
[Federal Register Volume 77, Number 200 (Tuesday, October 16, 2012)]
[Notices]
[Pages 63370-63380]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25407]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68033; File No. SR-CHX-2012-13]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change, as Modified by Amendments 
Nos. 1 and 2, To Establish Listing Standards for Issuers' Compensation 
Committees

October 10, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 26, 2012, the Chicago Stock Exchange, Inc. (``CHX'' 
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 filing was amended and replaced in its entirety by 
Amendment No. 2 thereto on October 10, 2012, which Items have been 
prepared by the Exchange.\3\ 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.
    \3\ The Commission notes that Amendment No. 1 was submitted on 
October 2, 2012 to indicate that the Board of Directors had approved 
the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Article 22, Rule 2 (Admittance to 
Listing), Rule 4 (Removal of Securities) and Rule 19 (Corporate 
Governance) to comport with Section 10(C) of the Exchange Act \4\ and 
Rule 10C-1 \5\ thereunder that directs the Exchange to establish 
listing standards, among other things, that require each member of a 
listed issuer's compensation committee to be an independent member of 
its board of directors and relating to compensation committees and 
their use of compensation consultants, independent legal counsel and 
other advisers (collectively, ``compensation advisers''). The text of 
this proposed rule change is available on the Exchange's Web site at 
(www.chx.com) and in the Commission's Public Reference Room.
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    \4\ 15 U.S.C. 78j-3.
    \5\ 17 CFR 240.10C-1.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CHX included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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
    This Amendment No. 2 to SR-CHX-2012-13 (the ``filing'') amends and 
replaces in its entirety the Filing as originally submitted on 
September 26, 2012. Amendment No. 2 corrects several technical errors 
under this Rule 19b-4 form, Exhibit 1 and Exhibit 5. Moreover, 
substantive amendments were made to the Exhibit 5 and corresponding 
amendments were also made to this Exhibit 1 and 19b-4 form. Item 2 of 
this 19b-4 filing has been amended to indicate that this proposal was 
approved by the Exchange's Board of Directors on September 27, 2012.\6\ 
Proposed Rule 19(d)(1) was amended to require issuers to have a 
compensation committee composed entirely of independent directors, 
subject to the general independence requirements of proposed Rule 
19(p)(3)(A) and additional specific requirements for compensation 
committees under proposed Rule 19(p)(3)(B). Moreover, proposed Rule 
19(d)(1) was amended to define ``compensation committee'' as 
independent directors functioning within either formal committees of 
the board of directors or a non-committee group. Proposed Rule 19(d)(2) 
was amended to include a charter requirement for compensation 
committees and removes the definition of ``compensation committee'' and 
``functional equivalent,'' which has been restated under proposed Rule 
19(d)(1)(A)-(C). The exceptions under proposed Rule 19(d)(5)(B) were 
amended to be numerically consistent with proposed paragraph .03 of the 
Interpretations and Policies of Rule 19. Proposed Rule 19(d)(5)(B)(iii) 
was amended to narrow the scope of the passive business organizations

[[Page 63371]]

exemption. Proposed Rule 19(d)(5)(B)(iv) was amended to include a 
phase-in period for foreign issuers who no longer qualify as such. 
Proposed Rule 19(d)(5)(C) was amended to solely refer to the smaller 
reporting companies exemption and includes a phase-in period for 
issuers that no longer qualify as such. Proposed Rule 19(p)(3) was 
amended to reorganize the bright line tests for independent directors 
and to allow the inclusion of proposed paragraph (B), which outlines 
additional independent director requirements specific to compensation 
committee membership. Proposed Rule 19(p)(5) was amended to make the 
terms ``small business issuer'' and ``smaller reporting company'' 
interchangeable for the purposes of CHX rules. Proposed paragraph .03 
of the Interpretations and Policies of Rule 19 was amended to remove a 
listed exemption for small business issuers. Finally, proposed 
paragraph .05(6) of the Interpretations and Policies of Rule 19 
outlines an amended transition period for compliance with the proposed 
listing standards.
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    \6\ The Commission notes that this change was filed as Amendment 
No. 1. See supra note 3.
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    The Exchange proposes to amend Article 22, Rule 2 (Admittance to 
Listing), Rule 4 (Removal of Securities) and Rule 19 (Corporate 
Governance) to comport with Section 10(C) of the Exchange Act \7\ and 
Rule 10C-1 \8\ thereunder, which directs the Exchange to establish 
listing standards that require each member of a listed issuer's 
compensation committee to be an independent member of its board of 
directors and listing standards relating to compensation committees and 
their use of compensation advisers.
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    \7\ Supra note 4.
    \8\ Supra note 5.
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    The Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (``Dodd-Frank Act'') established Section 10C of the Exchange Act, 
which directed the Securities and Exchange Commission (``Commission'' 
or ``SEC'') to require national securities exchanges and 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.\9\ Specifically, section 10C(a)(1) 
of the Exchange Act required 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\ Moreover, Section 
10C(a)(4) \11\ of the Exchange Act required the Commission 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 and 
section 10C(f)(3) \12\ required the Commission to permit the exchanges 
to exempt categories of issuers from the requirements of section 10C, 
as each exchange determines is appropriate, taking into consideration 
of the impact of section 10C on smaller reporting issuers. In addition, 
Section 10C(f) \13\ of the Exchange Act required the Commission to 
adopt rules directing the exchanges to establish listing standards that 
provide for 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. Finally, Section 10C(c)(2) required 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.\14\
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    \9\ 15 U.S.C. 78j-3.
    \10\ 15 U.S.C. 78j-3(a).
    \11\ 15 U.S.C. 78j-3(a)(4).
    \12\ 15 U.S.C. 78j-3(f)(3)(A).
    \13\ 15 U.S.C. 78j-3(f).
    \14\ 15 U.S.C. 78j-3(c)(2).
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    On June 27, 2012, the Commission promulgated Exchange Act Rule 10C-
1 to implement the compensation committee listing requirements of 
Sections 10C of the Exchange Act. As such, the Exchange now proposes to 
amend its rules to comport with the new requirements.
Proposed Amendments to CHX Article 22
    The Exchange proposes to amend portions of Article 22, Rule 2 
(Admittance to Listing), Rule 4 (Removal of Securities) and Rule 19 
(Corporate Governance) to establish listing standards that require each 
member of a listed issuer's compensation committee to be an 
``independent'' member of its board of directors, to adopt standards 
relating to compensation committees' authority to use compensation 
advisers and to clarify the consequences to issuers for failure to 
comply with these proposed amendments. It is important to note that 
virtually all of the proposed amendments are in Rule 19(d), which 
currently outlines all of the listing standards with respect to 
issuers' compensation committees.
Proposed Rule 2 and Rule 4(a)
    Proposed Rule 2 provides that the Exchange's Board of Governors may 
list securities once the requirements of Article 22 are met and upon 
terms, conditions and payment of fees as the Exchange's board of 
directors may from time to time prescribe. In doing so, proposed Rule 2 
adopts much of the current Rule 2, while only clarifying that the Board 
of Governors may only admit securities ``once the requirements of this 
Article are met.'' Also, proposed Rule 4(a) provides that securities 
may be removed from the list, with notice, by either the issuer or the 
Exchange, for any reason, including an issuer's failure to comply with 
the listing standards of this Article 22. In doing so, proposed Rule 
4(a) adopts much of the current Rule 4(a), while inserting language 
that states that securities may be delisted by either the issuer or the 
Exchange and clarifies that securities may be removed for any reason, 
including an issuer's failure to comply with the requirements of this 
Article, which includes proposed Rule 19(d). Current Rule 4(b)-(g) 
establish the procedures under which a security may be delisted, to 
which the Exchange proposes no amendments.
    As such, proposed Rule 2 and Rule 4, considered in conjunction with 
current Article 22, Rule 1 \15\, comport with Exchange Act Rule 10C-
1(a)(1) that requires the Exchange to ``prohibit the initial and 
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.'' That is, the purpose of these proposed amendments is 
to clarify the potential consequences of an issuer's failure to comply 
with CHX Article 22, which includes the proposed compensation committee 
listing standards.
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    \15\ CHX Article 22, Rule 1 states, in pertinent part, that 
``the requirements, set forth in this Article, must be met in order 
for the Exchange to entertain an application for listing.''
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Proposed Rule 19(d)(1) and 19(p)(3)
    Proposed Rule 19(d)(1) \16\ states that an issuers must have a 
``compensation

[[Page 63372]]

committee'' composed entirely of ``independent directors,'' as defined 
under proposed Rule 19(p)(3) and that also meet the additional 
independence requirements specific to compensation committees, under 
proposed Rule 19(p)(3)(B). The proposed rule continues to define 
``compensation committee'' as: (A) a committee of the board of 
directors that is designated as the compensation committee; (B) 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 the executive compensation, even if it is not 
designated as the compensation committee or also performs other 
functions; or (C) in the absence of one of the aforementioned 
committees, the members of the board of directors who oversee executive 
compensation matters on behalf of the board of directors, who together 
must comprise a majority of the board's independent directors.
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    \16\ In order to implement proposed Rule 19(d)(1), the Exchange 
proposes to delete current Rule 19(d)(1), which outlines how the 
compensation of a chief executive officer is to be determined and 
current Rule 19(d)(2), which outlines how a the compensation of 
other officers are to be determined, and restate those rules with 
amendments, as proposed Rule 19(d)(4), which is discussed below.
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    In turn, proposed Rule 19(p)(3) defines ``independent director'' as 
a person who is a member of the issuer's board of directors, other than 
an officer or employee of the issuer or its subsidiaries or any other 
individual having a relationship, which, in the opinion of the issuer's 
board of directors, would interfere with the exercise of independent 
judgment in carrying out the responsibilities of an independent 
director and places the affirmative duty of making such a determination 
on the board of directors. Furthermore, proposed Rule 19(p)(3)(A) 
provides that a director may not be deemed to be independent if such 
director has a relationship with the issuer which violates any one of 
seven ``bright line'' tests.\17\ Proposed Rule 19(p)(3)(B) establishes 
additional independent director requirements specific to compensation 
committees that states that in affirmatively determining the 
independence of any director who will serve on the compensation 
committee of the issuer's board of directors, the board must consider 
all factors specifically relevant to determining whether a director has 
a relationship to the issuer which is material to that director's 
ability to be independent from management in connection with the duties 
of a compensation committee member, including, but not limited to, two 
factors. First, (i) the board must consider the source of compensation 
of such director, including any consulting, advisory or other 
compensatory fee paid by the issuer to such director. Proposed 
subparagraph (i) explains that this factor requires that when 
considering the sources of a director's compensation, the board should 
consider whether the director receives compensation from any person or 
entity that would impair her ability to make independent judgments 
about the issuer's executive compensation. Second, (ii) the board must 
consider whether such director is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the issuer. 
The proposed subparagraph (ii) explains that this factor requires that 
when considering such affiliate relationships in determining her 
independence for purposes of compensation committee service, the board 
should consider whether the affiliate relationship places the director 
under the direct or indirect control of the issuer or its senior 
management, or creates a direct relationship between the director and 
members of senior management, in each case of a nature that would 
impair her ability to make independent judgments about the issuer's 
executive compensation.
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    \17\Proposed Rule 19(p)(3)(A)(i)-(vii) virtually adopts current 
Rule 19(p)(3)(A)-(G) and provides that the following persons shall 
not be considered independent: (i) A director who is, or during the 
past three years, was employed by the issuer or its parent or 
subsidiary; (ii) a director or an immediately family member of a 
director who had accepted payments from the issuer or its parent or 
subsidiary in excess of $120,000 in the current fiscal year or any 
of the past three fiscal years, with exceptions for payments 
received for services to the board, payments arising from 
investments in the issuer's securities, compensation paid to an 
immediate family member who is an employee, but not an executive 
officer, of the issuer, benefits under a tax-qualified retirement 
plan, non-discretionary compensation or loans permitted under 
Section 13(k) of the Exchange Act; (iii) a director who is an 
immediate family member of an individual who is, or at any time 
during the past three years was, employed by the issuer or by any 
parent or subsidiary of the issuer as an executive officer; (iv) a 
director who is, or has an immediate family member who is, a partner 
in, or a controlling shareholder or an executive officer of, any 
organization to which the issuer made, or from which the issuer 
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, other than payments arising solely from investments in the 
issuer's securities or payments under non-discretionary charitable 
contribution matching programs; (v) a director of the issuer who is, 
or has an immediate 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 issuer served on the 
compensation committee of such other entity; (vi) A director who is, 
or has an immediate family member who is, a current partner of the 
issuer's outside auditor, or who has a partner or employee of the 
issuer's outside auditor who worked on the issuer's audit at any 
time during the past three years; (vii) In the case of an investment 
company, in lieu of paragraphs (i)-(vi), a director who 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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    As such, proposed Rule 19(d)(1) and Rule 19(p)(3) comport with the 
requirements of Exchange Act Rule 10C-1(b)(1)(i) and (ii). Initially, 
as mandated by Exchange Act Rule 10C-1(b)(1)(i), which states, ``each 
member of a compensation committee must be a member of the board of 
directors of the listed issuer, and must otherwise be independent,'' 
proposed Rule 19(d)(1) requires members of an issuer's compensation 
committee be ``independent directors'' and, in turn, proposed Rule 
19(p)(3) defines a ``director,'' in relevant part, as a ``person who is 
member of the issuer's board of directors.'' Additionally, the Exchange 
proposes to require issuers to have a compensation committee, similar 
to Section 303A.05 of the NYSE Listed Company Manual.\18\ The Exchange 
submits that its proposed definition of ``compensation committee,'' 
which adopts Exchange Act Rule 10C-1(c)(2) \19\ almost verbatim, does 
not require issuers to do anything more than what they are already 
required to do, which is to have either ``a majority of the independent 
directors or a compensation committee comprised solely of independent 
directors'' determine or recommend executive compensation.\20\
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    \18\ Section 303A.05 of the NYSE Listed Company Manual states, 
``listed companies must have a compensation committee composed 
entirely of independent directors.''
    \19\ 17 CFR 240.10C-1(c)(2).
    \20\ CHX Article 22, Rule 19(d)(1) and Rule 19(d)(2).
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    Moreover, proposed Rule 19(p)(3) comports with Exchange Act Rule 
10C-1(b)(1)(ii). Specifically, Exchange Act Rule 10C-1(b)(1)(ii)(A) 
requires the Exchange to consider ``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 a member of the board of directors,'' whereas Exchange Act Rule 
10C-1(b)(1)(ii)(B) requires the Exchange to consider ``whether a member 
of the board of directors of an issuer is affiliated with the 
issuer,\21\ a subsidiary of the issuer or an affiliate of a subsidiary 
of the issuer.'' The Exchange

[[Page 63373]]

submits that Exchange Act Rule 10C-1(b)(1)(ii) is largely already 
addressed via proposed Rule 19(p)(3)(A)(i)-(vii) \22\ and is fully 
incorporated through proposed Rule 19(p)(3)(B).
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    \21\ The Exchange understands ``affiliated with issuer'' to have 
a similar meaning as ``affiliated with a specified person'' defined 
under Exchange Act Rule 12b-2 [17 CFR 240.12b02 [sic] as ``a person 
that directly, or indirectly through one more intermediaries, 
controls, or is controlled by, or is under common control with, the 
person specified.''
    \22\ As mentioned above, supra note 16, proposed Rule 
19(p)(3)(A)(i)-(vii) virtually mirrors current Rule 19(p)(3)(A)-(G), 
but for a few minor substantive amendments, that are discussed 
below.
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    Proposed Rule 19(p)(3)(A)(i) precludes from being considered 
independent a director who currently is or was, during the past three 
years, employed by the issuer or parent or subsidiary of the issuer. 
This preclusion is based, in part, on Exchange Act Rule 16b-
3(b)(3)(i),\23\ which excludes from the definition of a ``non-employee 
director'' a director who is an officer 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. The Exchange submits that a 
director who is or was an executive officer or employee of the issuer 
should not be considered independent due to the nature of the 
professional relationships that are formed in an employment setting and 
the consequences therefrom. For example, a director who is employed by 
the issuer may have her employee compensation (i.e. salary, bonuses, 
etc. * * *) affected by her actions as a member of the compensation 
committee. Moreover, a director who recently ended her employment with 
the issuer may still maintain personal relationships with executive 
officers that may compromise independent judgment. Consequently, the 
look-back provision is necessary, because the nature of such personal 
relationships may remain unchanged for sometime after the director 
ceased being employed by the issuer.
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    \23\ 17 CFR 240.16b-3(b)(3)(i).
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    Proposed Rule 19(p)(3)(A)(ii) precludes from being considered 
independent a director who had or an immediate family member of the 
director who had accepted payments from the issuer or parent or 
subsidiary of the issuer in excess of $120,000 in the current fiscal 
year or any of the past three fiscal years, excluding (1) compensation 
for board or board committee service; (2) payments arising solely from 
investments in the issuer's securities; (3) compensation paid to an 
immediate family member who is a non-executive employee of the issuer 
or a parent or subsidiary of the issuer; (4) benefits under a tax-
qualified retirement plan; (5) non-discretionary compensation; or (6) 
loans permitted under Section 13(k) of the Act. The only difference 
between proposed Rule 19(p)(3)(A)(ii) and current Rule 19(p)(3)(B) is 
the proposal to increase the cap amount from $60,000 to $120,000, so as 
to remain in lockstep with other exchanges, such as BATS \24\ and 
disclosure guidelines under Item 404(a) of Regulation S-K,\25\ both of 
which set threshold amounts at $120,000.
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    \24\ BATS Rule 14.10(c)(1)(B) states, in pertinent part, that an 
```independent director' means a person other than an Executive 
Officer or employee of the Company or any other individual having a 
relationship which, in the opinion of the Company's board of 
directors, would interfere with the exercise of independent judgment 
in carrying out the responsibilities of a director'' and paragraph 
(c)(1)(B)(ii) precludes from being considered independent ``a 
director who accepted or who has a Family Member 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.''
    \25\ 17 CFR 229.404.
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    Similar to subparagraph (i), proposed subparagraph (ii) is also 
based in part on Exchange Act Rule 16b-3(b)(3)(i), which excludes from 
the definition of ``non-employee director,'' a director who receives 
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 $120,000, pursuant to Item 404(a) of 
Regulation S-K.\26\ The Exchange acknowledges that a director who meets 
the definition of a ``non-employee director'' is not necessarily 
``independent.'' However, the Exchange submits that a cap of $120,000 
on affected payments are adequately high to allow a director or 
immediate family member to receive payments for permissible services to 
the issuer, while sufficiently low as to not preclude director 
independence. Moreover, a cap on such payments is preferable to an 
absolute rule that precludes director independence for any payments 
made. This is because the category of services contemplated by this 
subparagraph (ii), such as consulting services, are inherently 
independent from the ordinary business function of the issuer, in 
contrast to payments received in the context of employment. Given these 
considerations, the Exchange submits that payments that arise from 
independent permissible services should not per se disqualify a 
director from being considered independent.
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    \26\ Item 404(a) of Regulation S-K [17 CFR 229.404] mandates 
disclosure requirements for transactions exceeding $120,000 in which 
the registrant was a participant and in which any ``related person'' 
has a direct or indirect material interest. In the context of Item 
404(a), a ``related person'' includes any director of the 
registrant.
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    Moreover, due to the intimate nature of the relationship between a 
director and an immediate family member,\27\ the Exchange submits that 
immediate family members of a director that fall under the purview of 
subparagraph (ii) should also preclude such a director from being 
considered independent. For the same reason, the Exchange has also 
included a director's relationship to such immediate family members 
within the purview of paragraphs (iii)-(vi). With respect to the six 
categories of payments that excluded [sic] from the cap requirement of 
this subparagraph (B), the Exchange submits that such exceptions are 
appropriate because those payments are nondiscretionary and/or 
predetermined payments. As such, these payments are immaterial to a 
director's ability to be independent, where it is unlikely that these 
payments could be unilaterally altered by any executive officer, at 
least without the knowledge of the board of directors.
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    \27\ Pursuant to CHX Rule 19(p)(2), an ``immediate family 
member'' includes a person's spouse, parents, children, siblings, 
mothers and fathers-in-law, sons and daughters-in-law, brothers and 
sisters-in-law and any person who has the same residence.
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    Proposed Rule 19(p)(3)(A)(iii) precludes a director who is an 
immediate family member of an individual who currently is or was, 
during the past three years, employed as an executive officer of the 
issuer or parent or subsidiary of the issuer. Given the intimate nature 
of the relationship between immediate family members, the Exchange 
submits that where a director's immediate family member is an executive 
officer of the issuer, the director is per se not independent. This is 
because the nature of the personal relationship between the director 
and immediate family member who is an executive officer will likely 
compromise independent judgment, especially in the context of 
determining the compensation of the immediate family member. It is 
important to note that although this paragraph does not include 
immediate family members who are non-executive employees of the issuer, 
Rule 19(p)(3) still allows for a board of directors to nonetheless find 
that such a relationship would preclude a director from being 
independent. However, the Exchange submits that establishing an 
absolute rule would be inappropriate and that an issuer's boards of 
directors is better equipped to assess such relationships on a case by 
case basis.
    Proposed Rule 19(p)(3)(A)(iv) precludes from being independent a 
director who is or has an immediate family member who is a partner in 
or a

[[Page 63374]]

controlling shareholder or an executive officer of any organization to 
which the issuer made or from which 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, excluding payments arising (1) solely 
from investments in the issuer's securities or (2) payment under non-
discretionary charitable contribution matching programs. The purpose of 
this rule is to scrutinize directors who benefit from their business 
activities with the issuer when determining their ability to exercise 
independent judgment. Similar to subparagraph (ii), the Exchange 
submits that placing a cap on value of property or services received or 
given is preferable to a rule that precludes director independence for 
any such activity. This is because the nature of corporate governance 
is as such that directors are frequently affiliated with multiple 
corporate entities in the same or related fields and inevitably, these 
various entities deal with each other in the ordinary course of their 
respective businesses. Thus, the Exchange submits that so long as such 
activities do not exceed 5% of the payment recipient's consolidated 
gross revenues for that year or $200,000, whichever is more, the 
activity is ordinary enough so as to not preclude director 
independence. In addition, the exclusions to this paragraph are 
necessary so as to exclude categories of payments that are non-
discretionary and pre-determined, therefore immaterial to the 
independence assessment.
    Proposed Rule 19(p)(3)(A)(v) precludes from being independent a 
director who is or has an immediate 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 issuer served on the 
compensation committee of the other entity. The Exchange submits that a 
director cannot be independent where the director is charged with 
determining the compensation of an executive, who in turn, is charged 
with determining the director's compensation in her capacity as an 
executive officer of the other entity. This scenario is obviously 
improper, as it may open the door to, among other things, undue 
influence and breaches of fiduciary duty. Certainly, a director 
subjected to such forces would not be able to exercise independent 
judgment. Also, given the personal nature of family relationships, 
directors who have immediate family members who are employed as 
executive officers by the aforementioned other entity should also be 
disqualified from being considered independent.
    Proposed Rule 19(p)(3)(A)(vi) precludes from being independent a 
director (1) who is or has an immediate family member who is a current 
partner of the issuer's outside auditor or (2) who was a partner or 
employee of the issuer's outside auditor who worked on the issuer's 
audit at any time during the past three years. The primary purpose of 
this subparagraph is to prevent a director, who has or had a direct 
association with the issuer's outside auditor, from being placed on the 
issuer's audit committee.
    Proposed Rule 19(p)(3)(A)(vii) applies to investment companies in 
lieu of subparagraphs (i)-(vi) and precludes from being independent a 
director who is an ``interested person,'' as that term is defined under 
section 2(a)(19) of the Investment Company Act of 1940 (``Investment 
Company Act'').\28\ The Exchange proposes to maintain the exemption of 
open-ended and closed-ended investment companies, as those terms are 
defined under section 4 and 5(a) of the Investment Company Act,\29\ 
from the compensation committee requirements of this proposed Rule 
19(d). The exemptions are discussed in detail below through proposed 
Rule 19(d)(5)(B)(ii).
---------------------------------------------------------------------------

    \28\ 15 USCS [sic] 80a-2(a)(19).
    \29\ Pursuant to Section 4 and 5(a)(1) of the Investment Company 
Act [15 USCS [sic] 80a-4 and 80a-5(a)(1)], an ``open-end company'' 
means a management company, other than a unit investment trust or 
face-amount certificate company, which is offering for sale or has 
outstanding any redeemable security of which it is the issuer. 
Pursuant to section 5(a)(2) [15 USCS 80a-5(a)], a ``closed-end 
company'' means any management company other than an open-end 
company.
---------------------------------------------------------------------------

    Moreover, proposed Rule 19(p)(3)(B) comports with Exchange Act Rule 
10C-1(b)(ii) by requiring an issuer's board of directors to consider 
all factors specifically relevant to determining whether a director has 
a relationship to the issuer which is material to that director's 
ability to be independent from management in connection with the duties 
of a compensation committee member, including, but not limited to, the 
two factors explicitly enumerated in Rule 10C-1(b)(ii). When 
considering the sources of a director's compensation in determining her 
independence for purposes of compensation committee service, proposed 
Rule 19(p)(3)(B)(i) states the board should consider whether the 
director receives compensation from any person or entity that would 
impair her ability to make independent judgments about the issuer's 
executive compensation. Similarly, when considering any affiliate 
relationship a director has with the issuer, a subsidiary of the 
issuer, or an affiliate of a subsidiary of the issuer, in determining 
her independence for purposes of compensation committee service, the 
proposed Rule 19(p)(3)(B)(ii) provides that the board should consider 
whether the affiliate relationship places the director under the direct 
or indirect control of the issuer or its senior management, or creates 
a direct relationship between the director and members of senior 
management, in each case of a nature that would impair her ability to 
make independent judgments about the issuer's executive compensation.
    However, the Exchange does not propose to adopt any specific 
numerical tests with respect to the factors specified in proposed Rule 
19(p)(3)(B) or to adopt a requirement to consider any other specific 
factors. In particular, the Exchange does not intend to adopt an 
absolute prohibition on a board making an affirmative finding that a 
director is independent solely on the basis that the director or any of 
the director's affiliates are shareholders owning more than some 
specified percentage of the issuer. In the adopting release for Rule 
10C-1 (``adopting release''),\30\ the SEC recognized that the exchange 
might determine that not all affiliate relationships would adversely 
affect a director's ability to be independent from management.\31\ 
Consistent with the view of commentators on the SEC's rules as 
originally proposed, the Exchange believes that, rather than adversely 
affecting a director's ability to be independent from management as a 
compensation committee member, share ownership in the issuer aligns the 
director's interest with those of unaffiliated shareholders, as their 
stock ownership gives then the same economic interest in ensuring that 
the issuer's executive compensation is not excessive.
---------------------------------------------------------------------------

    \30\ See Listing Standards for Compensation Committees, Release 
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240].
    \31\ See Adopting Release at 24.
---------------------------------------------------------------------------

    In sum, the Exchange believes that its existing ``bright line'' 
independence standards as set forth in proposed Rule 19(p)(3)(A) and 
the additional independence requirement as set forth in proposed Rule 
19(p)(3)(B) are sufficiently broad to encompass the types of 
relationships which would generally be material to a director's 
independence for compensation committee service. In addition, there is 
language in current Rule 19(p)(3), adopted in proposed Rule 19(p)(3) 
that already requires the board to consider

[[Page 63375]]

any other material relationships between the director and the issuer or 
its management that are not subject of ``bright line'' tests in 
proposed Rule 19(p)(3)(A). The Exchange believes that these 
requirements with respect to general director independence, when 
combined with the additional requirements of proposed Rule 19(p)(3)(B), 
represent an appropriate standard for compensation committee 
independence that is consistent with the requirements of Exchange Act 
Rule 10C-1.
Proposed Rule 19(d)(2)
    Proposed Rule 19(d)(2) establishes a formal written charter or 
board resolution requirement for all issuers, with respect to 
compensation committees. Specifically, the proposed rule states that 
each issuer must adopt a formal written charter or board resolution, as 
applicable, addressing at minimum (A) the scope of the compensation 
committee's responsibilities and how it carries out those 
responsibilities, including structure, process and membership 
requirements; (B) the compensation committee's responsibility for 
determining or recommending to the board for determination, the 
compensation of the chief executive officer and all other officers of 
the issuer as set forth in proposed Rule 19(d)(3); and (C) the specific 
compensation committee responsibilities and authority set forth in 
proposed Rule 19(d)(4).
    The Exchange submits that requiring issuers to adopt such a charter 
or board resolution is necessary to facilitate compliance with the 
proposed amendments to the compensation committee listing standards. 
Moreover, the proposed rule is consistent with other CHX corporate 
governance rules requiring a written charter or board resolution \32\ 
and is also modeled on proposed NASDAQ Rule 5065(d)(1).\33\
---------------------------------------------------------------------------

    \32\ Proposed Rule 19(d)(3) is modeled on CHX Article 22, Rule 
19(c)(2), which requires each issuer to adopt a formal written 
charter or board resolution, as applicable, addressing the 
nominations process and any related matters as may be required under 
federal securities law.
    \33\ Proposed NASDAQ Rule 5605(d)(1) states, ``each Company must 
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. The 
charter must specify: (A) The scope of the compensation committee's 
responsibilities, and how it carries out those responsibilities, 
including structure, process and membership requirements; (B) 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; (C) that the chief executive officer may not be present 
during voting or deliberations on his or her compensation; and (D) 
the specific compensation committee responsibilities and authority 
set forth in Rule 5605(d)(3).''
---------------------------------------------------------------------------

Proposed Rule 19(d)(3)
    Proposed Rule 19(d)(3) is a consolidated restatement of current 
Rule 19(d)(1) and 19(d)(2). In doing so, current Rule 19(d)(3)(A) has 
been deleted and restated as proposed Rule 19(d)(5)(A)(i), with some 
syntax amendments to improve logical flow and organization and current 
Rule 19(d)(3)(B) has been deleted and restated under proposed Rule 
19(d)(5)(B)(i). Specifically, proposed Rule 19(d)(3) states that the 
function of a compensation committee or functional equivalent is to 
determine or recommend to the issuer's board of directors for 
determination the compensation of issuer's chief executive officer and 
other officers. It continues that the chief executive officer shall not 
be present during the deliberations regarding her own compensation, but 
that the chief executive officer may be present during deliberations 
regarding compensation of other officers, but may not vote. Aside from 
syntax, the only difference between this proposed rule and current Rule 
19(d)(1) and Rule 19(d)(2) is that the proposed rule omits the portions 
of the current rules that mention that compensation of executive 
officers shall be determined or recommended to the board ``either by 
(A) a majority of the issuer's independent directors or (B) a 
compensation committee comprised solely of independent directors.'' 
\34\ The reason for this omission is that ``compensation committee'' 
and ``majority of the issuer's independent directors'' have been 
combined and defined under proposed Rule 19(d)(1) as ``compensation 
committee.'' The Exchange submits that this organizational amendment is 
necessary for the logical flow of the proposed Rule 19(d).
---------------------------------------------------------------------------

    \34\ Currently, CHX Article 22, Rule 19(d)(1) states 
``compensation of the issuer's chief executive officer shall be 
determined, or recommended to the board for determination, either by 
(A) a majority of the independent directors or (B) a compensation 
committee comprised solely of independent directors. The chief 
executive officer may not be present during voting or 
deliberations'' and Rule 19(d)(2) states ``compensation of the 
issuer's other officers, as that term is defined in Section 16 of 
the Act, shall be determined, or recommended to the board for 
determination, either by (A) a majority of the issuer's independent 
directors or (B) a compensation committee comprised solely of 
independent directors. The chief executive officer may be present 
during deliberations regarding compensation of other officers, but 
may not vote.''
---------------------------------------------------------------------------

Proposed Rule 19(d)(4)
    Proposed Rule 19(d)(4)(A)-(E) outlines listing standards mandated 
under Exchange Act Rule 10C-1(b)(2), concerning the authority of 
compensation committees to retain compensation consultants, outside 
legal counsel and other advisers (collectively ``compensation 
advisers'').
    Specifically, pursuant to Exchange Act Rule 10C-1(b)(2)(i), 
proposed subparagraph (A) provides that a compensation committee may, 
in its sole discretion, retain or obtain the advice of a compensation 
consultant, independent legal counsel or other adviser. Also, pursuant 
to Exchange Act Rule 10C-1(c)(2)(iii), proposed subparagraph (A) 
continues by stating that it shall not apply to issuers that do not 
maintain a formal committee of the board of directors for determining 
executive compensation. The reason behind this exclusion is that since 
an action by independent directors acting outside of a formal committee 
structure would generally be considered action by the full board of 
directors, it is unnecessary to apply this requirement 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.\35\
---------------------------------------------------------------------------

    \35\ See Listing Standards for Compensation Committees, Release 
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240], at p. 12.
---------------------------------------------------------------------------

    Also, pursuant to Exchange Act Rule 10C-1(b)(2)(ii), proposed 
subparagraph (B) provides that 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. Furthermore, 
pursuant to Exchange Act Rule 10C-1(b)(2)(iii), proposed subparagraph 
(C) states that nothing in this proposed Rule 19(d)(3) shall be 
construed to require the compensation committee to implement or act 
consistently with the advice or recommendations of the compensation 
consultant, independent legal counsel or other adviser nor to affect 
the ability or obligation of a compensation committee to exercise its 
own judgment in fulfillment of its duties.
    Moreover, pursuant to Exchange Act Rule 10C-1(b)(3), proposed 
subparagraph (D) states that an issuer that maintains a compensation 
committee shall provide for appropriate funding, as determined by the 
compensation committee, for payment of reasonable compensation to a 
compensation consultant, independent legal counsel or any other adviser 
retained by the compensation committee. Similar to proposed

[[Page 63376]]

subparagraph (A), pursuant to Exchange Act Rule 10C-1(c)(2)(iii), 
proposed subparagraph (D) continues by stating that it shall not apply 
to issuers that do not maintain a formal committee of the board of 
directors, pursuant to Exchange Act Rule 10C-1(c)(2)(iii).\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    Finally, pursuant to Exchange Act Rule 10C-1(b)(4), proposed 
subparagraph (E) states that the compensation committee may select a 
compensation consultant, legal counsel or other adviser, other than in-
house legal counsel, only after taking into consideration the following 
six factors: (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, or other adviser or the person 
employing the adviser with an executive officer of the issuer. The 
Exchange agrees with the Commission that these six factors, when 
considered together, are competitively neutral, as they will require 
compensation committees and functional equivalents 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.\37\ Therefore, the Exchange 
proposes to add no further requirements or factors to be considered 
under this subparagraph (E).
---------------------------------------------------------------------------

    \37\ See Listing Standards for Compensation Committees, Release 
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240], at p. 40.
---------------------------------------------------------------------------

Proposed Rule 19(d)(5), Rule 19(p)(5) and Paragraph .03 of the 
Interpretations and Policies of Rule 19
    Proposed Rule 19(d)(5) outlines exceptions to the listing standards 
of this proposed Rule 19(d), pursuant to Exchange Act Rule 10C-
1(b)(1)(iii), which exempts specified categories of issuers and gives 
the Exchange discretion to exempt certain director relationships from 
the requirements of Rule 10C-1(b)(1) and Rule 10C-1(b)(5), which gives 
the Exchange discretion to exempt from the requirements of Exchange Act 
Rule 10C-1 any category of issuer, after considering relevant factors. 
In establishing these exemptions, proposed Rule 19(d)(5) distinguishes 
between (A) temporary exemptions, (B) general exemptions and a (C) 
limited exemption for smaller reporting companies.
    Proposed Rule 19(d)(5) lists the temporary exemptions from proposed 
Rule 19(d). Proposed Rule 19(d)(5)(A)(i) is a restatement of current 
Rule 19(d)(3), which allows an issuer, under exceptional and limited 
circumstances, to temporarily appoint a non-independent director to its 
compensation or functional equivalent one director who is not 
independent, for a term that shall not exceed two years from the date 
of appointment (unless the director becomes independent prior to the 
end of the two year period), if (1) the compensation committee or 
functional equivalent is comprised of at least three persons, including 
the proposed non-independent director; (2) the non-independent director 
is not a current officer or employee nor is an immediate family member 
of a current officer or employee; and (3) the issuer's board of 
directors determines that (a) the membership of the non-independent 
director on the compensation committee or functional equivalent is 
required by the best interests of the company and its shareholders and 
(b) the board discloses, in the proxy statement for the next annual 
meeting subsequent to such determination (or, if the issuer does not 
file a proxy, in its Form 10-K or 20-F), the nature of the relationship 
and the reasons for the determination.
    The purpose of this exemption is to allow issuers to efficiently 
deal with unforeseen and exceptional circumstances, so as to ensure the 
smooth function of its compensation committee or functional equivalent. 
While doing so, the exemption clearly establishes guidelines to 
minimize the risk of abuse by requiring that the non-independent 
director's appointment be temporary, that such a director will not be 
an employee of the issuer and that such a director's appointment is 
made clear to the shareholders via a proxy statement or Form 10-K or 
20F. Furthermore, the Exchange submits that it would not be in the 
public interest to burden issuers confronted with unforeseen and 
exceptional circumstances, especially where inaction by a compensation 
committee may result in a loss of executive talent to the detriment of 
shareholders. It is important to note that the same temporary 
exemption, with some differences for context, can be found in CHX 
Article 22, Rule 19(b)(1)(C)(i) \38\ and given the similarities between 
that rule for audit committees and this proposed rule for compensation 
committees, the Exchange submits that this exemption is wholly 
appropriate and necessary.
---------------------------------------------------------------------------

    \38\ CHX Article 22, Rule 19(b) governs listing standards for 
``audit committees'' and Rule 19(b)(1)(C)(i) states ``one director 
who is not independent as required by section (b)(1)(A)(i) above, 
but who meets the criteria set forth in SEC Rule 10A-3 and who is 
not a current officer or employee (or an immediate family member of 
a current officer or employee) may be appointed to the audit 
committee, if the issuer's board under exceptional and limited 
circumstances, determines that membership on the committee by the 
individual is required by the best interests of the corporation and 
its shareholders, and the board discloses, in the proxy statement 
for the next annual meeting subsequent to such determination (or, if 
the issuer does not file a proxy, in its Form 10-K, 20-F or other 
applicable annual disclosure filed with the SEC), the nature of the 
relationship and the reasons for that determination. A member 
appointed under this exception may not serve on the audit committee 
for more than two years under this exception (unless he or she 
ultimately satisfies the definition of an independent director) and 
may not chair the audit committee.''
---------------------------------------------------------------------------

    In addition, proposed Rule 19(d)(5)(A)(ii) outlines an opportunity 
to cure defects, almost precisely as stated in Exchange Act Rule 10C-
1(a)(3) and current CHX Article 22, Rule 19(b)(1)(C)(ii).\39\ 
Specifically, it states that if a member of an issuer's compensation 
committee or functional equivalent ceases to be an independent director 
for reasons outside the member's reasonable control, that member, with 
prompt notice by the issuer to the Exchange, may remain a member of the 
compensation committee or functional equivalent until the earlier of 
the next annual shareholders meeting of the issuer or one year from the 
occurrence of the event that caused the member to be no longer an 
independent director.
---------------------------------------------------------------------------

    \39\ CHX Article 22, Rule 19(b) governs listing standards for 
``audit committees'' and Rule 19(b)(1)(C)(ii) and Rule 
19(b)(1)(C)(ii) states ``if a member of an audit committee ceases to 
meet the independence criteria set forth in SEC Rule 10A-3 for 
reasons outside the person's reasonable control, that person may 
remain a member of the committee until the earlier of the next 
annual shareholders' meeting or one year from the occurrence of the 
event that caused the member to no longer meet the independence 
criteria. The issuer must promptly notify the Exchange if this 
circumstance occurs.''
---------------------------------------------------------------------------

    Proposed Rule 19(d)(5)(B)(i)-(viii) list the general exemptions 
from proposed Rule 19(d). All of the exemptions listed under this 
subparagraph are (1) specific

[[Page 63377]]

exemptions required under Exchange Act Rule 10C-1(b)(5); (2) proposed 
expansions of specific exemptions listed under Exchange Act Rule 10C-
1(b)(1)(iii); or (3) exemptions already in effect under CHX Rules and 
proposed pursuant to Exchange Act Rule 10C-1(b)(5)(i). Some of the 
proposed exemptions fall under one or more of these categories and each 
exemption will discussed in this context.
    Proposed subparagraph (i) exempts limited partnerships and 
companies in bankruptcies from the requirements of proposed Rule 19(d). 
Such issuers are already exempt from the current compensation committee 
requirements under paragraph .03(1) of the Interpretations and Policies 
of Rule 19.\40\ Although Exchange Act Rule 10C-1(b)(1)(iii)(A)(1) and 
(2) already mandate that such companies be exempt from the independence 
requirements, subparagraph (ii) proposes to expand that exemption to 
all requirements under Exchange Act Rule 10C-1, pursuant to the 
Exchange's authority granted under Exchange Act Rule 10C-1(b)(5)(i). A 
``limited partnership'' is defined as 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.\41\ 
As such, limited partnerships are already exempt from the current 
compensation committee requirements because the ownership/management 
structure of limited partnerships renders the independent director 
requirements inapplicable. The Exchange submits that this same 
reasoning renders the compensation adviser requirements unnecessary as 
well. With respect to companies in bankruptcy, the purpose behind this 
exemption is to not overburden issuers that are struggling to emerge 
from bankruptcy. That is, it would not be in public interest to burden 
such companies with additional listing standards where such companies 
are subject to a host of bankruptcy requirements that will 
fundamentally impact its survival. Given these considerations, the 
Exchange submits that it would be wholly appropriate to exempt limited 
partnerships and companies in bankruptcy from all of the requirements 
of proposed Rule 19(d).
---------------------------------------------------------------------------

    \40\ Paragraph .03(1) of the Interpretations and Policies of 
Rule 19 states that ``limited partnerships and companies in 
bankruptcies are not required to comply with sections (a), (c) and 
(d) above.''
    \41\ See Unif. Ltd. P'ship Act sections 102, 303 and 404 (2001).
---------------------------------------------------------------------------

    Proposed subparagraph (ii) exempts from the requirements of 
proposed Rule 19(d) ``closed-end and open-end management companies'' 
registered under the Investment Company Act,\42\ as already stated in 
CHX rules as paragraph .03(2) of the Interpretations and Policies of 
Rule 19.\43\ Although Exchange Act Rule 10C-1(b)(1)(iii)(A)(3) only 
exempts open-end management investment companies from the independence 
requirement of the Rule 10C-1(b), the Exchange proposes to expand that 
exemption, pursuant to Rule 10C-1(b)(5)(i) to include both open-end and 
closed-end management investment companies and to apply the exemption 
to all the requirements of Rule 10C-1. The Exchange submits that since 
registered investment companies are already subject to the requirements 
of the Investment Company Act, including, in particular, requirements 
concerning potential conflicts of interest related to investment 
adviser compensation,\44\ requiring such companies to comport with the 
requirements of this proposed Rule 19(d) would be duplicative and 
unnecessary.
---------------------------------------------------------------------------

    \42\ Supra note 29.
    \43\ Paragraph .03(2) of the Interpretations and Policies of 
Rule 19 entitled, ``Closed-End and Open-End Management Companies'' 
states, ``(A) Closed-end management companies that are registered 
under the Investment Company Act of 1940 are not required to comply 
with sections (a) through (f) of this Rule; except that closed-end 
funds must (i) maintain an audit committee of at least three 
persons; and (ii) comply with the provisions of SEC Rule 10A-3 and 
the provisions of paragraphs (b)(1)(A)(iv), (b)(1)(B), (b)(2), 
(b)(3) and (f), above, subject to applicable exceptions. 
Additionally, these issuers must establish procedures for the 
confidential, anonymous submission of concerns regarding 
questionable accounting or auditing matters by employees of the 
investment adviser, administrator, principal underwriter, or any 
other provider of accounting related services for the investment 
company, as well as employees of the investment company. (B) 
Business development companies, which are a type of closed-end 
management investment company defined in Section 2(a)(48) of the 
Investment Company Act of 1940 that are not registered under that 
Act, are required to comply with all of the provisions of this Rule. 
(C) Open-end funds (including open-end funds that can be listed or 
traded as investment company units) are not required to comply with 
the provisions of sections (a) through (f) of this Rule; except that 
these funds must comply with the provisions of sections (b) and 
(f)(2), above, to the extent required by SEC Rule 10A-3. 
Additionally, these issuers must establish procedures for the 
confidential, anonymous submission of concerns regarding 
questionable accounting or auditing matters by employees of the 
investment adviser, administrator, principal underwriter, or any 
other provider of accounting related services for the investment 
company, as well as employees of the investment company and must 
address this responsibility in the audit committee charter.''
    \44\ 15 USCS 80a-2, 15 USCS 80a-3, 15 USCS 80a-15, 15 USCS 80a-
17, 15 USCS 80a-35 [sic].
---------------------------------------------------------------------------

    Proposed subparagraph (iii) exempts from the requirements of 
proposed Rule 19(d) passive business organizations, such as royalty 
trusts, or derivatives and special purpose entities, pursuant to the 
Exchange's discretion to exempt certain categories of issuers under 
Exchange Act Rule 10C-1(b)(5)(iii). Such issuers are already exempt 
from the current compensation committee requirements under paragraph 
.03(3) of the Interpretations and Policies of Rule 19.\45\ The 
reasoning behind exempting passive business organizations, such as 
royalty trusts, is that such entities are structured fundamentally 
different from conventional equities issuers. For instance, in the case 
of royalty trusts, such entities do not have employees and virtually 
all profits earned are distributed to shareholders. As such, these 
entities have no need for compensation committees. Moreover, special 
purpose entities are frequently utilized to securitize receivables, 
such as loans. Similar to the reasoning behind exempting clearing 
agencies \46\ that issue futures products and standardized options, 
purchasers of securities issued by such special purpose entities do not 
make an investment decision based on the issuer, but rather, the 
underlying security. As a result, information about the special purpose 
entities, its officers and directors and its financial statements is 
much less relevant to investors in these securities than information 
about the underlying security.
---------------------------------------------------------------------------

    \45\ Paragraph .03(3) of the Interpretations and Policies of 
Rule 19 states, ``passive business organizations (such as royalty 
trusts) or derivatives and special purpose entities that are exempt 
from the requirements of SEC Rule 10A-3 are not subject to any 
requirement under sections (a) through (f) of this rule. To the 
extent that Rule 10A-3 applies to a passive business organization, 
derivative or special purpose security, such entities are required 
to comply with the provisions of paragraphs (b) and (f)(2) above, to 
the extent required by SEC Rule 10A-3.''
    \46\ See Listing Standards for Compensation Committees, Release 
No. 33-9330 (June 27, 2012) [17 CFR Parts 229 and 240], at p. 51.
---------------------------------------------------------------------------

    Proposed subparagraph (iv) exempts from the requirements of 
proposed Rule 19(d) any ``foreign private issuer'' that discloses in 
its annual report the reasons that it does not have an independent 
compensation committee, subject to the additional requirements of 
paragraph .03(4) of the Interpretations and Policies of Rule 19.\47\ 
Moreover,

[[Page 63378]]

subparagraph (v) adopts the definition of ``foreign private issuer'' as 
stated under Exchange Act Rule 3b-4.\48\ Pursuant to Exchange Act Rule 
10C-1(b)(4)(ii), the Exchange proposes to expand the Exchange Act Rule 
10C-1(b)(1)(iii)(A)(4) exemption of foreign private issuers from only 
the independence requirements to all requirements under Rule 10C-1. 
This is because foreign private issuers are already subject to 
corporate regulations of their respective home countries and requiring 
such issuers to comport with Exchange Act Rule 10C-1 would be 
cumulative, if not contradictory. In addition, the Exchange further 
proposes include a phase-in provision, nearly identical to proposed 
Section 303A.00 (Compliance Dates/A Company Ceases to Qualify as a 
Foreign Private Issuer) of the NYSE Listing Company Manual,\49\ which 
requires compliance with the proposed compensation committee rules 
within six months of the date on which it failed to qualify as a 
foreign private issuer.
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    \47\ Paragraph .03(4) of the Interpretations and Policies of 
Rule 19 states, ``foreign issuers will be permitted to comply with 
their home country practices with respect to corporate governance 
(and thus are exempt from the requirements of sections (a)-(f), 
above), except to the extent that SEC Rule 10A-3 requires compliance 
with specific audit committee requirements in sections (b) and 
(f)(2) above. Foreign issuers must provide English language 
disclosure of any significant ways in which their corporate 
governance practices differ from those required for domestic issuers 
under this Rule 19. This disclosure may be provided either on the 
issuer's Web site or in the annual report distributed to 
shareholders in the U.S. If the disclosure is made only on an 
issuer's Web site, the issuer must note that fact in its annual 
report and provide the Web address at which the disclosure may be 
reviewed.''
    \48\ Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)] 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.''
    \49\ Section 303A.00 (Compliance Dates/A Company Ceases to 
Qualify as a Foreign Private Issuer) of the NYSE Listing Company 
Manual states, in pertinent part, ``to the extent a foreign private 
issuer ceases to qualify as such under SEC rules (so that is 
required to file on domestic forms with the SEC), such company is 
required to comply with Section 303A domestic company requirements 
as follows: [* * *] The company must have fully independent 
nominating and compensation committees as required by Sections 
303A.04 and 303A.05, if applicable, within six months of the Foreign 
Private Issuer Determination Date.'' The Commission notes that a 
portion of this language is proposed in NYSE-2012-049.
---------------------------------------------------------------------------

    Proposed subparagraph (v) exempts from the requirements of proposed 
Rule 19(d) issuers listing only preferred or debt securities on the 
Exchange that are subject to the multiple listing exception described 
in paragraph .04 of the Interpretations and Policies of Rule 19, 
pursuant to the Exchange's discretion to exempt certain categories of 
issuers under Exchange Act Rule 10C-1(b)(5)(iii). Such issuers are 
already exempt from the current compensation committee requirements 
under paragraph .03(5) of the Interpretations and Policies of Rule 
19.\50\ The reasoning behind this exemption is that issuers of 
preferred or debt securities are already subject to the requirements of 
the rules of the exchange on which they are primarily listed. As such, 
this proposed exemption prevents such issuers from having to comport 
with multiple sets of rules. Moreover, holders of listed preferred 
stock have significantly greater protections with respect to their 
rights to receive dividends and a liquidation preference upon 
dissolution of the issuer. In addition, investors typically regard 
preferred stocks as a fixed income investment comparable to debt 
securities. Furthermore, debt securities are not equity securities, as 
they do not impart an ownership interest to the holder of such 
securities. Given these considerations, preferred and debt securities 
fall outside the scope of Exchange Act Rule 10C-1(a)(1) and should be 
generally exempt.
---------------------------------------------------------------------------

    \50\ Paragraph .03(5) of the Interpretations of Policies of Rule 
19 states, ``issuers listing only preferred or debt securities on 
the Exchange typically will not be required to adhere to the 
requirements set out in sections (a)-(f) because they will be 
subject to the multiple listing exception described in 
Interpretation .04, below. To the extent required by SEC Rule 10A-3, 
these issuers will only be required to comply with sections (b) and 
(f)(2) above.''
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    Proposed subparagraph (vi) exempts controlled companies from the 
requirements of proposed Rule 19(d), as mandated by Exchange Act Rule 
10C-1(b)(5)(ii), with certain additional requirements.\51\ Such issuers 
are already exempt from the current compensation committee requirements 
under current Rule 19(d)(3)(B).\52\ Under Rule 19(p)(1), a ``controlled 
company'' is defined as a company in which an individual, group or 
another company, holds more than 50 percent of the voting power. This 
definition is consistent with Exchange Act Rule 10C-1(c)(3), which 
defines a ``controlled company'' as an issuer that is listed on a 
national securities exchange or by national securities association and 
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. The 
Exchange further proposes to include this exemption under paragraph .03 
of the Interpretations and Policies of Rule 19, as proposed paragraph 
.03(6).
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    \51\ Pursuant to CHX paragraph .02 of the Interpretations and 
Policies of Rule 19, controlled companies that rely on this 
exemption are required to disclose in its annual proxy (or Form 10-
K, 20-F, or other applicable annual disclosure filed with the SEC) 
that it is a controlled company and the basis for that 
determination.
    \52\ Current Rule 19(d)(3)(B) states, ``controlled company is 
exempt from the requirements of this paragraph (d).''
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    Proposed subparagraph (vii) exempts from the requirements of 
proposed Rule 19(d) clearing agencies that are registered pursuant to 
Section 17A of the Exchange Act or that are exempt from the 
registration requirements of section 17A(b)(7)(A) of the Exchange Act 
that clear and list a security futures product or standardized option, 
pursuant to Exchange Act Rule 10C-1(b)(5)(iii) and (b)(5)(iv). The 
Exchange further proposes to include this exemption under paragraph .03 
of the Interpretations and Policies of Rule 19, as proposed paragraph 
.03(7).
    Moreover, proposed Rule 19(d)(5)(C) establishes a limited exemption 
for smaller reporting companies to proposed Rule 19(d) and proposed 
Rule 19(p)(5) merely states that the terms ``small business issuer'' 
and ``smaller reporting company'' means any issuer that meets the 
definition of ``smaller reporting company'' set out in SEC Rule 12b-2. 
Specifically, the limited exemption narrows the scope of the general 
exemption under Exchange Act Rule 10C-1(b)(5)(ii) and exempts smaller 
reporting companies only from the compensation adviser requirements of 
proposed Rule 19(d)(4) and the additional independent director 
requirements specific to compensation committees of proposed Rule 
19(p)(3)(B). This is because under current CHX rules, small business 
issuers are already subject to independent director requirements for 
its compensation committees and, as such, the Exchange submits that 
requiring such issuers to continue to comply with similar proposed 
rules is not overly burdensome. Moreover, the proposed rule includes a 
phase-in provision similar to proposed Rule 19(d)(5)(B)(iv) for foreign 
private issuers and proposed Section 303A.00 (Compliance Dates/A 
Company Ceases to Qualify as a Smaller Reporting Company) of the NYSE 
Listing Company Manual,\53\ which states that if the smaller reporting 
company ceases to qualify as such under SEC rules, it is required to 
(i) meet the additional

[[Page 63379]]

independent director requirements of proposed Rule 19(p)(3)(B) within 
six months of the date on which the issuer failed to qualify as a 
smaller reporting company and (ii) comply with the compensation adviser 
requirements of proposed Rule 19(d)(4) as of the date on which the 
issuer failed to qualify as a smaller reporting company.
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    \53\ Section 303A.00 (Compliance Dates/A Company Ceases to 
Qualify as a Smaller Reporting Company) states, in pertinent part, 
``under SEC Rule 12b-2, a company tests its status as a smaller 
reporting company on an annual basis at the end of its most recently 
completed second fiscal quarter [* * *] To the extent a smaller 
reporting company ceases to qualify as such under SEC rules, it is 
required, if applicable, to: (1) Have a compensation committee of 
which all of the members meet the independence standards of Section 
303A.02(a)(ii) within six months of the Smaller Reporting Company 
Determination Date; and (II) comply with Section 303A.05(c)(iv) as 
of the Smaller Reporting Company Determination Date.'' The 
Commission notes that this is language proposed in NYSE-2012-049.
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Proposed Paragraph .05 of the Interpretations and Policies
    Pursuant to the exemptive authority provided to the exchanges under 
Exchange Act Rule 10C-1(b)(1)(iii), the Exchange proposes to amend 
paragraph .05 (Transition Periods and Compliance Dates) of the 
Interpretations and Policies of Rule 19 to establish a transition 
period for issuers to conform to the requirements of proposed Rule 19, 
as proposed paragraph .05(6). Specifically, proposed paragraph .05(6) 
establishes that proposed Rule 19(d), Rule 19(p)(3), Rule 19(p)(5) and 
paragraphs .03 and .05 of the Interpretations and Policies of Rule 19 
(which are all of the provisions that have been amended under this 
proposed rule filing) will become immediately operative upon approval 
by the SEC. However, issuers shall have until the earlier of its first 
annual shareholders meeting after January 15, 2014 or October 31, 2014 
to comply with the compensation committee charter requirements of 
proposed Rule 19(d)(2), the compensation adviser requirements of 
proposed Rule 19(d)(4) and the additional independent director 
requirements of proposed Rule 19(p)(3)(B). That is, the amendments that 
do not require issuers to do anything in addition to what they are 
already required to do, under current rules, will become operative 
immediately upon approval and the amendments that place additional 
requirements on the issuers will be subject to the longer transition 
period.
    This proposed transition period is similar to proposed Section 
303A.00 (Transition Periods for Compensation Committee Requirements) of 
the NYSE Listed Company Manual, which provides that listed companies 
will have until the earlier of their first annual meeting after January 
15, 2014 or October 31, 2004, to comply with the new standards with 
respect to compensation committees. The only difference between the 
NYSE proposed transition period and this proposed paragraph .05(6) is 
that the NYSE proposes to maintain current rule language operative 
through June 30, 2013, whereas the Exchange proposes to make amended 
rule language that does not substantively change the current 
compensation committee listing standards immediately operative. 
However, the Exchange submits that both approaches are practically 
similar and the differences are based on how CHX rules are organized.
2. Statutory Basis
    The proposed rule change in relation to the Exchange's compensation 
committee requirements and the proposed compensation committee 
consultant independence requirements are consistent with the 
requirements of Rule 10C-1, with respect to the adoption by national 
securities exchange of compensation committee listing standards. 
Moreover, the proposed rule changes are consistent with Section 6(b) of 
the Act \54\ in general, and furthers the objectives of Section 6(b)(5) 
\55\ in particular, in that it is designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transaction in securities, to 
remove impediments and perfect the mechanisms of a free and open 
market, and, in general, to protect investors and the public interest. 
Specifically, the Exchange believes that the proposed rule change 
supports the objective of the Exchange Act by providing harmonization 
between CHX Rules and rules of all other organization subject to the 
requirements of Exchange Act Rule 10C-1, which would result in less 
burdensome and more efficient regulatory compliance. Moreover, the 
Exchange submits that the proposed amendments to its compensation 
committee listing standards are consistent with the protection of 
investors and the public interest in that they strengthen the 
independence requirements for compensation committee membership, 
provide additional authority to compensation committees and require 
compensation committees to consider the independence of compensation 
consultants.
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    \54\ 15 U.S.C. 78f(b).
    \55\ 15 U.S.C. 78f(b)(5).
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    Furthermore, the Exchange submits that the exemptions from the 
proposed requirements that it is granting to limited partnerships and 
companies in bankruptcies, management companies registered under the 
Investment Company Act of 1940, passive business organizations or 
derivatives and special purpose entities that are exempt from the 
requirements of Exchange Act 10A-3, foreign private issuers, issuer's 
listing only preferred or debt securities, controlled companies and 
clearing agencies that clear and list securities futures products or 
standardized options are consistent with Section 10C and Rule 10C-1 for 
the reasons stated above in the ``Purpose'' section. Specifically, Rule 
10C-1(b)(5)(ii) explicitly exempts smaller reporting companies and 
foreign private issuers will comply with their home country law and, if 
they avail themselves of the exemption, will be required to disclose 
that fact under existing Exchange listing requirements. Moreover, the 
Exchange submits it is an appropriate use of its exemptive authority 
under Rule 10C-1(b)(5)(i), and that it is not unfairly discriminatory 
under Section 6(b)(5) of the Act, to provide general exemptions under 
the proposed rules to issuers whose only listed class of equity 
securities on the Exchange is a preferred stock, as holders of listed 
preferred stock have significantly greater protections with respect to 
their rights to receive dividends and a liquidation preference upon 
dissolution of the issuer, and preferred stocks are typically regarded 
by investors as a fixed income investment comparable to debt 
securities, the issuers of which are exempt from compliance with Rule 
10C-1. In addition, the Exchange submits that it is an appropriate use 
of its exemptive authority under Rule 10C-1(b)(5)(i) and that is not 
unfairly discriminatory under Section 6(b)(5) of the Exchange Act, to 
provide general exemptions under the proposed rules for all of the 
other categories of issuers that are not currently subject to the 
Exchange's compensation committee requirement, for the structural 
reasons discussed in the ``Purpose'' section and because it would be a 
significant and unnecessarily burdensome alteration in their governance 
structures to require them to comply with the proposed new 
requirements.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    No written comments were either solicited or received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i)

[[Page 63380]]

as the Commission may designated 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 self-regulatory organization consents, 
the Commission will:
    (A) By order approve 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-CHX-2012-13 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-CHX-2012-13. 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 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 offices of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CHX-2012-13, and should be submitted on or before 
November 6, 2012.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25407 Filed 10-15-12; 8:45 am]
BILLING CODE 8011-01-P


