[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63166-63173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28074]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48738; File No. SR-CSE-2003-11]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change and Amendment 
No. 1 Thereto by the Cincinnati Stock Exchange Relating to Shareholder 
Approval of Equity Compensation Plans

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 1, 2003, the Cincinnati Stock Exchange (``CSE'' 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 29, 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 from interested persons and is 
approving the proposal and Amendment No. 1 thereto on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Jennifer M. Lamie, Assistant General Counsel 
and Secretary, CSE, to Sapna C. Patel, Special Counsel, Division of 
Market Regulation, Commission, dated October 29, 2003 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange made a technical 
correction to its proposed rule language to fix two typographical 
errors in proposed CSE Rule 13.6(e)(2). Because this is a technical 
amendment, it is not subject to notice and comment.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to implement changes to its listing 
standards to adopt requirements related to shareholder approval of 
equity compensation plans and to amend its rules related to the voting 
of proxies. The Exchange represents that this proposed rule change is 
part of an ongoing review of the Exchange's listing standards aimed at 
helping to restore investor confidence by strengthening corporate 
governance practices.
    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deleted language is [bracketed].
* * * * *

Rule 13.3 Proxies

    (a)-(c) No change to text.
    (d) Notwithstanding the provisions of this Rule 13.3, a member 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 pursuant to Rule 13.6). This provision will be 
effective for any meeting of shareholders that occurs on or after the 
90th day following the effective date of this provision.
* * * * *

Rule 13.6 Shareholder Approval of Equity Compensation Plans

    Equity compensation plans can help align shareholder and management 
interests, and equity-based awards are often very important components 
of employee compensation. To provide checks and balances on the 
potential dilution resulting from the process of earmarking shares to 
be used for equity-based awards, the Exchange requires that all equity 
compensation plans, and any material revisions to the terms of such 
plans, be subject to shareholder approval, with limited exemptions 
identified in this rule.
    (a) Definition of Equity Compensation Plan. An ``equity 
compensation plan'' is a plan or other arrangement that provides for 
the delivery of equity securities (either newly issued or treasury 
shares) of the listed company to any employee, director or other 
service provider as compensation for services. A compensatory grant of 
options or other equity securities that is not made under a plan is 
considered an ``equity compensation plan'' for purposes of these rules.
    (b) Exceptions to Equity Compensation Plan Definition. The 
following are not equity compensation plans, even if the brokerage and 
other costs of the plan are paid for by the listed company:
    (1) Plans that are made available to shareholders generally, such 
as a typical dividend reinvestment plan;
    (2) Plans that merely allow employees, directors or other service

[[Page 63167]]

providers to elect to buy shares on the open market or from the listed 
company for their current fair market value, regardless of whether: (i) 
The shares are delivered immediately or on a deferred basis; or (ii) 
the payments for the shares are made directly or by giving up 
compensation that is otherwise due (for example, through payroll 
deductions).
    (c) Material Revisions. A ``material revision'' of an equity 
compensation plan includes, but is not limited to, the following:
    (1) A material increase in the number of shares available under the 
plan, other than an increase solely to reflect a reorganization, stock 
split, merger, spinoff or similar transaction.
    (i) If a plan contains a formula for automatic increases in the 
number of shares available (sometimes referred to as an ``evergreen 
formula'') or for automatic grants pursuant to a formula, each such 
increase or grant will be considered a revision requiring shareholder 
approval unless the plan has a term of not more than ten years. 
Regardless of the term, this type of plan is referred to below as a 
``formula plan.'' Examples of automatic grants pursuant to a formula 
are: (A) annual grants to directors of restricted stock having a 
certain dollar value, and (B) ``Matching contributions,'' whereby stock 
is credited to a participant's account based upon the amount of 
compensation the participant elects to defer.
    (ii) If a plan contains no limit on the number of shares available 
and it is not a formula plan, then each grant under the plan will 
require separate shareholder approval regardless of whether the plan 
has a term of not more than ten years. This type of plan is referred to 
below as a ``discretionary plan.'' A requirement that grants be made 
out of treasury shares or repurchased shares will not, in itself, be 
considered a limit or pre-established formula so as to prevent a plan 
from being considered a discretionary plan.
    (2) An expansion of the types of awards available under the plan.
    (3) A material expansion of the class of employees, directors or 
other service providers eligible to participate in the plan.
    (4) A material extension of the term of the plan.
    (5) A material change to the method of determining the strike price 
of options under the plan.
    (i) A change in the method of determining ``fair market value'' 
from the closing price on the date of the grant to the average of the 
high and low price on the date of grant is an example of a change that 
the Exchange would not review as material.
    (6) The deletion or limitation of any provision prohibiting 
repricing of options. An amendment will not be considered a ``material 
revision'' if it curtails rather than expands the scope of the plan in 
question.
    (d) Repricings. A plan that does not contain a provision that 
specifically permits repricing of options will be considered for 
purposes of this listing standard as prohibiting repricing. 
Accordingly, any actual repricing of options will be considered a 
material revision of a plan even if the plan itself is not revised. 
This consideration will not apply to a repricing through an exchange 
offer that commenced before the date this listing standard became 
effective. ``Repricing'' means any of the following or any other action 
that has the same effect:
    (1) Lowering the strike price of an option after it is granted.
    (2) Any other action that is treated as a repricing under generally 
accepted accounting principles.
    (3) Canceling an option at a time when its strike price exceeds the 
fair market value of the underlying stock, in exchange for another 
option, restricted stock, or other equity, unless the cancellation and 
exchange occurs in connection with a merger, acquisition, spin-off or 
other similar corporate transaction.
    (e) Exemptions. The listing standard does not require shareholder 
approval of employment inducement awards; certain grants, plans and 
amendments in the context of mergers and acquisitions; and certain 
specific types of plans, all described below. However, these exempt 
grants, plans and amendments may be made only with the approval of the 
company's independent compensation committee or the approval of a 
majority of the company's independent directors. Companies must also 
notify the Exchange in writing when they use one of these exemptions.
    (1) Employment Inducement Awards. An employment inducement award is 
a grant of options or other equity-based compensation as a material 
inducement to a person or persons being hired by the listed company or 
any of its subsidiaries, or being rehired following a bona fide period 
of interruption of employment. Inducement awards include grants to new 
employees in connection with a merger or acquisition. Promptly 
following a grant of any inducement award in reliance on this 
exemption, the listed company must disclose in a press release the 
material terms of the award, including the recipient(s) of the award 
and the number of shares involved.
    (2) Mergers and Acquisitions. Two exemptions apply in the context 
of corporate acquisitions and mergers. First, shareholder approval will 
not be required to convert, replace or adjust outstanding options or 
other equity compensation awards to reflect the transaction. Second, 
shares available under certain plans acquired in corporate acquisitions 
and mergers may be used for certain post-transaction grants without 
further shareholder approval. This exemption applies to situations 
where a party that is not a listed company following the transaction 
has shares available for grant under pre-existing plans that were 
previously approved by shareholders. A plan adopted in contemplation of 
the merger or acquisition transaction would not be considered ``pre-
existing'' for purposes of this exemption. Shares available under such 
a pre-existing plan may be used for post-transaction grants of options 
and other awards with respect to equity of the entity that is the 
listed company after the transaction, either under the pre-existing 
plan or another plan, without further shareholder approval, so long as:
    (i) The number of shares available for grants is appropriately 
adjusted to reflect the transaction;
    (ii) The time during which those shares are available is not 
extended beyond the period when they would have been available under 
the pre-existing plan, absent the transaction; and
    (iii) The options and other awards are not granted to individuals 
who were employed, immediately before the transaction, by the post-
transaction listed company or entities that were its subsidiaries 
immediately before the transaction.
    Any shares reserved for listing in connection with a transaction 
pursuant to either of these exemptions would be counted by the Exchange 
in determining whether the transaction involved the issuance of 20% or 
more of the company's outstanding common stock, and thus require 
shareholder approval. These merger-related exemptions will not result 
in any increase in the aggregate potential dilution of the combined 
enterprise. Further, mergers or acquisitions are not routine 
occurrences and are not likely to be abused. Therefore, the Exchange 
considers both of these exemptions to be consistent with the 
fundamental policy involved in this standard.
    (3) Qualified Plans, Section 423 Plans and Parallel Excess Plans.

[[Page 63168]]

    (i) The following types of plans, and material revisions thereto, 
are exempt from the shareholder approval requirement: (A) Plans 
intended to meet the requirements of Section 401(a) of the Internal 
Revenue Code (e.g., ESOPs); (B) plans intended to meet the requirements 
of Section 423 of the Internal Revenue Code; and (C) ``parallel excess 
plans'' as defined below.
    (ii) Section 401(a) plans and Section 423 plans are already 
regulated under the Internal Revenue Code and Treasury regulations. 
Section 423 plans, which are stock purchase plans under which an 
employee can purchase no more than $25,000 worth of stock per year at a 
plan-specified discount capped at 15% are also required by the Internal 
Revenue Code to receive shareholder approval. While Section 401(a) 
plans and parallel plans are not required to be approved by 
shareholders, U.S. GAAP requires that the shares issued under these 
plans be ``expensed'' (i.e., treated as a compensation expense on the 
income statement) by the company issuing the shares. An equity 
compensation plan that provides non-U.S. employees with substantially 
the same benefits as a comparable Section 401(a) plan, Section 423 plan 
or parallel excess plan that the listed company provides to its U.S. 
employees, but for features necessary to comply with applicable foreign 
tax law, are also exempt from shareholder approval under this section.
    (iii) The term ``parallel excess plan'' means a plan that is a 
``pension plan'' within the meaning of the Employee Retirement Income 
Security Act (``ERISA'') that is designed to work in parallel with a 
plan intended to be qualified under Internal Revenue Code Section 
401(a) to provide benefits that exceed the limits set forth in Internal 
Revenue Code Section 402(g)(the section that limits an employee's 
annual pre-tax contributions to a 401(k) plan), Internal Revenue Code 
Section 401(a)(17)(the section that limits the amount of an employee's 
compensation that can be taken into account for plan purposes) and/or 
Internal Revenue Code Section 415 (the section that limits the 
contributions and benefits under qualified plans) and/or any successor 
or similar limitations that may hereafter be enacted. A plan will not 
be considered a parallel excess 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 Internal Revenue Code Section 401(a)(17)(or any successor or 
similar limits that may hereafter be enacted); (B) its terms are 
substantially the same as the qualified plan that it parallels except 
for the elimination of the limits described in the proceeding sentence 
and the limitation described in clause (C); and (C) no participant 
receives employer equity contributions under the plan in excess of 25% 
of the participant's cash compensation.
    (f) Transition Rules. Except as provided below, a plan that was 
adopted before the date the Commission order approving this listing 
standard will not be subject to shareholder approval under this Rule 
13.6 unless and until it is materially revised.
    (1) In the case of a discretionary plan, as defined in ``Material 
Revisions'' above, whether or not previously approved by shareholders, 
additional grants may be made after the effective date of this Rule 
13.6 without further shareholder approval only for a limited 
transaction period, defined below, and then only in a manner consistent 
with past practice. In applying this rule, if a plan can be separated 
into a discretionary plan portion and a portion that is not 
discretionary, the non-discretionary portion of the plan can continue 
to be used separately, under the appropriate transition rule. For 
example, if a shareholder-approved plan permits both grants pursuant to 
a provision that makes available a specific number of shares, and 
grants pursuant to provision authorizing the use of treasury shares 
without regard to the specific share limit, the former provision (but 
not the latter) may continue to be used after the transition period, 
under the general rule above.
    (2) In the case of a formula plan, as defined in ``Material 
Revisions'' above, that either (i) has not previously been approved by 
shareholders or (ii) does not have a term of ten years or less, 
additional grants may be made after the effective date of this Rule 
13.6 without further shareholder approval only for a limited transition 
period, defined below.
    (3) The limited transition period described in subparagraphs (f)(1) 
and (f)(2) above will end upon the first to occur of: (i) The listed 
company's next annual meeting at which directors are elected that 
occurs more than 180 days after the effective date of this listing 
standard; (ii) the first anniversary of the effective date this Rule 
13.6; and (iii) the expiration of the plan.
    (4) A shareholder-approved formula plan may continue to be used 
after the end of this transition period if it is amended to provide for 
a term of ten years or less from the date of its original adoption or, 
if later, the date of its most recent shareholder approval. Such an 
amendment may be made before or after the effective date of this Rule 
13.6, and would not itself be considered a ``material revision'' 
requiring shareholder approval. In addition, a formula plan may 
continue to be used, without shareholder approval, if the grants after 
the effective date of this Rule 13.6 are made only from the shares 
available immediately before the effective date (i.e., based on 
formulaic increases that occurred prior to such effective date).
    (g) Broker Voting. For member proxy requirements with respect to 
the implementation of any equity compensation plan, or any material 
revisions to the terms of any existing equity compensation plan, refer 
to Rule 13.3.
* * * * *

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
    In conjunction with a review of its corporate listing standards 
with the goal of enhancing accountability, integrity and transparency 
of listed companies, the Exchange is proposing to adopt listing 
standards related to shareholder approval of equity compensation plans 
and to amend its rules related to the voting of proxies.\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 63169]]

    The Exchange is proposing to adopt new CSE Rule 13.6, which would 
require shareholder approval of all equity-compensation plans and 
material revisions to such plans, subject to limited exemptions. Under 
the Exchange's proposal, an equity compensation plan is defined as a 
plan or other arrangement that provides for the delivery of equity 
securities (either newly issued or treasury shares) of the listed 
company to any employee, director or other service provider as 
compensation for services, including a compensatory grant of options or 
other equity securities that is not made under a plan. The Exchange is 
also proposing to provide clarification on certain plans that would not 
be considered equity compensation plans under this definition, such as 
plans that do not provide for delivery of equity securities of the 
issuer (e.g., plans that pay in cash) and deferred compensation plans 
under which employees pay full current market value for deferred 
shares.
    In addition, the proposal provides for certain types of grants that 
are exempted from shareholder approval. These limited exemptions 
include: (1) Inducement awards to person's first becoming an employee 
of an issuer or any of its subsidiaries, to rehires following a bona 
fide period of employment interruption, and for grants to new employees 
in connection with a merger or acquisition; \5\ (2) mergers and 
acquisitions, when conversions, replacements or adjustments of 
outstanding options or other equity compensation awards are necessary 
to reflect the transaction, and when shares available under certain 
plans acquired in corporate acquisitions and mergers may be used for 
certain post-transaction grants without further shareholder approval; 
and (3) plans intended to meet the requirements of Section 401(a) of 
the Internal Revenue Code \6\ (e.g., ESOPs), plans intended to meet the 
requirements of Section 423 of the Internal Revenue Code,\7\ and 
parallel excess plans that meet certain conditions. The Exchange also 
proposes that, in circumstances in which equity compensation plans and 
amendments to plans are not subject to shareholder approval, the plans 
and amendments still must be subject to the approval of the company's 
independent compensation committee or a majority of the company's 
independent directors. In addition, the Exchange proposes that an 
issuer must notify the Exchange in writing when it uses any of the 
exemptions from the shareholder approval requirements.
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    \5\ The Exchange is also proposing to include a requirement that 
listed companies provide prompt public disclosure following the 
grant of any inducement award in reliance on the exemption.
    \6\ 26 U.S.C. 401(a).
    \7\ 26 U.S.C. 423.
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    The Exchange is also proposing to provide a non-exclusive list of 
``material revisions'' to a plan that would require shareholder 
approval. Within this list of revisions, the Exchange proposes to 
define the concepts of ``evergreen plans'' (i.e., plans that contain a 
formula for automatic increases in the shares available), ``formula 
plans'' (i.e., plans that provide for automatic grants pursuant to a 
formula), and ``discretionary plans'' (i.e., plans that contain no 
limit on the number of shares available and plans that are not formula 
plans). The Exchange proposes that each grant under a discretionary 
plan require shareholder approval regardless of whether the plan has a 
term of not more than 10 years.
    Shareholder approval will be required for plans adopted before the 
effective date of these proposed amendments that have not been approved 
by shareholders and have neither an evergreen formula nor a specific 
number of shares available under the plan. The Exchange is proposing to 
provide transition rules to clarify when shareholder approval will be 
required for these pre-existing plans. In addition, during the period 
prior to the approval, pre-existing plans may be utilized, but only in 
a manner consistent with past practice. The transition rules provide 
that an evergreen plan that was approved by shareholders but does not 
have a ten-year term must be: (1) Approved by shareholders before any 
shares that become available as a result of a formulaic increase are 
utilized, or (2) amended to include a term of no more than ten years 
from the date the plan was adopted or last approved by shareholders. If 
the plan were amended to include such term, shareholder approval would 
not be required. No action would be required, however, if a plan were 
frozen at the level of shares available at the time the rule becomes 
effective. The transition rules also provide that repricings that have 
commenced prior to the effectiveness of the proposal (i.e., exchange 
offers to optionees) will not be subject to shareholder approval 
(assuming that such repricing would not require shareholder approval 
under other Exchange By-Laws or Rules).
    Finally, the Exchange is also proposing to amend CSE Rule 13.3 to 
prohibit members from voting on equity compensation plans unless the 
beneficial owner of the shares has given voting instructions. The 
Exchange proposes a transition period that will make these provisions 
of CBOE Rule 13.3 applicable only to shareholder meetings that occur on 
or after the 90th day following the date of the Commission order 
approving the rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\8\ in general, and furthers the objectives 
of Section 6(b)(5) of the Act,\9\ 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

[[Page 63170]]

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-CSE-2003-11 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.\10\ Specifically, the Commission finds that approval of the 
Exchange's proposal is consistent with Section 6(b)(5) of the Act \11\ 
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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    \10\ 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).
    \11\ 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 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 \12\ 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.
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    \12\ 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).
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    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.\13\ 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.
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    \13\ See supra notes 4 and 12.
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A. Exemption 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 exemption from shareholder approval. In addition, the 
Exchange proposes to limit its exemption 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 exemption 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.\14\ 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,\15\ that an issuer must notify it in writing when it 
uses this exemption, and/or any other exemption, 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 exemption for inducement 
grants.
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    \14\ 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.
    \15\ 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. Exemption From Shareholder Approval for Mergers and Acquisitions

    The Commission notes that the Exchange's exemption 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 exemption 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. Finally, the Commission notes that the 
Exchange proposes an additional requirement that an issuer must notify 
it in writing when it uses this exemption, and/or any other exemption, 
from its shareholder approval requirement. Based on the above, the 
Commission believes that the Exchange has provided measures to ensure 
that the exemption for mergers and acquisitions is only used in limited 
circumstances, which should help reduce the potential for dilution of 
shareholder interests.

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

    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 exemption. In addition, the Commission 
notes that the Exchange proposes to add

[[Page 63171]]

a limitation under this exemption 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 
exemption, and/or any other exemption, from its shareholder approval 
requirement. The Commission believes that, taken together, these 
limitations should reduce concerns regarding abuse of this exemption 
from the shareholder approval requirements.
    In addition, the Commission notes that, similar to the exemptions 
in the NYSE and Nasdaq's recently approved shareholder approval rules, 
the Exchange proposes to adopt an exemption from the shareholder 
approval requirements for an equity compensation plan that provides 
non-U.S. employees with substantially the same benefits as a comparable 
Section 401(a) plan, Section 423 plan or parallel excess plan that the 
listed company provides to its U.S. employees, but for features 
necessary to comply with applicable foreign tax law. 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,\16\ 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 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); an expansion of the type of awards available 
under the plan; a material expansion of the class of participants 
eligible to participate in the plan; a material extension of the term 
of the plan; a material change to limit or delete any provisions 
prohibiting repricing of options in a plan or for determining the 
strike or exercise price of options under a plan. The Exchange's 
proposal 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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    \16\ See supra note 4; see also supra note 12.
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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 the Exchange's proposal provides that, if 
a plan explicitly contains a repricing provision, shareholder approval 
would be required to delete or limit the repricing provisions. The 
Commission further notes that the Exchange's proposal provides that, if 
a plan is silent on repricing, it will be considered as prohibiting 
repricing and shareholder approval would be required to permit 
repricing under the plan. The Exchange's proposal also clarifies that 
repricings that have commenced prior to the date of effectiveness of 
its proposal would not be subject to shareholder approval, provided 
that such repricing does not require shareholder approval under the 
Exchange's existing shareholder approval rules.
    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.
    The Commission further notes that the Exchange has proposed a 
transition period for evergreen/formula plans and discretionary plans. 
The limited transition period would end on the first to occur of the 
following: (1) The listed company's next annual meeting at which 
directors are elected that occurs more than 180 days after the date of 
the effective date of the Exchange's proposal; (2) the first 
anniversary of the effective date of the Exchange's proposal; or (3) 
the expiration of the plan. The Commission believes that the Exchange's 
proposed transition period for evergreen/formula and discretionary 
plans should provide companies with additional clarity and guidance as 
to when shareholder approval would be required for such plans while in 
the transition period, and should provide companies with more time to 
comply with the Exchange's new shareholder approval requirements for 
evergreen/formula type plans. The Commission believes that this period 
is not so long as to permit abuse of the shareholder approval 
requirement, and at most, will last one year from the date of this 
Commission approval order.

[[Page 63172]]

G. Miscellaneous Provisions

    The Commission notes that the Exchange's proposal--similar to the 
NYSE and Nasdaq's recently approved shareholder approval rules \17\--
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.
---------------------------------------------------------------------------

    \17\ See supra note 4; see also supra note 12.
---------------------------------------------------------------------------

    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.

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

    The Commission believes that the Exchange's proposed provision, CSE 
Rule 3.3(d), 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.\18\ 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.\19\ 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.
---------------------------------------------------------------------------

    \18\ See NASD Rule 2260; NYSE Rule 452; and Section 402.08 of 
the NYSE's Listed Company Manual.
    \19\ See supra notes 4 and 18.
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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 is 
similar to the NYSE and Nasdaq's recently approved shareholder approval 
rules.\20\ 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 exemptions 
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 exemptions 
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 exemptions.\21\ In addition, the Exchange's 
proposed amendment to CSE Rule 13.3, 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.
---------------------------------------------------------------------------

    \20\ See supra note 4; see also supra note 12.
    \21\ See also supra note 14 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal, which is 
similar to the NYSE and Nasdaq's shareholder approval rules,\22\ 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.\23\ The Commission therefore finds the 
Exchange's proposal to be consistent with the Act and the rules and 
regulations thereunder.
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    \22\ See supra note 4; see also supra note 12.
    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Accelerated Approval of the Exchange's Proposal and Amendment No. 1

    The Commission finds good cause for approving the Exchange's 
proposal and Amendment No. 1 thereto prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register. The 
Exchange has requested accelerated approval of the proposed rule change 
so as to avoid a delay in the implementation of these listing standards 
designed to protect investors and the public interest, which standards 
the Exchange represents are substantially similar to standards recently 
approved by the Commission for the NYSE and Nasdaq. The Exhange 
therefore believes that the Exchange's adoption of the proposed listing 
standards presents no novel issues. 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.\24\ 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.\25\
---------------------------------------------------------------------------

    \24\ 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 12.
    \25\ 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 12.

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[[Page 63173]]

    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,\26\ to 
approve the Exchange's proposal and Amendment No. 1 thereto on an 
accelerated basis.
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    \26\ 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,\27\ that the proposed rule change (SR-CSE-2003-11) and Amendment 
No. 1 thereto are hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28074 Filed 10-30-03; 8:45 am]
BILLING CODE 8010-01-P