
[Federal Register Volume 78, Number 15 (Wednesday, January 23, 2013)]
[Notices]
[Pages 4936-4946]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01220]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68653; File No. SR-CHX-2012-13]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Amendment No. 3, and Order Granting Accelerated 
Approval for Proposed Rule Change, as Modified by Amendment Nos. 1, 2 
and 3, To Amend the Listing Rules for Compensation Committees To Comply 
With Securities Exchange Act Rule 10-C-1 and Make Other Related Changes

January 14, 2013.

I. Introduction

    On September 26, 2012, Chicago Stock Exchange, Inc. (``Exchange'' 
or ``CHX'') 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. On October 10, 2012, CHX filed 
Amendment Nos. 1 and 2 to the proposed rule change.\3\ The proposed 
rule change, as modified by Amendment Nos. 1 and 2 thereto, was 
published for comment in the Federal Register on October 16, 2012.\4\ 
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 14, 2013.\5\ The Commission received 
no comment letters on the proposal.\6\ On January 7, 2013, the Exchange 
filed Amendment No. 3 to the proposed rule change.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 indicated that the proposal had been 
approved by CHX's board of directors on September 27, 2012. 
Amendment No. 2 replaced the original filing in full.
    \4\ See Securities Exchange Act Release No. 68033 (October 10, 
2012), 77 FR 63370 (``Notice'').
    \5\ See Securities Exchange Act Release No. 68311 (November 28, 
2012), 77 FR 71852 (December 4, 2012).
    \6\ The Commission notes that comments were received on 
substially similar proposals filed by New York Stock Exchange, LLC 
and The Nasdaq Stock Market LLC. For a discussion and summary of 
these comments see Securities Exchange Act Release Nos. 68011 
(October 9, 2012) (``NYSE Notice) (File No. SR-NYSE-2012-49); 68013 
(October 9, 2012) (``Nasdaq Notice'') (File No. SR-NASDAQ-2012-109); 
68639 (January 11, 2013) (``NYSE Approval Order''); and 68640 
(January 11, 2013) (``Nasdaq Approval Order'').
    \7\ In Amendment No. 3 to SR-CHX-2012-013, CHX: (a) Removed a 
proposed amendment to Rule 4 concerning delisting standards, see 
infra notes 21-22 and accompanying text; (b) added commentary to 
state that the independence assessment of compensation advisers 
required of compensation committees does not need to be conducted 
for in-house counsel and 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 53-55 and 
accompanying text; and (c) added commentary to state that the 
independence assessment of compensation advisers required of 
compensation committees does not require the adviser to be 
independent, only that the compensation committee consider the 
enumerated factors before selecting or receiving advise from the 
adviser; see infra notes 56-58 and accompanying text; (d) removed a 
proposed exemption from the rule; and (e) reincorporated existing 
Rules 19(d) and 19(p)(3) as ``sunset provisions'' with text that 
would be effective until July 1, 2013, rather than delete them in 
their entirety and otherwise modified the transition schedule for 
currently listed companies with provisions of the proposed rule. See 
infra notes 72-74 and accompanying text.
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    This order approves the proposed rule change, as modified by 
Amendment Nos. 1, 2, and 3 thereto, on an accelerated basis.

II. Description of the 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''),\8\ the Commission proposed 
Rule 10C-1 under the Act,\9\ 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.\10\
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    \8\ Public Law 111-203, 124 Stat. 1900 (2010).
    \9\ 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'').
    \10\ 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 \11\ of 
a listed issuer must be a member of the board of directors of the 
issuer, and must otherwise be independent.\12\ In determining the 
independence standards for members of compensation committees of listed 
issuers, Rule 10C-

[[Page 4937]]

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'').\13\
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    \11\ For a definition of the term ``compensation committee'' for 
purposes of Rule 10C-1, see Rule 10C-1(c)(2)(i)-(iii).
    \12\ See Rule 10C-1(a) and (b)(1).
    \13\ 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.\14\ The exchange rules 
must also provide that each listed issuer provide for appropriate 
funding for the payment of reasonable compensation, as determined by 
the compensation committee, to any compensation adviser retained by the 
compensation committee.\15\ 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,\16\ as 
well as any other factors identified by the relevant exchange in its 
listing standards.\17\
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    \14\ See Rule 10C-1(b)(2).
    \15\ See Rule 10C-1(b)(3).
    \16\ See Rule 10C-1(b)(4). The six factors, which CHX proposes 
to set forth in its rules, are specified in the text accompanying 
note 51, infra.
    \17\ 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. CHX's Proposed Rule Change as Amended

    To comply with Rule 10C-1, CHX proposes to amend three sections of 
its rules in Article 22 concerning corporate governance requirements 
for companies listed on the Exchange: Rule 2, ``Admittance to 
Listing;'' Rule 19(d), ``Corporate Governance--Compensation 
Committee;'' and Rule 19(p)(3), ``Corporate Governance--Definitions--
Independent Director.'' In addition, CHX proposes to make some other 
changes to its rules regarding compensation committees. To accomplish 
these changes, the Exchange proposes to replace current Rules 19(d) and 
19(p)(3) with new operative text that will be effective on July 1, 
2013. Current Rules 19(d) and 19(p)(3), which would remain effective 
until June 30, 2013,\18\ provides that compensation of the executive 
officers of a listed company shall 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.\20\
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    \18\ See Amendment No. 3, supra note 7.
    \19\ ``Independent Directors,'' as defined in CHX Rule 19(p)(3) 
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.
    \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 19(d)(1).
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1. Admittance to Listing
    CHX proposes to clarify that the Exchange's Board of Governors may 
only admit securities for listing ``once the requirements of this 
Article are met.'' \21\ The Exchange believes that this modification 
largely adopts much of the current Rule 2, while only clarifying this 
fact.\22\
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    \21\ See proposed Rule 2.
    \22\ See Notice, supra note 4.
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2. Compensation Committee Composition and Independence Standards
    CHX proposes to retain its existing requirement that each issuer 
must have a compensation committee, composed entirely of Independent 
Directors, as defined in current Rule 19(p)(3),\23\ to oversee 
executive compensation or, in the alternate, a majority of the issuer's 
independent directors providing such oversight.\24\ CHX proposes to 
modify, however, its definition of compensation committee to include 
the following three, rather than two, options: (1) A committee 
designated as a compensation committee: (2) in the absence of a 
committee designated as a compensation committee, a committee 
performing functions typically performed by a compensation committee, 
including oversight of executive compensation, even if it performs 
other functions; or (3) in the absence of any such committees, the 
members of the board of directors who oversee executive compensation on 
behalf of the board, who together must comprise a majority of the 
board's independent directors.\25\ The existing alternative option to a 
formal committee, as described above, would therefore continue to be 
available to issuers. In addition, CHX proposes that the Independent 
Directors serving on a Compensation Committee must meet the additional 
requirements described below.\26\
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    \23\ See proposed Rule 19(d)(1).
    \24\ See id.
    \25\ See proposed Rule 19(d)(1)(A)-(C). For ease of reference 
throughout this release, in our discussion of the CHX rules we are 
approving, references to an issuer's ``Compensation Committee'' 
include all three options.
    \26\ See proposed Rule 19(d)(1). For the current definition of 
``Independent Director,'' see supra note 19.
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    CHX also proposes that an issuer must adopt a formal written 
charter or board resolution related to the Compensation Committee.\27\ 
The charter or board resolution must address the scope of the 
Compensation Committee's responsibilities and how it carries out those 
responsibilities, including structure, processes and membership 
requirements.\28\ Generally, the proposed rule would require the 
charter or board resolution to specify the Compensation Committee's 
responsibilities 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 deliberation on his or her own compensation.\29\ In 
addition, the charter or board resolution must specify the Compensation 
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

[[Page 4938]]

and receiving advice from advisers; and receiving funding from the 
company to engage such advisers, which are discussed in detail 
below.\30\
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    \27\ See proposed Rule 19(d)(2). 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 14-16 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 issuers to 
have a charter or board resolution, and to include this authority 
and set of responsibilities in addition to the required content 
discussed infra at text accompanying notes 46-51.
    \28\ See proposed Rule 19(d)(2)(A).
    \29\ See proposed Rule 19(d)(2)(B); see also proposed Rule 
19(d)(3).
    \30\ See proposed Rule 19(d)(2)(C); see also proposed Rule 
19(d)(4) and infra notes 47-51 and accompanying text. Because 
smaller reporting companies are not required to comply with the 
provisions relating to compensation advisers in proposed CHX Rule 
19(d)(4), see infra notes 61-62, their charters or board resolutions 
are not required to reflect these responsibilities.
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    As noted above, CHX's rules currently require each member of a 
listed company's Compensation Committee to be an Independent Director 
as defined in CHX Rule 19(p)(3).\31\ CHX will retain Rule 19(p)(3), 
which would continue to contain the bright line test and provide that 
no director qualifies as ``independent'' unless the board of directors 
of the issuer affirmatively determines that the director has no 
relationship that would interfere with the exercise of independent 
judgment in carrying out the responsibilities of a director. 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, CHX discussed its 
consideration of these factors,\32\ and proposed the following:\33\
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    \31\ See supra note 19.
    \32\ See Notice, supra note 4.
    \33\ These additional factors would not apply to the selection 
of members of the Compensation Committee of a smaller reporting 
company.
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    With respect to the Fees Factor and the Affiliation Factor, CHX 
proposes to adopt a provision stating that the board of directors of 
the listed company would be required, in affirmatively determining the 
independence of any director who will serve on the Compensation 
Committee of the board, to consider all factors specifically relevant 
to determining whether a director has a relationship to the issuer 
which is material to that director's ability to be independent from 
management in connection with the duties of a Compensation Committee 
member, including, but not limited to the following factors: (i) The 
source of compensation of such director, including any consulting, 
advisory or other compensatory fee paid by the issuer to the director; 
and (ii) whether such director is affiliated with the issuer, a 
subsidiary of the issuer or an affiliate of a subsidiary of the 
issuer.\34\
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    \34\ See proposed Rule 19(p)(3)(B).
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    With respect to the Fees Factor, CHX also proposes additional 
guidance that the board, when considering the sources of a director's 
compensation, should consider whether the director receives 
compensation from any person or entity that would impair the director's 
ability to make independent judgments about the issuer's executive 
compensation.\35\
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    \35\ See proposed Rule 19(p)(3)(B)(i).
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    With respect to the Affiliation Factor, CHX proposes, similarly, to 
provide additional guidance to provide that the board should consider 
whether an affiliate relationship places the director under the direct 
or indirect control of the listed company or its senior management, or 
creates a direct relationship between the director and members of 
senior management, `` * * * in each case of a nature that would impair 
her ability to make independent judgments about the issuer's executive 
compensation.'' \36\
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    \36\ See proposed Rule 19(p)(3)(B)(ii).
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    Although Rule 10C-1 requires that exchanges consider ``relevant 
factors'' not limited to the Fees Factor and Affiliation Factor, CHX 
states that, after reviewing its current and proposed listing rules, it 
concluded not to propose any specific numerical tests with respect to 
the factors specified in proposed Rule 19(p)(3)(B) or to adopt a 
requirement to consider any other specific factors.\37\ In its 
proposal, CHX stated that it did not intend to adopt an absolute 
prohibition on a board making an affirmative finding that a director is 
independent solely on the basis that the director or any of the 
director's affiliates are shareholders owning more than some specified 
percentage of the issuer.\38\ Further, as stated in its filing, CHX 
believes that its existing ``bright-line'' independence standards, as 
set forth in current Rule 19(p)(3)(A)-(G), and the additional 
independence requirements proposed in Rule 19(p)(3)(B) are sufficiently 
broad to encompass the types of relationships which would generally be 
material to a director's independence for compensation committee 
service.\39\ Additionally, CHX stated that Rule 19(p)(3) already 
requires the board to consider any other material relationships between 
the director and the issuer or its management that are not the subject 
of ``bright-line'' tests in existing Rule 19(p)(3)(A)-(G).\40\ CHX 
believes that these requirements with respect to general director 
independence, when combined with the specific considerations required 
by proposed Rule 19(p)(3)(B), represent an appropriate standard for 
compensation committee independence.\41\
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    \37\ See Notice, supra note 4.
    \38\ See Notice, supra note 4.
    \39\ See Notice, supra note 4. CHX proposes to reorganize the 
numbering of its existing bright-line tests to allow for the 
inclusion of additional factors specific to compensation committees. 
See proposed Rule 19(p)(3)(A)(i)-(vii).
    \40\ See Notice, supra note 4.
    \41\ See Notice, supra note 4.
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    CHX proposes a cure period for a failure of a listed company to 
meet its Compensation Committee composition requirements for 
independence. Under the provision, if a member of an issuer's 
compensation committee or functional equivalent ceases to be an 
independent director for reasons outside the member's reasonable 
control, that member may remain a member of the compensation committee 
or functional equivalent until the earlier of the next annual 
shareholders meeting of the issuer or one year from the occurrence of 
the event that caused the member to no longer be an independent 
director.\42\ The proposed rule also requires a company relying on this 
provision to provide notice to CHX promptly.\43\
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    \42\ See proposed Rule 19(d)(5)(A)(ii). CHX stated that its 
proposed rule outlines the opportunity to cure defects almost 
precisely as stated in Rule 10C-1. See Notice, supra note 4.
    \43\ See proposed Rule 19(d)(5)(A)(ii). CHX does not otherwise 
propose any new procedures for an issuer to have an opportunity to 
cure defects with respect to its proposed requirements, but CHX does 
have existing delisting procedures that provide issuers with notice, 
opportunity for a hearing, opportunity for appeals, and an 
opportunity to cure defects before an issuer's securities are 
delisted. See Article 22, Rule 4, ``Removal of Securities.'' For 
example, Rule 4(b) provides procedure for providing deficient 
companies with notice; Rube 4(c)-(d) provides procedures for an 
issuer to avail itself of a hearing; and Rule 4(e) provides 
procedures for issuers to appeal to CHX's Executive Committee.
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    CHX also proposes Rule 19(d)(5)(A)(i) to make an exception that 
allows a director who is not independent to be temporarily appointed to 
such a committee under exceptional and limited circumstances, as long 
as that director is not currently an officer, employee or family member 
of a current officer or employee. The exception applies, however, only 
if the committee is comprised of at least three members and the board 
determines that the individual's membership on the committee is 
required in the best interests of the company and its shareholders.\44\ 
CHX believes this exception will allow issuers to efficiently deal with 
unforeseen and exceptional circumstances, so as to ensure the smooth 
function of its compensation committee or functional equivalent, while 
minimizing the risk of abuse.\45\
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    \44\ See proposed Rule 19(d)(5)(A)(i).
    \45\ See Notice, supra note 4.

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[[Page 4939]]

3. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers and Factors
    In its proposed rule change, CHX proposes to fulfill the 
requirements imposed by Rule 10C-1(b)(2)-(4) under the Act concerning 
compensation advisers by setting forth those requirements in its own 
rules and requiring these new rights and responsibilities to be 
included in the compensation committee's charter or board 
resolution.\46\ Thus, proposed Rule 19(d)(4)(A)-(B) and (D) proposes to 
adopt the requirements that CHX believes are required by Rule 10C-
1(b)(2)-(3) that: (A) The compensation committee may, in its sole 
discretion, retain or obtain the advice of a compensation consultant, 
legal counsel or other adviser;\47\ (B) the Compensation Committee 
shall be directly responsible for the appointment, compensation and 
oversight of the work of any compensation consultant, legal counsel or 
other adviser retained by the Compensation Committee;\48\ and (D) 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.\49\
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    \46\ 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 proposed Rule 19(d)(4)(F), as modified by Amendment No. 
3, CHX provides for two limited exceptions. See infra notes 53-55 
and accompanying text.
    \47\ CHX proposes that this requirement will not apply to 
issuers that do not maintain a formal committee of the board of 
directors for determining executive compensation. As noted by CHX, 
the reason behind this exclusion is that since an action by 
independent directors acting outside of a formal committee structure 
would generally be considered action by the full board of directors, 
it is unnecessary to apply this requirement to directors acting 
outside of a formal committee structure, as they retain all the 
powers of the board of directors in making executive compensation 
determinations. See Notice, supra note 4.
    \48\ The proposal also includes a provision, derived from Rule 
10C-1, stating that nothing in the rule may be construed to require 
the compensation committee to implement or act consistently with the 
advice or recommendations of the compensation consultant, 
independent legal counsel or other adviser to the compensation 
committee; nor to affect the ability or obligation of the 
compensation committee to exercise its own judgment in fulfillment 
of the duties of the compensation committee. See proposed Rule 
19(d)(4)(C).
    \49\ See Notice, supra note 4. CHX proposes that this 
requirement will not apply to issuers that do not maintain a formal 
committee of the board of directors for determining executive 
compensation. In Amendment No. 3, CHX removed the word 
``independent'' from the term ``legal counsel'' used in proposed 
Rule 19(d)(4)(A)-(D) to conform the instructions with guidance now 
provided in Rule 19(d)(4)(F), as amended. See Amendment No. 3, supra 
note 7.
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    Proposed Rule 19(d)(4)(E), 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, other than in-house legal counsel, only after 
taking into consideration the following six factors set forth in Rule 
10C-1 regarding independence assessments of compensation advisers.\50\
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    \50\ 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 listed company 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.\51\
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    \51\ See also Rule 10C-1(b)(4)(i)-(vi).
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    As proposed, Rule 19(d)(4)(F) would not include any specific 
additional factors for consideration, as CHX stated that it believes 
that this list will require compensation committees and functional 
equivalents to consider a variety of factors that may bear upon the 
likelihood that a compensation adviser can provide independent advice 
to the Compensation Committee, but will not prohibit committees from 
choosing any particular adviser or type of adviser.\52\
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    \52\ See Notice, supra note 4.
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    Proposed Rule 19(d)(4)(F), as modified by Amendment No. 3,\53\ 
further states that, as provided in Rule 10C-1, a Compensation 
Committee is required to conduct the independence assessment outlined 
in proposed Rule 19(d)(4)(E) with respect to any compensation 
consultant, legal counsel or other adviser that provides advice to the 
compensation committee, other than (i) in-house legal counsel \54\ and 
(ii) any compensation consultant, legal counsel or other adviser whose 
role is limited to the following activities for which no disclosure 
would be required under Item 407(e)(3)(iii) of Regulation S-K: 
Consulting on any broad-based plan that does not discriminate in scope, 
terms, or operation, in favor of executive officers or directors of the 
listed company, and that is available generally to all salaried 
employees; or providing information that either is not customized for a 
particular company or that is customized based on parameters that are 
not developed by the compensation consultant, and about which the 
compensation consultant does not provide advice.\55\
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    \53\ See supra note 7. CHX's proposal as submitted originally 
only contained an exception for in-house legal counsel. As described 
below, the Exchange amended its proposal to add an exception for 
advisers whose role is limited to certain broad-based plans or to 
providing non-customized information.
    \54\ See proposed Rule 19(d)(4)(F).
    \55\ See Amendment No. 3, supra note 7, and proposed Rule 
19(d)(4)(F).
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    Proposed Rule 19(d)(4)(F), as modified by Amendment No. 3, 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 Rule 19(d)(4)(E).\57\ The Exchange 
clarified that, while the Compensation Committee is required to 
consider the independence of compensation advisers, the Compensation 
Committee is not precluded from selecting or receiving advice from 
compensation advisers that are not independent.\58\
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    \56\ See Exhibit 5 to Amendment No. 3, supra note 7.
    \57\ See id.
    \58\ See Amendment No. 3, supra note 7.
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4. Application to Smaller Reporting Companies
    Rule 10C-1 includes an exemption for smaller reporting companies 
from all the requirements included within the Rule.\59\ Consistent with 
this Rule 10C-1 provision, CHX, as a general matter, proposes that a 
smaller reporting

[[Page 4940]]

company, as defined in Rule 12b-2 \60\ 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.\61\ 
Thus, CHX proposes not to require Smaller Reporting Companies to comply 
with either the enhanced independence standards for members of 
compensation committees relating to compensatory fees and affiliation 
or the compensation adviser authority and funding requirements or 
adviser independence considerations.
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    \59\ See supra Section II.A; see also Rule 10C-1(b)(5)(ii).
    \60\ 17 CFR 240.12b-2.
    \61\ See proposed Rule 19(d)(5)(C).
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    CHX notes that, under current CHX rules, Smaller Reporting 
Companies are already subject to the general independence requirements 
for compensation committees, and as such, CHX believes that requiring 
such issuers to continue to comply with existing standards is not 
overly burdensome.\62\
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    \62\ See Notice, supra note 4.
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5. Exemptions
    CHX proposes to exempt six categories of issuers from all of the 
compensation committee requirements of Rule 19(d).\63\ These include 
exemptions to the following issuers: limited partnerships; \64\ 
companies in bankruptcy; \65\ closed-end and open-end management 
companies that are registered under the Investment Company Act of 1940 
(``Investment Company Act''); \66\ passive business organizations (such 
as royalty trusts) or derivatives and special purpose entities; \67\ 
issuers listing only preferred or debt securities; \68\ and controlled 
companies.\69\
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    \63\ See id. In addition, such exempt companies would also 
thereby be exempt from the enhanced independence requirements for 
compensation committee composition described in proposed Rule 
19(p)(3)(B). See also proposed Rule 19(d)(5)(B).
    \64\ CHX notes that limited partnerships are already exempt from 
the current compensation committee requirements because the Exchange 
believes the ownership/management structure renders the independent 
director requirements inapplicable and argues the same reasoning 
renders the adviser requirements unnecessary. See Notice, supra note 
4.
    \65\ CHX believes exempting such companies will avoid 
overburdening issuers struggling to emerge from bankruptcy. See 
Notice, supra note 4. Like limited partnerships, such companies are 
already exempt from existing requirements under paragraph .03(1) of 
the Interpretations and Policies of Rule 19.
    \66\ CHX believes that, because investment companies are already 
subject to the requirements of the Investment Company Act, including 
requirements concerning potential conflicts of interest related to 
investment adviser compensation, Rule 19(d) would be duplicative and 
unnecessary. See Notice, supra note 4.
    \67\ CHX believes that such entities are structured 
fundamentally different from conventional issuers. See Notice, supra 
note 4.
    \68\ CHX believes such issuers, which are already exempt from 
existing requirements on CHX, should continue to be exempt from the 
additional requirements of Rule 10C-1 because they are either often 
subject to requirements of the exchange where they are primarily 
listed, often provide stockholders with significantly greater 
protections, or do not impart ownership interest. See Notice, supra 
note 4.
    \69\ CHX notes that controlled companies are already exempt from 
existing compensation committee requirements under existing Rule 
19(d)(3)(B) and will continue to be exempt from existing and 
proposed compensation committee requirements under proposed Rule 
19(d)(5)(B)(vi).
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    Concerning foreign private issuers,\70\ CHX current commentary in 
Paragraph .03(4) of the Interpretations and Policies of Rule 19 permits 
any such issuer to follow its home country practice in lieu of many of 
CHX's corporate governance listing standards, including the Exchange's 
compensation-related listing rules. Paragraph .03(4) current provides 
that foreign private issuers are permitted to follow home country 
practice in lieu of the provisions of Rule 19(d), but this allowance is 
granted on condition that the issuer discloses in its annual report 
filed with the Commission any significant ways in which its corporate 
governance practices differ from those followed by domestic companies 
under CHX-listing standards. Under proposed 19(d)(5)(B)(iv), CHX 
proposes that this continue to apply to the new compensation related 
requirements, so long as the foreign private issuer also discloses in 
its annual report the reasons that it does not have an independent 
compensation committee. CHX believes that foreign private issuers are 
already subject to corporate regulations of their respective home 
countries and requiring such issuers to comport with Rule 10C-1 would 
be cumulative, if not contradictory.\71\
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    \70\ CHX proposes, in Rule 19(d)(5)(B)(iv), that the term 
``foreign private issuer'' will have the same meaning as Rule 3b-4 
under the Exchange Act for purposes of Rule 19.
    \71\ See Notice, supra note 4.
---------------------------------------------------------------------------

6. Transition to the New Rules for Companies Listed as of the Effective 
Date
    The proposed rule change, as amended, provides that certain of the 
new requirements for listed companies will be effective on July 1, 2013 
and others will be effective after that date.\72\ Specifically, CHX 
proposes to amend the Interpretations and Policies .05(6) to Rule 19 to 
provide transition periods by which listed companies would be required 
to comply with the new Rule 19(p)(3)(B) compensation committee director 
independence standards. Pursuant to the proposal, listed companies 
would have until the earlier of their first annual meeting after 
January 15, 2014, or October 31, 2014, to comply with the new standards 
for compensation committee director independence.\73\ Existing 
compensation committee independence standards would continue to apply 
pending the transition to the new independence standards. CHX proposes 
that all other proposed sections would become effective on July 1, 2013 
for purposes of compliance by currently listed issuers that are not 
otherwise exempt.\74\
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    \72\ During the transition periods described herein, existing 
compensation committee independence standards would continue to 
apply pending the transition to the new independence standards.
    \73\ CHX originally proposed that this transition period would 
also apply to the charter or board resolution and adviser 
independence consideration, but has amended these transition periods 
to require that issuers must comply with these requirements by July 
1, 2013. See Amendment No. 3, supra note 7.
    \74\ CHX originally proposed that these transitions would become 
effective immediately upon approval by the Commission, but has 
amended these transition periods to require that issuers must comply 
by July 1, 2013. See Amendment No. 3, supra note 7.
---------------------------------------------------------------------------

7. Compliance Schedules: IPOs; Companies Transferring From Other 
Markets and Smaller Reporting Companies
    With respect to issuers listing securities on the Exchange in 
connection with an initial public offering, existing CHX Interpretation 
and Policy .05(3) provides that such issuers will be required to comply 
with the new governance standards for each applicable committee that 
the issuer establishes. Specifically, under the rule, the compensation 
committee for the issuer must have one independent member at the time 
of listing, a majority of independent members within 90 days of listing 
and all independent members within one year.
    With respect to companies that transfer from other markets, 
existing CHX Interpretation and Policy .05(4) to Rule 19 provides that 
(1) any issuers transferring during another market's transition period 
to new governance standards will be allowed to comply with CHX's 
requirements within any transition period that has been provided by the 
other marketplace and (2) any issuer transferring from a market that 
does not have governance standards substantially similar to CHX shall 
have one year from the date of listing to be in compliance. CHX does 
not propose to change this rule, and so it will also apply to the newly 
adopted portions of Rules 19(d) and 19(p), described above.
    CHX proposes to create a compliance schedule for companies that 
cease to be

[[Page 4941]]

a Smaller Reporting Company. To the extent a Smaller Reporting Company 
ceases to qualify as such, the proposed rule change, as modified by 
Amendment No. 2, establishes a compliance schedule based on certain 
dates relating to the company's change in status.\75\ Specifically, 
such a company would be required, if otherwise applicable, to: (i) Have 
a compensation committee of which the members meet the additional 
independence requirements of Rule 19(p)(3)(B) within six months of the 
date on which the issuer failed to qualify as a smaller reporting 
company and (ii) comply with Rule 19(d)(4) concerning compensation 
advisers as of the date on which the issuer failed to qualify as a 
Smaller Reporting Company.
---------------------------------------------------------------------------

    \75\ See proposed Rule 19(d)(5)(C). In the proposal as 
originally submitted, the compliance schedule was to require 
compliance immediately with all requirements.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the CHX proposal, 
as amended, is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\76\ In 
particular, the Commission finds that the amended proposed rule change 
is consistent with the requirements of Section 6(b) of the Act,\77\ as 
well as with Section 10C of the Act \78\ and Rule 10C-1 thereunder.\79\ 
Specifically, the Commission finds that the proposed rule change, as 
amended, is consistent with Section 6(b)(5) of the Act,\80\ 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.
---------------------------------------------------------------------------

    \76\ In approving the CHX proposed rule change, as amended, the 
Commission has considered its impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \77\ 15 U.S.C. 78f(b).
    \78\ 15 U.S.C. 78j-3.
    \79\ 17 CFR 240.10C-1.
    \80\ 15 U.S.C. 78f(b)(5).
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    The development and enforcement of meaningful listing standards for 
a national securities exchange is of substantial importance to 
financial markets and the investing public. Meaningful listing 
standards are especially important given investor expectations 
regarding the nature of companies that have achieved an exchange 
listing for their securities. The corporate governance standards 
embodied in the listing rules of national securities exchanges, in 
particular, play an important role in assuring that companies listed 
for trading on the exchanges' markets observe good governance 
practices, including a reasoned, fair, and impartial approach for 
determining the compensation of corporate executives. The Commission 
believes that the CHX 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,\81\ Congress resolved to require that ``board 
committees that set compensation policy will consist only of directors 
who are independent.'' \82\ 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.
---------------------------------------------------------------------------

    \81\ See supra note 8.
    \82\ 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, CHX submitted the proposed rule change, which includes 
rules intended to comply with the requirements of Rule 10C-1 and 
additional provisions designed to strengthen the Exchange's listing 
standards relating to Compensation Committees. The Commission believes 
that the proposed rule change satisfies the mandate of Rule 10C-1 and 
otherwise will promote effective oversight of its listed issuers' 
executive compensation practices.
    The Commission believes that the proposed rule change, as modified 
by Amendment Nos. 1, 2 and 3, appropriately revises CHX's rules for 
Compensation Committees of listed companies, for the following reasons:

A. Admittance to Listing

    The Commission believes that the clarification to the admittance to 
listing standards, which makes explicit the fact that the Exchange's 
Board of Governors may only admit securities for listing once the 
requirements of Article 22, which contains the Exchange's listing 
standards, are met, is reasonable and consistent with the Act. The 
Commission agrees with CHX that the modification largely adopts much of 
current Rule 2, while only clarifying an existing fact with respect to 
listing securities on CHX.\83\
---------------------------------------------------------------------------

    \83\ See Notice, supra note 4.
---------------------------------------------------------------------------

B. Compensation Committee Composition

    As discussed above, under Rule 10C-1, the exchanges must adopt 
listing standards that require each member of a compensation committee 
to be independent, and to develop a definition of independence after 
considering, among other relevant factors, the source of compensation 
of a director, including any consulting, advisory or other compensatory 
fee paid by the issuer to the director, as well as whether the director 
is affiliated with the issuer or any of its subsidiaries or their 
affiliates.
    The Commission notes that Rule 10C-1 leaves it to each exchange to 
formulate a final definition of independence for these purposes, 
subject to review and final Commission approval pursuant to Section 
19(b) of the Act. As the Commission stated in the Rule 10C-1 Adopting 
Release, ``given the wide variety of issuers that are listed on 
exchanges, we believe that the exchanges should be provided with 
flexibility to develop independence requirements appropriate for the 
issuers listed on each exchange and consistent with the requirements of 
the independence standards set forth in Rule 10C-1(b)(1).'' \84\ 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.
---------------------------------------------------------------------------

    \84\ 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 Act.
---------------------------------------------------------------------------

    As noted above, CHX proposes to maintain its requirements that an 
issuer have a compensation committee, composed entirely of independent 
directors, as defined in current Rule 19(p)(3), to oversee executive 
compensation, or in the alternate, a majority of the independent 
directors providing such oversight.\85\ However, the Exchange proposes 
to modify its definition of compensation committee

[[Page 4942]]

to include the following three options: (1) A committee designated as a 
compensation committee: (2) in the absence of a committee designated as 
a compensation committee, a committee performing functions typically 
performed by a compensation committee, including oversight of executive 
compensation; or (3) in the absence of any such committees, the members 
of the board of directors who oversee executive compensation on behalf 
of the board, who together must comprise a majority of the board's 
independent directors. The alternative option to a formal committee, as 
described above, would therefore continue to be available to issuers. 
The Commission believes that these three alternatives are consistent 
with the definitions provided Rule 10C-1, and should provide issuers 
with flexibility while continuing to ensure Independent Director 
oversight of executive compensation.
---------------------------------------------------------------------------

    \85\ See Rule 19(d)(1).
---------------------------------------------------------------------------

    In addition to retaining its existing independence standards that 
currently apply to board and Compensation Committee members, which 
include certain bright-line tests,\86\ CHX has enhanced its listing 
requirements regarding Compensation Committees by adopting additional 
standards for independence to comply with the Fees Factor and 
Affiliation Factor, as well as the other standards set forth in Rule 
10C-1. The CHX's proposal also adopts the cure procedures provided as 
an option in Rule 10C-1(a)(3) for Compensation Committee members who 
cease to be independent for reasons outside their reasonable control.
---------------------------------------------------------------------------

    \86\ See Notice, supra note 4. See also supra note 19.
---------------------------------------------------------------------------

    Further, as discussed in more detail below, the CHX proposal adopts 
the requirement that the Compensation Committee have a written charter 
or board resolution that addresses the committee's purpose and 
responsibilities, and adds requirements to specify the compensation 
committee's authority and responsibilities as to compensation advisers 
as set forth under Rule 10C-1. Taken as a whole, the Commission 
believes that these changes will strengthen the oversight of executive 
compensation in CHX-listed companies and further greater 
accountability, and will therefore further the protection of investors 
consistent with Section 6(b)(5) of the Act.
    The Commission believes that the Exchange's proposal, which 
requires the consideration of the additional independence factors for 
Compensation Committee members, is designed to protect investors and 
the public interest and is consistent with the requirements of Sections 
6(b)(5) and 10C of the Act and Rule 10C-1 thereunder.
    With respect to the Fees Factor of Rule 10C-1, the Exchange rules 
state when considering the source of a director's compensation in 
determining independence for Compensation Committee service, the board 
should consider whether the director receives compensation from any 
person or entity that would impair his ability to make independent 
judgments about the listed company's executive compensation. In 
addition to the continued application of the CHX's current independence 
standards and bright-line tests, CHX's new rules also require the board 
to consider all relevant factors in making independence determinations 
for Compensation Committee membership. The Exchange believes that these 
requirements of proposed Article 19(p)(3)(B) of the Exchange's Rules, 
in addition to the general director independence requirements, 
represent an appropriate standard for Compensation Committee 
independence that is consistent with the requirements of Rule 10C-1 and 
the Fees Factor.
    The Commission believes that the provisions noted above to address 
the Fees Factor give a board broad flexibility to consider a wide 
variety of fees, including any consulting, advisory or other 
compensatory fee paid by the issuer or entity, when considering a 
director's independence for compensation committee service. While the 
Exchange does not bar all compensatory fees, the approach is consistent 
with Rule 10C-1 and provides a basis for a board to prohibit a director 
from being a member of the Compensation Committee, should the director 
receive compensation that impairs the ability to make independent 
decisions on executive compensation matters, even if that compensation 
does not exceed the threshold in the bright-line test.\87\ The 
Commission, therefore, believes that the proposed compensatory fee 
requirements comply with Rule 10C-1 and are designed to protect 
investors and the public interest, consistent with Section 6(b)(5) of 
the Act. The Commission notes that the compensatory fee consideration 
may help ensure that Compensation Committee members are less likely to 
have received fees, from either the issuer or another entity, which 
could potentially influence their decisions on compensation matters.
---------------------------------------------------------------------------

    \87\ See supra note 39, referencing the seven existing bright-
line tests.
---------------------------------------------------------------------------

    With respect to the Affiliation Factor of Rule 10C-1, CHX 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. Under CHX's rules, it may be appropriate for certain 
affiliates, such as representatives of significant stockholders, to 
serve on Compensation Committees. The Exchange has provided guidance 
that the board should consider whether an affiliate relationship places 
the director under the direct or indirect control of the listed company 
or its senior management, ``in each case of a nature that would impair 
her ability to make independent judgments about the issuer's executive 
compensation.'' \88\ The Commission believes that CHX's approach of 
requiring boards only to consider such affiliations is reasonable and 
consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \88\ See proposed Rule 19(p)(3)(B)(ii).
---------------------------------------------------------------------------

    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.'' \89\ In determining that CHX's affiliation standard is 
consistent with Sections 6(b)(5) and 10C under the Act, the Commission 
notes that CHX'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. The CHX rule further states that, in 
considering affiliate relationships, a board should consider whether 
such affiliate

[[Page 4943]]

relationship places the director under the direct or indirect control 
of the listed company or its senior management such that it would 
impair the ability of the director to make independent judgments on 
executive compensation. 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 or its senior management.
---------------------------------------------------------------------------

    \89\ 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 his ability to make independent judgment'' as 
a member of the committee. See also supra notes 36-41 and 
accompanying text.
---------------------------------------------------------------------------

    As to whether CHX should adopt any additional relevant independence 
factors, the Exchange stated that it reviewed its rules in light of 
Rule 10C-1, and concluded that its existing rules together with its 
proposed rules are sufficiently broad to encompass the types of 
relationships which would generally be material to a director's 
independence for Compensation Committee service. 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 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 exchange's 
proposal to reflect any such additional factors.
    CHX also 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.
    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 CHX's current rules with 
respect to compensation committees, as well as for nominations 
committees and audit committees.\90\ 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.
---------------------------------------------------------------------------

    \90\ See Securities Exchange Act Release No. 49911 (June 24, 
2004), 69 FR 39989 (July 1, 2004) (order approving File No. CHX-
2003-19).
---------------------------------------------------------------------------

    In summary, the Commission believes the flexibility provided in 
CHX's new Compensation Committee independence standards provides 
companies with guidance, while allowing them to identify those 
relationships that might raise questions of independence for service on 
the compensation committee. It provides further flexibility for 
companies in circumstances where one member of the committee ceases to 
meet the independence requirements, under specified conditions, for 
reasons outside the member's reasonable control. For these reasons, we 
believe the independence standards are consistent with the investor 
protection provision of Section 6(b)(5) of the Act.

C. Authority of Committees To Retain Compensation Advisers; Funding; 
and Independence of Compensation Advisers and Factors

    As discussed above, CHX proposes to set forth explicitly in its 
rules the requirements of Rule 10C-1 regarding a compensation 
committee's authority to retain compensation advisers, its 
responsibilities with respect to such advisers, and the listed 
company's obligation to provide appropriate funding for payment of 
reasonable compensation to a compensation adviser retained by the 
committee. As such, the Commission believes these provisions meet the 
mandate of Rule 10C-1 \91\ and are consistent with the Act.\92\
---------------------------------------------------------------------------

    \91\ See Rule 10C-1.
    \92\ 15 U.S.C. 78j-3.
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring companies to 
specify the enhanced compensation committee responsibilities through 
the Compensation Committee's written charter or board resolution will 
help to assure that there is adequate transparency as to the rights and 
responsibilities of compensation committee members. 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.
    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, CHX has proposed, in 
Amendment No. 3, to add language to the provision regarding the 
independence assessment of compensation advisers \93\ 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. 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.\94\
---------------------------------------------------------------------------

    \93\ See proposed Rule 19(d)(4)(F), as amended by Amendment No. 
3.
    \94\ See 17 CFR 229.407(e)(3)(iii).
---------------------------------------------------------------------------

    The Commission views CHX'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.\95\ 
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

[[Page 4944]]

required to implement Section 10C(c)(2). The Commission also believes 
that the exception should allay some of the concerns raised by the 
commenters to other filings regarding the scope of the independence 
assessment requirement.\96\ 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.
---------------------------------------------------------------------------

    \95\ 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.'').
    \96\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 6.
---------------------------------------------------------------------------

    Regarding the independence assessment requirement, 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. 3, CHX 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.\97\
---------------------------------------------------------------------------

    \97\ See supra notes 56-58 and accompanying text.
---------------------------------------------------------------------------

    Finally, one commenter on the New York Stock Exchange LLC's 
proposal requested guidance ``on how often the required independence 
assessment should occur.'' \98\ 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.\99\
---------------------------------------------------------------------------

    \98\ See Comment to NYSE Notice by Robert B. Lamm, Chair, 
Securities Law Committee, The Society of Corporate Secretaries & 
Governance Professionals, dated December 7, 2012.
    \99\ See NYSE Approval Order and Nasdaq Approval Order, supra 
note 6 for a discussion of comments.
---------------------------------------------------------------------------

    The changes to CHX's rules on compensation advisers should 
therefore benefit investors in CHX-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.

D. Application to Smaller Reporting Companies

    The Commission believes that the requirement for Smaller Reporting 
Companies, like all other CHX-listed companies, to have a compensation 
committee, composed solely of independent directors or to otherwise 
have compensation determined by a majority of the independent 
directors, is reasonable and consistent with the protection of 
investors. The Commission notes that CHX'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.\100\
---------------------------------------------------------------------------

    \100\ See Notice, supra note 4.
---------------------------------------------------------------------------

    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 CHX to provide some flexibility to 
Smaller Reporting Companies. Further, in view of the potential 
additional costs, it is reasonable not to require a Smaller Reporting 
Company to comply with these additional requirements.\101\
---------------------------------------------------------------------------

    \101\ As discussed supra notes 60-62 and accompanying text, 
under CHX's proposal, Smaller Reporting Companies are exempted from 
all of the compensation adviser requirements, including the 
requirement that specified independence factors be considered before 
selecting such advisers.
---------------------------------------------------------------------------

E. 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 CHX proposes for 
companies that fail to comply with the enhanced independence 
requirements designed to comply with Rule 10C-1 is the same as the cure 
period suggested under Rule 10C-1. The Commission believes that 
providing this cure provision as an option for independent directors 
who cease to be independent for reasons outside their control is fair 
and reasonable and consistent with investor protection under Rule 
6(b)(5). In addition, CHX's general rules include delisting procedures 
that provide issuers with notice, opportunity for a hearing, 
opportunity for appeals, and an opportunity to cure defects before an 
issuer's securities are delisted.
    The Commission believes that these general procedures for companies 
out of compliance with listing requirements, in addition to the 
particular cure provisions for compensation committees 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.

F. Exemptions

    The Commission believes that it is appropriate for CHX to exempt 
from the new requirements established by the proposed rule change the 
same categories of issuers that are exempt from its existing standards 
for oversight of executive compensation for listed companies. Although 
Rule 10C-1 does not explicitly exempt some of these categories of 
issuers from its requirements, it does grant discretion to exchanges to 
provide additional exemptions. CHX states that the reasons it adopted 
the existing exemptions apply equally to the new requirements, and the 
Commission believes that this assertion is reasonable.
    CHX proposes to exempt limited partnerships, companies in 
bankruptcy, and open-end investment management companies registered 
under the Investment Company Act from all of the requirements of Rule 
10C-1. The Commission believes such exemptions are reasonable, and 
notes that such entities, which were already generally exempt from 
CHX's existing compensation committee requirements, also are exempt 
from the compensation committee independence requirements specifically 
under Rule 10C-1. CHX also proposes to exempt closed-end management 
investment companies registered under the Investment Company Act from 
the requirements of Rule 10C-1. The Commission believes that this 
exemption is reasonable because the Investment Company Act already 
assigns important duties of investment company governance, such as 
approval of the investment advisory contract, to independent directors, 
and because such entities were already generally exempt from CHX's 
existing compensation committee requirements.
    The Commission further believes that other proposed exemption 
provisions

[[Page 4945]]

relating to controlled companies,\102\ passive business organizations 
or derivative and special purpose entities, and issuers whose only 
listed equity stock is a preferred stock or debt security are 
reasonable, given the specific characteristics of these entities 
identified by CHX.\103\
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    \102\ 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).
    \103\ See supra notes 64-69 and accompanying text.
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    The CHX proposal would continue to permit foreign private issuers 
to follow home country practice in lieu of the provisions of the new 
rules, but would now require further disclosure from such entities 
regarding the reason why they do not have an independent compensation 
committee. The Commission believes that granting exemptions to foreign 
private issuers in deference to their home country practices with 
respect to compensation committee practices is appropriate, and 
believes that the existing and proposed disclosure requirements will 
help investors determine whether they are satisfied with the 
alternative standard. The Commission also notes that CHX's proposal 
conforms its rules to Rule 10C-1, which exempts foreign private issuers 
from the compensation committee independence requirements of Rule 10C-1 
to the extent such entities disclose in their annual reports the 
reasons they do not have independent compensation committees.

G. 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, as amended, are reasonable and should 
afford listed companies adequate time to make the changes, if any, 
necessary to meet the new standards. The Commission believes that the 
July 1, 2013 deadline proposed is clear-cut and matches the deadline 
set forth by NYSE and The NASDAQ Stock Market, as revised.\104\ 
Additionally, the amended deadline gives companies until the earlier of 
their first annual meeting after January 15, 2014, or October 31, 2014, 
to comply with the enhanced independence standards for the members of 
compensation committees in Rule 19(p)(3)(B).\105\
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    \104\ See Securities Exchange Act Release Nos. 68011 (October 9, 
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49); 68013 (October 9, 2012), 77 FR 62563 (October 15, 2012) 
(Notice of File No. SR-NASDAQ-2012-109); see also Amendment No. 1 to 
File No. SR-NASDAQ-2012-109.
    \105\ The proposal is, however, otherwise effective on July 1, 
2013, and issuers will be required to comply with the new 
compensation committee charter (or board resolution) and adviser 
requirements as of that date. As noted above, certain existing 
issuers, such as Smaller Reporting Companies, are exempt from 
compliance with the new independence requirement with respect to 
compensation committee service.
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H. Compliance Schedules: Companies Transferring From Other Markets

    The Commission believes that it is reasonable for CHX to allow, 
with respect to companies listing in connection with an initial public 
offering 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 compliance schedule for 
companies that cease to be Smaller Reporting Companies, as revised in 
Amendment No. 2, is adequate time to come into compliance with the 
rules that apply to other companies.

IV. Accelerated Approval of Amendment No. 3 to the Proposed Rule Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\106\ for approving the proposed rule change, as modified by 
Amendment Nos. 1, 2 and 3, prior to the 30th day after the date of 
publication of notice in the Federal Register.
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    \106\ 15 U.S.C. 78s(b)(2).
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    The change made to the proposal by Amendment No. 3 to remove a 
proposed amendment to Rule 4 is not substantive, as Rule 4's listing 
standards will now not be changed. For the same reason, the removal of 
the proposed general exemption for clearing agencies clearing futures 
or options from the rule is not a substantive change.\107\
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    \107\ The Commission notes that the listing of a security 
futures product cleared by a clearing agency that is registered 
pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that is 
exempt from the registration requirements of section 17A(b)(7)(A) 
(15 U.S.C. 78q-1(b)(7)(A)) and the listing of a standardized option, 
as defined in Sec.  240.9b-1(a)(4), issued by a clearing agency that 
is registered pursuant to section 17A of the Act (15 U.S.C. 78q-1) 
are provided an automatic exemption from the application of the 
entirety of Rule 10C-1 by Rule 10C-1(b)(5).
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    The additional language in Amendment No. 3 to exclude advisers that 
provide only certain types of services from the independence assessment 
is also appropriate. 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. Similarly, the 
addition of further guidance by Amendment No. 3 merely clarifies that 
the same exception applies for in-house legal counsel, and is not a 
substantive changes, as it was the intent of the rule as originally 
proposed.
    Next, the addition of further guidance by Amendment No. 3 merely 
clarifies that nothing in the Exchange's rules require a compensation 
adviser to be independent, only that the compensation committee 
consider the independence factors before selecting or receiving advice 
from a compensation adviser, and that is not a substantive change, as 
it was also the intent of the rule as originally proposed.
    Finally, the change made by Amendment No. 3 to require companies 
currently listed on CHX to comply with the majority of the new rules by 
July 1, 2013, rather than immediately, as originally proposed, 
reasonably affords companies more time to take the steps necessary for 
compliance. The change to require such companies to comply with the 
charter and compensation adviser consideration provisions by July 1, 
2013, rather than, as originally proposed, the earlier of their first 
annual meeting after January 15, 2014, or October 31, 2014, still 
allows ample time for companies to adjust to the new rules, and accords 
with the deadline set by NYSE and Nasdaq in their proposals to comply 
with Rule 10C-1. \108\
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    \108\ See Securities Exchange Act Release Nos. 68011 (October 9, 
2012), 77 FR 62541 (October 15, 2012) (Notice of File No. SR-NYSE-
2012-49); 68013 (October 9, 2012), 77 FR 62563 (October 15, 2012) 
(Notice of File No. SR-NASDAQ-2012-109); see also Amendment No. 1 to 
File No. SR-NASDAQ-2012-109.
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    Similarly, the conforming insertion of the current rule language as 
a sunset provision merely makes clear what issuers will be required to 
comply with prior to the effectiveness of the new rule text.
    For all the reasons discussed above, the Commission finds good 
cause to accelerate approval of the proposed changes made by Amendment 
No. 3.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment No. 3 is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

[[Page 4946]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CHX-2012-13 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CHX-2012-13. This file 
number should be included on the subject line if email is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal office of CHX. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CHX-2012-13, and should be submitted on or before 
February 13, 2013.

VI. Conclusion

    In summary, and for the reasons discussed in more detail above, the 
Commission believes that the rules being adopted by CHX, taken as 
whole, should benefit investors by helping listed companies make 
informed decisions regarding the amount and form of executive 
compensation. CHX'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.
    CHX'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 CHX-listed 
companies are better informed about potential conflicts when selecting 
and receiving advice from advisers. Similarly, the provisions of CHX'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, SR-CHX-2012-13, as amended, is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with Section 6(b)(5) 
of the Exchange Act.\109\
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    \109\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\110\ that the proposed rule change, SR-CHX-2012-13, as amended, 
be, and it hereby is, approved.
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    \110\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\111\
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    \111\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01220 Filed 1-22-13; 8:45 am]
BILLING CODE 8011-01-P


