[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63159-63166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28072]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48734; File No. SR-CHX-2003-31]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto and Order Granting Accelerated 
Approval to a Proposed Rule Change and Amendment No. 1 Thereto by the 
Chicago 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 October 6, 2003, the Chicago Stock Exchange, Inc. (``CHX'' 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 October 30, 2003, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ 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\ Amendment No. 1 replaces the Exchange's original Rule 19b-4 
filing in its entirety.
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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 certain provisions of its rules to 
strengthen listing standards relating to shareholder approval for 
equity compensation plans.\4\
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    \4\ 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 National Association of Securities Dealers, Inc. (``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'')).

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[[Page 63160]]

    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized; proposed deleted language is [bracketed].
* * * * *

Chicago Stock Exchange Rules

ARTICLE XXVIII

Listed Securities

Tier I Corporate Governance and Disclosure Standards

Corporate Governance

    RULE 19. The following Rule 19 applies [only] to Tier I issuers: 
(a)-(i)No change to text.
    (j) Shareholder Approval. Each issuer shall require shareholder 
approval [of a plan or arrangement under (i) below, or] prior to the 
issuance of securities under (1), (2), (3) or (4)[(ii), (iii) or (iv)] 
below[, when]:
    (1) Equity Compensation Plans. When an equity compensation plan, 
pursuant to which options or stock may be acquired by officers, 
directors, employees or consultants, is established or materially 
amended, except for:
    (A) 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); or
    (B)(i) Tax qualified, non-discriminatory employee benefit plans or 
parallel non-qualified plans, provided such plans are approved by the 
issuer's independent compensation committee or a majority of the 
issuer's independent directors; or (ii) plans that provide 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 U.S. employees, but for 
features necessary to comply with applicable foreign tax law; or (iii) 
plans that merely provide a convenient way to purchase shares on the 
open market or from the issuer at fair market value; or
    (C) Plans or arrangements relating to an acquisition or merger 
where: (i) The issuer is converting, replacing or adjusting outstanding 
options or other equity compensation awards to reflect the transaction; 
or (ii) the issuer is using shares available under certain plans 
acquired in acquisitions or mergers for certain post-transaction 
grants, as set out in Interpretation and Policy .06; or
    (D) Issuances to a person not previously an employee or director of 
the company, or following a bona fide period of non-employment or non-
service, as an inducement material to the individual's entering into 
employment with the issuer, provided such issuances are approved by the 
issuer's independent compensation committee or by 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 shares.
    (E) Each issuer must notify the Exchange, in writing, when it uses 
one of the exemptions set forth in paragraphs (A) through (D) above.
    [(i) A stock option or purchase plan is to be established or other 
arrangement made pursuant to which stock may be acquired by officers or 
directors, except for warrants or rights issued generally to security 
holders of the company or broadly based plans or arrangements including 
other employees (e.g., ESOPs). In a case where the shares or options 
are to be issued to a person not previously employed by the company, as 
an inducement essential to the individual's entering into an employment 
contract with the company, provided that the potential issuance of 
shares pursuant to the options does not exceed 5% of the company's 
outstanding stock, shareholder approval will generally not be 
required.]
    [In the case of the establishment of a plan or arrangement under 
which the amount of securities which may be issued does not exceed the 
lesser of 1% of the number of shares of common stock outstanding, 1% of 
the voting power outstanding or 25,000 shares, shareholder approval 
will generally not be required, 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 outstanding common 
stock or voting power outstanding. (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).]
    ([ii]2 No change to text.
    ([iii]3 No change to text.
    ([iv]4 No change to text.
    ([v]5 No change to text.
    ([vi]6 No change to text.
    ([vii]7 No change to text.
* * * * *

* * * Interpretations and Policies

    .01 No change to text.
    .02-.05 Reserved.
    .06 Shareholder approval of equity compensation plans.
    (1) An ``equity compensation plan'' is a plan or other arrangement 
that provides for the delivery of equity securities (either newly 
issued or treasury shares) of the listed company to any officer, 
director, employee or consultant as compensation for services. Even a 
compensatory grant of options or other equity securities that is not 
made under a formal plan is an equity compensation plan, for purposes 
of this rule.
    (2) A ``material revision'' of an equity compensation plan 
includes, but is not limited to:
    (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 that (i) permits a repricing (or decrease in 
exercise price) of outstanding options (ii) reduces the price at which 
shares or options to purchase shares may be offered or (iii) extends 
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.
    (3) In general, 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), the plan cannot have a term in excess of ten years 
unless shareholder approval is obtained every ten years. However, if a 
plan does not contain a formula and does not impose a limit on the 
number of shares available for grant, each grant under the plan must be 
approved by shareholders. A requirement that grants be made out of 
treasury shares or repurchased shares will not alleviate the 
shareholder approval requirements set out in this paragraph.
    (4) When preparing-plans and presenting them for shareholder 
approval, issuers should strive to make plan terms easy to understand. 
Plans meant to permit repricing should use explicit terminology to make 
this intent clear.

[[Page 63161]]

    (5) An issuer is not permitted to use repurchased shares to fund 
option plans or grants without prior shareholder approval.
    (6) Rule 19(j)(1)(C)(ii) provides that plans or arrangements 
relating to an acquisition or merger do not require shareholder 
approval where the issuer is using shares available under certain plans 
acquired in acquisitions or mergers for certain post-transaction 
grants. 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 that meet the requirements of Rule 19(j). 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 under another plan, without further shareholder approval, provided 
(a) 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 (b) 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 adopted in contemplation of the 
merger or acquisition is not considered a pre-existing plan for 
purposes of this exception. Any shares available for issuance under an 
equity compensation plan 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 requirements under Rule 
19(j)(3)(b).
    (7) A ``tax qualified, non-discriminatory employee benefit plan'' 
is one that meets the requirements of Section 401(a) or 423 of the 
Internal Revenue Code and applicable Treasury Department regulations.
    (8) A ``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, 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 be enacted. However, a 
plan will not be considered a parallel nonqualified plan unless: (a) 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 be enacted); (b) 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 (c) no participant receives employer equity contributions 
under the plan in excess of 25% of the participant's cash compensation.
    (9) The Exchange precludes 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 prohibition is 
codified in Article XXXIII, Rule 3 and will become effective for any 
meeting of shareholders that occurs on or after the 90th day following 
Commission approval of the change.
* * * * *

Tier II Corporate Governance, Disclosure, and Miscellaneous 
Requirements

    RULE 21. The following Rule 21 applies only to Tier II issuers:
    ([1]a) No change to text.
    (b) Each issuer shall comply with the shareholder approval 
requirements relating to equity compensation plans set out in Rule 
19(j) of this Article and is subject to Interpretation .06 of that 
rule.
    ([2]c) No change to text.
    ([3]d) No change to text.
    ([4]e) No change to text.
    ([a]1) No change to text.
    ([b]2) No change to text.
    ([c]3) No change to text.
    ([d]4) No change to text.
    ([e]5) No change to text.
    ([f]6) No change to text.
    ([g]7) No change to text.
    ([h]8) No change to text.
    ([i]9) No change to text.
    ([j]10) No change to text.
    ([k]11) No change to text.
    ([l]12) No change to text.
    ([m]13) No change to text.
    ([n]14) No change to text.
    ([o]15) No change to text.
    ([p]16) No change to text.
    ([q]17) No change to text.
    ([r]18) No change to text.
* * * * *

ARTICLE XXXIII

Proxies

* * * * *

Instructions of Beneficial Owner

    RULE 3. 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.
    A member organization may give a proxy to vote any stock registered 
in its name if such organization holds such stock as executor, 
administrator, guardian, trustee, or in a similar representative or 
fiduciary capacity with authority to vote.
    A member organization which was transmitted proxy soliciting 
material to the beneficial owner of stock and solicited voting 
instructions in accordance with the provisions of Rule 2, 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, except for voting on equity compensation plans as 
set forth below, 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 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 shareholder approval of such plan is required by 
Article XXVIII, Rules 19 or 21). The provision will become effective 
for any meeting of shareholders that occurs on or after the 90th day 
following Commission approval of the change.
* * * * *

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

[[Page 63162]]

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 amend certain provisions of the Exchange's 
rules to strengthen listing standards relating to shareholder approval 
for equity compensation plans.
    Current CHX Article XXVIII, Rule 19, generally requires issuers to 
seek shareholder approval of stock option or purchase plans pursuant to 
which officers or directors might acquire stock. The Rule, however, 
contains an exception for broadly based plans or arrangements that 
include other employees, as well as for plans that meet a specific de 
minimis standard. To enhance investor confidence and to ensure that the 
Exchange's requirements for shareholder approval of equity compensation 
plans are not less stringent than those of other markets, the Exchange 
now proposes to delete both the de minimis exception and the exception 
for broadly based plans and proposes to expand the rule to require that 
shareholder approval be obtained whenever an equity compensation plan 
is established or materially amended, unless a specifically-defined 
exception applies.\5\ The Exchange proposes to make these requirements 
applicable to both its Tier I and Tier II issuers.\6\
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    \5\ Under the Exchange's proposal, as amended, an equity 
compensation plan is any plan or other arrangement that provides for 
the delivery of equity securities (either newly issued or treasury 
shares) of the listed company to any officer, director, employee or 
consultant as compensation for services. See proposed Interpretation 
and Policy .06(1) to CHX Rule 19(j).
    \6\ Tier II governance standards are set out in CHX Rule 21.
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    Exceptions. The Exchange's revised rule would provide exceptions 
for: (1) Warrants or rights issued generally to all security holders of 
the company or stock purchase plans available on equal terms to all 
security holders; \7\ (2) certain tax qualified, non-discriminatory 
employee benefit plans, parallel non-qualified plans, plans that 
provide non-U.S. employees with the same benefits as tax qualified, 
nondiscriminatory employee benefit plans or parallel non-qualified 
plans or plans that merely provide a convenient way to purchase shares 
on the open market or from the issuer; \8\ (3) certain plans or 
arrangements relating to an acquisition or merger; \9\ and (4) certain 
issuances given as material inducements to a person's decision to 
become an employee of the issuer, so long as the issuances are approved 
by the issuer's independent compensation committee or by a majority of 
its independent directors.\10\ Under the Exchange's proposal, as 
amended, each issuer must notify the Exchange, in writing, when it uses 
one of these exceptions.\11\
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    \7\ This exception exists in the current CHX rule.
    \8\ Sections (7) and (8) of proposed new Interpretation and 
Policy .06 to CHX Rule 19(j) contain definitions of the terms ``tax 
qualified, non-discriminatory employee benefit plan'' and ``parallel 
nonqualified plan.'' See proposed CHX Rule 19(j)(1)(B).
    \9\ This exception applies to plans or arrangements where an 
issuer is converting, replacing or adjusting outstanding options or 
other equity compensation awards to reflect a merger or acquisition 
or where the issuer is using shares available under certain plans 
acquired in acquisitions or mergers for certain post-transaction 
grants, as set out in proposed Interpretation and Policy .06(6) to 
CHX Rule 19(j). See proposed CHX Rule 19(j)(1)(C).
    \10\ These issuances only qualify for the exception if they are 
made to a person not previously an employee or director of the 
issuer or following a bona fide period of non-employment or non-
service. If an issuer uses this exception, it must promptly 
disclose, in a press release, the material terms of the grant, 
including the recipient of the grant and the number of shares 
included in the grant. See proposed CHX Rule 19(j)(1)(D).
    \11\ See proposed CHX Rule 19(j)(1)(E).
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    The Exchange believes that these exceptions are narrowly-tailored 
and appropriate. The Exchange believes that shareholder approval should 
not be separately required under the Exchange's listing standards for 
tax qualified, nondiscriminatory employee benefit plans because those 
plans are regulated under the Internal Revenue Code and Treasury 
Department regulations, which may already contain provisions requiring 
shareholder approval. Where that approval is not required, the Exchange 
believes that the additional protections from any inappropriate use of 
these plans and parallel non-qualified plans is provided through the 
requirement that these plans be approved by the issuer's independent 
compensation committee or a majority of the issuer's independent 
directors. Similarly, the Exchange believes that shareholder approval 
of inducement grants to new employees and directors is not appropriate 
because of the impracticality of seeking shareholder approval during 
the recruiting process and because these transactions occur when the 
company has an arm's-length relationship with the new employee and its 
interests are directly aligned with the interests of its shareholders. 
The Exchange believes that the exceptions associated with mergers and 
acquisitions are appropriate because they do not result in any increase 
in the aggregate potential dilution of the combined enterprise.
    In its proposed rules, the Exchange includes a definition of the 
types of ``material revisions'' of a plan that would cause shareholder 
approval to be required. Specifically, the rules confirm that a 
material revision includes, 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 or similar transaction); 
a material increase in benefits to participants; a material expansion 
of the class of participants eligible to participate in the plan; and 
an expansion in the types of options or awards provided under the 
plan.\12\ Additional provisions of the proposed rules provide issuers 
with further guidance about situations that require (or do not require) 
shareholder approval.\13\
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    \12\ See proposed Interpretation and Policy .06(2) to CHX Rule 
19(j).
    \13\ For example, proposed Interpretation and Policy .06(3) to 
CHX Rule 19(j) confirms that where a plan contains an evergreen 
formula (for automatic increases in the shares available) or an 
automatic grant pursuant to a dollar-based formula, the plan cannot 
have a term in excess of ten years unless shareholder approval is 
obtained every ten years. Other provisions confirm that issuers 
should strive to make plan terms easy to understand when preparing 
plans and presenting them for shareholder approval and that an 
issuer is not permitted to use repurchased shares to fund option 
plans or grants without prior shareholder approval. See proposed 
Interpretation and Policy .06(4) and (5) to CHX Rule 19(j). The 
Commission notes that if a plan permits a specific action without 
further shareholder approval, it must be clear and specific enough 
to provide meaningful shareholder approval of those provisions.
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    As a final change, the Exchange proposes to amend CHX Article 
XXXIII, Rule 3, to mirror requirements now set out in NYSE Rule 452 to 
prohibit a member from giving a proxy to vote on a matter that 
establishes or materially amends an equity compensation plan, unless 
the member has instructions from the beneficial owners of those shares.
    Effective date. The Exchange proposes that the changes to CHX Rules 
19 and 21 become effective upon Commission approval and that existing 
equity compensation plans be grandfathered. Any material modifications 
to existing (i.e., grandfathered) plans would be subject to applicable 
shareholder approval requirements of these rules. The Exchange proposes 
that its changes to Article XXXIII, Rule 3, take effect for any meeting 
of shareholders that occurs on or after the 90th day following 
Commission approval of the change.

[[Page 63163]]

2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act,\14\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\15\ 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. The Exchange believes that its proposal, as amended, 
is intended to be essentially identical to those submitted by the NYSE 
and Nasdaq and approved by the Commission.\16\
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See supra note 4.
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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 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. The Exchange, however, did notify its issuers of the 
types of proposed rule changes that it was contemplating and has not 
received any objections to those proposals.

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-CHX-2003-31 and should be submitted by November 28, 2003.

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

    After careful review, the Commission finds that the Exchange'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.\17\ Specifically, the Commission finds that approval of the 
Exchange's proposal, as amended, is consistent with Section 6(b)(5) of 
the Act \18\ 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.
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    \17\ 15 U.S.C. 78f(b). In approving the Exchange'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).
    \18\ 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 Exchange's amended 
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 \19\ 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.\20\
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    \19\ See supra note 4. 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).
    \20\ The Commission notes that these new listing standards will 
apply to all companies listed on the CHX and will include both CHX's 
Tier I and Tier II designations.
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    In addition, the Commission notes that the Exchange'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.\21\ The Commission 
believes that it has already considered and addressed the issues that 
may be raised by the Exchange's amended proposal when it approved these 
proposals. The Commission notes that approval of the Exchange's 
proposal, as amended, 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.
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    \21\ See supra notes 4 and 19.
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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 Exchange's amended 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 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.\22\ The

[[Page 63164]]

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,\23\ 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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    \22\ 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.
    \23\ 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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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 
amended 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 CHX Rule 19(j)(3)(B). 
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 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,\24\ as to what constitutes a material 
revision to a plan. As noted above, material revisions to plans will 
require shareholder approval under Exchange rules. A material revision 
under the Exchange's amended 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, as amended, also describes what would constitute a 
material revision for plans containing a formula for automatic 
increases (such as evergreen plans) and automatic grants requiring 
shareholder approval.
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    \24\ See supra note 4; see also supra note 19.
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    The Commission believes that the Exchange's non-exclusive list of 
what would constitute a material 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, 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 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, 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 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, as amended, provides 
guidance for the treatment of evergreen/formula plans. More 
specifically, under the Exchange's proposal, as amended, if a plan 
contains a formula for automatic

[[Page 63165]]

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, 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 Exchange'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.
    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 amended proposal--similar 
to the NYSE and Nasdaq's recently approved shareholder approval rules 
\25\--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, 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.
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    \25\ See supra note 4; see also supra note 19.
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    The Commission notes that the Exchange's proposal, as amended, 
provides that pre-existing plans, which were adopted prior to the SEC's 
approval of the Exchange's amended proposal, would essentially be 
``grandfathered'' and would not require shareholder approval unless the 
plans were materially amended. Under the Exchange's amended 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.

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

    The Commission believes that the Exchange's proposed amendment to 
CHX Article XXXIII, Rule 3, 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.\26\ 
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.\27\ 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.
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    \26\ See NASD Rule 2260; NYSE Rule 452; and Section 402.08 of 
the NYSE's Listed Company Manual.
    \27\ See supra notes 4 and 26.
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    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, as 
amended, is similar to the NYSE and Nasdaq's recently approved 
shareholder approval rules.\28\ The Commission therefore believes that 
the Exchange's proposal, as amended, 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 amended 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.\29\ In addition, the 
Exchange's proposed amendment to CHX Article XXXIII, Rule 3, 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.
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    \28\ See supra note 4; see also supra note 19.
    \29\ See also supra note 22 and accompanying text.
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    The Commission believes that the Exchange's proposal, as amended, 
which is similar to the NYSE and Nasdaq's shareholder approval 
rules,\30\ sets a consistent, minimum standard for shareholder approval 
of equity compensation plans. The Commission believes that the 
Exchange'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 Exchange's proposal, as amended, 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.\31\ The Commission therefore finds the Exchange's proposal, as 
amended, to be consistent with the Act and the rules and regulations 
thereunder.
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    \30\ See supra note 4; see also supra note 19.
    \31\ 15 U.S.C. 78f(b)(5).
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V. Accelerated Approval of the Exchange's Proposal and Amendment No. 1

    The Commission finds good cause for approving the Exchange's 
proposal and

[[Page 63166]]

Amendment No. 1 thereto 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, as amended, 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.\32\ 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.\33\
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    \32\ 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 4; see also supra note 19.
    \33\ 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 4; see also supra note 19.
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    The Commission believes that accelerated approval of the Exchange's 
proposal, as amended, 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,\34\ to 
approve the Exchange's proposal and Amendment No. 1 thereto on an 
accelerated basis.
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    \34\ 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,\35\ that the proposed rule change (SR-CHX-2003-31) and Amendment 
No. 1 thereto are hereby approved on an accelerated basis.
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    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28072 Filed 11-6-03; 8:45 am]
BILLING CODE 8010-01-P