
[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Notices]
[Pages 4554-4570]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01107]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68640; File No. SR-NASDAQ-2012-109]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment Nos. 1 and 2, and Order Granting 
Accelerated Approval of Proposed Rule Change as Modified by Amendment 
Nos. 1 and 2 To Amend the Listing Rules for Compensation Committees To 
Comply With Rule 10C-1 Under the Act and Make Other Related Changes

January 11, 2013.

I. Introduction

    On September 25, 2012, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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 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 
eight comment letters on the proposed rule change,\5\ as well as a 
response to the comment letters from Nasdaq.\6\ On December 12, 2012, 
the Exchange filed Amendment No. 1 to the proposed rule change.\7\ On 
January 4, 2013, the Exchange filed Amendment No. 2 to the proposed 
rule change.\8\ This order approves the proposed rule change, as 
modified by Amendment Nos. 1 and 2 thereto, on an accelerated basis.
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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. 68013 (October 9, 
2012), 77 FR 62563 (``Notice'').
    \4\ See Securities Exchange Act Release No. 68313 (November 28, 
2012), 77 FR 71853 (December 4, 2012).
    \5\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from: J. Robert Brown, Jr., Director, Corporate & Commercial Law 
Program, University of Denver Sturm College of Law, dated October 
30, 2012 (``Brown Letter''); Dorothy Donohue, Deputy General 
Counsel, Securities Regulation, Investment Company Institute, dated 
November 1, 2012 (``ICI Letter''); Jeff Mahoney, General Counsel, 
Council of Institutional Investors, dated November 1, 2012 (``CII 
Letter''); Harold R. Carpenter, Chief Financial Officer, Pinnacle 
Financial Partners, Inc., dated November 5, 2012 (``Pinnacle 
Letter''); Brandon J. Rees, Acting Director, Office of Investment, 
AFL-CIO, dated November 5, 2012 (``AFL-CIO Letter''); Carin Zelenko, 
Director, Capital Strategies Department, International Brotherhood 
of Teamsters, dated November 5, 2012 (``Teamsters Letter''); Wilson 
Sonsini Goodrich & Rosati Professional Corporation, dated November 
14, 2012 (``Wilson Sonsini Letter); and Robert B. Lamm, Chair, 
Securities Law Committee, The Society of Corporate Secretaries & 
Governance Professionals, dated December 7, 2012 (``Corporate 
Secretaries Letter'').
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Erika J. Moore, Associate General Counsel, Nasdaq, dated 
December 12, 2012 (``Nasdaq Response Letter'').
    \7\ In Amendment No. 1, Nasdaq: (a) Added language to proposed 
Rule 5605(d)(3) to set forth in detail the requirements of Rule 10C-
1(b)(2)-(4) regarding the authority of a compensation committee to 
retain compensation advisers, the requirement that a listed company 
fund such advisers, and the independence assessment required to be 
made before selecting or receiving advice from such advisers, rather 
than incorporating these details by reference as in the original 
proposal, see infra notes 51-58 and accompanying text; (b) revised 
the dates by which companies currently listed on Nasdaq will be 
required to comply with the new rules, see infra notes 73-79 and 
accompanying text; (c) revised the phase-in schedule for companies 
that cease to be Smaller Reporting Companies to comply with the full 
range of the new requirements, see infra notes 85-88 and 
accompanying text; and (d) added a preamble to the new rules 
clarifying that, during the transition periods until the new rules 
apply, a company must continue to comply with the corresponding 
provisions, if any, in the current rules, see infra note 73. In 
Amendment No. 1 the Exchange also made conforming changes to the 
Purpose section of the proposal, provided explanations for the 
revisions, and clarified certain matters, see, e.g., infra notes 58, 
194, and 199 and accompanying text; and also added, as Exhibit 3 to 
the proposal, the form that it will provide for companies to certify 
their compliance with the rules.
    \8\ In Amendment No. 2, Nasdaq revised the proposed rules to 
state that the independence assessment of compensation advisers 
required of compensation committees does not need to be conducted 
for advisers whose roles are limited to those entitled to an 
exception from the adviser disclosure rules under Item 
407(e)(3)(iii) of Regulation S-K. See infra notes 59-60 and 
accompanying text.
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II. Description of Proposed Rule Change

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''),\9\ the Commission proposed 
Rule 10C-1 under the Act,\10\ 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.\11\
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    \9\ Public Law 111-203, 124 Stat. 1900 (2010).
    \10\ 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'').
    \11\ 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 \12\ of 
a listed issuer must be a member of the board of directors of the 
issuer, and must otherwise be independent.\13\ 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'').\14\
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    \12\ For a definition of the term ``compensation committee'' for 
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \13\ See Rule 10C-1(a) and (b)(1).
    \14\ See id. See also Rule 10C-1(b)(1)(iii)(A), which sets forth 
exemptions from the independence requirements for certain categories 
of issuers. In addition, an exchange may exempt a particular 
relationship with respect to members of a 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 
mandate that compensation committees be given the authority to retain 
or obtain the advice of a compensation adviser, and have direct 
responsibility for the appointment, compensation and oversight of the 
work of any compensation adviser they retain.\15\ The exchange rules 
must also provide that each listed issuer provide for appropriate 
funding for the payment of

[[Page 4555]]

reasonable compensation, as determined by the compensation committee, 
to any compensation adviser retained by the compensation committee.\16\ 
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,\17\ as well as any 
other factors identified by the relevant exchange in its listing 
standards.\18\
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    \15\ See Rule 10C-1(b)(2).
    \16\ See Rule 10C-1(b)(3).
    \17\ See Rule 10C-1(b)(4). The six factors, which Nasdaq 
proposes to set forth explicitly in its rules, are specified in the 
text accompanying note 55, infra.
    \18\ 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. Nasdaq's Proposed Rule Change, as Amended

    To comply with Rule 10C-1, Nasdaq proposes to amend two sections of 
its rules concerning corporate governance requirements for companies 
listed on the Exchange: Rule 5605, ``Boards of Directors and 
Committees,'' and Rule 5615, ``Exemptions from Certain Corporate 
Governance Requirements.'' In addition, Nasdaq proposes to make some 
other changes to its rules regarding compensation committees.
    To accomplish these changes, the Exchange proposes to replace 
current paragraph (d) of Rule 5605, entitled ``Independent Director 
Oversight of Executive Officer Compensation,'' with a new paragraph (d) 
entitled ``Compensation Committee Requirements.'' Current paragraph (d) 
provides that compensation of the executive officers of a listed 
company must be determined, or recommended to the company's board for 
determination, either by a compensation committee comprised solely of 
``Independent Directors'' \19\; or, as an alternative to a formal 
committee, by a majority of the board's Independent Directors in a vote 
in which only Independent Directors participate (``Alternative 
Option'').\20\
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    \19\ ``Independent Directors,'' as defined in Nasdaq Rule 
5605(a)(2) and used herein, includes a two-part test for 
independence. The rule sets forth seven specific categories of 
directors who cannot be considered independent because of certain 
discrete relationships (``the bright-line tests''); and also 
provides that a listed company's board must make an affirmative 
determination that each independent director has no relationship 
that, in the opinion of the board, ``would interfere with the 
exercise of independent judgment in carrying out the 
responsibilities of a director.'' Id. See also the Interpretive 
Material to Rule 5605.
    \20\ The current rule also provides that the chief executive 
officer (``CEO'') may not be present during voting or deliberations 
regarding the CEO's own compensation. See Rule 5605(d)(1).
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1. Compensation Committee Composition and Independence Standards
    First, Nasdaq proposes that each listed company be required to have 
a compensation committee.\21\ The Alternative Option described above 
would be eliminated. In addition, Nasdaq proposes that the compensation 
committee be required to be composed of at least two members, each of 
whom must be an Independent Director as defined in Nasdaq's rules and 
also meet the additional independence requirements described below.\22\
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    \21\ See proposed Rule 5605(d)(2).
    \22\ Id. For the definition of ``Independent Director, see supra 
note 19.
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    In discussing the proposed elimination of the Alternative Option, 
Nasdaq stated that it had considered whether the Alternative Option 
remains appropriate, ``given the heightened importance of compensation 
decisions in today's corporate governance environment.'' The Exchange 
concluded that ``there are benefits from a board having a standing 
committee dedicated solely to oversight of executive compensation.'' 
\23\ In discussing the proposed requirement that the committee have at 
least two members, the Exchange stated that ``[g]iven the importance of 
compensation decisions to stockholders, Nasdaq believes that it is 
appropriate to have more than one director responsible for these 
decisions.'' \24\
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    \23\ See Notice, supra note 3, for the Exchange's more complete 
explanation of its reasons for the proposed change, including a 
discussion of whether eliminating the Alternative Option would pose 
an undue hardship on Nasdaq-listed companies.
    \24\ See id. for the Exchange's more complete discussion of the 
proposed size requirement.
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    Nasdaq also proposes that a compensation committee must have a 
formal written charter.\25\ Under this provision, a listed company must 
certify that it has adopted such a charter and that its compensation 
committee will review and reassess the adequacy of that charter on an 
annual basis.\26\
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    \25\ See proposed Nasdaq Rule 5605(d)(1). As discussed further 
in Section II.B.3., a Smaller Reporting Company may adopt either a 
formal written compensation committee charter or a board resolution 
that specifies the committee's responsibilities and authority.
    \26\ The Commission notes that Rule 10C-1 does not require a 
listed issuer specifically to have a charter. As noted above, 
however, see supra notes 15-17 and accompanying text, Rule 10C-1 
does require a compensation committee to have certain specified 
authority and responsibilities. Often, listed issuers will specify 
authority and responsibilities of this kind in a charter in any 
case. The proposed rule requires them to have a charter, and to 
include this authority and set of responsibilities in addition to 
the required content discussed infra at text accompanying notes 27-
29.
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    The charter must specify the scope of the committee's 
responsibilities and how it carries out those responsibilities, 
including structure, processes, and membership requirements.\27\ It 
must specify the committee's responsibility for determining or 
recommending to the board for determination, the compensation of the 
CEO and all other executive officers of the company, and provide that 
the CEO may not be present during voting or deliberations on his or her 
compensation.\28\ In addition, the charter must specify the committee's 
responsibilities and authority set forth in the Exchange's rules with 
respect to retaining its own advisers; appointing, compensating, and 
overseeing such advisers; considering certain independence factors 
before selecting advisers; and receiving funding from the company to 
engage them, which are discussed in detail below.\29\
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    \27\ Proposed Rule 5605(d)(1)(A). Nasdaq states that this 
requirement is copied from the Exchange's similar listing rule 
relating to audit committee charters, Rule 5605(c)(1), except that 
the annual review and reassessment requirement is written 
prospectively, rather than retrospectively. The proposed rule change 
includes a conforming revision to make the audit committee review 
and reassessment prospective, as well. See Notice.
    \28\ Proposed Rule 5605(d)(1)(B)-(C). Nasdaq states that these 
provisions are based upon Nasdaq's current compensation-related 
listing rules, except that the Alternative Option discussed above is 
not available under the proposed rule change. See supra note 21 and 
accompanying text.
    \29\ See proposed Rule 5605(d)(1)(D) and infra notes 49-58 and 
accompanying text. Because Smaller Reporting Companies are not 
required to comply with the provisions relating to compensation 
advisers in proposed Nasdaq Rule 5605(d)(3), see infra notes 62-67, 
their charters or board resolutions are not required to reflect 
these responsibilities.
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    Nasdaq's rules currently require each member of a listed company's 
compensation committee to be an Independent Director as defined in 
Nasdaq Rule 5605(a)(2).\30\ Rule 10C-1, as discussed above, provides 
that exchange standards must require compensation committee members to 
be independent, and further provides that each exchange, in determining 
independence for this purpose, must consider relevant factors, 
including the Fees Factor and Affiliation Factor described above. In 
its proposal, Nasdaq discussed its consideration of these factors,\31\ 
and proposed the following \32\:
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    \30\ See supra note 19.
    \31\ Notice, supra note 3.
    \32\ These additional factors would not apply to the selection 
of members of the compensation committee of a Smaller Reporting 
Company. See infra note 64.

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[[Page 4556]]

    With respect to the Fees Factor, Nasdaq proposes to adopt a 
provision stating that each member of a compensation committee of a 
listed company must not accept directly or indirectly any consulting, 
advisory or other compensatory fee from the listed company or any of 
its subsidiaries.\33\ In discussing its review of its current listing 
rules and the Fees Factor, Nasdaq noted that its rules for audit 
committees of listed companies, in meeting the criteria of Rule 10A-3 
under the Act, prohibit an audit committee member from accepting such 
fees. The Exchange concluded that ``there is no compelling 
justification to have different standards for audit and compensation 
committee members'' with respect to the Fees Factor.\34\
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    \33\ See proposed Rule 5605(d)(2)(A).
    \34\ See Notice.
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    As currently permitted under Nasdaq's rules for audit committee 
members, however, the proposed rule would permit a compensation 
committee member to receive fees for his or her membership on the 
committee, on the company's board, or on any other board committee.\35\ 
In addition, a compensation committee member would be permitted to 
receive fixed amounts of compensation under a retirement plan 
(including deferred compensation) for prior service with the company, 
provided that such compensation is not contingent in any way on 
continued service.\36\
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    \35\ See supra note 33.
    \36\ Id.
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    With respect to the Affiliation Factor, Nasdaq proposes that, in 
determining whether a director is eligible to serve on the compensation 
committee, the company's board also must consider whether the director 
is affiliated with the company, a subsidiary of the company, or an 
affiliate of a subsidiary of the company to determine whether such 
affiliation would impair the director's judgment as a member of the 
compensation committee.\37\ In discussing its review of its current 
rules and its consideration of the Rule 10C-1 requirement in this 
area,\38\ the Exchange noted that its rules for audit committees of 
listed companies, in meeting the criteria of Rule 10A-3 under the Act, 
prohibit an audit committee member from being an affiliated person of 
the issuer or any subsidiary thereof. The Exchange said that it 
concluded, however, that ``such a blanket prohibition would be 
inappropriate for compensation committees.'' \39\ Nasdaq believes that 
``it may be appropriate for certain affiliates, such as representatives 
of significant stockholders, to serve on compensation committees since 
their interests are likely aligned with those of other stockholders in 
seeking an appropriate executive compensation program.'' \40\
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    \37\ See proposed Rule 5605(d)(2)(A).
    \38\ See Notice.
    \39\ Id.
    \40\ Id.
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    Although Rule 10C-1 requires that exchanges consider ``relevant 
factors'' not limited to the Fees and Affiliation Factors, Nasdaq 
states that, after reviewing its current and proposed listing rules, it 
concluded that these rules are sufficient to ensure the independence of 
compensation committee members. The Exchange therefore determined not 
to propose further independence requirements.\41\
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    \41\ Id.
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    Nasdaq proposes a cure period for a failure of a listed company to 
meet its committee composition requirements. The proposed cure period 
is the same as the cure period currently provided in Nasdaq's rules for 
noncompliance with the requirement to have a majority independent 
board.\42\ Under the provision, if a listed company fails to comply 
with the compensation committee composition requirements due to one 
vacancy, or if one compensation committee member ceases to be 
independent due to circumstances beyond the member's reasonable 
control, the company must regain compliance by the earlier of the next 
annual shareholders meeting or one year from the occurrence of the 
event that caused the noncompliance.\43\
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    \42\ See Rule 5605(b)(1)(A) regarding the majority board 
requirement.
    \43\ See proposed Rule 5605(d)(4).
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    However, if the annual shareholders meeting occurs no later than 
180 days following the event that caused the noncompliance, the company 
instead has 180 days from the event to regain compliance. As explained 
by Nasdaq, this provides a company at least 180 days to cure 
noncompliance and would typically allow a company to regain compliance 
in connection with its next annual meeting.\44\ The proposed rule also 
requires a company relying on this provision to provide notice to 
Nasdaq immediately upon learning of the event or circumstance that 
caused the noncompliance.
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    \44\ See Notice.
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    Nasdaq's current rules relating to compensation committees include 
an exception that allows a director who is not an Independent Director 
to be appointed to such a committee under exceptional and limited 
circumstances, as long as that director is not currently an executive 
officer, an employee, or the family member of an executive officer.\45\ 
The exception applies, however, only if the committee is comprised of 
at least three members and the company's board determines that the 
individual's membership on the committee is required by the best 
interests of the company and its shareholders.\46\ The exception is 
retained under the proposed rule change, and permits a listed company 
to avail itself of the allowance even for a director who fails the new 
requirements regarding the Fees and Affiliation Factors.\47\ A 
compensation committee member may not serve longer than two years under 
this exception. In addition, a company relying on the exception must 
make certain disclosures on its Web site or in its proxy statement 
regarding the nature of the relationship and the reasons for the 
determination.
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    \45\ See current Rule 5605(d)(3).
    \46\ See id.
    \47\ See proposed Rule 5605(d)(2)(b).
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    In its discussion of this provision,\48\ Nasdaq notes that its 
rules for audit committees and nominations committees of listed 
companies also include such an exception. The Exchange states that, 
while these exceptions are used infrequently by its listed companies, 
it believes that they are an important means to allow companies 
flexibility as to board and committee membership and composition in 
unusual circumstances. The Exchange further believes that the exception 
may be particularly important for smaller companies.
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    \48\ See Notice.
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2. Authority of Committees to Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers
    In its proposed rule change, as modified by Amendment No. 1,\49\ 
Nasdaq proposes to fulfill the requirements imposed by Rule 10C-
1(b)(2)-(4) under the Act by setting forth those requirements in full 
in its own rules.\50\ Thus, proposed Nasdaq Rule 5605(d)(3), as 
amended, provides that the compensation committee of a listed company 
may, in its sole discretion,

[[Page 4557]]

retain or obtain the advice of a compensation consultant, legal counsel 
or other adviser.\51\ Further, the compensation committee shall be 
directly responsible for the appointment, compensation and oversight of 
the work of any compensation consultant, legal counsel and other 
adviser retained by the compensation committee.\52\ In addition, the 
listed company must provide for appropriate funding, as determined by 
the compensation committee, for payment of reasonable compensation to a 
compensation consultant, legal counsel or any other adviser retained by 
the compensation committee.\53\
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    \49\ See supra note 7. Nasdaq's proposal as submitted originally 
incorporated the requirements of Rule 10C-1(b)(2)-(4) by reference. 
The Exchange amended the proposal to set forth those requirements 
explicitly.
    \50\ Rule 10C-1(b)(4) does not include the word ``independent'' 
before ``legal counsel'' and requires an independence assessment for 
any legal counsel to a compensation committee, other than in-house 
counsel. In setting forth the requirements of Rule 10C-1(b)(2) and 
(3), Nasdaq has deleted the word ``independent'' prior to ``legal 
counsel'' so as to avoid confusion.
    \51\ See Item 9 of Amendment No. 1.
    \52\ See id. The proposal, as amended, also includes a 
provision, derived from Rule 10C-1, stating that nothing in these 
rules may be construed: (i) 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 (ii) to affect the ability or obligation 
of a compensation committee to exercise its own judgment in 
fulfillment of the duties of the compensation committee. Id.
    \53\ Id.
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    Proposed Nasdaq Rule 5605(d)(3), as amended, also sets forth 
explicitly, in accordance with Rule 10C-1, that the compensation 
committee may select, or receive advice from, a compensation 
consultant, legal counsel or other adviser to the compensation 
committee, other than in-house legal counsel, only after taking into 
consideration the six factors set forth in Rule 10C-1 regarding 
independence assessments of compensation advisers.\54\
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    \54\ See Rule 10C-1(b)(4).
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    The six factors, which are set forth in full in the proposed rule, 
are: (i) The provision of other services to the issuer by the person 
that employs the compensation consultant, legal counsel or other 
adviser; (ii) the amount of fees received from the issuer by the person 
that employs the compensation consultant, legal counsel or other 
adviser, as a percentage of the total revenue of the person that 
employs the compensation consultant, legal counsel or other adviser; 
(iii) the policies and procedures of the person that employs the 
compensation consultant, legal counsel or other adviser that are 
designed to prevent conflicts of interest; (iv) any business or 
personal relationship of the compensation consultant, legal counsel or 
other adviser with a member of the compensation committee; (v) any 
stock of the issuer owned by the compensation consultant, legal counsel 
or other adviser; and (vi) any business or personal relationship of the 
compensation consultant, legal counsel, other adviser or the person 
employing the adviser with an executive officer of the issuer.\55\
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    \55\ Rule 10C-1(b)(4)(i)-(vi).
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    Proposed Rule 5605(d)(3), as amended, also clarifies that nothing 
in the rule requires a compensation consultant, legal counsel or other 
compensation adviser to be independent, only that the compensation 
committee consider the enumerated independence factors before 
selecting, or receiving advice from, a compensation adviser.\56\ It 
further clarifies that compensation committees may select, or receive 
advice from, any compensation adviser they prefer, including ones that 
are not independent, after considering the six independence factors set 
forth in the rule.\57\ In Amendment No. 1, Nasdaq emphasizes that a 
compensation committee is not required to retain an independent 
compensation adviser; rather, a compensation committee is required only 
to conduct the independence analysis described in Rule 10C-1 before 
selecting a compensation adviser.\58\
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    \56\ See id.
    \57\ See id.
    \58\ See Item 2 of Amendment No. 1.
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    In Amendment No. 2, Nasdaq added language to the provision 
regarding the independence assessment of compensation advisers \59\ to 
state that the compensation committee is not required to conduct an 
independence assessment for a compensation adviser that acts in a role 
limited to the following activities for which no disclosure is required 
under Item 407(e)(3)(iii) of Regulation S-K: (a) Consulting on any 
broad-based plan that does not discriminate in scope, terms, or 
operation, in favor of executive officers or directors of the company, 
and that is available generally to all salaried employees; and/or (b) 
providing information that either is not customized for a particular 
issuer or that is customized based on parameters that are not developed 
by the adviser, and about which the adviser does not provide advice.
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    \59\ See proposed Rule 5605(d)(3), as amended by Amendment No. 
2.
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    Nasdaq states that this exception copies language from Item 
407(e)(3)(iii) of Regulation S-K, which provides a limited exception to 
the Commission's requirement for a registrant to disclose any role of 
compensation consultants in determining or recommending the amount and 
form of a registrant's executive and director compensation.\60\ The 
Exchange believes that its proposed exception from the independence 
assessment requirement is appropriate because the types of services 
excepted do not raise conflict of interest concerns, and noted that 
this is the same reason for which the Commission excluded these types 
of services from the disclosure requirement in Item 407(e)(3)(iii) of 
Regulation S-K.\61\
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    \60\ See 17 CFR 229.407(e)(3)(iii).
    \61\ See Amendment No. 2.
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3. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies 
from all the requirements included within the rule.\62\ Consistent with 
this Rule 10C-1 provision, Nasdaq, as a general matter, proposes that a 
smaller reporting company, as defined in Rule 12b-2 under the Act 
(hereinafter, a ``Smaller Reporting Company''), not be subject to the 
new requirements set forth in its proposal specifically to comply with 
Rule 10C-1.\63\ Thus, Nasdaq proposes not to require Smaller Reporting 
Companies to comply with the enhanced independence standards for 
members of compensation committees relating to compensatory fees and 
affiliation.\64\
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    \62\ See supra Section II.A.
    \63\ See proposed Rule 5605(d)(5).
    \64\ See supra text accompanying notes 33 and 37.
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    In addition, a Smaller Reporting Company will not be required to 
include in its compensation committee charter (or, as discussed below, 
in a board resolution) a grant of authority to the committee to retain 
compensation advisers, a requirement that the company fund such 
advisers, and a requirement that the committee consider independence 
factors before selecting such advisers. As stated by Nasdaq, the 
exception for Smaller Reporting Companies also means that the 
compensation committees of such companies are not required to review 
and reassess the adequacy of their charters on an annual basis.\65\ The 
Exchange believes that this approach will minimize new costs imposed on 
Smaller Reporting Companies and allow them some flexibility not allowed 
for larger companies.
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    \65\ See Notice. In addition, a Smaller Reporting Company, like 
other listed companies, will be required to certify that it has 
adopted a formal written compensation committee charter (or, if it 
so chooses, a board resolution) that specifies the scope of the 
committee's responsibilities and its responsibility for determining 
or recommending to the board for determination the compensation of 
the CEO and other executive officers. See supra notes 27-28.
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    Nasdaq proposes not to exclude a Smaller Reporting Company, 
however, from its proposal to require a listed

[[Page 4558]]

company to have, and to certify that it has and will continue to have, 
a compensation committee of at least two members, each of whom must be 
an Independent Director as defined in the Exchange's Rule 
5605(a)(2).\66\ In its discussion of the rules from which Smaller 
Reporting Companies are not exempt, Nasdaq notes that its current 
listing rules regarding compensation committees do not provide any 
exemptions for Smaller Reporting Companies.\67\
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    \66\ See proposed Rule 5605(d)(5). See also proposed 
interpretive material IM-5605-6. As noted above, listed companies 
other than Smaller Reporting Companies and other exempted issuers 
must comply with the additional independence requirements for 
compensation committee members set forth in proposed Nasdaq Rule 
5605(d)(2)(A). See discussion in Section II.B.1., supra.
    \67\ See Notice.
---------------------------------------------------------------------------

4. Exemptions
    Nasdaq proposes that its existing exemptions from the Exchange's 
compensation-related listing rules currently in place, which are set 
forth in Nasdaq Rule 5615, apply also to the new requirements of the 
proposed rule change. These include exemptions for asset-backed issuers 
and other passive issuers, cooperatives, limited partnerships, 
management investment companies registered under the Investment Company 
Act of 1940 (``registered management investment companies''), and 
controlled companies.\68\ Nasdaq states that each of these categories 
has ``traditionally been exempt from Nasdaq's compensation-related 
listing rules,'' and believes that the reasons for the exemptions apply 
to the new requirements, as well.\69\
---------------------------------------------------------------------------

    \68\ See Rule 5615(a)(1), (2), (4), and (5).
    \69\ See Notice. See also discussion below at note 76, infra, 
for transition periods for companies that currently use the 
Alternative Option and do not have compensation committees.
---------------------------------------------------------------------------

    Asset-backed issuers and other passive issuers have been exempted, 
according to the Exchange, because they do not have a board of 
directors or persons acting in a similar capacity and their activities 
are limited to passively owning or holding (as well as administering 
and distributing amounts in respect of) assets on behalf of or for the 
benefit of the holders of the listed securities. Certain member-owned 
cooperatives have been exempt, the Exchange states, because they do not 
have a publicly traded class of common stock. Nasdaq further states 
that the structure of limited partnerships requires that public 
investors have limited rights and the general partners make all 
significant decisions about the operation of the limited partnership, 
and, as such, limited partners do not expect to have a voice in the 
operations of the partnership. Registered management investment 
companies, the Exchange states, are already subject to a pervasive 
system of federal regulation in certain areas of corporate governance. 
Controlled companies, by definition, are companies of which more than 
50% of the voting power for the election of directors are held by an 
individual, a group or another company, and the exemption for such 
companies, as stated by Nasdaq, recognizes that majority shareholders 
have the right to select directors and control certain key decisions, 
such as executive officer compensation, by virtue of their ownership 
rights.
    Concerning foreign private issuers, Nasdaq's current rules permit 
any such issuer to follow its home country practice in lieu of many of 
Nasdaq's corporate governance listing standards, including the 
Exchange's compensation-related listing rules.\70\ This allowance is 
granted on condition that the issuer discloses in its annual report 
filed with the Commission each requirement that it does not follow and 
describes the home country practice followed by the issuer in lieu of 
such requirement.\71\ Nasdaq proposes that this allowance continue to 
apply generally to the Exchange's compensation committee rules as 
revised by the instant proposal on the same condition, namely that the 
issuer discloses each requirement it does not follow and describes the 
home country practice it follows in lieu of such requirement. However, 
with respect, specifically, to the enhanced standards of independence 
for compensation committees (concerning fees received by members and 
their affiliations) Nasdaq proposes that, if a listed company follows 
its home country practice, it must additionally disclose in its annual 
report filed with the Commission the reasons why it does not have an 
independent compensation committee as set forth in these standards.\72\
---------------------------------------------------------------------------

    \70\ See Rule 5615(a)(3). Under Nasdaq's listing rules, 
``foreign private issuer'' has the same meaning as under Rule 3b-4 
under the Exchange Act. See Rule 5005(a)(18). Nasdaq's listing rules 
have traditionally provided qualified exemptions for foreign private 
issuers so that such issuers are not required to do any act that is 
contrary to a law, rule or regulation of any public authority 
exercising jurisdiction over such issuer or that is contrary to 
generally accepted business practices in the issuer's country of 
domicile, except to the extent such exemptions would be contrary to 
the public securities laws. See Securities Exchange Act Release No. 
48745 (November 4, 2003), 68 FR 64154, 64165 (November 12, 2003) 
(SR-NASD-2002-138).
    \71\ A Foreign Private Issuer that is not required to file its 
annual report with the Commission on Form 20-F may make this 
disclosure only on its Web site.
    \72\ As stated by Nasdaq, this proposed condition adopts the 
requirements of Rule 10C-1(b)(1)(iii)(A)(4), which provides an 
exemption from the independence requirements of Rule 10C-1 for a 
``foreign private issuer that discloses in its annual report the 
reasons that the foreign private issuer does not have an independent 
compensation committee.''
---------------------------------------------------------------------------

5. Transition to the New Rules for Companies Listed as of the Effective 
Date \73\
---------------------------------------------------------------------------

    \73\ During the transition periods described herein, until a 
company is required to comply with a particular provision of the new 
rules, the company must continue to comply with the corresponding 
provision, if any, in the current rules, which are re-designated as 
Rule 5605A(d) and IM-5605A-6 (``Sunsetting Provisions). See 
Amendment No. 1, which added this clarification as a preamble to the 
new Rule 5605(d). The addition mirrors a similar statement already 
included in the original proposal as a preamble to the Sunsetting 
Provisions.
---------------------------------------------------------------------------

    The proposed rule change, as amended, provides that certain of the 
new requirements for listed companies will be effective on July 1, 
2013.\74\ Specifically, as of that date, listed companies will be 
required to comply with the provisions of the proposed rule change 
relating to the authority of a compensation committee to retain 
compensation consultants, legal counsel, and other compensation 
advisers; the authority to fund such advisers; and the responsibility 
of the committee to consider independence factors before selecting such 
advisers.\75\ To the extent a company does not yet have a compensation 
committee by that date,\76\ these provisions will apply to the 
Independent Directors who determine, or recommend to the board for 
determination, the compensation of the CEO and all other executive 
officers of the company.\77\
---------------------------------------------------------------------------

    \74\ See proposed Rule 5605(d)(6), as modified by Amendment No. 
1 to the proposed rule change. The original proposal provided that 
these provisions were to be effective immediately.
    \75\ Id.
    \76\ A listed company that does not currently have a 
compensation committee is not required to meet the requirement to 
have such a committee until the earlier of its first annual meeting 
after January 15, 2014, or October 31, 2014. See infra note 78 and 
accompanying text.
    \77\ While the provisions of the proposed rule change relating 
to the authority of a compensation committee to retain compensation 
advisers, the company's obligation to fund such advisers, and the 
responsibility of the committee to consider independence factors 
before selecting such advisers must be assigned to the committee or 
Independent Directors acting in lieu of a committee by July 1, 2013, 
the requirement that they be included in a written committee charter 
does not apply until a later date, as it is one of the remaining 
provisions of the new compensation committee rule subject to the 
transition period discussed below. Rule 5605(d)(6) states that 
companies should consider under state corporate law whether to grant 
the specific responsibilities and authority referenced through a 
charter, resolution or other board action.

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

[[Page 4559]]

    Regarding the remaining new provisions for compensation committees, 
the proposed rule change, as amended, provides that, in order to allow 
listed companies to make necessary adjustments in the course of their 
regular annual meeting schedule, they will have until the earlier of 
their first annual meeting after January 15, 2014, or October 31, 
2014,\78\ to comply with these remaining provisions.\79\ A listed 
company must certify to Nasdaq, no later than 30 days after the final 
implementation deadline applicable to it, that it has complied with 
Rule 5605(d).
---------------------------------------------------------------------------

    \78\ See proposed Rule 5605(d)(6), as modified by Amendment No. 
1 to the proposed rule change. The original proposal had required 
these provisions to be implemented by the company's second annual 
meeting after the proposal was approved, but no later than December 
31, 2014.
    \79\ The remaining provisions subject to this schedule include 
IM-5605-6, which is new interpretive material to be included in the 
text of Nasdaq's rules that elaborates on the compensation committee 
requirements.
---------------------------------------------------------------------------

6. Phase-In Schedules: IPOs; Companies That Lose Their Exemptions; 
Companies Transferring From Other Markets
    Nasdaq's existing rules permit a company listing in connection with 
its initial public offering (``IPO'') to phase in its compliance with 
the Exchange's independence requirements for compensation and 
nominations committees,\80\ as follows: Each such committee must have 
one independent member at the time of listing; a majority of members 
must be independent within 90 days of listing; and all members of such 
committees must be independent within one year of listing. The same 
phase-in schedule is permitted for companies emerging from bankruptcy 
\81\ and companies ceasing to be controlled companies.\82\ Nasdaq 
proposes that this schedule continue to apply and that it remain the 
same with respect to the new compensation committee composition 
requirements set forth in the proposed rule change.\83\
---------------------------------------------------------------------------

    \80\ See Rule 5615(b)(1).
    \81\ See Nasdaq Listing Rule 5615(b)(2).
    \82\ See Nasdaq Listing Rule 5615(c)(3).
    \83\ Specifically, the phase-in schedule would apply to proposed 
Rule 5605(d)(2).
---------------------------------------------------------------------------

    As stated by Nasdaq, this would mean that a company listing on the 
Exchange in connection with its IPO, a company emerging from 
bankruptcy, or a company ceasing to be a controlled company would be 
permitted to phase in its compliance with the requirements that a 
compensation committee have at least two members, that these members be 
Independent Directors as defined in Nasdaq's rules, and that they meet 
the enhanced standards of independence for compensation committees 
(concerning fees received by members and their affiliations) adopted 
pursuant to Rule 10C-1.\84\
---------------------------------------------------------------------------

    \84\ See Notice for an illustration provided by Nasdaq of how 
the compensation committee composition requirement will interact 
with the minimum size requirement.
---------------------------------------------------------------------------

    For a company that was, but has ceased to be, a Smaller Reporting 
Company, the proposed rule change, as modified by Amendment No. 1, 
establishes a phase-in schedule based on certain dates relating to the 
company's change in status.\85\ Pursuant to Rule 12b-2 under the Act, a 
company tests its status as a Smaller Reporting Company on an annual 
basis as of the last business day of its most recently completed second 
fiscal quarter (the ``Determination Date''). A company with a public 
float of $75 million or more as of the Determination Date will cease to 
be a Smaller Reporting Company as of the beginning of the fiscal year 
following the Determination Date. Under Nasdaq's proposal, the day of 
this change in status is the beginning of the phase-in period (``Start 
Date'').\86\
---------------------------------------------------------------------------

    \85\ See proposed Rule 5605(d)(4), as amended. In the proposal 
as originally submitted, the phase-in schedule was to be the same as 
the phase-in schedule for a company listing in conjunction with an 
IPO, and was to start to run on the due date of the filing with the 
Commission in which the company is required to report that it is an 
issuer other than a Smaller Reporting Company. In Amendment No. 1, 
Nasdaq states that while the revised phase-in schedule is different 
from what it originally proposed, the amended version will allow 
companies sufficient time to adjust to the differences.
    \86\ See Amendment No. 1.
---------------------------------------------------------------------------

    By six months from the Start Date, the company will be required to 
comply with Rule 5605(d)(3), which sets forth the provisions described 
above relating to authority of a compensation committee to retain 
compensation advisers, the requirement that the company fund such 
advisers, and the requirement that the committee consider independence 
factors before selecting such advisers. By six months from the Start 
Date, the company will also be required to certify to Nasdaq (i) that 
it has complied with the requirement in Rule 5605(d)(1) to adopt a 
formal written compensation committee charter including the content 
specified in Rule 5605(d)(1)(A)-(D) \87\; and (ii) that it has 
complied, or within the applicable phase-in schedule will comply, with 
the additional requirements in Rule 5605(d)(2)(A) regarding 
compensation committee composition.
---------------------------------------------------------------------------

    \87\ See supra notes 26-29. This includes the provisions with 
which the company is now required to comply relating to authority of 
a compensation committee to retain compensation advisers, the 
requirement that the company fund such advisers, and the requirement 
that the committee consider independence factors before selecting 
such advisers.
---------------------------------------------------------------------------

    Under the proposal, as amended, a company that has ceased to be a 
Smaller Reporting Company will be permitted to phase in its compliance 
with the enhanced independence requirements for compensation committee 
members (relating to compensatory fees and affiliation) as follows: (i) 
One member must satisfy the requirements by six months from the Start 
Date; (ii) a majority of members must satisfy the requirements by nine 
months from the Start Date; and (iii) all members must satisfy the 
requirements by one year from the Start Date.\88\
---------------------------------------------------------------------------

    \88\ During the phase-in schedule, a company that has ceased to 
be a Smaller Reporting Company will be required to continue to 
comply with the rules previously applicable to it.
---------------------------------------------------------------------------

    However, because a Smaller Reporting Company is required to have a 
compensation committee and such committee is required to be comprised 
of at least two Independent Directors, a company that has ceased to be 
a Smaller Reporting Company will not be permitted to use the phase-in 
schedule for these requirements.
    Nasdaq proposes no changes to the phase-in schedule in its current 
listing rules for companies transferring to Nasdaq from other 
markets.\89\
---------------------------------------------------------------------------

    \89\ See Rule 5615(b)(3).
---------------------------------------------------------------------------

7. Conforming Changes and Correction of Typographical Errors
    Finally, Nasdaq proposes to make minor conforming changes to its 
requirements relating to audit and nominations committees and to 
correct certain typographical errors in its current corporate 
governance requirements.\90\
---------------------------------------------------------------------------

    \90\ See Exhibit 5 of the proposed rule change.
---------------------------------------------------------------------------

III. Comments on the Proposed Rule Change and Nasdaq's Response

    As stated previously, the Commission received a total of eight 
comment letters on the proposed rule change.\91\ Three commenters 
expressed general support for the proposal, although one of these 
commenters found it wanting in some respects and another believed that 
it needed to be amended before being approved.\92\ Some commenters

[[Page 4560]]

supported specific provisions of the proposal,\93\ some opposed 
specific provisions,\94\ and some sought clarification of certain 
aspects of the proposal.\95\ Some commenters believed that the proposal 
fell short of meeting the requirements of Rule 10C-1 and believed that 
it should have been more stringent.\96\ These and other comments, as 
well as Nasdaq's responses to some of the comments that raised issues 
with the proposal, are summarized below.
---------------------------------------------------------------------------

    \91\ See supra note 5.
    \92\ See ICI Letter, which urged approval of the proposal; 
Teamsters Letter, which strongly supported the proposal while 
believing that it did not fully satisfy the requirements of Rule 
10C-1 and that it did not go far enough in certain respects; and 
Corporate Secretaries Letter, which generally supported the 
proposal, but believed that certain of its aspects were 
unnecessarily burdensome or not sufficiently clear such that the 
proposal needed to be amended before being approved by the 
Commission.
    \93\ See AFL-CIO Letter, Brown Letter, CII Letter, ICI Letter, 
and Teamsters Letter.
    \94\ See AFL-CIO Letter, Brown Letter, and Pinnacle Letter. See 
also CII Letter, which stated that it did not support certain 
specific aspects of the proposal.
    \95\ See Pinnacle Letter and Corporate Secretaries Letter.
    \96\ See, e.g., AFL-CIO Letter, Brown Letter, CII Letter, and 
Teamsters Letter.
---------------------------------------------------------------------------

A. Compensation Committee Composition

    Three commenters expressed support for Nasdaq's proposal to require 
all listed companies to have standing compensation committees,\97\ and 
two further supported the proposal that such committees have at least 
two members.\98\ Three commenters supported the provision that requires 
compensation committees to adopt a written charter.\99\
---------------------------------------------------------------------------

    \97\ See AFL-CIO Letter, CII Letter, and Teamsters Letter.
    \98\ See AFL-CIO Letter, Teamsters Letter.
    \99\ See AFL-CIO Letter, CII Letter, and Teamsters Letter.
---------------------------------------------------------------------------

    Two commenters opposed the proposal's absolute prohibition barring 
a compensation committee member from receiving any fees from the 
company.\100\ One of these commenters argued, for example, that such a 
prohibition is ``unnecessarily prescriptive and effectively precludes 
certain professionals, particularly attorneys, from compensation 
committee service.'' \101\ In addition, this commenter argued, because 
most Nasdaq companies have three committees that require Independent 
Directors (audit, compensation, and nominations committees) and audit 
committee members are already subject to a ``no compensatory fee'' 
restriction, adding the same restriction for compensation committee 
membership would impose it ``on a very high percentage of the 
independent directors.'' \102\ This commenter suggested that the 
Commission reject the proposed rule and that, if Nasdaq determined to 
maintain a prohibition, the prohibition should not be absolute. Rather, 
this commenter argued, ``some level below a de minimus amount'' of fees 
should be permitted and fees for service that have no relationship to 
the work of the compensation committee should be excluded.\103\
---------------------------------------------------------------------------

    \100\ See Pinnacle Letter and Corporate Secretaries Letter.
    \101\ Pinnacle Letter. The commenter observed that the rule 
would disqualify, for instance, a knowledgeable employment attorney 
whose firm provides only a limited amount of real estate closing or 
non-employment litigation services, and neither he nor his firm 
provided employment or compensation advice to the company. Id.
    \102\ Id.
    \103\ Id.
---------------------------------------------------------------------------

    In a similar vein, the other commenter opposing an absolute bar 
believed that it is important to companies that seek to maximize the 
contributions of their directors not to be restricted by such a 
prohibition, and expressed concern that the proposal would 
``disproportionately impact small- and mid-cap companies, whose boards 
tend to be smaller and who have fewer resources to engage non-employee 
advisers and consultants.'' \104\ This commenter believed that a better 
approach would be to have a company's board of directors consider such 
consulting or advisory fees in making its determination as to whether 
the member's receipt of such compensation would interfere with the 
member's exercise of independent judgment.\105\
---------------------------------------------------------------------------

    \104\ Corporate Secretaries Letter.
    \105\ Id.
---------------------------------------------------------------------------

    In response, Nasdaq stated that it had carefully weighed the 
potential benefits of the prohibition, and had determined that the 
payment of direct or indirect fees from a company to a compensation 
committee member ``could influence, or create the appearance of 
influencing, the member's judgment and therefore render the member 
unwilling or unable to provide a truly independent voice on executive 
compensation decisions.'' \106\ Nasdaq acknowledged that the 
prohibition will preclude certain professionals from service on 
compensation committees, but stated that, ``given the heightened 
importance of executive compensation decisions in today's business 
environment,'' it believes that ``the goal of ensuring independent 
compensation decisions outweighs the potential negative impact of 
excluding a small group of individuals'' from such service.\107\
---------------------------------------------------------------------------

    \106\ See Nasdaq Response Letter.
    \107\ Id. See also infra text accompanying note 143.
---------------------------------------------------------------------------

    Three commenters generally supported Nasdaq's proposal that members 
of compensation committees must not accept any consulting, advisory or 
other compensatory fees,\108\ despite their own belief, generally, that 
additional requirements or prohibitions should be imposed.\109\ Two of 
these commenters believed, however, that the proposal falls short of 
the requirements of Rule 10C-1, which, in their view, requires that 
fees paid to a director for service on the company's board also be 
considered.\110\ Another commenter argued that the language of Section 
10C of the Act itself, as well as its legislative history, indicates 
Congress's intent that such fees be considered.\111\ These commenters 
believed that compensation for board service ``can, in certain 
circumstances, impair independence,'' \112\ because ``high director 
fees relative to other sources of income can compromise director 
objectivity,'' \113\ and ``highly paid directors also may be more 
inclined to approve large executive pay packages.'' \114\ One commenter 
believed that the requirement of Section 10C of the Act and Rule 10C-1 
to consider the source of compensation of a director goes further, and 
applies to all types of compensation that a director may receive, 
including compensation paid by any person, including non-issuers.\115\
---------------------------------------------------------------------------

    \108\ See AFL-CIO Letter, CII Letter, and Teamsters Letter.
    \109\ For a discussion of the additional kinds of rules these 
comments favored relating to payments made to members of 
compensation committees, and Nasdaq's response to their arguments, 
see infra notes 123-127 and accompanying text.
    \110\ See AFL-CIO Letter and Teamsters Letter, noting that Rule 
10C-1 requires the exchanges to consider a director's ``source of 
compensation,'' and arguing that this phrase includes director fees. 
In the proposal, Nasdaq stated that it does not believe that the 
intent of the Dodd-Frank Act or Rule 10C-1 was to limit independence 
based on director compensation. See Notice.
    \111\ See Brown Letter.
    \112\ Id.
    \113\ AFL-CIO Letter. See also Teamsters Letter, arguing that 
directors who are highly paid ``may be more inclined to approve 
large executive pay packages.''
    \114\ AFL-CIO Letter.
    \115\ See Brown Letter.
---------------------------------------------------------------------------

    In its response to comments, Nasdaq stated that companies typically 
adopt a uniform compensation policy that applies to all directors, not 
only those who serve on compensation committees, such that ``a 
requirement to determine eligibility for compensation committee service 
based on director fees would lead to no meaningful distinction among 
directors.'' \116\ In addition, Nasdaq stated, ``directors should be 
adequately compensated to ensure that they devote appropriate time and 
attention to their roles and responsibilities.'' Nasdaq also observed 
that, to the extent a conflict of interest exists because directors set 
their own compensation, companies must disclose director compensation, 
and investors will become aware of excessive or non-customary director

[[Page 4561]]

compensation through this means.\117\ The Exchange further cited to the 
requirement in its rules that a company board make an affirmative 
determination that each Independent Director has no relationship that, 
in the opinion of the board, would interfere with his or her 
independent judgment in carrying out director responsibilities, and 
that a board could therefore consider director fees in this 
context.\118\
---------------------------------------------------------------------------

    \116\ Nasdaq Response Letter.
    \117\ Id.
    \118\ Id.
---------------------------------------------------------------------------

    With respect to the other prong of Nasdaq's independence standard 
for compensation committee members, one commenter stated that it did 
not object to the Exchange's proposal to require the board of a listed 
company to consider whether a director is affiliated with the company 
or any of its subsidiaries and their affiliates in determining 
eligibility for compensation committee membership.\119\ Another 
commenter, on the other hand, expressed disappointment that the 
Exchange did not propose a ban on such affiliations, maintaining that 
``affiliated persons--such as a large shareholder seeking a change in 
control of the company--may have interests or investment time horizons 
that differ from shareholders generally.'' \120\
---------------------------------------------------------------------------

    \119\ See CII Letter.
    \120\ See Teamsters Letter.
---------------------------------------------------------------------------

    In response to the latter commenter, Nasdaq stated that it had 
considered whether to adopt such a prohibition, but concluded that 
``such a blanket prohibition would be inappropriate for compensation 
committee members.'' \121\ The Exchange believed that it may be 
desirable for representatives of significant stockholders in a listed 
company to serve on its compensation committee ``since their interests 
are aligned with other stockholders in seeking a rational compensation 
program.'' \122\
---------------------------------------------------------------------------

    \121\ Nasdaq Response Letter.
    \122\ Id.
---------------------------------------------------------------------------

    Some commenters believed that the proposed rule should explicitly 
require the board of a listed company, when considering affiliations of 
a director in determining eligibility for the compensation committee, 
to consider personal or business relationships between the director and 
the company's executive officers.\123\ As expressed by one commenter, 
``too many corporate directors have significant personal, financial or 
business ties to the senior executives that they are responsible for 
compensating.'' \124\
---------------------------------------------------------------------------

    \123\ See AFL-CIO Letter, Brown Letter, CII Letter, Teamsters 
Letter.
    \124\ AFL-CIO Letter. See also Teamsters Letter.
---------------------------------------------------------------------------

    Some commenters believed that related party transactions should 
explicitly be included as a relevant factor in determining independence 
for members of compensation committees.\125\ The additional 
requirements suggested by commenters also included disqualification of 
a director from membership on the compensation committee if an 
immediate family member of the director received compensation in excess 
of $120,000 a year from the company even if that family member was not 
an executive officer of the company; \126\ or if the director has, or 
in the past five years has had, a personal contract with the company, 
an executive officer of the company, or any affiliate of the 
company.\127\
---------------------------------------------------------------------------

    \125\ See AFL-CIO Letter and Teamsters Letter.
    \126\ See AFL-CIO Letter and Teamsters Letter. Nasdaq's 
definition of Independent Director already disqualifies a director 
from membership on the compensation committee if an immediate family 
member of the director received in excess of $120,000 from the 
company and also was an executive officer of the company.
    \127\ See CII Letter.
---------------------------------------------------------------------------

    Nasdaq responded that its definition of Independent Directors, in 
addition to the bright-line tests of independence that it imposes,\128\ 
requires a company's board to make an affirmative determination that 
each such director has no relationship that, in the opinion of the 
board, would interfere with the exercise of independent judgment in 
carrying out the responsibilities of a director.\129\ ``This 
bifurcation,'' Nasdaq stated, ``recognizes that [Nasdaq] cannot in its 
rules legislate every possible relationship between a [company] and its 
directors and therefore empowers the board, which must be comprised of 
a majority of Independent Directors, to assess the relevant 
relationships.''
---------------------------------------------------------------------------

    \128\ See supra note 19.
    \129\ See Nasdaq Response Letter.
---------------------------------------------------------------------------

    Several commenters read a statement made by the Commission in 
adopting Rule 10C-1 as indicating that no single factor could determine 
a director's independence,\130\ and believed that such a position 
undermines the intent of the rule.\131\ Two commenters explicitly 
sought clarification from Nasdaq that a single factor can result in the 
loss of independence.\132\
---------------------------------------------------------------------------

    \130\ See AFL-CIO Letter, Brown Letter, Teamsters Letter.
    \131\ See, e.g., Teamsters Letter.
    \132\ See AFL-CIO Letter, Brown Letter.
---------------------------------------------------------------------------

    In its response letter, Nasdaq confirmed that a director cannot be 
independent if he or she fails any of the bright-line prohibitions in 
the definition of Independent Director or accepts directly or 
indirectly any consulting, advisory, or other fee from the company or 
any of its subsidiaries. The Exchange stated that its proposals 
``operate to exclude directors who fail these tests from serving on the 
compensation committee.'' \133\
---------------------------------------------------------------------------

    \133\ Nasdaq Response Letter.
---------------------------------------------------------------------------

    Some of the above commenters expressed the belief, in general, that 
the definition of an independent director should be more narrowly 
drawn, that the bright-line tests of independence should be 
strengthened, and that the standards of independence should be uniform 
for all committees requiring Independent Directors.\134\
---------------------------------------------------------------------------

    \134\ See CII Letter, AFL-CIO Letter, Teamsters Letter.
---------------------------------------------------------------------------

    Several commenters did not support the exception proposed by Nasdaq 
\135\ to allow a director who fails to meet the enhanced independence 
standards for compensation committees to be appointed to such a 
committee under exceptional and limited circumstances, provided that 
the director is not currently an executive officer, an employee, or the 
family member of an executive officer.\136\ These commenters noted 
that, while providing a cure period when an independent director loses 
his or her independent status, Section 10C of the Act does not provide 
an exception to allow the appointment of a non-independent director in 
the first instance.\137\ One commenter expressed the belief that the 
cure period provides sufficient flexibility for companies when a 
director ceases to be independent, such that this additional exception 
is not necessary.\138\ One commenter added that the standard set by the 
proposed rule for permitting the exception to be used--when the 
appointment is in ``the best interests of the Company and its 
Shareholders''--is ``vague and ill-defined.'' \139\
---------------------------------------------------------------------------

    \135\ See supra note 47.
    \136\ See AFL-CIO Letter, Brown Letter, CII Letter.
    \137\ See, e.g., CII Letter.
    \138\ See AFL-CIO Letter.
    \139\ Brown Letter.
---------------------------------------------------------------------------

    Nasdaq responded that its proposal is consistent with Rule 10C-1, 
which permits an exchange to exempt from the enhanced independence 
requirements ``a particular relationship with respect to members of the 
compensation committee, as each national securities exchange * * * 
determines is appropriate, taking into consideration the size of an 
issuer and any other relevant factors.'' \140\ Nasdaq noted that the 
exception for exceptional and limited circumstances has been included 
in its rules for oversight of executive compensation committees

[[Page 4562]]

since they were implemented.\141\ The Exchange stated that the 
exception has been used throughout its life--albeit infrequently--and 
that the Exchange therefore believes that it adds value to its 
rules.\142\ The Exchange added that it believed that it is appropriate 
to allow a listed company the flexibility afforded by the provision and 
that it is particularly important for a smaller company ``that may have 
relationships that require such flexibility,'' and that, in this way, 
the exception also addresses concerns raised by some commenters that 
the proposal to prohibit a compensation committee member from accepting 
directly or indirectly any consulting, advisory or other compensatory 
fee from the company is overly prescriptive.\143\
---------------------------------------------------------------------------

    \140\ Rule 10C-1(b)(1)(iii)(B).
    \141\ Nasdaq Response Letter. In response to the concern that a 
board could use a non-independent director indefinitely, Nasdaq 
noted that it tracks the use of the exception and can exercise its 
discretionary authority to apply additional or more stringent 
criteria for the initial or continued listing of particular 
securities and deny use of the exception to any company that the 
Exchange believes is abusing it. See id.
    \142\ Id.
    \143\ Id.
---------------------------------------------------------------------------

B. Compensation Adviser Independence Factors

    The Commission received letters from three commenters relating to 
the provision of the proposed rule change that requires a compensation 
committee to take into consideration the factors set forth in the 
proposal in the selection of a compensation consultant, legal counsel, 
or other adviser to the committee.\144\
---------------------------------------------------------------------------

    \144\ See Wilson Sonsini Letter, CII Letter, and Corporate 
Secretaries Letter.
---------------------------------------------------------------------------

    One commenter believed that Nasdaq's proposed rule could be read as 
requiring a compensation committee to consider the independence factors 
set forth in Rule 10C-1 only when selecting independent counsel, rather 
than any outside legal counsel that might provide legal advice to a 
compensation committee.\145\ The commenter sought an explicit statement 
from Nasdaq that a compensation committee is not required to consider 
the enumerated independence factors with respect to any outside legal 
counsel, ``other than in circumstances where the compensation committee 
has determined it is advisable to retain independent legal counsel, 
such as in the case of an investigation or litigation.'' \146\ 
Otherwise, the commenter believed, the proposed rule ``may cause an 
unnecessary expenditure of resources by companies that feel compelled 
to conduct an independent analysis of all counsel providing advice to 
the Committee.'' \147\
---------------------------------------------------------------------------

    \145\ See Wilson Sonsini Letter.
    \146\ Id.
    \147\ Id.
---------------------------------------------------------------------------

    In its response letter, Nasdaq disagreed with this commenter's 
reading of Rule 10C-1, stating that, while a compensation committee is 
not required to retain an independent compensation adviser, the 
compensation committee is required to conduct the independence analysis 
set forth in Rule 10C-1 before selecting any compensation adviser other 
than in-house legal counsel.\148\
---------------------------------------------------------------------------

    \148\ See Nasdaq Response Letter.
---------------------------------------------------------------------------

    A second commenter believed that at least one additional factor 
should be considered: ``whether the compensation committee consultants, 
legal counsel, or other advisers require that their clients 
contractually agree to indemnify or limit their liability.'' \149\ The 
commenter believed that such contractual provisions ``raise conflict of 
interest red flags'' that every compensation committee should consider 
in determining the independence of the consultant.\150\
---------------------------------------------------------------------------

    \149\ CII Letter.
    \150\ Id.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the Nasdaq proposal, 
maintained that the required independence assessment will be ``time-
consuming and burdensome'' due to the scope of information that will 
need to be gathered in order to conduct the required independence 
assessment.\151\ This commenter believed that uncertainty over the 
scope of the requirement could have a counterproductive effect of 
discouraging compensation committees from obtaining the advice of 
advisers subject to the rule, particularly in situations where quick 
action is required of the compensation committee, and further 
identified a number of specific issues that it believed the Exchange 
should address to provide greater clarity regarding the standard.\152\
---------------------------------------------------------------------------

    \151\ Corporate Secretaries Letter.
    \152\ The Commission notes that Nasdaq addressed some of the 
commenter's concerns in Amendment No. 2.
---------------------------------------------------------------------------

C. Opportunity to Cure Defects

    One commenter supported the rule proposed by the Exchange to permit 
issuers a period of time, under specified conditions, to cure failures 
to comply with the independence requirements for compensation committee 
members.\153\ The commenter was concerned, however, that the proposed 
rules did not specify a cure period for any other form of non-
compliance with the new rules.\154\ The commenter believed that a 
company should be allowed to take corrective action within a reasonable 
time after the company's senior executives learn of the non-compliance.
---------------------------------------------------------------------------

    \153\ See Corporate Secretaries Letter.
    \154\ See id. The commenter mentioned, in particular, the 
requirement that the committee may obtain advice from a consultant 
or adviser only after assessing that individual's independence. The 
commenter believed that inadvertent violations of this requirement 
could arise, for example, if a person is appearing before a 
compensation committee solely to provide information or other 
services, and the individual then on a solicited or unsolicited 
basis makes a statement that could be viewed as providing advice on 
executive compensation. In the absence of a cure mechanism, the 
commenter believed, the company would be in violation of the listing 
standard and have no recourse.
---------------------------------------------------------------------------

D. Exemptions

    The Commission received one comment letter supporting the 
Exchange's proposal to exempt investment companies from the Rule 10C-1 
requirements.\155\ As the commenter noted, although Rule 10C-1 exempts 
certain entities, including registered open-end management investment 
companies, from the enhanced independence requirements for members of 
compensation committees, it did not explicitly exempt other types of 
registered management investment companies, including closed-end funds, 
from any of the requirements of Rule 10C-1. Under the Nasdaq proposal, 
both closed-end and open-end funds would be exempt from all the 
requirements of the rule.
---------------------------------------------------------------------------

    \155\ See ICI Letter.
---------------------------------------------------------------------------

    The commenter supported this aspect of the proposal, stating that 
both open-end and closed-end funds typically are externally managed and 
do not employ executives or by their nature have employees. The 
commenter believed that such funds are adequately governed by other 
federal regulation with respect to corporate governance matters, 
generally, and compensation matters, specifically.\156\
---------------------------------------------------------------------------

    \156\ Id.
---------------------------------------------------------------------------

E. Transition Period

    One commenter voiced support for the transition period proposed by 
Nasdaq for compliance with the new compensation committee independence 
standard, but believed that the Exchange should provide a longer period 
for companies to satisfy proposed Rule 5605(d)(3), relating to the 
authority of a compensation committee to retain compensation 
consultants, legal counsel, and other compensation advisers; the 
authority to fund such advisers; and the responsibility of the

[[Page 4563]]

committee to consider independence factors before selecting such 
advisers.\157\
---------------------------------------------------------------------------

    \157\ See Corporate Secretaries Letter. The Commission notes 
that the commenter's letter was submitted prior to Nasdaq's 
submission of Amendment No. 1, in which the Exchange revised the 
proposed transition period for compliance with Rule 5605(d)(3).
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the Nasdaq 
proposal, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\158\ In particular, the Commission finds that the amended 
proposed rule change is consistent with the requirements of Section 
6(b) of the Act,\159\ as well as with Section 10C of the Act \160\ and 
Rule 10C-1 thereunder.\161\ Specifically, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\162\ 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.
---------------------------------------------------------------------------

    \158\ In approving the Nasdaq proposed rule change, as amended, 
the Commission has considered its impact on efficiency, competition 
and capital formation. 15 U.S.C. 78c(f).
    \159\ 15 U.S.C. 78f(b).
    \160\ 15 U.S.C. 78j-3.
    \161\ 17 CFR 240.10C-1.
    \162\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 Nasdaq 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,\163\ Congress resolved to require that ``board 
committees that set compensation policy will consist only of directors 
who are independent.'' \164\ 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.
---------------------------------------------------------------------------

    \163\ See supra note 9.
    \164\ 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).
---------------------------------------------------------------------------

    In response, Nasdaq 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 notes that a number of the commenters generally 
supported the proposed rule change, although some commenters offered 
suggestions to clarify or improve various provisions of Nasdaq's 
proposal. The Commission believes that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, appropriately revises Nasdaq's 
rules for compensation committees of listed companies, for the 
following reasons:

A. Compensation Committee Composition and Charter

    The Commission believes that it is reasonable for Nasdaq to require 
each company listed on its market to have a compensation committee. 
Although the Alternative Option to a formal committee in the Exchange's 
current rules may have been useful to a small number of companies,\165\ 
the Commission agrees that the heightened importance of compensation 
decisions and oversight of executive compensation in today's 
environment, as well as the benefits that can result for investors of 
having a standing committee overseeing compensation matters, makes it 
appropriate and consistent with investor protection and the public 
interest under Section 6(b)(5) of the Act for Nasdaq to raise its 
standards in this regard. In making this determination the Commission 
is aware that Rule 10C-1 does not require listed companies of national 
securities exchanges to have a committee dedicated to compensation 
matters. Nevertheless, it is consistent with Section 6(b)(5) of the Act 
for Nasdaq to require all its listed companies to have an independent 
compensation committee overseeing executive compensation matters 
because of the importance and accountability to investors that such a 
formal structure can provide.\166\ The Commission also notes that some 
of the other requirements of Rule 10C-1 apply only when a company has a 
committee overseeing compensation matters.\167\ Thus, the requirement 
to have a compensation committee will trigger the additional 
protections for shareholders created by these requirements.
---------------------------------------------------------------------------

    \165\ As stated by Nasdaq, as of June 30, 2012, only 25 of its 
2,636 listed companies relied on the Alternative Option in lieu of 
having a standing compensation committee. See Notice.
    \166\ See, e.g., Section 303A.05 of the New York Stock Exchange 
(``NYSE'') Listed Company Manual, which does not provide for an 
Alternative Option as is currently allowed under Nasdaq rules.
    \167\ Under Rule 10C-1, the provisions of Rule 10C-1(b)(2)(i) 
(concerning the authority to retain or obtain the advice of a 
compensation adviser) and Rule 10C-1(b)(3) (concerning funding for 
compensation advisers) do not apply to members of the board of 
directors who oversee executive compensation matters on behalf of 
the board of directors outside a committee structure.
---------------------------------------------------------------------------

    Similarly, the Commission believes that it is appropriate for 
Nasdaq to raise its standards to require the compensation committee of 
each issuer to have at least two members, instead of permitting a sole 
individual to be responsible for compensation policy, and that this 
furthers investor protection and the public interest in accordance with 
Section 6(b)(5). In light of the importance of compensation matters, 
the added thought and objectivity that is likely to result when two or 
more individuals deliberate over how much a listed company should pay 
its executives, and what form such compensation should take, is 
consistent with the goal of promoting more accountability to 
shareholders on executive compensation matters. Moreover, given the 
complexity of executive compensation packages for corporate executives, 
it is reasonable for Nasdaq to require listed companies to have the 
input of more than one committee member on such matters. Finally, we 
note that, as Nasdaq stated in its filing, only a small number of

[[Page 4564]]

currently listed companies have a compensation committee of only one 
member. The Commission believes that, with the transition period 
proposed by Nasdaq for such companies to add an additional member, the 
two-member requirement will not be an onerous burden for such companies 
and should actually strengthen their review of compensation matters.
    The proposal by the Exchange to require a compensation committee to 
have a written charter detailing the committee's authority and 
responsibility is also consistent with Section 6(b)(5) of the Act and 
will help listed companies to comply with the rules being adopted by 
Nasdaq to fulfill its mandate under Rule 10C-1. For example, as noted 
above, under Nasdaq's proposal the charter must set forth the 
compensation committee's responsibilities as well as the specific 
authority concerning compensation advisers as required under Rule 10C-
1.\168\ A written charter will also provide added transparency for 
shareholders regarding how a company determines compensation and may 
clarify and improve the process itself. In this regard, the Commission 
notes that Nasdaq's requirement that listed companies review and 
reassess the adequacy of the compensation's committee charter on an 
annual basis will also help to ensure accountability and transparency 
on an on-going basis. The Commission also notes that several exchanges 
already require their compensation committees to have written 
charters.\169\
---------------------------------------------------------------------------

    \168\ The Commission notes that the provision that is required 
in the charter regarding the authority of the committee to retain 
compensation advisers, the requirement that the company fund such 
advisers, and the requirement that the committee consider 
independence factors before selecting such advisers does not apply 
under the Nasdaq proposal to Smaller Reporting Companies. See supra 
notes 62-65 and accompanying text.
    \169\ See, e.g., NYSE Listed Company Manual, Section 303A.05.
---------------------------------------------------------------------------

    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, however, 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 Rule 10C-1(b)(1).''\170\ 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.
---------------------------------------------------------------------------

    \170\ 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.
---------------------------------------------------------------------------

    As noted above, in addition to retaining its existing independence 
standards that currently apply to board and compensation committee 
members, which include certain bright-line tests, Nasdaq has determined 
to adopt a definition that prohibits a director who receives 
compensation or fees from a listed company (other than, among other 
things, director compensation) from serving on the company's 
compensation committee.\171\
---------------------------------------------------------------------------

    \171\ See supra note 33-36 and accompanying text.
---------------------------------------------------------------------------

    As the Exchange noted in its proposal, under the bright-line tests 
of its general rules for director independence, directors can still be 
considered independent and serve on listed companies' compensation 
committees if they receive fees that do not exceed certain 
thresholds.\172\ This is in contrast to Nasdaq's requirements to serve 
on a listed company's audit committee, which bar a director who 
receives any compensatory fees from the company. In considering the 
Fees Factor under Rule 10C-1, Nasdaq stated that it did not see any 
compelling justification to set a different standard with respect to 
the acceptance of compensatory fees for members of the compensation 
committee than for members of audit committees.
---------------------------------------------------------------------------

    \172\ See Nasdaq Listing Rules 5605(a)(2)(B) and (D).
---------------------------------------------------------------------------

    The Commission notes that, while two commenters opposed Nasdaq's 
proposed outright bar on the receipt of these fees,\173\ other 
commenters believed that the Exchange's proposal relating to 
compensatory fees fell short of Rule 10C-1's requirements \174\ or 
otherwise proposed additional requirements.\175\ In response to the 
commenters opposing the fee prohibition, the Exchange stated that it 
carefully weighed the benefits and burdens of its proposal and 
concluded that a director's receipt of compensatory fees from a company 
(other than compensation for board and board committee service or 
compensation under a retirement plan for prior service with the company 
as described above \176\) could render the member unwilling or unable 
to provide a truly independent voice on executive compensation 
decisions.\177\ The Exchange further stated that, although certain 
individuals may be excluded from the compensation committee because of 
the proposal's fee restriction, the restriction was warranted given the 
heightened importance of executive compensation decisions in today's 
business environment.
---------------------------------------------------------------------------

    \173\ See Corporate Secretaries Letter and Pinnacle Letter and 
supra notes 100-105 and accompanying text.
    \174\ See AFL-CIO Letter, Brown Letter, and Teamsters Letter, 
maintaining that Nasdaq's proposal ``falls short'' of the Rule 10C-1 
provision requiring exchanges to consider a director's source of 
compensation. See also supra notes 123-127 and accompanying text.
    \175\ See, e.g., CII Letter (``the Council's policies on 
independence relating to the acceptance of compensatory fees are 
clearly more narrowly drawn than those of [Nasdaq's proposal]'').
    \176\ See supra notes 35-36 and accompanying text.
    \177\ See Nasdaq Response Letter, supra note 6.
---------------------------------------------------------------------------

    The Commission believes that the Exchange has complied with Rule 
10C-1 and Section 10C and that the proposed compensatory fee 
restriction, which is designed to protect investors and the public 
interest, is consistent with the requirements of Section 6(b)(5) of the 
Act. The Commission notes that the compensatory fee restriction will 
help to ensure that compensation committee members cannot receive 
directly or indirectly fees that could potentially influence their 
decisions on compensation matters.
    The Commission recognizes that some commenters did not believe that 
the Nasdaq proposal went far enough because the Exchange did not 
adequately consider the compensation that directors receive for board 
or committee service in formulating its standards of independence for 
service on the compensation committee, and, in particular, the levels 
to which such compensation may rise.\178\ The Commission notes, 
however, that, as Nasdaq stated, to the extent a conflict of interest 
exists because directors set their

[[Page 4565]]

own compensation, companies must disclose director compensation, and 
investors will become aware of excessive or non-customary director 
compensation through this means.\179\ In addition, a company board must 
make an affirmative determination that each Independent Director has no 
relationship that, in the opinion of the board, would interfere with 
his or her independent judgment in carrying out director 
responsibilities, and a board could therefore consider director 
compensation in that context. The Commission believes that these 
arguments are sufficient to find that Nasdaq has complied with the 
requirements of Rule 10C-1 in this regard.
---------------------------------------------------------------------------

    \178\ As stated by commenters, ``[h]igh director fees relative 
to other sources of income can compromise director objectivity'' and 
``[h[ighly paid directors also may be more inclined to approve large 
executive pay packages.'' AFL-CIO Letter. See also Teamsters Letter.
    \179\ See Nasdaq Response Letter.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, Nasdaq has 
concluded that an outright bar from service on a company's compensation 
committee of any director with an affiliation with the company, its 
subsidiaries, and their affiliates is inappropriate for compensation 
committees. Nasdaq's existing independence standards will also continue 
to apply to those directors serving on the compensation committee. 
Nasdaq maintains that it may be appropriate for certain affiliates, 
such as representatives of significant stockholders, to serve on 
compensation committees ``since their interests are likely aligned with 
those of other stockholders in seeking an appropriate executive 
compensation program.'' In spite of the argument of one commenter in 
favor of an outright ban on affiliations with the company,\180\ the 
Commission believes that Nasdaq's approach of requiring boards only to 
consider such affiliations is reasonable and consistent with the 
requirements of the Act.
---------------------------------------------------------------------------

    \180\ See Teamsters Letter and supra note 120 and accompanying 
text.
---------------------------------------------------------------------------

    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.'' \181\ In determining that Nasdaq's affiliation standard is 
consistent with Sections 6(b)(5) and 10C under the Act, the Commission 
notes that Nasdaq's proposal requires a company's board, in selecting 
compensation committee members, to consider whether any such 
affiliation would impair a director's judgment as a member of the 
compensation committee. We believe that this should give companies the 
flexibility to assess whether a director who is an affiliate, including 
a significant shareholder, should or should not serve on the company's 
compensation committee, depending on the director's particular 
affiliations with the company.
---------------------------------------------------------------------------

    \181\ Rule 10C-1 Adopting Release. 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 the director's judgment'' as a member of the 
committee. See also infra notes 183-184.
---------------------------------------------------------------------------

    As to consideration by Nasdaq of whether it should adopt any 
additional relevant independence factors, the Exchange stated that it 
reviewed its rules in the light of Rule 10C-1, but concluded that its 
existing rules together with its proposed rules are sufficient to 
ensure committee member independence. The Commission believes that, 
through this review, the Exchange has complied with the requirement 
that it consider relevant factors, including, but not limited to, the 
Fees and Affiliation Factors in determining its definition of 
independence for compensation committee members. The Commission does 
not agree with the commenters who argued that the Exchange's proposal 
falls short of the requirements and/or intent of Section 10C of the Act 
and Rule 10C-1.\182\ The Commission notes that Rule 10C-1 requires each 
exchange to consider relevant factors in determining independence 
requirements for members of a compensation committee, but does not 
require the final definition and the rules imposed on listed companies 
to reflect any such additional factors.
---------------------------------------------------------------------------

    \182\ See supra notes 110-111 and accompanying text.
---------------------------------------------------------------------------

    As noted above, several commenters argued that Nasdaq should 
require other ties between directors and the company, including 
business and personal relationships with executives of the company, to 
be considered by boards in making independence determinations.\183\ The 
Commission did emphasize in the Rule 10C-1 Adopting Release that ``it 
is important for exchanges to consider other ties between a listed 
issuer and a director * * * that might impair the director's judgment 
as a member of the compensation committee,'' \184\ and noted that ``the 
exchanges might conclude that personal or business relationships 
between members of the compensation committee and the listed issuer's 
executive officers should be addressed in the definition of 
independence.'' However, the Commission did not require exchanges to 
reach this conclusion and thus Nasdaq's decision that such ties need 
not be included explicitly in its definition of independence does not 
render its proposal insufficient.
---------------------------------------------------------------------------

    \183\ See supra notes 123-124 and accompanying text.
    \184\ Id.
---------------------------------------------------------------------------

    In explaining why it did not include, specifically, personal and 
business relationships as a factor, Nasdaq cites its standards for 
Independent Directors, generally, which require the board of directors 
of a listed issuer to make an affirmative determination that each such 
director has no relationship that, in the opinion of the board, would 
interfere with the exercise of independent judgment in carrying out the 
responsibilities of a director.\185\ All compensation committee members 
must meet the general independence standards under Nasdaq's rules in 
addition to the two new criteria being adopted herein. The Commission 
therefore expects that boards, in fulfilling their obligations, will 
apply this standard to each such director's individual responsibilities 
as a board member, including specific committee memberships such as the 
compensation committee. Although personal and business relationships, 
related party transactions, and other matters suggested by commenters 
are not specified either as bright-line disqualifications or explicit 
factors that must be considered in evaluating a director's 
independence, the Commission believes that compliance with Nasdaq's 
rules and the provision noted above would demand consideration of such 
factors with respect to compensation committee members, as well as to 
all Independent Directors on the board.
---------------------------------------------------------------------------

    \185\ See Nasdaq Rule 5605(a)(2).
---------------------------------------------------------------------------

    The Commission does not believe that Nasdaq is required in the 
current proposed rule change to consider further revisions of its 
independence rules as suggested by some commenters,\186\ although it 
may wish to do so in the future. Finally, notwithstanding the concern 
of some

[[Page 4566]]

commenters,\187\ the Commission confirms that Rule 10C-1 does not mean 
that a director cannot be disqualified on the basis of one factor 
alone. Although Nasdaq does not state this explicitly, the Commission 
believes that nothing in Rule 10C-1 or in Nasdaq's current or proposed 
rules implies otherwise.
---------------------------------------------------------------------------

    \186\ See supra note 134 and accompanying text.
    \187\ See supra notes 130-132 and accompanying text.
---------------------------------------------------------------------------

    Nasdaq proposes that the ``Exceptional and Limited Circumstances'' 
provision in its current rules, which allows one director who fails to 
meet the Exchange's Independent Director definition to serve on a 
compensation committee under certain conditions, apply to the enhanced 
independence standards discussed above that the Exchange is adopting to 
comply with Rule 10C-1. The Commission believes that the discretion 
granted to each exchange by Rule 10C-1, generally, to determine the 
independence standards it adopts to comply with the Rule includes the 
leeway to carve out exceptions to those standards, as long as they are 
consistent with the Act. Nasdaq also cites, in justifying the 
exception, the provision of Rule 10C-1 that permits an exchange to 
exempt a particular relationship with respect to members of the 
compensation committee as the exchange determines is appropriate, 
taking into consideration the size of an issuer and any other relevant 
factors. In this respect, Nasdaq states that the exception, although 
infrequently used, has been valuable, and states that the flexibility 
afforded by the exception is particularly important for a smaller 
company.
    Regarding the justification for such an exception, the Commission 
notes that it long ago approved as consistent with the Act the same 
exception and concept in the context of Nasdaq's definition of 
Independent Director under Exchange Rule 5605(a)(2),\188\ with respect 
to compensation committees, as well as for nominations committees and 
audit committees. Although the additional independence standards 
required by Rule 10A-3 for audit committees are not subject to this 
exception, the Commission notes that Rule 10C-1 grants exchanges more 
discretion than Rule 10A-3 when considering independence standards for 
compensation committee membership. One commenter was also concerned 
that the board could include a non-independent director indefinitely on 
its compensation committee by using the exception.\189\ The Commission 
notes that a member appointed under the Exceptional and Limited 
Circumstances provision may not serve longer than two years. Further, 
in the Nasdaq Response Letter, the Exchange stated that it tracks the 
use of the exception by listed companies and would have discretion in 
its rules to deny the use of the exception if it thought a company was 
abusing it.\190\
---------------------------------------------------------------------------

    \188\ See supra note 19.
    \189\ See Brown Letter.
    \190\ See supra note 141.
---------------------------------------------------------------------------

B. Authority of Committees to Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers and Factors

    As discussed above, Nasdaq 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.\191\ As such, the Commission believes these provisions meet 
the mandate of Rule 10C-1 and are consistent with the Act.
---------------------------------------------------------------------------

    \191\ The Commission notes that, in Amendment No. 1, Nasdaq 
revised its proposed rule text to set forth these requirements in 
full.
---------------------------------------------------------------------------

    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. The Commission believes that this provision 
is consistent with Rule 10C-1 and Section 6(b)(5) of the Act.
    As noted above, one commenter believed that Rule 10C-1 could be 
read as not requiring a compensation committee to consider the 
enumerated independence factors with respect to regular outside legal 
counsel and sought confirmation of this reading from Nasdaq.\192\ This 
reading is incorrect and Nasdaq has amended its rule language to 
clarify this issue. The Commission notes that Rule 10C-1 includes an 
instruction that specifically requires a compensation committee to 
conduct the independence assessment with respect to ``any compensation 
consultant, legal counsel or other adviser that provides advice to the 
compensation committee, other than in-house counsel.'' \193\ To avoid 
any confusion, Nasdaq, in Amendment No. 1, added rule text that 
reflects this instruction in its own rules.\194\
---------------------------------------------------------------------------

    \192\ See supra notes 145-146 and accompanying text.
    \193\ See Instruction to paragraph (b)(4) of Rule 10C-1.
    \194\ See supra note 54 and accompanying text.
---------------------------------------------------------------------------

    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. However, Nasdaq has proposed, in 
Amendment No. 2, to add language to the provision regarding the 
independence assessment of compensation advisers \195\ to state that 
the compensation committee is not required to conduct an independence 
assessment for a compensation adviser that acts in a role limited to 
the following activities for which no disclosure is required under Item 
407(e)(3)(iii) of Regulation S-K: (a) Consulting on any broad-based 
plan that does not discriminate in scope, terms, or operation, in favor 
of executive officers or directors of the company, and that is 
available generally to all salaried employees; and/or (b) providing 
information that either is not customized for a particular issuer or 
that is customized based on parameters that are not developed by the 
adviser, and about which the adviser does not provide advice. Nasdaq 
states that this exception is based on Item 407(e)(3)(iii) of 
Regulation S-K, which provides a limited exception to the Commission's 
requirement for a registrant to disclose any role of compensation 
consultants in determining or recommending the amount and form of a 
registrant's executive and director compensation.\196\
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    \195\ See proposed Rule 5605(d)(3), as amended by Amendment No. 
2.
    \196\ See 17 CFR 229.407(e)(3)(iii).
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    The Commission views Nasdaq's proposed exception as reasonable, as 
the Commission determined, when adopting the compensation consultant 
disclosure requirements in Item 407(e)(3)(iii), that the two excepted 
categories of advice do not raise conflict of interest concerns.\197\ 
The Commission also made similar findings when it noted it was 
continuing such exceptions in the Rule 10C-1 Adopting Release, 
including excepting such roles from the new conflict of interest 
disclosure rule required to implement Section

[[Page 4567]]

10C(c)(2). The Commission also believes that the exception should allay 
some of the concerns raised by the commenters regarding the scope of 
the independence assessment requirement. Based on the above, the 
Commission believes these limited exceptions are consistent with the 
investor protection provisions of Section 6(b)(5) of the Act.
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    \197\ See Proxy Disclosure Enhancements, Securities Act Release 
No. 9089 (Dec. 19, 2009), 74 FR 68334 (Dec. 23, 2009), at 68348 
(``We are persuaded by commenters who noted that surveys that 
provide general information regarding the form and amount of 
compensation typically paid to executive officers and directors 
within a particular industry generally do not raise the potential 
conflicts of interest that the amendments are intended to 
address.'').
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    Regarding the belief of another commenter that the independence 
assessment requirement could discourage compensation committees from 
obtaining the advice of advisers,\198\ the Commission notes that, as 
already discussed, nothing in the proposed rule prevents a compensation 
committee from selecting any adviser that it prefers, including ones 
that are not independent, after considering the six factors. In this 
regard, in Amendment No. 1 Nasdaq added specific rule language stating, 
among other things, that nothing in its rule requires a compensation 
adviser to be independent, only that the compensation committee must 
consider the six independence factors before selecting or receiving 
advice from a compensation adviser.\199\
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    \198\ See Corporate Secretaries Letter and supra note 151 and 
accompanying text.
    \199\ See supra notes 56-58 and accompanying text.
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    Regarding the commenter's concern over the burdens that the 
Exchange proposal imposes,\200\ the Commission notes that Rule 10C-1 
explicitly requires exchanges to require consideration of these six 
factors.\201\ Moreover, five of the six factors 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.\202\ The 
changes to Nasdaq's rules on compensation advisers should therefore 
benefit investors in Nasdaq listed 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.
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    \200\ See supra note 151 and accompanying text.
    \201\ The Commission also does not agree with the argument of 
one commenter that Nasdaq must require compensation committees to 
specifically consider, among the independence factors relating to 
compensation advisers, whether such an adviser requires that clients 
contractually agree to indemnify or limit their liability. See CII 
Letter. The Commission views as reasonable the Exchange's belief 
that the six factors set forth in Rule 10C-1 are sufficient for the 
required independence assessment.
    \202\ See Rule 10C-1 Adopting Release, supra note 11.
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    Finally, one commenter requested guidance ``on how often the 
required independence assessment should occur.'' \203\ This commenter 
observed that it ``will be extremely burdensome and disruptive if prior 
to each such [compensation committee] meeting, the committee had to 
conduct a new assessment.'' The Commission anticipates that 
compensation committees will conduct such an independence assessment at 
least annually.
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    \203\ See Corporate Secretaries Letter.
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C. 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, with at least two 
members is reasonable and consistent with the protection of investors. 
The Commission notes that Nasdaq's rules for compensation committees 
have not made a distinction for Smaller Reporting Companies in the 
past. However, consistent with the exemption of Smaller Reporting 
Companies from Rule 10C-1, the Exchange has decided not to require 
Smaller Reporting Companies to meet its proposed new independence 
requirements as to compensatory fees and affiliation as well as the 
requirements concerning compensation advisers.
    Nasdaq will also require a Smaller Reporting Company to adopt a 
formal written compensation committee charter or board resolution that 
specifies the compensation committee's responsibilities and authority, 
but the company will not be required to review and reassess the 
adequacy of the charter or board resolution on an annual basis. This is 
different from other Nasdaq listed companies, which must include the 
committee's responsibilities and authority specifically in a formal 
written charter and must review the charter's adequacy on an annual 
basis.
    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 Nasdaq to provide some flexibility to 
Smaller Reporting Companies regarding whether the compensation 
committee's responsibilities should be set forth in a formal charter or 
through board resolution. Further, because a Smaller Reporting Company 
does not need to include in its charter or board resolution the 
additional provisions regarding compensation advisers that Nasdaq is 
requiring all other listed companies to include to comply with Rule 
10C-1,\204\ and in view of the potential additional costs of an annual 
review, it is reasonable not to require a Smaller Reporting Company to 
conduct an annual assessment of its charter or board resolution.
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    \204\ As discussed supra notes 64-65 and accompanying text, the 
charter or board resolution of a Smaller Reporting Company will not 
be required to include, like the charters of other listed companies, 
a grant of authority to the committee to retain compensation 
advisers, a requirement that the company fund such advisers, and a 
requirement that the committee consider independence factors before 
selecting such advisers, because Smaller Reporting Companies are not 
subject to these requirements.
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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 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 Nasdaq proposes for 
companies that fail to comply with the enhanced independence 
requirements designed to comply with Rule 10C-1 is not exactly the same 
as the cure period that the Rule sets forth as an option.\205\ The 
Nasdaq proposal adds the proviso that, if the annual shareholders 
meeting occurs no later than 180 days following the event that caused 
the noncompliance, the company instead has 180 days from the event to 
regain compliance.
---------------------------------------------------------------------------

    \205\ See supra notes 42-44 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that, although the cure period proposed by 
Nasdaq gives a company more leeway in certain circumstances than the 
cure period suggested under Rule 10C-1, the accommodation is fair and 
reasonable. As a general matter, it allows all companies at least 180 
days to cure noncompliance. To give a specific example, the proposal 
would afford a company additional time to comply,

[[Page 4568]]

than the Rule 10C-1 option, where a member of the compensation 
committee ceases to be independent two weeks before the company's next 
annual meeting. The Commission further notes that it has approved a 
similar cure period in the context of other Nasdaq corporate governance 
requirements.\206\
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    \206\ See Securities Exchange Act Release No. 54421 (September 
11, 2006), 71 FR 54698 (September 18, 2006) (approval of File No. 
NASDAQ-2006-011, modifying the cure period available to an issuer 
that loses an independent director or audit committee member).
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    The Commission agrees with the understanding of the commenter who 
believed that Rule 10C-1 requires that an exchange provide a company an 
opportunity to cure any defects in compliance with any of the new 
requirements.\207\ The Commission believes that Nasdaq's general due 
process procedures for the delisting of companies that are out of 
compliance with the Exchange's rules satisfy this requirement.\208\ In 
particular, Nasdaq's rules provide that, unless continued listing of 
the company raises a public interest concern, when a company is 
deficient in compliance with, among other rules, Rule 5605, which 
includes the Exchange's standards for compensation committees, the 
listed company may submit a plan for compliance. The rules permit the 
Exchange's staff to extend the deadline for regaining compliance, under 
established parameters, and, if the company does not regain compliance 
within the time period provided by all applicable staff extensions--at 
which point the staff will immediately issue a determination indicating 
the date on which the company's securities will be suspended--a company 
can still request review by a hearings panel.
---------------------------------------------------------------------------

    \207\ See supra note 154 and accompanying text.
    \208\ See, generally, Nasdaq Rule 5810.
---------------------------------------------------------------------------

    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.

E. Exemptions

    As discussed above, asset-backed issuers and other passive issuers, 
cooperatives, limited partnerships, registered management investment 
companies, and controlled companies are exempt from Nasdaq's existing 
rules relating to compensation, and Nasdaq proposes to extend the 
exemptions for these entities to the new requirements of the proposed 
rule change. The Commission notes that Rule 10C-1 allows exchanges to 
exempt from the listing rules adopted pursuant to Rule 10C-1 certain 
categories of issuers, as the national securities exchange determines 
is appropriate.\209\ The Commission believes that, given the specific 
characteristics of the aforementioned types of issuers,\210\ it is 
reasonable and consistent with Section 6(b)(5) of the Act for the 
Exchange to exempt them from the new requirements.
---------------------------------------------------------------------------

    \209\ The Commission notes, moreover, that, in the case of 
limited partnerships and open-end registered management investment 
companies, Rule 10C-1 itself provides exemptions from the 
independence requirements of the Rule. 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). The 
additional Nasdaq provisions requiring listed companies to have a 
two-member compensation committee and a written committee charter, 
will, of course, not apply to the exempted entities, which are 
currently required to have neither a compensation committee nor the 
Alternative Option.
    \210\ See supra Section II.B.4.
---------------------------------------------------------------------------

    Specifically with regard to investment companies, the Commission 
received one comment letter supporting the Exchange's proposal to 
exempt such companies from the Rule 10C-1 requirements.\211\ As the 
commenter noted, although Rule 10C-1 exempts certain entities, 
including registered open-end management investment companies, from the 
enhanced independence requirements for members of compensation 
committees, it did not explicitly exempt other types of registered 
management investment companies, including closed-end funds, from any 
of the requirements of Rule 10C-1. Under the Nasdaq proposal, both 
closed-end and open-end funds would be exempt from all the requirements 
of the rule.
---------------------------------------------------------------------------

    \211\ See ICI Letter.
---------------------------------------------------------------------------

    The commenter supported this aspect of the proposal, stating that 
both open-end and closed-end funds typically are externally managed and 
do not employ executives or by their nature have employees. The 
commenter believed that such funds are adequately governed by other 
federal regulation with respect to corporate governance matters, 
generally, and compensation matters, specifically.\212\ The Commission 
believes that this exemption is reasonable because the Investment 
Company Act of 1940 already assigns important duties of investment 
company governance, such as approval of the investment advisory 
contract, to independent directors, and because such entities were 
already generally exempt from Nasdaq's existing compensation committee 
requirements. The Commission notes that, as the commenter stated, that 
almost all registered investment companies do not employ executives or 
employees or have compensation committees.
---------------------------------------------------------------------------

    \212\ Id.
---------------------------------------------------------------------------

    The Commission notes that Nasdaq proposes, however, to amend its 
current rule for foreign private issuers, which allows such issuers to 
follow their home country practice in lieu of the Exchange's standards 
regarding a company's compensation decision-making process. The current 
rule includes the proviso that the issuer must disclose its reliance on 
the exemption. Nasdaq proposes to conform its rules in this regard with 
the provision of Rule 10C-1 permitting a foreign private issuer to 
follow home country practice only when it meets the additional 
condition that the issuer disclose the reasons why it does not have an 
independent compensation committee.

F. Transition to the New Rules for Companies Listed as of the Effective 
Date

    The Commission believes that the deadlines for compliance with the 
proposal's various provisions are reasonable and should afford listed 
companies adequate time to make the changes, if any, necessary to meet 
the new standards. The Commission notes that the provision in the 
original proposal requiring companies to comply with certain of the 
requirements immediately has been revised in Amendment No. 1 to allow 
companies until July 1, 2013 to satisfy these requirements.\213\ The 
Commission also believes that the revised deadline proposed in 
Amendment No. 1, which gives companies until the earlier of their first 
annual meeting after January 15, 2014, or October 31, 2014, to comply 
with the remaining provisions is more clear-cut than the deadline in 
the original proposal and also matches the deadline set forth by the 
New York Stock Exchange in its proposed rule change to comply with Rule 
10C-1.\214\
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    \213\ See supra notes 73-74 for the provisions to which the new 
transition date applies.
    \214\ See Securities Exchange Act Release No. 68011 (October 9, 
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49).
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G. Phase-In Schedules: IPOs; Companies That Lose their Exemptions; 
Companies Transferring From Other Markets

    The Commission believes that it is reasonable for Nasdaq to allow, 
with

[[Page 4569]]

respect to IPOs, companies emerging from bankruptcy, companies ceasing 
to be controlled companies, and companies transferring from other 
markets, the same phase-in schedule for compliance with the new 
requirements as is permitted under its current compensation-related 
rules.
    The Commission also believes that the phase-in schedule for 
companies that cease to be Smaller Reporting Companies, as revised in 
Amendment No. 1, affords such companies ample time to come into 
compliance with the full panoply of rules that apply to other 
companies. In the Commission's view, the revised schedule also offers 
such companies more clarity in determining when they will be subject to 
the heightened requirements.

V. Accelerated Approval of Amendment Nos. 1 and 2 to the Proposed Rule 
Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\215\ for approving the proposed rule change, as modified by 
Amendment Nos. 1 and 2, prior to the 30th day after the date of 
publication of notice in the Federal Register. The change made to the 
proposal by Amendment No. 1 to set forth in detail the requirements of 
Rule 10C-1(b)(2)-(4) explicitly in the Exchange's rules, rather than 
incorporating these details by reference as in the original 
proposal,\216\ is not a substantive one and merely codifies the 
original intent of that provision. Moreover, the change improves the 
proposal because it brings together the full set of the Exchange's 
rules on compensation committees in one place, thereby easing 
compliance for listed companies and benefiting investors seeking an 
understanding of an issuer's obligations with regard to determining 
executive compensation.
---------------------------------------------------------------------------

    \215\ 15 U.S.C. 78s(b)(2).
    \216\ See supra note 49 and accompanying text.
---------------------------------------------------------------------------

    The change made by Amendment No. 1 to require companies currently 
listed on Nasdaq to comply with certain of the new rules by July 1, 
2013 rather than immediately, as originally proposed,\217\ reasonably 
affords companies more time to take the steps necessary for compliance. 
The change to require such companies to comply with the remaining 
provisions by the earlier of their first annual meeting after January 
15, 2014, or October 31, 2014, rather than by the deadline originally 
proposed,\218\ still allows ample time for companies to adjust to the 
new rules, and accords with the deadline set by NYSE in its proposed 
rule change to comply with Rule 10C-1, which was published at the same 
time as the Nasdaq proposal.\219\
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    \217\ See supra note 74 and accompanying text.
    \218\ See supra note 78 and accompanying text.
    \219\ The Commission received one comment letter relating to 
this provision in the NYSE proposal, in which the commenter 
supported this transition period for compliance with the new 
compensation committee independence standards but believed that a 
longer period should be provided to implement the other listing 
standards that NYSE proposed. See Letter to Elizabeth M. Murphy, 
Secretary, Commission, from Robert B. Lamm, Chair, Securities Law 
Committee, The Society of Corporate Secretaries & Governance 
Professionals, concerning File No. SR-NYSE-2012-49, dated December 
7, 2012.
---------------------------------------------------------------------------

    The revision made by Amendment No. 1 to the phase-in rules for 
companies that cease to be Smaller Reporting Companies \220\ 
establishes a schedule that is easier to understand, while still 
affording such companies adequate time to come into compliance. The 
Commission notes that the Start Date of the phase-in period for such a 
company is six months after the Determination Date, and the company is 
given no less than another six months from the Start Date to gain 
compliance with the rules from which it had been previously exempt. 
Moreover, with respect to the enhanced independence standards for 
compensation committee members (relating to fees and affiliation with 
the company), only one member must meet these standards within six 
months after the Start Date. The company is given nine months from the 
Start Date (i.e., fifteen months from the Determination Date) to have a 
majority of committee members meeting the standards, and a full year 
from the Start Date (i.e., eighteen months from the Determination Date) 
to fully comply with the standards.
---------------------------------------------------------------------------

    \220\ See supra note 85 and accompanying text.
---------------------------------------------------------------------------

    The addition by Amendment No. 1 of a preamble to proposed Rule 
5605(d) to set forth the obligations of a company during the transition 
period until the new rules apply introduces no substantive change.\221\ 
It merely mirrors the instructions in the preamble to the Sunsetting 
Provisions, providing clarity for listed companies. The inclusion in 
Amendment No. 1 of language in Nasdaq's rules that requires a 
compensation committee to conduct the independence assessment with 
respect to ``any compensation consultant, legal counsel or other 
adviser that provides advice to the compensation committee, other than 
in-house counsel'' merely reflects an instruction in Rule 10C-1 
itself.\222\ Finally, the addition of further guidance by Amendment No. 
1 merely clarifies that nothing in the Exchange's rules requires a 
compensation adviser to be independent, only that the compensation 
committee consider the independence factors before selecting or 
receiving advice from a compensation adviser,\223\ and is not a 
substantive change.
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    \221\ See supra note 73.
    \222\ See supra note 194 and accompanying text.
    \223\ See supra note 56 and accompanying text.
---------------------------------------------------------------------------

    Amendment No. 2 excluded advisers that provide certain types of 
services from the independence assessment.\224\ As discussed above, the 
Commission has already determined to exclude such advisers from the 
disclosure requirement regarding compensation advisers in Regulation S-
K because these types of services do not raise conflict of interest 
concerns. For all the reasons discussed above, the Commission finds 
good cause to accelerate approval of the proposed changes made by 
Amendment Nos. 1 and 2.
---------------------------------------------------------------------------

    \224\ See supra notes 59-60 and accompanying text.
---------------------------------------------------------------------------

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment Nos. 1 and 2 
are 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-NASDAQ-2012-109 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-NASDAQ-2012-109. 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

[[Page 4570]]

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 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of Nasdaq. 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-NASDAQ-2012-109, and should 
be submitted on or before February 12, 2013.

VII. Conclusion

    In summary, and for the reasons discussed in more detail above, the 
Commission believes that the rules being adopted by Nasdaq, taken as 
whole, should benefit investors by helping listed companies make 
informed decisions regarding the amount and form of executive 
compensation. Nasdaq'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.
    Nasdaq'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 
Nasdaq-listed companies are better informed about potential conflicts 
when selecting and receiving advice from advisers. Similarly, the 
provisions of Nasdaq'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 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, as modified by Amendment Nos. 1 and 2, is consistent with 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with Section 6(b)(5) 
of the Act.\225\
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    \225\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\226\ that the proposed rule change, SR-NASDAQ-2012-109, as 
modified by Amendment Nos. 1 and 2, is approved.
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    \226\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\227\
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    \227\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01107 Filed 1-18-13; 8:45 am]
BILLING CODE 8011-01-P


