Corporate and Financial Weekly Digest - September 28, 2012

Profession:Katten Muchin Rosenman LLP

Edited by Robert L. Kohl and David A. Pentlow SEC/CORPORATE

NYSE and NASDAQ Propose Compensation Committee and Compensation Adviser Independence Rules

Earlier this week, the New York Stock Exchange and NASDAQ Stock Market each filed proposed rules regarding the independence of compensation committees and compensation advisers of listed companies, as required by Rule 10C-1 adopted by the Securities and Exchange Commission on June 20. Click here for a Katten Client Advisory from earlier this year addressing these final rules.

Subject to certain exemptions noted below, the proposed NYSE and NASDAQ rules each set forth the following requirements for listed companies:

Listed companies must establish and maintain a formal compensation committee (NASDAQ currently allows compensation decisions to be made by a majority of the board's independent directors in the absence of a compensation committee). Each member of a listed company's compensation committee must be a member of the board of directors and must be independent (although companies listed on NASDAQ may continue to rely on an existing exception that allows certain non-independent directors to serve on a compensation committee under "exceptional and limited circumstances"). For determinations of independence, the board of directors must consider relevant factors, including the source of compensation of a director and whether a director has an affiliated relationship with the company. The proposed NASDAQ rules would prohibit a compensation committee member from accepting, directly or indirectly, any consulting, advisory or other compensation fee other than for board service, but there is no "lookback" period, while the proposed NYSE rules allow for board discretion. Both NYSE and NASDAQ provide for "bright line" independence tests, including that a director who received more than $120,000 in fees not related to board service in any 12-month period within the previous three years may not be deemed independent. The proposed NYSE and NASDAQ rules would allow the board of directors to conclude that a director with a large equity ownership in the company is independent for these purposes. A compensation committee must be appropriately funded by the listed company and must have a written charter. A compensation committee may, in its sole discretion, obtain the advice of a compensation adviser and the compensation committee is directly responsible for the appointment, compensation and oversight of compensation advisers. A compensation committee may select a compensation adviser only after considering the following independence factors: (i) whether the person that employs the compensation adviser is providing any other services to the company, (ii) the amount of fees paid to the person that employs the adviser as a percentage of that person's total revenues, (iii) the policies and procedures of the person that employs the adviser that are designed to prevent conflicts of interest, (iv) whether the adviser has any business or personal relationship with a member of the compensation committee, (v) whether the adviser owns any stock of the company, and (vi) whether the adviser or the person employing the adviser has any business or personal relationship with an executive officer of the company. "Smaller reporting companies" are exempt from the proposed NYSE rules. Under the NASDAQ proposed rules, smaller reporting companies must have compensation committees, but they are not required to adhere to certain compensation committee eligibility requirements or the requirements relating to compensation advisers. Further, the following issuers are exempt from the proposed NYSE and NASDAQ rules: (i) limited partnerships, (ii) companies in bankruptcy proceedings, (iii) open-end management investment companies registered under the Investment Company Act of 1940, (iv) any foreign private issuer that discloses in its annual report the reasons that it does not have an independent compensation committee, and (v) controlled companies. In addition, other types of existing issuers that are exempt from compensation-related requirements under existing NYSE and NASDAQ rules will be exempt from the proposed rules.

The proposed NYSE rule changes will not become operative until July 1, 2013, and listed companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new compensation committees independence standards. Certain of the proposed NASDAQ rules relating to the compensation committee's responsibilities and authority (including the consideration of the independence of compensation advisers) would be effective immediately upon the SEC's approval of the proposed rules. Listed companies would be required to comply with the remaining NASDAQ proposed rules (including the compensation committee independence requirement) by the earlier of the second annual meeting held after the date of approval by the SEC or December 31, 2014.

Click here to view the NYSE proposed rule change. Click here to view the NASDAQ proposed rule change.


SEC Report Regarding Handling of Material Non-public Information by Broker-Dealers

The Securities and Exchange Commission issued a report by its Office of Compliance Inspections and Examinations intended to help broker-dealers safeguard material non-public information from insider trading and other misuse. The report is a result of the examinations by the SEC of six of the largest broker-dealers and the examinations by the Financial Industry Regulatory Authority and the New York Stock Exchange of an additional thirteen broker-dealers. The report discusses the examination staff's observations of the policies and procedures, referred to as "information barriers," that exist at such broker-dealers to ensure that material non-public information is not being misused.

In the course of the examinations the staff noted the following areas of concern:

Informal and undocumented interaction between groups that have material non-public information and internal and external groups with sales and trading responsibilities that might profit from the misuse of such information; Senior executives overseeing a business unit having access to material non-public information from a different business unit that could potentially profit from misuse of that information, with no or limited restrictions or monitoring to prevent such misuse; Broker-dealers without risk controls to address the need for information against the restrictions required with respect to discussions between two internal business groups in which material non-public information is provided to one unit for business purposes (e.g., sales, trading or research personnel); and Broker-dealers that have gaps in oversight with respect to reviewing the trading in the accounts of institutional customers, retail customers and asset management affiliates or review of firm personnel who receive information through business activities outside of investment banking. The report provides that the foregoing concerns, by themselves, may not necessarily suggest violations of Section 15(g) of the Exchange Act of 1934, but broker-dealers may find it helpful to consider them in reviewing their policies and procedures. The report also highlights effective practices that the staff observed during the examinations, such as:

Adopting processes that differentiate between types of material non-public information based on the nature of the information or where it originated; Expanding reviews for potential misuse of material non-public information to include reviewing the trading of credit default swaps, equity or total return swaps, loans, components of pooled securities such as unit investment trusts and exchange traded funds, warrants and bond options...

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