[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63143-63150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28076]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48733; File No. SR-BSE-2003-16]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment Nos. 1 and 2 Thereto and Order Granting 
Accelerated Approval to a Proposed Rule Change and Amendment Nos. 1 and 
2 Thereto by the Boston Stock Exchange, Inc. 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 September 15, 2003, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described

[[Page 63144]]

in Items I and II below, which Items have been prepared by the 
Exchange. On October 2, 2003, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ On October 29, 2003, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and is approving the proposal, as 
amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the Exchange's original Rule 19b-4 
filing in its entirety.
    \4\ See letter from John Boese, Vice President, Legal 
Compliance, BSE, to Nancy Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated October 29, 2003 (``Amendment 
No. 2''). In Amendment No. 2, the Exchange made a technical 
correction to its proposed rule language by underlining proposed BSE 
Rule 3(e), Proxy Voting on Equity Compensation Plans, 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 is proposing to adopt a new section entitled ``Equity 
Compensation Plans'' in Chapter XXVII, Listed Securities--Requirements, 
regarding shareholder approval of equity compensation plans and to 
amend its rules related to the voting of proxies.
    Below is the text of the proposed rule change, as amended.\5\ 
Proposed new language is italicized; proposed deleted language is 
[bracketed].
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    \5\ The Exchange's rules under Chapter XXVII, Listed 
Securities--Requirements, are not numbered, so the Exchange is 
adding its proposed section entitled ``Equity Compensation Plans'' 
to the end of the chapter.
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* * * * *

Chapter XXXVI: Proxies

    Secs. 1-2, no change.
    Sec. 3(a)-(d), no change.

Proxy Voting on Equity Compensation Plans

    (e) A member organization may not give a proxy to vote without 
instructions from beneficial owners when the matter to be voted upon 
authorizes the implementation of any equity compensation plan, or any 
material revision to the terms of any existing equity compensation plan 
(whether or not stockholder approval of such plan is required by 
Chapter XXVII, Listed Securities, Equity Compensation Plans, of these 
Rules).
    Secs. 4-6, no change.
* * * * *

Chapter XXVII: Listed Securities--Requirements

* * * * *

Equity Compensation Plans

    Shareholders must be given the opportunity to vote on all equity-
compensation plans and material revisions thereto, with limited 
exemptions explained below.
    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 the limited exemptions 
explained below.

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. Even a 
compensatory grant of options or other equity securities that is not 
made under a plan is, nonetheless, an ``equity-compensation plan'' for 
these purposes.
    However, the following are not ``equity-compensation plans'' even 
if the brokerage and other costs of the plan are paid for by the listed 
company:
    [sbull] Plans that are made available to shareholders generally, 
such as a typical dividend reinvestment plan.
    [sbull] Plans that merely allow employees, directors or other 
service providers to elect to buy shares on the open market or from the 
listed company for their current fair market value, regardless of 
whether:
    [sbull] The shares are delivered immediately or on a deferred 
basis; or
    [sbull] The payments for the shares are made directly or by giving 
up compensation that is otherwise due (for example, through payroll 
deductions).

Material Revisions

    A ``material revision'' of an equity-compensation plan includes 
(but is not limited to), the following:
    [sbull] 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).
    [sbull] 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 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.
    This type of plan (regardless of its term) is referred to below as 
a ``formula plan.'' Examples of automatic grants pursuant to a formula 
are (1) annual grants to directors of restricted stock having a certain 
dollar value, and (2) ``matching contributions,'' whereby stock is 
credited to a participant's account based upon the amount of 
compensation the participant elects to defer.
    [sbull] 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 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.
    [sbull] An expansion of the types of awards available under the 
plan.
    [sbull] A material expansion of the class of employees, directors 
or other service providers eligible to participate in the plan.
    [sbull] A material extension of the term of the plan.
    [sbull] A material change to the method of determining the strike 
price of options under the plan.
    [sbull] A change in the method of determining ``fair market value'' 
from the closing price on the date of 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 view as material.
    [sbull] The deletion or limitation of any provision prohibiting 
repricing of options. See the next section for details.
    Note that an amendment will not be considered a ``material 
revision'' if it curtails rather than expands the scope of the plan in 
question.

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

[[Page 63145]]

commenced before the date this listing standard became effective.
    ``Repricing'' means any of the following or any other action that 
has the same effect:
    [sbull] Lowering the strike price of an option after it is granted.
    [sbull] Any other action that is treated as a repricing under 
generally accepted accounting principles.
    [sbull] 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.

Exemptions

    This 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 as 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.

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.

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:
    [sbull] The number of shares available for grants is appropriately 
adjusted to reflect the transaction;
    [sbull] 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
    [sbull] 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 required 
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.

Qualified Plans, Parallel Excess Plans and Section 423 Plans

    The following types of plans (and material revisions thereto) are 
exempt from the shareholder approval requirement:
    [sbull] Plans intended to meet the requirements of Section 401(a) 
of the Internal Revenue Code (e.g., ESOPs);
    [sbull] Plans intended to meet the requirements of Section 423 of 
the Internal Revenue Code; and
    [sbull] ``Parallel excess plans'' as defined below.
    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 excess 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. 
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 (1) 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 limits 
that may hereafter be enacted); (2) its terms are substantially the 
same as the qualified plan that it parallels except for the elimination 
of the limits described in the preceding sentence and the limitation 
described in clause (3); and (3) no participant receives employer 
equity contributions under the plan in excess of 25% of the 
participant's cash compensation.

Transition Rules

    Except as provided below, a plan that was adopted before the date 
of the Securities and Exchange Commission order approving this listing 
standard

[[Page 63146]]

will not be subject to shareholder approval under this section unless 
and until it is materially revised.
    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 listing 
standard without further shareholder approval only for a limited 
transition period, defined below, and then only in a manner consistent 
with past practice. See also ``Material Revisions'' above. 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 a 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. Similarly, in the case 
of a formula plan (as defined in ``Material Revisions'' above) that 
either (1) has not previously been approved by shareholders or (2) does 
not have a term of ten years or less, additional grants may be made 
after the effective date of this listing standard without further 
shareholder approval only for a limited transition period, defined 
below.
    The limited transition period described in the preceding two 
paragraphs will end upon the first to occur of:
    [sbull] 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;
    [sbull] The first anniversary of the effective date of this listing 
standard; and
    [sbull] The expiration of the plan.
    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 
listing standard, 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 
listing standard are made only from the shares available immediately 
before the effective date, in other words, based on formulaic increases 
that occurred prior to such effective date.

Transiti on Rules for Proxy Voting on Equity Compensation Plans

    Members or member-organizations are precluded from giving a proxy 
to vote on equity compensation plans unless the beneficial owner of the 
shares has given voting instructions, as set forth in Chapter XXVI, 
Proxies, Section 3(e), Proxy Voting on Equity Compensation Plans, of 
these Rules. This provision regarding equity compensation plans will be 
effective for any meeting of shareholders that occurs on or after the 
90th day following the date of the Securities and Exchange Commission 
order approving this provision.
* * * * *

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
    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 listing standards 
related to shareholder approval of equity compensation plans.\6\
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    \6\ 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 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 14 (regarding the Commission's recent 
approval of a similar proposal by the American Stock Exchange LLC 
(``Amex'')).
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    The Exchange is proposing to adopt a new section entitled ``Equity 
Compensation Plans'' in Chapter XXVII, Listed Securities--Requirements, 
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, as amended, 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, as amended, 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;\7\ (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 \8\ (e.g., ESOPs), plans intended to meet the 
requirements of Section 423 of the Internal Revenue Code,\9\ 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

[[Page 63147]]

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 (assuming that such repricing would not require 
shareholder approval under other Exchange rules).
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    \7\ 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.
    \8\ 26 U.S.C. 401(a).
    \9\ 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 proposed 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 are not a formula plan). 
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.
    Finally, the Exchange is also proposing to amend Section 3 in 
Chapter XXXVI, Proxies, to prohibit member organizations from giving a 
proxy to vote on the implementation of, or material changes to, equity 
compensation plans unless the beneficial owner of the shares has given 
voting instructions. The Exchange proposes a transition period that 
will make this provision applicable only to shareholder meetings that 
occur on or after the 90th day following the date of the Commission 
order approving this rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\11\ 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-BSE-2003-16 and should be submitted by November 28, 2003.

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

    After careful review, the Commission finds that the Exchange's 
proposal, as amended, is consistent with the Act and the rules and 
regulations promulgated thereunder applicable to a national securities 
exchange and, in particular, with the requirements of Section 6(b) of 
the Act. \12\ Specifically, the Commission finds that approval of the 
Exchange's proposal, as amended, is consistent with Section 6(b)(5) of 
the Act \13\ 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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    \12\ 15 U.S.C. 78f(b). In approving the Exchange's proposal, as 
amended, the Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \13\ 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, as 
amended, which requires shareholder approval of equity compensation 
plans and which follows the Commission's approval of similar proposals 
by the NYSE, Nasdaq, and Amex \14\ 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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    \14\ See supra note 6. The Commission notes that it has recently 
approved similar rules requiring shareholder approval of equity 
compensation plans for the American Stock Exchange LLC (``Amex''). 
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, as 
amended, is similar and almost

[[Page 63148]]

identical to proposals by NYSE and Nasdaq requiring shareholder 
approval of equity compensation plans that have previously been 
approved by the Commission.\15\ 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, as amended, will 
conform the Exchange's shareholder approval requirements for equity 
compensation plans with those of the NYSE and Nasdaq, and will 
immediately impose the same requirements on the Exchange's issuers as 
those imposed upon NYSE, Nasdaq, and Amex issuers. The adoption of 
these standards by the Exchange is an important step to ensure that 
issuers will not be able to avoid shareholder approval requirements for 
equity compensation plans based on their listed marketplace.
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    \15\ See supra notes 6 and 14.
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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 amended 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.\16\ 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,\17\ 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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    \16\ 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.
    \17\ 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, as amended, 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 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,\18\ as to what constitutes a material 
revision to a plan. As noted above, material revisions to plans will 
require shareholder approval under Exchange rules. A material revision 
under the Exchange's amended proposal would include, but is not limited 
to: a material increase in the number of shares to be issued under the 
plan (other than to reflect a reorganization, stock split, merger, 
spinoff or similar transaction); an expansion of the type of awards 
available under the plan; a material expansion of the class of 
participants eligible to participate in the

[[Page 63149]]

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, as amended, also describes what would 
constitute a material revision for plans containing a formula for 
automatic increases (such as evergreen plans) and automatic grants 
requiring shareholder approval.
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    \18\ See supra note 6; see also supra note 14.
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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 amended 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, as amended, 
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, 
as amended, 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, 
as amended, 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, as amended, 
should benefit shareholders by ensuring that companies cannot do a 
repricing of options, which can have a dilutive effect on shares, 
without explicit shareholder approval of such provisions and their 
terms. The Commission also believes that the Exchange's approach to 
repricings is similar to the NYSE and Nasdaq's respective approaches to 
repricings, and should offer companies clarity and guidance as to when 
a change in a plan regarding the repricing of options would trigger a 
shareholder approval requirement.

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

    The Commission notes the Exchange's proposal, as amended, provides 
guidance for the treatment of evergreen/formula plans. More 
specifically, under the Exchange's proposal, as amended, if a plan 
contains a formula for automatic 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 amended 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, as amended, 
provides that a requirement that grants be made out of treasury or 
repurchased shares will not alleviate the need for shareholder approval 
for additional grants.
    The Commission believes that these provisions should help to ensure 
that certain terms of a plan cannot be drafted so broad as to avoid 
shareholder scrutiny and approval. The Commission also believes that 
the Exchange's proposed rules relating to the treatment of evergreen/
formula plans and plans that do not contain a formula or place a limit 
on the number of shares available should provide more clarity and 
transparency to issuers as to when shareholder approval would be 
required for such plans. Finally, the Commission believes that the 
provision ensuring that treasury and repurchased shares cannot be used 
to avoid these additional shareholder approval requirements strengthens 
the proposal and ensures that companies cannot avoid compliance with 
the rule.
    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.

G. Miscellaneous Provisions

    The Commission notes that the Exchange's amended proposal similar 
to the NYSE and Nasdaq's recently approved shareholder approval rules 
\19\--incorporates the term ``equity compensation'' and proposes that 
plans that merely provide a convenient way to purchase shares in the 
open market or from the issuer at fair market price on equal terms to 
all security holders would not require shareholder approval. The 
Commission believes that the Exchange's proposal, as amended, is 
consistent with the NYSE and Nasdaq's rules in this area and should 
provide greater clarity with respect to which plans would and would not 
require shareholder approval.
---------------------------------------------------------------------------

    \19\ See supra note 6; see also supra note 14.
---------------------------------------------------------------------------

    The Commission notes that the Exchange's proposal, as amended, 
provides that pre-existing plans, which were adopted prior to the SEC's 
approval of the Exchange's proposal, would essentially be 
``grandfathered'' and would not require shareholder approval unless the 
plans were materially amended. Under the Exchange's amended proposal, 
however, shareholder approval is required for each grant made pursuant 
to any pre-existing plans that were not approved by shareholders and 
that do not have an evergreen formula or a specific number of shares 
available under the plan. This is consistent with the NYSE, Nasdaq, and 
Amex shareholder approval rules on this matter. The Commission believes 
that this clarification should provide companies with guidance as to 
which plans would be subject to the Exchange's new shareholder approval 
requirements.

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

    The Commission believes that the Exchange's proposed provision, BSE 
Section 3(e), 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

[[Page 63150]]

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.\20\ 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.\21\ 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.
---------------------------------------------------------------------------

    \20\ See NASD Rule 2260; NYSE Rule 452; and Section 402.08 of 
the NYSE's Listed Company Manual.
    \21\ See supra notes 6 and 20.
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    The Commission also notes that the Exchange proposes to implement a 
transition period that would make the new rule eliminating broker 
voting on equity compensation plans applicable only to shareholder 
meetings that occur on or after the 90th day from the effective date of 
the Exchange's proposal.

I. Summary

    Overall, the Commission believes that the Exchange's proposal, as 
amended, is similar to the NYSE and Nasdaq's recently approved 
shareholder approval rules.\22\ The Commission therefore believes that 
the Exchange's amended 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 amended proposal, shareholder approval under the new 
standards would be required in more circumstances than under existing 
Exchange rules. The Commission further notes that the Exchange proposes 
to adopt a requirement that an issuer must notify it in writing when it 
uses one of the 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.\23\ In addition, the 
Exchange's proposed amendment to BSE Section 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.
---------------------------------------------------------------------------

    \22\ See supra note 6; see also supra note 14.
    \23\ See also supra note 16 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal, as amended, 
which is similar to the NYSE and Nasdaq's shareholder approval 
rules,\24\ sets a consistent, minimum standard for shareholder approval 
of equity compensation plans. The Commission believes that the 
Exchange's proposal, as amended, should help to ensure that companies 
will not make listing decisions simply to avoid shareholder approval 
requirements for equity compensation plans and should provide 
shareholders with greater protection from the potential dilutive effect 
of equity compensation plans. Based on the above, the Commission finds 
that the Exchange's proposal, as amended, should help to protect 
investors, is in the public interest, and does not unfairly 
discriminate among issuers, consistent with Section 6(b)(5) of the 
Act.\25\ The Commission therefore finds the Exchange's proposal, as 
amended, to be consistent with the Act and the rules and regulations 
thereunder.
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    \24\ See supra note 6; see also supra note 14.
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Accelerated Approval of the Exchange's Proposal and Amendment Nos. 1 
and 2

    The Commission finds good cause for approving the Exchange's 
proposal and Amendment Nos. 1 and 2 thereto prior to the thirtieth day 
after the date of publication of notice thereof in the Federal 
Register. The Commission notes that the Exchange's proposal, as 
amended, is similar to the NYSE and Nasdaq's proposals requiring 
shareholder approval of equity compensation plans. Both the NYSE and 
Nasdaq's proposals were published for comment in the Federal Register 
and recently approved by the Commission.\26\ The Commission believes 
that it already considered and addressed the issues that may be raised 
by the Exchange's amended proposal in its approval of the NYSE and 
Nasdaq's proposals.\27\
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    \26\ 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 6; see also supra note 14.
    \27\ 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 6; see also supra note 14.
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    The Commission believes that accelerated approval of the Exchange's 
proposal, as amended, is essential to allow for immediate harmonization 
of, and consistency in, the shareholder approval requirements for 
equity compensation plans among the markets. This will prevent issuers 
from making listing decisions based on differences in self-regulatory 
organization shareholder approval requirements and should provide equal 
investor protection to shareholders on the dilutive effects of plans 
irrespective of where the security trades. The Commission further 
believes that making the Exchange's new shareholder approval rules 
effective upon Commission approval will immediately impose the same 
requirements on the Exchange's issuers as those imposed upon NYSE, 
Nasdaq, and Amex issuers. Based on the above, the Commission finds good 
cause, consistent with Sections 6(b)(5) and 19(b)(2) of the Act, \28\ 
to approve the Exchange's proposal and Amendment Nos. 1 and 2 thereto 
on an accelerated basis.
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    \28\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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VI. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-BSE-2003-16) and Amendment 
Nos. 1 and 2 thereto are hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28076 Filed 11-6-03; 8:45 am]
BILLING CODE 8010-01-P