the Company (provided that such compensation is not contingent in 
any way on continued service).\30\ Also similar to Rule 10A-3, the 
proposed requirement applicable to compensation committee members will 
not include a ``look-back'' period.\31\ Accordingly, the prohibition on 
the receipt of any consulting, advisory or other compensatory fee by a 
compensation committee member begins with the member's term of service 
on the compensation committee.\32\
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    \30\ See 17 CFR 240.10A-3(b)(1).
    \31\ See Securities Exchange Act Release No. 47654 (April 9, 
2003), 68 FR 18788, 18792 (April 16, 2003) (stating that ``[t]he 
final rule, like [the] proposal, applies the prohibitions only to 
current relationships with the audit committee member and related 
persons. They do not extend to a `look back' period before 
appointment to the audit committee.* * *'')
    \32\ BX notes, however, that as discussed above, compensation 
committee members must be Independent Directors as defined in BX 
Venture Market Listing Rule 5605(a)(2). Each of the bright-line 
tests in this definition includes a three-year ``lookback'' period. 
See BX Venture Market Listing Rule 5605(a)(2).
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Compensation Committee Composition--Affiliation
    Rule 10C-1 requires that in determining the independence 
requirements for compensation committee members, BX also must consider 
whether a member is affiliated with the issuer, a subsidiary of the 
issuer or an affiliate of a subsidiary of the issuer.\33\ In 
considering this particular factor, BX reviewed its current listing 
rules relating to affiliation. As outlined above, BX's current listing 
rules require compensation committee members to be Independent 
Directors. The definition of the term ``Independent Director'' does not 
refer to affiliation, although the definition does exclude certain 
individuals who may be considered affiliates from being an Independent 
Director. For example, any director who is an Executive Officer of the 
Company cannot be considered an Independent Director.\34\ 
Significantly, the Interpretive Material to BX's definition of 
Independent Director states that ``[b]ecause the Exchange does not 
believe that ownership of Company stock by itself would preclude a 
board finding of independence, it is not included in the aforementioned 
objective factors.'' \35\
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    \33\ See 17 CFR 240.10C-1(b)(1)(ii)(B).
    \34\ See BX Venture Market Listing Rule 5605(a)(2).
    \35\ IM-5605-1.
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    Beyond the definition of Independent Director, BX's current listing 
rules relating to audit committees require audit committee members to 
meet the criteria for independence set forth in Rule 10A-3(b)(1) under 
the Exchange Act, subject to certain exemptions.\36\ Rule 10A-3(b)(1) 
prohibits an audit committee member from being an affiliated person of 
the issuer or any subsidiary thereof. The term ``affiliate'' means ``a 
person that directly, or indirectly through one or more intermediaries, 
controls, or is controlled by, or is under common control with, the 
person specified.'' \37\ However, Rule 10A-3 includes a safe harbor for 
a person that is not: (i) The beneficial owner, directly or indirectly, 
of more than 10% of any class of voting equity securities of the 
specified person; and (ii) an executive officer of a specified 
person.\38\
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    \36\ See BX Venture Market Listing Rule 5605(c)(2)(A)(ii).
    \37\ See 17 CFR 240.10A-3(e)(1).
    \38\ Id.
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    After reviewing its current listing rules, BX considered whether to 
propose that compensation committee members must meet the same standard 
applicable to audit committee members under Rule 10A-3 under the 
Exchange Act with respect to affiliation, similar to its proposal with 
respect to compensatory fees. However, BX concluded that such a blanket 
prohibition would be inappropriate for compensation committees. In 
fact, BX believes that it may be appropriate for certain affiliates, 
such as representatives of significant stockholders, to serve on 
compensation committees since their interests are likely aligned with 
those of other stockholders in seeking an appropriate executive 
compensation program.
    As a result, BX proposes that Companies' boards of directors should 
consider affiliation in making an eligibility determination for 
compensation committee members, but it does not propose bright-line 
rules around this factor. In making this eligibility determination, a 
Company's board specifically must consider whether the director is 
affiliated with the Company, a subsidiary of the Company or an 
affiliate of a subsidiary of the Company to determine whether such 
affiliation would impair the director's judgment as a member of the 
compensation committee. In performing this analysis, a board of 
directors is not required to apply a ``look-back'' period, and is 
therefore required to consider affiliation only with respect to 
relationships that occur during an individual's term of service as a 
compensation committee member.
    A board may conclude that it is appropriate for a director who is 
an affiliate to serve on the compensation committee. While this differs 
from the requirement applicable to audit committee members, BX could 
identify no compelling policy justification for precluding all 
affiliates, such as owners of a Company, even those with very large 
stakes, from serving on the compensation committee.

[[Page 62551]]

Compensation Committee Composition--Other
    Rule 10C-1 permits BX to consider other relevant factors in 
determining the independence requirements for compensation committee 
members.\39\ After reviewing its current and proposed listing rules, BX 
concluded that these rules are sufficient to ensure the independence of 
compensation committee members. Therefore, BX determined not to propose 
further independence requirements.
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    \39\ See 17 CFR 240.10C-1(b)(1)(ii).
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Exceptional and Limited Circumstances Exception
    With some edits, BX proposes to retain its existing exception that 
allows a Company to have a non-Independent Director serve on the 
compensation committee under exceptional and limited circumstances.\40\ 
Under this exception, if a compensation committee consists of at least 
three members, one director who is not an Independent Director and is 
not a current officer or employee or a Family Member of an officer or 
employee, may be appointed to the compensation committee if the board, 
under exceptional and limited circumstances, determines that such 
individual's membership on the committee is required by the best 
interests of the Company and its Shareholders. The NASDAQ Stock Market 
LLC (``Nasdaq'') recently amended the identical exception in its rules 
to allow a Company to rely on the exception for a non-Independent 
Director who is a Family Member of a non-executive employee of the 
Company.\41\ BX proposes to make the same change to its exceptional and 
limited circumstances exception.
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    \40\ See BX Venture Market Listing Rule 5605(d)(3).
    \41\ See Securities Exchange Act Release No. 67468 (July 19, 
2012), 77 FR 43618 (July 25, 2012) (SR-NASDAQ-2012-062). Nasdaq made 
the same change to its exceptional and limited circumstances 
exception for audit committee members, and BX also proposes to make 
a conforming change to its identical exception for audit committee 
members. BX notes that under both the current and proposed versions 
of the exception for audit committee members, a Company could not 
rely on the exception for a director who does not meet the criteria 
set forth in Section 10A(m)(3) of the Exchange Act and the rules 
thereunder to allow a director to serve on the audit committee. See 
15 U.S.C. 78j-1(m)(3) and 17 CFR 240.10A-3(b)(1).
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    A Company that relies on this exception must disclose either on or 
through the Company's Web site or in the proxy statement for the next 
annual meeting subsequent to such determination (or, if the Company 
does not file a proxy, in its Form 10-K or 20-F), the nature of the 
relationship and the reasons for the determination. In addition, the 
Company must provide any disclosure required by Instruction 1 to Item 
407(a) of Regulation S-K regarding its reliance on this exception. A 
member appointed under this exception may not serve longer than two 
years.
    BX believes this exception is an important means to allow Companies 
flexibility as to board and committee membership and composition in 
unusual circumstances, which may be particularly important for smaller 
Companies.
    BX would allow a Company to avail itself of the exception even for 
a director who fails the new requirements adopted pursuant to Rule 10C-
1.
Cure Period
    Consistent with Rule 10C-1, BX's proposal provides Companies with 
an opportunity to cure defects in the composition of compensation 
committees.\42\ The proposed cure period is copied from the cure period 
in Nasdaq's current listing rules for noncompliance with the 
requirement to have a majority independent board.\43\
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    \42\ See 17 CFR 240.10C-1(a)(3).
    \43\ See Nasdaq Listing Rule 5605(b)(1)(A).
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    Under BX's proposal, if a Company fails to comply with the 
compensation committee composition requirements due to one vacancy, or 
one compensation committee member ceases to be independent due to 
circumstances beyond the member's reasonable control, the Company shall 
regain compliance by the earlier of the next annual shareholders 
meeting or one year from the occurrence of the event that caused the 
noncompliance. However, if the annual shareholders meeting occurs no 
later than 180 days following the event that caused the noncompliance, 
the Company shall instead have 180 days from such event to regain 
compliance. This provides a Company at least 180 days to cure 
noncompliance and would typically allow a Company to regain compliance 
in connection with its next annual meeting. A Company relying on this 
provision shall provide notice to BX immediately upon learning of the 
event or circumstance that caused the noncompliance.
Compensation Committee Charter
    BX proposes to require each Company to certify that it has adopted 
a formal written compensation committee charter and that the 
compensation committee will review and reassess the adequacy of the 
formal written charter on an annual basis.\44\ This proposal is similar 
to BX's current requirement for Companies to certify as to the adoption 
of a formal written audit committee charter, except that the proposed 
requirement for annual review and reassessment of the adequacy of the 
compensation committee charter is written prospectively, rather than 
retrospectively.\45\ In other words, the proposed compensation 
committee charter requirement states that the compensation committee 
will review and reassess the adequacy of the charter on an annual 
basis, while the current audit committee charter requirement states 
that the audit committee has reviewed and reassessed the adequacy of 
the charter on an annual basis.\46\
---------------------------------------------------------------------------

    \44\ Smaller Reporting Companies may adopt either a formal 
written compensation committee charter or a board resolution that 
specifies the committee's responsibilities and authority, except 
Smaller Reporting Companies are not required to specify the specific 
compensation responsibilities and authority set forth in proposed BX 
Venture Market Listing Rule 5605(d)(3). For further discussion, see 
the section entitled ``Smaller Reporting Companies'' below.
    \45\ See BX Venture Market Listing Rule 5605(c)(1).
    \46\ BX proposes to make a conforming change to its audit 
committee charter requirement to clarify that Companies' annual 
review and reassessment of the audit committee charter should be 
prospective. This is consistent with BX's current interpretation of 
its audit committee charter requirement. By proposing this 
amendment, BX seeks to minimize differences between the audit 
committee and compensation committee charter requirements and to 
eliminate potential questions as to whether BX intended a 
discrepancy between these two requirements.
---------------------------------------------------------------------------

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

[[Page 62552]]

from BX's similar listing rule relating to audit committee 
charters.\47\
---------------------------------------------------------------------------

    \47\ See BX Venture Market Listing Rule 5605(c)(1)(A).
---------------------------------------------------------------------------

    The requirement for the charter to specify the compensation 
committee's responsibility for determining, or recommending to the 
board for determination, the compensation of the chief executive 
officer and all other Executive Officers of the Company, is based upon 
BX's current compensation-related listing rules.\48\ These listing 
rules require that the compensation of a Company's chief executive 
officer and all other Executive Officers must be determined by (i) a 
compensation committee comprised solely of Independent Directors or 
(ii) the Independent Directors constituting a majority of the board's 
Independent Directors in a vote in which only Independent Directors 
participate. As discussed above, BX proposes to eliminate the 
Alternative, and therefore, the compensation of a Company's chief 
executive officer and all other Executive Officers must be determined, 
or recommended to the board for determination, by a compensation 
committee comprised of Independent Directors. Going forward, BX 
proposes to implement this requirement by requiring Companies to 
include it in their formal written compensation committee charters.
---------------------------------------------------------------------------

    \48\ See BX Venture Market Listing Rules 5605(d)(1) and (2).
---------------------------------------------------------------------------

    The requirement for the charter to specify that the chief executive 
officer of the Company may not be present during voting or 
deliberations by the compensation committee on his or her compensation 
is based upon BX's current compensation-related listing rules.\49\ 
Going forward, BX proposes to implement this requirement by requiring 
Companies to include it in their formal written compensation committee 
charters.
---------------------------------------------------------------------------

    \49\ See BX Venture Market Listing Rule 5605(d)(1).
---------------------------------------------------------------------------

    Finally, the requirement for the charter to specify the specific 
compensation committee responsibilities and authority set forth in 
proposed BX Venture Market Listing Rule 5605(d)(3) is modeled after 
BX's similar listing rule relating to audit committee charters.\50\ 
Proposed BX Venture Market Listing Rule 5605(d)(3) implements the 
requirements of Section 10C(b)-(e) of the Exchange Act and Rule 10C-
1(b)(2), (3) and (4)(i)-(vi) thereunder. Specifically, the proposed 
listing rule states that a compensation committee must have the 
specific compensation committee responsibilities and authority 
necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) relating 
to the: (i) Authority to retain compensation consultants, independent 
legal counsel and other compensation advisers; (ii) authority to fund 
such advisers; and (iii) responsibility to consider certain 
independence factors before selecting such advisers, other than in-
house legal counsel.\51\
---------------------------------------------------------------------------

    \50\ See BX Venture Market Listing Rule 5605(c)(1)(D), which 
requires that an audit committee charter set forth the specific 
audit committee responsibilities and authority set forth in BX 
Venture Market Listing Rule 5605(c)(3). BX Venture Market Listing 
Rule 5605(c)(3) states that an audit committee must have the 
specific responsibilities and authority necessary to comply with 
Rule 10A-3(b)(2), (3), (4) and (5) under the Exchange Act, with 
certain exemptions. Rule 10A-3(b)(2), (3), (4) and (5) under the 
Exchange Act concerns responsibilities relating to: (i) Registered 
public accounting firms; (ii) complaints relating to accounting, 
internal accounting controls or auditing matters; (iii) authority to 
engage advisors; and (iv) funding as determined by the audit 
committee.
    \51\ The independence factors include: (i) The provision of 
other services to the issuer by the person that employs the adviser 
(the ``Employer''); (ii) the amount of fees received from the issuer 
by the Employer, as a percentage of the total revenue of the 
Employer; (iii) the policies and procedures of the Employer that are 
designed to prevent conflicts of interest; (iv) any business or 
personal relationship of the adviser with a member of the 
compensation committee; (v) any stock of the issuer owned by the 
adviser; and (vi) any business or personal relationship of the 
adviser or the Employer with an executive officer of the issuer. See 
17 CFR 240.10C-1(b)(4).
---------------------------------------------------------------------------

    Rule 10C-1 permits BX to identify other relevant independence 
factors that a compensation committee must consider when selecting a 
compensation consultant, legal counsel or other adviser.\52\ BX 
considered whether to adopt other independence factors, but ultimately 
concluded that the six independence factors enumerated in Rule 10C-1 
will provide compensation committees with a broad and sufficient range 
of facts and circumstances to consider in making an independence 
determination. Like the Commission, BX seeks to emphasize that a 
compensation committee is not required to retain an independent 
compensation adviser; rather, a compensation committee is required only 
to conduct the independence analysis described in Rule 10C-1 before 
selecting a compensation adviser.\53\
---------------------------------------------------------------------------

    \52\ Id.
    \53\ See the Adopting Release, at 38432-3 (stating that 
``neither the [Dodd-Frank] Act nor [Rule 10C-1] requires a 
compensation adviser to be independent, only that the compensation 
committee consider the enumerated independence factors before 
selecting a compensation adviser. Compensation committees may select 
any compensation adviser they prefer, including ones that are not 
independent, after considering the six independence factors outlined 
in the [Rule 10C-1].'')
---------------------------------------------------------------------------

Exemptions
    Rule 10C-1 allows the national securities exchanges to exempt from 
the listing rules adopted pursuant to Rule 10C-1 certain categories of 
issuers, as the national securities exchange determines is appropriate, 
taking into consideration, among other relevant factors, the potential 
impact of the listing rules on smaller reporting issuers.\54\ BX 
proposes that its existing exemptions from the compensation-related 
listing rules remain generally unchanged. BX's current listing rules 
include exemptions for: asset-backed issuers and other passive 
issuers,\55\ limited partnerships \56\ and management investment 
companies.\57\ For the same reasons that these categories of Companies 
have traditionally been exempt from BX's compensation-related listing 
rules, BX proposes that they continue to be exempt from its revised 
listing rules relating to compensation committees.
---------------------------------------------------------------------------

    \54\ See 17 CFR 240.10C-1(b)(5).
    \55\ See BX Venture Market Listing Rule 5615(a)(1). Asset-backed 
issuers and other passive issuers have traditionally been exempt 
from BX's compensation-related listing rules because these issuers 
do not have a board of directors or persons acting in a similar 
capacity and their activities are limited to passively owning or 
holding (as well as administering and distributing amounts in 
respect of) securities, rights, collateral or other assets on behalf 
of or for the benefit of the holders of the listed securities. See 
IM-5615-1.
    \56\ See BX Venture Market Listing Rule 5615(a)(4). BX's 
compensation-related listing rules historically have not been 
applied to limited partnerships because the structure of these 
entities requires that public investors have limited rights and that 
the general partners make all significant decisions about the 
operation of the limited partnership. As such, limited partners do 
not expect to have a voice in the operations of the partnership. 
Limited partnerships also are exempt from the independence 
requirements of Rule 10C-1. See 17 CFR 240.10C-1(b)(1)(iii)(A)(1).
    \57\ See BX Venture Market Listing Rule 5615(a)(5). Management 
investment companies registered under the Investment Company Act of 
1940 are already subject to a pervasive system of federal regulation 
in certain areas of corporate governance, and as a result, these 
entities have traditionally been exempt from BX's compensation-
related listing rules. See IM-5615-4. Open-end management investment 
companies registered under the Investment Company Act of 1940 also 
are exempt from the independence requirements of Rule 10C-1. See 17 
CFR 240.10C-1(b)(1)(iii)(A)(3).
---------------------------------------------------------------------------

    In addition, BX's current listing rules provide that a Foreign 
Private Issuer may follow its home country practice in lieu of BX's 
compensation-related listing rules if the Foreign Private Issuer 
discloses in its annual reports filed with the Commission each 
requirement that it does not follow and describes the home country 
practice followed by the issuer in lieu of such requirements.\58\

[[Page 62553]]

Alternatively, a Foreign Private Issuer that is not required to file 
its annual report with the Commission on Form 20-F may make this 
disclosure only on its Web site. BX proposes that a Foreign Private 
Issuer continue to be allowed to follow its home country practice in 
lieu of BX's revised listing rules relating to compensation committees 
if the Foreign Private Issuer provides the disclosures described above. 
BX also proposes to add an additional disclosure requirement for any 
Foreign Private Issuer that follows its home country practice in lieu 
of the requirement to have an independent compensation committee to 
disclose in its annual reports filed with the Commission the reasons 
why it does not have such a committee.\59\
---------------------------------------------------------------------------

    \58\ See BX Venture Market Listing Rule 5615(a)(3). Under BX's 
listing rules, Foreign Private Issuer has the same meaning as under 
Rule 3b-4 under the Exchange Act. See BX Venture Market Listing Rule 
5005(a)(12). BX's listing rules are modeled after Nasdaq's listing 
rules, which have traditionally provided qualified exemptions for 
foreign private issuers so that such issuers are not required to do 
any act that is contrary to a law, rule or regulation of any public 
authority exercising jurisdiction over such issuer or that is 
contrary to generally accepted business practices in the issuer's 
country of domicile, except to the extent such exemptions would be 
contrary to the public securities laws. See Securities Exchange Act 
Release No. 48745 (November 4, 2003), 68 FR 64154, 64165 (November 
12, 2003) (SR-NASD-2002-138).
    \59\ This proposal adopts the requirements of Rule 10C-
1(b)(1)(iii)(A)(4), which provides an exemption from the 
independence requirements of Rule 10C-1 for a ``foreign private 
issuer that discloses in its annual report the reasons that the 
foreign private issuer does not have an independent compensation 
committee.''
---------------------------------------------------------------------------

    Finally, BX proposes to add exemptions to its compensation 
committee rules for cooperatives \60\ and Controlled Companies,\61\ 
which BX proposes to define as Companies ``of which more than 50% of 
the voting power for the election of directors is held by an 
individual, a group or another company.'' These proposed exemptions are 
modeled after the similar exemptions in Nasdaq's rules.\62\
---------------------------------------------------------------------------

    \60\ Certain member-owned cooperatives that list their preferred 
stock are required to have their common stock owned by their 
members. Because of their unique structure and the fact that they do 
not have a publicly traded class of common stock, BX believes these 
Companies should be exempt from its compensation committee rules.
    \61\ This exemption recognizes that majority Shareholders, 
including parent companies, have the right to select directors and 
control certain key decisions, such as executive officer 
compensation, by virtue of their ownership rights. Controlled 
Companies also are exempt from all of the requirements of Rule 10C-
1. See 17 CFR 240.10C-1(b)(5)(ii).
    \62\ See Nasdaq Listing Rule 5615(a)(2), Nasdaq IM-5615-2, 
Nasdaq Listing Rule 5615(c) and Nasdaq IM-5615-5.
---------------------------------------------------------------------------

Phase-In Schedules
    BX proposes that its existing phase-in schedules for the 
requirements relating to compensation committee composition remain 
generally unchanged. BX's current listing rules include phase-in 
schedules for: Companies listing in connection with an initial public 
offering \63\ and Companies emerging from bankruptcy.\64\ Since each of 
these categories of Company did not previously have a compensation 
committee, each is allowed to phase in compliance with the compensation 
committee composition requirement as follows: (1) One independent 
member at the time of listing; (2) a majority of independent members 
within 90 days of listing; and (3) all independent members within one 
year of listing. BX proposes that these phase-in schedules remain 
unchanged under its revised listing rules, except to clarify that a 
Company may phase in compliance with the minimum size requirement and 
the additional eligibility requirements adopted pursuant to Rule 10C-1, 
as well as the requirement for compensation committee members to be 
Independent Directors.\65\
---------------------------------------------------------------------------

    \63\ See BX Venture Market Listing Rule 5615(b)(1).
    \64\ See BX Venture Market Listing Rule 5615(b)(2).
    \65\ To provide an illustration of how the compensation 
committee composition requirement will interact with the minimum 
size requirement, consider a Company that at the time of listing has 
a compensation committee consisting of two members, both of whom are 
Independent Directors, but one of whom accepts compensatory fees of 
$50,000 annually from the Company pursuant to a consulting 
agreement. Although only one of these directors is fully eligible to 
serve on the compensation committee, the committee meets the 
requirements of BX's phase-in schedule because it has one fully 
eligible member at the time of listing. By the 90th day from 
listing, the committee must have a majority of fully eligible 
members, so the Company could: (i) Remove the ineligible member and 
temporarily have a committee of one fully eligible member; (ii) 
replace the ineligible member with a fully eligible member so that 
the committee consists of two members, all of whom are fully 
eligible; or (iii) add a second fully eligible member so that the 
committee consists of three members, a majority of whom are fully 
eligible. By one year from listing, the Company's compensation 
committee must consist of at least two members, and all members must 
be fully eligible under BX's compensation committee composition 
requirement.
---------------------------------------------------------------------------

    In addition, BX proposes minor clarifying changes to the phase-in 
schedule in its current listing rules for Companies transferring from 
other markets.\66\ Companies transferring from another national 
securities exchange with a substantially similar requirement shall be 
immediately subject to the compensation committee requirement, provided 
that such Companies shall be afforded the balance of any grace period 
afforded by the other market. Companies that are not subject to a 
substantially similar requirement at the time of listing on BX, such as 
a Company quoted in the over-the-counter market, shall be permitted to 
phase in compliance with the compensation committee composition 
requirements in Rule 5605(d)(2)(A), including the requirement that 
compensation committee members be Independent Directors, the minimum 
size requirement and the additional eligibility requirements adopted 
pursuant to Rule 10C-1, on the same schedule as Companies listing in 
connection with an initial public offering.
---------------------------------------------------------------------------

    \66\ See BX Venture Market Listing Rule 5615(b)(3).
---------------------------------------------------------------------------

    Since BX is proposing to add to its rules an exemption for 
Controlled Companies, as discussed above, BX also proposes to add a 
phase-in schedule for Companies ceasing to be Controlled Companies. 
This proposed phase-in schedule is modeled after the similar phase-in 
schedule in Nasdaq's rules.\67\
---------------------------------------------------------------------------

    \67\ See Nasdaq Listing Rule 5615(c)(3).
---------------------------------------------------------------------------

    None of the aforementioned phase-in schedules apply to the 
requirement to adopt a formal written compensation committee charter 
including the content specified in BX Venture Market Listing Rule 
5605(d)(1)(A)-(D).\68\
---------------------------------------------------------------------------

    \68\ As discussed below under ``Smaller Reporting Companies,'' 
BX is proposing a new phase-in schedule for a Company ceasing to be 
a Smaller Reporting Company. BX proposes to allow such a Company 30 
days to certify to BX that it has adopted a formal written 
compensation committee charter including the content specified in BX 
Venture Market Listing Rule 5605(d)(1)(A)-(D). See footnote 70, 
infra.
---------------------------------------------------------------------------

Smaller Reporting Companies
    While Rule 10C-1 exempts Smaller Reporting Companies from all of 
its requirements, BX's current listing rules do not include any such 
exemptions.\69\ Consistent with the exemption in Rule 10C-1, however, 
BX proposes not to require Smaller Reporting Companies to adhere to the 
new requirements relating to compensatory fees and affiliation, which 
BX is proposing in response to Rule 10C-1, or to incorporate into their 
formal written compensation committee charter or board resolution that 
specifies the committee's responsibilities and authority the language 
in Rule 10C-1 regarding compensation advisers. This approach will 
minimize new costs imposed on Smaller Reporting Companies and allow 
them some flexibility not allowed for larger Companies.
---------------------------------------------------------------------------

    \69\ See 17 CFR 240.10C-1(b)(5)(ii).
---------------------------------------------------------------------------

    However, as discussed above, BX proposes to eliminate the 
Alternative in its current listing rules that allows compensation 
decisions to be made by a majority of the Independent Directors rather 
than by a committee composed entirely of Independent Directors. BX 
proposes to eliminate the Alternative for Smaller Reporting Companies, 
just like all other Companies. As a result, Smaller Reporting Companies 
would be

[[Page 62554]]

required to have a compensation committee comprised of at least two 
Independent Directors as defined under BX's existing listing rules.
    In addition, BX proposes that Smaller Reporting Companies must 
adopt a formal written compensation committee charter or board 
resolution that specifies the committee's responsibilities and 
authority. Unlike other Companies, Smaller Reporting Companies may 
include this content in a board resolution, rather than a compensation 
committee charter, and Smaller Reporting Companies are not required to 
review and reassess the adequacy of the charter or board resolution on 
an annual basis. The charter or board resolution must specify the same 
content as other Companies, except Smaller Reporting Companies are not 
required to specify the specific compensation responsibilities and 
authority set forth in proposed BX Venture Market Listing Rule 
5605(d)(3) relating to the: (i) Authority to retain compensation 
consultants, independent legal counsel and other compensation advisers; 
(ii) authority to fund such advisers; and (iii) responsibility to 
consider certain independence factors before selecting such advisers, 
other than in-house legal counsel.\70\
---------------------------------------------------------------------------

    \70\ BX notes that Smaller Reporting Companies remain subject to 
the disclosure requirements of Item 407(e)(3)(iv) of Regulation S-K, 
which were adopted at the same time as Rule 10C-1. See the Adopting 
Release.
---------------------------------------------------------------------------

    BX also proposes to apply the same phase-in schedule to a Company 
ceasing to be a Smaller Reporting Company that applies to a Company 
listing in conjunction with its initial public offering. Since a 
Smaller Reporting Company is required to have a compensation committee 
comprised of at least two Independent Directors, a Company that has 
ceased to be a Smaller Reporting Company may use the phase-in schedule 
for the additional eligibility requirements relating to compensatory 
fees and affiliation, but not for the minimum size requirement or the 
requirement that the committee consist only of Independent Directors. 
This phase-in schedule will start to run on the due date of the SEC 
filing in which the Company is required to report that it is an issuer 
other than a Smaller Reporting Company.\71\ During the phase-in 
schedule, a Smaller Reporting Company must continue to comply with the 
requirement to have a compensation committee comprised of at least two 
Independent Directors as defined under BX's existing listing rules.
---------------------------------------------------------------------------

    \71\ Within 30 days after the start of its phase-in schedule, a 
Company that has ceased to be a Smaller Reporting Company must 
certify to BX that: (i) It has complied with the requirement in BX 
Venture Market Listing Rule 5605(d)(1) to have a compensation 
committee charter including the content specified in BX Venture 
Market Listing Rule 5605(d)(1)(A)-(D); and (ii) it has, or will 
within the applicable phase-in schedule, comply with the requirement 
in BX Venture Market Listing Rule 5605(d)(2) regarding compensation 
committee composition.
---------------------------------------------------------------------------

Effective Dates/Transition
    BX proposes that Rule 5605(d)(3), relating to compensation 
committee responsibilities and authority, shall be effective 
immediately.\72\ Specifically, this proposed rule states that a 
compensation committee must have the specific compensation committee 
responsibilities and authority necessary to comply with Rule 10C-
1(b)(2), (3) and (4)(i)-(vi) under the Act relating to the: (i) 
Authority to retain compensation consultants, independent legal counsel 
and other compensation advisers; (ii) authority to fund such advisers; 
and (iii) responsibility to consider certain independence factors 
before selecting such advisers, other than in-house legal counsel. To 
the extent a Company does not have a compensation committee, the 
provisions of this rule shall apply to the Independent Directors who 
determine, or recommend to the board for determination, the 
compensation of the chief executive officer and all other Executive 
Officers of the Company. Companies should consider under state 
corporate law whether to grant these specific responsibilities and 
authority through a charter, resolution or other board action; however, 
BX proposes to require only that compensation committees immediately 
have such responsibilities and authority. While BX proposes that 
Companies must eventually have a written compensation committee charter 
that includes, among others, these responsibilities and authority, 
Companies may implement such a charter on the schedule discussed below.
---------------------------------------------------------------------------

    \72\ See supra note 3.
---------------------------------------------------------------------------

    In order to allow Companies to make necessary adjustments to their 
boards and committees in the course of their regular annual meeting 
schedules, BX proposes that Companies must comply with the remaining 
provisions of the amended listing rules on compensation committees by 
the earlier of: (1) Their second annual meeting held after the date of 
approval of BX's amended listing rules; or (2) December 31, 2014. This 
transition period is similar to the transition period used when Nasdaq 
implemented similar requirements for audit committees in 2003.\73\
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (SR-NASD-2002-141).
---------------------------------------------------------------------------

    A Company must certify to BX, no later than 30 days after the 
implementation deadline applicable to it, that it has complied with the 
amended listing rules on compensation committees. BX will provide 
Companies with a form for this certification.
    During the transition period, Companies that are not yet required 
to comply with the amended listing rules on compensation committees 
must continue to comply with BX's existing listing rules, which have 
been redesignated as Listing Rule 5605A(d) and IM-5605A-6 in BX's 
proposal.
Conforming Changes and Correction of Typographical Errors
    Finally, BX proposes to make minor conforming changes to its 
requirements relating to audit committees. BX also proposes to correct 
certain typographical errors in its corporate governance requirements 
as set forth in Exhibit 5.\74\
---------------------------------------------------------------------------

    \74\ The Commission notes that Exhibit 5 is available at http://nasdaqomxbx.cchwallstreet.com.
---------------------------------------------------------------------------

2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Exchange Act,\75\ in general, and with 
Section 6(b)(5) of the Exchange Act,\76\ in particular. Section 6(b)(5) 
requires, among other things, that a national securities exchange's 
rules must be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest. Section 6(b)(5) also requires that a national 
securities exchange's rules not be designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78f.
    \76\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As required by the Dodd-Frank Act and Rule 10C-1, BX is proposing 
amendments to its listing rules relating to the independence of 
compensation committees and their advisers. BX reviewed its existing 
compensation-relating listing rules, in combination with the 
requirements of Rule 10C-1, to develop a set of proposed compensation-
related listing rules. These proposals generally fall into three 
categories: proposed rule amendments to comply with Rule 10C-1; 
proposals

[[Page 62555]]

to continue certain rules relatively unchanged; and proposed rule 
amendments not required by Rule 10C-1. BX believes that collectively, 
these proposals protect investors and the public interest by requiring 
Companies, with certain exemptions, to have a compensation committee 
meeting certain requirements relating to composition, responsibilities 
and authority.
    More specifically, BX's proposed amendments to its listing rules in 
order to comply with Rule 10C-1 set forth: additional eligibility 
requirements for compensation committee members relating to 
compensatory fees and affiliation; an opportunity to cure defects in 
compensation committee composition; a requirement that compensation 
committees have the specific responsibilities and authority necessary 
to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange 
Act; and exemptions for limited partnerships, management investment 
companies, foreign private issuers that provide certain required 
disclosures, Controlled Companies and Smaller Reporting Companies. BX 
believes that its proposals fairly balance the goal of protecting the 
investing public by ensuring effective deliberation over executive 
compensation with the goal of avoiding the imposition of undue costs on 
Companies.
    BX's proposals to continue relatively unchanged some of its 
existing exemptions to the compensation-related listing rules for 
certain categories of Companies and to add a new exemption for 
cooperatives takes into account the unique characteristics of these 
Companies.\77\ As a result, BX does not believe that continuing the 
existing exemptions and adding a new exemption for cooperatives will 
discriminate unfairly among issuers, consistent with Section 6(b)(5) of 
the Exchange Act.\78\
---------------------------------------------------------------------------

    \77\ See footnotes 54-57 and 59, supra.
    \78\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed rule amendments not required by Rule 10C-1 require 
that: Companies must have a standing compensation committee; the 
committee must consist of a minimum of two members; the committee must 
have a formal written charter (or board resolution, in the case of 
Smaller Reporting Companies) that specifies the committee's 
responsibilities and authority; and Smaller Reporting Companies must 
continue to comply with certain of BX's compensation-related listing 
rules. As discussed in the ``Purpose'' section, BX believes that these 
new requirements will facilitate effective oversight of executive 
compensation and promote accountability to investors for executive 
compensation decisions. With regard to Smaller Reporting Companies, BX 
notes that these Companies continue to be subject to the same 
requirements as all other Companies, except the new requirements that 
BX is proposing under Rule 10C-1 relating to compensatory fees, 
affiliation and the specific compensation committee responsibilities 
and authority set forth in proposed BX Venture Market Listing Rule 
5605(d)(3). BX believes that this hybrid approach does not discriminate 
unfairly between issuers because it recognizes the fact that the 
``executive compensation arrangements of [Smaller Reporting Companies] 
generally are so much less complex than those of other public companies 
that they do not warrant the more extensive disclosure requirements 
imposed on companies that are not [Smaller Reporting Companies] and 
related regulatory burdens that could be disproportionate for [Smaller 
Reporting Companies].'' \79\ In addition, BX notes that the Commission 
exempted Smaller Reporting Companies from Rule 10C-1.\80\ As a result, 
this distinction does not discriminate unfairly among issuers.
---------------------------------------------------------------------------

    \79\ See the Adopting Release, at 38438 (quoting Securities 
Exchange Act Release No. 54302A (August 29, 2006), 71 FR 53158, 
53192 (September 8, 2006)).
    \80\ See 17 CFR 240.10C-1(b)(5)(ii).
---------------------------------------------------------------------------

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

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

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

    BX did not solicit comments on the proposed rule change. BX 
received two written comments, which are attached as Exhibit 2.\81\
---------------------------------------------------------------------------

    \81\ The Commission notes that the comments are available at 
http://nasdaqomxbx.cchwallstreet.com.
---------------------------------------------------------------------------

    The first commenter recommended that BX should require Companies to 
disclose: (i) How they are complying with the requirement to consider 
the independence factors enumerated in Rule 10C-1; and (ii) the nature 
of any conflict of interest arising from the engagement of legal 
counsel by a compensation committee. BX considered these 
recommendations, but it preferred to defer to the judgment of the 
Commission with respect to the appropriate disclosure framework under 
Rule 10C-1. BX therefore decided not to propose any new disclosure 
requirements for Companies, other than those that are required by Rule 
10C-1.\82\
---------------------------------------------------------------------------

    \82\ Specifically, as required by Rule 10C-1(b)(1)(iii)(A)(4), 
BX proposes to require a Foreign Private Issuer that follows a home 
country practice in lieu of the requirement to have an independent 
compensation committee to disclose the reasons why it does not have 
such a committee.
---------------------------------------------------------------------------

    The second commenter proffered four recommendations. First, this 
commenter recommended that BX include director fees within the list of 
relevant factors that must be considered when assessing the 
independence of compensation committee members. BX does not believe 
that the intent of the Dodd-Frank Act or Rule 10C-1 was to limit 
independence based on director compensation, and therefore, BX proposes 
to continue to exempt board fees from its prohibition on payment of 
compensatory fees to a compensation committee member. Second, this 
commenter recommended that BX include in the requirements for 
compensation committee independence a factor relating to business or 
personal relationships between directors and officers. As discussed in 
the ``Purpose'' section above, BX reviewed its current and proposed 
listing rules and concluded that these rules are sufficient to ensure 
the independence of compensation committee members. Therefore, BX 
determined not to propose further independence requirements, other than 
those discussed above. Third, this commenter recommended that BX expand 
the additional factors for compensation committee eligibility to cover 
all independent directors, not just those serving on the compensation 
committee. While BX heavily weighed the commenter's concern that 
multiple definitions of independence add to the complexity of board 
membership, BX believed that the intent of the Dodd-Frank Act and Rule 
10C-1 was to address the independence of compensation committee 
members, as well as their advisers, specifically. BX concluded 
therefore that it is inappropriate to expand the additional 
requirements proposed herein to cover all independent directors. 
Finally, this commenter recommended that BX clarify that, while the 
factors must be considered in their totality, a single factor can 
result in a loss of director independence. BX confirms that a director 
cannot be deemed independent if he or she fails any one of the bright-
line prohibitions in BX Venture Market Listing Rule 5605(a)(2).

[[Page 62556]]

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BX-2012-063 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2012-063. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of BX. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make publicly available. All 
submissions should refer to File Number SR-BX-2012-063 and should be 
submitted on or before November 5, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\83\
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    \83\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25223 Filed 10-12-12; 8:45 am]
BILLING CODE 8011-01-P


