[Federal Register Volume 66, Number 67 (Friday, April 6, 2001)]
[Notices]
[Pages 18334-18338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8505]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44141; File No. SR-NYSE-00-32]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Shareholder Approval 
of Stock Option Plans

March 30, 2001.

I. Introduction

    On July 13, 2000, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 extend the effectiveness of a 
pilot regarding the Exchange's shareholder approval policy with respect 
to stock option and similar plans. The proposed rule change was 
published for comment in the Federal Register on August 10, 2000.\3\ On 
August 15, 2000, the Commission extended the comment period until

[[Page 18335]]

September 20, 2000.\4\ The Commission received 25 comment letters on 
the proposal in response to both the regular and extended comment 
periods.\5\ On March 7, 2001, the NYSE submitted its response to the 
comment letters.\6\ On January 19, 2001, the Exchange submitted 
Amendment No. 1 to the proposed rule change, which was published in the 
Federal Register on February 2, 2001.\7\ No comments were received on 
Amendment No. 1. This order approves the proposal, as amended, on a 
pilot basis until September 30, 2001.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43111 (August 2, 2000), 
65 FR 49046 (``2000 Proposal''). In addition, the NYSE submitted a 
monitoring report that presented data regarding the use of the 
``broadly-based'' exemption by NYSE-listed companies. See letter to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), SEC, from Catherine R. Kinney, Group Executive Vice 
President, Office of Chief Executive, NYSE, dated September 28, 2000 
(``Pilot Monitoring Report''). This report is part of the public 
file and may be inspected at the Commission's Public Reference Room 
as well as the principle office of the NYSE.
    \4\ Securities Exchange Act Release No. 43155, 65 FR 51382 
(August 23, 2000). As originally noticed, the comment period expired 
on August 31, 2000.
    \5\ See letters to Jonathan G. Katz, Secretary, SEC from Sarah 
A.B. Teslik, Executive Director, Council of Institutional Investors, 
dated August 17, 2000 (``CII''), Linda S. Selbach, Global Proxy 
Manager, Barclays Global Investors, dated August 21, 2000 
(``Barclays Global Investors''); Jeffrey W. States, et al., 
Sacramento County Employees' Retirement System, dated August 23, 
2000 (``Sacramento County''); James P. Hoffa, General President, 
International Brotherhood of Teamsters, dated August 28, 2000 
(``Teamsters''); Alan G. Hevesi, Comptroller, Comptroller of the 
City of New York, dated August 24, 2000 (``Comptroller of the City 
of New York''); Kay R.H. Evans, Executive Director, Maine State 
Retirement System, dated August 29, 2000 (``Maine State Retirement 
System''); Peter C. Clapman, Senior Vice President and Chief 
Counsel, Investments, Teachers Insurance and Annuity Association 
College Retirement Equities Fund, dated August 23, 2000 (``TIAA-
CREF''); Tom Herndon, Executive Director, State Board of 
Administration of Florida, dated August 28, 2000 (``State Board of 
Florida''); Keith Johnson, Chief Legal Counsel, State of Wisconsin 
Investment Board, dated September 1, 2000 (``State of Wisconsin 
Investment Board''); Steven E. Kornrumpf, Director, State of New 
Jersey, Department of the Treasury, Division of Investment, dated 
August 31, 2000 (``State of New Jersey''); Peter M. Gilbert, Chief 
Investment Officer, Commonwealth of Pennsylvania, State Employees' 
Retirement System, dated September 7, 2000 (``PA State Employees' 
Retirement System''); Mark E. Brossman, Counsel to Longview Funds, 
Schulte, Roth & Zabel, dated September 12, 2000 (``Schulte, Roth & 
Zabel''); Nell Minnow, Editor, The Corporate Library, dated 
September 19, 2000 (``Corporate Library''); Denise L. Nappier, 
Treasurer, State of Connecticut, Office of the Treasurer, dated 
September 18, 2000 (``State of Connecticut''); Michael R. Zucker, 
Director, Office of Corporate Affairs, American Federation of State, 
County and Municipal Employees, AFL-CIO, dated September 19, 2000 
(``AFSCME''); Joseph T. Hansen, International Secretary-Treasurer, 
United Food & Commercial Workers International Union, AFL-CIO & CLC, 
dated September 19, 2000 (``UFCW''); William Patterson, Director, 
Office of Investment, American Federation of Labor and Congress of 
Industrial Organizations, dated September 20, 2000 (``AFL-CIO''); 
Gary K. Duberstein, Managing Director, Greenway Partners, L.P., 
dated September 20, 2000 (``Greenway Partners''); H.W. Ward, Chief 
Executive Officer, Hotel Employees and Restaurant Employees 
International Union, Welfare-Pension Funds, dated September 19, 2000 
(``Hotel Employees and Restaurant Employees International Union''); 
John F. Olsen, Gibson, Dunn & Crutcher LLP, dated October 9, 2000 
(``Gibson, Dunn & Crutcher''); James P. Ryan, Senior Counsel, Fund 
Business Management Group, Capital Research and Management Company, 
dated November 13, 2000 (``Capital Research and Management 
Company''); Eugene P. Stein, Executive Vice President, Capital 
Guardian Trust Company, dated November 22, 2000 (``Capital Guardian 
Trust Company''); Sheila W. Beckett, Executive Director, Employees 
Retirement System of Texas, dated December 11, 2000 (``Employees 
Retirement System of Texas''); Deb Lingle, e-mail received on 
September 25, 2000; and John Johnson, e-mail received on September 
25, 2000.
    \6\ See letter to Jonathan G. Katz, Secretary, SEC, from James 
E. Buck, Senior Vice President and Secretary, dated March 5, 2001 
(``NYSE Letter'').
    \7\ Securities Exchange Act Release No. 43879 (January 24, 
2001), 66 FR 8827 (``Amendment No. 1'').
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II. Background

    On June 4, 2000, the Commission approved, on a pilot basis, an 
Exchange proposal to amend Sections 312.01, 312.03, and 312.04 of the 
Exchange's Listed Company Manual (``Manual'') with respect to the 
definition of a ``broadly-based'' stock option plan (``1999 
Pilot'').\8\ The 1999 Pilot was scheduled to expire on September 30, 
2000. Therefore, the Exchange submitted the 2000 Proposal to extend the 
effectiveness of the 1999 Pilot. In addition, the NYSE submitted its 
Pilot Monitoring Report to provide the Commission with data regarding 
the use of the ``broadly-based'' exemption.\9\ Originally, the Exchange 
sought a three-year extension of the 1999 Pilot. However, in Amendment 
No. 1, the Exchange shortened its extension request to one year and 
also modified the ``broadly-based'' definition to address a potential 
loop-hole. To provide time for consideration of the 2000 Proposal, the 
effectiveness of 1999 Pilot was extended through March 30, 2001.\10\
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    \8\ Securities Exchange Act Release No. 41479, 64 FR 31667 (June 
11, 1999).
    \9\ See note 3 supra. In the Pilot Monitoring Report, the NYSE 
stated that of the 319 listing applications with respect to stock 
option or purchase plans submitted to the Exchange from June 4, 1999 
through May 2000, 209 were submitted to shareholders for a vote and 
60 Plans relied on the ``broadly-based'' exemption approved in the 
1999 Pilot.
    \10\ Securities Exchange Act Release Nos. 44018 (February 28, 
2001), 66 FR 13821 (March 7, 2001); 43647 (November 30, 2000, 65 FR 
77404 (December 11, 2000) (Notice of Filing to extend the 
effectiveness of the 1999 Pilot through February 28, 2001); 43329 
(September 22, 2000), 65 FR 58833 (October 2, 2000) (Notice of 
Filing to extend the effectiveness of the 1999 Pilot through 
November 30, 2000).
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    Paragraphs 312.01, 312.03, and 312.04 of the Manual set forth the 
Exchange's policy with respect to shareholder approval of stock option 
and similar plans (``Plans''). As a prerequisite to listing, 
shareholder approval of Plans or any other arrangement pursuant to 
which officers or directors acquire stock is required. There are, 
however, four exemptions from the shareholder approval requirement, one 
of which is an exemption for Plans that are ``broadly-based.'' 
Historically, the Exchange had not provided a definition of what 
constituted a ``broadly-based'' Plan other than to state that such a 
Plan must include employees other than officers and directors. The only 
express example of such a Plan in the Manual was an employee stock 
option plan, or ``ESOP.''
    In December 1997, the Exchange filed a proposed rule change, which 
codified, among other things, existing Exchange interpretations 
regarding ``broadly-based'' Plans (``Original Proposal'').\11\ 
Specifically, in the Original Proposal, the Exchange amended the Manual 
to state that the determination of whether a Plan was ``broadly-based'' 
required a review of a number of factors, including the number of 
persons included in the Plan, and the nature of the company's 
employees, such as whether there were separate compensation 
arrangements for salaried and hourly employees. The Original Proposal 
also codified a non-exclusive safe harbor for Plans in which at least 
20 percent of a company's employees were eligible to participate in the 
Plan, provided that the majority of those eligible were neither 
officers nor directors. The Commission did not receive any comments on 
the Original Proposal, and subsequently approved it, on April 8, 
1998.\12\
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    \11\ Securities Exchange Act Release No. 39659 (February 12, 
1998), 63 FR 9036 (February 23, 1998).
    \12\ Securities Exchange Act Release No. 39839, 63 FR 18481 
(April 15, 1998).
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    Following the Commission's approval of the Original Proposal, the 
Exchange and the Commission received a significant number of inquiries 
and comments regarding the Original Proposal. Many of these inquiries 
and comments originated from the institutional investor community and 
focused on the ``broadly-based'' definition. Commenters expressed 
general concern that, without shareholder approval, companies could 
dilute the value of existing shares by creating new Plans.
    In response, the Exchange issued a request for comment regarding 
the definition of ``broadly-based'' Plans. According to the NYSE, the 
listed company community favored retaining the new Policy, while the 
institutional investor community favored a narrower definition of what 
constituted a ``broadly-based'' Plan, and suggested that such 
definition be an exclusive test instead of a non-exclusive safe harbor.
    A Stockholder Approval Policy Task Force (``Task Force'') was 
subsequently established by the NYSE to review the comments and to make

[[Page 18336]]

recommendations concerning possible changes to the NYSE's Policy. The 
Task Force was composed of representatives of the Exchange's legal 
Advisory Committee, Individual Investors Committee, Pension Managers 
Advisory Committee, and Listed Company Advisory Committee. In addition, 
members of other Exchange constituencies, including the Council of 
Institutional Investors, were represented on the Task Force.
    Following its deliberations, the Task Force recommended that 
certain changes be made to the definition of a ``broadly-based'' 
Plan.\13\ In addition, the Task Force recommended that the Exchange 
actively consider setting an overall dilution maximum for all non- tax 
qualified Plans that otherwise would be exempt from shareholder 
approval requirements.
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    \13\ See Report of the Special Task Force on Stockholder 
Approval Policy dated August 28, 1998.
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    The Exchange responded by submitting the 1999 Pilot, which amended 
Sections 312.01, 312.03, and 312.04 of the Manual to reflect the 
recommendations to the Task Force. The Exchange also directed the Task 
Force to continue its work to consider the dilution issue with a target 
date of NYSE's September 1999 meeting of the Board of Directors.
    The Task Force submitted its finding to the Exchange's Board at the 
November 1999 meeting.\14\ The Task Force recommended implementing 
enhanced disclosure requirements for the compensation tables contained 
in a company's SEC filings.\15\ Although the Task Force formulated 
dilution standards and presented them in its report, the Task Force 
believed, and the Exchange's Board agreed, that such standards should 
be adopted uniformly by all the major listing markets in the United 
States. The Task Force was concerned that adoption of the dilution 
standard by only one market would lead to competition for listings 
based on disparities in the corporate governance rules of the 
respective markets. The Task Force believed that this would compromise 
the purposes intended to be served by those rules, and could undermine 
the public's confidence and trust in the markets.
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    \14\ See Report of the New York Stock Exchange Special Task 
Force on Stockholder Approval Policy. The Task Force had previously 
submitted a status report to the Commission in October 1999. See 
letter to Annette Nazareth, Director, Division, SEC, from Catherine 
Kinney, Group Executive Vice President, Office of Chief Executive, 
NYSE, dated October 28, 1999 (Status Report Submission NYSE-98-32). 
The Task Force Report and the Status Report are part of the public 
file and may be inspected at the Commission's Public Reference Room 
as well as at the principle office of the NYSE.
    \15\ In January 2001, the Commission approved for publication 
and public comment a proposed rule that would enhance disclosure of 
equity compensation plans. See Securities Act Release No. 7944 
(January 26, 2001), 66 FR 8732 (February 1, 2001). A copy of the 
Commission's proposal also can be found on the Commission's website 
at www.sec.gov. The comment period for this proposal ends on April 
2, 2001.
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    Accordingly, the Exchange began discussions with the management of 
the National Association of Securities Dealers, Inc. regarding a 
dilution standard. On December 5, 2000, the Nasdaq Stock Market, Inc. 
(``Nasdaq'') solicited comment from its members and investors on the 
NYSE Task Force's dilution standard. The comment period for the Nasdaq 
request for comment expired on February 5, 2001.

III. Description of the Proposal

    As approved in the 1999 Pilot, a Plan is currently considered 
``broadly-based,'' and thus exempt from the Exchange's shareholder 
approval requirements, if, pursuant to the terms of the Plan (a) at 
least a majority of the issuer's full time, exempt U.S. employees are 
eligible to participate under the Plan; and (b) at least a majority of 
the shares awarded under the Plan, or shares of stock underlying 
options awarded under the Plan, during the shorter of the three-year 
period commencing on the date the Plan is adopted by the issuer or the 
term of the Plan itself are made to employees who are not officers or 
directors of the issuer.
    In the 2000 Proposal, as amended, the Exchange requested that the 
Commission extend the 1999 Pilot through September 30, 2001 in order to 
permit additional industry discussions of the issues, while at the same 
time enabling the Exchange to continue to study the experience of NYSE-
listed companies and their investors that utilize the exemption from 
shareholder approval for ``broadly-based'' Plans.\16\
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    \16\ See Amendment No. 1, note 7 supra. As discussed above, the 
Exchange originally requested an extension until September 30, 2003.
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    In addition, the Exchange proposed to amend the second part of the 
``broadly-based'' definition, which focuses on actual grants made under 
a Plan.\17\ Specifically, the Exchange proposed to amend this provision 
by requiring that at least a majority of shares of stock or shares of 
stock underlying options awarded under a Plan during any three-year 
period must be awarded to employees who are not officers or directors 
of the company. According to the NYSE, the three-year period refers to 
periods of consecutive years and is a continuing requirement that 
should be applied on a rolling three-year basis by Plans with terms 
longer than three years. In the event that a Plan is implemented with a 
stated term shorter than three years, awards, under the revision, would 
have to be made in a way that would meet the rule criteria during such 
shorter period.
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    \17\ See Amendment No. 1, note 7 supra.
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IV. Summary of Comments

    The Commission received 25 comment letters on the proposed rule 
change.\18\ Of the 25 comment letters, 20 comment letters opposed the 
Exchange's proposal to extend the effectiveness of the pilot for three 
years,\19\ and two commenters while opposing the three-year extension 
request, supported a one-year extension of the 1999 Pilot.\20\ One 
commenter was from a member of the Task Force and responded to issues 
raised by various commenters.\21\ Two commenters did not address the 
issues raised in the proposed rule change.\22\
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    \18\ See note 5 supra.
    \19\ See letters from CII; Barclays Global Investors; Sacramento 
County; Teamsters; Comptroller of the City of New York; Maine State 
Retirement System; State Board of Florida; State of Wisconsin 
Investment Board; State of New Jersey; PA State Employees' 
Retirement System; Schulte, Roth & Zabel; Corporate Library; State 
of Connecticut; UFCW; AFL-CIO; Greenway Partners; Hotel Employees 
and Restaurant Employees International Union; Capital Research and 
Management Company; Capital Guardian Trust Company; and Employees 
Retirement System of Texas.
    \20\ See letters from TIAA-CREF and AFSCME.
    \21\ See letter from Gibson, Dunn & Crutcher. The Commission 
notes that the following commenters were also members of the NYSE 
Task Force: Barclays Global Investors; TIAA-CREF; State Board of 
Florida; and State of Wisconsin Investment Board.
    \22\ See e-mails from Deb Lingle and John Johnson.
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    The Exchange submitted a written response to the issues raised in 
the comment letters.\23\ The following discussion summarizes the issues 
raised by the commenters and the Exchange's response.
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    \23\ See NYSE Letter, note 6 supra.
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A. Three-Year Extension Request

    A majority of commenters opposed the original three-year extension 
requested by the NYSE and argued that the NYSE should adopt a dilution 
standard immediately or by the 2001 proxy season.\24\ For example, 
several commenters noted that the 1999 Pilot

[[Page 18337]]

was approved on a pilot basis with the understanding that a new 
standard be in place for the 2000 proxy season.\25\
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    \24\ See letters from CII; Barclays Global Investors; Sacramento 
County; Teamsters; Comptroller of the City of New York; Maine State 
Retirement System; TIAA-CREF; State Board of Florida; State of 
Wisconsin Investment Board; State of New Jersey; PA State Employees' 
Retirement System; Schulte, Roth & Zabel; Corporate Library; State 
of Conneticut; AFSCME; UFCW; AFL-CIO; Greenway Partners; Hotel 
Employees and Restaurant Employees International Union; Capital 
Research and Management Company; Capital Guardian Trust Company; and 
Employees Retirement System of Texas.
    \25\ See e.g., letters from Teamsters and State of Wisconsin 
Investment Board. See also letter from TIAA-CREF, which stated that 
the 1999 Pilot was understood as a stop-gap measure until permanent 
resolution could be reached.
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    As described above, the Exchange modified its extension request in 
Amendment No. 1 so that the 2000 Proposal now proposes an extension 
until September 30, 2001.

B. Dilution

    A majority of commenters argued that the NYSE should adopt the 
dilution standard developed by its Task Force.\26\ Generally, dilution 
refers to the diminished value of a shareholder's investment that can 
occur when stock options are granted. As noted above, the Task Force 
developed a dilution standard to measure the effects of Plans on 
shareholders' interests but recommended that the NYSE delay adopting 
the dilution standard until the other major listing markets followed 
suit. Several commenters believed that a dilution standard should be 
added to the current rule along with the ``broadly-based'' 
standard.\27\ One commenter noted that the extension request would 
``increase the risk of excessive dilution of [its] investments in NYSE 
listed companies that establish ``broard-based'' stock option plans.'' 
\28\ Another commenter argued that delaying implementation of a 
dilution standard is unacceptable given the cost of Plans to 
shareholders.\29\ Finally, one commenter argued that the NYSE should 
adopt both of its Task Force's recommendations on dilution and 
shareholder approval of all Plans that permit officer and director 
participation.\30\
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    \26\ See letters from CII; Barclays Global Investors; Sacramento 
County; Teamsters; Comptroller of the City of New York; Maine State 
Retirement System; TIAA-CREF; State Board of Florida; State of 
Wisconsin Investment Board; State of New Jersey; PA State Employees' 
Retirement System; Schulte, Roth & Zabel; State of Connecticut; 
AFSCME; UFCW; AFL-CIO; Greenway Partners; Hotel Employees and 
Restaurant Employees International Union; Capital Research and 
Management Company; Capital Guardian Trust Company; and Employees 
Retirement System of Texas.
    \27\ See letters from Capital Research and Management Company, 
which supported the ``broadly-based'' definition but believed that a 
dilution standard was also necessary; and Capital Guardian Trust 
Company.
    \28\ See letter from Comptroller of the City of New York.
    \29\ See letter from AFSCME.
    \30\ See letter from Hotel Employees and Restaurant Employees 
International Union.
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    In response, the Exchange stated that it continues to believe that 
a change as significant as a move to a dilution-based standard cannot 
be made by only one of several competing listing markets. According to 
the Exchange, a uniform approach that is supported by as broad a 
consensus as possible is necessary. The Exchange noted several 
developments including the Commission's proposal to enhance disclosure, 
which NYSE's Task Force found to be an important adjunct to a dilution-
based standard, as well as Nasdaq's solicitation of comments on this 
issue. The Exchange committed to continue working with its 
constituents, the Commission, and other markets to achieve a consensus 
that adequately addresses the needs of all involved.

C. Enhanced Disclosure

    Several commenters argued that enhanced disclosure of Plans was 
needed.\31\ These commenters urged the Commission to adopt new Plan 
disclosure rules. The Commission notes that in January 2001, it 
approved for publication and public comment a proposal to enhance 
disclosure of equity compensation plans.\32\
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    \31\ See letters from CII; Barclays Global Investors; Sacramento 
County; Teamsters; Maine State Retirement system; TIAA-CREF; State 
of Wisconsin Investment Board; Schulte, Roth & Zabel; AFSCME; Hotel 
Employees and Restaurant Employees International Union; Deb Lingle; 
John Johnson; and Employees Retirement System of Texas.
    \32\ See note 15 supra.
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D. Uniform Standards

    Several commenters disagreed with NYSE's argument that a dilution 
standard should be implemented on a uniform basis with other listing 
markets.\33\ One commenter argued that it believed that ``there is no 
need to wait for other exchanges to join-in'' because ``the market 
place will surely have them follow.'' \34\ Another commenter questioned 
the Exchange's commitment to adopting a dilution-based standard.\35\ 
They along with another commenter argued that adoption of a dilution-
based standard should not hinge on approval of a similar rule by the 
Nasdaq/Amex market.\36\ Finally, one commenter noted that because many 
Nasdaq companies rely heavily on Plans to compensate and retain highly 
skilled employees, it is unlikely that Nasdaq would propose a standard 
to require shareholder approval of Plans and thus, NYSE's pre-condition 
for moving forward with a dilution-based standard was unreasonable.\37\
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    \33\ See letters from Comptroller of the City of New York; State 
Board of Florida; PA State Employees' Retirement System; Schulte 
Roth & Zabel; AFSCME; Greenway Partners; and Hotel Employees and 
Restaurant Employees International Union.
    \34\ See letter from Hotel Employees and Restaurant Employees 
International Union.
    \35\ See letter from Schulte, Roth & Zabel, which stated ``we 
believe that the NYSE could have resolved this issue with Nasdaq/
Amex by now, and grow increasingly concerned about NYSE's commitment 
to adopting a dilution-based standard.''
    \36\ Id. See also letter from State Board of Florida.
    \37\ See letter from Comptroller of the City of New York.
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    As noted above, the NYSE continues to believe that a shareholder 
approval standard based on dilution is a significant change and cannot 
be made by one of several competing listing markets. NYSE argues that a 
uniform approach should be adopted.

E. Other Issues

    Many commenters raised other issues related generally to the 
``broadly-based'' definition that were raised and considered in the 
1999 Pilot.\38\ For example, several commenters argued that the 
``broadly-based'' exemption denies shareholders of the right to oversee 
and consider potentially dilutive Plans.\39\ In this regard, a few 
commenters noted that they acted as fiduciaries for clients and had 
obligations to protect their clients' interests, which they believed 
the NYSE rule usurped.\40\
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    \38\ See order approving the 1999 Pilot, note 8 supra
    \39\ See letter from Teamsters; Comptroller of the City of New 
York; State of Wisconsin Investment Board; PA State Employees' 
Retirement System; UFCW; Hotel Employees and Restaurant Employees 
International Union; and Capital Guardian Trust Company.
    \40\ See letters from Barclays Global Investments; Comptroller 
of the City of New York; PA State Employees' Retirement System; and 
Capital Guardian Trust Company.
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    Two commenters argued that the definition should be amended to 
delete the reference to ``exempt'' employees.\41\ Two other commenters 
stated shareholders should have the authority to approve all stock 
option plans.\42\ Finally, one commenter reiterated the concern about 
conflicts of interest of officers and directors that implement Plans in 
which they participate noting that lower level employees could be 
excluded from participating in such Plans.\43\
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    \41\ See letters from Teamsters and AFL-CIO.
    \42\ See letters from State of New Jersey and UFCA.
    \43\ See letter from PA State Employees' Retirement System.
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V. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\44\ In particular, the Commission believes that the proposal 
is consistent with the requirements of

[[Page 18338]]

Section 6(b)(5) of the Act, which requires, among other things, that 
the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest, and not be designed to permit unfair discrimination 
between issuers.\45\
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    \44\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \45\ 15 U.S.C. 78f(b)(5).
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    The Commission has carefully considered the issues raised by this 
proposed rule change and continues to believe that it is consistent 
with the requirements of the Act.\46\ In approving this proposal, the 
Commission recognizes that a majority of the commenters continue to 
believe that a dilution standard would be more appropriate. 
Nevertheless, the Commission believes that the current 2000 Proposal, 
which addresses concerns that the 1999 Pilot permitted grants made 
under ``broadly-based'' Plans to be made in a non-broadly-based 
fashion, is still a better test that the previous non-exclusive safe 
harbor approved in the Original Proposal.\47\
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    \46\ See also order approving the 1999 Pilot, note 8 supra. In 
addition, the Commission has reviewed the Pilot Monitoring Report. 
The Commission expects the NYSE to continue to monitor its listed 
companies' use of the ``broadly-based'' exemption and to submit a 
similar report prior to any future submission regarding this matter.
    \47\ The Commission notes that if it found that the current 
``broadly-based'' definition was not consistent with the 
requirements of the Act, the Original Proposal approved by the 
Commission in 1998 would become effective. See notes 11 and 12 
supra.
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    The Commission approved the 1999 Pilot basis to provide the NYSE 
with time to develop a dilution test. The NYSE Task Force did develop 
such a test but recommended that the NYSE Board of Directors refrain 
from proposing and implementing its dilution standard until such time 
as the other listing markets, specifically Nasdaq, would adopt similar 
requirements. At this time, Nasdaq has not adopted the NYSE dilution 
standard and has not developed its own dilution standard. However, as 
noted above, Nasdaq has taken substantial steps in considering the NYSE 
dilution proposal by issuing a request for comment from its issuers and 
investors. Nasdaq received approximately 275 comment letters on the 
NYSE dilution proposal. The Commission expects to receive the Nasdaq 
analysis on these letters in the near future. In addition, in its 
response to the comment letters, the NYSE stated that it intends to 
coordinate with Nasdaq in developing a consensus on the issue.\48\ In 
addition, the NYSE has substantially shortened the duration of the 
extension request from three years to one year. Thus, the Commission 
believes that extending the pilot through September 30, 2001 is 
appropriate at this time to enable the markets to continue to work on 
developing a potential uniform standard.
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    \48\ See note 6 supra.
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    In the order approving the 1999 Pilot, the Commission noted that 
its standard for reviewing the NYSE's proposal is whether its 
consistent with the Act. The Commission must apply this same standard 
to the current 2000 Proposal. While the Commission still strongly urges 
the markets to address the issues in this area and review adoption of a 
dilution standard, we nonetheless continue to believe that the 2000 
Proposal is consistent with the Act because it represents a reasonable 
effort by the Exchange to clarify which Plans are ``broadly-based'' and 
therefore exempt from shareholder approval. Accordingly, the adoption 
of the proposed rule change on a pilot basis should protect investors 
in accordance with Section 6(b)(5) of the Act \49\ by helping ensure 
that only ``broadly based'' Plans will be exempted from shareholder 
approval.
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    \49\ 15 U.S.C. 78f(b)(5).
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    Further, as noted above, the NYSE has modified its definition of 
``broadly-based'' to require that awards granted to Plan participants 
must be considered on a rolling three year period to determine if in 
fact the awards are granted in a ``broadly-based'' fashion, i.e., a 
majority of shares must be awarded to non-officer and director Plan 
participants. The Commission notes that, in approving the 1999 Pilot, 
it received numerous comments about a loop-hole in the definition of 
``broadly-based'' Plans because the definition only required actual 
grants to be awarded to non-officers and directors during the first 
three years of the Plan. The Commission believes that the modification 
of the rolling three-year period shall strengthen the definition and 
should help to ensure that Plans that are established by NYSE-listed 
companies are actually implemented in ``broadly-based'' fashion. 
Accordingly, the new rolling three-year definition should address the 
previous concerns by preventing NYSE-listed companies from establishing 
Plans and only implementing them in a ``broadly-based'' fashion during 
the first three years of the Plan. This modification should further 
protect the interests of investors by ensuring that only truly 
``broadly-based'' Plan are exempt from shareholder approval 
requirements consistent with Section 6(b)(5) of the Act.\50\
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    \50\ 15 U.S.C. 78f(b)(5).
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    The Commission has decided to approve the proposed rule change on a 
pilot basis to permit the markets to continue their consideration of a 
dilution standard. The Commission notes that the majority of commenters 
that opposed the 2000 Proposal were opposed to the three-year 
extension. In addition, two members of the Task Force, while 
questioning the length of time requested, believed that some extension 
of the pilot was justified.\51\ In response, the NYSE shortened its 
extension request to one year. In the NYSE Letter, the Exchange 
reiterated its commitment to continue working with its constituents, 
the Commission, and other markets to achieve a consensus solution that 
adequately addresses the needs of all involved. Further, Nasdaq 
recently displayed its willingness to consider the issues regarding 
shareholder approval standards for Plans. Therefore, the Commission 
believes that it is appropriate to approve the NYSE proposal on a pilot 
basis until September 30, 2001 to enable the markets to continue 
working on a solution that balances the needs of investors with the 
needs of listed companies.
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    \51\ See letters from TIAA-CREF, which stated ``we believe that 
the issues are capable of a comprehensive resolution within one year 
based on the recommended standards already conditionally approved by 
the NYSE * * *''; and Gibson, Dunn & Crutcher, which stated 
``[w]hile the duration of the extension can legitimately be the 
subject of discussion, the justification for an extension cannot be 
seriously questioned.''
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the amended proposed rule change (SR-NYSE-00-32) is 
approved on a pilot basis until September 30, 2001.
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    \52\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-8505 Filed 4-5-01; 8:45 am]
BILLING CODE 8010-01-M