Securities and Exchange Commission Proposes New Rules on the Disclosure of Equity Compensation Plans
February 2001
For over two years, the New York Stock Exchange has been struggling with its definition of "broadly-based" plans and how its stockholder approval policy should be implemented. Only recently, the New York Stock Exchange and NASDAQ joined forces to present a consolidated front. Most public companies have received notices from either the New York Stock Exchange or NASDAQ that solicit comments on the proposed stockholder approval policy, which will be adopted jointly by the New York Stock Exchange, NASDAQ and probably AMEX. Public companies should have also received the "Report of the New York Stock Exchange Special Task Force on Stockholder Approval Policy." In the report, the Task Force specifically asks the Securities and Exchange Commission (SEC) to implement a broader disclosure policy with respect to equity compensation plans.
As a consequence, the SEC has proposed new rules (Release Nos. 33-7944 and 34-43892, February 1, 2001) requiring increased disclosure of all relevant information pertaining to these plans. The problems associated with these plans has only now reached the spotlight since their number and scope has increased drastically over the past decade. One study cited by the SEC estimates that approximately 10 million employees are now compensated in part through stock options, compared to one million in 1992.
The proposal would require disclosure (in tabular format) of the following information in the corporation's proxy statement and/or Form 10-K or 10K-SB with respect to all equity plans in effect as of the last fiscal year:
Equity Compensation Plan Information
| (a) | (b) | (c) | (d) | (e) |
| Name of plan | Number of securities authorized for issuance under the plan | Number of securities awarded plus number of securities to be issued upon execise of options, warrants or rights granted during last fiscal year | Number of securities to be issued upon exercise of outstanding options, warrants or rights | Number of securities remaining available for future issuance |
| Plan #1 | ||||
| Plan # | ||||
| Plan # | ||||
| Individual Arrangements (Aggregated) |
||||
| Total |
A primary concern prompting the SEC's issuance of this proposal is the dilutive effect that equity compensation plans may have on publicly held securities. According to the proposal, "(T)his information is important if investors are to assess the effect that equity compensation plans have on their ownership or to compare the equity compensation plans of a registrant with those of its competitors." Given that many of these plans do not require shareholder approval, the SEC believes that dissemination of this information is necessary in order to allow shareholders to accurately value their securities.
In addition to its request for comment on the general desirability of adopting these new disclosure requirements, the SEC has invited suggestions on the substance and form of these disclosures. Among the issues the SEC has left open for discussion include whether a narrative disclosure is preferable over a tabular format; additional categories of information which should be included; the relevant time period the disclosure should cover and whether aggregating should be allowed. The comment period for the proposal ends on April 2, 2001.
