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Vol. 77 Wednesday,No. 124 June 27, 2012

Part III

Securities and Exchange Commission17 CFR Parts 229 and 240Listing Standards for Compensation Committees; Final Rule

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38422 Federal Register / Vol. 77, No. 124 / Wednesday, June 27, 2012 / Rules and Regulations

1 15 U.S.C. 78a et seq.2 17 CFR 229.407.3 17 CFR 229.10 through 229.1208.

4 See Release No. 339199 (Mar. 30, 2011) [76 FR18966] (the Proposing Release).

5 15 U.S.C. 78j3.6 Public Law 111203, 124 Stat. 1900 (2010).7 A national securities exchange is an exchange

registered as such under Section 6 of the ExchangeAct [15 U.S.C. 78f]. There are currently sixteennational securities exchanges registered under

Section 6(a) of the Exchange Act: NYSE Amex(formerly the American Stock Exchange), BATSExchange, BATS Y-Exchange, BOX OptionsExchange, C2 Options Exchange, Chicago BoardOptions Exchange, Chicago Stock Exchange, EDGAExchange, EDGX Exchange, International SecuritiesExchange, NASDAQ OMX BX (formerly the BostonStock Exchange), The NASDAQ Stock Market,National Stock Exchange, New York StockExchange, NYSE Arca and NASDAQ OMX PHLX(formerly Philadelphia Stock Exchange). Certainexchanges are registered with the Commissionthrough a notice filing under Section 6(g) of theExchange Act for the purpose of trading securityfutures. See Section II.B.1, below, for a discussionof these types of exchanges.

8 A national securities association is anassociation of brokers and dealers registered as suchunder Section 15A of the Exchange Act [15 U.S.C.

78o3]. The Financial Industry RegulatoryAuthority (FINRA) is the only national securitiesassociation registered with the Commission underSection 15A of the Exchange Act. FINRA does notlist equity securities; therefore, we refer only tonational securities exchanges in this release. Inaddition, Section 15A(k) of the Exchange Act [15U.S.C. 78o3(k)] provides that a futures associationregistered under Section 17 of the CommodityExchange Act [7 U.S.C. 21] shall be registered as anational securities association for the limitedpurpose of regulating the activities of members whoare registered as broker-dealers in security futuresproducts pursuant to Section 15(b)(11) of theExchange Act [15 U.S.C. 78o(b)(11)]. See SectionII.B.1, below, for a discussion regarding securityfutures products.

SECURITIES AND EXCHANGECOMMISSION

17 CFR Parts 229 and 240

[Release Nos. 339330; 3467220; File No.S71311]

RIN 3235AK95

Listing Standards for CompensationCommittees

AGENCY : Securities and ExchangeCommission.ACTION : Final rule.

SUMMARY : We are adopting a new ruleand amendments to our proxydisclosure rules to implement Section952 of the Dodd-Frank Wall StreetReform and Consumer Protection Act of 2010, which added Section 10C to theSecurities Exchange Act of 1934.Section 10C requires the Commission toadopt rules directing the national

securities exchanges and nationalsecurities associations to prohibit thelisting of any equity security of an issuerthat is not in compliance with Section10Cs compensation committee andcompensation adviser requirements. Inaccordance with the statute, new Rule10C1 directs the national securitiesexchanges to establish listing standardsthat, among other things, require eachmember of a listed issuerscompensation committee to be amember of the board of directors and to

be independent, as defined in thelisting standards of the nationalsecurities exchanges adopted inaccordance with the final rule. Inaddition, pursuant to Section 10C(c)(2),we are adopting amendments to ourproxy disclosure rules concerningissuers use of compensationconsultants and related conflicts of interest.DATES : Effective Date: July 27, 2012.

Compliance Dates: Each nationalsecurities exchange and nationalsecurities association must provide tothe Commission, no later thanSeptember 25, 2012, proposed rulechange submissions that comply with

the requirements of Exchange Act Rule10C1. Further, each national securitiesexchange and national securitiesassociation must have final rules or ruleamendments that comply with Rule10C1 approved by the Commission nolater than June 27, 2012. Issuers mustcomply with the disclosure changes inItem 407 of Regulation SK in any proxyor information statement for an annualmeeting of shareholders (or a specialmeeting in lieu of the annual meeting)at which directors will be electedoccurring on or after January 1, 2013.

FOR FURTHER INFORMATION CONTACT : N.Sean Harrison, Special Counsel, Officeof Rulemaking, at (202) 5513430, orHeather Maples, Senior SpecialCounsel, Office of Chief Counsel, at(202) 5513520, in the Division of Corporation Finance, U.S. Securitiesand Exchange Commission, 100 F StreetNE., Washington, DC 205493628.SUPPLEMENTARY INFORMATION : We areadopting new Rule 10C1 under theSecurities Exchange Act of 1934 1 andamendments to Item 407 2 of RegulationSK. 3 Table of ContentsI. Background and SummaryII. Discussion of the Final Rules

A. Exchange Listing Standards1. Applicability of Listing Standardsa. Proposed Rule

b. Comments on the Proposed Rulec. Final Rule2. Independence Requirementsa. Proposed Rule

b. Comments on the Proposed Rulec. Final Rule3. Authority To Retain Compensation

Advisers; Responsibilities; and Fundinga. Proposed Rule

b. Comments on the Proposed Rulec. Final Rule4. Compensation Adviser Independence

Factorsa. Proposed Rule

b. Comments on the Proposed Rulec. Final Rule5. Opportunity To Cure Defectsa. Proposed Rule

b. Comments on the Proposed Rulec. Final RuleB. Implementation of Listing Requirements1. Exchanges and Securities Affecteda. Proposed Rule

b. Comments on the Proposed Rulec. Final Rule2. Exemptionsa. Proposed Rulei. Issuers Not Subject to Compensation

Committee Independence Requirementsii. Exemption of Relationships and Other

Categories of Issuers b. Comments on the Proposed Rulec. Final RuleC. Compensation Consultant Disclosure

and Conflicts of Interest1. Proposed Rule2. Comments on the Proposed Rule3. Final Rulea. Disclosure Requirements

b. Disclosure Exemptionsc. Disclosure Regarding DirectorCompensation

D. Transition and TimingIII. Paperwork Reduction Act

A. BackgroundB. Summary of the Final RulesC. Summary of Comment Letters and

Revisions to ProposalsD. Revisions to PRA Reporting and Cost

Burden Estimates

IV. Economic AnalysisA. Background and Summary of the Rule

AmendmentsB. Benefits and Costs, and Impact on

Efficiency, Competition and CapitalFormation

1. Section 10C of the Exchange Act, asAdded by Section 952 of the Act

2. Discretionary AmendmentsV. Final Regulatory Flexibility Act Analysis

A. Need for the AmendmentsB. Significant Issues Raised by PublicComments

C. Small Entities Subject to the Final RulesD. Reporting, Recordkeeping and Other

Compliance RequirementsE. Agency Action To Minimize Effect on

Small EntitiesVI. Statutory Authority and Text of the

Amendments

I. Background And SummaryOn March 30, 2011, we proposed a

new rule and rule amendments 4 toimplement Section 10C of the SecuritiesExchange Act of 1934 (the ExchangeAct), 5 as added by Section 952 of theDodd-Frank Wall Street Reform andConsumer Protection Act of 2010 (theAct).6 Section 10C requires theCommission to direct the nationalsecurities exchanges 7 (the exchanges)and national securities associations 8 toprohibit the listing of any equity


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38423Federal Register / Vol. 77, No. 124 / Wednesday, June 27, 2012 / Rules and Regulations

9 See Exchange Act Sections 10C(a) and (f).10 Five categories of issuers are excluded from

this requirement: controlled companies, limitedpartnerships, companies in bankruptcyproceedings, open-end management investmentcompanies registered under the InvestmentCompany Act of 1940 (the Investment CompanyAct), and foreign private issuers that disclose intheir annual reports the reasons why they do nothave an independent compensation committee.

11 Exchange Act Sections 10C(c)(1)(A) and10C(d)(1).

12 Exchange Act Section 10C(b).

13 Exchange Act Sections 10C(c)(1)(B) and10C(d)(2).

14 Exchange Act Section 10C(e).15 Section 10C(g) of the Exchange Act exempts

controlled companies from the requirements of Section 10C.

16 We extended the original comment perioddeadline from April 29, 2011 to May 19, 2011. SeeListing Standards for Compensation Committees,Release No. 339203 (Apr. 29, 2011) [76 FR 25273].

17 See H.R. Rep. No. 111517, Joint ExplanatoryStatement of the Committee of Conference, Title IX,Subtitle E Accountability and ExecutiveCompensation, at 872873 (Conf. Rep.) (June 29,2010).

18 Id.19 By contrast, Section 3(a)(58) of the Exchange

Act defines an audit committee as a committee(or equivalent body) established by and amongst the

board of directors of an issuer for the purpose of overseeing the accounting and financial reportingprocesses of the issuer and audits of the financial

Continued

security of an issuer, with certainexceptions, that does not comply withSection 10Cs compensation committeeand compensation adviserrequirements. 9

Specifically, Section 10C(a)(1) of theExchange Act requires the Commissionto adopt rules directing the exchanges toestablish listing standards that requireeach member of a listed issuerscompensation committee to be amember of the board of directors and to

be independent. 10 The termindependent is not defined in Section10C. Instead, Section 10C(a)(3) providesthat independence is to be defined bythe exchanges after taking intoconsideration relevant factors, whichare required to include (1) a directorssource of compensation, including anyconsulting, advisory or othercompensatory fee paid by the issuer tosuch director, and (2) whether a directoris affiliated with the issuer, a subsidiary

of the issuer, or an affiliate of asubsidiary of the issuer. Section10C(a)(4) of the Exchange Act requiresour rules to permit the exchanges toexempt particular relationships from theindependence requirements, as eachexchange determines is appropriate,taking into consideration the size of anissuer and any other relevant factors.

In addition to the independencerequirements set forth in Section 10C(a),Section 10C(f) of the Exchange Actrequires the Commission to adopt rulesdirecting the exchanges to establishlisting standards that provide for the

following requirements relating tocompensation committees andcompensation consultants, independentlegal counsel and other advisers(collectively, compensation advisers),as set forth in paragraphs (b)(e) of Section 10C:

Each compensation committee musthave the authority, in its sole discretion,to retain or obtain the advice of compensation advisers; 11

Before selecting any compensationadviser, the compensation committeemust take into consideration specificfactors identified by the Commission

that affect the independence of compensation advisers; 12

The compensation committee must be directly responsible for theappointment, compensation andoversight of the work of compensationadvisers; 13 and

Each listed issuer must provideappropriate funding for the payment of reasonable compensation, as determined

by the compensation committee, tocompensation advisers. 14 Finally, Section 10C(c)(2) requires eachissuer to disclose in any proxy orconsent solicitation material for anannual meeting of shareholders (or aspecial meeting in lieu of the annualmeeting), in accordance withCommission regulations, whether theissuers compensation committeeretained or obtained the advice of acompensation consultant; whether thework of the compensation consultanthas raised any conflict of interest; and,if so, the nature of the conflict and howthe conflict is being addressed.

We proposed new Exchange Act Rule10C1 to implement the compensationcommittee listing requirements of Sections 10C(a)(g) 15 of the ExchangeAct. We proposed rule amendments toItem 407 of Regulation SK to requirethe disclosures mandated by Section10C(c)(2), which are to be provided inany proxy or information statementrelating to an annual meeting of shareholders at which directors are to beelected (or special meeting in lieu of theannual meeting). In connection withthese amendments, we also proposed torevise the current disclosurerequirements with respect to theretention of compensation consultants.

The comment period for theProposing Release closed on May 19,2011. 16 We received 58 comment lettersfrom 56 different commentators,including pension funds, corporations,compensation consulting firms,professional associations, trade unions,institutional investors, investmentadvisory firms, law firms, academics,individual investors and otherinterested parties. Commentatorsgenerally supported the proposedimplementation of the newrequirements. Some commentatorsurged us to adopt additionalrequirements not mandated by the Act.Other commentators opposed someaspects of the proposed rule and rule

amendments and suggestedmodifications to the proposals.

We have reviewed and considered allof the comments that we received on theproposals. The final rules reflect anumber of changes made in response tothese comments. We discuss ourrevisions with respect to the proposedrule and rule amendments in moredetail throughout this release.II. Discussion of the Final Rules

A. Exchange Listing Standards

1. Applicability of Listing StandardsWe proposed to direct the exchanges

to adopt listing standards that wouldapply Section 10Cs independencerequirements to members of a listedissuers compensation committee aswell as any committee of the board thatperforms functions typically performed

by a compensation committee. We areadopting this aspect of the rule

substantially as proposed, but with onechange reflecting comments wereceived.

a. Proposed RuleIn enacting Section 10C of the

Exchange Act, Congress intended torequire that board committees that setcompensation policy will consist onlyof directors who are independent. 17 Inaddition, Congress sought to provideshareholders in a public companywith additional disclosures involvingcompensation practices. 18 AlthoughSection 10C includes numerousprovisions applicable to thecompensation committees of listedissuers, it does not require a listedissuer to have a compensationcommittee or a committee that performsfunctions typically assigned to acompensation committee. Moreover,Section 10C does not provide that, inthe absence of a compensationcommittee, the entire board of directorswill be considered to be thecompensation committee, nor does itinclude provisions that have the effectof requiring a compensation committeeas a practical matter.

Neither the Act nor the Exchange Act

defines the term compensationcommittee. 19 Our rules do not


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statements of the issuer; and * * * if no suchcommittee exists with respect to an issuer, theentire board of directors of the issuer.

20 There are some exchanges registered underSection 6(a) of the Exchange Act that have notadopted listing standards that require executivecompensation determinations for listed issuers to bemade or recommended by an independentcompensation committee or independent directors.However, these exchanges, which include the BOXOptions Exchange, International SecuritiesExchange, EDGA Exchange, EDGX Exchange, BATSY-Exchange, and C2 Options Exchange, currentlyeither trade securities only pursuant to unlistedtrading privileges or trade only standardizedoptions. In addition, the listing standards of certainexchanges that are registered with the Commissionfor the purpose of trading security futures do notaddress executive compensation matters. SeeSection II.B.1, below, for a discussion of these typesof exchanges.

21 See NYSE Listed Company Manual Section303A.05. Section 303A.05 permits a listed issuers

board to allocate the responsibilities of thecompensation committee to another committee,provided that the committee is composed entirelyof independent directors and has a committeecharter. The NYSE exempts certain issuers from thisrequirement, including controlled companies,limited partnerships, companies in bankruptcy, andclosed-end and open-end management investmentcompanies registered under the InvestmentCompany Act. See NYSE Listed Company ManualSection 303A.00.

22

See Nasdaq Rule 5605(d). Based on datasupplied by Nasdaq, we understand that fewer than2% of its listed issuers utilize the alternative of having independent board members, and not acommittee, oversee compensation. See also NasdaqIM 56056 (stating that the Nasdaq rule isintended to provide flexibility for a [c]ompany tochoose an appropriate board structure and to reduceresource burdens, while ensuring [i]ndependent[d]irector control of compensation decisions.).Nasdaq exempts certain issuers from thisrequirement, including asset-backed issuers andother passive issuers, cooperatives, limitedpartnerships, management investment companiesregistered under the Investment Company Act, andcontrolled companies. See Nasdaq Rules 5615(a)and 5615(c)(2).

23 See NYSE Arca Rule 5.3(k)(4); National StockExchange Rule 15.5(d)(5); and NASDAQ OMXPHLX Rule 867.05.

24 See NASDAQ OMX BX Rule 4350(c)(3); NYSEAmex Company Guide Section 805; Chicago BoardOptions Exchange Rule 31.10; Chicago StockExchange Article 22, Rules 19(d) and 21; and BATSExchange Rule 14.10(c)(4).

25 As noted, to the extent no board committee isauthorized to oversee executive compensation,

under applicable listing standards, boarddeterminations with respect to executivecompensation matters may be made by the full

board with only independent directorsparticipating. In such situations, under statecorporate law, we understand that action by theindependent directors would generally beconsidered action by the full board, not action bya committee.

26 See, e.g., letters from Chris Barnard(Barnard), the Chartered Financial AnalystInstitute (CFA) and Railpen Investments(Railpen).

27 See, e.g., letters from Barnard, Better MarketsInc. (Better Markets), CFA, Georg Merkl(Merkl), National Association of CorporateDirectors (NACD) and Railpen.

28 See letters from NACD and Railpen.29 See letter from the American Bar Association,

Business Law Section (ABA).30 This commentator also noted that, [a]s a

practical matter, we understand that most listedcompanies that are accelerated filers under theExchange Act, and many listed companies that aresmaller reporting companies, already havecompensation committees or committeesperforming the functions of compensationcommittees. Id.

31 See letters from the American Federation of Labor and Congress of Industrial Organizations(AFLCIO), the Council of Institutional Investors(CII), Merkl and the Ohio Public EmployeesRetirement System (OPERS).

32 See letters from ABA, CFA and NACD.

currently require that a listed issuerestablish a compensation committee.Current exchange listing standards,however, generally require listed issuerseither to have a compensationcommittee or to have independentdirectors determine, recommend oroversee specified executivecompensation matters. 20 For example,the New York Stock Exchange (NYSE)requires a listed issuer to have acompensation committee composedsolely of independent directors and toassign various executive compensation-related tasks to that committee. 21 On theother hand, the NASDAQ Stock Market(Nasdaq) does not mandate that alisted issuer have a compensationcommittee, but requires that executivecompensation be determined orrecommended to the board fordetermination either by a compensationcommittee composed solely of independent directors or by a majority

of the boards independent directors ina vote in which only independentdirectors participate. 22 Some of the

other exchanges have standardscomparable to the NYSEs and requiretheir listed issuers to have independentcompensation committees. 23 Otherexchanges have standards comparable toNasdaqs and, in the absence of acompensation committee, requireexecutive compensation determinationsto be made or recommended by amajority of independent directors on thelisted issuers board. 24

Proposed Rule 10C1(b) would directthe exchanges to adopt listing standardsthat would apply to a listed issuerscompensation committee or, in theabsence of such a committee, any other

board committee that performsfunctions typically performed by acompensation committee, includingoversight of executive compensation.Proposed Rule 10C1(b), however,would not require the independencelisting requirements to apply tomembers of the board who oversee

executive compensation in the absenceof a board committee. 25 b. Comments on the Proposed Rule

Comments on this proposal weregenerally favorable. Many commentatorssupported the functional approach of the proposed rule, which would requirecompensation committee independencelisting standards to apply to any boardcommittee charged with oversight of executive compensation, regardless of its formal title. 26 In response to ourrequest for comment on whether weshould direct the exchanges to apply theproposed rules requirements todirectors who oversee executivecompensation matters in the absence of a formal committee structure, severalcommentators recommended that we doso, 27 and two of these commentatorssuggested that such a requirement

would help ensure that companiescould not rely on technicalities orloopholes to avoid independent directoroversight of executive compensation. 28 Another commentator, however, arguedthat the final rule should not apply toindependent directors who determine,or recommend to the board, executivecompensation matters in the absence of a formal committee structure. 29 Thiscommentator believed that broadeningthe scope of the rule to apply to a groupof directors who determine executivecompensation in lieu of a formalcommittee is not clearly mandated bySection 10C and would burden listedissuers that do not have a boardcommittee overseeing executivecompensation, without necessarilyimproving their oversight of executivecompensation. 30

In the Proposing Release, werequested comment on whether theexchanges should be prohibited from

listing issuers that do not havecompensation committees. Severalcommentators supported the concept of mandatory compensation committeesfor listed issuers, on the basis thatexecutive compensation deservesspecial, ongoing attention by adedicated working group of the board; acommittee structure may promoteincreased board expertise oncompensation; and having a formalcommittee would help promoteaccountability to shareholders. 31 Several other commentators opposedsuch requirements, arguing that theexchanges should be allowed broaddiscretion on how listed issuersdetermine compensation matters. 32 c. Final Rule

After considering the comments, weare adopting Rule 10C1(b) substantiallyas proposed. Under the final rule, theexchanges will be directed to adoptlisting standards that apply to anycommittee of the board that performsfunctions typically performed by acompensation committee, includingoversight of executive compensation,whether or not such committee also


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33 For example, if a listed issuer has a corporategovernance committee or a human resourcescommittee, the responsibilities of which include,among other matters, oversight of executivecompensation, such committee will be subject tothe compensation committee listing requirements of the applicable exchange.

34 See NYSE Listed Company Manual Section303A.02(b); Nasdaq Rule 5605(a)(2).

35 See id.36 See id.37 See Commentary to NYSE Listed Company

Manual Section 303A.02(a); Nasdaq Rule 5605;Nasdaq IM5605.

38 See NYSE Rule 303A.02(a).

performs other functions or is formallydesignated as a compensationcommittee. 33 In addition, the listingstandards adopted by the exchangesmust also apply the directorindependence requirements of Rule10C1(b)(1), the requirements relating toconsideration of a compensationadvisers independence in Rule 10C1(b)(4), and the requirements relating toresponsibility for the appointment,compensation and oversight of compensation advisers in Rules 10C1(b)(2)(ii) and (iii) to the members of alisted issuers board of directors who, inthe absence of a board committee,oversee executive compensation matterson behalf of the board of directors. We

believe this approach is an appropriateway to implement Section 10C. Thelisting standards are intended to benefitinvestors by requiring that theindependent directors of a listed issueroversee executive compensation

matters, consider independence criteria before retaining compensation advisersand have responsibility for theappointment, compensation andoversight of these advisers. We believeit would benefit investors to implementSection 10C in a manner that does notallow listed issuers to avoid these listingstandards by simply not having acompensation committee or another

board committee oversee executivecompensation matters.

We have determined not to requirethe exchanges to apply the listingstandards relating to the compensationcommittees authority to retaincompensation advisers, Rule 10C1(b)(2)(i), or required funding forpayment of such advisers to directorswho oversee executive compensationmatters outside of the structure of aformal board committee, Rule 10C1(b)(3). As noted above, we understandthat action by independent directorsacting outside of a formal committeestructure would generally be consideredaction by the full board of directors. Asa result, we believe it is unnecessary toapply these requirements to directorsacting outside of a formal committeestructure, as they retain all the powers

of the board of directors in makingexecutive compensation determinations.We are implementing this change by

defining the term compensationcommittee so that it includes, for allpurposes other than the requirementsrelating to the authority to retain

compensation advisers in Rule 10C1(b)(2)(i) and required funding forpayment of such advisers in Rule 10C1(b)(3), the members of the board of directors who oversee executivecompensation matters on behalf of the

board of directors in the absence of aformal committee. For ease of referencethroughout this release, in ourdiscussion of the final rules we areadopting, references to an issuerscompensation committee include anycommittee of the board that performsfunctions typically performed by acompensation committee, includingoversight of executive compensation,whether or not formally designated as acompensation committee, as well as,to the extent applicable, those membersof a listed issuers board of directorswho oversee executive compensationmatters on behalf of the board of directors in the absence of such acommittee.

The final rule will not require a listedissuer to have a compensationcommittee or a committee that performsfunctions typically assigned to acompensation committee. We believethis aspect of the final rule is consistentwith the requirements of Section 10C,which does not direct us to require sucha committee. Moreover, in light of ourdetermination to apply the requirementsfor director independence,consideration of adviser independence,and responsibility for the appointment,compensation and oversight of compensation advisers to those

members of a listed issuers board of directors who oversee executivecompensation matters on behalf of the

board of directors in the absence of aformal committee, there will be littledifference between the requirementsapplicable to listed issuers that do nothave compensation committees ascompared to those applicable to issuersthat do have compensation committees.

2. Independence Requirements

Proposed Rule 10C1(b)(1) wouldrequire each member of a listed issuerscompensation committee to be a

member of the board of directors and to be independent. We proposed to requirethat the exchanges develop a definitionof independence applicable tocompensation committee members afterconsidering relevant factors, including,

but not limited to, the two factorsenumerated in Section 10C(a)(3). We areadopting these requirements asproposed, except that, as discussedabove, this aspect of the final rule willalso apply to those members of a listedissuers board of directors who overseeexecutive compensation matters on

behalf of the board of directors in theabsence of a board committee.

a. Proposed Rule

Most exchanges that list equitysecurities already require directors oncompensation committees or directorsdetermining or recommending executivecompensation matters to beindependent under their generalindependence standards. Althoughindependence requirements andstandards vary somewhat among thedifferent exchanges, listing standardsgenerally prescribe certain bright-lineindependence tests (includingrestrictions on compensation,employment and familial or otherrelationships with the listed issuer orthe executive officers of the listed issuerthat could interfere with the exercise of independent judgment) that directorsmust meet in order to be consideredindependent. 34 For example, both NYSEand Nasdaq rules preclude a finding of independence if the director is orrecently was employed by the listedissuer, the directors immediate familymember is or recently was employed asan executive officer of the listed issuer,or the director or directors familymember received compensation fromthe listed issuer in excess of specifiedlimits. 35 In addition, under both NYSEand Nasdaq rules, directors may bedisqualified based on their or theirfamily members relationships with alisted issuers auditor, affiliation withentities that have material business

relationships with the listed issuer, oremployment at a company whosecompensation committee includes anyof the listed issuers executive officers. 36 We note, however, that with theexception of audit committeemembership requirements, stockownership alone will not automaticallypreclude a director from beingconsidered independent under eitherNYSE or Nasdaq listing standards. 37 The NYSE and Nasdaq also require theirlisted issuers boards to affirmativelydetermine that each independentdirector either, in NYSEs case, has nomaterial relationship with the issuer 38 or, in Nasdaqs case, has no relationshipwhich, in the opinion of the issuers

board of directors, would interfere withthe directors exercise of independentjudgment in carrying out his or her


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39 See Nasdaq Rule 4200(a)(15).40 See, e.g., NYSE Arca Rule 5.3(k)(1) and NYSE

AMEX Company Guide Section 803.A.02.41 As defined in Exchange Act Rule 16b3(b)(3)(i)

[17 CFR 240.16b3(b)(3)(i)], a Non-EmployeeDirector is a director who is not currently anofficer (as defined in Rule 16a1(f)) of the issuer ora parent or subsidiary of the issuer, or otherwisecurrently employed by the issuer or a parent orsubsidiary of the issuer; does not receive

compensation, either directly or indirectly, from theissuer or a parent or subsidiary of the issuer forservices rendered as a consultant or in any capacityother than as a director, except for an amount thatdoes not exceed the dollar amount for whichdisclosure would be required pursuant to Item404(a) of Regulation SK; and does not possess aninterest in any other transaction for whichdisclosure would be required pursuant to Item404(a) of Regulation SK. In addition, Rule 16b3(b)(3)(ii) provides that a Non-Employee Director of a closed-end investment company is a director whois not an interested person of the i ssuer, as thatterm is defined in Section 2(a)(19) of the InvestmentCompany Act [15 U.S.C. 80a2(a)(19)].

42 See letter from Sullivan & Cromwell LLP toFacilitating Shareholder Director Nominations,Release No. 3460089, available at http:// www.sec.gov/comments/s7-10-09/s71009-430.pdf .

(In our experience, many compensation committeecharters require their members to meet therequirements of Rule 16b3 and Section 162(m).);Ira G. Bogner & Michael Krasnovsky, ExchangeRules Impact Compensation CommitteeComposition, The Metropolitan CorporateCounsel , Apr. 2004, at 17 (Most compensationcommittees of public companies include at leasttwo directors that are outside directors underSection 162(m) of the Internal Revenue Code * * *and non-employee directors under Rule 16b3 of the Securities Exchange Act * * *.).

43 A director is an outside director if thedirector (A) is not a current employee of thepublicly held corporation; (B) is not a formeremployee of the publicly held corporation whoreceives compensation for prior services (other than

benefits under a tax-qualified retirement plan)during the taxable year; (C) has not been an officerof the publicly held corporation; and (D) does notreceive remuneration from the publicly heldcorporation, either directly or indirectly, in anycapacity other than as a director. For this purpose,remuneration includes any payment in exchange forgoods or services. Section 162(m) of the InternalRevenue Code of 1986, as amended. Treas. Reg.Section 1.16227(e)(3).

44 Public Law 107204, 116 Stat. 745 (2002).45 15 U.S.C. 78j1(m)(1).

46 See Section 10A(m) of the Exchange Act.Exchange Act Rule 10A3 states that in order to beconsidered independent, an audit committeemember may not, other than in his or her capacityas a member of the audit committee, the board of directors, or any other board committee * * *[a]ccept directly or indirectly any consulting,advisory, or other compensatory fee from the issueror any subsidiary thereof * * *. For non-investment company issuers, the audit committeemember also cannot be an affiliated person of theissuer or its subsidiaries. For investment companyissuers, the audit committee member cannot be aninterested person of the issuer as defined inSection 2(a)(19) of the Investment Company Act.

47 See, e.g., letters from ABA, Barnard, SanjaiBhagat, et al. (Bhagat), the Center on ExecutiveCompensation (CEC), CFA, Davis Polk &Wardwell LLP (Davis Polk), MarkWest EnergyPartners, L.P. (MarkWest), NYSE Euronext(NYSE), Pfizer Inc. (Pfizer) and Sullivan &Cromwell LLP (S&C).

48 See letter from MarkWest.

responsibilities. 39 The other exchangeshave similar requirements. 40

In addition to meeting exchangelisting standards, there are other reasonsfor members of the compensationcommittee to be independent. Forexample, in order for a securitiestransaction between an issuer and oneof its officers or directors to be exemptfrom short-swing profit liability underSection 16(b) of the Exchange Act, thetransaction must be approved by the full

board of directors or by a committee of the board that is composed solely of twoor more Non-Employee Directors, asdefined in Exchange Act Rule 16b3(b)(3). 41 We understand that manyissuers use their independentcompensation committees to availthemselves of this exemption. 42 Similarly, if an issuer wishes to preservethe tax deductibility of the amounts of certain awards paid to executiveofficers, among other things, the

performance goals of such awards must be determined by a compensationcommittee composed of two or moreoutside directors, as defined inSection 162(m) of the Internal RevenueCode. 43 The definitions of Non-

Employee Director and outsidedirector are similar to the exchangesdefinitions of independent director.

The proposed rule would direct theexchanges to develop a definition of independence applicable tocompensation committee members afterconsidering relevant factors, including,

but not limited to, a directors source of compensation, including anyconsulting, advisory or othercompensatory fee paid by the issuer tosuch director, and whether a director isaffiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiaryof the issuer. We did not propose tospecify any additional factors that theexchanges must consider in determiningindependence requirements formembers of compensation committees.

In proposing Rule 10C1(b)(1), weconsidered the similarities anddifferences between Section 952 of theAct and Section 301 of the Sarbanes-Oxley Act of 2002. 44 Section 301 of theSarbanes-Oxley Act added Section10A(m)(1) to the Exchange Act, 45 whichrequired the Commission to direct theexchanges to prescribe independencerequirements for audit committeemembers. Although the independencefactors in Section 10C(a)(1) are similarto those in Section 10A(m)(1)andindeed, Section 952 of the Actessentially provides the compensationcommittee counterpart to the auditcommittee requirements of Section 301of the Sarbanes-Oxley Actonesignificant difference is that Section10C(a) requires only that the exchangesconsider relevant factors (emphasisadded), which include the source of compensation and any affiliaterelationship, in developingindependence standards forcompensation committee members,whereas Section 10A(m) expressly statesthat certain relationships precludeindependence: An audit committeemember may not, other than in his orher capacity as a member of the auditcommittee * * * [a]ccept anyconsulting, advisory, or othercompensatory fee from the issuer; or[b]e an affiliated person of the issuer or

any subsidiary thereof (emphasisadded). 46

As a result, we interpret Section 10Cas providing the exchanges morediscretion to determine the standards of independence that compensationcommittee members are required tomeet than they are provided underSection 10A with respect to auditcommittee members. Section 10A(m)prescribes minimum criteria for theindependence of audit committeemembers. In contrast, Section 10C givesthe exchanges the flexibility to establishtheir own minimum independencecriteria for compensation committeemembers after considering relevantfactors, including the two enumeratedin Section 10C(a)(3). Accordingly, theproposed rule would allow eachexchange to establish its ownindependence definition, subject toCommission review and approvalpursuant to Section 19(b) of theExchange Act, provided the exchangeconsiders relevant factors inestablishing its own standards,including those specified in Section10C(a)(3).

b. Comments on the Proposed Rule

Comments on this proposal weregenerally favorable. Many commentatorssupported permitting the exchanges toestablish their own independencecriteria for compensation committeemembers, provided they consider thestatutorily-required factors. 47 Onecommentator claimed that this approach

would utilize the relative strengths andexperiences of the exchanges byavoiding a one size fits all approachand could be more conducive toresponding quickly to changes incorporate governance. 48 Anothercommentator noted that the proposalpermitted each exchange to developmore finely tuned listing rules that


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49 See letter from ABA (noting that the average board size of an S&P 100 company (which areprimarily listed on the NYSE) is approximately50% larger than the average board size of a SiliconValley 150 company (which are primarily listed onNasdaq and that [i]nvestors in these disparatecategories of companies have meaningfully differentexpectations and interests in the governancecontext).

50 See, e.g., letters from the American Federationof State, County and Municipal Employees

(AFSCME), California Public EmployeesRetirement System (CalPERS), the ColoradoPublic Employees Retirement Association(COPERA), OPERS and USS.

51 See letters from CalPERS, Railpen and USS.52 See letter from USS.53 See letter from AFLCIO.54 See, e.g., letters from AFSCME, Better Markets,

CFA, CII, the State Board of Administration of Florida (FLSBA) and UAW Retiree MedicalBenefits Trust (UAW).

55 See, e.g., letters from AFLCIO, AFSCME, CFA,CII, FLSBA and UAW.

56 See, e.g., letters from AFSCME, CII, FLSBA andUAW.

57 See letter from CII.

58 See letter from Better Markets.59 See letters from ABA, NYSE and the Society of

Corporate Secretaries and Governance Professionals(SCSGP).

60 See letter from NYSE.61 To facilitate public input on the Act, the

Commission has provided a series of email links,organized by topic, on its Web site at http:// www.sec.gov/spotlight/regreformcomments.shtml. The public comments we received on Section 952of the Act before we issued the Proposing Releaseare available on our Web site at http://www.sec.gov/ comments/df-title-ix/executive-compensation/ executive-compensation.shtml. Several of thosecommentators suggested that stock ownership aloneshould not automatically disqualify a boardmember from serving as an independent director onthe compensation committee. See, e.g., letters fromABA, Brian Foley & Company, Inc., Compensia,Davis Polk and Frederic W. Cook & Co., Inc.(Frederic Cook).

62 See, e.g., letters from ABA, AFSCME, Bhagat,CEC, Davis Polk, Debevoise, Robert J. Jackson

(Jackson), the Private Equity Growth CapitalCouncil (PEGCC) and SCSGP.

63 See, e.g., letters from CEC and Davis Polk.64 See letter from PEGCC.65 See id.66 See letter from Barnard.67 See letters from AFSCME and UAW.68 See letters from Better Markets and CFA.

reflect the particular characteristics of each exchanges listed companies. 49

Allowing the exchanges the latitudeto establish their own independencecriteria concerned some commentators,however. 50 These commentatorscautioned against permitting theexchanges to establish their ownindependence criteria and argued insupport of a uniform definition of independence across all exchanges. 51 One of these commentators claimed thatuniform requirements would serve as adeterrent to engaging in a race to the

bottom. 52 Another commentatorrecommended that the exchangesindependence criteria should preclude afinding of independence if a directorfails to meet the definitions of anoutside director under Section 162(m)of the Internal Revenue Code or a non-employee director under Exchange ActRule 16b3(b)(3); is a party to a relatedparty transaction that must be disclosed

pursuant to Item 404 of Regulation SK; or has an immediate family memberwho is employed by the company. 53

Some commentators urged us torequire the exchanges to consideradditional factors in developing adefinition of independence. 54 Severalcommentators advocated that we shouldrequire the exchanges to include

business or personal relationships between a compensation committeemember and executive officers of theissuer as factors for consideration, 55 aswell as board interlocks. 56 Anothercommentator believed that mandatoryfactors for consideration should includelinkages between a directors familymembers and the company or itsaffiliates and a directors relationshipswith other directors. 57 Onecommentator believed that, in setting

independence standards forcompensation committee members, theexchanges should be required toconsider all factors relevant to assessingthe independence of a board member,including personal, family and businessrelationships, and all other factors thatmight compromise a board membersjudgment on matters relating toexecutive compensation. 58 Three commentators, including theNYSE, stated that we should not specifyadditional mandatory factors that theexchanges must consider in developinga definition of independence applicableto compensation committee members. 59 In particular, the NYSE expressedconcern that if the final rule specifiesadditional mandatory factors forconsideration, such factors would beunderstood by the exchanges and bymany boards of directors as theCommissions determination that suchrelationships compromise director

independence, which would therebyeffectively preempt the review of compensation committee independencestandards that the exchanges would berequired to undertake under the rule. 60

In the Proposing Release, we notedthe concern of several commentators 61 that our rules implementing Section 10Cnot prohibit directors affiliated withsignificant investors (such as privateequity funds and venture capital firms)from serving on compensationcommittees. We requested comment onwhether a director affiliated with ashareholder with a significantownership interest who is otherwiseindependent would be sufficientlyindependent for the purpose of servingon the compensation committee. Manycommentators advocated that asignificant shareholders stockownership alone should not precludedirectors affiliated with the significantshareholder from serving on an issuerscompensation committee. 62 A number

of these commentators noted that equityownership by directors serves to alignthe directors interests with those of theshareholders with respect tocompensation matters. 63 According toone commentator, private equity fundstypically have a strong institutional

belief in the importance of appropriatelystructured and reasonable compensationarrangements, and the directors elected

by such funds are highly incentivized torigorously oversee compensationarrangements because the fundsincome, success and reputations aredependent on creating value forshareholders. 64 This commentator alsonoted that, while private equity fundsmay seek to create shareholder value bystrengthening or replacing themanagement team of a portfoliocompany, such funds rarely appointpartners or employees of their affiliatedprivate equity firms to serve asexecutives of portfolio companies. 65

One commentator did not believe thatdirectors affiliated with largeshareholders should be permitted toserve on compensation committees,noting that situations could arise wherethe directors obligation to act in the

best interest of all shareholders wouldconflict with the directors or largeshareholders own interest. 66 Twoadditional commentators noted thatprivate equity and venture capital firmsmay engage in significant transactionswith an issuer, and urged that all ties tothe company be considered inevaluating the independence of directors affiliated with significantshareowners. 67

Our proposed rule would require theexchanges to consider currentrelationships between the issuer and thecompensation committee member, andwe requested comment on whetherrelationships prior to a directorsappointment to the compensationcommittee or, for directors alreadyserving as compensation committeemembers when the new listingstandards take effect, prior to theeffective date of the new listingstandards, should also be considered.Only two commentators expressed

support for establishing any such look- back period. 68 One commentator,although not supporting a look-backperiod, believed that the decision of whether to require one should bedetermined not by the Commission but


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69 See letter from Davis Polk.70 See letters from ABA and CEC.

71 As the NYSE Listed Company Manual observes,the concern is independence from management.See Commentary to NYSE Rule 303A.02(a). See alsothe Commentary to NYSE Rule 303A.02(a), whichdiscusses the wide range of circumstances thatcould signal conflicts of interest or that might bearon the materiality of the relationship between thedirector and the issuer.

72 The standard of review for approving proposedexchange listing standards is found in Section19(b)(2)(C) of the Exchange Act, which providesthat [t]he Commission shall approve a proposedrule change of a self-regulatory organization if itfinds that such proposed rule change is consistentwith the requirements of this title and the rules andregulations issued under this title that areapplicable to such organization. Under Section6(b) of the Exchange Act, the rules of an exchangemust be designed to prevent fraudulent andmanipulative acts and practices, to promote just

and equitable principles of trade, to fostercooperation and coordination with persons engagedin regulating, clearing, settling, processinginformation with respect to, and facilitatingtransactions in securities, to remove impedimentsto and perfect the mechanism of a free and openmarket and a national market system, and, ingeneral, to protect investors and the publicinterest.

73 A submission would be required even if anexchange believes that its existing rules satisfy therequirements of Rule 10C1. In such acircumstance, the exchanges rule submissionwould explain how the exchanges existing rulessatisfy the requirements of Rule 10C1, and thesubmission would be subject to the Commissionsreview and approval.

by the exchanges. 69 Other commentatorsargued that a look-back period was notnecessary because the two largestexchanges (NYSE and Nasdaq) currentlyimpose look-back requirements on listedissuers in their standards regardingdirector independence. 70 c. Final Rule

After consideration of the comments,we are adopting the requirements asproposed, except that we are alsoextending them to apply to thosemembers of a listed issuers board of directors who oversee executivecompensation matters on behalf of the

board of directors in the absence of a board committee. Under the final rule,the exchanges will be directed toestablish listing standards requiringeach member of a listed issuerscompensation committee to be amember of the board of directors and to

be independent. The final rule does not

require that exchanges establish auniform definition of independence. We believe this approach is consistent withthe mandate in Section 10C(a)(3).Further, given the wide variety of issuers that are listed on exchanges, we

believe that the exchanges should beprovided with flexibility to developindependence requirements appropriatefor the issuers listed on each exchangeand consistent with the requirements of Rule 10C1(b)(1). Although thisprovides the exchanges with flexibilityto develop the appropriateindependence requirements, asdiscussed below, the independencerequirements developed by theexchanges will be subject to review andfinal Commission approval pursuant toSection 19(b) of the Exchange Act.

In developing their own definitions of independence applicable tocompensation committee members, theexchanges will be required to considerrelevant factors, including, but notlimited to:

A directors source of compensation, including anyconsulting, advisory or compensatoryfee paid by the issuer; and

Whether a director is affiliated with

the issuer, a subsidiary of the issuer, oran affiliate of a subsidiary of the issuer.The final rule does not specify any

additional factors that the exchangesmust consider in determiningindependence requirements forcompensation committee members, nordoes the final rule prescribe anystandards or relationships that willautomatically preclude a finding of independence. Because the rules

relevant factors cover the same mattersas the prohibitions in Section 10A(m)sdefinition of audit committeeindependence, we expect the exchangesto consider whether those prohibitionsshould also apply to compensationcommittee members. However,consistent with Section 10C, theexchanges are not required to adoptthose prohibitions in their requirementsand will have flexibility to considerother factors in developing theirrequirements.

As noted above and in the ProposingRelease, Section 10C of the ExchangeAct does not require that the exchangesprohibit all affiliates from serving on acompensation committee. Inestablishing their independencerequirements, the exchanges maydetermine that, even though affiliateddirectors are not allowed to serve onaudit committees, such a blanketprohibition would be inappropriate for

compensation committees, and certainaffiliates, such as representatives of significant shareholders, should bepermitted to serve. However, inresponse to concerns noted by somecommentators that significantshareholders may have otherrelationships with listed companies thatwould result in such shareholdersinterests not being aligned with those of other shareholders, we emphasize that itis important for exchanges to considerother ties between a listed issuer and adirector, in addition to share ownership,that might impair the directorsjudgment as a member of thecompensation committee. For example,the exchanges might conclude thatpersonal or business relationships

between members of the compensationcommittee and the listed issuersexecutive officers should be addressedin the definition of independence. 71

Although each exchange mustconsider affiliate relationships inestablishing a definition of compensation committee independence,there is no requirement to adopt listingstandards precluding compensationcommittee membership based on anyspecific relationships. Accordingly, wedo not believe it is necessary toseparately define the term affiliate forpurposes of Rule 10C1. In addition, thefinal rule does not impose any requiredlook-back periods that must beincorporated in exchange listing

standards relating to the independenceof compensation committee members.We agree with commentators that thedetermination of whether to impose alook-back period in evaluatingcompensation committee memberindependence should be left to theexchanges and note that the exchangesalready incorporate various look-backperiods in their general criteria fordirector independence. In this respect,the final rule is similar to Exchange ActRule 10A3, which did not impose amandatory look-back period forevaluating audit committee memberindependence in light of look-backperiods already required by theexchanges for evaluating directorindependence generally.

Consistent with the proposal, theexchanges definitions of independencefor compensation committee memberswill be implemented through proposedrule changes that the exchanges will be

required to file pursuant to Section19(b) of the Exchange Act, which aresubject to the Commissions review andapproval. 72 Consistent with theproposal, Rule 10C1(a)(4) will requirethat each proposed rule changesubmission include, in addition to anyother information required underSection 19(b) of the Exchange Act andthe rules thereunder: a review of whether and how the proposed listingstandards satisfy the requirements of thefinal rule; a discussion of the exchangesconsideration of factors relevant tocompensation committee independence;and the definition of independenceapplicable to compensation committeemembers that the exchange proposes toadopt or retain in light of such review. 73 The Commission will then consider,


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74 See Exchange Act Section 10C(c)(1).75 See Exchange Act Section 10C(d)(1).76 See Exchange Act Section 10C(e).

77 See Standards Relating to Listed CompanyAudit Committees, Release No. 338220 (Apr. 9,2003) [68 FR 18788], n. 114 (As proposed, therequirement does not preclude access to or advicefrom the companys internal counsel or regularoutside counsel. It also does not require an auditcommittee to retain independent counsel.).

78 See Exchange Act Section 10A(m)(5)(Eachaudit committee shall have the authority to engageindependent counsel and other advisers, as itdetermines necessary to carry out its duties.).

79 See, e.g., letters from Barnard, CalSTRS, DavisPolk, Pfizer and SCSGP.

80 See letters from AFLCIO, Better Markets,CalPERS, CFA Institute, CII, FLSBA and Railpen.

81 See, e.g., letters from ABA, CEC (noting thatthe compensation committee is in the best positionto determine whether a particular advisor would bean appropriate advisor following a review of allfactors and subject to appropriate disclosure) andMerkl.

82 See letter from ABA.83 See id.84 See letter from Merkl.85 See letter from Carl Struby.86 See letter from Merkl.87 See letter from Robert M. Fields (Apr. 6,

2011)(Fields).

prior to final approval, whether theexchanges considered the relevantfactors outlined in Section 10C(a) andwhether the exchanges proposed rulechanges are consistent with therequirements of Section 6(b) andSection 10C of the Exchange Act.3. Authority To Retain Compensation

Advisers; Responsibilities; and FundingSection 10C(c)(1) of the Exchange Actprovides that the compensationcommittee of a listed issuer may, in itssole discretion, retain or obtain theadvice of a compensationconsultant, 74 and Section 10C(d)extends this authority to independentlegal counsel and other advisers. 75 Both sections also provide that thecompensation committee shall bedirectly responsible for theappointment, compensation andoversight of the work of compensationadvisers. Sections 10C(c)(1)(C) and

10C(d)(3) provide that the compensationcommittees authority to retain, andresponsibility for overseeing the workof, compensation advisers may not beconstrued to require the compensationcommittee to implement or actconsistently with the advice orrecommendations of a compensationadviser or to affect the ability orobligation of the compensationcommittee to exercise its own judgmentin fulfillment of its duties. To ensurethat the listed issuers compensationcommittee has the necessary funds topay for such advisers, Section 10C(e)provides that a listed issuer shallprovide appropriate funding, asdetermined by the compensationcommittee, for payment of reasonablecompensation to compensationadvisers. 76

We proposed Rules 10C1(b)(2) and(3) to implement these statutoryrequirements. We are adopting theserequirements substantially as proposed.a. Proposed Rule

Proposed Rule 10C1(b)(2) wouldimplement Sections 10C(c)(1) and (d) byrepeating the provisions set forth inthose sections regarding the

compensation committees authority toretain or obtain a compensation adviser,its direct responsibility for theappointment, compensation andoversight of the work of anycompensation adviser, and the relatedrules of construction. In addition,proposed Rule 10C1(b)(3) wouldimplement Section 10C(e) by repeatingthe provisions set forth in that section

regarding the requirement to provideappropriate funding for the payment of reasonable compensation, as determined

by the compensation committee, tocompensation advisers.

In the Proposing Release, we notedthat while the statute provides thatcompensation committees of listedissuers shall have the express authorityto hire independent legal counsel, thestatute does not require that they do so.Similar to our interpretation 77 of Section 10A(m) of the Exchange Act,which gave the audit committeeauthority to engage independent legalcounsel, 78 we do not construe therequirements related to independentlegal counsel and other advisers as setforth in Section 10C(d)(1) of theExchange Act as requiring acompensation committee to retainindependent legal counsel or asprecluding a compensation committeefrom retaining non-independent legal

counsel or obtaining advice from in-house counsel or outside counselretained by the issuer or management.

b. Comments on the Proposed RuleMany commentators expressed

general support for the proposedrequirements. 79 While severalcommentators suggested thatcompensation committees should use,or be permitted to use, onlyindependent compensation advisers, 80 other commentators agreed with theinterpretive position expressed in theProposing Release that the statute doesnot require a compensation committeeto retain independent legal counsel orpreclude the compensation committeefrom retaining non-independent legalcounsel or obtaining advice from in-house counsel or counsel retained bythe issuer or management. 81 Onecommentator noted that the proposedrule should not be interpreted to applyto or interfere with a compensationcommittees dealings with legal counsel

from whom it may obtain advice, butwhich was not retained or selected bythe committee, such as in-house andcompany counsel. Thus, the proposedlanguage * * * should be clear that therequirement that independent legalcounsel and other advisers be subject tothe direct oversight of the compensationcommittee applies only to such counseland advisors who are specifically andseparately retained by the compensationcommittee. 82 This commentatorthought it would be helpful to includethe Commissions interpretation of thestatute in the text of the rule, 83 althoughone commentator viewed suchclarification as unnecessary. 84 Onecommentator asked that we clarifywhether the interpretive view expressedin the Proposing Release would applyequally to compensation consultantsi.e., whether a compensation committeecould obtain advice from compensationconsultants retained by management. 85

We asked for comment on whether weshould define what constitutes anindependent legal counsel. Onecommentator stated, withoutexplanation, that it would not benecessary for us to define whatconstitutes an independent legalcounsel. 86 Another commentator

believed that we should provide moreguidance for issuers to determinewhether legal counsel is independent,so that listed issuers would have greaterassurance that they are in compliancewith Exchange Act Section 10C(d)(1). 87 c. Final Rule

We are adopting the rule substantiallyas proposed, with modifications toclarify that the scope of therequirements is limited to only thosecompensation advisers retained by thecompensation committee and to applythe requirement that the compensationcommittee be directly responsible forthe appointment, compensation andoversight of the work of anycompensation adviser retained by thecompensation committee to thosemembers of a listed issuers board of directors who oversee executivecompensation matters on behalf of the

board of directors in the absence of a board committee. Under the final rules,the exchanges will be directed to adoptlisting standards that provide that:

The compensation committee may,in its sole discretion, retain or obtain theadvice of a compensation adviser;


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88 Similarly, Exchange Act Rule 10A3 providesthat audit committees must have the authority toengage independent counsel and that listedissuers must provide for appropriate funding of such advisers. Independent counsel is not furtherdefined in Rule 10A3, and we do not believe thatthere has been any uncertainty arising from theabsence of such a definition.

89 Although there is no relevant legislative

history, we assume this requirement is intended toaddress the concern expressed by the multi-servicecompensation consulting firms that the disclosurerequirements the Commission adopted in 2009 arenot competitively neutral because they do notaddress potential conflicts of interest presented by

boutique consulting firms that are dependent on therevenues of a small number of clients. See letterfrom Towers Perrin, commenting on ProxyDisclosure and Solicitation Enhancements, ReleaseNo. 339052 (July 10, 2009), available at http:// www.sec.gov/comments/s7-13-09/s71309-90.pdf. The list of independence factors in Section10C(b)(2), which addresses both multi-service firmother services conflicts and boutique firmrevenue concentration conflicts, is consistentwith this assumption. 90 See Proposing Release, 76 FR at 18972.

The compensation committee,which for this purpose includes thosemembers of a listed issuers board of directors who oversee executivecompensation matters on behalf of the

board of directors in the absence of a board committee, shall be directlyresponsible for the appointment,compensation and oversight of the workof any compensation adviser retained bythe compensation committee; and

Each listed issuer must provide forappropriate funding for payment of reasonable compensation, as determined

by the compensation committee, to anycompensation adviser retained by thecompensation committee.Consistent with Sections 10C(c)(1)(c)and 10C(d)(3), the final rule may not beconstrued to require the compensationcommittee to implement or actconsistently with the advice orrecommendations of any adviser to thecompensation committee or to affect the

ability or obligation of a compensationcommittee to exercise its own judgmentin fulfillment of the duties of thecompensation committee.

Consistent with our interpretation of Section 10C, the final rule does notrequire compensation committees toretain or obtain advice only fromindependent advisers. A listed issuerscompensation committee may receiveadvice from non-independent counsel,such as in-house counsel or outsidecounsel retained by management, orfrom a non-independent compensationconsultant or other adviser, includingthose engaged by management. The finalrule does not require a compensationcommittee to be directly responsible forthe appointment, compensation oroversight of compensation advisers thatare not retained by the compensationcommittee, such as compensationconsultants or legal counsel retained bymanagement. Rather, the directresponsibility to oversee compensationadvisers applies only to those advisersretained by a compensation committee,and the obligation of the issuer toprovide for appropriate funding appliesonly to those advisers so retained.Finally, in light of the provisions of ourfinal rule and the fact thatcommentators did not urge us to defineindependent legal counsel, we do not

believe such a definition is needed. 88 We note that the final rule requires thepayment of reasonable compensation

not only to independent legal counsel but also to any other adviser to thecompensation committee, whichincludes any compensation advisersretained by the compensationcommittee, such as attorneys andconsultants, whether or not they areindependent.

4. Compensation Adviser IndependenceFactorsSection 10C(b) of the Exchange Act

provides that the compensationcommittee of a listed issuer may selecta compensation adviser only after takinginto consideration the fiveindependence factors specified inSection 10C(b) as well as any otherfactors identified by the Commission. Inaccordance with Section 10C(b), thesefactors would apply to the selection of compensation consultants, legal counseland other advisers to the committee.The statute does not require a

compensation adviser to beindependent, only that thecompensation committee of a listedissuer consider the enumeratedindependence factors before selecting acompensation adviser. Section 10C(b)(2)specifies that the independence factorsidentified by the Commission must becompetitively neutral 89 and include, atminimum:

The provision of other services tothe issuer by the person that employsthe compensation consultant, legalcounsel or other adviser;

The amount of fees received fromthe issuer by the person that employsthe compensation consultant, legalcounsel or other adviser, as a percentageof the total revenue of the person thatemploys the compensation consultant,legal counsel or other adviser;

The policies and procedures of theperson that employs the compensationconsultant, legal counsel or otheradviser that are designed to preventconflicts of interest;

Any business or personalrelationship of the compensationconsultant, legal counsel or other

adviser with a member of thecompensation committee; and

Any stock of the issuer owned bythe compensation consultant, legalcounsel or other adviser.

We proposed to direct the exchangesto adopt listing standards requiring thecompensation committee of a listedissuer to consider the five factors

enumerated in Section 10C(b) of theExchange Act prior to selecting acompensation adviser. We are adoptingthe rule substantially as proposed, butwith some changes in response tocomments.a. Proposed Rule

Proposed Rule 10C1(b)(4) woulddirect the exchanges to adopt listingstandards that require the compensationcommittee of a listed issuer to take intoaccount the five factors identified inSection 10C(b)(2), in addition to anyother factors identified by the relevantexchange, before selecting acompensation adviser. Under theproposed rule, the exchanges wouldhave the ability to add otherindependence factors that must beconsidered by compensationcommittees. In the Proposing Release,we stated that we did not propose anyadditional factors because we believedthat the factors set forth in Section10C(b) are generally comprehensive,although we solicited comment as towhether there are any additionalindependence factors that should betaken into consideration by a listedissuers compensation committee. 90

As noted above and in the ProposingRelease, Section 10C does not requirecompensation advisers to beindependentonly that thecompensation committee considerfactors that may bear uponindependence. As a result, we did not

believe that it would be appropriate toestablish bright-line or numericalthresholds that would affect whether orwhen the factors listed in Section 10C,or any additional factors, must beconsidered by a compensationcommittee. For example, we did not

believe that our rules should provide

that a compensation committee mustconsider stock owned by an adviseronly if ownership exceeds a specifiedminimum percentage of the issuersstock, or that a committee must considerthe amount of revenues that the issuers

business represents for an adviser onlyif the percentage exceeds a certainpercentage of the advisers revenues.Accordingly, proposed Rule 10C1(b)(4)would require the listing standardsdeveloped by the exchanges to include


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91 As noted above, the exchanges would have theability to add other independence factors that must

be considered by compensation committees, andthese additional factors could include materiality or

bright-line thresholds or cutoffs.92 See, e.g., letters from ABA, Pfizer, SCSGP and

USS.93 See letter from Aon Hewitt (AON).94 See letter from Hodak Value Advisors.95 See, e.g., letters from Frederic Cook,

Longnecker & Associates (Longnecker), Mercer,Steven Hall & Partners (Steven Hall) and TowersWatson (Towers).

96 See letters from Frederic Cook and Longnecker.

97 See letters from AON, Mercer and Towers.98 See, e.g., letters from ABA, AFLCIO, AFSCME

and USS.99 See letters from AFLCIO, AFSCME, Frederic

Cook and UAW. See also letter from Steven Hall(noting that the requirement that a compensationcommittee consider the companys fees paid to afirm as a percentage of the firms overall fees seemsto overlook the more significant issue of the amountof fees the consulting firm receives for services tothe compensation committee as a percentage of thetotal fees the firm receives including fees for otherservices to the company).

100 See, e.g., letters from ABA (supportingconsideration of relationships between advisersemployer and issuers executive officers), BetterMarkets, Merkl (supporting consideration of relationships between either adviser or advisersemployer and issuers executive officers), and USS(supporting consideration of relationships betweenadviser and issuers executive officers). Onecommentator supported requiring consideration of

business or personal relationships between anissuers executive officers and the compensationadviser, but not the advisers employer. See letterfrom Towers.

101 See, e.g., letters from AON, MeridianCompensation Partners (Meridian), SCSGP andSteven Hall.

102 See letter from Steven Hall.

103 See letters from ABA, Davis Polk, McGuireWoods and S&C.

104 See letters from ABA and McGuire Woods.105 See letters from ABA and S&C.106 See, e.g., letters from Better Markets, Robert M.

Fields (Apr. 29, 2011), Richard Thalheimer andTowers.

107 See letter from Towers.108 See letters from Longnecker, McGuireWoods,

Meridian, SCSGP and Towers.

the independence factors set forth in thestatute and incorporated into the rulewithout any materiality or bright-linethresholds or cutoffs. 91

b. Comments on the Proposed RuleComments on this proposal were

mixed. A number of commentatorssupported directing the exchanges to

adopt listing standards that require thecompensation committee to take intoaccount the five factors enumerated inSection 10C, in addition to any otherfactors identified by the exchanges. 92 One multi-service compensationconsulting firm believed that the fivefactors listed in Section 10C(b)(2) were,in total, competitively neutral, but that,on an individual basis, some of thefactors were not competitively neutral. 93 This commentator suggested that weshould provide an instruction to thefinal rules to emphasize that the factorsshould be considered in their totalityand that no one factor should be viewedas a determinative factor of independence. Another commentatorargued that the full effects of anyindependence factor on competition inthe rapidly evolving advisory industryare not entirely knowable, and that theCommission should generallyrecommend factors that, when appliedequally across the full spectrum of existing firms, help in achieving thegoal of adviser independence. 94

Several commentators argued thatsome or all of the five factors identifiedin Section 10C(b)(2) and included in theproposed rule were not competitivelyneutral.

95

Multi-service consulting firmsargued that the consideration of otherservices provided to the issuer by theperson that employs the compensationconsultant was not competitivelyneutral as this factor would affect onlymulti-service firms. For their part,smaller consulting firms argued that theconsideration of the amount of feesreceived from the issuer as a percentageof a firms total revenues was notcompetitively neutral because thelikelihood of revenue concentrationwould be greater in smaller firms. 96 Three commentators argued that our

existing compensation consultant fee

disclosure requirementsdisproportionately affect multi-serviceconsulting firms, and suggested that wecould improve the competitiveneutrality of our rules by requiringcompetitively neutral disclosure of feespaid to all compensation consultants oradvisers. 97

Many commentators urged us to addmore independence factors to the list of factors that could affect theindependence of a compensationadviser. 98 Several commentators arguedthat we should include a comparison of the amount of fees received forproviding executive compensationconsulting services to the amount of feesreceived for providing non-executivecompensation consulting services. 99 Other commentators expressed supportfor requiring compensation committeesto consider any business or personalrelationship between an executiveofficer of the issuer and an adviser or

the person employing the compensationadviser. 100 Some commentators,however, opposed adding new factors tothe list of factors identified in theproposed rule, 101 although one of thesecommentators acknowledged that itwould advise any compensationcommittee evaluating the independenceof a potential adviser to consider the

business and personal relationships between the issuers executive officersand the adviser or advisers firm. 102

In the Proposing Release, werequested comment on the applicationof the independence factors to differentcategories of advisers. Severalcommentators requested that westipulate that a compensation committeeconferring with or soliciting advice from

the issuers in-house or outside legalcounsel would not be required toconsider the independence factors withrespect to such counsels. 103 Thesecommentators believed that acompensation committee should berequired to consider the independencefactors only when the committee itself selects a compensation adviser, but notwhen it receives advice from, but doesnot select, an adviser. 104 Moreover, twoof these commentators questioned theusefulness of the independenceassessment as it relates to in-house legalcounsel, outside legal counsel to anissuer or a compensation adviserretained by management, as they are notheld out, or considered by thecompensation committee, to beindependent. 105

On the other hand, a number of commentators argued that thecompensation adviser independencerequirements should apply to any legalcounsel that provides advice to thecompensation committee. 106 One of these commentators argued that thelanguage of Section 10C(b)(1) isunambiguous and that the final rulesshould clarify that exchange listingstandards must require compensationcommittees to consider theindependence factors whenever acommittee receives advice from legalcounsel, regardless of whether or not thecommittee selected counsel. 107

We also requested comment onwhether we should include materiality,numerical or other thresholds thatwould limit the circumstances in whicha compensation committee is requiredto consider the independence factors.Several commentators opposedincluding such materiality, numerical orother bright-line thresholds in therule. 108 These commentators expressedconcern that such thresholds may not becompetitively neutral and could reducethe flexibility compensation committeeshave to select advisers best-suited to theissuer. A number of commentatorssupported a materiality threshold withrespect to the stock ownership factor.One commentator suggested that

consideration of this factor should berequired only if an individual beneficially owns in excess of 5% of anoutstanding class of an issuers equity


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109 See letter from Steven Hall.110 See letter from ABA.111 See letters from AON and Mercer.112 See letters from AON and Towers.113 See letter from Merkl.114 See letters from Hodak and Mercer.115 See letter from Mercer.116 See, e.g., letters from AON and Meridian.117 See letter from Meridian.118 See letter from AON.

119 See letters from Merkl and Towers.120 See letter from Mercer.121 See letter from Meridian.122 See letter from Mercer (noting that the more

junior members of the team rarely interact directlywith the compensation committee).

123 See, e.g., letters from CFA Institute andFrederic Cook.

124 See, e.g., letter from Better Markets.

125 See, e.g., letters from ABA, Better Markets,Merkl and USS.

126 See letter from AON.

securities. 109 Another commentatorsuggested a threshold of $50,000 in fairmarket value or 5,000 shares of a listedissuers stock, below which an advisersstock ownership would not be deemedto affect his or her independence. 110 Other commentators suggested thatcompensation committees should berequired to consider only stock owned

by the lead adviser and not stock owned by other employees on the advisersteam. 111

Comments were mixed as to whetherthe final rule should clarify the phrasesprovision of other services orbusiness or personal relationships, asused in proposed Rule 10C1(b)(4).Some commentators thought no furtherclarification of the phrase provision of other services was necessary, 112 andanother commented that it is better tohave a general principle than to haveexhaustive detailed rules that may leaveloopholes for services that may impair

the independence of an advisoryfirm. 113 Two commentators suggesteddefining the phrase to expressly excludecertain services. 114 For example, onecommentator suggested excludingadvice related to broad-based, non-discriminatory plans or surveys. 115

Some commentators urged that wefurther define the phrase business orpersonal relationship. 116 Onecommentator suggested that we shoulddefine business relationship toexpressly exclude any non-commercialrelationship between an adviser and amember of the issuers compensationcommittee, provided that suchrelationship does not result insignificant monetary or economic gainto either party, and that we shoulddefine personal relationship toinclude only familial relationships. 117 Another commentator argued that

business or personal relationships thatare more casual in nature may not berelevant to adviser independence andsuggested limiting consideration of suchrelationships to those that would morelikely than not have a materialadverse effect on an individualsindependence. 118 Two commentatorsthought it would be helpful if we

provided examples of the types of relationships to be considered, in orderto guide compensation committees asthey consider the breadth of possible

relationships that might impair adviserindependence. 119 Another commentatorthought it was unnecessary for us tofurther define the phrase because themyriad possible definitions andconsiderations are unlikely to be fullyencompassed by such a definition. 120

A few commentators also urged thatwe clarify the scope of individualswhose relationships would need to beconsidered in the context of evaluatingadviser independence. Onecommentator recommended limiting therequired consideration to the individualadviser who renders services to thecompensation committee, 121 andanother commentator similarlyrecommended limiting the requiredconsideration to the lead consultant,counsel or adviser to the committee, butnot to other members of the advisersteam serving the compensationcommittee. 122

We requested comment on whetherwe should require disclosure of acompensation committees process forselecting advisers. Many commentatorscriticized this idea, citing concernsabout extending already lengthy proxystatement discussions of executivecompensation and expressing doubt thatadditional disclosure of the process forselecting advisers would provide anyuseful information to investors. 123 However, some commentators thoughtsuch disclosure could be useful inproviding transparency as to whethercompensation committees werefollowing the required process forselecting advisers. 124 c. Final Rule

After considering the comments, weare adopting the requirementssubstantially as proposed, but withsome revisions. As discussed above, thisaspect of the final rule will also applyto those members of a listed issuers

board of directors who overseeexecutive compensation matters on

behalf of the board of directors in theabsence of a board committee. We havealso decided to include one additionalindependence factor that compensationcommittees must consider before

selecting a compensation adviser. Underthe final rule, the exchanges will bedirected to adopt listing standards thatrequire a compensation committee totake into account the five factors

enumerated in Section 10C(b)(2), as wellas any business or personalrelationships between the executiveofficers of the issuer and thecompensation adviser or the personemploying the adviser. This wouldinclude, for example, situations wherethe chief executive officer of an issuerand the compensation adviser have afamilial relationship or where the chief executive officer and the compensationadviser (or the advisers employer) are

business partners. We agree withcommentators who stated that businessand personal relationships between anexecutive officer and a compensationadviser or a person employing thecompensation adviser may potentiallypose a significant conflict of interestthat should be considered by thecompensation committee beforeselecting a compensation adviser. 125

As was proposed, the final rule doesnot expand the stock ownership factor

to require consideration of stock owned by the person employing acompensation adviser. As we noted inthe Proposing Release, we interpretany stock of the issuer owned by thecompensation consultant, legal counsel,or other adviser to include sharesowned by the individuals providingservices to the compensation committeeand their immediate family members.

Other than the additional factordescribed above, the final rules will notrequire the listing standards to mandateconsideration of independence factors

beyond those set forth in Section10C(b)(2). We believe that these sixfactors, when taken together, arecompetitively neutral, as they willrequire compensation committees toconsider a variety of factors that may

bear upon the likelihood that acompensation adviser can provideindependent advice to thecompensation committee, but will notprohibit committees from choosing anyparticular adviser or type of adviser. Weagree with the commentator whosuggested that the factors should beconsidered in their totality and that noone factor should be viewed as adeterminative factor of

independence.126

We do not believe it isnecessary, however, to provide aninstruction to this effect, as the finalrule directs the exchanges to requireconsideration of all of the specifiedfactors. In response to concerns echoed

by a number of commentators, weemphasize that neither the Act nor ourfinal rule requires a compensationadviser to be independent, only that the


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38433Federal Register / Vol. 77, No. 124 / Wednesday, June 27, 2012 / Rules and Regulatio

2012-15408

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