[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63150-63158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28075]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48737; File No. SR-CBOE-2003-45]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. and Amendment No. 1 Thereto 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

[[Page 63151]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 6, 2003, the Chicago Board Options Exchange, Inc. (``CBOE'' 
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 David Doherty, Attorney, Legal Division, 
CBOE, to Sapna C. Patel, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated October 29, 2003 
(``Amendment No. 1''). In Amendment No. 1, the Exchange made a 
technical correction to its proposed rule language by underlining 
the heading ``Interpretations and Policies'' under CBOE Rule 31.79 
to indicate that it is proposed new language. 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 proposes to amend CBOE Rules 31.79, 31.80, 31.85 and 
31.96, and CBOE Form 1 under ``Forms For Listing,'' to strengthen 
listing standards relating to shareholder approval for stock option 
plans or other equity compensation arrangements and to adopt 
interpretative material pertaining to shareholder approval for stock 
option plans or other equity compensation arrangements.
    Below is the text of the proposed rule change.\4\ Proposed new 
language is italicized; proposed deleted language is [bracketed].
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    \4\ With respect to implementation of revised CBOE Rules 31.79, 
31.80, 31.85 and 31.96, and CBOE Form 1 under ``Forms For Listing,'' 
the Exchange notes that they become effective upon SEC approval, and 
that existing plans would be grandfathered. However, any material 
modification to plans in place or adopted after the effective date 
would require shareholder approval. Telephone conversation between 
David Doherty, Attorney, Legal Division, CBOE, and Sapna C. Patel, 
Special Counsel, Division, Commission, on October 28, 2003.
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* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Chapter XXXI

* * * * *

Shareholders' Approval

* * * * *

Rule 31.79 Options to Officers, Directors, [or Key] Employees or 
Consultants

    Approval of shareholders is required [(unless exempted under 
paragraphs (a) and (b) below) as a prerequisite to approval of 
applications to list additional shares reserved for] with respect to 
the establishment of (or material amendment to) a stock option[s] or 
purchase plan or other equity compensation arrangement pursuant to 
which options or stock may be acquired by officers, directors, 
employees, or consultants [granted or to be granted to officers, 
directors or key employees], regardless of whether or not such 
authorization is required by law or by the company's charter, except 
for:[.] [The Exchange requires that such shareholder's approval be 
solicited pursuant to a proxy statement conforming to SEC proxy rules 
which discloses all of the essential details of the options or of the 
plan pursuant to which the options will be granted.]
    [Note: This policy does not preclude the adoption of a stock option 
plan, or the granting of options, subject to ratification by 
shareholders, prior to the filing of an application for the listing of 
the shares reserved for such purpose.
    The Exchange will not require shareholder's approval as a condition 
to listing shares reserved for the exercise of options when:]
    (a) [such options are issued] issuances to an individual, not 
previously an employee[d] or director of [by] the company, or following 
a bonafide period of non-employment, as an inducement [essential] 
material to entering into [a contract of] employment with the company, 
provided [that] (i) such issuances are approved by either a majority of 
the company's independent directors or the company's independent 
compensation committee and (ii) the company discloses in a press 
release the material terms of the grant, including the recipient(s) of 
the grant and the number of shares involved, promptly following an 
issuance of any employment inducement grant in reliance on this 
exception [the potential issuance of shares pursuant to such options 
does not exceed 5% of the company's outstanding common stock]; or
    (b) [such options are to be granted:]
    [(i)] [under a] tax qualified, non-discriminatory employee benefit 
plans [or arrangement] (e.g., plans that meet the requirements of 
Section 401(a) or 423 of the Internal Revenue Code) or parallel 
nonqualified plans, provided such plans are approved by a majority of 
the company's independent directors or the company's independent 
compensation committee, or plans that merely provide a convenient way 
to purchase shares on the open market or from the company at fair 
market value [in which all, or substantially all, of the company's 
employees participate, in a fair and equitable manner,]; or
    (c) Plans or arrangements relating to an acquisition or merger; or
    (d) Warrants or rights issued generally to all security holders of 
the company or stock purchase plans available on equal terms to all 
security holders of the company (such as a typical dividend 
reinvestment plan).
    The Exchange requires that such shareholder's approval be solicited 
pursuant to a proxy statement conforming to SEC proxy rules which 
discloses all of the essential details of the options or of the plan 
pursuant to which the options will be granted.
    [(ii) under a plan or arrangement for officers, directors or key 
employees provided such incentive arrangement for officers, directors 
or key employees do not authorize the issuance in any one year of more 
than the lesser of 1% of the number of shares outstanding common stock, 
1% of the voting power outstanding, or 25,000 shares and provided that 
all arrangements adopted without shareholder approval in any five-year 
period do not authorize, in the aggregate, the issuance of more than 
10% of 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 
canceled shall not be included.)
    For purposes of the above policy, the term ``options'' includes not 
only the usual type of nontransferable options granted in consideration 
of continued employment but also any other arrangement under which 
controlling shareholders, officers, directors or key employees may 
acquire (other than as part of a public offering) stock or convertible 
securities of a company at a price below market price at the time such 
stock is acquired or through the use of credit extended, directly or 
indirectly, by the company. Thus, the sale to such a person(s) of 
common stock purchase warrants or rights (not part of a public 
offering) or the sale of stock to such person who has borrowed money 
from the company, will normally necessitate shareholder approval.]
* * * * *
* * * Interpretations and Policies:

[[Page 63152]]

    .01 Rule 31.79 requires shareholder approval when a plan or other 
equity compensation arrangement is established or materially amended. 
For these purposes, a material amendment would include, but not be 
limited to, the following:
    (1) Any material increase in the number of shares to be issued 
under the plan (other than to reflect a reorganization, stock split, 
merger, spinoff or similar transaction);
    (2) Any material increase in benefits to participants, including 
any material change to:
    (i) permit a repricing (or decrease in the exercise price) of 
outstanding options, (ii) reduce the price at which shares or options 
to purchase shares may be offered, or (iii) extend the duration of a 
plan;
    (3) Any material expansion of the class of participants eligible to 
participate in the plan; and
    (4) Any expansion in the types of options or awards provided under 
the plan.
    While general authority to amend a plan would not obviate the need 
for shareholder approval, if a plan permits a specific action without 
further shareholder approval, then no such approval would generally be 
required. However, if a plan contains a formula for automatic increases 
in the shares available (sometimes called an ``evergreen formula''), or 
for automatic grants pursuant to a dollar-based formula (such as annual 
grants based on a certain dollar value, or matching contributions based 
upon the amount of compensation the participant elects to defer), such 
plans cannot have a term in excess of ten years unless shareholder 
approval is obtained every ten years. However, plans that do not 
contain a formula and do not impose a limit on the number of shares 
available for grant would require shareholder approval of each grant 
under the plan. A requirement that grants be made out of treasury 
shares or repurchased shares will not alleviate these additional 
shareholder approval requirements.
    As a general matter, when preparing plans and presenting them for 
shareholder approval, issuers should strive to make plan terms easy to 
understand. In that regard, it is recommended that plans meant to 
permit repricing use explicit terminology to make this clear.
    Rule 31.79 provides an exception to the requirement for shareholder 
approval for warrants or rights offered generally to all shareholders. 
An exception is also provided for tax qualified, non-discriminatory 
employee benefit plans as well as parallel nonqualified plans as these 
plans are regulated under the Internal Revenue Code and Treasury 
Department regulations. An equity compensation plan that provides non-
U.S. employees with substantially the same benefits as a comparable tax 
qualified non-discriminatory employee benefit plan or parallel 
nonqualified plan that the issuer provides to its U.S. employees, but 
for features necessary to comply with applicable foreign tax law, are 
also exempt from shareholder approval under this section. The term 
``parallel nonqualified plan'' means a plan that is a ``pension plan'' 
within the meaning of the Employee Retirement Income Security Act 
(``ERISA''), 29 U.S.C. Sec.  1002 (1999), that is designed to work in 
parallel with a plan intended to be qualified under Internal Revenue 
Code Section 401(a), to provide benefits that exceed the limits set 
forth in Internal Revenue Code Section 402(g) (the section that limits 
an employee's annual pre-tax contributions to a 401(k) plan), Internal 
Revenue Code Section 401(a)(17) (the section that limits the amount of 
an employee's compensation that can be taken into account for plan 
purposes) and/or Internal Revenue Code Section 415 (the section that 
limits the contributions and benefits under qualified plans) and/or any 
successor or similar limitations that may thereafter be enacted. 
However, a plan will not be considered a parallel nonqualified plan 
unless: (i) It covers all or substantially all employees of an employer 
who are participants in the related qualified plan whose annual 
compensation is in excess of the limit of Code Section 401(a)(17) (or 
any successor or similar limitation that may hereafter be enacted); 
(ii) its terms are substantially the same as the qualified plan that it 
parallels except for the elimination of the limitations described in 
the preceding sentence; and (iii) no participant receives employer 
equity contributions under the plan in excess of 25% of the 
participant's cash compensation.
    Further, there is an exception for inducement grants to new 
employees because in these cases a company has an arm's length 
relationship with the new employees. Inducement grants for these 
purposes include grants of options or stock to new employees in 
connection with a merger or acquisition. Rule 31.79 requires that such 
issuances must be approved by the issuer's independent compensation 
committee or a majority of the issuer's independent directors. The rule 
further requires that promptly following an issuance of any employment 
inducement grant in reliance on this exception, the listed company must 
disclose in a press release the material terms of the grant, including 
the recipient(s) of the grant and the number of shares involved.
    In addition, plans or arrangements involving a merger or 
acquisition do not require shareholder approval in two situations. 
First, shareholder approval will not be required to convert, replace or 
adjust outstanding options or other equity compensation awards to 
reflect the transaction. Second, shares available under certain plans 
acquired in acquisitions and mergers may be used for certain post-
transaction grants without further shareholder approval. This exception 
applies to situations where the party which is not a listed company 
following the transaction has shares available for grant under pre-
existing plans that were previously approved by shareholders pursuant 
to Rule 31.79. These shares may be used for post-transaction grants of 
options and other equity awards by the listed company (after 
appropriate adjustment of the number of shares to reflect the 
transaction), either under the pre-existing plan or arrangement or 
another plan or arrangement, without further shareholder approval, 
provided: (1) The time during which those shares are available for 
grants is not extended beyond the period when they would have been 
available under the pre-existing plan, absent the transaction, and (2) 
such options and other awards are not granted to individuals who were 
employed by the granting company or its subsidiaries at the time the 
merger or acquisition was consummated. A plan or arrangement adopted in 
contemplation of the merger or acquisition transaction would not be 
viewed as pre-existing for purposes of this exception. This exception 
is appropriate because it will not result in any increase in the 
aggregate potential dilution of the combined enterprise. In this 
regard, any additional shares available for issuance under a plan or 
arrangement acquired in connection with a merger or acquisition would 
be counted in determining whether the transaction involved the issuance 
of 20% or more of the company's outstanding common stock, thus 
triggering the shareholder approval requirements of Rule 31.80(b).
    A listed company is not permitted to use repurchased shares to fund 
option plans or grants without prior shareholder approval.
    Pursuant to Rule 31.96(H), a listed company is required to notify 
the Exchange in writing prior to the use of any of the exceptions set 
forth in

[[Page 63153]]

paragraphs (a) through (d) of Rule 31.79.
* * * * *

Rule 31.80 Acquisitions

* * * * *

* * * Interpretations and Policies

    .01 Any additional shares available for issuance under a stock 
option or purchase plan or other equity compensation arrangement 
acquired in connection with a merger or acquisition are counted in 
determining whether the transaction involved the issuance of 20% or 
more of the company's outstanding common stock as provided in Rule 
31.80(b).
* * * * *

Rule 31.85 Giving Proxies by Member Organizations

    (a) No change.
    (b) When a member organization may not vote without customer 
instructions--A member organization may not give a proxy to vote 
without instructions from beneficial owners when the matter to be voted 
upon:
    (1)-(8) No change.
    (9) involves a waiver or modification of preemptive rights[, except 
when the company's proposal is to waive such rights with respect to 
shares being offered pursuant to stock options or purchase plans 
involving the additional issuance of not more than 5% of the company's 
outstanding common shares];
    (10)-(11) No change.
    (12) [authorizes the issuance of stock, or options to purchase 
stock to directors, officers or employees in an amount which exceeds 5% 
of the total amount of the class outstanding] 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 Rule 31.79);
    (13)-(18) No change.
    (c)-(h) No change.
* * * * *

Rule 31.96 Notices to Exchange

    (A)-(G) No change.
    (H) Reliance on Shareholder Approval Exceptions
    A listed company is required to notify the Exchange in writing 
prior to the use of any of the exceptions set forth in paragraphs (a) 
through (d) of Rule 31.79.
* * * * *

Forms for Listing

* * * * *

Form 1

* * * * *

Listing Agreement

-------------- (the ``Company''), in consideration of the listing of 
its securities, hereby agrees with the Chicago Board Options Exchange, 
Incorporated (the ``Exchange''), that it will:

1. Promptly notify the Exchange of the following:

    (a)-(i) No change.
    (j) Any diminution in the supply of the security available for 
trading caused by deposit of the security under voting trust, tender 
offer or other agreements; [and]
    (k) The existence of any technical default or default in interest 
or principal payment, cumulative dividends, sinking funds, or 
redemption fund requirements of the Company or any controlled 
corporation, whether consolidated or unconsolidated; and[.]
    (l) the use of any of the exceptions set forth in paragraphs (a) 
through (d) of Rule 31.79, which notice must be sent to the Exchange in 
writing prior to such use.
    (2)-(28) No 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 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 Basisfor, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its non-option rules (i.e., equity 
rules) that apply to listing standards for stocks that may be listed on 
the Exchange. CBOE Rule 31.79 currently requires listed companies to 
obtain shareholder approval for stock option plans and other 
arrangements in which officers, directors, and key employees 
participate. However, the current Rule contains two exceptions, one for 
``broadly based plans,'' which, under CBOE Rule 31.79, is a plan in 
which all or substantially all of the company's employees participate 
in a fair and equitable manner, even if officers, directors and key 
employees receive options grants under the plan, and one for de minimis 
grants. To enhance investor confidence in the national securities 
markets, the Exchange now proposes to require shareholder approval of 
all stock option and equity compensation plans, including ``broad based 
plans.'' The proposed rule change would also provide four exceptions to 
the shareholder approval requirement based on the proposals set forth 
in a recent approval order of the New York Stock Exchange, Inc. 
(``NYSE'') and the National Association of Securities Dealers, Inc. 
(``NASD'')/The Nasdaq Stock Market, Inc. (``Nasdaq'') proposals related 
to equity compensation plans.\5\ In addition, the Exchange proposes to 
eliminate the de minimis exception currently reflected in CBOE Rule 
31.79(b)(ii), which generally allows for the grant of the lesser of 1% 
of the number of outstanding shares of common stock, 1% of the voting 
power outstanding or 25,000 shares without shareholder approval, as 
this exception is not in accord with the concept of restricting the use 
of unapproved options.
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    \5\ 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) (the ``Nasdaq/NYSE Proposals''). 
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 11 (regarding the Commission's recent 
approval of a similar proposal by the American Stock Exchange LLC 
(``Amex'')).
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    Proposed CBOE Rule 31.79(a) amends the current exception set forth 
in CBOE Rule 31.79(a) to provide for inducement grants to new employees 
or to previous employees following a bonafide period of non-employment 
with the listed company. The proposed rule change would delete the 
reference that limits the grant to five percent of the company's 
outstanding common stock, which would align proposed CBOE Rule 31.79(a) 
with the Nasdaq/NYSE Proposals. The Exchange does not believe that 
shareholder approval is necessary for these types of inducement grants 
since in these cases a company has an arm's length relationship with

[[Page 63154]]

the new employees, and its interests are directly aligned with those of 
shareholders. The Exchange believes that any potential abuse of the 
inducement exception would be mitigated by the requirement that the 
company's independent compensation committee or a majority of the 
company's independent directors approve the inducement grant. In 
addition, a listed company relying on the inducement award exception, 
as set forth in Rule 31.79(a), 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.
    Proposed CBOE Rule 31.79(b), a new exception based on the Nasdaq/
NYSE Proposals, does not require shareholder approval for tax 
qualified, nondiscriminatory benefit plans, as these plans are 
regulated under the Internal Revenue Code and Treasury Department 
regulations. However, the listed company's independent compensation 
committee or a majority of the listed company's independent directors 
must approve these plans. Along with tax qualified, non-discriminatory 
employee benefit plans, proposed CBOE Rule 31.79(b) also proposes an 
exception for parallel nonqualified plans. The proposed rule change 
would not impact any shareholder approval or other requirements under 
the Internal Revenue Code or other applicable laws or requirements for 
such plans. Additionally, an equity compensation plan that provides 
non-U.S. employees with substantially the same benefits as a comparable 
tax qualified, non-discriminatory employee benefit plan or parallel 
nonqualified plan that the issuer provides to its U.S. employees, but 
for features necessary to comply with applicable foreign tax law, is 
also exempt from the shareholder approval requirements.
    Proposed Interpretation .01 to CBOE Rule 31.79 makes clear that a 
company would not be permitted to use repurchased shares to fund 
options plans without prior shareholder approval. However, plans that 
merely provide a convenient way to purchase shares on the open market 
or from the issuer at fair market value would not require shareholder 
approval.
    With respect to plans or arrangements relating to an acquisition or 
merger, as set forth in proposed CBOE Rule 31.79(c), proposed 
Interpretation .01 to CBOE Rule 31.79 makes clear that these plans or 
arrangements would not require shareholder approval in two situations. 
First, shareholder approval will not be required to convert, replace or 
adjust outstanding options or other equity compensation awards to 
reflect the transaction. Second, shares available under certain plans 
acquired in acquisitions and mergers may be used for certain post-
transaction grants without further shareholder approval. This exception 
applies to situations where the party that is not a listed company 
following the transaction has shares available for grant under pre-
existing plans that were previously approved by shareholders. These 
shares may be used for post-transaction grants of options and other 
equity awards by the listed company (after appropriate adjustment of 
the number of shares to reflect the transaction), either under the pre-
existing plan or another plan, without further shareholder approval, so 
long as (1) the time during which those shares are available for grants 
is not extended beyond the period when they would have been available 
under the pre-existing plan, absent the transaction, and (2) such 
options and other awards are not granted to individuals who were 
employed by the granting company or its subsidiaries at the time the 
merger or acquisition was consummated. The Exchange would view a plan 
adopted in contemplation of the merger or acquisition transaction as 
not pre-existing for purposes of this exception. The Exchange believes 
that this exception is appropriate because it believes that it would 
not result in any increase in the aggregate potential dilution of the 
combined enterprise.
    Finally, proposed CBOE Rule 31.79(d) sets forth a new exception for 
warrants or rights offered generally to all shareholders. The Exchange 
believes that this issuance does not raise the same concerns regarding 
self-dealing and dilution as other, more exclusive stock option plans 
or arrangements may create.
    The Exchange's proposal also clarifies that only material 
amendments to plans (including existing plans) will require shareholder 
approval. Proposed Interpretation .01 to CBOE Rule 31.79 specifies a 
non-exclusive list of plan amendments that would be considered 
material. While broad, general authority to amend a plan would not 
obviate the need for shareholder approval, if a plan permits a specific 
action without further shareholder approval, then no such approval 
would be required.\6\ Certain provisions in a plan, however, cannot be 
amended without shareholder approval. For example, plans that contain a 
formula for automatic increases in the shares available (sometimes 
called an ``evergreen formula'') or that automatically grant shares 
pursuant to a dollar-based formula cannot have a term in excess of ten 
years, unless shareholder approval is obtained every ten years. In 
addition, plans that do not contain a formula and do not impose a limit 
on the number of shares available for grant would require shareholder 
approval of each grant under the plan. A requirement that grants be 
made out of treasury shares or repurchased shares will not alleviate 
these additional shareholder approval requirements. Proposed 
Interpretation .01 to CBOE Rule 31.79 also provides that issuers should 
strive to make plan terms easily understandable and that plans meant to 
permit repricing should use explicit terminology in this regard.
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    \6\ 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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    Proposed Interpretation .01 to CBOE Rule 31.80 reflects the concept 
set forth in proposed Interpretation .01 to CBOE Rule 31.79, that 
additional shares available for issuance under a stock option or 
purchase plan or other equity compensation arrangement acquired in 
connection with a merger or acquisition are counted in determining 
whether the transaction involved the issuance of 20% or more of the 
company's outstanding common stock. Furthermore, the Exchange proposes 
to amend CBOE Rule 31.96 and the Listing Agreement set forth on CBOE 
Form 1 to require issuers to notify the Exchange in writing prior to 
the use of any of the exceptions set forth in paragraphs (a) through 
(d) of CBOE Rule 31.79.
    In addition, the Exchange proposes to amend CBOE Rule 31.85 to 
preclude the Exchange's member organizations from giving a proxy to 
vote on equity compensation plans unless the beneficial owner of the 
shares has given voting instructions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\7\ in general, and furthers the objectives 
of Section 6(b)(5) of the Act,\8\ 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. 
As previously noted, the Exchange believes that the proposed rule 
change will strengthen shareholder approval

[[Page 63155]]

requirements with respect to stock option plans.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 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-CBOE-2003-45 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.\9\ Specifically, the Commission finds that approval of the 
Exchange's proposal is consistent with Section 6(b)(5) of the Act \10\ 
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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    \9\ 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).
    \10\ 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 \11\ 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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    \11\ See supra note 5. 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.\12\ 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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    \12\ See supra notes 5 and 11.
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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 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.\13\ 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,\14\ 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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    \13\ 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.
    \14\ 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

[[Page 63156]]

employed, immediately before the transaction, by the post-transaction 
listed company or its subsidiaries. The Commission also notes that, 
under the Exchange's proposal, any shares reserved for listing in 
connection with a merger or acquisition pursuant to this exception 
would be counted by the Exchange in determining whether the transaction 
involved the issuance of 20% or more of the company's outstanding 
common stock, thereby requiring shareholder approval under CBOE Rule 
31.80(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 Amendments/Revisions to Plans

    The Commission notes that the Exchange proposes to provide a non-
exclusive list, similar to lists found in the NYSE and Nasdaq's 
shareholder approval rules,\15\ as to what constitutes a material 
amendment/revision to a plan. As noted above, material amendments/
revisions to plans will require shareholder approval under Exchange 
rules. A material amendment/revision under the Exchange's proposal 
would include, but is not limited to: A material increase in the number 
of shares to be issued under the plan (other than to reflect a 
reorganization, stock split, merger, spinoff or similar transaction); a 
material increase in benefits to participants, including any material 
change to (1) permit a repricing (or decrease in exercise price) of 
outstanding options, (2) reduce the price at which shares or options to 
purchase shares may be offered, or (3) extend the duration of the plan; 
a material expansion of the class of participants eligible to 
participate in the plan; and an expansion of the type of options or 
awards available under the plan. The Exchange's proposal also describes 
what would constitute a material amendment/revision for plans 
containing a formula for automatic increases (such as evergreen plans) 
and automatic grants requiring shareholder approval.
---------------------------------------------------------------------------

    \15\ See supra note 5; see also supra note 11.
---------------------------------------------------------------------------

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

E. Repricing of Plans

    The Commission notes that, under the Exchange's proposal, if a plan 
is amended to permit repricing, such an amendment would be considered a 
material amendment to a plan requiring shareholder approval. In 
addition, the Exchange recommended in its proposal that plans meant to 
permit repricing should explicitly and clearly state that repricing is 
permitted.
    The Commission believes that the Exchange's proposal should benefit 
shareholders by ensuring that companies cannot do a repricing of 
options, which can have a dilutive effect on shares, without explicit 
shareholder approval of such provisions and their terms. The Commission 
also believes that the Exchange's approach to repricings is similar to 
the NYSE and Nasdaq's respective approaches to repricings, and should 
offer companies clarity and guidance as to when a change in a plan 
regarding the repricing of options would trigger a shareholder approval 
requirement.

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

    The Commission notes the Exchange's proposal provides guidance for 
the treatment of evergreen/formula plans. More specifically, under the 
Exchange's proposal, if a plan contains a formula for automatic 
increases in the shares available or for automatic grants pursuant to a 
formula, such plans cannot have a term in excess of ten years unless 
shareholder approval is obtained every ten years. In addition, under 
the Exchange's proposal, if a plan contains no limit on the number of 
shares available and is not a formula plan, then each grant under the 
plan will require separate shareholder approval. Furthermore, the 
Exchange's proposal provides that a requirement that grants be made out 
of treasury or repurchased shares will not alleviate the need for 
shareholder approval for additional grants.
    The Commission believes that these provisions should help to ensure 
that certain terms of a plan cannot be drafted so broad as to avoid 
shareholder scrutiny and approval. The Commission also believes that 
the Exchange's proposed rules relating to the treatment of evergreen/
formula plans and plans that do not contain a formula or place a limit 
on the number of shares available should provide more clarity and 
transparency to issuers as to when shareholder approval would be 
required for such plans. Finally, the Commission believes that the 
provision ensuring that

[[Page 63157]]

treasury and repurchased shares cannot be used to avoid these 
additional shareholder approval requirements strengthens the proposal 
and ensures that companies cannot avoid compliance with the rule.

G. Miscellaneous Provisions

    The Commission notes that the Exchange's proposal--similar to the 
NYSE and Nasdaq's recently approved shareholder approval rules \16\--
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.
---------------------------------------------------------------------------

    \16\ See supra note 5; see also supra note 11.
---------------------------------------------------------------------------

    The Commission notes that the Exchange's proposal provides that 
pre-existing plans, which were adopted prior to the SEC's approval of 
the Exchange's proposal, would essentially be ``grandfathered'' and 
would not require shareholder approval unless the plans were materially 
amended. Under the Exchange's proposal, however, shareholder approval 
is required for each grant made pursuant to any pre-existing plans that 
were not approved by shareholders and that do not have an evergreen 
formula or a specific number of shares available under the plan. This 
is consistent with the NYSE, Nasdaq, and Amex shareholder approval 
rules on this matter. The Commission believes that this clarification 
should provide companies with guidance as to which plans would be 
subject to the Exchange's new shareholder approval requirements.
    The Commission further notes that the Exchange proposes to adopt an 
exception from the shareholder approval requirement for warrants or 
rights offered generally to all shareholders. This exception would 
exclude stock purchase plans available on equal terms to all security 
holders of the company (e.g., a dividend reinvestment plan). The 
Commission believes that the adoption of such an exception would make 
the Exchange's proposal consistent with the rules of other markets in 
this area.
    Finally, the Commission notes that the proposed amendments to CBOE 
Form 1 concerning Listing Agreements, which requires advance written 
notice to the Exchange when issuers use any of the exceptions from 
shareholder approval, should help the Exchange to ensure that the use 
of any exception is consistent with the intent of the shareholder 
approval requirements for equity compensation plans.

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

    The Commission believes that the Exchange's proposed amendment to 
CBOE Rule 31.85 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.\17\ 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.\18\ 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.\19\
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    \17\ See NASD Rule 2260; NYSE Rule 452; and Section 402.08 of 
the NYSE's Listed Company Manual.
    \18\ See supra notes 5 and 17.
    \19\ The Commission notes that the Exchange did not propose to 
implement a transition period on the elimination of the broker vote, 
similar to the NYSE's 90-day transition period, because the proposed 
amendment will not impact any issuers currently listed on the 
Exchange. Telephone conversation between David Doherty, Attorney, 
Legal Division, CBOE, and Sapna C. Patel, Special Counsel, Division, 
Commission, on October 28, 2003.
---------------------------------------------------------------------------

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 exceptions 
from shareholder approval under the Exchange's proposal, shareholder 
approval under the new standards would be required in more 
circumstances than under existing Exchange rules. The Commission 
further notes that the Exchange proposes to adopt a requirement that an 
issuer must notify it in writing when it uses one of the exceptions 
from the shareholder approval requirements. The Commission believes 
that such a requirement, coupled with the additional disclosure 
requirements for inducement grants, should reduce the potential for 
abuse of any of the exceptions.\21\ In addition, the Exchange's 
proposed amendment to CBOE Rule 31.85, 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 5; see also supra note 11.
    \21\ See also supra note 13 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.
---------------------------------------------------------------------------

    \22\ See supra note 5; see also supra note 11.
    \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 that the Commission approve the proposed rule 
change on an accelerated basis so that the proposed corporate 
governance listing standards relating to shareholder approval of equity 
compensation plans may be implemented as soon as possible. The 
Commission notes that the Exchange's

[[Page 63158]]

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\
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    \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 5; see also supra note 11.
    \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 5; see also supra note 11.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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-CBOE-2003-45) 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. 03-28075 Filed 11-6-03; 8:45 am]
BILLING CODE 8010-01-P