Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange is proposing to amend NSX Rule 15.5 to incorporate additional listing standard requirements applicable to issuers of equity securities listed on the Exchange as required by the provisions of Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), which added Section 10C to the Securities Exchange Act of 1934, as amended ("Exchange Act"), and Exchange Act Rule 10C-1 which implements these requirements.
The text of the proposed rule change is available on the Exchange's Web site at
In its filing with the Commission, the Exchange 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 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-NSX-2012-15 (the "Filing") amends and replaces in its entirety the Filing as originally submitted on September 26, 2012. The Exchange is proposing Amendment No. 1 to (i) reflect the approval of the Filing by the Executive Committee of the Exchange's Board of Directors and the Regulatory Oversight Committee, (ii) amend the rule text to propose transition periods under NSX Rule 15.5(b), and add corresponding language to the Purpose section, (iii) propose to exempt small business [sic] as defined under Exchange Act Rule 12b-2 and clarify [sic] basis for other proposed exemptions to NSX Rule 15.5 and (iv) remedy editorial inconsistencies in the rule text. [sic]
The Dodd-Frank Act
The Exchange is proposing to amend NSX Rule 15.5 in accordance with Exchange Act Rule 10C-1 to: (i) Prohibit the listing or continued listing of an equity security for a listed company that is not in compliance with the requirements set forth in NSX Rule 15.5, (ii) clarify the definition of "independence" as applicable to members of the "compensation committee", (iii) clarify the definition of the term compensation committee as used in NSX Rule 15.5, (iv) authorize the compensation committee to retain, compensate and oversee the work of the compensation advisers, and (v) require a compensation committee to consider the independence of a compensation adviser prior to retaining their services.
Section 10C(a)(1) of the Exchange Act required the Commission to adopt rules directing each national securities exchange registered under Section 6 of the Exchange Act, and certain national securities associations registered pursuant to Section 15A of the Exchange Act, to establish listing standards requiring a listed company's compensation committee to be comprised of independent members of the board of directors. Section 10C(a)(3) of the Exchange Act and Exchange Act Rule 10C-1(b) require Exchanges to adopt an independence standard for members of a compensation committee after considering the following factors: (i) The director's source of compensation including fees derived from consulting or other advisory or compensatory fees paid by the listed company to the director and listed company (ii) whether the director is affiliated with the listed company, a subsidiary of the listed company, or an affiliate of a subsidiary of the listed company.
NSX Rule 15.5 "Other Listing Standards" currently requires listed companies to have a compensation committee that is composed entirely of independent directors. The Exchange now proposes to amend paragraph (a) of Rule 15.5
The Exchange's amendments also clarify the definition of "independence" as it pertains to members of the compensation committee in NSX Rule 15.5(d)(5)(a) by expressly enumerating relevant factors that a listed company's board of directors must consider including (i) the source of compensation of a member of the compensation committee, including any consulting [sic] advisory or other compensatory fee paid by the listed company to such member, and (ii) whether a member of the compensation committee is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company. The Exchange believes this requirement will benefit investors by ensuring that the members of the company's compensation committee that oversees executive compensation are not subject to conflicts of interest.
Section 10C(f) of the Exchange Act also required the Commission to adopt rules directing the national securities exchanges to establish listing standards which provide a compensation committee with the authority, in its sole discretion, to hire compensation consultants or outside legal counsel ("Compensation Advisers"). The compensation committee may only retain the Compensation Adviser after considering certain independence factors.
Exchange Act Rule 10C-1(b)(2) provides that the compensation committee must be directly responsible for the appointment, compensation and oversight of the work of any Compensation Adviser retained by the compensation committee. Exchange Act Rule 10C-1(b)(3) also requires the listed company to provide appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to such Compensation Adviser retained by the compensation committee. However, the compensation committee must consider, prior to retaining the Compensation Adviser, independence factors that are consistent with Exchange Act Rule 10C-1(b)(4) including: (i) Whether the Compensation Adviser's employer provides other services to the listed company; (ii) the amount of fees the listed company has paid to the Compensation Adviser's employer as a percentage of the total revenue of the person that employs the Compensation Advisor; (iii) the policies and procedures designed to prevent conflicts of interest of the person that employs the Compensation Adviser; (iv) any business or personal relationship between compensation committee member and the Compensation Adviser; (v) whether the Compensation Adviser owns any of the listed company's stock; and (vi) any business or personal relationship between the Compensation Adviser or the Compensation Adviser's employer and any executive officer of the listed company.
The Exchange is proposing to amend NSX Rule 15.5(d)(5)(i)(b) [sic] to require the compensation committee's written charter to authorize the compensation committee in its sole discretion, to (i) retain a Compensation Adviser but only after considering certain factors regarding independence, and (ii) have direct responsibility for the appointment, compensation and oversight of the work performed by any Compensation Adviser on behalf of the compensation committee.
The Exchange also proposes to add NSX Rule 15.5(d)(5)(b)(i)(F) which will require a compensation committee to consider the independence factors set forth in Exchange Act Rule 10C-1(b)(4) prior to retaining a Compensation Advisor including: (i) Whether the Compensation Adviser's employer provides other services to the listed company; (ii) the amount of fees the listed company has paid to the Compensation Adviser's employer as a percentage of the total revenue of the person that employs the Compensation Advisor; (iii) the policies and procedures designed to prevent conflicts of interest of the person that employs the Compensation Adviser; (iv) any business or personal relationship between compensation committee member and the Compensation Adviser; (v) whether the Compensation Adviser owns any of the listed company's stock; and (vi) any business or personal relationship between the Compensation Adviser or the Compensation Adviser's employer and any executive officer of the listed company. The Exchange finds these proposed changes are appropriate in order to ensure that the compensation committee's decisions are not inappropriately biased towards the listed company's management.
The Exchange is proposing to add paragraph (c) under NSX Rule 15.5(d)(5) which requires each listed company to provide the compensation committee with appropriate funding for the reasonable compensation of Compensation Advisers retained by the compensation committee. The level of appropriate funding and compensation is determined by the compensation committee.
Exchange Act Rule 10C-1(b)(5)
The Exchange proposes that its existing exemptions from the compensation-related listing rules remain unchanged. The Exchange's current listing rules provide exemptions for; (i) controlled companies; (ii) limited partnerships and companies in bankruptcy; (iii) closed-end and open-end funds registered under the 1940 Act; (iv) passive business organizations in the form of trusts (such as royalty trusts), derivatives and special purpose securities (such as those described in NSX Rule 15.5(a)(1)), and issuers whose only listed equity security is a preferred stock. 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
The Exchange currently does not require issuers whose only listed security is a preferred stock to comply with NSX Rule 15.5.
While Exchange Act Rule 10C-1 exempts Smaller Reporting Companies from all of its requirements, Nasdaq's [sic] current listing rules do not include any such exemptions.
The Adopting Release contemplates that exchanges may provide transition periods through the exemptive authority provided to the exchanges under Exchange Act Rule 10C-1(b)(1)(iii).
As permitted under Exchange Act Rule 10C-1(a)(3), the Exchange is amending Rule 15.5(d)(5)(d) to provide listed companies with a reasonable opportunity to cure any non-compliance with the Rule's compensation committee listing requirements that could result in a delisting of the listed company's securities. As outlined in the proposed rule changes, listed companies that fail to comply with the requirements will be subject to the delisting procedures set forth in Exchange Rule 15.7 unless the deficiencies are cured within forty-five days from the date of notification by the Exchange. However, if a member of the Compensation committee ceases to be independent for reasons outside of the member's control, that person, with notice by the listed company to the Exchange may remain a Compensation committee member of the listed company until the earlier of the next annual shareholders' meeting of the listed company or one year from the occurrence of the event that caused the member to be no longer independent.
The proposed changes are intended to benefit investors by (a) requiring independent directors of a listed companies to oversee executive compensation matters, (b) consider the independence of any adviser to the compensation committee prior to retention, and (c) be responsible for the appointment, compensation, and oversight of these advisers.
The Exchange believes the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 10C of the Exchange Act.
In particular, the proposed rule change will benefit investors by
The proposed rule change is non-discriminatory and is applicable to all listed companies on the Exchange, unless specifically exempted under proposed Rule 15.5(a) and 15.5(d)(5)(e). 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 Exchange listing requirements. The Exchange believes it is an appropriate use of its exemptive authority under Exchange Act 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 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 Exchange Act Rule 10C-1. The Exchange believes that 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 for all of the other categories of issuers that are not currently subject to the Exchange's compensation committee requirement, for the structural reasons discussed in the "Purpose" section and because it would be a significant and unnecessarily burdensome alteration in their governance structures to require them to comply with the proposed new requirements.
The Exchange does not believe that the proposed rule change will impose any inappropriate burden on competition.
Written comments on the proposed rule change were neither solicited nor received.
Within 45 days of the date of publication of this notice in the
(A) By order approve 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 change is consistent with the Act. Comments may be submitted by any of the following methods:
* 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.