[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63173-63180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28077]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48735; File No. SR-PCX-2003-50]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to its Shareholder Approval Policy for Its 
Listed Companies Regarding Stock Option Plans and Other Equity 
Compensation Arrangements

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 22, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE''), filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through PCXE, is proposing to amend its Section 3, 
Corporate Governance and Disclosure Policies, and more specifically 
PCXE Rule 5.3(d), Shareholder Approval Policy, relating to stock option 
plans and other equity compensation arrangements. The Exchange, through 
PCXE, is also proposing to amend PCXE Rule 9.4, Proxies Voting, to 
prohibit the holder of an Equity Trading Permit (``ETP'') from voting 
on equity compensation plans unless the beneficial owner of the shares 
has given voting instructions. The Exchange believes that the proposed 
changes are aimed at helping to restore investor confidence by 
strengthening listed companies' corporate governance practices.
    Below is the text of the proposed rule change.\3\ Proposed new 
language is italicized; proposed deleted language is [bracketed].
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    \3\ Upon the Exchange's request, the Commission made a technical 
correction to the proposed rule text. Telephone conversation between 
Steven B. Matlin, Senior Counsel, Regulatory Policy, PCX, and Sapna 
C. Patel, Special Counsel, Division of Market Regulation, 
Commission, on October 17, 2003.
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* * * * *

PCX Equities, Inc.

Rule 5

Listings

    Rules 5.1-5.2--No change.
Section 3. Corporate Governance and Disclosure Policies
Corporate Governance and Disclosure Policies
    Rule 5.3--No Change.
    Rule 5.3(a)-5.3(c)--No Change.
Shareholder Approval Policy
Rule 5.3(d) Shareholder Approval Policy
    Each issuer shall require shareholder approval of a plan or 
arrangement pursuant to [under] subparagraphs (1) through (7) below or, 
prior to the issuance of designated securities under subparagraphs (8) 
[(2)] through (11) [(4)] below.[, when:]
    (1) Shareholder Approval. Except as provided for in this Rule 
5.3(d) all equity-compensation plans, and any material revisions to the 
terms of such plans, must be approved by the shareholders of the listed 
company. [A stock option or purchase plan is to be established or other 
arrangement made pursuant to which stock may be acquired by officers or 
directors, except for warrants or rights issued generally to security 
holders of the company or broadly based plans or arrangements including 
other employees (e.g., ESOPs).
    The Corporation will generally not require shareholder's approval 
as a condition to listing shares reserved for the exercise of options 
when:
    (i) such options are issued to an individual, not previously 
employed by the company, as an inducement essential to the individual's 
entering into an employment contract with the company provided that the 
potential issuance of shares pursuant to such options does not exceed 
5% of the company's outstanding common stock; or
    (ii) the establishment of a plan or arrangement under which the 
amount of securities which may be issued does not exceed the lesser of 
1% of the number of shares 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 aggregate, stock to be 
issued pursuant to options which have expired and/or been cancelled 
shall not be included.)]
    (2) Equity Compensation Plan Defined. 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. For purposes of this rule, a compensatory 
grant of options or other equity securities that is not made under

[[Page 63174]]

a plan is, nonetheless, an equity compensation plan.
    (A) Exceptions. The following are not equity compensation plans 
even if the brokerage and other costs of the plan are paid for by the 
listed company:
    (i) Plans that are made available to shareholders generally, such 
as a typical dividend reinvestment plan.
    (ii) 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:
    (a) The shares are delivered immediately or on a deferred basis; or
    (b) The payments for the shares are made directly or by giving up 
compensation that is otherwise due (for example, through payroll 
deductions).
    (3) Material Revisions. A material revision of an equity 
compensation plan includes, but is not limited to, the following:
    (A) A material increase in the number of shares available under the 
plan (other than an increase solely to reflect a reorganization, stock 
split, merger, spinoff or similar transaction).
    (i) If a plan contains a formula for automatic increases in the 
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 as a 
formula plan. Examples of automatic grants pursuant to a formula plan 
are:
    (a) Annual grants to directors of restricted stock having a certain 
dollar value; and
    (b) Matching contributions, whereby stock is credited to a 
participant's account based upon the amount of compensation the 
participant elects to defer.
    (ii) If a plan contains no limit on the number of shares available 
and 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 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 preestablished 
formula so as to prevent a plan from being considered a discretionary 
plan.
    (B) An expansion of the types of awards available under the plan.
    (C) A material expansion of the class of employees, directors or 
other service providers eligible to participate in the plan.
    (D) A material extension of the term of the plan.
    (E) A material change to the method of determining the strike price 
of options under the plan.
    (F) The deletion or limitation of any provision prohibiting 
repricing of options. An amendment will not be considered a Material 
Revision if it curtails rather than expands the scope of the plan in 
question.
    (4) Repricings. Repricing means any of the following or any other 
action that has the same effect:
    (A) Lowering the strike price of an option after it is granted.
    (B) Any other action that is treated as a repricing under generally 
accepted accounting principles.
    (C) 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 
occurs in connection with a merger, acquisition, spin-off or other 
similar corporate transaction.
    A plan that does not contain a provision that specifically permits 
repricing of options will be considered for purposes of this rule as 
prohibiting repricing. Therefore, any actual repricing of options will 
be considered a material revision of a plan even if the plan itself is 
not revised. This consideration will not apply to a repricing through 
an exchange offer that commenced before the date this rule became 
effective.
    (5) Exemptions. This rule 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, as described below. These exempt grants, plans and amendments 
may be made only with the approval of the listed company's independent 
compensation committee or the approval of a majority of the company's 
independent directors. Listed companies must notify the Exchange in 
writing when they use these exemptions.
    (A) 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 of 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.
    (B) Mergers and Acquisitions. In the context of corporate 
acquisitions and mergers, the following exemptions apply:
    (i) Shareholder approval is not required to convert, replace or 
adjust outstanding options or other equity compensations awards to 
reflect the transaction.
    (ii) 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 
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 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:
    (a) The number of shares available for grants is appropriately 
adjusted to reflect the transaction;
    (b) 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
    (c) 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 requires 
shareholder approval pursuant to Rule 5.3(d)(9)(B).
    (D) 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:
    (i) Plans intended to meet the requirement of Section 401(a) of the 
Internal Revenue Code (e.g. ESOP);

[[Page 63175]]

    (ii) Plans intended to meet the requirements of Section 423 of the 
Internal Revenue Code;
    (iii) Parallel excess plans. A parallel excess plan is a plan that 
is a pension plan within the meaning of the Employee Retirement Income 
Security Act 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 the contributions and benefits 
under qualified plans), Internal Revenue Code Section 401(a)(17) (the 
section that limits the amount of an employee's compensation that can 
be taken into account for plan purposes) and/or Internal Revenue Code 
Section 415 (the section that limits the contributions and benefits 
under qualified plans) and/or any successor or similar limitations that 
may hereafter be enacted.
    A plan will not be considered a parallel excess plan unless:
    (a) It covers all or substantially all employees of an employer who 
are participants in the related qualified plan whose annual 
compensation is in excess of the limit of Internal Revenue Code Section 
401(a)(17) or any successor or similar limits that may hereafter be 
enacted;
    (b) Its terms are substantially the same as the qualified plan that 
it parallels except for the elimination of the limits described in the 
preceding sentence and the limitation described in clause (c) below; 
and
    (c) No participant receives employer equity contributions under the 
plan in excess of 25% of the participant's cash compensation.
    (iv) 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.
    (6) Transition Rules. Except as provided below, a plan that was 
adopted before the date of the Securities and Exchange Commission order 
approving this rule 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 Rule 
5.3(d)(3)(A)(ii), whether or not previously approved by shareholders, 
additional grants may be made after the effective date of this rule 
without further shareholder approval only for a limited transition 
period, defined below, and then only in a manner consistent with past 
practice. In applying this rule, if a plan can be separated into a 
discretionary plan portion and a portion that is not discretionary, the 
non-discretionary portion of the plan can continue to be used 
separately, under the appropriate transition rule. For example, if a 
shareholder approved plan permits both grants pursuant to a provision 
that makes available a specific number of shares, and grants pursuant 
to 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.
    In the case of a formula plan, as defined in Rule 5.3(d)(3)(A)(i), 
that either has not previously been approved by shareholders or does 
not have a term of ten years or less, additional grants may be made 
after the effective date of this rule without further shareholder 
approval only for a limited transition period defined below.
    The limited transition period will end upon the first to occur of:
    (A) The listed company's next annual meeting at which directors are 
elected that occurs more than 180 days after the effective date of this 
rule;
    (B) The first anniversary of the effective date of this rule; and
    (C) 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 rule, 
and would not itself be considered a material revision requiring 
shareholder approval.
    A formula plan may continue to be used, without shareholder 
approval, if the grants after the effective date of this rule 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.
    (7) Broker Voting. The Exchange will preclude its ETP Holders from 
giving a proxy to vote on equity compensation plans unless the 
beneficial owner of the shares has given voting instructions. This is 
codified in Rule 9.4 (Proxy Voting). Amended Rule 9.4 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 the rule change.
    (8)[(2)] The issuance will result in a change of control of the 
issuer.
    (9)[(3)] In connection with the acquisition of the stock or assets 
of another company, shareholder approval is needed in the following 
circumstances:
    (A)[(i)] If any director, officer, or substantial shareholder of 
the listed company has a 5% or greater interest (or such persons 
collectively have a 10% or greater interest), directly or indirectly, 
in the company or assets to be acquired or in the consideration to be 
paid in the transaction (or series of related transactions) and the 
present or potential issuance of common stock, or securities 
convertible into or exercisable for common stock, could result in an 
increase in outstanding common shares or voting power of 5% or more; or
    (B)[(ii)] Where the present or potential issuance of common stock, 
or securities convertible into or exercisable for common stock (other 
than in a public offering for cash), could result in an increase in 
outstanding common shares of 20% or more or could represent 20% or more 
of the voting power outstanding before the issuance of such stock or 
securities.
    (10)[(4)] In connection with a transaction other than a public 
offering involving:
    (A)[(i)] The sale or issuance by the company of common stock (or 
securities convertible into or exercisable for common stock) at a price 
less than the greater of book or market value, which together with 
sales by officers, directors or principal shareholders of the company 
equals 20% or more of presently outstanding common stock, or 20% or 
more of the presently outstanding voting power; or
    (B)[(ii)] The sale or issuance by the company of common stock (or 
securities convertible into or exercisable for common stock) equal to 
20% or more of presently outstanding stock or voting power for less 
than the greater of book or market value of the stock.
    (11)[(5)] Exceptions may be made upon application to the 
Corporation when:
    (A)[(i)] The delay in securing shareholder approval would seriously 
jeopardize the financial viability of the enterprise; and
    (B)[(ii)] Reliance by the company on this exception is expressly 
approved by the audit committee of the board or a comparable body.
    A company relying on this exception must mail to all shareholders, 
no later than ten days before issuance of the securities, a letter 
alerting them to its omission to seek the shareholder approval that 
would otherwise be required and indicating that the audit committee of 
the board or a comparable

[[Page 63176]]

body has expressly approved the exception.
    Commentary:
    .01-.02--No Change.
    Rule 5.3(e)-5.3(o)No Change.
* * * * *

Rule 9

Conducting Business With the Public

* * * * *
] 7963M Proxies Voting
    Rule 9.4. No ETP Holder shall give a proxy vote that authorizes the 
implementation of any equity compensation plan, or any material 
revision to the terms of any existing equity compensation plan (whether 
or not stockholder approval of such plan is required by Rule 5.3(d)(1)-
(7)), unless the beneficial owner of the shares has given voting 
instructions. This provision for equity compensation plans shall 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 the rule change. In all other matters besides equity 
compensation plans, no ETP Holder shall sign or give a proxy to vote 
any stock registered in the name or control of such ETP Holder unless 
(a) the ETP Holder is the actual owner thereof, (b) pursuant to the 
written instructions of such actual owner, or (c) pursuant to the rules 
of another national securities exchange to which he or she or his or 
her firm is responsible.
* * * * *

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

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

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

1. Purpose
    In light of the recent failures of a number of significant 
companies due to the lack of diligence, ethics and controls, the 
Exchange, through PCXE, chose to review its corporate governance and 
disclosure policies. In September 2002, the PCXE Board of Directors 
formed a subcommittee to review the PCXE's current corporate governance 
and disclosure standards. The Exchange represents that the goal of the 
subcommittee was to enhance the accountability, integrity and 
transparency of the Exchange's listed companies. The Exchange further 
represents that it took its first step towards improving the corporate 
governance and disclosure standards for its listed companies by 
proposing revisions to PCXE Rule 5.3 to comply with the requirements of 
the Sarbanes-Oxley Act of 2002.\4\
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    \4\ See File No. SR-PCX-2003-35.
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    At the request of Commission staff, the Exchange reviewed its 
Shareholder
    Approval Policy for its listed companies. The subcommittee reviewed 
the New York Stock Exchange, Inc. (``NYSE'') and the National 
Association of Securities Dealers, Inc.(``NASD'')/The Nasdaq Stock 
Market, Inc. (``Nasdaq'')'s new shareholder approval requirements for 
equity compensation plans.\5\ The Exchange proposes to adopt a 
shareholder approval requirement for equity compensation plans that is 
almost identical to the policy adopted by the NYSE.
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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). 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 13 (regarding the 
Commission's recent approval of a similar proposal by the American 
Stock Exchange LLC (``Amex'')).
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    The Exchange proposes to amend PCXE Rule 5.3(d) to require 
shareholder approval of all equity compensation plans and material 
revisions to such plans, subject to limited exemptions. The Exchange 
represents that the new standards in PCXE Rule 5.3(d) will apply to all 
companies listed under PCX's Tier I and Tier II designations.
    Under the Exchange's proposal, an equity compensation plan is 
defined as a plan or other arrangement that provides for the delivery 
of equity securities (either newly issued or treasury shares) of the 
listed company to any employee, director or other service provider as 
compensation for services, including a compensatory grant of options or 
other equity securities that is not made under a plan. The Exchange is 
also proposing to provide clarification on certain plans that would not 
be considered equity compensation plans under this definition, such as 
plans that do not provide for delivery of equity securities of the 
issuer (e.g., plans that pay in cash) and deferred compensation plans 
under which employees pay full current market value for deferred 
shares.
    In addition, the proposal provides for certain types of grants that 
are exempted from shareholder approval. These limited exemptions 
include: (1) Inducement awards to person's first becoming an employee 
of an issuer or any of its subsidiaries, to rehires following a bona 
fide period of employment interruption, and for grants to new employees 
in connection with a merger or acquisition;\6\ (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 \7\ (e.g., ESOPs), plans intended to meet the 
requirements of Section 423 of the Internal Revenue Code,\8\ and 
parallel excess plans that meet certain conditions. The Exchange also 
proposes that, in circumstances in which equity compensation plans and 
amendments to plans are not subject to shareholder approval, the plans 
and amendments still must be subject to the approval of the company's 
independent compensation committee or a majority of the company's 
independent directors. In addition, the Exchange proposes that an 
issuer must notify the Exchange in writing when it uses any of the 
exemptions from the shareholder approval requirements.
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    \6\ 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.
    \7\ 26 U.S.C. 401(a).
    \8\ 26 U.S.C. 423.
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    The Exchange is also proposing to provide a non-exclusive list of 
``material revisions'' to a plan that would require shareholder 
approval. Within this list of revisions, the Exchange proposes to 
define the concepts of ``evergreen plans'' (i.e., plans that contain a 
formula for automatic increases in the shares available), ``formula 
plans'' (i.e., plans that provide for automatic grants pursuant to a 
formula), and ``discretionary plans'' (i.e., plans that contain no 
limit on the number of shares available and plans that are not

[[Page 63177]]

formula plans). The Exchange proposes that each grant under a 
discretionary plan require shareholder approval regardless of whether 
the plan has a term of not more than ten years.
    Shareholder approval will be required for plans adopted before the 
effective date of these proposed amendments that have not been approved 
by shareholders and have neither an evergreen formula nor a specific 
number of shares available under the plan. The Exchange is proposing to 
provide transition rules to clarify when shareholder approval will be 
required for these pre-existing plans. In addition, during the period 
prior to the approval, pre-existing plans may be utilized, but only in 
a manner consistent with past practice. The transition rules provide 
that an evergreen plan that was approved by shareholders but does not 
have a ten-year term must be: (1) Approved by shareholders before any 
shares that become available as a result of a formulaic increase are 
utilized, or (2) amended to include a term of no more than ten years 
from the date the plan was adopted or last approved by shareholders. If 
the plan were amended to include such term, shareholder approval would 
not be required. No action would be required, however, if a plan were 
frozen at the level of shares available at the time the rule becomes 
effective. The transition rules also provide that repricings that have 
commenced prior to the effectiveness of the proposal (i.e., exchange 
offers to optionees) will not be subject to shareholder approval 
(assuming that such repricing did not require shareholder approval 
under existing Exchange rules).
    Finally, the Exchange is also proposing to prohibit the holder of 
an ETP from voting on equity compensation plans unless the beneficial 
owner of the shares has given voting instructions. The Exchange 
proposes a transition period that will make these provisions of PCXE 
Rule 9.4 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 is consistent 
with Section 6 of the Act,\9\ in general, and furthers the objectives 
of Section 6(b)(5) of the Act,\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 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-PCX-2003-50 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.\11\ Specifically, the Commission finds that approval of the 
Exchange's proposal is consistent with Section 6(b)(5) of the Act \12\ 
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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    \11\ 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).
    \12\ 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 \13\ 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.\14\
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    \13\ 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).
    \14\ The Commission notes that these new listing standards in 
PCXE Rule 5.3(d) will apply to all companies listed on the PCX and 
will include both PCX's Tier I and Tier II designations.
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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.\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 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

[[Page 63178]]

equity compensation plans based on their listed marketplace.
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    \15\ See supra notes 5 and 13.
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A. Exemption from Shareholder Approval for Inducement Grants

    The Commission believes that the requirement that the issuance of 
all inducement grants be subject to review by either the issuer's 
independent compensation committee or a majority of the board's 
independent directors, under the Exchange's proposal, should prevent 
abuse of this exemption from shareholder approval. In addition, the 
Exchange proposes to limit its exemption for inducement grants to new 
employees or to previous employees being rehired after a bona fide 
period of interruption of employment, and to new employees in 
connection with an acquisition or merger. The Commission believes that 
these limitations should help to prevent the inducement exemption from 
being used inappropriately.
    The Commission notes that the Exchange is proposing to include a 
requirement, similar to the requirement under the NYSE and Nasdaq's 
recently approved shareholder approval rules, that, promptly following 
the grant of any inducement award, companies must disclose in a press 
release the material terms of the award, including the recipient(s) of 
the award and the number of shares involved.\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, 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 under PCXE Rule 5.3(d)(9)(B). 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 proposal would include, but is not limited to: A 
material increase in the number of shares to be issued under the plan 
(other than to reflect a reorganization, stock split, merger, spinoff 
or similar transaction); an expansion of the type of awards available 
under the plan; a material expansion of the class of participants 
eligible to participate in the plan; a material extension of the term 
of the plan; a material change to limit or delete any provisions 
prohibiting repricing of options in a plan or for determining the 
strike or exercise price of options under a plan. The Exchange's 
proposal also describes what would constitute a material revision for 
plans containing a formula for automatic increases (such as evergreen 
plans) and automatic grants requiring shareholder approval.
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    \18\ See supra note 5; see also supra note 13.
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    The Commission believes that the Exchange's non-exclusive list of 
what would constitute a material revision to a plan provides companies 
with clarity and guidance for when certain amendments and revisions to 
plans would require shareholder approval. The Commission also believes 
that the Exchange's proposal to conform its non-exclusive list with the 
NYSE and Nasdaq's rules on material amendments/revisions should help to

[[Page 63179]]

ensure that the concept of material amendments/revisions is consistent 
among the markets so that differences between the markets cannot be 
abused.

E. Repricing of Plans

    The Commission notes that the Exchange's proposal provides that, if 
a plan explicitly contains a repricing provision, shareholder approval 
would be required to delete or limit the repricing provisions. The 
Commission further notes that the Exchange's proposal provides that, if 
a plan is silent on repricing, it will be considered as prohibiting 
repricing and shareholder approval would be required to permit 
repricing under the plan. The Exchange's proposal also clarifies that 
repricings that have commenced prior to the date of effectiveness of 
its proposal would not be subject to shareholder approval, provided 
that such repricing does not require shareholder approval under the 
Exchange's existing shareholder approval rules.
    The Commission believes that the Exchange's proposal should benefit 
shareholders by ensuring that companies cannot do a repricing of 
options, which can have a dilutive effect on shares, without explicit 
shareholder approval of such provisions and their terms. The Commission 
also believes that the Exchange's approach to repricings is similar to 
the NYSE and Nasdaq's respective approaches to repricings, and should 
offer companies clarity and guidance as to when a change in a plan 
regarding the repricing of options would trigger a shareholder approval 
requirement.

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

    The Commission notes the Exchange's proposal provides guidance for 
the treatment of evergreen/formula plans. More specifically, under the 
Exchange's proposal, if a plan contains a formula for automatic 
increases in the shares available or for automatic grants pursuant to a 
formula, such plans cannot have a term in excess of ten years unless 
shareholder approval is obtained every ten years. In addition, under 
the Exchange's proposal, if a plan contains no limit on the number of 
shares available and is not a formula plan, then each grant under the 
plan will require separate shareholder approval. Furthermore, the 
Exchange's proposal provides that a requirement that grants be made out 
of treasury or repurchased shares will not alleviate the need for 
shareholder approval for additional grants.
    The Commission believes that these provisions should help to ensure 
that certain terms of a plan cannot be drafted so broad as to avoid 
shareholder scrutiny and approval. The Commission also believes that 
the Exchange's proposed rules relating to the treatment of evergreen/
formula plans and plans that do not contain a formula or place a limit 
on the number of shares available should provide more clarity and 
transparency to issuers as to when shareholder approval would be 
required for such plans. Finally, the Commission believes that the 
provision ensuring that treasury and repurchased shares cannot be used 
to avoid these additional shareholder approval requirements strengthens 
the proposal and ensures that companies cannot avoid compliance with 
the rule.
    The Commission further notes that the Exchange has proposed a 
transition period for evergreen/formula plans and discretionary plans. 
The limited transition period would end on the first to occur of the 
following: (1) The listed company's next annual meeting at which 
directors are elected that occurs more than 180 days after the date of 
the effective date of the Exchange's proposal; (2) the first 
anniversary of the effective date of the Exchange's proposal; or (3) 
the expiration of the plan. The Commission believes that the Exchange's 
proposed transition period for evergreen/formula and discretionary 
plans should provide companies with additional clarity and guidance as 
to when shareholder approval would be required for such plans while in 
the transition period, and should provide companies with more time to 
comply with the Exchange's new shareholder approval requirements for 
evergreen/formula type plans. The Commission believes that this period 
is not so long as to permit abuse of the shareholder approval 
requirement, and at most, will last one year from the date of this 
Commission approval order.

G. Miscellaneous Provisions

    The Commission notes that the Exchange's 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 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 5; see also supra note 13.
---------------------------------------------------------------------------

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

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

    The Commission believes that the Exchange's proposed amendment to 
PCX Rule 9.4 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.\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.
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    \20\ See NASD Rule 2260; NYSE Rule 452; and Section 402.08 of 
the NYSE's Listed Company Manual.
    \21\ See supra notes 5 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

[[Page 63180]]

equity compensation plans applicable only to shareholder meetings that 
occur on or after the 90th day from the effective date of the 
Exchange's proposal.

I. Summary

    Overall, the Commission believes that the Exchange's proposal is 
similar to the NYSE and Nasdaq's recently approved shareholder approval 
rules.\22\ The Commission therefore believes that the Exchange's 
proposal should provide for more clear and uniform standards for 
shareholder approval of equity compensation plans. The Commission notes 
that, even with the availability of the proposed limited exemptions 
from shareholder approval under the Exchange's proposal, shareholder 
approval under the new standards would be required in more 
circumstances than under existing Exchange rules. The Commission 
further notes that the Exchange proposes to adopt a requirement that an 
issuer must notify it in writing when it uses one of the exemptions 
from the shareholder approval requirements. The Commission believes 
that such a requirement, coupled with the additional disclosure 
requirements for inducement grants, should reduce the potential for 
abuse of any of the exemptions.\23\ In addition, the Exchange's 
proposed amendment to PCXE Rule 9.4, which would preclude broker-
dealers from voting on equity compensation plans without explicit 
instructions from the beneficial owner, is consistent with the standard 
under current NYSE and NASD rules.
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    \22\ See supra note 5; see also supra note 13.
    \23\ See also supra note 16 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal, 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 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.\25\ The Commission therefore finds the 
Exchange's proposal to be consistent with the Act and the rules and 
regulations thereunder.
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    \24\ See supra note 5; see also supra note 13.
    \25\ 15 U.S.C. 78f(b)(5).
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V. Accelerated Approval of the Exchange's Proposal

    The Commission finds good cause for approving the Exchange's 
proposal prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission notes that the 
Exchange's proposal is similar to the NYSE and Nasdaq's proposals 
requiring shareholder approval of equity compensation plans. Both the 
NYSE and Nasdaq's proposals were published for comment in the Federal 
Register and recently approved by the Commission.\26\ 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.\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 5; see also supra note 13.
    \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 5; see also supra note 13.
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    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,\28\ to 
approve the Exchange's proposal 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-PCX-2003-50) is hereby 
approved on an accelerated basis.
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    \29\ 15 U.S.C. 78s(b)(2).
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    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).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28077 Filed 11-6-03; 8:45 am]
BILLING CODE 8010-01-P