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Daily Rules, Proposed Rules, and Notices of the Federal Government

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68013; File No. SR-NASDAQ-2012-109]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Modify the Listing Rules for Compensation Committees To Comply With Rule 10C-1 Under the Exchange Act and Make Other Related Changes

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act"),1 and Rule 19b-4 thereunder,2 notice is hereby given that on September 25, 2012, The NASDAQ Stock Market LLC ("Nasdaq") filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change

Nasdaq proposes to modify the listing rules for compensation committees to comply with Rule 10C-1 under the Exchange Act and make other related changes. The text of the proposed rule change is available on Nasdaq's Web site athttp://nasdaq.cchwallstreet.com,at Nasdaq's principal office, and at the Commission's Public Reference Room.

Nasdaq will implement the proposed rule upon approval. Proposed Nasdaq Listing Rule 5605(d)(3), which requires compensation committees to have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act, shall be effective immediately.3 To the extent a Company does not have a compensation committee, the provisions of this rule shall apply to the Independent Directors who determine, or recommend to the board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company.

Companies must comply with the remaining provisions of the amended listing rules by the earlier of: (1) Their second annual meeting held after the date of approval of this proposal; or (2) December 31, 2014. Until a Company is required to comply with the amended listed rules, it must continue to comply with Nasdaq's existing listing rules.

II. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Nasdaq 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 these statements may be examined at the places specifiedin Item IV below. Nasdaq has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change1. Purpose

Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act")4 added Section 10C to the Exchange Act.5 Section 10C required the Commission to direct the national securities exchanges, including Nasdaq, and national securities associations to prohibit the listing of any equity security of an issuer, with certain exemptions, that does not comply with Section 10C's requirements relating to compensation committees and advisers. To effect this requirement, the Commission has adopted Rule 10C-1 under the Exchange Act, which became effective on July 27, 2012. Rule 10C-1 requires each national securities exchange and national securities association to provide to the Commission, no later than September 25, 2012, proposed rules or rule amendments that comply with the requirements of Rule 10C-1.6

Rule 10C-1 generally requires that:

* Each member of the compensation committee of a listed issuer must be an independent member of the board of directors;

* in determining independence requirements for compensation committee members, exchanges must consider relevant factors, including, but not limited to:

* The source of compensation of a member, including any consulting, advisory or other compensatory fee paid by the issuer to such member; and

* whether the member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer;

* the compensation committee must have the authority to retain or obtain the advice of a compensation consultant, independent legal counsel or other compensation adviser;

* the listed issuer must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to such compensation advisers;

* the compensation committee may select such compensation advisers only after taking into consideration six independence factors that are enumerated in Rule 10C-1, as well as any other factors identified by an exchange; and

* certain categories of issuers, including, but not limited to, controlled companies and smaller reporting companies, are generally exempt from all of Rule 10C-1, while other categories of issuers, including, but not limited to, foreign private issuers that provide certain disclosures, are specifically exempt from the requirement to have a fully independent compensation committee.

General Overview of Nasdaq's Proposals

Nasdaq is proposing to modify its compensation-related listing rules, as required by Rule 10C-1. Generally, Nasdaq's proposals provide that:

* Companies7 must have a compensation committee consisting of at least two members, each of whom must be an Independent Director8 as defined under Nasdaq's current listing rules;

* compensation committee members must not accept directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from a Company or any subsidiary thereof;

* in determining whether a director is eligible to serve on a compensation committee, a Company's board must consider whether the director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company to determine whether such affiliation would impair the director's judgment as a member of the compensation committee;

* Companies may continue to rely on Nasdaq's existing exception that allows certain non-Independent Directors to serve on a compensation committee under exceptional and limited circumstances;

* if a Company fails to comply with the compensation committee composition requirements in certain circumstances, it may rely on a cure period;

* Companies must adopt a formal, written compensation committee charter that must specify the compensation committee responsibilities and authority in Rule 10C-1 relating to the: (i) Authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel;

* Companies must review and reassess the adequacy of the compensation committee charter on an annual basis;

* Nasdaq's existing exemptions from, and phase-in schedules for, the compensation-related listing rules remain generally unchanged; and

* Smaller Reporting Companies9 must have a compensation committee comprised of at least two Independent Directors and a formal written compensation committee charter or board resolution that specifies the committee's responsibilities and authority, but such Companies are not required to adhere to the compensation committee eligibility requirements relating to compensatory fees and affiliation, or the requirements relating to compensation consultants, independent legal counsel and other compensation advisers that Nasdaq is proposing to adopt under Rule 10C-1.

Rule 10C-1 requires Nasdaq to include in its submission: (i) A review of whether and how its existing or proposed listing rules satisfy the requirements of Rule 10C-1; (ii) a discussion of the consideration of factors relevant to compensation committee independence conducted by Nasdaq; and (iii) the definition of independence applicable to compensation committee members that Nasdaq proposes to adopt or retain in light of such review.10 Nasdaq's proposals and its underlying analysis are discussed in depth below.

Requirement To Have a Compensation Committee

Nasdaq's current listing rules require that compensation of the chief executive officer and all other Executive Officers11 of a Company must be determined, or recommended to the board for determination, either by: (i) A compensation committee comprised solely of Independent Directors; or (ii) Independent Directors constituting a majority of the board's IndependentDirectors in a vote in which only Independent Directors participate (the "Alternative").12

Although it was not required to do so by Rule 10C-1,13 Nasdaq considered whether the Alternative remains appropriate given the heightened importance of compensation decisions in today's corporate governance environment. Since responsibility for executive compensation decisions is one of the most important responsibilities entrusted to a board of directors, Nasdaq believes that there are benefits from a board having a standing committee dedicated solely to oversight of executive compensation. Specifically, directors on a standing compensation committee may develop expertise in a Company's executive compensation program in the same way that directors on a standing audit committee develop expertise in a Company's accounting and financial reporting processes. In addition, a formal committee structure may help promote accountability to stockholders for executive compensation decisions.

Nasdaq also considered whether eliminating the Alternative would pose an undue hardship on Nasdaq-listed Companies. Only a small number of Companies rely on the Alternative,14 and since the Alternative requires certain executive compensation decisions to be determined, or recommended to the board for determination, by a majority of the board's Independent Directors, these Companies already have some directors who focus on executive compensation. In addition, Nasdaq would allow a transition period for these Companies to implement a standing compensation committee. As a result, Nasdaq does not believe that eliminating the Alternative would be unduly burdensome to Companies.

As a result, Nasdaq proposes to eliminate the Alternative and require Nasdaq-listed Companies to have a standing compensation committee with the responsibility for determining, or recommending to the full board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company.

Compensation Committee Size

Nasdaq's current listing rules do not impose size requirements on any board committees, other than the audit committee, which must consist of at least three members.15 As a result, it is possible to have a compensation committee comprised of only one member under Nasdaq's current listing rules.

Although it was not required to do so by Rule 10C-1, Nasdaq considered whether it is appropriate to impose a minimum size requirement on a compensation committee. Given the importance of compensation decisions to stockholders, Nasdaq believes that it is appropriate to have more than one director responsible for these decisions and that therefore, a compensation committee should consist of at least two members. Nasdaq then considered whether to require compensation committees to adhere to the same size requirement as audit committees and have a minimum of three members. However, Nasdaq was concerned that it might be difficult for Companies, especially smaller Companies, to comply with a requirement to have a three-member compensation committee, in addition to a three-member audit committee.

Nasdaq also considered whether imposing a minimum size requirement on a compensation committee would be unduly burdensome to Nasdaq-listed Companies, especially in combination with the proposal to eliminate the Alternative, as discussed above. Since only a small number of Companies currently have a compensation committee of one member and Nasdaq would allow a transition period to add an additional member, Nasdaq does not believe that requiring a compensation committee to consist of at least two members would be an undue hardship for Nasdaq-listed Companies.16

As a result, Nasdaq proposes to require a compensation committee of a Company to consist of at least two members of the board of directors.

Compensation Committee Composition--General Independence Definition

Nasdaq's current listing rules require a compensation committee to be comprised solely of Independent Directors, as defined in Nasdaq Listing Rule 5605(a)(2).17 This definition includes a two-part test for independence. First, there are certain categories of directors who cannot be considered independent, including:

* A director who is an Executive Officer or employee of the Company;18

* a director who is, or at any time during the past three years was, employed by the Company;19

* A director who accepted or who has a Family Member20 who accepted any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence;21

* A director who is a Family Member of an individual who is, or at any time during the past three years was, employed by the Company as an Executive Officer;22

* A director who is, or has a Family Member who is, a partner in, or a controlling Shareholder23 or an Executive Officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more;24

* A director of the Company who is, or has a Family Member who is, employed as an Executive Officer of another entity where at any time during the past three years any of the Executive Officers of the Company serve on thecompensation committee of such other entity;25 or

* a director who is, or has a Family Member who is, a current partner of the Company's outside auditor, or was a partner or employee of the Company's outside auditor who worked on the Company's audit at any time during any of the past three years.26

Second, a Company's board of directors must make an affirmative determination that each Independent Director has no relationship that, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.27

Nasdaq proposes to continue unchanged its existing requirement that a compensation committee be comprised solely of Independent Directors, as defined in Nasdaq Listing Rule 5605(a)(2).

Compensation Committee Composition--Compensatory Fees

Rule 10C-1 requires that in determining the independence requirements for compensation committee members, Nasdaq must consider relevant factors, including, but not limited to, the source of compensation of a member, including any consulting, advisory or other compensatory fee paid by the issuer to the member.28 In considering this particular factor, Nasdaq reviewed its current listing rules relating to compensatory fees. As outlined above, Nasdaq's current listing rules require compensation committee members to be Independent Directors. Independent Director is defined to exclude any director who: (i) Accepted any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the prior three years; or (ii) is a partner in, or a controlling Shareholder or an Executive Officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more.29 As a result, directors who receive compensatory fees from a Company below these thresholds may serve on a compensation committee under Nasdaq's current listing rules.

This is in contrast to Nasdaq's current listing rules relating to audit committees, which require audit committee members to meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act, subject to certain exemptions.30 Rule 10A-3(b)(1) prohibits an audit committee member from accepting directly or indirectly any consulting, advisory or other compensatory fee from an issuer or any subsidiary, with certain exemptions.

After reviewing its current listing rules, Nasdaq concluded that there is no compelling justification to have different independence standards for audit and compensation committee members with respect to the acceptance of compensatory fees from a Company. Accordingly, Nasdaq proposes to adopt the same standard for compensation committee members that applies to audit committee members under Rule 10A-3 under the Exchange Act with respect to compensatory fees. Specifically, Nasdaq's proposal prohibits a compensation committee member from accepting directly or indirectly any consulting, advisory or other compensatory fee from an issuer or any subsidiary. As in Rule 10A-3, compensatory fees shall not include: (i) Fees received as a member of the compensation committee, the board of directors or any other board committee; or (ii) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the Company (provided that such compensation is not contingent in any way on continued service).31 Also similar to Rule 10A-3, the proposed requirement applicable to compensation committee members will not include a "look-back" period.32 Accordingly, the prohibition on the receipt of any consulting, advisory or other compensatory fee by a compensation committee member begins with the member's term of service on the compensation committee.33

Compensation Committee Composition--Affiliation

Rule 10C-1 requires that in determining the independence requirements for compensation committee members, Nasdaq also must consider whether a member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.34 In considering this particular factor, Nasdaq reviewed its current listing rules relating to affiliation. As outlined above, Nasdaq's current listing rules require compensation committee members to be Independent Directors. The definition of the term "Independent Director" does not refer to affiliation, although the definition does exclude certain individuals who may be considered affiliates from being an Independent Director. For example, any director who is an Executive Officer of the Company cannot be considered an Independent Director.35 Significantly, the Interpretive Material to Nasdaq's definition of Independent Director states that "[b]ecause Nasdaq does not believe that ownership of Company stock by itself would preclude a board finding of independence, it is not included in the aforementioned objective factors."36

Beyond the definition of Independent Director, Nasdaq's current listing rules relating to audit committees require audit committee members to meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act, subject to certain exemptions.37 Rule 10A-3(b)(1) prohibits an audit committee member from being an affiliated person of the issuer or any subsidiary thereof. The term "affiliate" means "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified."38 However, Rule 10A-3 includes a safe harbor for a person that is not: (i) The beneficial owner, directly or indirectly, of more than 10% of any class of voting equity securities of the specified person; and(ii) an executive officer of a specified person.39

After reviewing its current listing rules, Nasdaq considered whether to propose that compensation committee members must meet the same standard applicable to audit committee members under Rule 10A-3 under the Exchange Act with respect to affiliation, similar to its proposal with respect to compensatory fees. However, Nasdaq concluded that such a blanket prohibition would be inappropriate for compensation committees. In fact, Nasdaq believes that it may be appropriate for certain affiliates, such as representatives of significant stockholders, to serve on compensation committees since their interests are likely aligned with those of other stockholders in seeking an appropriate executive compensation program.

As a result, Nasdaq proposes that Companies' boards of directors should consider affiliation in making an eligibility determination for compensation committee members, but it does not propose bright-line rules around this factor. In making this eligibility determination, a Company's board specifically must consider whether the director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company to determine whether such affiliation would impair the director's judgment as a member of the compensation committee. In performing this analysis, a board of directors is not required to apply a "look-back" period, and is therefore required to consider affiliation only with respect to relationships that occur during an individual's term of service as a compensation committee member.

A board may conclude that it is appropriate for a director who is an affiliate to serve on the compensation committee. While this differs from the requirement applicable to audit committee members, Nasdaq could identify no compelling policy justification for precluding all affiliates, such as owners of a Company, even those with very large stakes, from serving on the compensation committee.

Compensation Committee Composition--Other

Rule 10C-1 permits Nasdaq to consider other relevant factors in determining the independence requirements for compensation committee members.40 After reviewing its current and proposed listing rules, Nasdaq concluded that these rules are sufficient to ensure the independence of compensation committee members. Therefore, Nasdaq determined not to propose further independence requirements.

Exceptional and Limited Circumstances Exception

With minor edits, Nasdaq proposes to retain its existing exception that allows a Company to have a non-Independent Director serve on the compensation committee under exceptional and limited circumstances.41 Under this exception, if a compensation committee consists of at least three members, one director who is not an Independent Director and is not currently an Executive Officer or employee or a Family Member of an Executive Officer, may be appointed to the compensation committee if the board, under exceptional and limited circumstances, determines that such individual's membership on the committee is required by the best interests of the Company and its Shareholders. A Company that relies on this exception must disclose either on or through the Company's Web site or in the proxy statement for the next annual meeting subsequent to such determination (or, if the Company does not file a proxy, in its Form 10-K or 20-F), the nature of the relationship and the reasons for the determination. In addition, the Company must provide any disclosure required by Instruction 1 to Item 407(a) of Regulation S-K regarding its reliance on this exception. A member appointed under this exception may not serve longer than two years.

In addition to the existing exception for compensation committees, Nasdaq's current listing rules include similar exceptions for audit and nominations committees.42 While these exceptions are used infrequently by Nasdaq-listed Companies,43 Nasdaq believes they are an important means to allow Companies flexibility as to board and committee membership and composition in unusual circumstances, which may be particularly important for smaller Companies.

Nasdaq would allow a Company to avail itself of the exception even for a director who fails the new requirements adopted pursuant to Rule 10C-1.

Cure Period

Consistent with Rule 10C-1, Nasdaq's proposal provides Companies with an opportunity to cure defects in the composition of compensation committees.44 The proposed cure period is copied from the cure period in Nasdaq's current listing rules for noncompliance with the requirement to have a majority independent board.45

Under Nasdaq's proposal, if a Company fails to comply with the compensation committee composition requirements due to one vacancy, or one compensation committee member ceases to be independent due to circumstances beyond the member's reasonable control, the Company shall regain compliance by the earlier of the next annual shareholders meeting or one year from the occurrence of the event that caused the noncompliance. However, if the annual shareholders meeting occurs no later than 180 days following the event that caused the noncompliance, the Company shall instead have 180 days from such event to regain compliance. This provides a Company at least 180 days to cure noncompliance and would typically allow a Company to regain compliance in connection with its next annual meeting. A Company relying on this provision shall provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the noncompliance.

Compensation Committee Charter

Nasdaq proposes to require each Company to certify that it has adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis.46 This proposal is similar to Nasdaq's current requirement for Companies to certify as to the adoption of a formal written audit committee charter, except that the proposed requirement for annual review and reassessment of theadequacy of the compensation committee charter is written prospectively, rather than retrospectively.47 In other words, the proposed compensation committee charter requirement states that the compensation committee will review and reassess the adequacy of the charter on an annual basis, while the current audit committee charter requirement states that the audit committee has reviewed and reassessed the adequacy of the charter on an annual basis.48

Nasdaq proposes that the compensation committee charter must specify:

* the scope of the compensation committee's responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements;

* the compensation committee's responsibility for determining, or recommending to the board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company;

* that the chief executive officer of the Company may not be present during voting or deliberations by the compensation committee on his or her compensation; and

* the specific compensation committee responsibilities and authority set forth in proposed Nasdaq Listing Rule 5605(d)(3), which implements the requirements of Section 10C(b)-(e) of the Exchange Act and Rule 10C-1(b)(2), (3) and (4)(i)-(vi) thereunder.

The requirement for the charter to specify the scope of the compensation committee's responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements, is copied from Nasdaq's similar listing rule relating to audit committee charters.49

The requirement for the charter to specify the compensation committee's responsibility for determining, or recommending to the board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company, is based upon Nasdaq's current compensation-related listing rules.50 These listing rules require that the compensation of a Company's chief executive officer and all other Executive Officers must be determined by (i) a compensation committee comprised solely of Independent Directors or (ii) the Independent Directors constituting a majority of the board's Independent Directors in a vote in which only Independent Directors participate. As discussed above, Nasdaq proposes to eliminate the Alternative, and therefore, the compensation of a Company's chief executive officer and all other Executive Officers must be determined, or recommended to the board for determination, by a compensation committee comprised of Independent Directors. Going forward, Nasdaq proposes to implement this requirement by requiring Companies to include it in their formal written compensation committee charters.

The requirement for the charter to specify that the chief executive officer of the Company may not be present during voting or deliberations by the compensation committee on his or her compensation is based upon Nasdaq's current compensation-related listing rules.51 Going forward, Nasdaq proposes to implement this requirement by requiring Companies to include it in their formal written compensation committee charters.

Finally, the requirement for the charter to specify the specific compensation committee responsibilities and authority set forth in proposed Nasdaq Listing Rule 5605(d)(3) is modeled after Nasdaq's similar listing rule relating to audit committee charters.52 Proposed Nasdaq Listing Rule 5605(d)(3) implements the requirements of Section 10C(b)-(e) of the Exchange Act and Rule 10C-1(b)(2), (3) and (4)(i)-(vi) thereunder. Specifically, the proposed listing rule states that a compensation committee must have the specific compensation committee responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) relating to the: (i) Authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.53

Rule 10C-1 permits Nasdaq to identify other relevant independence factors that a compensation committee must consider when selecting a compensation consultant, legal counsel or other adviser.54 Nasdaq considered whether to adopt other independence factors, but ultimately concluded that the six independence factors enumerated in Rule 10C-1 will provide compensation committees with a broad and sufficient range of facts and circumstances to consider in making an independence determination. Like the Commission, Nasdaq seeks to emphasize that a compensation committee is not required to retain an independent compensation adviser; rather, a compensation committee is required only to conduct the independence analysis described in Rule 10C-1 before selecting a compensation adviser.55

Exemptions

Rule 10C-1 allows the national securities exchanges to exempt from the listing rules adopted pursuant to Rule 10C-1 certain categories of issuers, as the national securities exchange determines is appropriate, taking into consideration, among other relevant factors, the potential impact of the listing rules on smaller reporting issuers.56 Nasdaq proposes that its existing exemptions from the compensation-related listing rules remain generally unchanged. Nasdaq's current listing rules include exemptions for: asset-backed issuers and otherpassive issuers,57 cooperatives,58 limited partnerships,59 management investment companies60 and Controlled Companies.61 For the same reasons that these categories of Companies have traditionally been exempt from Nasdaq's compensation-related listing rules, Nasdaq proposes that they continue to be exempt from its revised listing rules relating to compensation committees.

In addition, Nasdaq's current listing rules provide that a Foreign Private Issuer may follow its home country practice in lieu of Nasdaq's compensation-related listing rules if the Foreign Private Issuer discloses in its annual reports filed with the Commission each requirement that it does not follow and describes the home country practice followed by the Company in lieu of such requirements.62 Alternatively, a Foreign Private Issuer that is not required to file its annual report with the Commission on Form 20-F may make this disclosure only on its Web site. Nasdaq proposes that a Foreign Private Issuer continue to be allowed to follow its home country practice in lieu of Nasdaq's revised listing rules relating to compensation committees if the Foreign Private Issuer provides the disclosures described above. Nasdaq also proposes to add an additional disclosure requirement for any Foreign Private Issuer that follows its home country practice in lieu of the requirement to have an independent compensation committee to disclose in its annual reports filed with the Commission the reasons why it does not have such a committee.63

Phase-In Schedules

Nasdaq proposes that its existing phase-in schedules for the requirements relating to compensation committee composition remain generally unchanged. Nasdaq's current listing rules include phase-in schedules for: Companies listing in connection with an initial public offering,64 Companies emerging from bankruptcy65 and Companies ceasing to be Controlled Companies.66 Since each of these categories of Company did not previously have a compensation committee, each is allowed to phase in compliance with the compensation committee composition requirement as follows: (1) One independent member at the time of listing; (2) a majority of independent members within 90 days of listing; and (3) all independent members within one year of listing. Nasdaq proposes that these phase-in schedules remain unchanged under its revised listing rules, except to clarify that a Company may phase in compliance with the minimum size requirement and the additional eligibility requirements adopted pursuant to Rule 10C-1, as well as the requirement for compensation committee members to be Independent Directors.67

In addition, Nasdaq proposes no changes to the phase-in schedule in its current listing rules for Companies transferring from other markets.68 Companies transferring from other markets with a substantially similar requirement shall be afforded the balance of any grace period afforded by the other market. Companies transferring from other listed markets that do not have a substantially similar requirement shall be afforded one year from the date of listing on Nasdaq to comply with the compensation committee composition requirements.

None of the aforementioned phase-in schedules apply to the requirement to adopt a formal written compensation committee charter including the content specified in Nasdaq Listing Rule 5605(d)(1)(A)-(D).69

Smaller Reporting Companies

While Rule 10C-1 exempts Smaller Reporting Companies from all of its requirements, Nasdaq's current listing rules do not include any such exemptions.70 Consistent with theexemption in Rule 10C-1, however, Nasdaq proposes not to require Smaller Reporting Companies to adhere to the new requirements relating to compensatory fees and affiliation, which Nasdaq is proposing in response to Rule 10C-1, or to incorporate into their formal written compensation committee charter or board resolution that specifies the committee's responsibilities and authority the language in Rule 10C-1 regarding compensation advisers. This approach will minimize new costs imposed on Smaller Reporting Companies and allow them some flexibility not allowed for larger Companies.

However, as discussed above, Nasdaq proposes to eliminate the Alternative in its current listing rules that allows compensation decisions to be made by a majority of the Independent Directors rather than by a committee composed entirely of Independent Directors. Nasdaq proposes to eliminate the Alternative for Smaller Reporting Companies, just like all other Nasdaq-listed Companies. As a result, Smaller Reporting Companies would be required to have a compensation committee comprised of at least two Independent Directors as defined under Nasdaq's existing listing rules.

In addition, Nasdaq proposes that Smaller Reporting Companies must adopt a formal written compensation committee charter or board resolution that specifies the committee's responsibilities and authority. Unlike other Companies, Smaller Reporting Companies may include this content in a board resolution, rather than a compensation committee charter, and Smaller Reporting Companies are not required to review and reassess the adequacy of the charter or board resolution on an annual basis. The charter or board resolution must specify the same content as other Companies, except Smaller Reporting Companies are not required to specify the specific compensation responsibilities and authority set forth in proposed Nasdaq Listing Rule 5605(d)(3) relating to the: (i) Authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.71

Nasdaq also proposes to apply the same phase-in schedule to a Company ceasing to be a Smaller Reporting Company that applies to a Company listing in conjunction with its initial public offering. Since a Smaller Reporting Company is required to have a compensation committee comprised of at least two Independent Directors, a Company that has ceased to be a Smaller Reporting Company may use the phase-in schedule for the additional eligibility requirements relating to compensatory fees and affiliation, but not for the minimum size requirement or the requirement that the committee consist only of Independent Directors. This phase-in schedule will start to run on the due date of the SEC filing in which the Company is required to report that it is an issuer other than a Smaller Reporting Company.72 During the phase-in schedule, a Smaller Reporting Company must continue to comply with the requirement to have a compensation committee comprised of at least two Independent Directors as defined under Nasdaq's existing listing rules.

Effective Dates/Transition

Nasdaq proposes that Rule 5605(d)(3), relating to compensation committee responsibilities and authority, shall be effective immediately.73 Specifically, this proposed rule states that a compensation committee must have the specific compensation committee responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Act relating to the: (i) Authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel. To the extent a Company does not have a compensation committee, the provisions of this rule shall apply to the Independent Directors who determine, or recommend to the board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company. Companies should consider under state corporate law whether to grant these specific responsibilities and authority through a charter, resolution or other board action; however, Nasdaq proposes to require only that compensation committees immediately have such responsibilities and authority. While Nasdaq proposes that Companies must eventually have a written compensation committee charter that includes, among others, these responsibilities and authority, Companies may implement such a charter on the schedule discussed below.

In order to allow Companies to make necessary adjustments to their boards and committees in the course of their regular annual meeting schedules, Nasdaq proposes that Companies must comply with the remaining provisions of the amended listing rules on compensation committees by the earlier of: (1) Their second annual meeting held after the date of approval of Nasdaq's amended listing rules; or (2) December 31, 2014. This transition period is similar to the transition period used when Nasdaq implemented similar requirements for audit committees in 2003.74

A Company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it has complied with the amended listing rules on compensation committees. Nasdaq will provide Companies with a form for this certification.

During the transition period, Companies that are not yet required to comply with the amended listing rules on compensation committees must continue to comply with Nasdaq's existing listing rules, which have been redesignated as Listing Rule 5605A(d) and IM-5605A-6 in Nasdaq's proposal.

Conforming Changes and Correction of Typographical Errors

Finally, Nasdaq proposes to make minor conforming changes to its requirements relating to audit and nominations committees. Nasdaq also proposes to correct certain typographical errors in its corporate governance requirements as set forth in Exhibit 5.75

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of Section 6 of the Exchange Act,76 in general, and with Section 6(b)(5) of the Exchange Act,77 in particular. Section 6(b)(5) requires,among other things, that a national securities exchange's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. Section 6(b)(5) also requires that a national securities exchange's rules not be designed to permit unfair discrimination between customers, issuers, brokers or dealers.

As required by the Dodd-Frank Act and Rule 10C-1, Nasdaq is proposing amendments to its listing rules relating to the independence of compensation committees and their advisers. Nasdaq reviewed its existing compensation-relating listing rules, in combination with the requirements of Rule 10C-1, to develop a set of proposed compensation-related listing rules. These proposals generally fall into three categories: Proposed rule amendments to comply with Rule 10C-1; proposals to continue certain rules relatively unchanged; and proposed rule amendments not required by Rule 10C-1. Nasdaq believes that collectively, these proposals protect investors and the public interest by requiring Companies, with certain exemptions, to have a compensation committee meeting certain requirements relating to composition, responsibilities and authority.

More specifically, Nasdaq's proposed amendments to its listing rules in order to comply with Rule 10C-1 set forth: Additional eligibility requirements for compensation committee members relating to compensatory fees and affiliation; an opportunity to cure defects in compensation committee composition; a requirement that compensation committees have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act; and exemptions for limited partnerships, management investment companies, Controlled Companies, foreign private issuers that provide certain required disclosures, and Smaller Reporting Companies. Nasdaq believes that its proposals fairly balance the goal of protecting the investing public by ensuring effective deliberation over executive compensation with the goal of avoiding the imposition of undue costs on Companies.

Nasdaq's proposals to continue relatively unchanged some of its existing exemptions to the compensation-related listing rules for certain categories of Companies takes into account the unique characteristics of these Companies.78 As a result, Nasdaq does not believe that continuing these exemptions will discriminate unfairly among issuers, consistent with Section 6(b)(5) of the Exchange Act.79

The proposed rule amendments not required by Rule 10C-1 require that: Companies must have a standing compensation committee; the committee must consist of a minimum of two members; the committee must have a formal written charter (or board resolution, in the case of Smaller Reporting Companies) that specifies the committee's responsibilities and authority; and Smaller Reporting Companies must continue to comply with certain of Nasdaq's compensation-related listing rules. As discussed in the "Purpose" section, Nasdaq believes that these new requirements will facilitate effective oversight of executive compensation and promote accountability to investors for executive compensation decisions. With regard to Smaller Reporting Companies, Nasdaq notes that these Companies continue to be subject to the same requirements as all other Companies, except the new requirements that Nasdaq is proposing under Rule 10C-1 relating to compensatory fees, affiliation and the specific compensation committee responsibilities and authority set forth in proposed Nasdaq Listing Rule 5605(d)(3). Nasdaq believes that this hybrid approach does not discriminate unfairly between issuers because it recognizes the fact that the "`executive compensation arrangements of [Smaller Reporting Companies] generally are so much less complex than those of other public companies that they do not warrant the more extensive disclosure requirements imposed on companies that are not [Smaller Reporting Companies] and related regulatory burdens that could be disproportionate for [Smaller Reporting Companies].' "80 In addition, Nasdaq notes that the Commission exempted Smaller Reporting Companies from Rule 10C-1.81 As a result, this distinction does not discriminate unfairly among issuers.

B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

Nasdaq did not solicit comments on the proposed rule change. Nasdaq received two written comments, which are attached as Exhibit 2.82

The first commenter recommended that Nasdaq should require Companies to disclose: (i) How they are complying with the requirement to consider the independence factors enumerated in Rule 10C-1; and (ii) the nature of any conflict of interest arising from the engagement of legal counsel by a compensation committee. Nasdaq considered these recommendations, but it preferred to defer to the judgment of the Commission with respect to the appropriate disclosure framework under Rule 10C-1. Nasdaq therefore decided not to propose any new disclosure requirements for Companies, other than those that are required by Rule 10C-1.83

The second commenter proffered four recommendations. First, this commenter recommended that Nasdaq include director fees within the list of relevant factors that must be considered when assessing the independence of compensation committee members. Nasdaq does not believe that the intent of the Dodd-Frank Act or Rule 10C-1 was to limit independence based on director compensation, and therefore, Nasdaq proposes to continue to exempt board fees from its prohibition on payment of compensatory fees to a compensation committee member. Second, this commenter recommended that Nasdaq include in the requirements for compensation committee independence a factor relating to business or personal relationships between directors and officers. As discussed in the "Purpose" section above, Nasdaq reviewed its current and proposed listing rules and concluded that these rules are sufficient to ensure the independence of compensation committee members. Therefore, Nasdaq determined not to propose further independence requirements, other than those discussed above. Third, this commenter recommended that Nasdaq expand the additional factors forcompensation committee eligibility to cover all independent directors, not just those serving on the compensation committee. While Nasdaq heavily weighed the commenter's concern that multiple definitions of independence add to the complexity of board membership, Nasdaq believed that the intent of the Dodd-Frank Act and Rule 10C-1 was to address the independence of compensation committee members, as well as their advisers, specifically. Nasdaq concluded therefore that it is inappropriate to expand the additional requirements proposed herein to cover all independent directors. Finally, this commenter recommended that Nasdaq clarify that, while the factors must be considered in their totality, a single factor can result in a loss of director independence. Nasdaq confirms that a director cannot be deemed independent if he or she fails any one of the bright-line prohibitions in Nasdaq Listing Rule 5605(a)(2).

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 45 days of the date of publication of this notice in theFederal Registeror within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Exchange Act. Comments may be submitted by any of the following methods:

Electronic Comments

* Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

* Send an email torule-comments@sec.gov.Please include File Number SR-NASDAQ-2012-109 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2012-109. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR-NASDAQ-2012-109 and should be submitted on or before November 5, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.84

8417 CFR 200.30-3(a)(12).

Kevin M. O'Neill, Deputy Secretary.
ACTION: 83Specifically, as required by Rule 10C-1(b)(1)(iii)(A)(4), Nasdaq proposes to require a Foreign Private Issuer that follows a home country practice in lieu of the requirement to have an independent compensation committee to disclose the reasons why it does not have such a committee.