March 29, 2001
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Disclosure of Equity Compensation Plan Information
(Release Nos. 33-7944; 34-43892)
Commission File No. S7-04-01
Dear Mr. Katz:
We are pleased to comment on the proposed amendments to the equity compensation plan disclosure requirements, applicable to proxy statements and periodic reports under the Securities Exchange Act of 1934. While we concur with the Commission's objective to provide investors with greater transparency of equity compensation plans, whether or not the plans have received security holder approval, we believe that certain aspects of the proposal increase the burden on registrants without a corresponding increase in the value of information provided to investors. Specifically, we question the need to provide disclosures at an individual plan level, as well as disclosures in either the proxy or the annual report on Form 10-K, depending on circumstances. We also are concerned that the current, ongoing project of the New York Stock Exchange ("NYSE") to change it's criteria for shareholder approval of equity compensation plans, would, upon successful completion, serve the same purpose of providing information on all plans to investors and that this proposal would then become an interim, redundant measure only. Our comments and recommendations regarding the proposed amendments are discussed in detail below.
Disclosures by Separate Plan
A burdensome feature of the proposal is the level of detail required. The proposed amendments require disclosure of information under each equity compensation plan of the registrant in effect as of the end of the most recently completed fiscal year. Although current rules allow for disclosures on an aggregate basis, the proposed amendments require a company that grants options under multiple stock-based employee compensation plans to provide information separately for different plans. This requires a significant effort to disaggregate information by plan and does not appear to provide any additional benefit to the investor. We recommend that aggregated disclosures be allowed instead. Aggregated disclosures would still achieve the Commission's goals for information on the potential dilutive effect of equity compensation plans and full disclosure for all plans, whether or not the plans have received security holder approval. Separating this information by individual plan increases the amount and costs of disclosures, without providing incremental information of value to investors.
Location of Disclosures
The proposed release states that the disclosures would be set forth in a tabular format in the registrant's proxy statement whenever the registrant is seeking security holder action regarding a compensation plan or in the registrant's annual report on Form 10-K in years when the registrant is not seeking security holder action regarding a compensation plan. Providing the information in the proxy statement one year and the Form 10-K the next, depending on circumstances, does not provide for a consistent approach and would be confusing to the investor. It is also not clear whether, in years where the disclosures are included directly in the proxy statement, disclosure would still need to be maintained in the Form 10-K. If that were the case, then the information in the Form 10-K would be duplicative. If that is not the case, then information would be moving from form to form, creating confusion for both registrants and investors. We recommend that the disclosures be required in the annual report on Form 10-K only, allowing for a standard approach that could more easily be complied with and maintained.
New York Stock Exchange Project
It is our understanding that, during 1999, the SEC called for the New York Stock Exchange, Inc. (NYSE) to review and make recommendations concerning possible changes to its definition of what constitutes a "broadly-based" stock option plan for purposes of the NYSE's shareholder approval policy for compensation plans. Currently, if a stock option plan is broadly-based, then the plan does not need to approved by shareholders, and hence detailed proxy disclosures are not required. The NYSE created a Task Force to consider utilizing an overall dilution maximum for plans that would otherwise be exempt from shareholder approval requirements. Although the Task Force formulated dilution standards, the Task Force and the NYSE's Board agreed that such standards should be adopted uniformly by all major listing markets in the United States. Accordingly, discussions are ongoing and no consensus has been achieved. The NYSE requested and received from the SEC, an extension of the study for three years (to September 30, 2003) to permit additional study and discussion.
The adoption of such a materiality-based criteria for shareholder approval would effectively eliminate the need for the additional equity compensation plan disclosures proposed in the SEC's release as all materially dilutive plans would present detailed disclosures in the proxy statement. We believe it would be inefficient and premature to implement disclosure requirements that could soon become redundant upon the completion of the NYSE's project.
Redundancy with GAAP Requirements
FASB Statement No. 123, Accounting for Stock-Based Compensation, currently requires, in an entity's financial statements, many of the disclosures about stock-based compensation arrangements that are being proposed. As suggested in the recently issued report of the GAAP-SEC Disclosure Requirements Working Group (as part of the Business Reporting Research Project, sponsored by the Financial Accounting Standards Board), the proposed disclosures should be re-examined, and the redundant requirements between GAAP and SEC disclosure requirements should be removed.
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We would be pleased to discuss our comments with the Commission or its staff at your convenience.
Very truly yours,
Ernst & Young LLP