[Federal Register Volume 68, Number 200 (Thursday, October 16, 2003)]
[Notices]
[Pages 59650-59656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26103]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48610; File No. SR-Amex-2003-42]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
Nos. 1, 2 and 3 Thereto by the American Stock Exchange LLC Relating to 
Shareholder Approval of Stock Option Plans and Other Equity 
Compensation Arrangements

October 9, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 6, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On July 24, 2003, the Amex filed Amendment No. 1 to the proposed rule 
change.\3\ On September 10, 2003, the Amex filed Amendment No. 2 to the 
proposed rule change.\4\ On October 1, 2003, the Amex filed Amendment 
No. 3 to the proposed rule change.\5\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons and is approving the proposal, as amended, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Claudia Crowley, Vice President, Listing 
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated July 22, 2003 
(``Amendment No. 1''). Amendment No. 1 supercedes and replaces 
Amex's original Rule 19b-4 filing in its entirety.
    \4\ See letter from Claudia Crowley, Vice President, Listing 
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated September 9, 2003 (``Amendment No. 2''). Amendment 
No. 2 supercedes and replaces Amex's original Rule 19b-4 filing and 
Amendment No. 1 in their entirety.
    \5\ See letter from Claudia Crowley, Vice President, Listing 
Qualifications, Amex, to Sapna C. Patel, Special Counsel, Division, 
Commission, dated October 1, 2003 (``Amendment No. 3''). In 
Amendment No. 3, the Amex made a technical change to the proposed 
rule language.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Section 711 of the Amex Company 
Guide relating to shareholder approval of stock option and equity 
compensation plans.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized; proposed deleted language is [bracketed].
* * * * *

American Stock Exchange LLC Company Guide

* * * * *

Sec. 711, [Options to Officers, Directors or Key Employees]--
Shareholder Approval of Stock Option and Equity Compensation Plans

    Approval of shareholders is required in accordance with Section 705 
[(unless exempted under paragraphs (a) and (b) below) as a prerequisite 
to approval of applications to list additional shares reserved for] 
with respect to the establishment of (or material amendment to) a stock 
option[s] or purchase plan or other equity compensation arrangement 
pursuant to which options or stock may be acquired by officers, 
directors, employees, or consultants [granted or to be granted to 
officers, directors or key employees], regardless of whether or not 
such authorization is required by law or by the company's charter, 
except for:[.]
    [Note: This policy does not preclude the adoption of a stock option 
plan, or the granting of options, subject to ratification by 
shareholders, prior to the filing of an application for the listing of 
the shares reserved for such purpose.
    The Exchange will not require shareholders' approval as a condition 
to listing shares reserved for the exercise of options when:]
    (a) [such options are issued] issuances to an individual, not 
previously an employee[d] or director of [by] the company, or following 
a bonafide period of non-employment, as an inducement [essential] 
material to entering into [a contract of] employment with the company 
provided that such issuances are approved by the company's independent 
compensation committee or a majority of the company's independent 
directors, and, promptly following an issuance of any employment 
inducement grant in reliance on this exception, the company discloses 
in a press release the material terms of the grant, including the 
recipient(s) of the grant and the number of shares involved [the 
potential issuance of shares pursuant to such options does not exceed 
5% of the company's outstanding common stock]; or
    (b) [such options are to be granted:]
    [(i)] [under a] tax qualified, non-discriminatory employee benefit 
plans [or arrangement] (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 company's 
independent compensation committee or a majority of the company's 
independent directors; or plans that merely provide a convenient way to 
purchase shares in the open market or from the issuer at fair market 
value [in which all, or substantially all, of the company's employees 
participate, in a fair and equitable manner]; or
    (c) a plan or arrangement relating to an acquisition or merger; or
    (d) 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 typical dividend 
reinvestment plan).
    A listed company is required to notify the Exchange in writing with 
respect to the use of any of the exceptions set forth in paragraphs (a) 
through (d).
    [(ii) under a plan or arrangement for officers, directors or key 
employees provided such incentive arrangements do not authorize the 
issuance of more than 5% of outstanding common stock in any one year 
and provided that all arrangements adopted without shareholder approval 
in any five-year period do not authorize, in the aggregate, the 
issuance of more than 10% of such common stock. (For the purpose of 
calculating the percentage of stock issued in the aggregate, stock to 
be issued pursuant to options which have expired and/or been cancelled 
shall not be included.)]
    [For purposes of the above policy, the term ``options'' includes 
not only the usual type of nontransferable options granted in 
consideration of continued employment, but also any other arrangement 
under which controlling shareholders, officers, directors or key 
employees may acquire (other than as part of a public offering) stock 
or convertible securities of a company at a price below market price at 
the time such stock is acquired or through the use of credit extended, 
directly or indirectly, by the company. Thus, the sale to such a 
person(s) of a common stock purchase warrant or right (not part

[[Page 59651]]

of a public offering) or the sale of stock to such person who has 
borrowed money from the company, will normally necessitate shareholder 
approval.]

Commentary * * *

    .01 Section 711 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:
    (a) 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);
    (b) 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;
    (c) any material expansion of the class of participants eligible to 
participate in the plan; and
    (d) 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. Plans that do not contain a 
formula and do not impose a 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.
    Section 711 provides an exception to the requirement for 
shareholder approval 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\1\ as these plans are regulated 
under the Internal Revenue Code and Treasury Department regulations. An 
equity compensation plan that provides non-U.S. employees with 
substantially the same benefits as a comparable tax-qualified, non-
discriminatory employee benefit plan or parallel nonqualified plan that 
the issuer provides to its U.S. employees, but for features necessary 
to comply with applicable foreign tax law, is also exempt from 
shareholder approval under this section.
    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. Section 711 requires that such 
issuances must be approved by the issuer's independent compensation 
committee or a majority of the issuer's independent directors. Also, 
promptly following an issuance of any employment inducement grant in 
reliance on this exception, the listed company must disclose in a press 
release the material terms of the grant, including the recipient(s) of 
the grant and the number of shares involved.
    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 Section 711. 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. A 
plan or arrangement adopted in contemplation of the merger or 
acquisition transaction would not be viewed as 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 
connection with a merger or acquisition would be counted 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 of Section 712(b).
    Inducement grants, tax qualified non-discriminatory benefit plans, 
and parallel nonqualified plans are subject to approval by either the 
issuer's independent compensation committee, or a majority of the 
issuer's independent directors. A listed company is not permitted to 
use repurchased shares to fund option plans or grants without prior 
shareholder approval. In addition, the issuer must notify the Exchange 
in writing when it uses any of these exceptions (see also Part 3 with 
respect to the requirements applicable to additional listing of the 
underlying shares).
* * * * *
    \1\ 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. Sec.  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) and (ii) its terms are 
substantially the same as the qualified plan that it parallels 
except for the elimination of

[[Page 59652]]

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.
    See also Section 806.
* * * * *

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

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

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

1. Purpose
    The Exchange represents that Section 711 of the Amex Company Guide 
currently requires listed companies to obtain shareholder approval for 
many stock option plans and other arrangements in which officers, 
directors and key employees participate, to address concerns about the 
possibility of self-dealing and dilution to the detriment of 
shareholders. The Exchange further states that under Section 711(b)(i) 
of the Amex Company Guide there is an exception for ``broadly based'' 
plans in which all, or substantially all, of the company's employees 
participate in a fair and equitable manner, even if officers, directors 
and key employees receive option grants under the plan, as well as for 
de minimus grants.
    The Exchange represents that, in order to enhance investor 
confidence and provide consistency across marketplaces, it is proposing 
to eliminate the existing exceptions to the shareholder approval 
requirements under current Section 711 of the Amex Company Guide and to 
require shareholder approval of all stock option and equity 
compensation plans, subject to limited exceptions.\6\ The proposed 
amendments to Section 711 of the Amex Company Guide will become 
effective upon SEC approval.
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    \6\ Section 302 of the Amex Company Guide provides that listed 
companies may not reissue treasury shares without first obtaining 
shareholder approval, for any purpose where the rules or policies of 
the Exchange would require such approval had the shares to be issued 
been previously authorized but unissued. This requirement is 
unchanged by the current proposal.
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    The Exchange represents that existing plans will not require 
shareholder approval unless there is a material amendment to the plan. 
Proposed Commentary .01 to Section 711 of the Amex Company Guide 
specifies a non-exclusive list of plan amendments that would be 
considered material, and also clarifies that while broad 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. 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 (sometimes called an ``evergreen 
plan'') 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 do not contain a 
formula and do not impose a 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 Commentary also provides that issuers should 
strive to make plan terms easily understandable and that plans meant to 
permit repricing should use explicit terminology in this regard.
    With respect to plans involving a merger or acquisition, 
shareholder approval would not be required in two situations. First, 
shareholder approval would not be required to convert, replace or 
adjust outstanding options or other equity compensation awards to 
reflect the transaction. Second, shares available under certain plans 
acquired in corporate acquisitions and mergers may be used for certain 
post-transaction grants without further shareholder approval. This 
exception applies to situations where the party which is not a listed 
company following the transaction has shares available for grant under 
pre-existing plans that meet the requirements of revised Section 711 of 
the Amex Company Guide.\7\ These shares may be used for post-
transaction grants of options and other equity awards by the listed 
company (after appropriate adjustment of the number of shares to 
reflect the transaction), either under the pre-existing plan or another 
plan, without further shareholder approval, so long as (1) the time 
during which those shares are available for grants is not extended 
beyond the period when they would have been available under the pre-
existing plan, absent the transaction, and (2) such options and other 
awards are not granted to individuals who were employed by the granting 
company at the time the merger or acquisition was consummated. The 
Exchange would view a plan adopted in contemplation of the merger or 
acquisition as not pre-existing for purposes of this exception. This 
exception is appropriate because it would not result in any increase in 
the aggregate potential dilution of the combined enterprise.\8\
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    \7\ The Amex represents that such post-transaction grants can 
only be made under pre-existing plans that were previously approved 
by shareholders. Telephone conversation between Claudia Crowley, 
Vice President, Listing Qualifications, Amex, and Sapna C. Patel, 
Attorney, Division, Commission, on July 23, 2003.
    \8\ The Amex notes that any such shares reserved for listing in 
connection with the transaction would be counted by the Amex 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 Section 712(b) of the Amex Company Guide.
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    The adoption of tax-qualified, non-discriminatory benefit plans 
(pursuant to Internal Revenue Code and Treasury Department regulations) 
or parallel nonqualified plans, will not require shareholder approval, 
but must be approved by either the issuer's independent compensation 
committee or a majority of its independent directors. In addition, an 
equity compensation plan that provides non-U.S. employees with 
substantially the same benefits as a comparable tax-qualified, non-
discriminatory employee benefit plan or parallel nonqualified plan that 
the issuer provides to its U.S. employees, but for features necessary 
to comply with applicable foreign tax law, is also exempt from 
shareholder approval under Section 711 of the Amex Company Guide. 
However, the proposed rule addresses only the issue of whether 
shareholder approval is required pursuant to Amex rules, and would not 
impact any shareholder approval or other requirements under the 
Internal Revenue Code or other applicable laws or requirements with 
respect to such plans.
    The Exchange is also proposing to retain its existing exception for 
inducement grants to new employees (including a previous employee 
following a bonafide period of non-employment by the listed company), 
including grants to new employees in connection with a merger or 
acquisition. The Exchange is also proposing to remove the existing 
restriction which

[[Page 59653]]

limits such grants to five percent of the company's outstanding common 
stock, which is in conformance with recently approved New York Stock 
Exchange, Inc. (``NYSE'') and The Nasdaq Stock Market, Inc. 
(``Nasdaq'') proposals.\9\ The Exchange does not believe that 
shareholder approval is necessary in these circumstances for several 
reasons. The Exchange believes that inducement grants are often subject 
to some urgency and the need to obtain shareholder approval could thus 
be impracticable. Furthermore, the Exchange believes that such grants 
are negotiated at ``arms'' length'' and do not involve the potential 
for self-dealing on the part of existing officers and directors. 
However, the Exchange represents that all inducement grants will be 
subject to approval by either the issuer's independent compensation 
committee or a majority of its independent directors. Additionally, the 
Exchange represents that promptly following an issuance of any 
employment inducement grant in reliance on this exception, a company 
must disclose in a press release the material terms of the grant, 
including the recipient(s) of the grant and the number of shares 
involved.
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    \9\ See Securities Exchange Act Release No. 48108 (June 30, 
2003), 68 FR 39995 (July 3, 2003) (order approving File Nos. SR-
NYSE-2002-46 and SR-NASD-2002-140). See also Section 303A(8) of the 
NYSE's Listed Company Manual; NASD Rule 4350(i) and IM-4350-5; and 
File No. SR-NASD-2003-130.
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    In addition, rights and warrants issued generally to all 
shareholders will not require shareholder approval, nor would plans 
that merely provide a convenient way for all security holders to 
purchase shares on the open market or from the issuer at fair market 
value on equal terms. The Amex believes that such issuances do not 
raise the same concerns regarding self-dealing and dilution as stock 
option plans.
    Further, the Exchange proposes to require the issuer to notify the 
Exchange in writing when it uses any of the exceptions to the 
shareholder approval requirement contained in Section 711 of the Amex 
Company Guide, and such grants are also subject to Part 3 of the Amex 
Company Guide with respect to the requirements applicable to the 
additional listing of the underlying shares.
    The Exchange also proposes to delete the existing provision of 
Section 711 of the Amex Company Guide, which contains an exception from 
the shareholder approval requirement for an option plan that does not 
authorize the issuance to officers, directors or key employees of more 
than five percent of outstanding common stock in any one year (provided 
all such arrangements adopted without shareholder approval in any five 
year period do not authorize the issuance of more than ten percent of 
outstanding common stock), and which governs participation by 
controlling shareholders, officers, directors and key employees in 
discounted private placements.\10\
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    \10\ The Exchange has submitted a separate rule change proposal 
(SR-Amex-2003-70) to amend Section 713 of the Amex Company Guide to 
reincorporate this policy solely in the context of discounted 
private placements. The Commission notes that this separate proposed 
rule change filed by the Amex is currently pending before the 
Commission and has not been approved.
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    Finally, the Exchange notes that the Commission has asked the Amex 
to adopt a rule similar to the NYSE's rule prohibiting members and 
member organizations from giving a proxy to vote without instructions 
from beneficial owners when the matter to be voted on authorizes the 
implementation of any equity compensation plan, or any material 
revision to the terms of any existing equity compensation plan.\11\ The 
Amex has consented to reconsidering this issue.\12\
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    \11\ See NYSE Rule 452 and Section 402.08 of the NYSE's Listed 
Company Manual.
    \12\ Telephone conversation between Claudia Crowley, Vice 
President, Listing Qualifications, Amex, and Sapna C. Patel, Special 
Counsel, Division, Commission, on October 2, 2003. The Commission 
notes that equity compensation plans have become an important issue 
for shareholders. Because of the potential for dilution from such 
issuances, the Commission believes that shareholders should be 
making the determination rather than brokers on their behalf. The 
Commission further notes that, generally under Amex 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 strongly urges the Amex to designate that shareholder 
approval of equity compensation plans is not a routine matter and 
must be voted on by the beneficial owner.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act \13\ in general and furthers the 
objectives of Section 6(b)(5)\14\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, to protect investors 
and the public interest and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-Amex-2003-42 and should be submitted by November 6, 2003.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the Amex's 
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.\15\ Specifically, the Commission finds that approval of the 
Amex's proposal, as amended, is consistent with Section 6(b)(5) of the 
Act \16\ 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

[[Page 59654]]

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.
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    \15\ 15 U.S.C. 78f(b). In approving the Amex's proposal, as 
amended, the Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    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 Amex's amended proposal, 
which requires shareholder approval of equity compensation plans and 
which follows the Commission's approval of similar proposals by the 
NYSE and Nasdaq,\17\ is the first step under this directive because it 
should have the effect of safeguarding the interests of shareholders, 
while placing certain restrictions on Amex-listed companies.
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    \17\ See supra note 9.
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    In addition, the Commission notes that the Amex's proposal, as 
amended, is similar and almost identical to proposals by NYSE and 
Nasdaq requiring shareholder approval of equity compensation plans that 
have previously been approved by the Commission.\18\ The Commission 
believes that it has already considered and addressed the issues that 
may be raised by the Amex's proposal when it approved the NYSE and 
Nasdaq's proposals. The Commission notes that approval of the Amex's 
proposal, as amended, will conform Amex's shareholder approval 
requirements for equity compensation plans with those of the NYSE and 
Nasdaq, and will immediately impose the same requirements on Amex 
issuers as those imposed upon NYSE and Nasdaq issuers. The adoption of 
these standards by the Amex is an important step to ensure that issuers 
will not be able to avoid shareholder approval requirements for equity 
compensation plans based on their listed marketplace.
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    \18\ See supra note 9.
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A. Exception From Shareholder Approval 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, under the Amex's amended proposal, should 
prevent abuse of this exception from shareholder approval. The 
Commission notes that the Amex is proposing to include a requirement, 
similar to the requirement under NYSE's recently approved shareholder 
approval rule, that, promptly 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.\19\ The Commission notes that the Amex is also 
proposing a requirement, similar to the requirements under the NYSE and 
Nasdaq's recently approved shareholder approval rules,\20\ that an 
issuer must notify it in writing when it uses this exception, and/or 
any other exception, from its shareholder approval requirement. The 
Commission believes that these disclosure and notification requirements 
will provide transparency to investors and should reduce the potential 
for abuse of this exception for inducement grants.
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    \19\ 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.
    \20\ See Section 303A(8) of the NYSE's Listed Company Manual and 
NASD Rules 4310(c)(17)(A) and 4320(e)(15)(A) .
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    In addition, the Amex proposes to limit its exception for 
inducement grants 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 limitations should help to prevent the 
inducement exception from being used inappropriately.

B. Exception From Shareholder Approval for Mergers and Acquisitions

    The Commission notes that the Amex's exception from shareholder 
approval for mergers and acquisitions contains 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 Amex's 
proposal, as amended, any shares reserved for listing in connection 
with a merger or acquisition pursuant to this exception would be 
counted by the Amex in determining whether the transaction involved the 
issuance of 20% or more of the company's outstanding common stock, 
thereby requiring shareholder approval under Section 712(b) of the Amex 
Company Guide. Finally, the Commission notes that the Amex proposes an 
additional requirement that an issuer must notify it in writing when it 
uses this exception, and/or any other exception, from its shareholder 
approval requirement. Based on the above, the Commission believes that 
the Amex has provided measures to ensure that the exception for mergers 
and acquisitions is only used in limited circumstances, which should 
help reduce the potential for dilution of shareholder interests.

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

    The Commission believes that, given the extensive government 
regulation--the Internal Revenue Code and Treasury regulations--for tax 
qualified plans and the general limitations associated with parallel 
nonqualified plans, shareholders should not experience significant 
dilution as a result of this exception. In addition, the Commission 
notes that the Amex proposes to add a limitation under this exception 
that a plan would not be considered a nonqualified parallel under its 
proposal if employees who are participants in such plans receive 
employer contributions under the plans in excess of 25% of the 
participants' cash compensation. The Commission further notes that the 
Amex proposes an additional requirement that an issuer must notify it 
in writing when it uses this exception, and/or any other exception, 
from its shareholder approval requirement. The Commission believes 
that, taken together, these limitations should reduce concerns 
regarding abuse of this exception from the shareholder approval 
requirements.
    In addition, the Commission notes that, similar to the exemption 
under Section 303A(8) of the NYSE's Listed Company Manual, the Amex 
proposes to adopt an exception from the shareholder approval 
requirements for an equity compensation plan that provides non-U.S. 
employees with substantially the same benefits as a comparable tax 
qualified, non-discriminatory employee benefit plan or parallel 
nonqualified plan that the issuer provides to its U.S. employees, but 
for features necessary to comply with applicable foreign tax law. The 
Commission believes that this change will conform Amex's shareholder 
approval rule to that of the NYSE and will provide greater clarity for 
issuers regarding tax qualified, non-

[[Page 59655]]

discriminatory employee benefit plans and parallel nonqualified plans 
for their non-U.S. employees.

D. Material Amendments to Plans

    The Commission notes that the Amex proposes to provide a non-
exclusive list, similar to lists found in the NYSE and Nasdaq's 
shareholder approval rules,\21\ as to what constitutes a material 
amendment to a plan. As noted above, material amendments to plans will 
require shareholder approval under Amex rules. A material amendment 
under the Amex proposal, as amended, would include, but is not limited 
to: 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); a material increase in benefits to 
participants, including any material change to (1) permit a repricing 
(or decrease in exercise price) of outstanding options, (2) reduce the 
price at which shares or options to purchase shares may be offered, or 
(3) extend the duration of the plan; a material expansion of the class 
of participants eligible to participate in the plan; an expansion of 
the type of options or awards available under the plan. The Amex's 
proposal, as amended, also describes what would constitute a material 
amendment for plans containing a formula for automatic increases (such 
as evergreen plans) and automatic grants requiring shareholder 
approval.
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    \21\ See supra note 9.
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    The Commission believes that the Amex's non-exclusive list of what 
would constitute a material amendment 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 Amex's 
proposal to conform its non-exclusive list with the NYSE and Nasdaq's 
rules on material amendments/revisions should help to ensure that the 
concept of material amendments is consistent among the markets so that 
differences between the markets cannot be abused.

E. Repricing of Plans

    The Commission notes that, under the Amex's proposal, as amended, 
if a plan is amended to permit repricing, such an amendment would be 
considered a material amendment to a plan requiring shareholder 
approval. In addition, the Amex recommended in its proposal that plans 
meant to permit repricing should explicitly and clearly state that 
repricing is permitted.
    The Commission believes that the Amex's proposal, 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 the Amex's approach to 
repricings is similar to the NYSE and Nasdaq's respective approaches to 
repricings, 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.

F. Evergreen or Formula Plans and Plans Without a Formula or Limit on 
the Number of Shares Available

    The Commission notes the Amex's proposal, as amended, provides 
guidance for the treatment of evergreen/formula plans. More 
specifically, under the Amex's proposal, as amended, if a plan contains 
a formula for automatic increases in the shares available or for 
automatic grants pursuant to a formula, such plans cannot have a term 
in excess of ten years unless shareholder approval is obtained every 
ten years. In addition, under the Amex's proposal, as amended, 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. Furthermore, the Amex's proposal, as amended, 
provides that a requirement that grants be made out of treasury or 
repurchased shares will not alleviate the need for shareholder approval 
for additional grants.\22\
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    \22\ See also supra note 8.
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    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 believes that 
Amex's proposed rules relating to the treatment of evergreen/formula 
plans and plans that do not contain a formula or place a limit on the 
number of shares available should provide more clarity and transparency 
to issuers as to when shareholder approval would be required for such 
plans. Finally, the Commission believes that the provision ensuring 
that treasury and repurchased shares cannot be used to avoid these 
additional shareholder approval requirements strengthens the proposal 
and ensures that companies cannot avoid compliance with the rule.

G. Miscellaneous Provisions and Other Items

    The Commission notes that the Amex's amended proposal--similar to 
the NYSE and Nasdaq's recently approved shareholder approval rules 
\23\--incorporates the term ``equity compensation'' and proposes that 
plans that merely provide a convenient way to purchase shares in the 
open market or from the issuer at fair market price on equal terms to 
all security holders would not require shareholder approval. The 
Commission believes that the Amex's proposal, as amended, is consistent 
with the NYSE and Nasdaq's rules in this area and should provide 
greater clarity with respect to which plans would and would not require 
shareholder approval.
---------------------------------------------------------------------------

    \23\ See supra note 9.
---------------------------------------------------------------------------

    The Commission notes that the Amex's proposal, as amended, provides 
that pre-existing plans, which were adopted prior to the SEC's approval 
of the Amex's proposal, would essentially be ``grandfathered'' and 
would not require shareholder approval unless the plans were materially 
amended. The Commission believes that this clarification should provide 
companies with guidance as to which plans would be subject to the new 
Amex shareholder approval requirements.
    Finally, the Commission urges the Amex to quickly adopt a standard 
prohibiting discretionary broker voting of equity compensation plans. 
NASD rules do not provide for broker voting on any matters, and NYSE 
rules prohibit broker voting on equity compensation plans. In its 
approval of the NYSE and Nasdaq proposals, the Commission considered 
the impact on smaller issuers, such as those listed on Nasdaq and the 
Amex, in response to the comments received on this issue.\24\ 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, and, 
therefore, strongly recommends that the Amex quickly adopt a 
prohibition on broker voting of equity compensation plans.\25\
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    \24\ See also supra notes 9 and 11.
    \25\ See also supra note 12 and accompanying text.
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H. Summary

    Overall, the Commission believes that the Amex's proposal, as 
amended, is similar to the NYSE and Nasdaq's recently approved 
shareholder approval rules.\26\ The Commission therefore believes that 
the Amex's proposal, as amended, should provide for more clear

[[Page 59656]]

and uniform standards for shareholder approval of equity compensation 
plans. The Commission notes that, even with the availability of the 
proposed limited exceptions to shareholder approval under the Amex's 
proposal, as amended, shareholder approval under the new standards 
would be required in more circumstances than under existing Amex rules. 
The Commission further notes that the Amex proposes to adopt a 
requirement that an issuer must notify it in writing when it uses one 
of the exceptions from the shareholder approval requirements. The 
Commission believes that such a requirement, coupled with the 
additional disclosure requirements for inducement grants, should reduce 
the potential for abuse of any of the exceptions.\27\
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    \26\ See supra note 9.
    \27\ See also supra note 19 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Amex's proposal, as amended, which 
is similar to the NYSE's shareholder approval rule and almost identical 
to Nasdaq's shareholder approval rule,\28\ sets a consistent, minimum 
standard for shareholder approval of equity compensation plans. The 
Commission believes that the Amex's proposal, as amended, should help 
to ensure that companies will not make listing decisions simply to 
avoid shareholder approval requirements for equity compensation plans 
and should provide shareholders with greater protection from the 
potential dilutive effect of equity compensation plans. Based on the 
above, the Commission finds that the Amex's proposal, as amended, 
should help to protect investors, are in the public interest, and do 
not unfairly discriminate among issuers, consistent with Sections 6(b) 
of the Act.\29\ The Commission therefore finds the Amex's proposal, as 
amended, to be consistent with the Act and the rules and regulations 
thereunder.
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    \28\ See supra note 9.
    \29\ 15 U.S.C. 78f(b)(5).
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V. Accelerated Approval of the Amex's Proposal and Amendment Nos. 1, 2 
and 3

    The Commission finds good cause for approving the Amex's proposal, 
as amended, prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission notes that the 
Amex's proposal, as amended, is similar to the NYSE's proposal and 
almost identical to the Nasdaq's proposal requiring shareholder 
approval of equity compensation plans. Both the NYSE and Nasdaq 
proposals were published for comment in the Federal Register and 
recently approved by the Commission.\30\ The Commission believes that 
it already considered and addressed the issues that may be raised by 
the Amex's proposal in its approval of the NYSE and Nasdaq's 
proposals.\31\
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    \30\ See Securities Exchange Act Release No. 46620 (October 8, 
2002), 67 FR 63486 (notice of the NYSE's proposal). The Commission 
also published a correction to the notice of the NYSE's proposal. 
See Securities Exchange Act Release No. 44620A (October 21, 2002), 
67 FR 65617 (October 25, 2002). See Securities Exchange Act Release 
No. 46649 (October 11, 2002), 67 FR 64173 (notice of Nasdaq's 
proposal). See supra note 9.
    \31\ Some of the substantive provisions ultimately adopted by 
the NYSE and Nasdaq, and now being proposed for adoption by the 
Amex, were in response to these comments. The comments on the NYSE 
and Nasdaq proposals were also discussed in detail in the 
Commission's approval order of the NYSE and Nasdaq proposals. See 
supra note 9.
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    The Commission believes that accelerated approval of the Amex's 
proposal, as amended, is essential to allow for immediate harmonization 
of, and consistency in, the shareholder approval requirements for 
equity compensation plans between the Amex, the NYSE, and Nasdaq. This 
will prevent issuers from making listing decisions based on differences 
in self-regulatory organization shareholder approval requirements and 
should provide equal investor protection to shareholders on the 
dilutive effects of plans irrespective of where the security trades. 
The Commission further believes that making the Amex's new shareholder 
approval rules effective upon Commission approval will immediately 
impose the same requirements on Amex issuers as those imposed upon NYSE 
and Nasdaq issuers. Based on the above, the Commission finds good 
cause, consistent with Sections 6(b)(5) and 19(b)(2) of the Act \32\ to 
approve the Amex's proposal, as amended, on an accelerated basis.
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    \32\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-Amex-2003-42) and Amendment 
Nos. 1, 2 and 3 are hereby approved on an accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26103 Filed 10-15-03; 8:45 am]
BILLING CODE 8010-01-P