[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63180-63187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28071]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48736; File No. SR-Phlx-2003-67]


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

October 31, 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 September 30, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
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. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delete the introductory language and 
subsection (a) of Phlx Rule 850, Shareholder Approval Policy, and 
replace it with rule text and commentary regarding shareholder approval 
of equity compensation plans that tracks the National Association of 
Securities Dealers, Inc.'s (``NASD'') Rule 4350(i) and NASD IM 4350-
5.\3\ The Exchange

[[Page 63181]]

also proposes to amend Phlx Rule 862, Proxies at Direction of Owner, to 
preclude broker voting on equity compensation plans.
---------------------------------------------------------------------------

    \3\ The Commission notes that the Exchange is proposing to adopt 
listing standards relating to shareholder approval of equity 
compensation plans that are similar to those that the Commission 
recently approved for the New York Stock Exchange, Inc. (``NYSE'') 
and the NASD, through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''). 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 Securities Exchange Act 
Release No. 48627 (October 14, 2003), 68 FR 60426 (October 22, 2003) 
(notice of filing and order granting accelerated approval to File 
No. SR-NASD-2003-130, incorporating amendments to the NASD's 
recently approved shareholder approval rules for equity compensation 
plans applicable to Nasdaq quoted securities). The Commission also 
published a correction to the notice of File No. SR-NASD-2003-130. 
See Securities Exchange Act Release No. 48627A (October 22, 2003), 
68 FR 61532 (October 28, 2003). The Commission notes that these 
additional amendments by Nasdaq make the NYSE and Nasdaq proposals 
more consistent and uniform. See also infra note (regarding the 
Commission's recent approval of a similar proposal by the American 
Stock Exchange LLC (``Amex'')).
---------------------------------------------------------------------------

    Below is the text of the proposed rule change.\4\ Proposed new 
language is italicized; proposed deleted language is [bracketed].
---------------------------------------------------------------------------

    \4\ Upon the Exchange's request, the Commission made a technical 
correction to the proposed rule text. Telephone conversation between 
Carla Behnfeldt, Director, Legal Department New Product Development 
Group, Phlx, and Sapna C. Patel, Special Counsel, Division of Market 
Regulation, Commission, on October 31, 2003.
---------------------------------------------------------------------------

* * * * *
Rule 850, Shareholder Approval Policy
    Rule 850. [A listed company shall require shareholder approval of 
the issuance of securities in connection with the following:
    (a) Options plans or other special remunerations plans for 
directors, officers or key employees.] Each issuer shall require 
shareholder approval prior to the issuance of designated securities 
under subparagraph (a), (b), or (c) 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 independent 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 the Commentary to this rule; 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 independent compensation committee or a majority of the 
issuer's independent directors. 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 the shares 
involved.
    Issuers shall notify the Exchange 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. 
    (b) No change.
    (c) No change.
* * * * *

Commentary

    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 850(a) 
ensures that shareholders have a voice in these situations, given this 
potential for dilution.
    Rule 850(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 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.
    Rule 850(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 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 that the issuer 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.

[[Page 63182]]

    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 independent compensation 
committee or a majority of the issuer's independent directors. The rule 
further requires 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.
    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 were previously approved by shareholders and meet 
the requirements of this Rule 850(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. The 
Exchange 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 connection with a 
merger or acquisition 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, thus triggering the shareholder 
approval requirements under Rule 850(c).
    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. 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.
    For purposes of Rule 850(a), including this Commentary, 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); 
(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.
    Rule 850(a) and this Commentary will become effective upon 
Securities and Exchange Commission approval; however, existing plans 
will be grandfathered. Any material modification to plans in place or 
adopted after the effective date will require shareholder approval.
    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 
Exchange Rule 862. Amended Rule 862 will be effective for any meeting 
of shareholders that occurs on or after the 90th day following the 
effective date of the Securities and Exchange Commission order 
approving the rule change.
* * * * *
Rule 862, Proxies at Direction of Owner
    Rule 862. A member organization shall give a proxy for stock 
registered in its name, at the direction of the beneficial owner. If 
the stock is not in the control or possession of the member 
organization, satisfactory proof of the beneficial ownership as of the 
record date may be required.
    Member organization holdings as executor, etc.
    A member organization may give a proxy to vote any stock registered 
in its name if the member organization holds such stock as executor, 
administrator, guardian, trustee, or in a similar representative or 
fiduciary capacity with authority to vote.
    Procedure without instructions--Instructions on stock in names of 
other member organizations
    A member organization which has transmitted proxy soliciting 
material to the beneficial owner of stock in accordance with the 
provisions of Rule 861, and which has not received instructions from 
the beneficial owner by the date specified in the statement 
accompanying such material, may give a proxy to vote such stock, 
provided the person signing the proxy has no knowledge of any contest 
as to the action to be taken at the meeting and provided such action 
does not include authorization for a merger, consolidation or any other 
matter which may affect substantially the legal rights or privileges of 
such stock.
    A member organization which has in its possession or control stock 
registered in the name of another member organization shall:
    (1) Forward to such other member organization any voting 
instructions received from the beneficial owner, or
    (2) If the proxy-soliciting material has been transmitted to the 
beneficial owner of the stock in accordance with Rule 861 and no 
instructions have been received by the date specified in the statement 
accompanying such material, notify such other member organization of 
such fact in order that such organization may give the proxy as 
provided in the first paragraph of this Rule.

[[Page 63183]]

    Notwithstanding the foregoing, a member organization may not give a 
proxy to vote without instructions from beneficial owners when the 
matter to be voted upon authorizes the implementation of any equity 
compensation plan, or any material revision to the terms of any 
existing equity compensation plan (whether or not stockholder approval 
of such plan is required by Rule 850.)
* * * * *

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

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

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

1. Purpose
    The Exchange proposes to revise Exchange Rule 850 to require 
shareholder approval for stock option plans or other equity 
compensation arrangements (subject to exceptions specified in the 
rule), to adopt a ``Commentary'' pertaining to shareholder approval for 
stock option plans or other equity compensation arrangements, and to 
revise Exchange Rule 862 to preclude broker voting in connection with 
shareholder approval of equity compensation plans.
    Specifically, the Exchange proposes to adopt an exception for 
warrants or rights offered generally to all shareholders. The exception 
would exclude stock purchase plans available on equal terms to all 
security holders of the company (such as a dividend reinvestment plan) 
from the shareholder approval requirement. In addition, the 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 
Exchange's proposal also provides an exception for parallel 
nonqualified plans, which are plans that work parallel with plans 
intended to qualify under the Internal Revenue Code. Additionally, 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 the 
shareholder approval requirements.
    Furthermore, the Exchange proposes to adopt an exception for 
inducement grants to new employees because, in these cases, a company 
has an arm's length relationship with the new employees, and its 
interests are directly aligned with the shareholders. This exception 
would apply to persons previously employed by the issuer following a 
bona fide period of non-employment. In addition, for these purposes, 
inducement grants would include grants of options or stock to new 
employees in connection with a merger or acquisition. The proposal 
would require 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.
    In addition, the proposal would provide that plans involving a 
merger or acquisition would not require shareholder approval in two 
situations. First, the Exchange will not require shareholder approval 
to convert, replace or adjust outstanding options or other equity 
compensation awards to reflect the transaction. Second, the 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 would apply 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. 
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. The Exchange would view 
a plan adopted in contemplation of the merger or acquisition 
transaction as not pre-existing for purposes of this exception. The 
Exchange 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.
    Under the Exchange's proposal, 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. The 
Exchange also notes that a company would not be permitted to use 
repurchased shares to fund options without prior shareholder approval. 
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 Exchange proposal further clarifies that material amendments to 
plans would require shareholder approval. The accompanying proposed 
``Commentary'' 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 generally be 
required.\5\ Certain provisions in a plan, however, cannot be amended 
without shareholder approval. For example, stock option plans that 
contain 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. 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.
---------------------------------------------------------------------------

    \5\ The Exchange 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.
---------------------------------------------------------------------------

    The proposed ``Commentary'' also provides that, as a general 
matter, when preparing plans and presenting them for

[[Page 63184]]

shareholder approval, issuers should strive to make plan terms easy to 
understand. In that regard, the Exchange recommends that plans meant to 
permit repricing use explicit terminology to make this clear.
    With respect to implementation of revised Rule 850 and the 
accompanying Commentary, the Exchange proposes that they become 
effective upon SEC approval, and that existing plans be grandfathered. 
Any material modification to plans in place or adopted after the 
effective date of revised Rule 850 and the accompanying Commentary 
would require shareholder approval.
    Under the Exchange's proposal, issuers would be required to notify 
the Exchange 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.
    Finally, the Exchange proposes to amend Exchange Rule 862 to 
prohibit member organizations from voting on equity compensation plans 
unless the beneficial owner of the shares has given voting 
instructions. The Exchange 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 Commission's 
order approving the amended rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\6\ in general, and furthers the objectives 
of Section 6(b)(5) of the Act,\7\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest, 
and does not permit unfair discrimination among issuers.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying 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-Phlx-2003-67 and 
should be submitted by November 28, 2003.

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

    After careful review, the Commission finds that the Exchange's 
proposal 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.\8\ Specifically, the Commission finds that approval of the 
Exchange's proposal is consistent with Section 6(b)(5) of the Act \9\ 
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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b). In approving the Exchange's proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 Exchange's proposal, 
which requires shareholder approval of equity compensation plans and 
which follows the Commission's approval of similar proposals by the 
NYSE, Nasdaq, and Amex \10\ is the first step under this directive 
because it should have the effect of safeguarding the interests of 
shareholders, while placing certain restrictions on Exchange-listed 
companies.
---------------------------------------------------------------------------

    \10\ See supra note 3. The Commission notes that it has recently 
approved similar rules requiring shareholder approval of equity 
compensation plans for the Amex on an accelerated basis. The Amex's 
proposal is almost identical to, and based on, the NYSE and Nasdaq 
proposals. See Securities Exchange Act Release No. 48610 (October 9, 
2003), 68 FR 59650 (October 16, 2003).
---------------------------------------------------------------------------

    In addition, the Commission notes that the Exchange's proposal 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.\11\ The Commission believes that it 
has already considered and addressed the issues that may be raised by 
the Exchange's proposal when it approved these proposals. The 
Commission notes that approval of the Exchange's proposal will conform 
the Exchange's shareholder approval requirements for equity 
compensation plans with those of the NYSE and Nasdaq, and will 
immediately impose the same requirements on the Exchange's issuers as 
those imposed upon NYSE, Nasdaq, and Amex issuers. The adoption of 
these standards by the Exchange 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.
---------------------------------------------------------------------------

    \11\ See supra notes 3 and 10.
---------------------------------------------------------------------------

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 Exchange's proposal, should prevent 
abuse of this exception from shareholder approval. In addition, the 
Exchange proposes to limit its exception for inducement grants to new 
employees or to previous employees being rehired

[[Page 63185]]

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.
    The Commission notes that the Exchange is proposing to include a 
requirement, similar to the requirement under the NYSE and Nasdaq's 
recently approved shareholder approval rules, 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.\12\ The Commission notes 
that the Exchange is also proposing a requirement, similar to the 
requirements under the NYSE and Nasdaq's recently approved shareholder 
approval rules,\13\ 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.
---------------------------------------------------------------------------

    \12\ 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.
    \13\ See Section 303A(8) of the NYSE's Listed Company Manual and 
NASD Rules 4310(c)(17)(A) and 4320(e)(15)(A). Under the Exchange's 
proposed rules, issuers have to notify the Exchange no later than 15 
calendar days prior to the use of any exceptions from the 
shareholder approval requirement.
---------------------------------------------------------------------------

B. Exception From Shareholder Approval for Mergers and Acquisitions

    The Commission notes that the Exchange'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 the Exchange's 
proposal, any shares reserved for listing in connection with a merger 
or acquisition pursuant to this exception 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, thereby 
requiring shareholder approval under Phlx Rule 850(c). Finally, the 
Commission notes that the Exchange 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 Exchange 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 Exchange proposes to add a limitation under this 
exception that a plan would not be considered a nonqualified parallel 
plan under its proposal if employees who are participants in such a 
plan receive employer contributions under the plan in excess of 25% of 
the participants' cash compensation. The Commission further notes that 
the Exchange 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 exceptions 
in the NYSE and Nasdaq's recently approved shareholder approval rules, 
the Exchange 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 the Exchange's 
shareholder approval rule to that of the NYSE and Nasdaq and will 
provide greater clarity for issuers regarding tax qualified, non-
discriminatory employee benefit plans and parallel nonqualified plans 
for their non-U.S. employees.

D. Material Amendments/Revisions to Plans

    The Commission notes that the Exchange proposes to provide a non-
exclusive list, similar to lists found in the NYSE and Nasdaq's 
shareholder approval rules,\14\ as to what constitutes a material 
amendment/revision to a plan. As noted above, material amendments/
revisions to plans will require shareholder approval under Exchange 
rules. A material amendment/revision under the Exchange's proposal 
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; and an expansion of the type of options or 
awards available under the plan. The Exchange's proposal also describes 
what would constitute a material amendment/revision for plans 
containing a formula for automatic increases (such as evergreen plans) 
and automatic grants requiring shareholder approval.
---------------------------------------------------------------------------

    \14\ See supra note 3; see also supra note 10.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's non-exclusive list of 
what would constitute a material amendment/revision to a plan provides 
companies with clarity and guidance for when certain amendments and 
revisions to plans would require shareholder approval. The Commission 
also believes that the Exchange'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/revisions 
is consistent among the markets so that differences between the markets 
cannot be abused.

E. Repricing of Plans

    The Commission notes that, under the Exchange's proposal, if a plan 
is amended to permit repricing, such an amendment would be considered a

[[Page 63186]]

material amendment to a plan requiring shareholder approval. In 
addition, the Exchange recommended in its proposal that plans meant to 
permit repricing should explicitly and clearly state that repricing is 
permitted.
    The Commission believes that the Exchange's proposal 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 Exchange'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 Exchange's proposal provides guidance for 
the treatment of evergreen/formula plans. More specifically, under the 
Exchange's proposal, 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 Exchange's proposal, 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 
Exchange's proposal 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.
    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 
the Exchange'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

    The Commission notes that the Exchange's proposal--similar to the 
NYSE and Nasdaq's recently approved shareholder approval rules \15\--
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 Exchange's proposal 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.
---------------------------------------------------------------------------

    \15\ See supra note 3; see also supra note 10.
---------------------------------------------------------------------------

    The Commission notes that the Exchange's proposal provides that 
pre-existing plans, which were adopted prior to the SEC's approval of 
the Exchange's proposal, would essentially be ``grandfathered'' and 
would not require shareholder approval unless the plans were materially 
amended. Under the Exchange's proposal, however, shareholder approval 
is required for each grant made pursuant to any 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. This 
is consistent with the NYSE, Nasdaq, and Amex shareholder approval 
rules on this matter. The Commission believes that this clarification 
should provide companies with guidance as to which plans would be 
subject to the Exchange's new shareholder approval requirements.
    The Commission further notes that the Exchange proposes to adopt an 
exception from the shareholder approval requirement for warrants or 
rights offered generally to all shareholders. This exception would 
exclude stock purchase plans available on equal terms to all security 
holders of the company (e.g., a dividend reinvestment plan). The 
Commission believes that the adoption of such an exception would make 
the Exchange's proposal consistent with the rules of other markets in 
this area.

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

    The Commission believes that the Exchange's proposed amendment to 
Phlx Rule 862 to preclude 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 issuances under such plans, shareholders 
should be making the determination rather than brokers on their behalf. 
The Commission further notes that NASD rules do not provide for broker 
voting on any matters and NYSE rules prohibit broker voting on equity 
compensation plans.\16\ Therefore, the Exchange's proposed provision 
would be consistent with NASD and NYSE rules regarding broker voting on 
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.\17\ 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.
---------------------------------------------------------------------------

    \16\ See NASD Rule 2260; NYSE Rule 452; and Section 402.08 of 
the NYSE's Listed Company Manual.
    \17\ See supra notes 3 and 16.
---------------------------------------------------------------------------

    The Commission also notes that the Exchange proposes to implement 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 Exchange's proposal.

I. Summary

    Overall, the Commission believes that the Exchange's proposal is 
similar to the NYSE and Nasdaq's recently approved shareholder approval 
rules.\18\ The Commission therefore believes that the Exchange's 
proposal should provide for more clear and uniform standards for 
shareholder approval of equity compensation plans. The Commission notes 
that, even with the availability of the proposed limited exceptions 
from shareholder approval under the Exchange's proposal, shareholder 
approval under the new standards would be required in more 
circumstances than under existing Exchange rules. The Commission 
further notes that the Exchange 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.\19\ In addition, the Exchange's 
proposed amendment to

[[Page 63187]]

Phlx Rule 862, 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 NYSE 
and NASD rules.
---------------------------------------------------------------------------

    \18\ See supra note 3; see also supra note 10.
    \19\ See also supra note 12 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal, which is 
similar to the NYSE and Nasdaq's shareholder approval rules,\20\ sets a 
consistent, minimum standard for shareholder approval of equity 
compensation plans. The Commission believes that the Exchange's 
proposal 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 Exchange's 
proposal should help to protect investors, is in the public interest, 
and does not unfairly discriminate among issuers, consistent with 
Section 6(b)(5) of the Act.\21\ The Commission therefore finds the 
Exchange's proposal to be consistent with the Act and the rules and 
regulations thereunder.
---------------------------------------------------------------------------

    \20\ See supra note 3; see also supra note 10.
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Accelerated Approval of the Exchange's Proposal

    The Commission finds good cause for approving the Exchange's 
proposal prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission notes that the 
Exchange's proposal is similar to the NYSE and Nasdaq's proposals 
requiring shareholder approval of equity compensation plans. Both the 
NYSE and Nasdaq's proposals were published for comment in the Federal 
Register and recently approved by the Commission.\22\ The Commission 
believes that it already considered and addressed the issues that may 
be raised by the Exchange's proposal in its approval of the NYSE and 
Nasdaq's proposals.\23\
---------------------------------------------------------------------------

    \22\ 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 3; see also supra note 10.
    \23\ Some of the substantive provisions ultimately adopted by 
the NYSE and Nasdaq, and now being proposed for adoption by the 
Exchange, 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 3; see also supra note 10.
---------------------------------------------------------------------------

    The Commission believes that accelerated approval of the Exchange's 
proposal is essential to allow for immediate harmonization of, and 
consistency in, the shareholder approval requirements for equity 
compensation plans among the markets. 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 Exchange's new shareholder approval rules 
effective upon Commission approval will immediately impose the same 
requirements on the Exchange's issuers as those imposed upon NYSE, 
Nasdaq, and Amex issuers. Based on the above, the Commission finds good 
cause, consistent with Sections 6(b)(5) and 19(b)(2) of the Act, \24\ 
to approve the Exchange's proposal on an accelerated basis.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-Phlx-2003-67) is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28071 Filed 11-6-03; 8:45 am]
BILLING CODE 8010-01-P