Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange proposes to amend Sections 303A.00, 303A.02(a) and 303A.05 of the Exchange's Listed Company Manual (the "Manual") to comply with the requirements of Securities and Exchange Commission ("Commission" or "SEC") Rule 10C-1.
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
This Amendment No. 1 to SR-NYSE-2012-49 (the "filing") amends and replaces in its entirety the Filing as originally submitted on September 25, 2012. Amendment No. 1 corrects a single error in the rule text in Exhibit 5 as originally filed. The error was in Section 303A.00 under the heading "Transition Periods for Compensation Committee Requirements."
The Exchange proposes to amend Sections 303A.00, 303A.02(a) and 303A.05 of the Manual to comply with the requirements of SEC Rule 10C-1.
The proposed changes to Sections 303A.00, 303A.02(a) and 303A.05 will not become operative until July 1, 2013. Consequently, the existing text of these sections will remain in the Manual until June 30, 2013 and will be removed immediately thereafter.
Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act")
In adopting independence requirements for compensation committee members, Rule 10C-1(b)(1)(ii)
The Exchange's director independence standards are set forth in Section 303A.02. Section 303A.02(a) provides that no director qualifies as "independent" unless the board of directors affirmatively determines that the director has no material relationship with the listed company (directly or as a partner, shareholder or officer of an organization that has a relationship with the company).
The Exchange proposes to amend Section 303A.02(a) of the Manual to adopt proposed Section 303A.02(a)(ii),
The Exchange does not propose to adopt any specific numerical tests with respect to the factors specified in proposed Section 303A.02(a)(ii) or to adopt a requirement to consider any other specific factors. In particular, the Exchange does not intend to adopt an absolute prohibition on a board making an affirmative finding that a director is independent solely on the basis that the director or any of the director's affiliates are shareholders owning more than some specified percentage of the listed company. In the adopting release for Rule 10C-1 (the "Adopting Release"),
The Exchange believes that its existing "bright line" independence standards as set forth in Section 303A.02(b) of the Manual are sufficiently broad to encompass the types of relationships which would generally be material to a director's independence for compensation committee service. In addition, Section 303A.02(a) already requires the board to consider any other material relationships between the director and the listed company or its management that are not the subject of "bright line" tests in Section 303A.02(b). The Exchange believes that these requirements with respect to general director independence, when combined with the specific considerations required by proposed Section 303A.02(a)(ii), represent an appropriate standard for compensation committee independence that is consistent with the requirements of Rule 10C-1.
(i) The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser; and
(ii) The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee.
The required powers of the compensation committee under Rule 10C-1(b)(2) and (3) as set forth above are in significant part already required by the NYSE's existing compensation committee listing standard, as they are required elements of the compensation committee charter as set forth in Section 303A.05(b). In the interests of clarity and emphasis, the Exchange proposes to adopt the requirements specified in Rule 10C-1(b)(2) and (3) verbatim as a proposed new subsection (c) of Section 303A.05. The Exchange proposes to remove the comparable requirements currently in Section 303A.05(b) commentary and replace them with a provision stating that the compensation committee charter must provide that the committee has all of the powers specified in new subsection (c).
(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 listed company 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 listed company 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 listed company.
Accordingly, the Exchange proposes to include in proposed Section 303A.05(c) a provision specifying that, before engaging an adviser, the compensation committee must consider the factors enumerated above. As proposed, Section 303A.05(c) would not include any specific additional factors for consideration, as the Exchange believes that the list included in Rule 10C-1(b)(4) is very comprehensive and the proposed listing standard would also require the compensation committee to consider any other factors that would be relevant to the adviser's independence from management.
Consistent with Rule 10C-1(b)(2)(iii),
The Adopting Release contemplates that exchanges may provide transition periods through the exemptive authority provided to the exchanges under Rule 10C-1(b)(1)(iii).
In addition, the Exchange proposes to continue to apply to the proposed new compensation committee requirements the existing transition periods available to newly-listed companies under Section 303A.00. Transition periods are available to: Companies listing in connection with their initial public offerings ("IPOs") or which did not have a class of common stock registered under the Exchange Act prior to the listing date;
The Exchange proposes to exempt smaller reporting companies
Pursuant to the general exemptive authority granted in Rule 10C-1(b)(5)(i), the Exchange proposes to exempt from all of the proposed requirements each category of issuer that qualifies for a general or specific exemption under Rule 10C-1(b)(1)(iii)(A). The Exchange also proposes to provide a general exemption from all of the requirements to all of the other categories of issuers that are currently exempt from the NYSE's existing compensation committee requirements. Thus, as proposed, controlled companies, limited partnerships and companies in bankruptcy, closed-end and open-end funds registered under the 1940 Act, passive business organizations in the form of trusts (such as royalty trusts), derivatives and special purpose securities (such as those described in Sections 703.19 and 703.20 of the Manual), and issuers whose only listed equity security is a preferred stock, would be exempt. The Exchange notes that these categories of issuers typically: (i) Are externally managed and do not directly employ executives (e.g., limited partnerships that are managed by their general partner or closed-end funds managed by an external investment adviser); (ii) do not by their nature have employees (e.g., passive business organizations in the form of trusts or issuers of derivative or special purpose securities); or (iii) have executive compensation policy set by a body other than the board (e.g., bankrupt companies have their executive compensation determined by the bankruptcy court). In light of these structural reasons why these categories of issuers generally do not have compensation committees, the Exchange believes that it would be a significant and unnecessarily burdensome alteration in their governance structures to require them to comply with the proposed new requirements and that it is appropriate to grant them an exemption.
Section 303A.00 currently provides that foreign private issuers are permitted to follow home country practice in lieu of compliance with the Exchange's compensation committee listing standard. The Exchange proposes to follow this approach by granting a general exemption, pursuant to the discretion granted to the Exchange by Rule 10C-1(b)(5)(i),
The Exchange currently does not require issuers whose only listed security is a preferred stock to comply with Section 303A.05(c). The Exchange proposes to grant these issuers a general exemption from compliance with the proposed amended rule. The Exchange believes this approach is appropriate because holders of listed preferred stock have significantly greater protections with respect to their rights to receive dividends and a liquidation preference upon dissolution of the issuer, and preferred stocks are typically regarded by investors as a fixed income investment comparable to debt securities, the issuers of which are exempt from compliance with Rule 10C-1.
The Exchange believes that the proposed rule change in relation to the Exchange's compensation committee requirements and the proposed compensation consultant independence requirements are consistent with Section 10C of the Exchange Act and Rule 10C-1 thereunder in that they comply with the requirements of Rule 10C-1 with respect to the adoption by national securities exchanges of compensation committee listing standards. The Exchange believes that the proposed rule change is consistent with Section 6(b)
The Exchange believes that the proposed amendments to its compensation committee listing standards are consistent with the protection of investors and the public interest in that they strengthen the independence requirements for compensation committee membership, provide additional authority to compensation committees and require compensation committees to consider the independence of compensation consultants.
The Exchange believes that the general exemptions from the proposed requirements that it is granting to foreign private issuers and smaller reporting companies are consistent with Section 10C and Rule 10C-1, for the reasons stated above in the "Purpose" section, including because (i) Rule 10C-1(b)(5)(ii) explicitly exempts smaller reporting companies and (ii) foreign private issuers will comply with their home country law and, if they avail themselves of the exemption, will be required to disclose that fact under existing NYSE listing requirements. The Exchange believes it is an appropriate use of its exemptive authority under Rule 10C-1(b)(5)(i), and that it is not unfairly discriminatory under Section 6(b)(5) of the Act, to provide general exemptions under the proposed rules to issuers whose only listed class of equity securities on the Exchange is a preferred stock, as holders of listed preferred stock have significantly greater protections with respect to their rights to receive dividends and a liquidation
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
The Exchange has not solicited written comments on the proposed rule change. The Exchange has received two comment letters on the proposed rule change.
The Exchange does not believe that it is appropriate to consider board compensation as part of the compensation committee independence determination with respect to individual directors. Non-executive directors devote considerable time to the affairs of the companies on whose boards they sit and eligible candidates would be difficult to find if board and committee service were unpaid in nature. Consequently, independent directors of listed companies are almost invariably paid for their board and committee service. As all independent directors are almost certainly going to receive board compensation from the company and do so on terms determined by the board as a whole, the Exchange does not believe that an analysis of the board compensation of individual directors is a meaningful consideration in determining their independence for purposes of compensation committee service.
The Exchange's existing director independence requirements require the board to consider relationships between the director and any member of management in making its affirmative independence determinations. Commentary included in Section 303A.02(a) makes this explicit by stating that when the board is making an affirmative independence determination "the concern is independence from management." Consequently, the Exchange does not believe that any further clarification of this requirement is necessary.
The Exchange does not believe that it is necessary to explicitly require that the additional independence considerations for compensation committee service should be a part of the board's general independence determinations for all independent directors. Section 303A.02(a) notes that "[I]t is not possible to anticipate, or explicitly to provide for, all circumstances that might signal potential conflicts of interest, or that might bear on the materiality of a director's relationship to a listed company" and that the board should therefore "broadly consider all relevant facts and circumstances" when making affirmative independence determinations. As such, the Exchange believes that, where appropriate, listed company boards should already be including in their general independence determinations factors including those being added to the compensation committee independence determination.
The Exchange does not believe it is necessary to include in the listing standards a statement that a single factor may be sufficiently material to render a director non-independent, as this is clearly the intention of the listing standards as drafted. Section 303A.02(a) in its current form and in its proposed amended form requires the board to consider the materiality of each separate relationship between the director and the listed company or its management.
The second commenter proposed that the Exchange should require companies to make a public disclosure with respect to the factors considered by the compensation committee in reviewing the independence of compensation consultants, legal counsel and other compensation advisers. This commenter also proposed that the Exchange should require with respect to outside counsel hired by the compensation committee the same disclosure as is required by Item 407(e)(3)(iv) of Regulation S-K with respect to the nature of any conflict that arises from the engagement of a compensation consultant identified in the proxy statement. The Exchange does not believe that it is necessary to establish additional disclosure requirements of this nature. Item 407 of Regulation S-K contains extensive disclosure requirements with respect to a listed company's corporate governance and the Exchange's own rules generally incorporate those requirements by reference where applicable. Moreover, with respect to disclosure of any conflicts of interest that may arise with respect to outside counsel hired by the compensation committee, the Exchange believes that the rigorous conflict of interest requirements applicable to attorneys adequately address such concerns. And the Exchange is mindful that requiring additional public disclosures regarding outside counsel could require a listed company to disclose information that otherwise may be protected by attorney-client privilege.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.