
[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4529-4536]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01109]



[[Page 4529]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68642; File No. SR-CBOE-2012-094]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving a Proposed Rule Change To Amend the Listing Rules 
for Compensation Committees To Comply with Securities Exchange Act Rule 
10C-1 and Make Other Related Changes

January 11, 2013.

I. Introduction

    On September 25, 2012, Chicago Board Options Exchange, Inc. 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify the Exchange's rules 
for compensation committees of listed issuers to comply with Commission 
Rule 10C-1 under the Act and make other related changes. The proposed 
rule change was published for comment in the Federal Register on 
October 15, 2012.\3\ The Commission subsequently extended the time 
period in which to either approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
to disapprove the proposed rule change, to January 13, 2013.\4\ The 
Commission received no comment letters on the proposed rule change.\5\ 
This order approves the CBOE proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68020 (October 09, 
2012), 77 FR 625558 (``Notice'').
    \4\ See Securities Exchange Act Release No. 34-68313 (November 
28, 2012), 77 FR 71853 (December 4, 2012).
    \5\ The Commission notes that comments were received on similar 
proposals filed by New York Stock Exchange, LLC and Nasdaq Stock 
Market LLC. For a synopsis of these comments see Securities Exchange 
Act Release Nos. 68011 (October 9, 2012) (``NYSE Notice) (File No. 
SR-NYSE-2012-49); 68013 (October 9, 2012) (``Nasdaq Notice'') (File 
No. SR-NASDAQ-2012-109); 68639 (January 11, 2013), (``NYSE Approval 
Order''); 68640 (January 11, 2013), (``Nasdaq Approval Order'').
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II. Description of the Proposal

A. Background: Rule 10C-1 under the Act

    On March 30, 2011, to implement Section 10C of the Act, as added by 
Section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act''),\6\ the Commission proposed 
Rule 10C-1 under the Act,\7\ which directs each national securities 
exchange (hereinafter, ``exchange'') to prohibit the listing of any 
equity security of any issuer, with certain exceptions, that does not 
comply with the Rule's requirements regarding compensation committees 
of listed issuers and related requirements regarding compensation 
advisers. On June 20, 2012, the Commission adopted Rule 10C-1.\8\
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    \6\ Public Law 111-203, 124 Stat. 1900 (2010).
    \7\ See Securities Act Release No. 9199, Securities Exchange Act 
Release No. 64149 (March 30, 2011), 76 FR 18966 (April 6, 2011) 
(``Rule 10C-1 Proposing Release'').
    \8\ See Securities Act Release No. 9330, Securities Exchange Act 
Release No. 67220 (June 20, 2012), 77 FR 38422 (June 27, 2012) 
(``Rule 10C-1 Adopting Release'').
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    Rule 10C-1 requires, among other things, each exchange to adopt 
rules providing that each member of the compensation committee \9\ of a 
listed issuer must be a member of the board of directors of the issuer, 
and must otherwise be independent.\10\ In determining the independence 
standards for members of compensation committees of listed issuers, 
Rule 10C-1 requires the exchanges to consider relevant factors, 
including, but not limited to: (a) The source of compensation of the 
director, including any consulting, advisory or other compensatory fee 
paid by the issuer to the director (hereinafter, the ``Fees Factor''); 
and (b) whether the director is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the issuer 
(hereinafter, the ``Affiliation Factor'').\11\
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    \9\ For a definition of the term ``compensation committee'' for 
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \10\ See Rule 10C-1(a) and (b)(1).
    \11\ See id. See also Rule 10C-1(b)(i)(iii)(A), which sets forth 
exemptions from the independence requirements for certain categories 
of issuers. See Rule 10C-1(b)(1)(iii)(A). In addition, an exchange 
may exempt a particular relationship with respect to compensation 
committee from these requirements as it deems appropriate, taking 
into consideration the size of an issuer and any other relevant 
factors. See Rule 10C-1(b)(1)(iii)(B).
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    In addition, Rule 10C-1 requires the listing rules of exchanges to 
address the authority of compensation committees to retain or obtain a 
compensation adviser, and its direct responsibility for the 
appointment, compensation and oversight of the work of any compensation 
adviser it retains.\12\ The exchange rules must also provide that each 
listed issuer provide for appropriate funding for the payment of 
reasonable compensation, as determined by the compensation committee, 
to any compensation adviser retained by the compensation committee.\13\ 
Finally, among other things, Rule 10C-1 requires each exchange to 
provide in its rules that the compensation committee of each listed 
issuer may select a compensation consultant, legal counsel or other 
adviser to the compensation committee only after taking into 
consideration six factors specified in Rule 10C-1,\14\ as well as any 
other factors identified by the relevant exchange in its listing 
standards.\15\
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    \12\ See Rule 10C-1(b)(2).
    \13\ See Rule 10C-1(b)(3).
    \14\ See Rule 10C-1(b)(4). The six factors, which CBOE proposes 
to set forth explicitly in its rules, are specified in the text 
accompanying note 35, infra.
    \15\ Other provisions in Rule 10C-1 relate to exemptions from 
the rule and a requirement that each exchange provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing.
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B. CBOE Proposal

    To comply with Rule 10C-1, CBOE proposes to amend Exchange Rule 
31.10 ``Corporate Governance.'' In particular, to accomplish these 
changes, the Exchange proposes to amend paragraph (c) of Rule 31.10, 
entitled ``Compensation of Officers.'' CBOE also proposes to amend the 
Interpretations and Policies section of Rule 31.10 by adding a new 
provision entitled Compensation Consultants, Independent Legal Counsel 
and Other Compensation Advisors. Current paragraph (c) of Rule 31.10 
provides that compensation of the chief executive officers and all 
other executive officers of a listed company must be determined by a 
majority of independent directors,\16\ or a compensation

[[Page 4530]]

committee comprised solely of independent directors.
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    \16\ ``Independent Director'' is defined in Rule 31.10(h)(2) as: 
A person other than an officer or employee of the company or its 
subsidiaries 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. The following persons shall not be 
considered independent: (A) A director who is, or at any time during 
the past three years was, employed by the company or by any parent 
or subsidiary of the company; (B) a director who accepted or who has 
a family member who accepted any payments from the company or any 
parent or subsidiary of the company in excess of $60,000 during the 
current or any of the past three fiscal years, other than the 
following: (i) Compensation for board or board committee service; 
(ii) payments arising solely from investments in the company's 
securities; (iii) compensation paid to a family member who is a non-
executive employee of the company or a parent or subsidiary of the 
company; (iv) benefits under a tax-qualified retirement plan, or 
non-discretionary compensation; or (v) loans permitted under 
Exchange Act Section 13(k). Provided, however, that audit committee 
members are subject to additional, more stringent requirements under 
Exchange Act Rule 10A-3, which requirements are incorporated by 
reference in the Exchange rules pursuant to Rule 31.10(b); (C) 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 or by 
any parent or subsidiary of the company as an executive officer; (D) 
a director who is, or has a family member who is, a partner in, or a 
controlling shareholder or an executive officer of, any organization 
to which the company made, or from which the company received, 
payments for property or services in the current or any of the past 
three fiscal years that exceed 5% of the recipient's consolidated 
gross revenues for that year, or $200,000, whichever is more, other 
than the following: (i) Payments arising solely from investments in 
the company's securities; or (ii) payments under non-discretionary 
charitable contribution matching programs; (E) a director of the 
listed 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 listed company 
serve on the compensation committee of such other entity; (F) 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; or (G) in the case of an 
investment company, in lieu of Rules 31.10(h)(2)(A)-(F), 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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1. Compensation Committee Composition and Independence Standards
    First, the Exchange is proposing to amend text in Rule 31.10 to 
require that the compensation of all executive officers must be 
determined by, or recommended for determination by a compensation 
committee.\17\ The Exchange proposes to define the term compensation 
committee as one of the following: (1) A committee of the board of 
directors that is designated as the compensation committee; (2) in the 
absence of a specifically designated committee, a committee of the 
board of directors that performs functions typically performed by a 
compensation committee, including oversight of executive compensation, 
even if it is not designated as the compensation committee or also 
performs other functions; or (3) in the absence of either of the 
immediately preceding definitions, the members of the board of 
directors who oversee executive compensation matters on behalf of the 
board of directors.\18\
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    \17\ See Rule 31.10(c)(1).
    \18\ As CBOE does not require a formal compensation committee, 
the term ``Compensation Committee'' for purposes of the CBOE 
proposal and as discussed in this release, in addition to describing 
a formal compensation committee, also refers to the listed company's 
independent directors as a group when dealing with executive 
compensation matters. See proposed Rule 31.10(c)(1).
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    The Exchange also proposes to amend Rule 31.10(c) to state that all 
members of a Compensation Committee must be ``Independent Directors'' 
as defined in Rule 31.10(h)(2).\19\ In its proposal, the Exchange 
stated that it believes that its current definition of Independent 
Director meets the independence requirements of Rule 10C-1.\20\ The 
Exchange notes that, as part of existing Rule 31.10(h)(2) defining 
independent director, the Exchange has requirements that a director is 
not considered ``independent'' if he or a family member has accepted 
any payments from the company or any parent or subsidiary of the 
company in excess of $60,000 during the current or any of the past 
three fiscal years, other than compensation for board or committee 
service, payments arising solely from investments in the company's 
securities, compensation paid to a family member who is a non-executive 
employee of the company or a parent or subsidiary of the company, 
benefits under a tax-qualified retirement plan, or non-discretionary 
compensation, or loans permitted under Exchange Act Section 13(k).\21\ 
The Exchange stated it believes that these requirements demonstrate 
that the definition of ``independent'' considers the sources of 
compensation of a member of the compensation committee.\22\
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    \19\ See Rule 31.10(c)(2). For a definition of independent 
directors under Rule 31.10(h)(2) see supra, note 16.
    \20\ See Notice, supra note 3.
    See Rule 10C-1(b)(1)(ii)(A) requiring that in determining the 
independence requirements for members of compensation committees, 
exchanges must consider all relevant factors, including, but not 
limited to, the source of compensation of that director (including 
any consulting, advisory, or other compensatory fee paid by the 
issuer to the director), and whether the director is affiliated with 
the issuer, a subsidiary of the issuer, or an affiliate of a 
subsidiary of the issuer.
    \21\ See Rule 31.10(h)(2), and supra note 16.
    \22\ See Notice, supra note 3.
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    The Exchange stated that it believes that its current definition of 
Independent Director meets the requirement in Rule 10C-1 that the 
Exchange's rules must consider whether the director is affiliated with 
the issuer or a subsidiary or affiliate of a subsidiary of the 
issuer.\23\ CBOE Rule 31.10(h)(2) states that a director is not 
``independent'' if, in the opinion of the issuer's board of directors, 
the person has a relationship which would interfere with the exercise 
of independent judgment in carrying out the responsibilities of a 
director. As the Exchange stated, ``any kind of affiliate relationship 
could be viewed as a conflict of interest that might interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director.'' \24\ In its proposal, the Exchange stated it believes 
that its requirement that a board of directors consider whether a 
director has a relationship which would interfere with the exercise of 
independent judgment in carrying out the responsibilities of a director 
in order to determine whether or not the director is ``independent'' 
requires consideration of whether the director is affiliated with the 
issuer, a subsidiary of the issuer or an affiliate of a subsidiary of 
the issuer.\25\
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    \23\ See Notice, supra note 3. See also Rule 10C-1(b)(1)(ii)(B) 
requiring that in determining the independence requirements for 
members of compensation committees, exchanges must consider all 
relevant factors, including, but not limited to whether a member of 
the board of directors of an issuer is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the 
issuer.
    \24\ The Commission notes that CBOE's rules provide a definition 
of affiliate that states an affiliate of or a person ``affiliated 
with'' another person means a person who, directly or indirectly, 
controls, is controlled by, or is under common control with, such 
other person. See CBOE Rule 1.1(j).
    \25\ See Notice, supra note 3.
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    The Exchange also proposes to add in Rule 31.10(c)(2) language 
stating that if a member of a compensation committee ceases to be an 
Independent Director for reasons outside of that member's reasonable 
control, that person may remain a compensation committee member 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 no 
longer be an Independent Director. The Exchange will require that an 
issuer relying on this provision must provide notice to the Exchange 
immediately upon learning of the event or circumstance that caused the 
member to cease to be an Independent Director.\26\
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    \26\ See Rule 31.10(c)(2).
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    Exchange Rule 31.10(c) currently provides an exception to the 
independence requirement for compensation committee members. This 
exception states that, notwithstanding said independence requirements, 
if the compensation committee is comprised of at least three members, 
one director, who is not independent as defined in Rule 31.10(h)(2) 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, 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

[[Page 4531]]

or 20-F), the nature of the relationship and the reasons for the 
determination. A member appointed under this exception may not serve 
longer than two years.\27\ CBOE notes that Rule 10C-1 is silent with 
respect to such exception to the independence requirements, and 
therefore is proposing to delete this exception. As the Exchange 
stated, it believes that independence of compensation committee members 
is important to ensure that there exist no undue influences in the 
compensation of executive officers.\28\
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    \27\ See Rule 31.10(c)(3).
    \28\ See Notice, supra note 3. CBOE is also proposing to extend 
to all executive officers the requirement that an executive officer 
not be present during the deliberations regarding his or her own 
compensation.
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2. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers
    Rule 10C-1 also discusses the retention of compensation 
consultants, independent legal counsel and other compensation advisers 
to assist the compensation committee of an issuer in determining 
compensation for executives.\29\ CBOE Rule 31.10 currently does not 
contain provisions regarding the authority to retain compensation 
advisers. Therefore, the Exchange proposes to adopt the provisions of 
Rule 10C-1 regarding this issue in a substantively identical manner to 
that in Rule 10C-1 in new Interpretation and Policy .11 to Rule 
31.10.\30\
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    \29\ See Rule 10C-1(b)(2).
    \30\ See id. and Interpretation and Policy .11 to Rule 31.10.
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    The new Interpretation and Policy would state that the Compensation 
Committee of an issuer, in its capacity as a committee of the board of 
directors, may, in its sole discretion, retain or obtain the advice of 
a compensation consultant, independent legal counsel or other 
adviser.\31\ The Interpretation and Policy states 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.\32\ Further, the Interpretation and Policy 
states that ``nothing in this Interpretation and Policy .11 to Rule 
31.10 shall be construed to require the Compensation Committee to 
implement or act consistently with the advice or recommendations of the 
compensation consultant, legal counsel or other adviser to the 
Compensation Committee, or to affect the ability or obligation of a 
Compensation Committee to exercise its own judgment in fulfillment of 
the duties of the Compensation Committee.'' \33\ Under the new 
Interpretation and Policy .11 to Rule 31.10, each listed issuer must 
provide for appropriate funding, as determined by the Compensation 
Committee, in its capacity as a committee of the board of directors, 
for payment of reasonable compensation to a compensation consultant, 
legal counsel or any other adviser retained by the Compensation 
Committee.\34\
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    \31\ See proposed Interpretation and Policy .11(a)(1) to Rule 
31.10.
    \32\ See proposed Interpretation and Policy .11(a)(2) to Rule 
31.10.
    \33\ See proposed Interpretation and Policy .11(a)(3)(A) and (B) 
to Rule 31.10.
    \34\ See proposed Interpretation and Policy .11(b) to Rule 
31.10.
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    Regarding the independence of compensation advisers, the new 
Interpretation and Policy .11 to Rule 31.10 states that the 
compensation committee of a listed issuer may select a compensation 
consultant, legal counsel or other adviser to the compensation 
committee only after taking into consideration the following factors: 
(1) The provision of other services to the issuer by the person that 
employs the compensation consultant, legal counsel or other adviser, 
(2) 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, (3) 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, (4) any business or personal relationship of the 
compensation consultant, legal counsel or other adviser with a member 
of the compensation committee, (5) any stock of the issuer owned by the 
compensation consultant, legal counsel or other adviser, and (6) any 
business or personal relationship of the compensation consultant, legal 
counsel, other adviser or the person employing the adviser with an 
executive office of the issuer.\35\ Pursuant to the new Interpretation 
and Policy, a compensation committee must consider these factors with 
respect to any compensation consultant, legal counsel or other advisor 
that provides advice to the compensation committee other than in-house 
legal counsel.\36\
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    \35\ See Interpretation and Policy .11(c)(1)-(6) to Rule 31.10.
    \36\ Id.
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3. Exemptions
    The Exchange proposes that the requirements of Interpretation and 
Policy .11 to Rule 31.10, concerning compensation advisers, discussed 
above at Section II(B)(2), shall not apply to any controlled company or 
to any smaller reporting company.\37\ The Exchange notes that this 
exemption complies with exemptions stated in Rule 10C-1.\38\ Under the 
new proposal, as the Exchange states, smaller reporting companies will 
still be subject to other corporate governance rules, as 
applicable.\39\ The Commission notes that this includes the provisions 
described above concerning independent oversight of executive 
compensation.
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    \37\ See Interpretation and Policy .11(d)(1) to Rule 31.10. See 
also Notice, supra note 3.
    \38\ See Rule 10C-1(b)(5) which exempts such entities from the 
entire requirements of Rule 10C-1. See also Notice, supra note 3.
    \39\ See Notice, supra note 3.
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    The Exchange proposes that the requirements of Interpretation and 
Policy .11 to Rule 31.10, concerning compensation advisers, discussed 
above at Section II(B)(2), shall not apply to the listing of a security 
futures product cleared by a clearing agency that is registered 
pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that is exempt 
from the registration requirements of section 17A(b)(7)(A) (15 U.S.C. 
78q-1(b)(7)(A)) \40\ or the listing of a standardized option, as 
defined in Sec.  240.9b-1(a)(4), issued by a clearing agency that is 
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1).\41\ 
The Exchange stated that these exemptions comply with those stated in 
Rule 10C-1.\42\
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    \40\ See Interpretation and Policy .11(d)(2) to Rule 31.10.
    \41\ See Interpretation and Policy .11(d)(3) to Rule 31.10.
    \42\ See Rule 10C-1(b)(5) which exempts such entities from the 
requirements of Rule 10C-1.
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    Rule 10C-1 exempts from the independence requirements any limited 
partnership, company in bankruptcy proceedings, open end management 
investment company registered pursuant to the Investment Company Act of 
1940, and foreign private issuer that discloses in its annual report 
the reasons that the foreign private issuer does not have an 
independent compensation committee.\43\ CBOE thereby proposes to 
incorporate these exemptions into proposed Rule 31.10(f)(6) by 
reference by stating that the categories of issuers listed in Rule 10C-
1(b)(1)(iii)(A) under the Securities Exchange Act of 1934 are also 
exempt from the requirements of Rule

[[Page 4532]]

31.10(c)(2) regarding the independence of directors on an issuer's 
compensation committee. These entities are exempt from the independent 
director requirements of Rule 31.10(c)(2), discussed supra in Section 
II(B)(1).
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    \43\ See Rule 10C-1(b)(1)(iii)(A).
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    Finally, as to exemptions, Rule 31.10(f) currently exempts a number 
of other categories of issuers from the executive compensation 
requirements of Rule 31.10(c).\44\ These types of issuers are 
controlled companies, registered management investment companies (which 
are similar to open-end management investment companies), and asset-
backed issuers and other passive issuers, cooperatives. The Exchange 
determined to exempt these categories of issuers from executive 
compensation requirements of Rule 31.10(c) due to their various unique 
attributes.\45\ While the Rule 10C-1 changes some of the executive 
compensation requirements, CBOE believes that these categories of 
issuers should still be exempt from all executive compensation 
requirements in Rule 31.10(c) generally.\46\ The Exchange has also 
proposed to add language to its rules to make clear that to the extent 
the proposed Rule 31.10(f)(6)'s exemption of open-end management 
investment companies registered under the Investment Company Act of 
1940 from the Compensation Committee director independence requirements 
of Rule 31.10(c)(2) conflicts with the more general already-existing 
exemption of registered management investment companies from the 
requirements of Rule 31.10(c), the more general exemption of registered 
management investment companies from the requirements of Rule 31.10(c) 
shall be controlling.\47\ As such, the exchange proposes to amend Rule 
31.10(f)(2) to state that the exemption of management investment 
companies from the requirements of Rule 31.10(c) shall be controlling 
over any other potentially-conflicting exemptions that may arise under 
Rule 31.10(f)(6).\48\
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    \44\ See Rule 31.10(f).
    \45\ See Notice, supra note 3.
    \46\ See Rule 10C-1(b)(1)(iii)(B) establishing that ``in 
addition to the issuer exemptions set forth in paragraph 
(b)(1)(iii)(A) of this section, a national securities exchange or a 
national securities association, pursuant to section 19(b) of the 
Act (15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the 
requirements of paragraph (b)(1) of this section a particular 
relationship with respect to members of the compensation committee, 
as each national securities exchange or national securities 
association determines is appropriate, taking into consideration the 
size of an issuer and any other relevant factors. Id.
    \47\ See Notice, supra note 3.
    \48\ See Rule 31.10(f)(2).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the CBOE proposal 
is consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\49\ In particular, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Section 6(b) of the Act,\50\ as well as with Section 
10C of the Act \51\ and Rule 10C-1 thereunder.\52\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\53\ which requires that the rules of a 
national securities exchange be designed, among other things, to 
prevent fraudulent and manipulative acts and practices; to promote just 
and equitable principles of trade; to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest; and not 
be designed to permit, among other things, unfair discrimination 
between issuers.
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    \49\ In approving the CBOE proposed rule change the Commission 
has considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78f(b).
    \51\ 15 U.S.C. 78j-3.
    \52\ 17 CFR 240.10C-1.
    \53\ 15 U.S.C. 78f(b)(5).
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    The development and enforcement of meaningful listing standards for 
a national securities exchange is of substantial importance to 
financial markets and the investing public. Meaningful listing 
standards are especially important given investor expectations 
regarding the nature of companies that have achieved an exchange 
listing for their securities. The corporate governance standards 
embodied in the listing rules of national securities exchanges, in 
particular, play an important role in assuring that companies listed 
for trading on the exchanges' markets observe good governance 
practices, including a reasoned, fair, and impartial approach for 
determining the compensation of corporate executives. The Commission 
believes that the CBOE proposal will foster greater transparency, 
accountability, and objectivity in the oversight of compensation 
practices of listed issuers and in the decision-making processes of 
their compensation committees.
    In enacting Section 10C of the Act as one of the reforms of the 
Dodd-Frank Act,\54\ Congress resolved to require that ``board 
committees that set compensation policy will consist only of directors 
who are independent.'' \55\ In June 2012, as required by this 
legislation, the Commission adopted Rule 10C-1 under the Act, which 
directs the national securities exchanges to prohibit, by rule, the 
initial or continued listing of any equity security of an issuer (with 
certain exceptions) that is not in compliance with the rule's 
requirements regarding issuer compensation committees and compensation 
advisers.
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    \54\ See supra note 6.
    \55\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of 
the Committee of Conference, Title IX, Subtitle E ``Accountability 
and Executive Compensation,'' at 872-873 (Conf. Rep.) (June 29, 
2010).
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    In response, CBOE submitted the proposed rule change, which 
includes rules intended to comply with the requirements of Rule 10C-1 
and additional provisions designed to strengthen the Exchange's listing 
standards relating to compensation committees. The Commission believes 
that the proposed rule change satisfies the mandate of Rule 10C-1 and 
otherwise will promote effective oversight of its listed issuers' 
executive compensation practices.
    The Commission believes that the proposed rule change appropriately 
revises CBOE's rules for compensation committees of listed companies, 
for the following reasons:

A. Compensation Committee Composition

    As discussed above, under Rule 10C-1, the exchanges must adopt 
listing standards that require each member of a compensation committee 
to be independent, and to develop a definition of independence after 
considering, among other relevant factors, the source of compensation 
of a director, including any consulting advisory or other compensatory 
fee paid by the issuer to the director, as well as whether the director 
is affiliated with the issuer or any of its subsidiaries or their 
affiliates.
    The Commission notes that Rule 10C-1 leaves it to each exchange to 
formulate a final definition of independence for these purposes, 
subject to review and final Commission approval pursuant to Section 
19(b) of the Act. As the Commission stated in the Rule 10C-1 Adopting 
Release, ``given the wide variety of issuers that are listed on 
exchanges, we believe that the exchanges should be provided with 
flexibility to develop independence requirements appropriate for the 
issuers listed on each exchange and consistent with the requirements of 
the independence standards set forth in

[[Page 4533]]

Rule 10C-1(b)(1).'' \56\ This discretion comports with the Act, which 
gives the exchanges the authority, as self-regulatory organizations, to 
propose the standards they wish to set for companies that seek to be 
listed on their markets consistent with the Act and the rules and 
regulations thereunder, and, in particular, Section 6(b)(5) of the Act.
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    \56\ As explained further in the Rule 10C-1 Adopting Release, 
prior to final approval, the Commission will consider whether the 
exchanges' proposed rule changes are consistent with the 
requirements of Section 6(b) and Section 10C of the Exchange Act.
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    As noted above, in considering the Fees Factor and Affiliation 
Factor of Rule 10C-1 CBOE decided its existing independence standards 
that currently apply to board and compensation committee members, which 
include certain bright line tests, in Rule 31.10(h)(2), are 
sufficient.\57\ The CBOE's proposal also adopts: (1) A requirement that 
listed issuers have a compensation committee composed entirely of 
Independent Directors as required by Rule 10C-1 and (2) the cure 
procedures set forth in Rule 10C-1(a)(3) for compensation committee 
members who cease to be independent for reasons outside their 
reasonable control.
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    \57\ See Rule 31.10(h)(2) and supra footnotes 16-26 and 
accompanying text.
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    The Commission notes that CBOE's proposal to require executive 
officer compensation to be determined only by Independent Directors, as 
defined in CBOE rules, is consistent with the requirements of Rule 10C-
1 and Section 6(b)(5) of the Act. The Commission notes, compensation of 
executive officers must be determined only by Independent Directors 
even where the board oversees executive compensation without a formal 
committee. The Commission also believes that CBOE has met the 
requirements of Rule 10C-1 to consider relevant factors including the 
Fee Factor and Affiliation Factor. As noted above, after such 
consideration, CBOE has determined that its existing independence 
standards, including its bright line independence factors, adequately 
take into account the additional independence factors for compensation 
committee members contained in Rule 10C-1.\58\
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    \58\ See Rule 10C-1(b)(1)(ii).
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    With respect to the Fees Factors of Rule 10C-1,\59\ the Exchange 
commentary states that as part of Rule 31.10(h)(2) defining independent 
director, the Exchange has requirements that a director is not 
considered ``independent'' if he or a family member has accepted any 
payments from the company or any parent or subsidiary of the company in 
excess of $60,000 during the current or any of the past three fiscal 
years, other than compensation for board or committee service, payments 
arising solely from investments in the company's securities, 
compensation paid to a family member who is a non-executive employee of 
the company or a parent or subsidiary of the company, benefits under a 
tax-qualified retirement plan, or non-discretionary compensation, or 
loans permitted under Exchange Act Section 13(k).\60\ The Exchange 
stated it believes that this existing requirement demonstrates that the 
definition of ``independent'' considers the sources of compensation of 
a member of the compensation committee.\61\
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    \59\ See Rule 10C-1(b)(1)(ii)(A)
    \60\ See Rule 31.10(h)(2).
    \61\ See Notice, supra note 3.
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    The Commission believes that the provisions noted above to address 
the Fees Factor give clear guidance when considering a wide variety of 
fees, including any consulting, advisory or other compensatory fee paid 
by the issuer or entity, when considering a director's independence for 
Compensation Committee service. While the Exchange does not bar all 
compensatory fees, by providing an aggregate fee cap in their bright 
line tests, the approach is consistent with Rule 10C-1. The Exchange's 
general independence standards will also provide a basis for a board to 
prohibit a director from being a member of the compensation committee, 
should the director receive compensation to a degree that impairs the 
ability to make independent decisions on executive compensation 
matters, even if that compensation does not exceed the threshold in the 
bright line test. The Commission, therefore, believes that the proposed 
existing compensatory fee requirements comply with Rule 10C-1 and are 
designed to protect investors and the public interest, consistent with 
Section 6(b)(5) of the Act. The Commission notes that the compensatory 
fee consideration may help ensure that compensation committee members 
are less likely to have received fees, from either the issuer or 
another entity, which could potentially influence their decisions on 
compensation matters.
    With respect to the Affiliation Factor of Rule 10C-1,\62\ the 
Exchange concluded that it believes that the current definition of 
Independent Director meets the requirement in Rule 10C-1 that the 
Exchange's rules must consider whether the director is affiliated with 
the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary 
of the issuer.\63\ CBOE Rule 31.10(h)(2) states that a director is not 
``independent'' if, in the opinion of the issuer's board of directors, 
the person has a relationship which would interfere with the exercise 
of independent judgment in carrying out the responsibilities of a 
director.\64\ As the Exchange noted, ``any kind of affiliate 
relationship, under the Exchange's own definition of affiliate * * * 
could be viewed as a conflict of interest that might interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director.'' \65\
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    \62\ See Rule 10C-1(b)(1)(ii)(B).
    \63\ See Notice, supra note 3. See also Rule 10C-1(b)(1)(ii)(B) 
requiring that in determining the independence requirements for 
members of compensation committees, exchanges must consider all 
relevant factors, including, but not limited to whether a member of 
the board of directors of an issuer is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the 
issuer.
    \64\ See Rule 31.10(h)(2).
    \65\ See Notice, supra note 3.
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    In considering whether a has 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, the board would necessarily have to consider whether the 
director is an affiliate of the issuer, a subsidiary of the issuer, or 
an affiliate of a subsidiary of the issuer, as those relationships 
necessarily could be relationships that interfere with the exercise of 
independent judgment in carrying out the responsibilities of a 
director, including the responsibilities as a member of the 
Compensation Committee.
    The Commission notes that Congress, in requiring the Commission to 
direct the exchanges to consider the Affiliation Factor, did not 
declare that an absolute bar was necessary. Moreover, as the Commission 
stated in the Rule 10C-1 Adopting Release, ``In establishing their 
independence requirements, the exchanges may determine that, even 
though affiliated directors are not allowed to serve on audit 
committees, such a blanket prohibition would be inappropriate for 
compensation committees, and certain affiliates, such as 
representatives of significant shareholders, should be permitted to 
serve.'' \66\ In determining that CBOE's

[[Page 4534]]

affiliation standard is consistent with Sections 6(b)(5) and 10C under 
the Act, the Commission notes that CBOE's proposal requires a company's 
board, in selecting compensation committee members, to consider 
``whether the person has a relationship which would interfere with the 
exercise of independent judgment in carrying out the responsibilities 
of a director.'' \67\ The Commission believes the Exchange has 
adequately considered the affiliation standard. As such, the Exchange's 
decision to retain its current definition of Independent Director is 
consistent with Sections 6(b)(5) and 10C under the Act.\68\
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    \66\ See Rule 10C-1 Adopting Release, supra note 8. At the same 
time, the Commission noted that significant shareholders may have 
other relationships with the listed company that would result in 
such shareholders' interests not being aligned with those of other 
shareholders and that the exchanges may want to consider these other 
ties between a listed issuer and a director. While the Exchange did 
not adopt any additional factors, the current affiliation standard 
would still allow a company to prohibit a director whose 
affiliations impair ``his ability to make independent judgment'' as 
a member of the compensation committee. See also supra notes 23-25 
and accompanying text.
    \67\ See Interpretation and Policy .01 to Rule 31.10(h)(2) 
stating that ``[i]t is important for investors to have confidence 
that individuals serving as independent directors do not have a 
relationship with the listed company that would impair their 
independence. The board has a responsibility to make an affirmative 
determination that no such relationships exist through the 
application of Rule 31.10(h)(2).''
    \68\ The Commission also believes it is consistent with Section 
6(b)(5) for CBOE to prohibit all executive officers, not just the 
chief executive officer as currently required, to be barred from all 
compensation committee deliberations regarding their own 
compensation. We agree this will help prohibit undue influence in 
the determination of executive officer compensation.
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B. Authority of Committees to Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers

    As discussed above, CBOE proposes to set forth explicitly in its 
rules the requirements of Rule 10C-1 regarding a compensation 
committee's authority to retain compensation advisers, its 
responsibilities with respect to such advisers, and the listed 
company's obligation to provide appropriate funding for payment of 
reasonable compensation to a compensation adviser retained by the 
committee. As such, the Commission believes these provisions meet the 
mandate of Rule 10C-1 \69\ and are consistent with the Act.\70\
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    \69\ 17 CFR 240.10C-1.
    \70\ 15 U.S.C. 78j-3.
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C. Compensation Adviser Independence Factors

    As discussed above, the proposed rule change requires the 
Compensation Committee of a listed company to consider the six factors 
relating to independence that are enumerated in the proposal before 
selecting a compensation consultant, legal counsel or other adviser to 
the compensation committee.\71\ Of these factors, five of the six were 
dictated by Congress itself in the Dodd-Frank Act. As previously stated 
by the Commission in adopting Rule 10C-1, the requirement that 
compensation committees consider the independence of potential 
compensation advisers before they are selected should help assure that 
compensation committees of affected listed companies are better 
informed about potential conflicts, which could reduce the likelihood 
that they are unknowingly influenced by conflicted compensation 
advisers.\72\ The Commission believes that this provision is consistent 
with Rule 10C-1 and Section 6(b)(5) of the Act.
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    \71\ See note 35, supra and accompanying text.
    \72\ See Rule 10C-1 Adopting Release, supra note 8.
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    In approving this aspect of the proposal, the Commission notes that 
compliance with the rule requires an independence assessment of any 
compensation consultant, legal counsel, or other adviser that provides 
advice to the Compensation Committee, and is not limited to advice 
concerning executive compensation. Finally, one commenter on the New 
York Stock Exchange LLC's proposal requested guidance ``on how often 
the required independence assessment should occur.\73\ This commenter 
observed that it ``will be extremely burdensome and disruptive if prior 
to each compensation committee meeting, the committee had to conduct a 
new assessment.'' The Commission anticipates that Compensation 
Committees will conduct such an independent assessment at least 
annually.\74\
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    \73\ See Comment to NYSE Notice by Robert B. Lamm, Chair, 
Securities Law Committee, The Society of Corporate Secretaries & 
Governance Professionals, dated December 7, 2012 (``Corporate 
Secretaries Letter'').
    \74\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 5 for a discussion of comments.
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    The changes to CBOE's rules on compensation advisers should 
therefore benefit investors of companies, and are consistent with the 
requirements in Section 6(b)(5) of the Act that rules of the exchange 
further investor protection and the public interest.

D. Opportunity to Cure Defects

    Rule 10C-1 requires the rules of an exchange to provide for 
appropriate procedures for a listed issuer to have a reasonable 
opportunity to cure any defects that would be the basis for the 
exchange, under Rule 10C-1, to prohibit the issuer's listing. Rule 10C-
1 also specifies that, with respect to the independence standards 
adopted in accordance with the requirements of the Rule, an exchange 
may provide a cure period of until the earlier of the next annual 
shareholders meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent.
    The Commission notes that the cure period that CBOE proposes for 
companies that fail to comply with the enhanced independence 
requirements designed to comply with Rule 10C-1 is the same as the cure 
period suggested under Rule 10C-1. The Commission believes that the 
accommodation is fair and reasonable and consistent with investor 
protection under Rule 6(b)(5) by ensuring that when a member ceases to 
be independent, the committee is entitled to a period to cure that 
situation. CBOE has delisting procedures that provide issuers with 
notice, opportunity for a hearing, opportunity for appeals, and 
delisting.\75\
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    \75\ See Rule 31.94(G).
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    The Commission believes that these general procedures for companies 
out of compliance with listing requirements, in addition to the 
particular cure provisions for failing to meet the new independence 
standards, adequately meet the mandate of Rule 10C-1 and also are 
consistent with investor protection and the public interest, since they 
give a company a reasonable time period to cure non-compliance with 
these important requirements before they will be delisted.
    As noted above, CBOE is removing its exception that allows members 
of a Compensation Committee to not be independent in certain 
circumstances. The Commission agrees with CBOE's rationale for 
eliminating the exception. As the Exchange noted, independence of 
compensation committee members is important to ensure that no undue 
influences affect the compensation of executive officers. Given the 
heightened importance of executive compensation decisions, we think 
that this is consistent with the investor protection provisions of 
Section 6(b)(5) of the Act.

E. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting 
Companies, like all other listed companies, to have a compensation 
committee, composed solely of Independent Directors is reasonable and 
consistent with the protection of investors. However, consistent with 
the exemption of Smaller Reporting Companies from Rule 10C-1, the CBOE 
proposal would exempt smaller reporting companies from the

[[Page 4535]]

requirements of Interpretation and Policy .11 to Rule 31.10 concerning 
compensation advisers, discussed supra at Section II(B)(2).\76\ Under 
the new proposal, as the Exchange states, smaller reporting companies 
will still be subject to other corporate governance rules, as 
applicable, and are only exempted out of the compensation advisor 
provisions.\77\
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    \76\ See Interpretation and Policy .11(d)(1) to Rule 31.10. See 
also Rule 10C-1(b)(5).
    \77\ See Notice, supra note 3.
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    The Commission believes that these provisions are consistent with 
the Act and do not unfairly discriminate between issuers. The 
Commission believes that, for similar reasons to those for which 
Smaller Reporting Companies are exempted from the Rule 10C-1 
requirements, it makes sense for CBOE to provide some flexibility to 
Smaller Reporting Companies. Further, regarding the exemption from 
having to consider additional factors regarding compensation advisers, 
in view of the potential additional costs of such review, it is 
reasonable not to require a Smaller Reporting Company to conduct such 
analysis of compensation advisers.

F. Additional Exemptions

    The Commission believes that it is appropriate for CBOE to exempt 
from the new requirements established by the proposed rule change the 
same categories of issuers that are exempt from its existing standards 
for oversight of executive compensation for listed companies. Although 
Rule 10C-1 does not explicitly exempt some of these categories of 
issuers from its requirements, it does grant discretion to exchanges to 
provide additional exemptions. CBOE states that the reasons it adopted 
the existing exemptions apply equally to the new requirements, and the 
Commission believes that this assertion is reasonable.
    The requirements of Interpretation and Policy .11 to Rule 31.10, 
concerning compensation advisers, discussed supra at Section II(B)(2), 
exempt security futures products cleared by a clearing agency that is 
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that 
is exempt from the registration requirements of section 17A(b)(7)(A) 
(15 U.S.C. 78q-1(b)(7)(A)) \78\ and the listing of a standardized 
option, as defined in Sec.  240.9b-1(a)(4), issued by a clearing agency 
that is registered pursuant to section 17A of the Act (15 U.S.C. 78q-
1).\79\ The Commission notes that these exemptions comply with those 
stated in the Rule 10C-1.\80\
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    \78\ See Interpretation and Policy .11(d)(2) to Rule 31.10.
    \79\ See Interpretation and Policy .11(d)(3) to Rule 31.10.
    \80\ See Rule 10C-1(b)(5) which exempts such entities from all 
of the requirements of Rule 10C-1.
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    Additionally, Rule 10C-1 exempts from the independence requirements 
Limited partnerships, companies in bankruptcy proceedings, and open-end 
management investment companies registered under the Investment Company 
Act of 1940.\81\ The CBOE proposal incorporates these exemptions into 
proposed Rule 31.10(f)(6).\82\ The Commission believes such exemptions 
are reasonable, and notes that such entities also are exempt from the 
compensation committee independence requirements specifically under 
Rule 10C-1.
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    \81\ See Rule 10C-1(b)(1)(iii)(A) and Rule 31.10(f)(6).
    \82\ The Commission notes that proposed Rule 31.10(f), open end 
management investment companies would also be exempt from all the 
requirements of Rule 31.10(c), not just the independence standards.
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    The CBOE proposal would exempt any foreign private issuer that 
discloses in its annual report the reasons that the foreign private 
issuer does not have an independent compensation committee. \83\ The 
Commission believes that granting exemptions to foreign private issuers 
in deference to their home country practices with respect to 
compensation committee practices is appropriate, and believes that the 
existing disclosure requirements will help investors determine whether 
they are satisfied with the alternative standard. The Commission notes 
that such entities are exempt from the compensation committee 
independence requirements of Rule 10C-1 to the extent such entities 
disclosure in annual reports the reasons it does not have an 
independent compensation committee.
---------------------------------------------------------------------------

    \83\ Rule 10C-1(b)(1)(iii).
---------------------------------------------------------------------------

    The CBOE proposal would retain Rule 31.10(f), which currently 
exempts a number of other categories of issuers from all of the 
executive compensation requirements of Rule 31.10(c).\84\ These types 
of issuers are controlled companies, registered management investment 
companies (which are similar to open-end management investment 
companies and include closed-end management investment companies), 
asset-backed issuers and other passive issuers, and cooperatives. The 
Exchange determined to exempt these categories of issuers from 
executive compensation requirements of Rule 31.10(c) due to their 
various unique attributes. The Commission believes that this exemption 
is reasonable because the Investment Company Act already assigns 
important duties of investment company governance, such as approval of 
the investment advisory contract, to Independent Directors of closed 
end management investment companies. The Commission further believes 
that other proposed exemption provisions relating to controlled 
companies,\85\ asset-backed issuers and other passive issuers, and 
cooperatives are reasonable given the specific characteristics of these 
entities, and as noted by the Exchange, their various unique 
attributes. The Commission believes that exemption of these entities 
from the requirements of Rule 10C-1 is consistent with the exemptive 
authority granted in Rule 10C-1.\86\
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    \84\ See Rule 31.10(f).
    \85\ The Commission notes that controlled companies are provided 
an automatic exemption from the application of the entirety of Rule 
10C-1 by Rule 10C-1(b)(5).
    \86\ See Rule 10C-1(b)(1)(iii)(B) establishing that ``in 
addition to the issuer exemptions set forth in paragraph 
(b)(1)(iii)(A) of this section, a national securities exchange or a 
national securities association, pursuant to section 19(b) of the 
Act (15 U.S.C. 78s(b)) and the rules thereunder, may exempt from the 
requirements of paragraph (b)(1) of this section a particular 
relationship with respect to members of the compensation committee, 
as each national securities exchange or national securities 
association determines is appropriate, taking into consideration the 
size of an issuer and any other relevant factors.'' Id.
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IV. Conclusion

    In summary, and for the reasons discussed in more detail above, the 
Commission believes that the rules being adopted by CBOE, taken as 
whole, should benefit investors by helping listed companies make 
informed decisions regarding the amount and form of executive 
compensation. CBOE's new rules will help to meet Congress's intent that 
compensation committees that are responsible for setting compensation 
policy for executives of listed companies consist only of independent 
directors that meet CBOE's requirements.
    CBOE's rules also, consistent with Rule 10C-1, require compensation 
committees of listed companies to assess the independence of 
compensation advisers, taking into consideration six specified factors. 
This should help to assure that compensation committees of potential 
CBOE-listed companies are better informed about potential conflicts 
when selecting and receiving advice from advisers. Similarly, the 
provisions of CBOE's standards that require compensation committees to 
be given the authority to engage and oversee compensation advisers, and 
require the listed company to provide for appropriate funding to 
compensate such advisers, should help

[[Page 4536]]

to support the compensation committee's role to oversee executive 
compensation and help provide compensation committees with the 
resources necessary to make better informed compensation decisions.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, SR-CBOE-2012-094 is consistent with the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and, in particular, with Section 6(b)(5) of the 
Exchange Act.\87\
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    \87\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\88\ that the proposed rule change, SR-CBOE-2012-094 be, and it 
hereby is, approved.
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    \88\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\89\
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    \89\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01109 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P


