[Federal Register Volume 67, Number 198 (Friday, October 11, 2002)]
[Notices]
[Pages 63486-63489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26037]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46620; File No. SR-NYSE-2002-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Shareholder 
Approval of Equity Compensation Plans and the Voting of Proxies

October 8, 2002.
    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 October 7, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    On August 16, 2002, the NYSE filed with the Commission amendments 
to its Listed Company Manual to implement significant changes to its 
listing standards aimed at helping to restore investor confidence by 
empowering and ensuring the independence of directors and strengthening 
corporate governance practices (``SR-NYSE-2002-33'' or the ``Corporate 
Governance Proposals'').\3\ The Exchange represents that this filing 
excerpts certain proposed rule changes from the Corporate Governance 
Proposals relating to shareholder approval of equity-compensation plans 
and the voting of proxies, in compliance with a request from the 
Commission staff to address these issues separately from the remainder 
of the Corporate Governance Proposals.
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    \3\ See File No. SR-NYSE-2002-33 (August 16, 2002).
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    The text of the proposed rule change is available at the Office of 
the Secretary, NYSE, at the Commission, and is also incorporated into 
the language of Item II, Section A below.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The NYSE states that it has long pioneered advances in corporate 
governance. The NYSE represents that it has required companies to 
comply with listing standards for nearly 150 years, and has 
periodically amended and supplemented those standards when the 
evolution of our capital markets has demanded enhanced governance 
standards or disclosure. On February 13, 2002, SEC Chairman Harvey Pitt 
asked the Exchange to review its corporate governance listing 
standards. In conjunction with that request, the NYSE appointed a 
Corporate Accountability and Listing Standards Committee (the 
``Committee'') to review the NYSE's current listing standards, along 
with recent proposals for reform, with the goal of enhancing the 
accountability, integrity and transparency of the Exchange's listed 
companies. On August 16, 2002, the NYSE filed the Corporate Governance 
Proposals with the Commission, proposing rule changes to its corporate 
governance standards which reflect the findings of the Committee and 
which are designed to further the ability of honest and well-
intentioned directors, officers and employees to perform their 
functions effectively. The proposals for new corporate governance 
listing standards for companies listed on the Exchange are proposed to 
be codified in a new Section 303A of the Exchange's Listed Company 
Manual.\4\
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    \4\ In its Report to the NYSE Board, the Committee set forth 
basic principles followed in many cases by explanation and 
clarification. The NYSE is adopting the recommendations as standards 
in substantially the form they were made by the Committee and 
adopted by the NYSE Board. Accordingly, the format used will state a 
basic principle, with the additional explanation and clarifications 
included as ``commentary.''
    While many of the requirements set forth in this new rule are 
relatively specific, the Exchange is articulating a philosophy and 
approach to corporate governance that companies are expected to 
carry out as they apply the requirements to the specific facts and 
circumstances that they confront from time to time. Companies and 
their boards are expected to apply the requirements carefully and in 
good faith, making reasonable interpretations as necessary, and 
disclosing the interpretations that they make.
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    Subsequent to the filing of the Corporate Governance Proposals, the 
Commission staff requested that the NYSE file proposed Section 303A(8) 
(relating to shareholder approval of equity-compensation plans) and 
proposed NYSE Rule 452 (which prohibits member organizations from 
giving a proxy to vote on equity-compensation plans absent specific 
instructions from a beneficial holder) separately from its remaining 
proposals to expedite review and processing of these portions of the 
Corporate Governance Proposals. The proposed rule change filed herewith 
amends proposed Section 303A(8) as originally filed to clarify its 
meaning in several respects,\5\ and also proposes to make conforming 
changes to current Sections 303.00 and 312.03 of the Listed Company 
Manual and NYSE Rule 452.
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    \5\ Section 303A(11) of the Corporate Governance Proposals 
clarifies that the NYSE will continue its practice of accommodating 
the home country practices of our listed foreign private issuers 
with respect to the proposed corporate governance standards. In 
light thereof, the NYSE will not require foreign private issuers to 
comply with Section 303A(8) as proposed herein, assuming that they 
have provided to the Exchange the home country practice 
certification referred to in Section 303.00 of the Listed Company 
Manual.
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    As amended, rule language of proposed Section 303A(8) of the 
Exchange's Listed Company Manual is as follows:


[[Page 63487]]


    8. To increase shareholder control over equity-compensation 
plans, shareholders must be given the opportunity to vote on all 
equity-compensation plans, except inducement awards, plans relating 
to mergers or acquisitions, and tax qualified and parallel 
nonqualified plans.

Commentary: Equity-compensation plans \6\ can help align shareholder 
and management interests, and equity-based awards have become very 
important components of employee compensation. In order to provide 
checks and balances on the process of earmarking shares to be used for 
equity-based awards, and to provide shareholders a voice regarding the 
resulting dilution, the Exchange requires that all equity-compensation 
plans, and any material revisions to the terms of such plans, be 
subject to stockholder approval.\7\
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    \6\ For these purposes, and ``equity compensation plan'' would 
not include any plan that is made available to shareholders 
generally (such as typical dividend reinvestment plan). In addition, 
an ``equity compensation plan'' would not include a plan that merely 
provides a convenient way (for example, through payroll deductions) 
for employees, directors or other service providers to buy shares on 
the open market or from the issuer, even if the brokerage and other 
costs of the plan are subsidized. However, if employees, directors 
or service providers pay less than fair market value for shares 
under the plan, and the plan is not made available to shareholders 
generally, the plan would be considered to be an ``equity 
compensation plan'' for these purposes.
    \7\ For the sake of clarity, the Exchange notes that its 
traditional ``treasury stock exception'' will no longer be available 
with respect to this requirement.
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    For these purposes, a ``material revision'' would include, but not 
be limited to, a revision that: materially increases the number of 
shares available under the plan (other than an increase solely to 
reflect a reorganization, stock split, merger, spinoff or similar 
transaction); \8\ changes the types of awards available under the plan; 
materially expands the class of persons eligible to receive awards 
under or otherwise participate in the plan; materially extends the term 
of the plan; or materially changes the method of determining the strike 
price of options under the plan.\9\ In addition, if a plan contains a 
provision that prohibits repricing of options, any revision that 
deletes or limits the scope of such a provision will be considered a 
material revision for purposes of this rule. If a plan does not contain 
a provision that specifically permits repricing of options, the plan 
will be considered for this purpose as prohibiting repricing, and any 
actual repricing of options will be considered a material revision of 
the plan, even if the plan itself is not revised.\10\
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    \8\ For these purposes, an automatic increase in the shares 
available under a plan pursuant to a formula set forth in the plan 
(sometimes referred to as an ``evergreen'' formula) will not be 
considered a revision if the term of the plan is limited to a 
specified period of time not in excess of ten years. See also 
footnote 15 below with respect to plans with evergreen formulas that 
were adopted before the effective date of this rule.
    \9\ A change in the method of determining ``fair market value'' 
from the closing price on the date of grant to the average of the 
high and low price on the date of grant is an example of a formula 
change that the Exchange would not view as material.
    \10\ For these purposes, a ``repricing'' means any of the 
following (or any other action that has the same effect as any of 
the following): (1) Amending the terms of an option after it is 
granted to lower its strike price; (2) any other action that is 
treated as a repricing under generally accepted accounting 
principles; and (3) canceling an option at a time when its strike 
price is equal to or less than the fair market value of the 
underlying stock, in exchange for another option, restricted stock, 
or other equity, unless the cancellation and exchange occurs in 
connection with a merger, acquisition, spin-off or other similar 
corporate transaction. A cancellation and exchange described in 
clause (3) of the preceding sentence will be considered a repricing 
regardless of whether the option, restricted stock or other equity 
is delivered simultaneously with the cancellation, regardless of 
whether it is treated as a repricing under generally accepted 
accounting principles, and regardless of whether it is voluntary on 
the part of the option holder.
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    There are certain types of plans and awards, however, which are 
appropriately exempt from this shareholder approval requirement. 
Employment inducement awards--that is, grants of options or shares as a 
material inducement to such person's first becoming an employee of the 
issuer or any of its subsidiaries--will not be subject to shareholder 
approval under this rule. The Exchange recognizes the urgency that may 
attach to the granting of options and other equity-based compensation 
in the context of inducing a candidate to accept employment and the 
resulting impracticality of obtaining a shareholder vote in these 
situations.
    In the case of corporate acquisitions and mergers, two exceptions 
are appropriate. First, shareholder approval will not be required to 
convert, replace or adjust outstanding options or other equity 
compensation awards to reflect the transaction. Second, shares 
available under certain plans acquired in corporate acquisitions and 
mergers may be used for certain post-transaction grants without further 
shareholder approval. This exception applies to situations where the 
party which is not a listed company following the transaction has 
shares available for grant under pre-existing plans that were 
previously approved by shareholders. These shares may be used for post-
transaction grants of options and other equity awards by the listed 
company (after appropriate adjustment of the number of shares to 
reflect the transaction), either under the pre-existing plan or another 
plan, without further shareholder approval, so long as (1) the time 
during which those shares are available for grants is not extended 
beyond the period when they would have been available under the pre-
existing plan, absent the transaction, and (2) such options and other 
awards are not granted to individuals who were employed by the granting 
company at the time the merger or acquisition was consummated. The 
Exchange would view a plan adopted in contemplation of the merger or 
acquisition transaction as not pre-existing for purposes of this 
exception. The NYSE believes that this exception is appropriate because 
it believes that it will not result in any increase in the aggregate 
potential dilution of the combined enterprise.\11\
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    \11\ Note that any such shares reserved for listing in 
connection with the transaction would be counted by the Exchange in 
determining whether the transaction involved the issuance of 20% or 
more of the company's outstanding common stock and thus required 
stockholder approval under Listed Company Manual Section 312.03(c).
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    Because inducement awards and mergers or acquisitions are not 
routine occurrences, and are not likely to be abused, the Exchange 
considers these exceptions to be consistent with the fundamental policy 
involved in this standard.
    Similarly, any plan intended to meet the requirements of Section 
401(a) \12\ of the Internal Revenue Code (e.g., ESOPs), any parallel 
nonqualified plan, \13\ and any plan intended to meet the requirements 
of Section 423\14\ of the Internal Revenue Code is exempt from the 
shareholder approval requirement. Plans such as Section 401(a) plans 
and Section 423 plans are already regulated under the Internal Revenue 
Code and Treasury regulations. Section 423 plans, which are stock 
purchase plans under

[[Page 63488]]

which an employee can purchase no more than $25,000 worth of stock per 
year at a plan-specified discount capped at 15%, are also required 
under the Internal Revenue Code to receive shareholder approval. While 
Section 401(a) plans and their parallel nonqualified plans are not 
required to be approved by shareholders, the shares issued under these 
plans must be ``expensed'' (i.e., treated as a compensation expense on 
the income statement) by the company issuing the shares. Equity 
compensation plans that would qualify for the exception described in 
this paragraph but for features necessary to comply with foreign tax 
law in the non-U.S. jurisdiction in which the employees covered by the 
plan reside, are also exempt from shareholder approval under this 
section.
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    \12\ 26 U.S.C. 401(a) (1988).
    \13\ The term ``parallel nonqualified plan'' means a plan that 
is a ``pension plan'' within the meaning of the Employee Retirement 
Income Security Act (``ERISA''), 29 U.S.C. 1002 (1999), that is 
designed to work in parallel with a plan intended to be qualified 
under Internal Revenue Code Section 401(a), to provide benefits that 
exceed the limits set forth in Internal Revenue Code Section 402(g) 
(the section that limits an employee's annual pre-tax contributions 
to a 401(k) plan), Internal Revenue Code Section 401(a)(17) (the 
section that limits the amount of an employee's compensation that 
can be taken into account for plan purposes) and/or Internal Revenue 
Code Section 415 (the section that limits the contributions and 
benefits under qualified plans) and/or any successor or similar 
limitations that may hereafter be enacted. However, a plan will not 
be considered a parallel nonqualified plan unless (1) it covers all 
or substantially all employees of an employer who are participants 
in the related qualified plan whose annual compensation is in excess 
of the limit of Code Section 401(a)(17) (or any successor or similar 
limitations that may hereafter be enacted) and (2) its terms are 
substantially the same as the qualified plan that it parallels 
except for the elimination of the limitations described in the 
preceding sentence.
    \14\ 26 U.S.C. 423(1988).
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    In circumstances in which equity compensation plans and amendments 
thereto are not subject to shareholder approval, the plans and 
amendments still must be subject to the approval of the company's 
compensation committee or a majority of the company's independent 
directors.
    This rule will be applicable to a plan adopted before the effective 
date of this rule only upon any subsequent material revision of the 
plan.\15\
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    \15\ A plan adopted before the effective date of this rule that 
contains an evergreen formula rather than setting forth a specific 
number of shares available under the plan must be submitted to 
shareholders for approval before the next increase in shares 
pursuant to the evergreen formula that occurs on or after the 
effective date of this rule, unless the plan (including the 
evergreen formula) was approved by shareholders before the effective 
date of this rule. See also footnote 8 above.
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    In addition, the Exchange will preclude its member organizations 
from giving a proxy to vote on equity compensation plans unless the 
beneficial owner of the shares has given voting instructions. This will 
be codified in proposed changes to NYSE Rule 452.\16\
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    \16\ The NYSE will establish a working group to advise with 
respect to the need for, and design of, mechanisms to facilitate 
implementation of the proposal that brokers may not vote on equity 
compensation plans presented to shareholders without instructions 
from the beneficial owners. This will not delay the immediate 
effectiveness of the broker-may-not-vote proposal.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\17\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\18\ in particular, in that it is 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, in general, to 
protect investors and the public interest.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not impose 
any burden on competition that is not necessary or appropriate in the 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

Shareholder Vote on Equity Compensation Plans

    The Exchange represents that this recommendation received 
particular support from the institutional investor community. They 
urged the NYSE Board not to dilute either the shareholder vote 
requirement or the broker vote prohibition. However, numerous 
constituents expressed concerns about both recommendations.

A. Shareholder Approval

    The Exchange represents that more than half of the larger 
companies, financial institutions and associations that commented on 
this issue maintained that only plans that offer options to officers 
and/or directors should be subject to shareholder approval. Many 
companies argued that subjecting broad-based equity compensation plans 
to the shareholder approval requirement would lessen their ability to 
compensate rank-and-file employees with stock options, putting NYSE-
listed companies at a competitive disadvantage in the labor market. 
They urged that the board should be able to adopt stock option plans 
for non-executive employees without shareholder approval; some 
suggested instead a requirement that all plans be approved by an 
independent compensation committee.
    Some commentators advocated exceptions for inducement awards or new 
hire grants (citing competitive employment markets) and tax-qualified 
plan awards (citing the alternative regulatory framework provided by 
the tax code), subject perhaps to approval by the independent 
compensation committee. One company suggested that there should be an 
exemption for situations where full-value stock is used to deliver an 
award that would otherwise be paid in cash. Another company noted that 
some plans are part of collective bargaining arrangements and urged 
that these be excluded from the shareholder approval requirement. 
Another comment advocated excepting ``inducement awards'' made to any 
employee of a merger or acquisition target.
    In addition, there were a number of detailed questions regarding 
plans approved prior to effectiveness of the new rules, amendments to 
plans, and plans run by an acquired company.
    The Exchange responds that it has clarified that inducement awards 
acquired in certain mergers or acquisitions, tax qualified plans and 
parallel nonqualified plans would be exempt, but all other plans would 
require shareholder approval.

B. Elimination of Broker Voting

    The Exchange represents that the institutional investor community 
gave strong support to this proposal. Many large companies, however, 
strongly urged the NYSE to maintain its existing rules, fearing 
primarily the increased proxy costs and increased uncertainty that the 
proposed change would entail. Large and small companies alike cited 
quorum difficulties and solicitation expenses that result when brokers 
are not allowed to vote uninstructed shares after a 10-day period. One 
such commentator warned that because of retail investor confusion about 
voting mechanics, there is a risk that the elimination of the 
discretionary broker vote will disenfranchise investors if not 
accompanied by an aggressive and vigorous program to educate them about 
how to vote their shares. Many commentators also expressed concern that 
institutional shareholders may simply vote their shares in accordance 
with strict internal or third-party guidelines or policies, rather than 
giving each plan individual consideration. One organization suggested 
proportional or mirror voting by brokers of uninstructed shares.

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

    Within 35 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 such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 63489]]

IV. Solicitation of Comments

    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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NYSE. All submissions should refer to File No. SR-NYSE-2002-46 and 
should be submitted by November 1, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26037 Filed 10-10-02; 8:45 am]
BILLING CODE 8010-01-P