Notice2023-12760
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New NYSE Arca Rule 5.3-E(p) To Establish Listing Standards Related to Recovery of Erroneously Awarded Incentive-Based Executive Compensation
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 15, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 115 (Thursday, June 15, 2023)</title>
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[Federal Register Volume 88, Number 115 (Thursday, June 15, 2023)]
[Notices]
[Pages 39305-39310]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-12760]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97690; File No. SR-NYSEARCA-2023-20]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New NYSE
Arca Rule 5.3-E(p) To Establish Listing Standards Related to Recovery
of Erroneously Awarded Incentive-Based Executive Compensation
June 9, 2023.
I. Introduction
On February 24, 2023, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt NYSE Arca Rule 5.3-E(p) to require
issuers to adopt and comply with a policy providing for the recovery of
erroneously awarded incentive-based compensation received by current or
former executive officers as required by Rule 10D-1 under the Act
(``Rule 10D-1''). The proposed rule change was published for comment in
the Federal Register on March 13, 2023.\3\ On April 24, 2023, the
Commission extended the time period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change.\4\
[[Page 39306]]
On June 7, 2023, the Exchange filed Amendment No. 1 to the proposed
rule change, which replaced and superseded the proposed rule change as
originally filed.\5\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as modified by Amendment
No. 1, from interested persons and is approving the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 97053 (March 7,
2023), 88 FR 15495 (``Notice''). No comments were received in
response to this Notice.
\4\ See Securities Exchange Act Release No. 97362, 88 FR 26370
(April 28, 2023).
\5\ Amendment No. 1 is available on the Commission's website at
<a href="https://www.sec.gov/comments/sr-nysearca-2023-20/srnysearca202320-201299-402782.pdf">https://www.sec.gov/comments/sr-nysearca-2023-20/srnysearca202320-201299-402782.pdf</a>. In Amendment No. 1, the Exchange (i) amends
proposed NYSE Arca Rule 5.3-E(p)(B) to provide that the effective
date of proposed NYSE Arca Rule 5.3-E(p) would be October 2, 2023;
(ii) amends proposed NYSE Arca Rule 5.3-E(p)(F) (Noncompliance with
Rule 5.3-E(p) (Erroneously Awarded Compensation)) to provide that in
the event of any failure by a listed issuer to comply with any
requirement of proposed NYSE Arca Rule 5.3-E(p), the Exchange may at
its sole discretion provide such issuer with an initial six-month
cure period and an additional six-month cure period; and (iii) makes
additional conforming changes to the description of the proposal.
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II. Background and Description of the Proposal, as Modified by
Amendment No. 1
On October 26, 2022, the Commission adopted final Rule 10D-1 \6\ to
implement section 954 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), which added section 10D to
the Act. Section 10D of the Act requires the Commission to adopt rules
directing the national securities exchanges to prohibit the listing of
any security of an issuer that is not in compliance with the
requirements of section 10D of the Act. Rule 10D-1 requires national
securities exchanges that list securities to establish listing
standards that require each issuer to adopt and comply with a written
executive compensation recovery policy and to provide the disclosures
required by Rule 10D-1 and in the applicable Commission filings.\7\
Under Rule 10D-1, listed companies must recover from current and former
executive officers incentive-based compensation received during the
three completed fiscal years preceding the date on which the issuer is
required to prepare an accounting restatement.
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\6\ 17 CFR 240.10D-1.
\7\ See Securities Exchange Act Release No. 96159, 87 FR 73076
(November 28, 2022) (``Adopting Release''). Rule 10D-1 requires such
exchange listing rules to be effective no later than one year after
November 28, 2022. Rule 10D-1 further requires that each listed
issuer: (i) adopt the required recovery policy no later than 60 days
following the effective date of the listing standard; (ii) comply
with the recovery policy for all incentive-based compensation
received by executive officers on or after the effective date of the
applicable listing standard; and (iii) provide the required
disclosures on or after the effective date of the listing standard.
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As required by Rule 10D-1, the Exchange proposes to adopt NYSE Arca
Rule 5.3-E(p) entitled ``Erroneously Awarded Compensation.'' Proposed
NYSE Arca Rule 5.3-E(p) (``Rule 5.3-E(p)'' or the ``Rule'') mirrors the
text of Rule 10D-1. Specifically, the Rule would require Exchange
listed issuers to adopt a recovery policy that complies with the
requirements of the Rule (``recovery policy''), comply with their
recovery policy, and provide the required disclosures in the applicable
Commission filing.\8\ Proposed Rule 5.3-E(p)(F) would prohibit the
initial or continued listing of any security of an issuer that is not
in compliance with the requirements of any portion of the Rule.\9\
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\8\ See proposed Rule 5.3-E(p)(B) and (C).
\9\ See proposed Rule 5.3-E(p)(F).
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Specifically, proposed Rule 5.3-E(p)(C)(1) would require each
issuer, for initial and continued listing, to adopt and comply with a
written recovery policy providing that the issuer will recover
reasonably promptly the amount of erroneously awarded incentive-based
compensation in the event that the issuer is required to prepare an
accounting restatement due to the material noncompliance of the issuer
with any financial reporting requirement under the securities laws,
including any required accounting restatement to correct an error in
previously issued financial statements that is material to the
previously issued financial statements, or that would result in a
material misstatement if the error were corrected in the current period
or left uncorrected in the current period.
The issuer's recovery policy must apply to all incentive-based
compensation received by a person: (A) after beginning service as an
executive officer; (B) who served as an executive officer at any time
during the performance period for that incentive-based compensation;
(C) while the issuer has a class of securities listed on a national
securities exchange or a national securities association; and (D)
during the three completed fiscal years immediately preceding the date
that the issuer is required to prepare an accounting restatement as
described in paragraph (C)(1) of the Rule.\10\ An issuer's obligation
to recover erroneously awarded compensation is not dependent on if or
when the restated financial statements are filed.
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\10\ See proposed Rule 5.3-E(p)(C)(1)(i). In addition to these
last three completed fiscal years, the recovery policy must apply to
any transition period (that results from a change in the issuer's
fiscal year) within or immediately following those three completed
fiscal years. However, a transition period between the last day of
the issuer's previous fiscal year end and the first day of its new
fiscal year that comprises a period of nine to 12 months would be
deemed a completed fiscal year.
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For purposes of determining the relevant recovery period, the date
that an issuer is required to prepare an accounting restatement as
described in paragraph (C)(1) of the Rule is the earlier to occur of:
(A) the date the issuer's board of directors, a committee of the board
of directors, or the officer or officers of the issuer authorized to
take such action if board action is not required, concludes, or
reasonably should have concluded, that the issuer is required to
prepare an accounting restatement as described in paragraph (C)(1) of
the Rule; or (B) the date a court, regulator, or other legally
authorized body directs the issuer to prepare an accounting restatement
as described in paragraph (C)(1) of the Rule.\11\
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\11\ See proposed Rule 5.3-E(p)(C)(1)(ii).
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The amount of incentive-based compensation that must be subject to
the issuer's recovery policy (``erroneously awarded compensation'') is
the amount of incentive-based compensation received that exceeds the
amount of incentive-based compensation that otherwise would have been
received had it been determined based on the restated amounts, and must
be computed without regard to any taxes paid. For incentive-based
compensation based on stock price or total shareholder return, where
the amount of erroneously awarded compensation is not subject to
mathematical recalculation directly from the information in an
accounting restatement: (A) the amount must be based on a reasonable
estimate of the effect of the accounting restatement on the stock price
or total shareholder return upon which the incentive-based compensation
was received; and (B) the issuer must maintain documentation of the
determination of that reasonable estimate and provide such
documentation to the Exchange.\12\
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\12\ See proposed Rule 5.3-E(p)(C)(1)(iii).
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The issuer must recover erroneously awarded compensation in
compliance with its recovery policy except to the extent that one of
the conditions set forth below is met, and the issuer's committee of
independent directors responsible for executive compensation decisions,
or in the absence of such a committee, a majority of the independent
directors serving on the board, has made a determination that recovery
would be impracticable.
[[Page 39307]]
<bullet> The direct expense paid to a third party to assist in
enforcing the policy would exceed the amount to be recovered. Before
concluding that it would be impracticable to recover any amount of
erroneously awarded compensation based on expense of enforcement, the
issuer must make a reasonable attempt to recover such erroneously
awarded compensation, document such reasonable attempt(s) to recover,
and provide that documentation to the Exchange.
<bullet> Recovery would violate home country law where that law was
adopted prior to November 28, 2022. Before concluding that it would be
impracticable to recover any amount of erroneously awarded compensation
based on violation of home country law, the issuer must obtain an
opinion of home country counsel, acceptable to the Exchange, that
recovery would result in such a violation, and must provide such
opinion to the Exchange.
<bullet> Recovery would likely cause an otherwise tax-qualified
retirement plan, under which benefits are broadly available to
employees of the registrant, to fail to meet the requirements of 26
U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.\13\
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\13\ See proposed Rule 5.3-E(p)(C)(1)(iv).
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The issuer is prohibited from indemnifying any executive officer or
former executive officer against the loss of erroneously awarded
compensation.\14\
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\14\ See proposed Rule 5.3-E(p)(C)(1)(v).
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Proposed Rule 5.3-E(p)(C)(2) would require that each issuer file
all disclosures with respect to such recovery policy in accordance with
the requirements of the federal securities laws, including the
disclosure required by the applicable Commission filings.
Proposed Rule 5.3-E(p)(D) would provide that the requirements of
the Rule do not apply to the listing of: (1) a security futures product
cleared by a clearing agency that is registered pursuant to section 17A
of the Act (15 U.S.C. 78q-1) or that is exempt from the registration
requirements of section 17A(b)(7)(A) (15 U.S.C. 78q-1(b)(7)(A)); (2) a
standardized option, as defined in 17 CFR 240.9b-1(a)(4), issued by a
clearing agency that is registered pursuant to section 17A of the Act
(15 U.S.C. 78q-1); (3) any security issued by a unit investment trust,
as defined in 15 U.S.C. 80a-4(2); and (4) any security issued by a
management company, as defined in 15 U.S.C. 80a-4(3), that is
registered under section 8 of the Investment Company Act of 1940 (15
U.S.C. 80a-8), if such management company has not awarded incentive-
based compensation to any executive officer of the company in any of
the last three fiscal years, or in the case of a company that has been
listed for less than three fiscal years, since the listing of the
company.
Proposed Rule 5.3-E(p)(E) would provide that, unless the context
otherwise requires, the following definitions apply for purposes of the
Rule:
<bullet> Executive Officer. An executive officer is the issuer's
president, principal financial officer, principal accounting officer
(or if there is no such accounting officer, the controller), any vice-
president of the issuer in charge of a principal business unit,
division, or function (such as sales, administration, or finance), any
other officer who performs a policy-making function, or any other
person who performs similar policy-making functions for the issuer.
Executive officers of the issuer's parent(s) or subsidiaries are deemed
executive officers of the issuer if they perform such policy making
functions for the issuer. In addition, when the issuer is a limited
partnership, officers or employees of the general partner(s) who
perform policy-making functions for the limited partnership are deemed
officers of the limited partnership. When the issuer is a trust,
officers, or employees of the trustee(s) who perform policy-making
functions for the trust are deemed officers of the trust. Policy-making
function is not intended to include policy-making functions that are
not significant. Identification of an executive officer for purposes of
the Rule would include at a minimum executive officers identified
pursuant to 17 CFR 229.401(b).
<bullet> Financial reporting measures. Financial reporting measures
are measures that are determined and presented in accordance with the
accounting principles used in preparing the issuer's financial
statements, and any measures that are derived wholly or in part from
such measures. Stock price and total shareholder return are also
financial reporting measures. A financial reporting measure need not be
presented within the financial statements or included in a filing with
the Commission.
<bullet> Incentive-based compensation. Incentive-based compensation
is any compensation that is granted, earned, or vested based wholly or
in part upon the attainment of a financial reporting measure.
<bullet> Received. Incentive-based compensation is deemed received
in the issuer's fiscal period during which the financial reporting
measure specified in the incentive-based compensation award is
attained, even if the payment or grant of the incentive-based
compensation occurs after the end of that period.
Proposed Rule 5.3-E(p)(B) would provide that the effective date of
the Rule (``effective date'') is October 2, 2023 and that each listed
issuer must (i) adopt the recovery policy no later than 60 days
following the effective date; (ii) comply with its recovery policy for
all incentive-based compensation received (as such term is defined in
proposed Rule 5.3-E(p)(E)) by executive officers on or after the
effective date; \15\ and (iii) provide the required disclosures in the
applicable Commission filings required on or after the effective
date.\16\
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\15\ As described above, a listed issuer would have to comply
with its recovery policy for all incentive-based compensation
received by executive officers on or after the effective date of the
applicable listing standard (i.e. Rule 5.3-E(p)). Incentive-based
compensation that is the subject of a compensation contract or
arrangement that existed prior to the effective date of Rule 10D-1
would still be subject to recovery under the Exchange's rule if such
compensation was received on or after the effective date of Rule
5.3-E(p), as required by Rule 10D-1. See Adopting Release, supra
note 7, and also definitions of ``incentive based compensation'' and
``received'' in proposed Rule 5.3-E(p)(E).
\16\ See Amendment No. 1, supra note 5, at 5-6. In support of
proposing an effective date of October 2, 2023, the Exchange states
it believes this is consistent with section 10D ``and the goal of
implementing the proposed rule promptly while also being consistent
with the expectations of listed issuer that the proposed rules would
take effect a year after the adoption of Rule 10D-1 based on the
issuers' understanding of a statement made . . . in the Rule 10D-1
Adopting Release.'' See id.
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The Exchange also proposes additional clarifying changes to Rule
5.3-E to make clear, consistent with the language of proposed Rule 5.3-
E(p), that every listed issuer would be subject to proposed Rule 5.3-
E(p) unless such issuer is eligible for an exemption set forth in that
rule.\17\
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\17\ See id. at 12.
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The Exchange states that the proposed new requirements described
above are consistent with the protection of investors and the public
interest because they further the goal of ensuring the accuracy of the
financial disclosure of listed issuers and may improve the overall
quality and reliability of financial reporting as well as provide
clarification by conforming the text of Rule 5.3-E to the requirements
of proposed Rule 5.3-E(p).\18\
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\18\ See id. at 12-13.
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As described above, Rule 10D-1 requires national securities
exchanges to prohibit the initial or continued listing of any security
of an issuer not in compliance with its rules adopted to comply with
Rule 10D-1. The Exchange proposes therefore to require that a listed
issuer will be subject to delisting
[[Page 39308]]
in the event of any failure by such listed issuer to comply with any
requirement of Rule 5.3-E(p), including the requirement to adopt a
recovery policy that complies with the applicable listing standard,
disclose the policy in accordance with Commission rules or comply with
its recovery policy. The Exchange states that the proposed delisting
process that sets forth procedures that would apply if an issuer failed
to comply with Rule 5.3-E(p) is closely modeled on the compliance
process for listed issuers delayed in submitting periodic reports to
the Commission as set forth in section 802.01E of the NYSE Listed
Company Manual and Section 1007 of the NYSE American Company Guide.\19\
Specifically, the Exchange proposes to adopt proposed Rule 5.3-
E(p)(F)(ii) to provide that a listed issuer that is out of compliance
with the Rule \20\ and fails to regain compliance within any cure
period provided by the Exchange (as further described below) would have
its listed securities immediately suspended and the Exchange would
immediately commence delisting procedures with respect to all such
listed securities.\21\ Proposed Section Rule 5.3-E(p)(F)(ii) would
provide that the Exchange may afford a listed issuer that fails to
comply with any of the requirements of the Rule an initial six-month
period to cure the deficiency.\22\ If the issuer fails to cure the
delinquency within the initial cure period, the Exchange may either
afford the issuer up to an additional six months to cure the deficiency
or, if the Exchange determines that an additional cure period is not
appropriate,\23\ commence suspension and delisting procedures in
accordance with Rule 5.5-E(a). Notwithstanding the foregoing, the
Exchange may in its sole discretion decide (i) not to afford a listed
issuer any initial cure period or additional cure period, or (ii) at
any time during such cure period, to truncate the cure period and
immediately commence suspension and delisting procedures if the listed
issuer is subject to delisting pursuant to any other provision of the
Exchange rules, including if the Exchange believes, in the Exchange's
sole discretion, that continued listing and trading of a listed
issuer's securities on the Exchange is inadvisable or unwarranted.\24\
In determining whether an initial or additional cure period is
appropriate, or whether either such period should be truncated, the
Exchange will consider the likelihood that the delinquency can be cured
during such period.\25\ The Exchange may also commence suspension and
delisting procedures without affording any cure period at all or at any
time during the initial or additional cure period if the Exchange
believes, in the Exchange's sole discretion, that it is advisable to do
so on the basis of an analysis of all relevant factors.\26\ In no event
would the Exchange continue to trade a listed issuer's securities if
that listed issuer has failed to cure its delinquency with the Rule on
the date that is twelve months after the date the Exchange notified the
issuer of the delinquency.\27\
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\19\ See id. at 10. The Exchange's original filing included
provisions establishing cure periods to be applied in the event of a
listed issuer's failure to adopt a recovery policy within the
required time period but did not establish cure periods for other
incidents of noncompliance with Rule 5.3-E(p). Amendment No. 1
revised these cure period provisions so that they are now applicable
to all incidents of noncompliance with Rule 5.3-E(p) and not just
delayed adoption of recovery policies. See id. at 4 n.4. The
Exchange states that it believes the compliance procedures, as
amended, ``are appropriately rigorous and are consistent with the
public interest and the interests of investors.'' See id. at 13.
\20\ Proposed Rule 5.3-E(p)(F)(ii) provides that a listed issuer
will be deemed to be below standards in the event of any failure by
such listed issuer to comply with any requirement of the Rule. The
listed issuer would be required to notify the Exchange in writing
within five days of any type of delinquency. When the Exchange
determines that a delinquency has occurred, it will promptly send
written notification to a listed issuer of the procedures set forth
in the Rule and, within five days of the date of receipt of such
notification, the listed issuer will be required to (i) contact the
Exchange to discuss the status of resolution of the delinquency and
(ii) issue a press release disclosing the occurrence of the
delinquency, the reason for the delinquency and, if known, the
anticipated date the delinquency will be cured. If the listed issuer
has not issued the required press release within five days of the
date of the delinquency notification, the Exchange will issue a
press release stating that the issuer has incurred a delinquency and
providing a description thereof. See proposed Rule 5.3-E(p)(F)(ii).
\21\ See proposed Rule 5.3-E(p)(F)(i) and (iv). A listed issuer
will be subject to the procedures outlined in NYSE Arca Rule 5.5-
E(a) (Maintenance Requirements and Delisting Procedures) with
respect to such a delisting determination. In addition, NYSE Arca
Rule 5.5-E(m) provides that an issuer subject to a delisting
determination generally has a right to an appeal hearing, subject to
certain procedures.
\22\ During such six-month period, the Exchange would monitor
the listed issuer and the status of resolution of the delinquency
until the delinquency is cured. See proposed Rule 5.3-E(p)(F)(iii).
\23\ In determining whether an additional cure period is
appropriate, the Exchange will consider the likelihood that the
delinquency can be cured during the additional cure period. See
proposed Rule 5.3-E(p)(F)(iv).
\24\ See proposed Rule 5.3-E(p)(F)(iii).
\25\ See proposed Rule 5.3-E(p)(F)(ii) and (iii).
\26\ See proposed Rule 5.3-E(p)(F)(iii).
\27\ See proposed Rule 5.3-E(p)(F)(iv).
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\28\ In particular, the
Commission finds that the proposed rule change is consistent with the
requirements of section 6(b) of the Act.\29\ Specifically, the
Commission finds that the proposed rule change is consistent with
section 6(b)(5) of the Act,\30\ which requires, among other things,
that the rules of a national securities exchange 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, and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. In addition, the Commission finds that the
proposed rule change is consistent with section 6(b)(7) of the Act,\31\
which requires, among other things, that the rules of a national
securities exchange provide a fair procedure for the prohibition or
limitation by the exchange of any person with respect to access to
services offered by the exchange. The proposed rule change, as modified
by Amendment No. 1, is also consistent with section 10D of the Act \32\
and Rule 10D-1 thereunder, as further described below.\33\
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\28\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
\31\ 15 U.S.C. 78(b)(7).
\32\ 15 U.S.C. 78j-4.
\33\ 17 CFR 240.10D-1.
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The development and enforcement of meaningful listing standards for
a national securities exchange is of substantial importance to
financial markets and the investing public. Meaningful listing
standards are especially important given investor expectations
regarding the nature of companies that have achieved an exchange
listing for their securities, and the role of an exchange in overseeing
its market and assuring compliance with its listing standards.\34\ The
corporate governance standards embodied in the listing rules of
national securities
[[Page 39309]]
exchanges, in particular, play an important role in assuring that
companies listed for trading on the exchanges' markets observe good
governance practices, including a fair approach and greater
accountability for the recovery of erroneously awarded
compensation.\35\
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\34\ See, e.g., Securities Exchange Release Nos. 65708 (November
8, 2011), 76 FR 70799 70802 (November 15, 2011) (SR-NASDAQ-2011-
073); 63607 (December 23, 2010), 75 FR 82420, 82422 (December 30,
2010) (SR-NASDAQ-2010-137); 57785 (May 6, 2008), 73 FR 27597, 27599
(May 13, 2008) (SR-NYSE-2008-17); and 93256 (October 4, 2021), 86 FR
56338 (October 8, 2021) (SR-NASDAQ-2021-007).
\35\ See, e.g., Securities Exchange Release No. 68639 (January
11, 2013), 78 FR 4570, 4579 (January 22, 2013) (SR-NYSE-2012-49)
(stating, in connection with the modification of exchange rules for
compensation committees of listed issuers to comply with Rule 10C-1
of the Act, that corporate governance listing standards ``play an
important role in assuring that companies listed for trading on the
exchanges' markets observe good governance practices, including a
reasoned, fair, and impartial approach for determining the
compensation of corporate executives'' and stating that the proposal
would foster ``greater transparency, accountability and
objectivity'' in oversight of compensation practices.).
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In enacting section 10D of the Act,\36\ Congress resolved to
require national securities exchanges to establish listing standards to
require listed issuers to develop and comply with a policy to recover
incentive-based compensation erroneously awarded on the basis of
financial information that requires an accounting restatement.\37\ In
October 2022, as required by this legislation, the Commission adopted
Rule 10D-1 under the Act, which directs the national securities
exchanges to establish listing standards that require issuers to: (i)
develop and comply with written policies for recovery of incentive-
based compensation based on financial information required to be
reported under the securities laws, applicable to the issuers'
executive officers, during the three completed fiscal years immediately
preceding the date that the issuer is required to prepare an accounting
restatement; and (ii) disclose those compensation recovery policies in
accordance with Commission rules. In response, the Exchange has filed
the proposed rule change, which includes rules intended to comply with
the requirements of Rule 10D-1.
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\36\ Publish Law 111-203, 954, 124 Stat. 1376, 1904 (2010)
(codified at 15 U.S.C. 78j-4).
\37\ As a part of the Dodd-Frank Act legislative process, in a
2010 report, the Senate Committee on Banking, Housing and Urban
Affairs stated that it is ``unfair to shareholders for corporations
to allow executive officers to retain compensation that they were
awarded erroneously.'' See Report of the Senate Committee on
Banking, Housing, and Urban Affairs, S.3217, Report No. 111-176 at
135-36 (Apr. 30, 2010) (``Senate Report'') at 135. See also Adopting
Release, supra note 7, 87 FR at 73077 (citing to the Senate Report)
(``The language and legislative history of the Dodd-Frank Act make
clear that section 10D is premised on the notion that an executive
officer should not retain incentive-based compensation that, had the
issuer's accounting been correct in the first instance, would not
have been received by the executive officer, regardless of any fault
of the executive officer for the accounting errors. The Senate
Report also indicates that shareholders should not `have to embark
on costly legal expenses to recoup their losses' and that
`executives must return monies that should belong to the
shareholders.' '').
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The Exchange's proposed Rule 5.3-E(p) incorporates the requirements
of Rule 10D-1. The Commission believes that the Exchange's proposal
will foster greater fairness, accountability, and transparency to
shareholders of listed issuers by advancing the recovery of incentive-
based compensation that was erroneously awarded on the basis of
financial information that requires an accounting restatement,
consistent with section 10D of the Act \38\ and Rule 10D-1
thereunder,\39\ and will therefore further the protection of investors
consistent with section 6(b)(5) of the Act.\40\ In addition, as the
Commission stated in the Adopting Release, the recovery requirements
may provide executive officers with an increased incentive to take
steps to reduce the likelihood of inadvertent misreporting and will
reduce the financial benefits to executive officers who choose to
pursue impermissible accounting methods, which can further discourage
such behavior.\41\ The Commission believes that these benefits of the
Exchange's new rules on the recovery of erroneously awarded
compensation will protect investors and the public interest as required
under section 6(b)(5) of the Act.
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\38\ 15 U.S.C. 78j-4.
\39\ 17 CFR 240.10D-1.
\40\ 15 U.S.C. 78f(b)(5).
\41\ See Adopting Release, supra note 7, 87 FR at 73077. See
also Amendment No. 1, supra note 5, at 12, agreeing with the
Commission's statement on the benefits of the recovery policy.
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Rule 10D-1 and the proposed Rule require that a listed issuer
recover the amount of erroneously awarded incentive-based compensation
``reasonably promptly.'' The Adopting Release stated that whether an
issuer is acting reasonably promptly ``will depend on the particular
facts and circumstances applicable to that issuer'' and ``the final
rules do not restrict exchanges from adopting more prescriptive
approaches to the timing and method of recovery under their rules in
compliance with section 19(b) of the Exchange Act . . .'' \42\ Rule
10D-1 also does not compel the exchanges to adopt a more prescriptive
approach to the timing and method of recovery. In its proposal, the
Exchange stated that ``the issuer's obligation to recover erroneously
awarded incentive-based compensation reasonably promptly will be
assessed on a holistic basis with respect to each such accounting
restatement prepared by the issuer'' and that ``[i]n evaluating whether
an issuer is recovering erroneously awarded incentive-based
compensation reasonably promptly, the Exchange will consider whether
the issuer is pursuing an appropriate balance of cost and speed in
determining the appropriate means to seek recovery, and whether the
issuer is securing recovery through means that are appropriate based on
the particular facts and circumstances of each executive officer that
owes a recoverable amount.'' \43\ The Commission believes this guidance
provided by the Exchange is consistent with the Commission's statements
regarding when an issuer is acting ``reasonably promptly'' as expressed
in the Adopting Release, with Rule 10D-1 and with the Act.\44\
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\42\ See Adopting Release, supra note 7, 87 FR at 73104. For
example, the Commission stated that after the exchanges have
observed issuer performance they can use any resulting data to
assess the need for further guidelines to ensure prompt and
effective recovery. See id.
\43\ See Amendment No. 1, supra note 5, at 5.
\44\ See Adopting Release, supra note 7, 87 FR 73104.
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Rule 10D-1 requires issuers subject to the listing standards to
adopt a recovery policy no later than 60 days following the date on
which the applicable listing standards become effective and to comply
with their recovery policy, and provide the required disclosures, on or
after the effective date. The Exchange, in Amendment No. 1, is
proposing that the effective date of the Rule be October 2, 2023.\45\
The Exchange believes that setting this date as the effective date will
ensure that issuers have more than a year from the date Rule 10D-1 was
published in the Federal Register to adopt recovery policies.\46\ This
is consistent with language in Rule 10D-1 and the Adopting Release,
while also ensuring prompt implementation of this proposed rule.
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\45\ See Amendment No. 1, supra note 5, amending proposed Rule
5.3-E(p)(B).
\46\ Listed issuers will need to have their recovery policy in
place no later than 60 days following the effective date of October
2, 2023, which would be more than a year after publication of Rule
10D-1 in the Federal Register. Listed issuers will also have to
comply with their recovery policy for all incentive-based
compensation received by executive officers on or after the
effective date of October 2, 2023, and provide the required
disclosures in the applicable Commission filings on or after the
effective date of October 2, 2023. See Adopting Release, supra note
7, and also definitions of ``incentive based compensation'' and
``received'' in proposed Rule 5.3-E(p)(E). See also supra notes 15-
16 and accompanying text.
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With respect to a listed issuer that fails to comply with proposed
Rule 5.3-E(p), the Exchange has proposed delisting procedures that are
closely modeled on the compliance process for listed issuers delayed in
submitting periodic reports to the Commission as set forth in Section
802.01E of the NYSE
[[Page 39310]]
Listed Company Manual and Section 1007 of the NYSE American Company
Guide.\47\ The Commission believes that these procedures, as modified
by Amendment No. 1, for listed issuers out of compliance with proposed
Rule, which are consistent with the procedures for filing delinquencies
as set forth in the NYSE Listed Company Manual and the NYSE American
Company Guide, adequately meet the mandate of Rule 10D-1 and are
consistent with investor protection and the public interest, since they
give a listed issuer a reasonable time period to cure non-compliance
with these important requirements before they will be delisted while
helping to ensure that listed issuers that are non-compliant will not
remain listed for an inappropriate amount of time.\48\ Additionally,
the proposed delisting process, including the cure period and the right
to a review of a delisting determination by a committee of the Board of
Directors of the Exchange, is consistent with section 6(b)(7) of the
Act in that it provides a fair procedure for the review of delisting
determinations based on violations of the Exchange's rules for
recovering erroneous compensation.
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\47\ See supra notes 19-27 and accompanying text.
\48\ The Exchange originally proposed that if an issuer was non-
compliant with any of the provisions of the Rule (except for a
delayed adoption of a recovery policy), the Exchange would
immediately suspend and commence delisting procedures with respect
to such issuer's listed securities. See Notice, supra note 3, 88 FR
at 15478-79. As discussed above, Amendment No. 1 amended the
Exchange's proposed delisting provisions to provide to that in the
event of any failure by a listed issuer to comply with any
requirement of Rule 5.3-E(p), the Exchange may provide such issuer
with an initial six-month cure period and an additional six-month
cure period. See Amendment No. 1, supra note 5.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether the proposed rule change, as modified by
Amendment No. 1, is consistent with the Exchange Act. Comments may be
submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d3a1a6bfb6feb0bcbebeb6bda7a093a0b6b0fdb4bca5"><span class="__cf_email__" data-cfemail="f98b8c959cd49a9694949c978d8ab98a9c9ad79e968f">[email protected]</span></a>. Please include
file number SR-NYSEARCA-2023-20 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NYSEARCA-2023-20. 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 website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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 website 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NYSEARCA-2023-20, and should
be submitted on or before July 6, 2023.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. In Amendment No. 1, the Exchange amended the
proposal to (i) propose that the effective date of proposed Rule 5.3-
E(p) be October 2, 2023; (ii) allow the Exchange, in its sole
discretion, to provide a listed issuer that fails to comply with any
requirement of proposed Rule 5.3-E(p), an initial six-month cure period
and an additional six-month cure period; and (iii) make additional
conforming changes to the description of the proposal.\49\ The changes
in Amendment No. 1 provide greater clarity to the proposal. The change
to the effective date of the listing standards is consistent with Rule
10D-1 and language in the Adopting Release. The changes to the
delisting procedures and the cure periods for non-compliance being
proposed by the Exchange are similar to those that exist under the
rules of other national securities exchanges for the late filing of
annual and quarterly reports that the Commission has previously
approved as consistent with the Act.\50\ The amended proposal also
provides for a cure period for any violations of Rule 5.3-E(p) similar
to the approach taken by Nasdaq in its proposal to adopt rules to
comply with Rule 10D-1.\51\ Nasdaq's proposal has also been approved by
the Commission as consistent the Act.\52\ Accordingly, the Commission
finds good cause, pursuant to section 19(b)(2) of the Exchange Act,\53\
to approve the proposed rule change, as modified by Amendment No. 1, on
an accelerated basis.
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\49\ See Amendment No. 1, supra note 5.
\50\ See Section 802.01E of the NYSE Listed Company Manual and
Section 1007 of the NYSE American Company Guide.
\51\ See Securities Exchange Act Release No. 97060 (March 7,
2023), 88 FR 15500 (March 13, 2023) (SR-Nasdaq-2023-005).
\52\ See Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change to Establish Listing
Standards Related to Recovery of Erroneously Awarded Executive
Compensation (June 9, 2023) (SR-Nasdaq-2023-005).
\53\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\54\ that the proposed rule change (SR-NYSEARCA-2023-20), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\54\ 15 U.S.C. 78s(b)(2).
\55\ 17 CFR 200.30-3(a)(12).
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12760 Filed 6-14-23; 8:45 am]
BILLING CODE 8011-01-P
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