[Federal Register Volume 68, Number 128 (Thursday, July 3, 2003)]
[Notices]
[Pages 39995-40009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16883]



[[Page 39995]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48108; File Nos. SR-NYSE-2002-46 and SR-NASD-2002-140]


Self-Regulatory Organizations; New York Stock Exchange, Inc. and 
National Association of Securities Dealers, Inc.; Order Approving NYSE 
and Nasdaq Proposed Rule Changes and Nasdaq Amendment No. 1 and Notice 
of Filing and Order Granting Accelerated Approval to NYSE Amendments 
No. 1 and 2 and Nasdaq Amendments No. 2 and 3 Thereto Relating to 
Equity Compensation Plans

June 30, 2003.

I. Introduction

    On October 7, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal relating to shareholder approval of equity-
compensation plans and the voting of proxies. On October 11, 2002, the 
NYSE proposal was published for public comment in the Federal 
Register.\3\ On November 6, 2002, the NYSE filed NYSE Amendment No. 1 
to the proposed rule change.\4\ The Commission received a total of 30 
comment letters on the NYSE proposal.\5\ On June 20, 2003, the NYSE 
filed NYSE Amendment No. 2 to its proposal.\6\
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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. 46620 (October 8, 
2002), 67 FR 63486 (``Notice of the NYSE Proposal''). The Commission 
also published a correction to the Notice of the NYSE Proposal to 
indicate that the word ``less'' in footnote 10 should be changed to 
``greater.'' See Securities Exchange Act Release No. 44620A (October 
21, 2002), 67 FR 65617 (October 25, 2002).
    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated November 5, 2002 (``NYSE Amendment 
No. 1''). In NYSE Amendment No. 1, the NYSE made technical 
corrections to its proposed rule language.
    \5\ See letters to Jonathan G. Katz, Secretary, Commission, from 
Deborah Ackerman, Vice President and General Counsel, Southwest 
Airlines Co., dated October 15, 2002 (``Southwest Airlines 
Letter''); Peter C. Clapman, Senior Vice President and Chief 
Counsel, Corporate Governance, Teacher Insurance and Annuity 
Association of America College Retirement And Equities Fund (``TIAA 
CREF''), dated October 24, 2002 (``TIAA CREF Letter''); R. Thomas 
Buffenbarger, International President, International Association of 
Machinists and Aerospace Workers (``IAM''), dated October 22, 2002 
(``IAM Letter''); Sarah A.B. Teslik, Executive Director, Council of 
Institutional Investors (``CII''), dated October 24, 2002 (``CII 
Letter''); Linda S. Selbach, Global Proxy Manager, Barclays Global 
Investors, dated October 24, 2002 (``Barclays Letter''); Henry I. 
Morgenbesser et al., Allen & Overy et al., dated October 31, 2002 
(``Allen & Overy Letter''); Keith Johnson, Chief Legal Counsel, 
State of Wisconsin Investment Board (``SWIB''), dated October 31, 
2002 (``SWIB Letter''); Peter A. Irwin, Vice President, Legal 
Services, Consolidated Edison Company of New York, Inc. 
(``conEdison''), dated October 31, 2002 (``conEdison Letter''); John 
P. Clarson, Assistant Corporate Secretary and Senior Corporate 
Attorney, Law Department, RadioShack Corporation, dated October 30, 
2002 (``RadioShack Letter''); Paul Lee, Shareholder Engagement 
Manager, Hermes Investment Management Limited, dated October 29, 
2002 (``Hermes Letter''); John Endean, President, American Business 
Conference (``ABC''), dated October 31, 2002 (``ABC Letter''); James 
P. Hoffa, General President, International Brotherhood of Teamsters 
(``IBT''), dated November 1, 2002 (``IBT Letter''); Dorothy M. 
Donohue, Associate Counsel, Investment Company Institute (``ICI''), 
dated November 1, 2002 (``ICI Letter''); Damon A. Silvers, Associate 
General Council, American Federation of Labor and Congress of 
Industrial Organizations (``AFL-CIO''), dated November 1, 2002 
(``AFL-CIO Letter''); Nancy Straus Sundheim, Senior Vice President 
and General Counsel, Unisys Corporation, dated November 1, 2002 
(``Unisys Letter''); Michael R. Fanning, Chief Executive Officer, 
Central Pension Fund of the International Union of Operating 
Engineers and Participating Employers (``CPF''), dated October 29, 
2002 (``CPF Letter''); Ted White, Director, Corporate Governance, 
California Public Employees' Retirement System (``CalPERS''), dated 
October 31, 2002 (``CalPERS Letter''); Sheila W. Beckett, Employees 
Retirement System of Texas, dated October 30, 2002 (``Employee 
Retirement System of Texas Letter''); Herbert L. Dryer, Executive 
Director, State Teachers Retirement System of Ohio (``STRS Ohio''), 
dated October 30, 2002 (STRS Ohio Letter''); William G. Clark, 
Deputy Director, New Jersey Division of Investment (``NJ 
Division''), Department of Treasury, dated October 31, 2002 (``NJ 
Division Letter''); James E. Heard, Chief Executive Officer and 
Patrick McGurn, Vice President and Special Counsel, Institutional 
Shareholder Services (``ISS''), dated October 31, 2002 (``ISS I 
Letter''); Sullivan & Cromwell, dated November 1, 2002 (``Sullivan & 
Cromwell Letter''); Mark Heesen, President, National Venture Capital 
Association (``NVCA''), dated November 1, 2002 (``NVCA I Letter''); 
Marsha Richter, Chief Executive Officer, Los Angeles County 
Employees Retirement Association (``LACERA''), dated November 7, 
2002 (``LACERA Letter''); Stanley Keller, Chair, Committee on 
Federal Regulation of Securities, American Bar Association 
(``ABA''), Section of Business Law, dated November 11, 2002 (``ABA 
Letter''); Kay R. H. Evans, Executive Director, Maine State 
Retirement System (``MSRS''), dated October 28, 2002 (``MSRS 
Letter''); Jerome Pella, dated October 30, 2002 (``Pella Letter''); 
Michael Ryan, Executive Vice President and General Counsel, American 
Stock Exchange LLC (``Amex''), dated December 19, 2003 (``Amex I 
Letter''); Claudia Crowley, Vice President, Listing Qualifications, 
Amex, dated February 19, 2003 (``Amex II Letter''); and William and 
Margaret Gillespie, dated May 17, 2003 (Gillespie Letter'').
    \6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
June 20, 2003 (``NYSE Amendment No. 2''). In NYSE Amendment No. 2, 
the NYSE proposed changes to the NYSE proposal based on discussions 
with Commission staff and in response to the comment letters. As 
discussed below, NYSE Amendment No. 2, among other things, did the 
following: (1) Clarified the terms ``equity compensation plan,'' 
``material revision,'' and ``repricing'; (2) defined ``evergreen,'' 
``formula'' and ``discretionary'' plans; and (3) provided new 
transition rules. For a more detailed description of NYSE Amendment 
No. 2, see Section II.A., infra.
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    On October 9, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq'') filed a similar proposal relating to shareholder approval 
for stock option plans and other equity compensation arrangements. On 
October 10, 2002, Nasdaq filed Nasdaq Amendment No. 1 to the proposed 
rule change.\7\ On October 17, 2002, the Nasdaq proposal, as amended, 
was published for comment in the Federal Register.\8\ The Commission 
received a total of 18 comment letters on the Nasdaq proposal.\9\ On 
March 24, 2003, Nasdaq filed Nasdaq Amendment No. 2 to the proposed 
rule change.\10\ On June 23, 2003, Nasdaq filed Nasdaq Amendment No. 3 
to its proposal.\11\ This order

[[Page 39996]]

approves the NYSE proposal, as amended by NYSE Amendments No. 1 and 2, 
and the Nasdaq proposal, as amended by Nasdaq Amendments No. 1, 2, and 
3. The Commission has found good cause to grant accelerated approval to 
NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3, as 
discussed below, and is soliciting comments from interested persons on 
these amendments.
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    \7\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated October 10, 2002 (``Nasdaq Amendment No. 1''). In Amendment 
No. 1, Nasdaq did the following: (1) Made technical corrections to 
its proposed rule language; (2) clarified the exceptions to 
shareholder approval for tax qualified, non-discriminatory employee 
benefit plans, parallel nonqualified plans, and plans relating to an 
acquisition or merger; and (3) clarified in the purpose section of 
its filing that it was proposing to make conforming changes to NASD 
Rules 4310(c)(17)(A) and 4320(e)(15)(A).
    \8\ See Securities Exchange Act Release No. 46649 (October 11, 
2002), 67 FR 64173 (``Notice of the Nasdaq Proposal''). Nasdaq 
represents that it made a technical error in its reprinting of the 
original rule text of NASD Rule 4320(e)(15). Nasdaq is not proposing 
to change this language. Telephone conversation between Sara Nelson 
Bloom, Associate General Counsel, Nasdaq, and Sapna C. Patel, 
Attorney, Division, Commission, on June 30, 2003.
    \9\ See letters to Jonathan G. Katz, Secretary, Commission, from 
James E. Heard, Chief Executive Officer and Patrick McGurn, Vice 
President and Special Counsel, ISS, dated November 6, 2002 (``ISS II 
Letter''); and Mark Heesen, President, NVCA, dated November 1, 2002 
(``NVCA II Letter''). The Commission notes that 16 of the 18 comment 
letters received on the Nasdaq proposal are letters commenting 
jointly on the NYSE and Nasdaq proposals. See TIAA CREF Letter; CII 
Letter; Barclays Letter; Allen & Overy Letter; SWIB Letter; MSRS 
Letter; Hermes Letter; ICI Letter; AFL-CIO Letter; CPA Letter; 
CalPERS Letter; STRS Letter; NJ Division Letter; LACERA Letter; ABA 
Letter; and Pella Letter.
    \10\ See letter from Sara Nelson Bloom, Associate General 
Counsel, Nasdaq, to Katherine A. England, Assistant Director, 
Division, Commission, dated March 24, 2003 (``Nasdaq Amendment No. 
2''). In Nasdaq Amendment No. 2, Nasdaq clarified the term 
``material amendment'' to a stock option plan by providing a non-
exclusive list of what Nasdaq would consider to be ``material,'' and 
proposed an exception to shareholder approval for plans that provide 
a way to purchase shares on the open market or from the issuer at 
fair market value. Nasdaq replaced Nasdaq Amendment No. 2 in its 
entirety with Nasdaq Amendment No. 3. As noted below, some of the 
proposed changes in Nasdaq Amendment No. 2 were incorporated into 
Nasdaq Amendment No. 3. See infra note 11 and Section II.B.
    \11\ See letter from Sara Nelson Bloom, Associate General 
Counsel, Nasdaq, to Katherine A. England, Assistant Director, 
Division, Commission, dated June 23, 2003 (``Nasdaq Amendment No. 
3''). In Nasdaq Amendment No. 3, Nasdaq did the following: (1) 
Replaced Nasdaq Amendment No. 2 in its entirety; (2) stated that on 
November 14, 2002, the Nasdaq Board of Directors approved, and that 
on December 9, 2002, the Board of Governors of the NASD reviewed, 
all remaining aspects of the Nasdaq proposal; and (3) made 
clarifying and conforming changes to the Nasdaq proposal in response 
to discussions with Commission staff and in response to the comment 
letters. As discussed below, Nasdaq Amendment No. 3, among other 
things, also clarified the term ``material amendment,'' proposed an 
exception to shareholder approval for plans that provide a way to 
purchase shares on the open market or from the issuer at fair market 
value, and discussed evergreen plans and repricings. For a more 
detailed description of Nasdaq Amendment No. 3, see Section II.B., 
infra.
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II. Description of the NYSE and Nasdaq Proposals

A. NYSE Proposal

    The NYSE proposes to adopt new section 303A(8) of the NYSE's Listed 
Company Manual, which would require shareholder approval of all equity-
compensation plans and material revisions to such plans, subject to 
limited exemptions.\12\ This new rule, when approved by the Commission, 
will replace the NYSE's current pilot program relating to amendments to 
Sections 312.01, 312.03 and 312.04 of the NYSE's Listed Company Manual 
with respect to the definition of a ``broadly-based'' stock option 
plan.\13\
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    \12\ The NYSE proposal is part of the recommendations made by 
the NYSE's Corporate Accountability and Listing Standards Committee 
(``Committee''), a committee appointed by NYSE to review its 
corporate governance listing standards. The rest of the Committee's 
recommendations are in a separate rule filing, File No. SR-NYSE-
2002-33. See Securities Exchange Act Release No. 47672, 68 FR 19051 
(April 17, 2003) (published notice of SR-NYSE-2002-33).
    \13\ See Securities Exchange Act Release No. 41479 (June 4, 
1999), 64 FR 31667 (June 11, 1999) (notice of filing and order 
granting accelerated approval, on a pilot basis, to File No. SR-
NYSE-98-32). The Pilot was extended several times, most recently 
until June 30, 2003. See Securities Exchange Act Release No. 47409 
(February 26, 2003), 68 FR 10560 (March 5, 2003) (File No. SR-NYSE-
2003-04).
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    Under the NYSE proposal, as amended, an equity compensation plan is 
defined as a plan or other arrangement that provides for the delivery 
of equity securities (either newly issued or treasury shares) of the 
listed company to any employee, director or other service provider as 
compensation for services, including a compensatory grant of options or 
other equity securities that is not made under a plan. The NYSE has 
also proposed changes to clarify certain plans that would not be 
considered equity compensation plans under its definition.\14\ In 
addition, the NYSE proposal provides for certain types of grants that 
are exempted from shareholder approval. These limited exemptions 
include: (1) Inducement awards to person's first becoming an employee 
of the issuer or any of its subsidiaries; (2) mergers and acquisitions, 
when conversions, replacements or adjustments of outstanding options or 
other equity compensation awards are necessary to reflect the 
transaction, and when shares available under certain plans acquired in 
corporate acquisitions and mergers may be used for certain post-
transaction grants without further shareholder approval; and (3) plans 
intended to meet the requirements of section 401(a) of the Internal 
Revenue Code \15\ (e.g., ESOPs), plans intended to meet the 
requirements of section 423 of the Internal Revenue Code,\16\ and 
parallel excess plans. The NYSE also proposes that, in circumstances in 
which equity compensation plans and amendments to plans 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. Finally, in its proposal, the 
NYSE provides a non-exclusive list of ``material revisions'' to a plan 
that would require shareholder approval, and also clarifies when plans 
containing an ``evergreen formula'' and when the ``repricings'' of 
options in plans would require shareholder approval.\17\
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    \14\ See NYSE Amendment No. 2, supra note 6. See also Section 
II.A.1. and 2., infra.
    \15\ 26 U.S.C. 401(a).
    \16\ 26 U.S.C. 423.
    \17\ See NYSE Amendment No. 2, supra note 6. See also Section 
II.A.1. and 2., infra.
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    The NYSE also proposes to amend NYSE Rule 452 to prohibit member 
organizations from voting on equity compensation plans unless the 
beneficial owner of the shares has given voting instructions. In 
addition, the NYSE proposes to make conforming changes to current 
Sections 303.00, 312.03, 312.04, and 402.08 of the NYSE's Listed 
Company Manual.
    NYSE Amendment No. 2 to the NYSE filing proposes a number of 
changes to the rules as they were published in the Notice of the NYSE 
Proposal. According to the NYSE, these changes were made in response to 
the comment letters and discussions with Commission staff. As a general 
matter, the changes provide additional guidance as to the scope of the 
NYSE's proposed rule changes, including the type of material changes to 
a plan that must be submitted for shareholder approval. The NYSE also 
proposes to include a new section entitled ``Transition Rules'' to 
clarify when shareholder approval will be required for plans adopted 
before the effective date of the proposed amendments. The basic 
structure of the rule as proposed has remained the same as originally 
submitted. While the Notice of the NYSE Proposal reflects the original 
format of the recommendations made by the Committee, stating a basic 
principle and including additional explanation and commentary, the NYSE 
states that it intended, through the proposed amendments to the rule 
text of section 303A(8) in NYSE Amendment No. 2 to write the rule 
language in a more ``plain-English'' format to enhance understanding of 
the rule.
1. Significant Changes From the Original Filing of the NYSE Proposal
    The NYSE proposes to clarify the description of plans that are not 
equity compensation plans to expressly exclude plans that do not 
provide for delivery of equity securities of the issuer (e.g., plans 
that pay in cash), and deferred compensation plans under which 
employees pay full current market value for deferred shares.
    The NYSE proposes to modify the language of the rule to clarify 
that shareholder approval is required for pre-existing plans that were 
not approved by shareholders and that have neither an evergreen formula 
nor a specific number of shares available under the plan. However, the 
NYSE proposes to provide a transition period for requiring shareholder 
approval for such plans.\18\ In addition, the NYSE has specified that, 
during the period prior to approval, the plan may be utilized, but only 
in a manner consistent with past practice.
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    \18\ See Section II.A.2., infra.
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    In the section entitled ``Material Revisions,'' the NYSE proposes 
to more specifically define the concept of ``evergreen'' plans (i.e., 
that contain a formula for automatic increases in the shares available) 
or ``formula'' plans \19\ (i.e., plans that provide for automatic 
grants pursuant to a formula), and proposes to introduce the concept of 
``discretionary plans.'' Generally, a

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discretionary plan is a plan that contains no limit on the number of 
shares available and is not a formula plan. The NYSE proposes that each 
grant under such a discretionary plan will require shareholder approval 
regardless of whether the plan has a term of not more than 10 years. In 
addition, the NYSE represents that the proposed language under 
``Transition Rules'' relating to evergreen plans clarifies that an 
evergreen plan that was approved by shareholders but that does not have 
a ten-year term must be: (1) Approved by shareholders before any shares 
that become available as a result of a formulaic increase are utilized, 
or (2) amended to include a term of no more than ten years from the 
date the plan was adopted or last approved by shareholders. If the plan 
were amended to include such term, shareholder approval would not be 
required. No action would be required, however, if a plan were frozen 
at the level of shares available at the time the rule becomes 
effective. The enumerated list of ``Material Revisions'' has also been 
revised to change the term ``changes the types of awards'' to 
``expansion of the types of awards.'' The NYSE represents that no 
further substantive amendment to the definition of ``Material 
Revisions'' have been made.
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    \19\ Under the NYSE's rules, an increase or grant pursuant to an 
evergreen or formula plans would require shareholder approval for 
each increase or grant unless the plan has a term of not more than 
10 years.
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    The NYSE proposal has been amended to clarify that repricings that 
have commenced prior to the date of effectiveness of the proposal 
(i.e., exchange offers to optionees) will not be subject to shareholder 
approval (assuming that such repricing did not require shareholder 
approval under existing NYSE rules).
    The NYSE proposal has also been amended to clarify that inducement 
awards are available for rehires following a bona fide period of 
employment interruption. The NYSE further proposes to clarify that 
inducement awards include grants to new employees in connection with a 
merger or acquisition. In addition, the NYSE proposes to include a 
requirement that listed companies must provide prompt public disclosure 
following the grant of any inducement award in reliance on the 
exemption.\20\
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    \20\ See Section II.A.2., infra.
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    With respect to the proposed exception for parallel nonqualified 
plans, the NYSE proposes to redesignate the exception as applying to 
``parallel excess plans'' and proposes to add an additional condition 
relating to employer equity contributions that a plan must satisfy in 
order to be deemed a parallel excess plan.
    The NYSE proposes to add a requirement that an issuer must notify 
the NYSE in writing when it uses any of the exemptions from the 
shareholder approval requirements.
    The NYSE has not made any changes to the proposed amendments to 
NYSE Rule 452. The NYSE proposes, however, a transition period that 
will make the amended rule applicable only to shareholder meetings that 
occur on or after the 90th day following the date of the SEC order 
approving the amended rule. In addition, the NYSE proposes to make a 
conforming change to NYSE Rule 452 subsection .11(9) to reflect the 
amendments that are being proposed to NYSE Rule 452 subsection .11(12), 
and proposes to reflect the proposed amendments to NYSE Rule 452 in 
Section 402.08 of the NYSE's Listed Company Manual (``Giving a Proxy to 
Vote Stock''), which restates NYSE Rule 452 in part.
2. Amended New Section 303A(8) of the NYSE's Listed Company Manual
    As amended by NYSE Amendments No. 1 and 2, proposed new section 
303A(8) of the NYSE's Listed Company Manual will read as follows:
    8. Shareholders must be given the opportunity to vote on all 
equity-compensation plans and material revisions thereto, with limited 
exemptions explained below.
    Equity-compensation plans can help align shareholder and management 
interests, and equity-based awards are often very important components 
of employee compensation. To provide checks and balances on the 
potential dilution resulting from the process of earmarking shares to 
be used for equity-based awards, the Exchange requires that all equity-
compensation plans, and any material revisions to the terms of such 
plans, be subject to shareholder approval, with the limited exemptions 
explained below.

Definition of Equity-Compensation Plan

    An ``equity-compensation plan'' is a plan or other arrangement that 
provides for the delivery of equity securities (either newly issued or 
treasury shares) of the listed company to any employee, director or 
other service provider as compensation for services. Even a 
compensatory grant of options or other equity securities that is not 
made under a plan is, nonetheless, an ``equity-compensation plan'' for 
these purposes.
    However, the following are not ``equity-compensation plans'' even 
if the brokerage and other costs of the plan are paid for by the listed 
company:
    [sbull] Plans that are made available to shareholders generally, 
such as a typical dividend reinvestment plan.
    [sbull] Plans that merely allow employees, directors or other 
service providers to elect to buy shares on the open market or from the 
listed company for their current fair market value, regardless of 
whether:

--The shares are delivered immediately or on a deferred basis; or
--The payments for the shares are made directly or by giving up 
compensation that is otherwise due (for example, through payroll 
deductions).

Material Revisions

    A ``material revision'' of an equity-compensation plan includes 
(but is not limited to), the following:
    [sbull] A material increase in the number of shares available under 
the plan (other than an increase solely to reflect a reorganization, 
stock split, merger, spinoff or similar transaction).

--If a plan contains a formula for automatic increases in the shares 
available (sometimes called an ``evergreen formula'') or for automatic 
grants pursuant to a formula, each such increase or grant will be 
considered a revision requiring shareholder approval unless the plan 
has a term of not more than ten years.

    This type of plan (regardless of its term) is referred to below 
as a ``formula plan.'' Examples of automatic grants pursuant to a 
formula are (1) annual grants to directors of restricted stock 
having a certain dollar value, and (2) ``matching contributions,'' 
whereby stock is credited to a participant's account based upon the 
amount of compensation the participant elects to defer.

--If a plan contains no limit on the number of shares available and 
is not a formula plan, then each grant under the plan will require 
separate shareholder approval regardless of whether the plan has a 
term of not more than ten years.

    This type of plan is referred to below as a ``discretionary 
plan.'' A requirement that grants be made out of treasury shares or 
repurchased shares will not, in itself, be considered a limit or 
pre-established formula so as to prevent a plan from being 
considered a discretionary plan.

    [sbull] An expansion of the types of awards available under the 
plan.
    [sbull] A material expansion of the class of employees, directors 
or other service providers eligible to participate in the plan.
    [sbull] A material extension of the term of the plan.
    [sbull] A material change to the method of determining the strike 
price of options under the plan.

--A change in the method of determining ``fair market value'' from

[[Page 39998]]

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 change that the 
Exchange would not view as material.

    [sbull] The deletion or limitation of any provision prohibiting 
repricing of options. See the next section for details.

Note that an amendment will not be considered a ``material revision'' 
if it curtails rather than expands the scope of the plan in question.

Repricings

    A plan that does not contain a provision that specifically permits 
repricing of options will be considered for purposes of this listing 
standard as prohibiting repricing. Accordingly any actual repricing of 
options will be considered a material revision of a plan even if the 
plan itself is not revised. This consideration will not apply to a 
repricing through an exchange offer that commenced before the date this 
listing standard became effective.
    ``Repricing'' means any of the following or any other action that 
has the same effect:
    [sbull] Lowering the strike price of an option after it is granted.
    [sbull] Any other action that is treated as a repricing under 
generally accepted accounting principles.
    [sbull] Canceling an option at a time when its strike price exceeds 
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.

Exemptions

    This listing standard does not require shareholder approval of 
employment inducement awards, certain grants, plans and amendments in 
the context of mergers and acquisitions, and certain specific types of 
plans, all as described below. However, these exempt grants, plans and 
amendments may be made only with the approval of the company's 
independent compensation committee or the approval of a majority of the 
company's independent directors. Companies must also notify the 
Exchange in writing when they use one of these exemptions.

Employment Inducement Awards

    An employment inducement award is a grant of options or other 
equity-based compensation as a material inducement to a person or 
persons being hired by the listed company or any of its subsidiaries, 
or being rehired following a bona fide period of interruption of 
employment. Inducement awards include grants to new employees in 
connection with a merger or acquisition. Promptly following a grant of 
any inducement award in reliance on this exemption, the listed company 
must disclose in a press release the material terms of the award, 
including the recipient(s) of the award and the number of shares 
involved.

Mergers and Acquisitions

    Two exemptions apply in the context of corporate acquisitions and 
mergers.
    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 exemption applies to 
situations where a party that is not a listed company following the 
transaction has shares available for grant under pre-existing plans 
that were previously approved by shareholders. A plan adopted in 
contemplation of the merger or acquisition transaction would not be 
considered ``pre-existing'' for purposes of this exemption.
    Shares available under such a pre-existing plan may be used for 
post-transaction grants of options and other awards with respect to 
equity of the entity that is the listed company after the transaction, 
either under the pre-existing plan or another plan, without further 
shareholder approval, so long as:
    [sbull] The number of shares available for grants is appropriately 
adjusted to reflect the transaction;
    [sbull] The time during which those shares are available is not 
extended beyond the period when they would have been available under 
the pre-existing plan, absent the transaction; and
    [sbull] The options and other awards are not granted to individuals 
who were employed, immediately before the transaction, by the post-
transaction listed company or entities that were its subsidiaries 
immediately before the transaction.
    Any shares reserved for listing in connection with a transaction 
pursuant to either of these exemptions 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 
shareholder approval under Listed Company Manual Section 312.03(c).
    These merger-related exemptions will not result in any increase in 
the aggregate potential dilution of the combined enterprise. Further, 
mergers or acquisitions are not routine occurrences, and are not likely 
to be abused. Therefore, the Exchange considers both of these 
exemptions to be consistent with the fundamental policy involved in 
this standard.

Qualified Plans, Parallel Excess Plans and Section 423 Plans

    The following types of plans (and material revisions thereto) are 
exempt from the shareholder approval requirement:
    [sbull] Plans intended to meet the requirements of Section 401(a) 
of the Internal Revenue Code \21\ (e.g., ESOPs);
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    \21\ 26 U.S.C. 401(a) (1988).
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    [sbull] Plans intended to meet the requirements of Section 423 of 
the Internal Revenue Code;\22\ and
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    \22\ 26 U.S.C. 423 (1988).
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    [sbull] ``Parallel excess plans'' as defined below.
    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 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 by the Internal 
Revenue Code to receive shareholder approval. While section 401(a) 
plans and parallel excess plans are not required to be approved by 
shareholders, U.S. GAAP requires that the shares issued under these 
plans be ``expensed'' (i.e., treated as a compensation expense on the 
income statement) by the company issuing the shares.
    An equity-compensation plan that provides non-U.S. employees with 
substantially the same benefits as a comparable Section 401(a) plan, 
Section 423 plan or parallel excess plan that the listed company 
provides to its U.S. employees, but for features necessary to comply 
with applicable foreign tax law, are also exempt from shareholder 
approval under this section.
    The term ``parallel excess plan'' means a plan that is a ``pension 
plan'' within the meaning of the Employee Retirement Income Security 
Act (``ERISA'') \23\ 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

[[Page 39999]]

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. 
A plan will not be considered a parallel excess 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 limits that may hereafter be enacted); (2) its terms are 
substantially the same as the qualified plan that it parallels except 
for the elimination of the limits described in the preceding sentence 
and the limitation described in clause (3); and (3) no participant 
receives employer equity contributions under the plan in excess of 25% 
of the participant's cash compensation.
---------------------------------------------------------------------------

    \23\ 29 U.S.C. 1002 (1999).
---------------------------------------------------------------------------

Transition Rules

    Except as provided below, a plan that was adopted before the date 
of the Securities and Exchange Commission order approving this listing 
standard will not be subject to shareholder approval under this section 
unless and until it is materially revised.
    In the case of a discretionary plan (as defined in ``Material 
Revisions'' above), whether or not previously approved by shareholders, 
additional grants may be made after the effective date of this listing 
standard without further shareholder approval only for a limited 
transition period, defined below, and then only in a manner consistent 
with past practice. See also ``Material Revisions'' above. In applying 
this rule, if a plan can be separated into a discretionary plan portion 
and a portion that is not discretionary, the non-discretionary portion 
of the plan can continue to be used separately, under the appropriate 
transition rule. For example, if a shareholder-approved plan permits 
both grants pursuant to a provision that makes available a specific 
number of shares, and grants pursuant to a provision authorizing the 
use of treasury shares without regard to the specific share limit, the 
former provision (but not the latter) may continue to be used after the 
transition period, under the general rule above.
    Similarly, in the case of a formula plan (as defined in ``Material 
Revisions'' above) that either (1) has not previously been approved by 
shareholders or (2) does not have a term of ten years or less, 
additional grants may be made after the effective date of this listing 
standard without further shareholder approval only for a limited 
transition period, defined below.
    The limited transition period described in the preceding two 
paragraphs will end upon the first to occur of:
    [sbull] the listed company's next annual meeting at which directors 
are elected that occurs more than 180 days after the effective date of 
this listing standard;
    [sbull] the first anniversary of the effective date of this listing 
standard; and
    [sbull] the expiration of the plan.
    A shareholder-approved formula plan may continue to be used after 
the end of this transition period if it is amended to provide for a 
term of ten years or less from the date of its original adoption or, if 
later, the date of its most recent shareholder approval. Such an 
amendment may be made before or after the effective date of this 
listing standard, and would not itself be considered a ``material 
revision'' requiring shareholder approval.
    In addition, a formula plan may continue to be used, without 
shareholder approval, if the grants after the effective date of this 
listing standard are made only from the shares available immediately 
before the effective date, in other words, based on formulaic increases 
that occurred prior to such effective date.

Broker Voting

    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 is 
codified in NYSE Rule 452. Amended Rule 452 will be effective for any 
meeting of shareholders that occurs on or after the 90th day following 
the date of the Securities and Exchange Commission order approving the 
rule change.
    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 effectiveness of the broker-may-not-
vote proposal.

B. Nasdaq Proposal

    Nasdaq proposes to amend NASD Rule 4350(i) to require shareholder 
approval for stock option plans or other equity compensation 
arrangements (subject to exceptions specified in the rule), adopt 
``Interpretative Material'' pertaining to shareholder approval for 
stock option plans or other equity compensation arrangements, and to 
make related conforming changes to NASD Rules 4310(c)(17)(A) and 
4320(e)(15)(A).
    Nasdaq Amendments No. 2 and 3 to the Nasdaq filing proposes a 
number of changes to the rules as they were published in the Notice of 
the Nasdaq Proposal. According to Nasdaq, these changes were made in 
response to the comment letters and discussions with Commission staff. 
The Nasdaq proposal, as amended by Nasdaq Amendments No. 2 and 3, is 
described below.
1. Nasdaq Proposal Amended by Nasdaq Amendments No. 2 and 3
    Specifically, Nasdaq proposes to eliminate the exception for 
broadly-based plans, and also proposes to eliminate the de minimis 
exception to NASD Rule 4350(i)(1)(A), which allows for the grant of the 
lesser of 1% of the number of shares of common stock or 25,000 shares, 
without shareholder approval. Nasdaq believes that this exception is 
not in accord with the concept of restricting the use of unapproved 
options.
    Nasdaq proposes to retain its current exception for warrants or 
rights offered generally to all shareholders. In Nasdaq Amendment No. 
3, Nasdaq proposed an amendment to this exception to exclude stock 
purchase plans available on equal terms to all security holders of the 
company (such as a dividend reinvestment plan) from shareholder 
approval. In addition, the Nasdaq proposal would not require 
shareholder approval for tax qualified, non-discriminatory benefit 
plans as these plans are regulated under the Internal Revenue Code and 
Treasury Department regulations. Along with tax qualified, non-
discriminatory employee benefit plans, the Nasdaq proposal also 
provides an exception for parallel nonqualified plans. Nasdaq 
represents that the proposed amendments to NASD Rule 4350(i) would not 
have any effect on any shareholder approval or other requirements under 
the Internal Revenue Code or other applicable laws or requirements for 
such plans.
    Furthermore, Nasdaq proposes to retain its current exception for 
inducement grants to new employees because Nasdaq believes that, in 
these cases, a company has an arm's length relationship with the new 
employees, and its interests are directly aligned with the 
shareholders. In Nasdaq Amendment No. 3, Nasdaq amended its proposal to 
apply this exception to persons previously employed by the issuer 
following a bona fide period of non-employment. In addition, Nasdaq 
states that, for these purposes, inducement grants would include grants

[[Page 40000]]

of options or stock to new employees in connection with a merger or 
acquisition.
    In addition, the proposed amendments to NASD Rule 4350(i) would 
clarify that plans involving a merger or acquisition would not require 
shareholder approval in two situations. First, Nasdaq will not require 
shareholder approval to convert, replace or adjust outstanding options 
or other equity compensation awards to reflect the transaction. Second, 
Nasdaq represents that shares available under certain plans acquired in 
corporate acquisitions and mergers may be used for certain post-
transaction grants without further shareholder approval. Nasdaq 
clarifies that this exception applies to situations where the target/
acquired company, which is no longer a listed company following the 
transaction, has shares available for grant under its pre-existing 
plans that were previously approved by its shareholders. Nasdaq 
represents that these shares may be used for post-transaction grants of 
options and other equity awards by the acquiring/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 only 
granted to individuals who were employed by the target/acquired company 
at the time the merger or acquisition was consummated. Nasdaq would 
view a plan adopted in contemplation of the merger or acquisition 
transaction as not pre-existing for purposes of this exception. Nasdaq 
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.
    Nasdaq states that, under the proposed amendments to the NASD Rule 
4350(i), inducement grants, tax qualified, non-discriminatory benefit 
plans, and parallel nonqualified plans are subject to approval by 
either the issuer's compensation committee, or a majority of the 
issuer's independent directors. Nasdaq also notes that a company would 
not be permitted to use repurchased shares to fund options without 
prior shareholder approval. Nasdaq represents, however, that plans that 
merely provide a convenient way to purchase shares on the open market 
or from the issuer at fair market value would not require shareholder 
approval.
    The Nasdaq proposal further clarifies that material amendments to 
plans would require shareholder approval. The accompanying proposed 
``Interpretative Material'' also provides a non-exclusive list of plan 
amendments that are considered material, and clarifies that while 
general authority to amend a plan would not obviate the need for 
shareholder approval, if a plan permits a specific action without 
further shareholder approval, then no such approval would be 
required.\24\ Certain provisions in a plan, however, cannot be amended 
without shareholder approval. For example, plans that contains a 
formula for automatic increases in the shares available or for 
automatic grants pursuant to a dollar-based formula cannot have a term 
in excess of ten years unless shareholder approval is obtained every 
ten years. In addition, plans that impose no limit on the number of 
shares available for grant would require shareholder approval of each 
grant under the plan. A requirement that grants be made out of treasury 
shares or repurchased shares will not alleviate these additional 
shareholder approval requirements. The proposed ``Interpretative 
Material'' also provides that as a general matter, when preparing plans 
and presenting them for shareholder approval, issuers should strive to 
make plan terms easy to understand. In that regard, Nasdaq recommends 
that plans meant to permit repricing use explicit terminology to make 
this clear.
---------------------------------------------------------------------------

    \24\ The Commission notes that if a plan permits a specific 
action without further shareholder approval, it must be clear and 
specific enough to provide meaningful shareholder approval of those 
provisions.
---------------------------------------------------------------------------

    With respect to implementation of the proposed amendments to NASD 
Rule 4350(i), Nasdaq proposes that amended NASD Rule 4350(i) become 
effective upon SEC approval, and that existing plans be 
grandfathered.\25\ Nasdaq represents that any material modification to 
plans in place or adopted after the effective date of NASD Rule 4350(i) 
would require shareholder approval.
---------------------------------------------------------------------------

    \25\ The Commission notes that the Nasdaq proposal does not 
address broker-dealer discretionary voting because NASD rules 
currently prohibit discretionary voting by broker-dealers without 
explicit instructions from the beneficial owner. In addition, the 
Commission notes that the Nasdaq proposal does not eliminate the 
``treasury share exception'' because Nasdaq does not have such an 
exception under current NASD rules.
---------------------------------------------------------------------------

    Separately, Nasdaq represents that Nasdaq staff intends to consider 
further changes to provide greater transparency to investors, including 
a possible disclosure requirement with respect to situations where an 
issuer relies upon an exception to the shareholder approval 
requirements of NASD Rule 4350(i)(1)(A).
    Lastly, Nasdaq proposes to make conforming changes to NASD Rules 
4310(c)(17)(A) and 4320(e)(15)(A). These proposed changes will require 
issuers to notify Nasdaq on the appropriate form no later than 15 
calendar days prior to establishing or materially amending a stock 
option plan, purchase plan or other equity compensation arrangement 
pursuant to which stock may be acquired by officers, directors, 
employees, or consultants without shareholder approval.
2. Amended NASD Rule 4350(i) and IM-4350-5
    As amended by Nasdaq Amendments No. 2 and 3, NASD Rule 
4350(i)(1)(A) and proposed new ``Interpretive Material,'' IM-4320-5, 
will read as follows:
    (i) Shareholder Approval
    (1) Each issuer shall require shareholder approval prior to the 
issuance of designated securities under subparagraph (A), (B), (C), or 
(D) below:
    (A) when a stock option or purchase plan is to be established or 
materially amended or other equity compensation arrangement made or 
materially amended pursuant to which options or stock may be acquired 
by officers, directors, employees, or consultants, except for:
    (i) warrants or rights issued generally to all security holders of 
the company or stock purchase plans available on equal terms to all 
security holders of the company (such as a dividend reinvestment plan); 
or
    (ii) tax qualified, non-discriminatory employee benefit plans 
(e.g., plans that meet the requirements of Section 401(a) or 423 of the 
Internal Revenue Code) or parallel nonqualified plans, provided such 
plans are approved by the issuer's compensation committee or a majority 
of the issuer's independent directors; or plans that merely provide a 
convenient way to purchase shares on the open market or from the issuer 
at fair market value; or
    (iii) plans or arrangements relating to an acquisition or merger as 
permitted under IM-4350-5; or
    (iv) issuances to a person not previously an employee or director 
of the company, or following a bonafide period of non-employment, as an 
inducement material to the individual's entering into employment with 
the company, provided such issuances are approved by either the 
issuer's compensation committee comprised of a majority of independent 
directors or a

[[Page 40001]]

majority of the issuer's independent directors.
* * * * *

IM-4350-5. Shareholder Approval for Stock Option Plans or Other Equity 
Compensation Arrangements

    Employee ownership of company stock can be an effective tool to 
align employee interests with those of other shareholders. Stock option 
plans or other equity compensation arrangements can also assist in the 
recruitment and retention of employees, which is especially critical to 
young, growing companies, or companies with insufficient cash resources 
to attract and retain highly qualified employees. However, these plans 
can potentially dilute shareholder interests. As such, Rule 
4350(i)(1)(A) ensures that shareholders have a voice in these 
situations, given this potential for dilution.
    Rule 4350(i)(1)(A) requires shareholder approval when a plan or 
other equity compensation arrangement is established or materially 
amended. For these purposes, a material amendment would include, but 
not be limited to, the following:
    (1) Any material increase in the number of shares to be issued 
under the plan (other than to reflect a reorganization, stock split, 
merger, spinoff or similar transaction);
    (2) Any material increase in benefits to participants, including 
any material change to: (i) permit a repricing (or decrease in exercise 
price) of outstanding options, (ii) reduce the price at which shares or 
options to purchase shares may be offered, or (iii) extend the duration 
of a plan;
    (3) Any material expansion of the class of participants eligible to 
participate in the plan; and
    (4) Any expansion in the types of options or awards provided under 
the plan.
    While general authority to amend a plan would not obviate the need 
for shareholder approval, if a plan permits a specific action without 
further shareholder approval, then no such approval would generally be 
required. However, if a plan contains a formula for automatic increases 
in the shares available (sometimes called an ``evergreen formula''), or 
for automatic grants pursuant to a dollar-based formula (such as annual 
grants based on a certain dollar value, or matching contributions based 
upon the amount of compensation the participant elects to defer), such 
plans cannot have a term in excess of ten years unless shareholder 
approval is obtained every ten years. However, plans that impose no 
limit on the number of shares available for grant would require 
shareholder approval of each grant under the plan. A requirement that 
grants be made out of treasury shares or repurchased shares will not 
alleviate these additional shareholder approval requirements.
    As a general matter, when preparing plans and presenting them for 
shareholder approval, issuers should strive to make plan terms easy to 
understand. In that regard, it is recommended that plans meant to 
permit repricing use explicit terminology to make this clear.
    Rule 4350(i)(1)(A) provides an exception to the requirement for 
shareholder approval for warrants or rights offered generally to all 
shareholders. In addition, an exception is provided for tax qualified, 
non-discriminatory employee benefit plans as well as parallel 
nonqualified plans \26\ as these plans are regulated under the Internal 
Revenue Code and Treasury Department regulations.
---------------------------------------------------------------------------

    \26\ 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 thereafter be enacted. However, a plan will not 
be considered a parallel nonqualified plan unless: (i) 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 
limitation that may hereafter be enacted); (ii) 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; and, (iii) no participant receives employer 
equity contributions under the plan in excess of 25% of the 
participant's cash compensation.
---------------------------------------------------------------------------

    Further, there is an exception for inducement grants to new 
employees because in these cases a company has an arm's length 
relationship with the new employees. Inducement grants for these 
purposes include grants of options or stock to new employees in 
connection with a merger or acquisition. The rule requires that such 
issuances must be approved by the issuer's compensation committee or a 
majority of the issuer's independent directors.
    In addition, plans or arrangements involving a merger or 
acquisition do not require shareholder approval in two situations. 
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 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 meet the requirements of this Rule 4350(i)(1)(A). 
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 arrangement or another plan or arrangement, 
without further shareholder approval, provided: (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 or its 
subsidiaries at the time the merger or acquisition was consummated. 
Nasdaq would view a plan or arrangement adopted in contemplation of the 
merger or acquisition transaction as not pre-existing for purposes of 
this exception. This exception is appropriate because it will not 
result in any increase in the aggregate potential dilution of the 
combined enterprise. In this regard, any additional shares available 
for issuance under a plan or arrangement acquired in a connection with 
a merger or acquisition would be counted by Nasdaq in determining 
whether the transaction involved the issuance of 20% or more of the 
company's outstanding common stock, thus triggering the shareholder 
approval requirements under Rule 4350(i)(1)(C).
    Inducement grants, tax qualified non-discriminatory benefit plans, 
and parallel nonqualified plans are subject to approval by either the 
issuer's compensation committee comprised of a majority of independent 
directors, or a majority of the issuer's independent directors. It 
should also be noted that a company would not be permitted to use 
repurchased shares to fund option plans or grants without prior 
shareholder approval.

III. Summary of Comments

    The Commission received a total of 32 comment letters on the NYSE 
and Nasdaq proposals.\27\ Sixteen comment

[[Page 40002]]

letters generally supported the proposals requiring shareholder 
approval of all equity compensation plans based on the general premise 
that these proposals would improve corporate governance standards 
overall and would help restore investor confidence in the 
marketplace.\28\ Several other commenters were supportive of certain 
aspects of the proposals, but expressed concerns about some or all of 
the exceptions in the proposed rules.\29\ Five comment letters 
commented only on specific aspects of the NYSE and Nasdaq 
proposals.\30\ Four comment letters stated that there should be a 
collective bargaining agreement exception.\31\ Another comment letter 
supported shareholder approval solely for plans including senior 
executives and directors.\32\ One comment letter stated that companies' 
compensation practices should not be micro-managed and that shareholder 
approval should be required only for plans that ``dilute (shareholder) 
ownership over a certain threshold (e.g., 1% to 2%) or on plans where a 
potential for self dealing exists (e.g., for top management and 
directors).'' \33\ One comment letter found the proposals to be too 
complicated and stated that ``the better solution may be to eliminate 
stock options from a company's source of funds for employees.'' \34\
---------------------------------------------------------------------------

    \27\ See supra notes 5 and 9.
    \28\ See TIAA-CREF Letter; Barclays Letter; Allen & Overy 
Letter; SWIB Letter; Hermes Letter; ICI Letter; NJ Division Letter; 
ISS I Letter; ISS II Letter; NVCA I Letter; NVCA II Letter; LACERA 
Letter; conEdison Letter; Unisys Letter; Employees Retirement System 
of Texas Letter; and Gillespie Letter. As discussed below, some of 
these commenters, while supporting the overall proposals, 
recommended eliminating or changing some of the exceptions to 
shareholder approval or requested clarification.
    \29\ See CII Letter; SWIB Letter; CPF Letter; IBT Letter; STRS 
Letter; MSRS Letter; and Employees Retirement System of Texas 
Letter.
    \30\ See CalPERS Letter; Sullivan & Cromwell Letter; ABA Letter; 
Radioshack Letter; and ABC Letter.
    \31\ See Southwest Airlines Letter; IAM Letter; AFL-CIO Letter; 
and IBT Letter. For example, see Southwest Airlines Letter, stating 
that the NYSE shareholder approval proposal is overly broad as 
currently drafted and that it would be ``unwise'' and ``unfair'' to 
approve unless a collective bargaining exception is added to the 
exceptions.
    \32\ See AFL-CIO Letter.
    \33\ See Employees Retirement System of Texas Letter.
    \34\ See Pella Letter.
---------------------------------------------------------------------------

    Thirteen comment letters supported the NYSE proposed rule change to 
preclude broker-dealers from casting proxy votes on equity compensation 
plans without instructions from the beneficial owner,\35\ while three 
commenters opposed this provision.\36\ Eleven of these commenters, 
supporting the elimination of broker voting on equity compensation 
plans, suggested precluding broker-dealers from voting proxies without 
instructions on all other matters as well.\37\ In addition, several 
commenters also supported the NYSE proposed rule change that would 
eliminate the ``treasury share exception.'' \38\
---------------------------------------------------------------------------

    \35\ See TIAA-CREF Letter; CII Letter; Barclays Letter; SWIB 
Letter; Hermes Letter; AFL-CIO Letter; CPF Letter; STRS Letter; NJ 
Division Letter; ISS I Letter; IBT letter; MSRS Letter; and 
Employees Retirement System of Texas Letter. As noted above, NASD 
rules already prohibit broker-dealer discretionary voting on such 
matters. See supra note .
    \36\ See ABC Letter; Pella Letter; Amex I Letter; and Amex II 
Letter. The Commission considers the Amex I Letter and Amex II 
Letter to be from the same commenter.
    \37\ See CII Letter; SWIB Letter; Hermes Letter; AFL-CIO Letter; 
CPF Letter; STRS Letter; NJ Division Letter; ISS I Letter; IBT 
Letter; MSRS Letter; and Employees Retirement System of Texas 
Letter.
    \38\ See CII Letter; Barclays Letter; SWIB Letter; Hermes 
Letter; CPF Letter; STRS Letter; NJ Division Letter; Unisys Letter; 
and Employees Retirement System of Texas Letter.
---------------------------------------------------------------------------

A. Exceptions to Shareholder Approval of Equity Compensation Plans

    Several commenters, while agreeing with the general concept of 
shareholder approval for all equity compensation plans, had concerns 
with various exceptions for the general requirement \39\ and some 
believed that the exceptions should be removed from the proposed 
rules.\40\
---------------------------------------------------------------------------

    \39\ See CII Letter; Barclays Letter; SWIB Letter; Hermes 
Letter; AFL-CIO Letter; CPF Letter; STRS Letter; LACERA Letter; 
Unisys Letter; and Employees Retirement System of Texas Letter.
    \40\ See Barclays Letter; SWIB Letter; Hermes Letter; and LACERA 
Letter.
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1. Exception for Inducements Grants
    Several commenters were critical of the exception from the 
shareholder approval requirement for inducement options offered in an 
arms-length transaction.\41\ One commenter, who commented separately on 
the NYSE and Nasdaq proposals, stated that this exception could have 
the effect of encouraging the use of inducement grants simply to avoid 
having to acquire shareholder approval to issue shares, and that this 
exception should therefore be limited.\42\ Another commenter stated 
that such an exception invites companies to offer huge one-time awards 
of options to incoming executives.\43\ One commenter, stated that there 
should not be an exception for inducement awards from shareholder 
approval, but noted that companies should anticipate the hiring of new 
executives and have a ``cushion of shares available for awards under 
existing shareholder-approved plans.'' \44\ This commenter was 
concerned that an exception for inducement awards would provide an 
incentive for management to move between companies to take advantage of 
the exception in obtaining larger option awards.\45\ Another commenter 
suggested that the exception should also be made available to 
individuals who are rehired by an issuer or one of its subsidiaries 
after a bona fide interruption of employment.'' \46\ One commenter 
suggested that Nasdaq conform its proposal to the NYSE proposal and 
permit the issuance of inducement awards to persons who were previously 
employees of or served on the board of directors of the issuer.\47\
---------------------------------------------------------------------------

    \41\ See CII Letter; Barclays Letter; SWIB Letter; Hermes 
Letter; CalPERS Letter; STRS Letter; NJ Division Letter; ISS I 
Letter; ISS II Letter; Unisys Letter; and Employees Retirement 
System of Texas Letter.
    \42\ See ISS I Letter and ISS II Letter.
    \43\ See Hermes Letter. See also AFL-CIO Letter, which refers to 
inducement grants as ``golden handshake'' compensation packages for 
newly recruited executives.
    \44\ See CalPERS Letter. Two other commenters recommended that 
companies plan in advance for these situations and set aside shares 
of stock for this specific purpose with shareholder approval. See 
IBT Letter and Employees Retirement System of Texas Letter.
    \45\ See CalPERS Letter.
    \46\ See Allen & Overy Letter. This commenter stated that Nasdaq 
should be also permit inducement grants to an independent director 
who is hired as an employee of an issuer or one of its subsidiaries.
    \47\ See ABA Letter.
---------------------------------------------------------------------------

2. Exception for Mergers and Acquisitions
    Several commenters were generally critical of the exception from 
the shareholder approval requirement for plans acquired in an 
acquisition or merger.\48\ These commenters specifically opposed the 
exception for shares available to employees of the acquired or targeted 
company, stating that such additional issuances could be dilutive to 
the shareholders of the acquiring company. Two commenters suggested 
that this exception could have ``the unintended consequence of making 
the availability of shares authorized under assumed plans dependent on 
the transaction structure.'' \49\ Another commenter argued that the 
exception could allow management to ``use a merger or acquisition to 
`adopt' a plan that otherwise would not be approved by their 
shareholders.'' \50\
---------------------------------------------------------------------------

    \48\ See CII Letter; Barclays Letter; SWIB Letter; AFL-CIO 
Letter; CalPERS Letter; STRS Letter; NJ Division Letter; ISS I 
Letter; ISS II Letter; Unisys Letter; and Employees Retirement 
System of Texas Letter.
    \49\ See Allen & Overy Letter and NJ Division Letter.
    \50\ See Employees Retirement System of Texas Letter.

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[[Page 40003]]

3. Exception for Tax Qualified and Parallel Nonqualified Plans
    Several commenters were generally critical of the exception from 
the shareholder approval requirement for tax qualified and parallel 
nonqualified plans.\51\ These commenters stated that shareholder 
oversight was necessary for tax qualified and parallel non-qualified 
plans. In addition, commenters noted that the exception for parallel 
nonqualified plans may result in a potential for abuse because 
participants in these plans could defer up to 100 percent of their 
compensation into stock if the plan allowed such deferrals before the 
application of tax limits.\52\ Commenters further noted that parallel 
nonqualified plans are structured solely to benefit highly compensated 
employees and, therefore, should be subject to shareholder 
approval.\53\ One commenter stated that ``the fact that such plans are 
expensed is not a valid reason to exempt them from the shareholder 
approval process.'' \54\ Two commenters stated that the definition of 
parallel nonqualified plan should be similar to the definition of 
``excess benefit plan'' under Rule 16b-3 of the Act.\55\ Another 
commenter stated that requiring non-parallel plans to be substantially 
similar to tax qualified plans is too narrow and restrictive a 
standard.\56\ One commenter suggested the use of ``stock purchase 
plans'' as defined in Rule 16b-3(b)(5) under the Act, stating that this 
definition should replace the reference to Section 423 plans under this 
exception.\57\ One commenter suggested that the exception for tax 
qualified and parallel nonqualified plans should be extended to cover 
employee stock option purchase plans that would qualify as 
noncompensatory plans under APB Opinion 25 of the Financial Accounting 
Standards Board.\58\
---------------------------------------------------------------------------

    \51\ See CII Letter; Barclays Letter; SWIB Letter; CalPERS 
Letter; STRS Letter; ISS I Letter; ISS II Letter; Unisys Letter; and 
Employees Retirement System of Texas Letter.
    \52\ See CII Letter; AFL-CIO Letter; CalPERS Letter; STRS 
Letter; and Unisys Letter.
    \53\ See CII Letter; SWIB Letter; CalPERS Letter; STRS Letter; 
and Unisys Letter.
    \54\ See Employees Retirement System of Texas Letter.
    \55\ See Sullivan & Cromwell Letter and ABA Letter.
    \56\ See RadioShack Letter.
    \57\ See ABA Letter.
    \58\ See Allen & Overy Letter.
---------------------------------------------------------------------------

4. Material Revisions to Plans
    Several commenters suggested that the NYSE and Nasdaq define 
``material'' for purposes of defining major changes to an equity 
compensation plan.\59\ One commenter stated that Nasdaq should adopt 
the NYSE's list of what is considered a ``material revision.'' \60\ 
Another commenter suggested that the NYSE follow Nasdaq's approach by 
defining ``materiality'' ``by reference to former Rule 16b-3 under the 
Act.'' \61\ One commenter suggested adopting a ``global standard'' and 
providing a ``transparent definition of materiality'' to ensure that 
issues regarding materiality are handled similarly by the NYSE and 
Nasdaq.\62\ Another commenter, while supporting a uniform definition, 
objected to the use of ``materiality,'' stating that the concept is too 
vague and subjective.\63\ Another commenter suggested that the 
definition of ``material'' should be more specific to ensure that 
companies have a practical and enforceable standard that they can 
apply.\64\ One commenter, separately commenting on both of the NYSE and 
Nasdaq proposals, suggested that, because it is difficult to determine 
what types of changes qualify as material, the Commission should 
require the NYSE and Nasdaq to separately publish, on a website in real 
time, determinations of all their staff determinations on requests for 
exemptions from the their rules and listing standards.\65\ One 
commenter stated that the definition of ``material revision'' of an 
equity compensation plan should be clarified so as not to include any 
decreases in any benefits under the plan, and thereby subject only 
material increases, to any benefits under a plan, to shareholder 
approval.\66\
---------------------------------------------------------------------------

    \59\ See CII Letter; STRS Letter; Sullivan & Cromwell Letter; 
ABA Letter; and Unisys Letter.
    \60\ See ISS II Letter.
    \61\ See Sullivan & Cromwell Letter.
    \62\ See AFL-CIO Letter.
    \63\ See CalPERS Letter.
    \64\ See IBT Letter.
    \65\ See ISS I Letter and ISS II Letter.
    \66\ See RadioShack Letter.
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5. Repricing of Plans
    Several commenters suggested that Nasdaq should address the issue 
of repricing, and that it should adopt the NYSE's approach for such 
repricing provisions in equity compensation plans.\67\ Under the NYSE 
proposal, unless a plan explicitly contains a repricing provision, 
shareholder approval would be required for any revisions deleting or 
limiting the repricing provisions; a plan that is silent on repricing 
would also require shareholder approval in these instances. One 
commenter, commenting solely on the NYSE proposal, stated that 
shareholder approval should not be required for plans that are silent 
on repricing.\68\ Another commenter suggested that repricing should 
only be considered a ``material revision'' of a plan for newly adopted 
plans or for plans that were materially revised after the effective 
date of the NYSE proposal.\69\
---------------------------------------------------------------------------

    \67\ See CII Letter; SWIB Letter; Hermes Letter; ICI Letter; 
CalPERS Letter; STRS Letter; NJ Division Letter; and Unisys Letter.
    \68\ See Sullivan & Cromwell Letter.
    \69\ See ABA Letter.
---------------------------------------------------------------------------

6. Foreign Exemption
    Two commenters suggested that the exemption for plans covering 
employees residing in non-U.S. jurisdictions should also apply to plans 
that are designed to comply with local foreign tax laws and under which 
all full-time employees of the sponsoring entity are, in general, 
eligible to participate subject to certain service, age or other 
requirements permitted under the foreign jurisdiction's law.\70\ Both 
commenters stated that Nasdaq should adopt a similar exemption.\71\ One 
commenter stated that a transition period should be provided for plans 
of listed domestic issuers and their affiliates covering employees 
residing in a non-U.S. jurisdiction.\72\
---------------------------------------------------------------------------

    \70\ See Allen & Overy Letter and ABA Letter.
    \71\ See Allen & Overy Letter and ABA Letter.
    \72\ See ABA Letter.
---------------------------------------------------------------------------

B. Collective Bargaining Agreements

    Four commenters suggested that there be an exception for the 
shareholder requirement for equity compensation plans for plans entered 
into pursuant to a collective bargaining agreement.\73\ Two of the 
commenters limited this suggestion to collective bargaining agreements 
that do not permit participation by officers and directors.\74\ Three 
of the commenters argued that proposed rules are overly-broad, would 
significantly impact the collective bargaining process, and provide 
disincentives for parties on both sides of the bargaining table to 
negotiate equity compensation plans.\75\ One commenter stated that a 
shareholder approval requirement would deny employees, who have given 
up pay raises for a number of years over the term of the collective 
bargaining agreement in order to receive stock options, the opportunity 
to participate fully in the growth and success of their companies.\76\
---------------------------------------------------------------------------

    \73\ See Southwest Airlines Letter; IAM Letter; AFL-CIO Letter; 
and IBT Letter.
    \74\ See Southwest Airlines Letter and IBT Letter.
    \75\ See Southwest Airlines Letter; IAM Letter and AFL-CIO 
Letter.
    \76\ See Southwest Airlines Letter.

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[[Page 40004]]

C. Evergreen Plans

    One commenter stated that ``evergreen plans'' can be dilutive to 
shareholders because ``there can be no termination date for the plans 
and the number of shares issued can increase annually depending on the 
number of shares outstanding.'' \77\ The commenter urged the NYSE and 
Nasdaq to view increases in the shares available under an evergreen 
plan to be a material revision requiring shareholder approval.\78\ One 
commenter, commenting solely on the NYSE proposal, requested 
clarification on whether, for evergreen plans, the 10-year maximum term 
for the plan runs from the effective date of the proposed rule, the 
date of the addition of the 10-year term, or the date of the original 
adoption or shareholder approval of the plan.\79\ Two commenters stated 
that a transition period--not requiring shareholder approval until the 
next annual shareholder meeting--should apply to existing evergreen 
plans.\80\ One commenter stated that there should be a ``specific 
transition period for plans adopted before the effective date that do 
not limit the number of shares available for grant, since these plans 
will never be required to be amended to increase the number of 
authorized share.'' \81\ Another commenter suggested that evergreen 
increases should not be considered ``material revisions'' until the 
earliest of: (1) A subsequent material revision to the plan; (2) the 
expiration of the term of the plan; (3) the later of ten years from the 
date the plan was adopted or five years from the effective date of the 
NYSE proposal.\82\ The same commenter recommended that Nasdaq conform 
its proposal to the NYSE proposal with respect to provisions on the 
treatment of evergreen plans.\83\ One commenter stated that a 
``retroactive shareholder approval requirement'' should not be applied 
to existing evergreen plans.\84\ Another commenter requested 
clarification on whether an evergreen plan that was previously approved 
by a company's shareholders must again be approved by the shareholders 
if it is for an unlimited term and has been in existence for more than 
ten years.\85\
---------------------------------------------------------------------------

    \77\ See ICI Letter.
    \78\ See ICI Letter.
    \79\ See Sullivan & Cromwell Letter.
    \80\ See Sullivan & Cromwell Letter and conEdsion Letter.
    \81\ See Allen & Overy Letter.
    \82\ See ABA Letter.
    \83\ See ABA Letter.
    \84\ See RadioShack Letter.
    \85\ See Unisys Letter. This commenter suggested a transition 
period until the next annual shareholder meeting to obtain 
shareholder approval if it is required in these circumstances.
---------------------------------------------------------------------------

D. Conformity and Clarity

    A few commenters stated that the NYSE and Nasdaq proposals should 
be consistent with one another.\86\ One commenter recommended specific 
changes to clarify and conform the NYSE and Nasdaq proposals.\87\ 
Another commenter suggested that the NYSE and Nasdaq clarify the 
proposed rules to indicate that cash-only plans and benefits would not 
be subject to shareholder approval.\88\ One commenter stated that the 
NYSE and Nasdaq should harmonize their proposals on the ``repricing'' 
issue; the commenter did not take a position on which approach it 
believed was more appropriate.\89\ The same commenter suggested that 
``the NYSE proposal, like the Nasdaq proposal, should specify the 
significant and substantive components of its (proposed) rule in the 
rule's text'' rather than in a commentary or footnotes.\90\ One 
commenter praised the NYSE and Nasdaq for proposing similar rules 
requiring shareholder approval of equity compensation plans, stating 
that this ``coordinated approach ensures that the NYSE and Nasdaq do 
not compete on the basis of differences in their rules, encouraging a 
``race to the bottom'' to attract new listings, to the detriment of 
investors.'' \91\
---------------------------------------------------------------------------

    \86\ See AFL-CIO Letter; Allen & Overy Letter; ICI Letter; and 
ABA Letter.
    \87\ See ABA Letter.
    \88\ See Allen & Overy Letter.
    \89\ See ABA Letter.
    \90\ See ABA Letter.
    \91\ See ICI Letter.
---------------------------------------------------------------------------

E. Elimination of Broker-Dealer Voting on Equity Compensation Plans

    Several commenters also supported the NYSE proposed rule change to 
preclude broker-dealers from voting on equity compensation plans 
without instructions from the beneficial owner.\92\ Some of these 
commenters stated that broker-dealers should be precluded from voting 
proxies without instructions on all other matters as well.\93\ Some of 
these commenters stated that votes should be cast by the beneficial 
owners--the real parties in interest--and not broker-dealers who tend 
to side with management and override their clients' interests.\94\ 
Other commenters pointed out that, because companies now routinely 
receive votes from more than 50 percent of their beneficial owners, 
broker-dealer votes are no longer necessary to meet quorum 
requirements.\95\ One commenter stated that ``this rule is unnecessary 
in an age where shareholders can vote electronically by telephone, 
Internet, and facsimile, in addition to the traditional means of 
written proxy or participation in shareholder meetings.'' \96\ One 
commenter stated that the NYSE should specify when the proposed new 
rule eliminating broker voting of equity compensation plans will become 
effective and stated that a transition period should be provided.\97\
---------------------------------------------------------------------------

    \92\ See TIAA-CREF Letter; CII Letter; Barclays Letter; SWIB 
Letter; Hermes Letter; AFL-CIO Letter; CPF Letter; STRS Letter; NJ 
Division Letter; ISS I Letter; IBT letter; MSRS Letter; and 
Employees Retirement System of Texas Letter.
    \93\ See CII Letter; SWIB Letter; Hermes Letter; AFL-CIO Letter; 
CPF Letter; STRS Letter; NJ Division Letter; ISS I Letter; IBT 
Letter; MSRS Letter; and Employees Retirement System of Texas 
Letter.
    \94\ See TIAA-CREF Letter; CII Letter; SWIB Letter; Hermes 
Letter; AFL-CIO Letter; CPF Letter; STRS Letter; ISS I Letter; IBT 
Letter; MSRS Letter; and Employees Retirement System of Texas 
Letter.
    \95\ See CII Letter; SWIB Letter; CPF Letter; STRS Letter; IBT 
Letter; and MSRS Letter. One commenter stated that, if uninstructed 
broker-dealer votes are needed to meet a quorum, broker voting 
should be limited solely to quorum votes. See ISS I Letter.
    \96\ See AFL-CIO Letter.
    \97\ See ABA Letter.
---------------------------------------------------------------------------

    Three commenters opposed the NYSE proposal to eliminate broker-
dealer proxy voting on equity compensation plans.\98\ Two of these 
commenters stated that the elimination of broker voting would harm 
smaller issuers and result in a significant increase in cost and 
administrative burden.\99\ In addition, one commenter stated that 
elimination of broker-dealer voting on equity compensation plans, and 
thereby designating such plans as ``non-routine'' for proxy voting 
purposes, would result in uncertainty of whether there will be a quorum 
and, instead suggested as an alternative that unvoted broker held 
shares be deemed voted in proportion to the votes actually cast (i.e., 
``echo'' voting).\100\ The commenter further stated that, while the 
issue of broker-dealer voting should be addresses on an industry-wide 
basis, it wanted clarification that the NYSE's elimination of broker-
dealer voting on equity compensation plans only applied to NYSE listed 
issuers `` and not to Amex listed issuers `` in case of a conflict in 
proxy voting rules of the two exchanges.\101\ One commenter stated that 
the average beneficial owner would not understand or know how to vote 
on his or her own.\102\
---------------------------------------------------------------------------

    \98\ See ABC Letter; Pella Letter; Amex I Letter; and Amex II 
Letter.
    \99\ See ABC Letter and Amex I Letter.
    \100\ See Amex I Letter.
    \101\ See Amex I Letter and Amex II Letter.
    \102\ See Pella Letter.
---------------------------------------------------------------------------

F. Miscellaneous Comments

    A few commenters suggested that the Commission urge the American 
Stock

[[Page 40005]]

Exchange, LLC (``Amex'') to propose and adopt listing standards similar 
to the NYSE and Nasdaq proposals.\103\ One commenter, commenting solely 
on the NYSE proposal, stated that the shareholder approval requirement 
should apply only to companies listing common stock on the NYSE.\104\ 
The same commenter stated that NYSE should state that the requirement 
of shareholder approval would not apply to ``cash-only'' plans and 
other plans where securities are not deliverable.\105\ The commenter 
also stated that plans adopted after the effective date of the proposed 
rule but before the company's stock is listed on the NYSE should also 
be grandfathered.'' \106\ The commenter further stated that 
compensation committee pre-approval of certain exceptions to 
shareholder approval, such as for inducement grants and tax qualified 
plans, is unnecessary and impractical.\107\ One commenter stated that 
NYSE should define ``equity compensation plan.'' \108\ The same 
commenter stated that the NYSE should specify when the proposed 
amendments to the NYSE Rule 452 eliminating broker voting on plans 
would become effective and suggested that there be a transition 
period.\109\ One commenter, commenting solely on the NYSE proposal, 
stated that there should be an implementation period for obtaining 
shareholder approval for plans that are not pre-existing plans that 
will become ``grandfathered'' upon approval of the NYSE proposal.\110\ 
One commenter stated that ``compensatory discount stock purchase 
plans'' should not be subject to shareholder approval because this 
requirement would unduly restrict the management's design of long-
standing compensation plans for a broad base of employees, while 
providing minimal benefit to shareholders.\111\ Some commenters stated 
that the 21-day comment period was inadequate to obtain public comment 
on these and other proposals.\112\
---------------------------------------------------------------------------

    \103\ See CII Letter; SWIB Letter; STRS Letter; NJ Division 
Letter; and Unisys Letter. In response to a Commission request, the 
Amex filed a proposed rule change on May 6, 2003, which proposes to 
require shareholder approval of stock option and equity compensation 
plans. See File No. SR-Amex-2003-42.
    \104\ See Sullivan & Cromwell Letter.
    \105\ See Sullivan & Cromwell Letter.
    \106\ See Sullivan & Cromwell Letter.
    \107\ See Sullivan & Cromwell Letter.
    \108\ See ABA Letter.
    \109\ See ABA Letter.
    \110\ See conEdison Letter.
    \111\ See RadioShack Letter.
    \112\ See CII Letter; CPF Letter; CalPERS Letter; STRS Letter; 
IBT Letter; and MSRS Letter.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the NYSE proposal, 
as amended, is consistent with the Act and the rules and regulations 
promulgated thereunder applicable to a national securities exchange 
and, in particular, with the requirements of section 6(b) of the 
Act.\113\ Specifically, the Commission finds that approval of the NYSE 
proposal, as amended, is consistent with section 6(b)(5) of the Act 
\114\ in that it is designed to, among other things, facilitate 
transactions in securities; 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 does not permit unfair 
discrimination among issuers.
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78f(b). In approving the NYSE proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \114\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In addition, after careful review, the Commission finds that the 
Nasdaq proposal, as amended, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities association.\115\ The Commission finds that the Nasdaq 
proposal, as amended, is consistent with provisions of section 15A of 
the Act,\116\ in general, and with section 15A(b)(6) of the Act,\117\ 
in particular, in that it is designed to, among other things, 
facilitate transactions in securities; 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 does not permit 
unfair discrimination among issuers.
---------------------------------------------------------------------------

    \115\ In approving the Nasdaq proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \116\ 15 U.S.C. 78o-3.
    \117\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission has long encouraged exchanges to adopt and 
strengthen their corporate governance listing standards in order to, 
among other things, restore investor confidence in the national 
marketplace. The Commission believes that the NYSE proposal and the 
Nasdaq proposal, which require shareholder approval of equity 
compensation plans, are the first step under this directive because 
they should have the effect of safeguarding the interests of 
shareholders, while placing certain restrictions on their listed 
companies. The Commission notes that many commenters generally 
supported the NYSE and Nasdaq's proposals to require shareholder 
approval of all equity compensation plans mainly based on the premise 
that such a requirement would protect shareholders and overall improve 
the marketplace. The Commission further notes that several commenters, 
while supporting the general shareholder approval requirement, voiced 
concerns regarding certain or all of the exemptions to, and certain 
aspects of, the shareholder approval requirement. Accordingly, the NYSE 
and Nasdaq amended their proposals to: (1) Respond to specific concerns 
raised by the commenters and suggestions made by Commission staff; (2) 
clarify terms and language used in their respective proposals; and (3) 
harmonize and conform their respective rule proposals, in response to 
certain comments, so that they are more consistent with one another.

A. Exemption From Shareholder Approval for Inducement Grants

    The Commission notes that several commenters were critical of the 
exemption from shareholder approval for inducement grants that could be 
made to recruit new employees. These commenters were generally 
concerned that the exemption could potentially lead to abuse and could 
be used to avoid shareholder approval. The commenters suggested either 
eliminating or limiting the exemption for inducement grants.
    The Commission believes that the requirement that the issuance of 
all inducement grants be subject to review by either the issuer's 
independent compensation committee or a majority of the board's 
independent directors, in both proposals, should prevent abuse of this 
exemption. The Commission notes that the NYSE has also amended its 
proposal to include a requirement that, following the grant of any 
inducement award, companies must disclose in a press release the 
material terms of the award, including the recipient(s) of the award 
and the number of shares involved.\118\ In addition, the

[[Page 40006]]

Commission notes that the NYSE proposes an additional requirement that 
an issuer must notify it in writing when it uses this exemption from 
the shareholder approval requirement. Nasdaq has also committed to 
considering similar disclosure requirements. The Commission believes 
that such disclosure requirements would provide transparency to 
investors and reduce the potential for abuse of this exemption for 
inducement grants.\119\
---------------------------------------------------------------------------

    \118\ This disclosure would, of course, be in addition to any 
information that is required to be disclosed in annual reports filed 
with the Commission. For example, Item 201(d) of Regulation S-K (17 
CFR 229.201(d)) and Item 201(d) of Regulation S-B (17 CFR 
228.201(d)) require issuers to present--in their annual reports on 
Form 10-K or Form 10-KSB--separate, tabular disclosure concerning 
equity compensation plans that have been approved by shareholders 
and equity compensation plans that have not been approved by 
shareholders.
    \119\ The Commission urges Nasdaq to consider adopting a 
disclosure requirement similar to the NYSE's requirement.
---------------------------------------------------------------------------

    In addition, one commenter pointed out an inconsistency between the 
NYSE and Nasdaq proposals--that the exemption for inducement grants as 
proposed in the Notice of the Nasdaq Proposal would exclude grants to 
previous employees and directors of the company, while the exemption 
for inducement grants as proposed in the Notice of the NYSE Proposal 
would allow grants to all new employees. In response to these concerns, 
the NYSE and Nasdaq clarified their respective exemptions for 
inducement grants and limited the exemptions to new employees or to 
previous employees being rehired after a bona fide period of 
interruption of employment, and to new employees in connection with an 
acquisition or merger. The Commission believes that these amendments to 
the exemption for inducement grants in the NYSE and Nasdaq proposals 
are consistent with the original intent of the exemption. The language 
requiring a bone fide period of interruption of employment for previous 
employees should help to prevent the inducement exemption from being 
used inappropriately. Furthermore, the proposed changes should address 
the commenters' concerns about consistency between the NYSE and Nasdaq 
proposals.

B. Exemption From Shareholder Approval for Mergers and Acquisitions

    The Commission notes that several commenters objected to an 
exemption from shareholder approval for plans acquired in a merger or 
acquisition. These commenters stated that additional issuances under 
plans to shareholders of the acquired or targeted company could be 
dilutive to shareholders of the acquiring company. The commenters were 
also concerned that companies could use a merger or acquisition to 
acquire a plan that would otherwise not be approved by their 
shareholders.
    While the Commission understands these concerns, it notes that both 
the NYSE and Nasdaq exemptions contain safeguards that should prevent 
abuse in this area. First, only pre-existing plans that were previously 
approved by the acquired company's shareholders would be available to 
the listed company for post-transactional grants. In addition, shares 
under those previously approved plans could not be granted to 
individuals who were employed, immediately before the transaction, by 
the post-transaction listed company or its subsidiaries. The Commission 
also notes that, under both the NYSE and Nasdaq proposals, any shares 
reserved for listing in connection with a merger or acquisition 
pursuant to this exemption would be counted by the NYSE and Nasdaq in 
determining whether the transaction involved the issuance of 20% or 
more of the company's outstanding common stock, thereby requiring 
shareholder approval under the appropriate NYSE and Nasdaq rules. 
Finally, the Commission notes that the NYSE proposes an additional 
requirement that an issuer must notify it in writing when it uses this 
exemption from the shareholder approval requirement. Based on the 
above, the Commission believes that the NYSE and Nasdaq have provided 
measures to ensure that the exemption for mergers and acquisitions is 
only used in limited circumstances, which should help reduce the 
potential for dilution of shareholder interests.

C. Exemption From Shareholder Approval for Tax Qualified and Parallel 
Nonqualified Plans

    Several commenters were critical of the exemption from shareholder 
approval for tax qualified and parallel nonqualified plans \120\ and 
stated that these plans should be subject to shareholder approval. Many 
of these commenters were concerned that these types of plans are 
structured in a way to benefit only highly compensated employees and 
that participants in such plans could defer up to 100% of their 
compensation in stock under these plans.
---------------------------------------------------------------------------

    \120\ The Commission notes that the NYSE has replaced the term 
``parallel nonqualified plan'' in its proposal with the term 
``parallel excess plan.'' Nasdaq has retained the term ``parallel 
nonqualified plan'' to describe such plans.
---------------------------------------------------------------------------

    The Commission believes that, given the extensive government 
regulation--the Internal Revenue Code and Treasury regulations--for 
qualified plans and the general limitations associated with parallel 
nonqualified plans, shareholders should not experience significant 
dilution as a result of this exemption. In addition, the Commission 
notes that NYSE and Nasdaq are proposing to add an additional 
limitation under this exemption that a plan would not be considered a 
nonqualified parallel under the Nasdaq proposal or parallel excess plan 
under the NYSE proposal if employees who are participants in such plans 
receive employer contributions under the plans in excess of 25% of the 
participants' cash contributions. The Commission further notes that the 
NYSE proposes an additional requirement that an issuer must notify it 
in writing when it uses this exemption from the shareholder approval 
requirement. The Commission believes that, taken together, these 
limitations should reduce concerns regarding abuse of this exemption.

D. Material Amendments to Plans

    The Commission notes that several commenters urged the NYSE and 
Nasdaq to adopt a similar definition for what constitutes a material 
amendment or revision to a plan requiring shareholder approval. 
Specifically, these commenters stated that the NYSE and Nasdaq should 
adopt a more uniform and enforceable definition. One commenter 
suggested that material revisions to plans should only include any 
increases in benefits, not decreases in benefits, under a plan.
    In response to these concerns, the NYSE and Nasdaq have proposed 
amendments to their respective proposals and provided similar 
definitions of a material amendment or revision. A material amendment 
or revision under both proposals would now basically include: A 
material increase in the number of shares to be issued under the plan 
(other than to reflect a reorganization, stock split, merger, spinoff 
or similar transaction); an expansion of the type of awards available 
under the plan; a material expansion of the class of participants 
eligible to participate in the plan; a material extension of the term 
of the plan; a material change to limit or delete any provisions 
prohibiting repricing of options in a plan or for determining the 
strike or exercise price of options under a plan. In addition, the NYSE 
amended its proposal under ``Material Revisions'' to define 
``evergreen'' and ``formula'' plans and introduced the new concept of 
``discretionary plan.'' The NYSE further described what would 
constitute a material revision to such plans and require shareholder 
approval. Nasdaq also amended its proposal to clarify when plans 
containing a formula for automatic increases (such as evergreen plans) 
and automatic grants would require shareholder approval.
    The Commission believes that the NYSE and Nasdaq's non-exclusive 
lists

[[Page 40007]]

of what would constitute a material amendment or revision to a plan 
provides companies with clarity and guidance for when certain 
amendments to plans would require shareholder approval. The Commission 
also believes that the NYSE and Nasdaq proposed amendments in this area 
should help to ensure that the concept of material amendments or 
revisions between their respective proposals is consistent with each 
other so that differences between the markets cannot be abused.

E. Repricing of Plans

    A minority of commenters suggested that Nasdaq should address the 
issue of the repricing of options in plans and adopt the NYSE's 
approach to this issue. The NYSE proposal provides that, if a plan 
explicitly contains a repricing provision, shareholder approval would 
be required to delete or limit the repricing provisions. In addition, 
the NYSE proposal provides that, if a plan is silent on repricing, it 
will be considered as prohibiting repricing and shareholder approval 
would be required to permit repricing under the plan. In response to 
the commenters' concerns on this issue, Nasdaq proposed amendments to 
its proposal to state that it would be considered a material amendment 
to a plan requiring shareholder approval if the plan was amended to 
permit repricing. In addition, Nasdaq recommended in its proposed 
amendments that plans meant to permit repricing should explicitly and 
clearly state that repricing is permitted. The NYSE proposed an 
amendment to its proposal to clarify that repricings that have 
commenced prior to the date of effectiveness of its proposal would not 
be subject to shareholder approval, provided that such repricing does 
not require shareholder approval under the NYSE's existing shareholder 
approval rules.
    The NYSE and Nasdaq proposals, as amended, should benefit 
shareholders by ensuring that companies cannot do a repricing of 
options, which can have a dilutive effect on shares, without explicit 
shareholder approval of such provisions and their terms. The Commission 
also believes that NYSE and Nasdaq proposals now provide similar views 
in the area of repricing and should offer companies clarity and 
guidance as to when a change in a plan regarding the repricing of 
options would trigger a shareholder approval requirement and addresses 
commenters' concerns in this area.

F. Evergreen or Formula Plans and Discretionary Plans

    A minority of commenters raised concerns about plans containing 
evergreen formulas, which would allow for automatic increases in the 
number of shares available or for automatic grants pursuant to a 
formula in the plans. These commenters were generally concerned about 
evergreen/formula plans that provided no termination date and that did 
not place a limit on the number of shares that could be issued. The 
commenters wanted the NYSE and Nasdaq to consider increases in the 
number of shares under such plans as material revisions to the plans 
requiring shareholder approval. In addition, some of these commenters 
suggested that the NYSE and Nasdaq provide a transition period for 
existing evergreen/formula plans to comply with the new shareholder 
approval requirements. Some commenters wanted more clarity as to when 
shareholder approval would be required for evergreen/formula plans that 
were adopted prior to the effective date of the NYSE and Nasdaq 
proposals, and one commenter suggested that Nasdaq adopt NYSE's 
approach to evergreen/formula plans.
    The Commission notes that both the NYSE and Nasdaq have proposed 
amendments to the respective proposals in response to commenters' 
concerns and are proposing similar approaches as to the treatment of 
evergreen/formula plans. More specifically, under both the NYSE and 
Nasdaq proposals, if a plan contains a formula for automatic increases 
in the shares available or for automatic grants pursuant to a formula, 
each increase or grant will require shareholder approval unless the 
plan has a term of not more than ten years. In addition, under both the 
NYSE and Nasdaq proposals, if a plan contains no limit on the number of 
shares available and is not a formula plan (the NYSE amended its 
proposal to refer to such plans as ``discretionary plans''), then each 
grant under the plan will require separate shareholder approval. 
Furthermore, both the NYSE and Nasdaq proposals provide that a 
requirement that grants be made out of treasury or repurchased shares 
will not alleviate the need for shareholder approval for additional 
grants.
    The Commission believes that these provisions should help to ensure 
that certain terms of a plan cannot be drafted so broad as to avoid 
shareholder scrutiny and approval. The Commission also notes that the 
NYSE and Nasdaq's conforming rules relating to the treatment of 
evergreen/formula and discretionary plans should provide more clarity 
and transparency to issuers as to when shareholder approval would be 
required for such plans.
    The Commission further notes that the NYSE has proposed amendments 
to its proposal to provide for a transition period for evergreen/
formula plans and discretionary plans. The limited transition period 
would end on the first to occur of the following: (1) The listed 
company's next annual meeting at which directors are elected that 
occurs more than 180 days after the date of the effective date of the 
NYSE proposal; (2) the first anniversary of the effective date of the 
NYSE proposal; or (3) the expiration of the plan. The Commission 
believes that the NYSE's proposed transition period for evergreen/
formula and discretionary plans should provide companies with 
additional clarity and guidance as to when shareholder approval would 
be required for such plans while in the transition period, and should 
provide companies with more time to comply with the new NYSE 
shareholder approval requirements for evergreen/formula type plans. The 
Commission believes that this period is not so long as to permit abuse 
of the shareholder approval requirement, and at most, will last one 
year from the date of this Commission approval order.

G. Miscellaneous Concerns

    Some commenters had suggested that there should be an exemption 
from shareholder approval for plans entered into pursuant to a 
collective bargaining agreement mainly because they believed that a 
shareholder approval requirement would hinder negotiations regarding 
equity compensation plans by both parties in the collective bargaining 
process. The Commission believes, however, that such an exemption could 
expose shareholders to significant dilution because of the lack of 
shareholders oversight in the collective-bargaining process. 
Accordingly, the Commission agrees with the NYSE and Nasdaq decisions 
not to provide such an exemption to their respective shareholder 
approval requirements.
    The Commission notes that commenters requested clarification as to 
what type of plans would be considered ``equity compensation plans'' 
and what type of plans would not be considered ``equity compensation 
plans.'' In response to commenters'' concerns, the NYSE proposed 
amendments to its proposal to better define ``equity compensation 
plans'' and clarified that such plans would expressly exclude plans 
that do not provide delivery of equity securities of the issuer--for 
example, ``cash plans''--and deferred compensation plans under which

[[Page 40008]]

employees pay full market value for deferred shares. The Commission 
notes that Nasdaq also amended its proposal to incorporate the term 
``equity compensation'' and proposes to adopt a similar concept as the 
NYSE as to this term so that plans that merely provide a convenient way 
to purchase shares in the open market or from the issuer at fair market 
price would not require shareholder approval. The Commission believes 
that the proposed amendments should make the NYSE and Nasdaq proposals 
more consistent and provide greater clarity with respect to which plans 
would and would not require shareholder approval.
    Finally, many commenters wanted clarification as to how the new 
NYSE and Nasdaq shareholder approval requirements would apply to pre-
existing plans. The NYSE and Nasdaq have proposed amendments to their 
proposals to clarify the applicability and transition period for their 
shareholder approval requirements. In particular, the NYSE and Nasdaq 
have provided that pre-existing plans, which were adopted prior to the 
SEC's approval of the NYSE and Nasdaq proposals, would essentially be 
``grandfathered'' and would not require shareholder approval unless the 
plans were materially revised or amended. The NYSE provides further 
clarification that shareholder approval is required for pre-existing 
plans that were not approved by shareholders and that do not have an 
evergreen formula or a specific number of shares available under the 
plan. The Commission believes that this clarification should provide 
companies with guidance as to which plans would be subject to the new 
NYSE and Nasdaq shareholder approval requirements.

H. Elimination of Broker-Dealer Voting on Equity Compensation Plans

    The Commission notes that several commenters supported the NYSE's 
proposed rule change to prohibit broker-dealers from voting proxies on 
equity compensation plans without the beneficial owner's explicit 
consent. These commenters urged the NYSE to adopt a prohibition for 
broker voting without instructions on all matters, not just with 
respect to equity compensation plans. Some of these commenters were 
concerned that broker-dealers tend to side with management and do not 
always vote in their client's best interest. One commenter requested 
clarification on the effective date for eliminating broker voting on 
equity compensation plans and suggested that the NYSE consider a 
transition period for the effective of the new rule.
    The Commission further notes that three commenters opposed the 
elimination of broker voting on equity compensation plans, stating that 
such elimination would harm smaller issuers and provide uncertainty as 
to whether there will be a quorum at the next meeting. These commenters 
suggested that the NYSE consider an alternative to the elimination of 
broker voting--``mirror'' or ``echo'' voting--where unvoted shares held 
by a broker-dealer would be deemed as being voted proportionally to 
votes that were actually cast. One commenter requested clarification 
that the NYSE's proposed elimination of broker voting on equity 
compensation plans would only apply to NYSE listed issuers and not to 
Amex listed issuers.
    The Commission believes that the NYSE's provision precluding broker 
voting on equity compensation plans is consistent with the Act. The 
Commission notes that equity compensation plans have become an 
important issue for shareholders. Because of the potential for dilution 
from such issuances, shareholders should be making the determination 
rather than brokers on their behalf. The Commission further notes that, 
generally under NYSE rules, only matters that are considered routine 
are allowed to be voted on by a broker on behalf of a beneficial owner. 
Because of the recent significance and concern about equity 
compensation plans, the Commission believes that it is appropriate for 
the NYSE to decide that shareholder approval of equity compensation 
plans is not a routine matter and must be voted on by the beneficial 
owner. As noted above, NASD rules do not provide for broker voting on 
any matters, so the NYSE's rule is now consistent for equity 
compensation plans. The Commission has considered the impact on smaller 
issuers, such as those listed on Nasdaq and the Amex, in response to 
the comments on this issue. The Commission believes that the benefit of 
ensuring that the votes reflect the views of beneficial shareholders on 
equity compensation plans outweighs the potential difficulties in 
obtaining the vote.
    The Commission notes that, in its original filing, the NYSE 
committed to establishing a working group to advise on how to 
facilitate the implementation of this new rule prohibiting brokers from 
voting on equity compensation plans without voting instructions from 
the beneficial owner of the shares. The Commission also notes that the 
NYSE, in response to a commenter's concerns, has implemented a 
transition period that would make the new rule eliminating broker 
voting on equity compensation plans applicable only to shareholder 
meetings that occur on or after the 90th day from the effective date of 
the NYSE proposal.

I. Summary

    Overall, the Commission believes that the proposed amendments to 
the NYSE and Nasdaq proposals should alleviate many of the concerns 
raised by the commenters and should provide for more clear and uniform 
standards for shareholder approval of equity compensation plans under 
both NYSE and NASD rules. The Commission notes that, even with the 
availability of the proposed limited exemptions to shareholder approval 
under the NYSE and Nasdaq proposals, shareholder approval under the new 
standards would be required in more circumstances than under existing 
NYSE and NASD rules. The Commission further notes that the NYSE 
proposes to add a requirement that an issuer must notify it in writing 
when it uses one of the exemptions from the shareholder approval 
requirements and that Nasdaq has committed to considering such a 
requirement. The Commission believes that this disclosure requirement 
should reduce the potential for abuse of any of the exemptions.\121\ In 
addition, the NYSE's proposed amendment to NYSE Rule 452, which would 
preclude broker-dealers from voting on equity compensation plans 
without explicit instructions from the beneficial owner, is consistent 
with the standard under current NASD rules.
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    \121\ See also supra note 118.
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    The Commission notes that the NYSE and Nasdaq proposals, while not 
identical, set a consistent, minimum standard for shareholder approval 
of equity compensation plans. These proposals should help to ensure 
that companies will not make listing decisions simply to avoid 
shareholder approval requirements for equity compensation plans. As 
noted above, many of the commentators expressed concerns over the 
differences between the proposals, as well as over issues of scope and 
clarity. The Commission believes the proposed amendments have addressed 
these concerns. Thus, the Commission believes that the NYSE and Nasdaq 
proposals should provide shareholders with greater protection from the 
potential dilutive effect of equity compensation plans. Based on the 
above, the Commission finds that the NYSE and Nasdaq proposals should 
help to protect investors, are in the

[[Page 40009]]

public interest, and do not unfairly discriminate among issuers, 
consistent with sections 6(b) and 15A(b) of the Act.\122\ The 
Commission therefore finds the proposals, as amended, to be consistent 
with the Act and the rules and regulations thereunder.
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    \122\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78o-3(b)(6).
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V. Accelerated Approval of NYSE Amendments No. 1 and 2 and Nasdaq 
Amendments No. 2 and 3

    The Commission finds good cause for approving NYSE Amendments No. 1 
and 2 and Nasdaq Amendments No. 2 and 3 to the NYSE and Nasdaq proposed 
rule changes prior to the thirtieth day after the amendments are 
published for comment in the Federal Register pursuant to section 
19(b)(2) of the Act.\123\ NYSE Amendment No. 1 proposes technical 
corrections to the proposed rule language of the NYSE proposal. NYSE 
Amendment No. 2 proposes changes to the NYSE proposal based on 
discussions with Commission staff and in response to the comment 
letters. As discussed more fully above, NYSE Amendment No. 2, among 
other things, does the following: (1) Clarifies the terms ``equity 
compensation plan,'' ``material revision,'' and ``repricing''; (2) 
defines ``evergreen,'' ``formula'' and ``discretionary'' plans; and (3) 
provides new transition rules. Nasdaq Amendment No. 3, which replaces 
Nasdaq Amendment No. 2 in its entirety, also does the following: (1) 
States that the Nasdaq Board of Directors approved the Nasdaq proposed 
rule changes for filing with the Commission; and (2) proposes 
clarifying and conforming changes to the Nasdaq proposal based on 
recommendations from Commission staff and in response to the comment 
letters. As discussed more fully above, Nasdaq Amendment No. 3, among 
other things, also clarifies the term ``material amendment,'' proposes 
an exception to shareholder approval for plans that provide a way to 
purchase shares on the open market or from the issuer at fair market 
value, and discusses evergreen plans and repricings.
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    \123\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    The Commission believes that the proposed changes in NYSE 
Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 not only 
address many concerns raised in the comment letters, but are necessary 
to the conformity and proper application of the NYSE and Nasdaq listing 
standards relating to shareholder approval of equity compensation 
plans. The Commission therefore believes that accelerated approval of 
NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 is 
appropriate. The Commission also notes that the amendments provide 
further clarification to portions of the NYSE and Nasdaq proposals that 
have already been noticed for comment and do not separately raise any 
new regulatory issues. Based on the above, the Commission finds, 
consistent with sections 6(b)(5),\124\ 15A(b)(6),\125\ and 19(b) \126\ 
of the Act, that good cause exists to accelerate approval of NYSE 
Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3.
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    \124\ 15 U.S.C. 78f(b)(5).
    \125\ 15 U.S.C. 78o-3(b)(6).
    \126\ 15 U.S.C. 78s(b).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning NYSE Amendments No. 1 and 2 and Nasdaq Amendments 
No. 2 and 3 to the NYSE and Nasdaq proposed rule changes, including 
whether NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 
are 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 offices of the NYSE and Nasdaq. 
All submissions should refer to File No. SR-NYSE-2002-46 and SR-NASD-
2002-140 and should be submitted by July 24, 2003.

VII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes, SR-NYSE-2002-46 and SR-NASD-2002-140, as amended, are 
consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange and a national securities 
association, respectively, and, in particular, with section 6(b)(5) of 
the Act \127\ and with section 15A(b)(6) of the Act,\128\ respectively.
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    \127\ 15 U.S.C. 78f(b)(5).
    \128\ 15 U.S.C. 78o-3(6).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\129\ that the proposed rule changes, SR-NYSE-2002-46 and SR-NASD-
2002-140, and Nasdaq Amendment No. 1 are approved, and that NYSE 
Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 are approved 
on an accelerated basis.
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    \129\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\130\
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    \130\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-16883 Filed 7-2-03; 8:45 am]
BILLING CODE 8010-01-P