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Notice

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; 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

 

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October 9, 2012.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), [1] and Rule 19b-4 thereunder, [2] notice is hereby given that on September 25, 2012, NASDAQ OMX BX, Inc. (“BX” or the “Exchange”) 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 BX. 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 Back to Top

BX 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 BX's Web site at http://nasdaqomxbx.cchwallstreet.com, at BX's principal office, and at the Commission's Public Reference Room.

BX will implement the proposed rule upon approval. Proposed BX Venture Market 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 BX's existing listing rules.

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

In its filing with the Commission, BX 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. BX 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 Change

1. 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 BX, 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 BX's Proposals

While BX does not presently list any securities, the Commission has approved listing rules for the Exchange's BX Venture Market. [7] BX is proposing to modify the compensation-related listing rules for the BX Venture Market, as required by Rule 10C-1. Generally, BX's proposals provide that:

  • Companies [8] must have a compensation committee consisting of at least two members, each of whom must be an Independent Director [9] as defined under BX'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 BX'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;
  • BX's existing exemptions from, and phase-in schedules for, the compensation-related listing rules remain generally unchanged, other than to add exemptions for cooperatives and Controlled Companies, as defined below, as well as a phase-in schedule for Companies ceasing to be Controlled Companies; and
  • Smaller Reporting Companies [10] 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 BX is proposing to adopt under Rule 10C-1.

Rule 10C-1 requires BX 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 BX; and (iii) the definition of independence applicable to compensation committee members that BX proposes to adopt or retain in light of such review. [11] BX's proposals and its underlying analysis are discussed in depth below.

Requirement To Have a Compensation Committee

BX's current listing rules require that compensation of the chief executive officer and all other Executive Officers [12] 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 Independent Directors in a vote in which only Independent Directors participate (the “Alternative”). [13]

Although it was not required to do so by Rule 10C-1, [14] BX 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, BX 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.

BX also considered whether eliminating the Alternative would pose an undue hardship on listed Companies. Since BX does not currently have any listed Companies, it does not believe that eliminating the Alternative would be unduly burdensome.

As a result, BX proposes to eliminate the Alternative and require 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

BX'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 BX's current listing rules.

Although it was not required to do so by Rule 10C-1, BX considered whether it is appropriate to impose a minimum size requirement on a compensation committee. Given the importance of compensation decisions to stockholders, BX 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. BX 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, BX 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.

BX also considered whether imposing a minimum size requirement on a compensation committee would be unduly burdensome to listed Companies, especially in combination with the proposal to eliminate the Alternative, as discussed above. Since BX does not currently have any listed Companies, it does not believe that imposing a minimum size requirement on a compensation committee would be unduly burdensome.

As a result, BX 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

BX's current listing rules require a compensation committee to be comprised solely of Independent Directors, as defined in BX Venture Market Listing Rule 5605(a)(2). [16] 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; [17]
  • a director who is, or at any time during the past three years was, employed by the Company; [18]
  • a director who accepted or who has a Family Member [19] 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; [20]
  • 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; [21]
  • a director who is, or has a Family Member who is, a partner in, or a controlling Shareholder [22] 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; [23]
  • 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 the compensation committee of such other entity; [24] 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. [25]

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. [26]

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

Compensation Committee Composition—Compensatory Fees

Rule 10C-1 requires that in determining the independence requirements for compensation committee members, BX 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. [27] In considering this particular factor, BX reviewed its current listing rules relating to compensatory fees. As outlined above, BX'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. [28] As a result, directors who receive compensatory fees from a Company below these thresholds may serve on a compensation committee under BX's current listing rules.

This is in contrast to BX'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. [29] 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, BX 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, BX 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, BX'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). [30] Also similar to Rule 10A-3, the proposed requirement applicable to compensation committee members will not include a “look-back” period. [31] 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. [32]

Compensation Committee Composition—Affiliation

Rule 10C-1 requires that in determining the independence requirements for compensation committee members, BX 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. [33] In considering this particular factor, BX reviewed its current listing rules relating to affiliation. As outlined above, BX'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. [34] Significantly, the Interpretive Material to BX's definition of Independent Director states that “[b]ecause the Exchange 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.” [35]

Beyond the definition of Independent Director, BX'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. [36] 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.” [37] 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. [38]

After reviewing its current listing rules, BX 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, BX concluded that such a blanket prohibition would be inappropriate for compensation committees. In fact, BX 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, BX 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, BX 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 BX to consider other relevant factors in determining the independence requirements for compensation committee members. [39] After reviewing its current and proposed listing rules, BX concluded that these rules are sufficient to ensure the independence of compensation committee members. Therefore, BX determined not to propose further independence requirements.

Exceptional and Limited Circumstances Exception

With some edits, BX 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. [40] Under this exception, if a compensation committee consists of at least three members, one director who is not an Independent Director and is not a current officer or employee or a Family Member of an officer or employee, 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. The NASDAQ Stock Market LLC (“Nasdaq”) recently amended the identical exception in its rules to allow a Company to rely on the exception for a non-Independent Director who is a Family Member of a non-executive employee of the Company. [41] BX proposes to make the same change to its exceptional and limited circumstances exception.

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.

BX believes this exception is 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.

BX 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, BX's proposal provides Companies with an opportunity to cure defects in the composition of compensation committees. [42] 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. [43]

Under BX'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 BX immediately upon learning of the event or circumstance that caused the noncompliance.

Compensation Committee Charter

BX 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. [44] This proposal is similar to BX'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 the adequacy of the compensation committee charter is written prospectively, rather than retrospectively. [45] 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. [46]

BX 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 BX Venture Market 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 BX's similar listing rule relating to audit committee charters. [47]

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 BX's current compensation-related listing rules. [48] 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, BX 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, BX 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 BX's current compensation-related listing rules. [49] Going forward, BX 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 BX Venture Market Listing Rule 5605(d)(3) is modeled after BX's similar listing rule relating to audit committee charters. [50] Proposed BX Venture Market 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. [51]

Rule 10C-1 permits BX to identify other relevant independence factors that a compensation committee must consider when selecting a compensation consultant, legal counsel or other adviser. [52] BX 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, BX 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. [53]

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. [54] BX proposes that its existing exemptions from the compensation-related listing rules remain generally unchanged. BX's current listing rules include exemptions for: asset-backed issuers and other passive issuers, [55] limited partnerships [56] and management investment companies. [57] For the same reasons that these categories of Companies have traditionally been exempt from BX's compensation-related listing rules, BX proposes that they continue to be exempt from its revised listing rules relating to compensation committees.

In addition, BX's current listing rules provide that a Foreign Private Issuer may follow its home country practice in lieu of BX'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 issuer in lieu of such requirements. [58] 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. BX proposes that a Foreign Private Issuer continue to be allowed to follow its home country practice in lieu of BX's revised listing rules relating to compensation committees if the Foreign Private Issuer provides the disclosures described above. BX 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. [59]

Finally, BX proposes to add exemptions to its compensation committee rules for cooperatives [60] and Controlled Companies, [61] which BX proposes to define as Companies “of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company.” These proposed exemptions are modeled after the similar exemptions in Nasdaq's rules. [62]

Phase-In Schedules

BX proposes that its existing phase-in schedules for the requirements relating to compensation committee composition remain generally unchanged. BX's current listing rules include phase-in schedules for: Companies listing in connection with an initial public offering [63] and Companies emerging from bankruptcy. [64] 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. BX 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. [65]

In addition, BX proposes minor clarifying changes to the phase-in schedule in its current listing rules for Companies transferring from other markets. [66] Companies transferring from another national securities exchange with a substantially similar requirement shall be immediately subject to the compensation committee requirement, provided that such Companies shall be afforded the balance of any grace period afforded by the other market. Companies that are not subject to a substantially similar requirement at the time of listing on BX, such as a Company quoted in the over-the-counter market, shall be permitted to phase in compliance with the compensation committee composition requirements in Rule 5605(d)(2)(A), including the requirement that compensation committee members be Independent Directors, the minimum size requirement and the additional eligibility requirements adopted pursuant to Rule 10C-1, on the same schedule as Companies listing in connection with an initial public offering.

Since BX is proposing to add to its rules an exemption for Controlled Companies, as discussed above, BX also proposes to add a phase-in schedule for Companies ceasing to be Controlled Companies. This proposed phase-in schedule is modeled after the similar phase-in schedule in Nasdaq's rules. [67]

None of the aforementioned phase-in schedules apply to the requirement to adopt a formal written compensation committee charter including the content specified in BX Venture Market Listing Rule 5605(d)(1)(A)-(D). [68]

Smaller Reporting Companies

While Rule 10C-1 exempts Smaller Reporting Companies from all of its requirements, BX's current listing rules do not include any such exemptions. [69] Consistent with the exemption in Rule 10C-1, however, BX proposes not to require Smaller Reporting Companies to adhere to the new requirements relating to compensatory fees and affiliation, which BX 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, BX 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. BX proposes to eliminate the Alternative for Smaller Reporting Companies, just like all other 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 BX's existing listing rules.

In addition, BX 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 BX Venture Market 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. [70]

BX 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. [71] 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 BX's existing listing rules.

Effective Dates/Transition

BX proposes that Rule 5605(d)(3), relating to compensation committee responsibilities and authority, shall be effective immediately. [72] 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, BX proposes to require only that compensation committees immediately have such responsibilities and authority. While BX 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, BX 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 BX'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. [73]

A Company must certify to BX, no later than 30 days after the implementation deadline applicable to it, that it has complied with the amended listing rules on compensation committees. BX 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 BX's existing listing rules, which have been redesignated as Listing Rule 5605A(d) and IM-5605A-6 in BX's proposal.

Conforming Changes and Correction of Typographical Errors

Finally, BX proposes to make minor conforming changes to its requirements relating to audit committees. BX also proposes to correct certain typographical errors in its corporate governance requirements as set forth in Exhibit 5. [74]

2. Statutory Basis

BX believes that the proposed rule change is consistent with the provisions of Section 6 of the Exchange Act, [75] in general, and with Section 6(b)(5) of the Exchange Act, [76] 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, BX is proposing amendments to its listing rules relating to the independence of compensation committees and their advisers. BX 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. BX 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, BX'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, foreign private issuers that provide certain required disclosures, Controlled Companies and Smaller Reporting Companies. BX 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.

BX's proposals to continue relatively unchanged some of its existing exemptions to the compensation-related listing rules for certain categories of Companies and to add a new exemption for cooperatives takes into account the unique characteristics of these Companies. [77] As a result, BX does not believe that continuing the existing exemptions and adding a new exemption for cooperatives will discriminate unfairly among issuers, consistent with Section 6(b)(5) of the Exchange Act. [78]

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 BX's compensation-related listing rules. As discussed in the “Purpose” section, BX 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, BX notes that these Companies continue to be subject to the same requirements as all other Companies, except the new requirements that BX is proposing under Rule 10C-1 relating to compensatory fees, affiliation and the specific compensation committee responsibilities and authority set forth in proposed BX Venture Market Listing Rule 5605(d)(3). BX 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].” [79] In addition, BX notes that the Commission exempted Smaller Reporting Companies from Rule 10C-1. [80] As a result, this distinction does not discriminate unfairly among issuers.

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

BX 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

BX did not solicit comments on the proposed rule change. BX received two written comments, which are attached as Exhibit 2. [81]

The first commenter recommended that BX 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. BX 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. BX therefore decided not to propose any new disclosure requirements for Companies, other than those that are required by Rule 10C-1. [82]

The second commenter proffered four recommendations. First, this commenter recommended that BX include director fees within the list of relevant factors that must be considered when assessing the independence of compensation committee members. BX 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, BX 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 BX 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, BX reviewed its current and proposed listing rules and concluded that these rules are sufficient to ensure the independence of compensation committee members. Therefore, BX determined not to propose further independence requirements, other than those discussed above. Third, this commenter recommended that BX expand the additional factors for compensation committee eligibility to cover all independent directors, not just those serving on the compensation committee. While BX heavily weighed the commenter's concern that multiple definitions of independence add to the complexity of board membership, BX 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. BX concluded therefore that it is inappropriate to expand the additional requirements proposed herein to cover all independent directors. Finally, this commenter recommended that BX clarify that, while the factors must be considered in their totality, a single factor can result in a loss of director independence. BX confirms that a director cannot be deemed independent if he or she fails any one of the bright-line prohibitions in BX Venture Market Listing Rule 5605(a)(2).

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

Within 45 days of the date of publication of this notice in the Federal Register or 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 Back to Top

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:

Electronic Comments

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-BX-2012-063. 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 BX. 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-BX-2012-063 and should be submitted on or before November 5, 2012.

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. [83]

Kevin M. O'Neill,

Deputy Secretary.

[FR Doc. 2012-25223 Filed 10-12-12; 8:45 am]

BILLING CODE 8011-01-P

Footnotes Back to Top

3. The Commission notes that this portion of the proposed rule, proposed BX Venture Market Listing Rule 5605(d)(3), will be effective upon approval by the Commission.

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4. Public Law 111-203, 124 Stat. 1376 (2010).

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6. See 17 CFR 240.10C-1(a)(4)(i).

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7. References in this filing to BX's listing rules refer to the listing rules for the BX Venture Market.

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8. “Company” means “the issuer of a security listed or applying to list on the Exchange.” BX Venture Market Listing Rule 5005(a)(4).

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9. For a discussion of the definition of the term “Independent Director,” see the section entitled “Compensation Committee Composition—General Independence Definition” below. Notwithstanding any of the proposed changes, and consistent with BX's existing listing rules, a Company's board has the responsibility to make an affirmative determination that no Independent Director has a relationship that, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

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10. Smaller Reporting Company is defined in Rule 12b-2 under the Exchange Act.

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11. See 17 CFR 240.10C-1(a)(4)(i).

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12. “Executive Officer” is defined as an officer “covered in Rule 16a-1(f) under the [Exchange] Act.” BX Venture Market Listing Rule 5605(a)(1).

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13. See BX Venture Market Listing Rules 5605(d)(1) and (2).

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14. See Securities Exchange Act Release No. 67220 (June 20, 2012), 77 FR 38422, 38425 (June 27, 2012) (the “Adopting Release”) (stating that “[t]he final rule will not require a listed issuer to have a compensation committee or a committee that performs functions typically assigned to a compensation committee.”).

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15. See BX Venture Market Listing Rule 5605(c)(2)(A).

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16. See BX Venture Market Listing Rules 5605(d)(1) and (2).

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17. See BX Venture Market Listing Rule 5605(a)(2). The rule's reference to the term “Company” includes any parent or subsidiary of the Company. The term “parent or subsidiary” is intended to cover entities the Company controls and consolidates with the Company's financial statements as filed with the Commission (but not if the Company reflects such entity solely as an investment in its financial statements). See IM-5605-1.

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18. See BX Venture Market Listing Rule 5605(a)(2)(A).

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19. “Family Member” is defined as “a person's spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone residing in such person's home.” BX Venture Market Listing Rule 5605(a)(2).

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20. See BX Venture Market Listing Rule 5605(a)(2)(B). This prohibition includes exceptions for: (i) compensation for board or board committee service; (ii) compensation paid to a Family Member who is an employee (other than an Executive Officer) of the Company; or (iii) benefits under a tax-qualified retirement plan, or non-discretionary compensation.

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21. See BX Venture Market Listing Rule 5605(a)(2)(C).

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22. “Shareholder” is defined as “a record or beneficial owner of a [s]ecurity listed or applying to list. For purposes of [the BX Venture Market Listing Rules], the term `Shareholder' includes, for example, a limited partner, the owner of a depository receipt, or unit.” BX Venture Market Listing Rule 5005(a)(26).

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23. See BX Venture Market Listing Rule 5605(a)(2)(D). This prohibition includes exceptions for payments: (i) Arising solely from investments in the Company's securities; or (ii) under non-discretionary charitable contribution matching programs.

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24. See BX Venture Market Listing Rule 5605(a)(2)(E).

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25. See BX Venture Market Listing Rule 5605(a)(2)(F). In the case of an investment company, in lieu of the prohibitions in BX Venture Market Listing Rule 5605(a)(2)(A)-(F), a director cannot be considered independent if he or she is an “interested person” of the Company as defined in Section 2(a)(19) of the Investment Company Act of 1940, other than in his or her capacity as a member of the board of directors or any board committee.

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26. See BX Venture Market Listing Rule 5605(a)(2) and IM-5605-1.

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27. See 17 CFR 240.10C-1(b)(1)(ii)(A).

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28. See BX Venture Market Listing Rules 5605(a)(2)(B) and (D).

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29. See BX Venture Market Listing Rule 5605(c)(2)(A)(ii).

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31. See Securities Exchange Act Release No. 47654 (April 9, 2003), 68 FR 18788, 18792 (April 16, 2003) (stating that “[t]he final rule, like [the] proposal, applies the prohibitions only to current relationships with the audit committee member and related persons. They do not extend to a `look back' period before appointment to the audit committee.* * *”)

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32. BX notes, however, that as discussed above, compensation committee members must be Independent Directors as defined in BX Venture Market Listing Rule 5605(a)(2). Each of the bright-line tests in this definition includes a three-year “lookback” period. See BX Venture Market Listing Rule 5605(a)(2).

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33. See 17 CFR 240.10C-1(b)(1)(ii)(B).

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34. See BX Venture Market Listing Rule 5605(a)(2).

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35. IM-5605-1.

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36. See BX Venture Market Listing Rule 5605(c)(2)(A)(ii).

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39. See 17 CFR 240.10C-1(b)(1)(ii).

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40. See BX Venture Market Listing Rule 5605(d)(3).

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41. See Securities Exchange Act Release No. 67468 (July 19, 2012), 77 FR 43618 (July 25, 2012) (SR-NASDAQ-2012-062). Nasdaq made the same change to its exceptional and limited circumstances exception for audit committee members, and BX also proposes to make a conforming change to its identical exception for audit committee members. BX notes that under both the current and proposed versions of the exception for audit committee members, a Company could not rely on the exception for a director who does not meet the criteria set forth in Section 10A(m)(3) of the Exchange Act and the rules thereunder to allow a director to serve on the audit committee. See 15 U.S.C. 78j-1(m)(3) and 17 CFR 240.10A-3(b)(1).

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43. See Nasdaq Listing Rule 5605(b)(1)(A).

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44. Smaller Reporting Companies may adopt either a formal written compensation committee charter or a board resolution that specifies the committee's responsibilities and authority, except Smaller Reporting Companies are not required to specify the specific compensation responsibilities and authority set forth in proposed BX Venture Market Listing Rule 5605(d)(3). For further discussion, see the section entitled “Smaller Reporting Companies” below.

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45. See BX Venture Market Listing Rule 5605(c)(1).

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46. BX proposes to make a conforming change to its audit committee charter requirement to clarify that Companies' annual review and reassessment of the audit committee charter should be prospective. This is consistent with BX's current interpretation of its audit committee charter requirement. By proposing this amendment, BX seeks to minimize differences between the audit committee and compensation committee charter requirements and to eliminate potential questions as to whether BX intended a discrepancy between these two requirements.

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47. See BX Venture Market Listing Rule 5605(c)(1)(A).

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48. See BX Venture Market Listing Rules 5605(d)(1) and (2).

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49. See BX Venture Market Listing Rule 5605(d)(1).

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50. See BX Venture Market Listing Rule 5605(c)(1)(D), which requires that an audit committee charter set forth the specific audit committee responsibilities and authority set forth in BX Venture Market Listing Rule 5605(c)(3). BX Venture Market Listing Rule 5605(c)(3) states that an audit committee must have the specific responsibilities and authority necessary to comply with Rule 10A-3(b)(2), (3), (4) and (5) under the Exchange Act, with certain exemptions. Rule 10A-3(b)(2), (3), (4) and (5) under the Exchange Act concerns responsibilities relating to: (i) Registered public accounting firms; (ii) complaints relating to accounting, internal accounting controls or auditing matters; (iii) authority to engage advisors; and (iv) funding as determined by the audit committee.

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51. The independence factors include: (i) The provision of other services to the issuer by the person that employs the adviser (the “Employer”); (ii) the amount of fees received from the issuer by the Employer, as a percentage of the total revenue of the Employer; (iii) the policies and procedures of the Employer that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the adviser with a member of the compensation committee; (v) any stock of the issuer owned by the adviser; and (vi) any business or personal relationship of the adviser or the Employer with an executive officer of the issuer. See 17 CFR 240.10C-1(b)(4).

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53. See the Adopting Release, at 38432-3 (stating that “neither the [Dodd-Frank] Act nor [Rule 10C-1] requires a compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting a compensation adviser. Compensation committees may select any compensation adviser they prefer, including ones that are not independent, after considering the six independence factors outlined in the [Rule 10C-1].”)

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55. See BX Venture Market Listing Rule 5615(a)(1). Asset-backed issuers and other passive issuers have traditionally been exempt from BX's compensation-related listing rules because these issuers do not have a board of directors or persons acting in a similar capacity and their activities are limited to passively owning or holding (as well as administering and distributing amounts in respect of) securities, rights, collateral or other assets on behalf of or for the benefit of the holders of the listed securities. See IM-5615-1.

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56. See BX Venture Market Listing Rule 5615(a)(4). BX's compensation-related listing rules historically have not been applied to limited partnerships because the structure of these entities requires that public investors have limited rights and that the general partners make all significant decisions about the operation of the limited partnership. As such, limited partners do not expect to have a voice in the operations of the partnership. Limited partnerships also are exempt from the independence requirements of Rule 10C-1. See 17 CFR 240.10C-1(b)(1)(iii)(A)(1).

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57. See BX Venture Market Listing Rule 5615(a)(5). Management investment companies registered under the Investment Company Act of 1940 are already subject to a pervasive system of federal regulation in certain areas of corporate governance, and as a result, these entities have traditionally been exempt from BX's compensation-related listing rules. See IM-5615-4. Open-end management investment companies registered under the Investment Company Act of 1940 also are exempt from the independence requirements of Rule 10C-1. See 17 CFR 240.10C-1(b)(1)(iii)(A)(3).

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58. See BX Venture Market Listing Rule 5615(a)(3). Under BX's listing rules, Foreign Private Issuer has the same meaning as under Rule 3b-4 under the Exchange Act. See BX Venture Market Listing Rule5005(a)(12). BX's listing rules are modeled after Nasdaq's listing rules, which have traditionally provided qualified exemptions for foreign private issuers so that such issuers are not required to do any act that is contrary to a law, rule or regulation of any public authority exercising jurisdiction over such issuer or that is contrary to generally accepted business practices in the issuer's country of domicile, except to the extent such exemptions would be contrary to the public securities laws. See Securities Exchange Act Release No. 48745 (November 4, 2003), 68 FR 64154, 64165 (November 12, 2003) (SR-NASD-2002-138).

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59. This proposal adopts the requirements of Rule 10C-1(b)(1)(iii)(A)(4), which provides an exemption from the independence requirements of Rule 10C-1 for a “foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.”

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60. Certain member-owned cooperatives that list their preferred stock are required to have their common stock owned by their members. Because of their unique structure and the fact that they do not have a publicly traded class of common stock, BX believes these Companies should be exempt from its compensation committee rules.

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61. This exemption recognizes that majority Shareholders, including parent companies, have the right to select directors and control certain key decisions, such as executive officer compensation, by virtue of their ownership rights. Controlled Companies also are exempt from all of the requirements of Rule 10C-1. See 17 CFR 240.10C-1(b)(5)(ii).

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62. See Nasdaq Listing Rule 5615(a)(2), Nasdaq IM-5615-2, Nasdaq Listing Rule 5615(c) and Nasdaq IM-5615-5.

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63. See BX Venture Market Listing Rule 5615(b)(1).

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64. See BX Venture Market Listing Rule 5615(b)(2).

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65. To provide an illustration of how the compensation committee composition requirement will interact with the minimum size requirement, consider a Company that at the time of listing has a compensation committee consisting of two members, both of whom are Independent Directors, but one of whom accepts compensatory fees of $50,000 annually from the Company pursuant to a consulting agreement. Although only one of these directors is fully eligible to serve on the compensation committee, the committee meets the requirements of BX's phase-in schedule because it has one fully eligible member at the time of listing. By the 90th day from listing, the committee must have a majority of fully eligible members, so the Company could: (i) Remove the ineligible member and temporarily have a committee of one fully eligible member; (ii) replace the ineligible member with a fully eligible member so that the committee consists of two members, all of whom are fully eligible; or (iii) add a second fully eligible member so that the committee consists of three members, a majority of whom are fully eligible. By one year from listing, the Company's compensation committee must consist of at least two members, and all members must be fully eligible under BX's compensation committee composition requirement.

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66. See BX Venture Market Listing Rule 5615(b)(3).

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67. See Nasdaq Listing Rule 5615(c)(3).

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68. As discussed below under “Smaller Reporting Companies,” BX is proposing a new phase-in schedule for a Company ceasing to be a Smaller Reporting Company. BX proposes to allow such a Company 30 days to certify to BX that it has adopted a formal written compensation committee charter including the content specified in BX Venture Market Listing Rule 5605(d)(1)(A)-(D). See footnote 70, infra.

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69. See 17 CFR 240.10C-1(b)(5)(ii).

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70. BX notes that Smaller Reporting Companies remain subject to the disclosure requirements of Item 407(e)(3)(iv) of Regulation S-K, which were adopted at the same time as Rule 10C-1. See the Adopting Release.

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71. Within 30 days after the start of its phase-in schedule, a Company that has ceased to be a Smaller Reporting Company must certify to BX that: (i) It has complied with the requirement in BX Venture Market Listing Rule 5605(d)(1) to have a compensation committee charter including the content specified in BX Venture Market Listing Rule 5605(d)(1)(A)-(D); and (ii) it has, or will within the applicable phase-in schedule, comply with the requirement in BX Venture Market Listing Rule 5605(d)(2) regarding compensation committee composition.

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72. See supra note 3.

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73. See Securities Exchange Act Release No. 48745 (November 4, 2003), 68 FR 64154 (November 12, 2003) (SR-NASD-2002-141).

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74. The Commission notes that Exhibit 5 is available at http://nasdaqomxbx.cchwallstreet.com.

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77. See footnotes 54-57 and 59, supra.

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79. See the Adopting Release, at 38438 (quoting Securities Exchange Act Release No. 54302A (August 29, 2006), 71 FR 53158, 53192 (September 8, 2006)).

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80. See 17 CFR 240.10C-1(b)(5)(ii).

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81. The Commission notes that the comments are available at http://nasdaqomxbx.cchwallstreet.com.

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82. Specifically, as required by Rule 10C-1(b)(1)(iii)(A)(4), BX 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.

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