May 7, 2001
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Jonathan G. Katz, Secretary
Re: Disclosure of Equity Compensation Plan Information
File No. S7-04-01
Ladies and Gentlemen:
This letter responds to the Commission's request for written comments on proposed amendments regarding disclosure relating to equity compensation plans contained in Release No. 33-7944; 34-43892 (January 26, 2001) (the "Release"). We generally support the proposal to require additional disclosure in this area, but suggest specific changes in the requirements for that disclosure. We believe that the additional disclosures respond to the concerns expressed by investors regarding equity compensation arrangements and will increase the accountability of corporate management in making equity awards.
This letter has been prepared by members of the Subcommittee on Employee Benefits, Executive Compensation and Section 16 (the "Subcommittee") of the Committee on Federal Regulation of Securities (the "Committee") of the Section of Business Law (the "Section") of the American Bar Association. A draft of this letter has been circulated for comment among the members of the Subcommittee, the Chairs and Vice-Chairs of the Committee, other subcommittees and task forces of the Committee, members of the Advisory Committee of the Committee and the officers of the Section. The substantial majority of those members of the Committee who have reviewed the letter in draft form have indicated general agreement with the views expressed. However, this letter does not represent the official position of the American Bar Association, the Section, the Committee or the Subcommittee, nor does it necessarily reflect the views of all of the individuals who have reviewed it or of their firms.
We note that the Commission has taken account of many of the recommendations developed by a task force (the "Task Force") of the New York Stock Exchange ("NYSE") established to study and recommend changes to the NYSE's broadly-based plan standard. The Task Force concluded that it was difficult to obtain accurate information about the level of dilution from equity compensation plans from disclosures currently required under SEC rules, and that the information that was available was not consistently available in any one place or format in corporate disclosure documents. To partly address these concerns, the Task Force designated a special drafting group to develop proposed changes in SEC disclosure standards to remedy the dilution information gap. The Task Force recommended that the NYSE formally propose to the SEC, and the NYSE did propose, amendments to the Regulation S-K disclosure requirements for equity compensation. The Task Force expressed its belief that the proposed disclosure changes would give stockholders and analysts in one place the information needed to make dilution calculations, would enhance the ability of investors to analyze equity compensation arrangements and would have a beneficial impact on shareholder education and effective corporate governance. The Task Force also stated that the proposed changes would permit investors to determine which plans had previously been approved by shareholders and enable them to obtain copies of all compensation plans and arrangements involving significant equity awards.
We acknowledge the efforts made, and contribution to the public dialogue on the issue of equity compensation disclosure, by the NYSE through the two years of work of its Task Force. This issue is of concern to institutional investors and other stockholders and is of importance to effective corporate governance. We believe that disclosure of the type proposed in the Release is appropriate to facilitate the ability of stockholders to make accurate calculations of dilution, including potential future dilution, resulting from awards under equity compensation arrangements. We also believe that this disclosure will have a beneficial impact on shareholder education and effective corporate governance. Moreover, we believe that the recommended changes will not significantly increase disclosure costs or burdens on registrants. However, we believe that the proposed disclosure requirements need to be strengthened and clarified in the following ways:
These and other matters are discussed in further detail below.
Location of Disclosure
We recommend that the new disclosure proposed in the Release be required to be presented in the registrant's proxy statement every year, whether or not an equity compensation plan is submitted for stockholder approval. Stockholders should not be required to go to the Annual Report on Form 10-K in some years and the proxy statement in other years to obtain equity plan disclosure. Additionally, this would avoid confusion by issuers of the filing requirements. Board decisions regarding a company's equity plans are relevant to shareholders' voting decisions in the election of directors even when compensation plans are not submitted for stockholder approval. We believe that the proposed equity plan disclosure is most appropriate in proxy statements relating to the election of directors or the adoption or amendment of an equity compensation plan. As such, we suggest that the requirement for such disclosure be placed in Schedule 14A, Item 8, rather than in Form 10-K, Item 12 and Schedule 14A, Item 10, as proposed. This could be accomplished by amending the first clause of Item 8 of Schedule 14A to read:
Item 8. Compensation of Directors and Executive Officers: Equity Compensation Plans
Furnish the information required by Item 201(d) and Item 402 of Regulation S-K if action is to be taken with regard to:... [new language underlined]
The additional disclosures should be confined to proxy statements subject to the SEC proxy rules as relevant to the election of directors. Accordingly, we do not believe that registrants that are not subject to the proxy rules (e.g., foreign private issuers and others reporting under Section 15(d) of the Securities Exchange Act of 1934) should be required to present the equity plan disclosure information in their Annual Reports on Form 10-K, 20F or 40-F. Nor do we believe that similar disclosure should be required in registration statements under the Securities Act of 1933, as amended. To the extent that dilution information is important to investors, Item 506 of Regulation S-K already requires information about the immediate dilution to investors and about outstanding options, and information about the possible effects of future sales of securities is generally included to the extent that it is material.
Disclosure of Economic Dilution
We recommend that an additional column be added to the "Equity Compensation Plan Information" table to indicate the weighted-average exercise price of outstanding options, warrants or rights held by all persons who received awards under "plans," as defined in the Instructions to Item 201(d) (as we propose to modify them below). This information would permit stockholders to determine the economic impact of potential dilution. Although this information is currently required to be reported in the footnotes to the registrant's financial statements in accordance with FASB Statement No. 123, Accounting for Stock-Based Compensation (October 1995), we believe that it would be appropriate to include similar information in the proposed Equity Compensation Plan Information table, as it would make this table more comprehensive without placing an undue burden on registrants. However, we believe that the Commission should not require disclosure of information by ranges of exercise prices for outstanding options, because this level of detail is less meaningful and is best left to the financial statement footnotes. Rather, the table should simply provide the weighted-average exercise price for all outstanding options.
The Task Force recommended separate disclosure for stock awards. A stock award, which is typically made as a stock bonus or as a stock purchase for a nominal price (such as par value), may be more dilutive than options, warrants or rights and should be separately identified depending on the number of shares subject to awards and the respective purchase or exercise prices of such awards. We believe that this disclosure should be done by footnote to avoid the distortion that would arise when a company has a flexible plan without a sublimit, but does not use stock awards at all or to any significant extent. Accordingly, we recommend that footnotes be added to the Equity Compensation Plan Information table to separately identify the availability of stock awards (whether restricted or otherwise) under the plan or individual arrangement, as distinguished from options, warrants or rights. With respect to shares available for future grant, the entries in that column should be footnoted to show whether shares are available for grant as stock awards or as options. This may be a portion of the total shares shown, if there is a separate stock award plan or a sublimit, or it may be all of the shares, if no separate plan or sublimit has been established. In addition, the entries in the column disclosing the total number of shares granted during the last fiscal year should be footnoted to disclose the number of such shares that were issued as stock awards.
Aggregation of Information
We recommend that the Equity Compensation Plan Information table aggregate information about plans that the registrant maintains in three separate categories. We believe that requiring information to be separately included in the table for each plan would be unduly burdensome on registrants and would not yield meaningful information. The burden would be particularly large on registrants that use separate plans for subsidiaries and affiliates and that assume plans maintained by entities that they acquire. For some registrants, separate information could run to dozens of line items. The Task Force recommended the presentation of aggregate information, albeit in somewhat different categories from the ones that we suggest. We believe that the equity plan disclosure would be enhanced by aggregating this information in the following three categories:
The instruction to proposed Item 201(d) of Regulation S-K should be revised to make clear that the required disclosure must cover any compensatory awards (including those to consultants) that are accounted for under the relevant accounting guidance of SFAS No. 123, Accounting for Stock-Based Compensation, or APB Opinion No. 25, Accounting for Stock Issued to Employees.
As discussed above in the section entitled "Aggregate Information," we recommend that individual arrangements be aggregated with plans. If the Commission does not agree with our recommendation, we suggest that proposed Item 201(d)(2)(ii) be modified to require the information in proposed columns (c) and (d) of the table proposed by the Commission, as well as the weighted average exercise price of outstanding awards (see discussion in "Economic Dilution" above), for individual arrangements, rather than the information in the Commission's proposed columns (b) and (e).
The information in proposed columns (b) (number of securities authorized for issuance under the plan) and (e) (number of securities remaining available for future issuance) is not appropriate for individual arrangements. By definition, these individual arrangements are entered into on an ad hoc basis. If an issuer authorized a specific number of shares for "individual arrangements" in advance, the arrangements would collectively constitute a "plan" disclosed under proposed Item 201(d)(2)(i) rather than (ii). By contrast, the information that is available and meaningful, i.e., the actual awards in the past year (proposed column (c)), is not proposed to be required for individual arrangements. We believe that this is precisely the information that is relevant for those arrangements.
We do not believe that separate disclosure should be required for individual awards that constitute 25% or more of the total individual awards (proposed Item 201(d)(4)). To the extent that such information is relevant, it is generally included in the option grants table required by Regulation S-K, Item 402(c). If the Commission believes that such disclosure is beneficial and that proposed Item 201(d)(4) should be retained, we believe that the use of information disclosed pursuant to proposed Item 201(d)(2)(ii)(B) (total "authorized") as the denominator in the calculation of 25% is not meaningful for individual awards for the reasons discussed above (i.e., there would be no future shares available for grant). Rather, we believe that the denominator used for calculations under proposed Item 201(d)(2)(ii)(B) should be actual awards granted.
Amendment of Item 601 Exhibit Filing Requirements
We recommend that Item 601 of Regulation S-K be amended to require that any plan pursuant to which equity compensation may be awarded, whether or not to any executive officer of the registrant, be filed by the registrant as an exhibit to the Annual Report on Form 10-K. Currently, Item 601(d)(10)(iii)(A) of Regulation S-K states only that any management contract and any compensatory plan in which any director or named executive officer participates shall be deemed material and is required to be filed. Other plans and arrangements (i.e., plans and arrangements in which other executive officers participate) are only required to be filed under Item 601(d)(10)(iii)(A) of Regulation S-K if material in amount or significance.
The Task Force recommended that all plans in which any officer or director participated should be filed. The Task Force also recommended that plans that permitted equity awards to any other employee having a value that was expected to exceed $100,000 should be filed. While we believe that it may be appropriate to establish some threshold of materiality in order to avoid the need to file immaterial plans, we are not convinced that the Task Force's recommendation is the correct standard. The Commission should consider an appropriate materiality threshold, which could be based on a percentage of outstanding shares. The threshold could be applied on both an individual and aggregate basis.
We recommend that the exhibit filing requirement be limited to plans under which new awards may be made in the future to any employee or consultant. Thus, plans that are assumed in an acquisition transaction would not be required to be filed unless new awards were permitted to be granted under such plans. We would also exclude from the exhibit filing requirement any tax-qualified retirement plans that meet the requirements of Section 401(a) of the Internal Revenue Code. In addition, individual compensatory arrangements should not be required to be filed unless otherwise required to be filed pursuant to Item 601(d)(10)(A) or (B).
Although our proposed new exhibit filing requirement may result in some additional exhibits being filed by many registrants, we believe that this proposed exhibit filing requirement would not impose an undue burden on issuers, and would provide useful information for those investors who want more detailed information about plans, such as whether the plan permits the granting of below-market stock options or the repricing of outstanding options.
Format for Disclosure
Consistent with the concept of Plain English, we agree that disclosure of equity compensation plans under proposed Item 201(d) (1) and (2) of Regulation S-K should be presented in tabular format, with the modifications described above. A properly constructed table would make the information easier to interpret and to compare with similar information for other companies. Reducing the line items by aggregating plans also would contribute to that objective. We have attached a suggested simplified and revised format for the table as Exhibit A to this letter. This format incorporates our comments in this letter, as well as certain minor changes to column headings and the addition of explanatory footnotes.
The information regarding plans is more appropriately presented in narrative format as required by proposed Item 201(d)(3). As discussed above, we suggest deleting proposed subsection (4) of Item 201(d).
Specific Language Changes
We have attached to this comment letter as Exhibit B revised language for proposed Item 201(d) of Regulation S-K. Conforming changes should also be made to proposed Item 201(d) of Regulation S-B.
We appreciate the opportunity to comment on the Commission's proposals on equity compensation disclosure. Members of the Subcommittees are available to discuss with the Staff the comments contained in this letter.
Chair, Committee on Federal Regulation of Securities
Scott P. Spector
Chair, Subcommittee on Employee Benefits, Executive Compensation and Section 16
Anne (Polly) G. Plimpton
Vice Chair, Subcommittee on Employee Benefits, Executive Compensation and Section 16
Robert E. Curley
Keith F. Higgins
Anne G. Plimpton
Scott P. Spector
Ann Yvonne Walker
Cc: Laura S. Unger, Acting Chairman
Paul R. Carey, Commissioner
Issac C. Hunt, Jr., Commissioner
David H. Martin, Jr., Director, Division of Corporation Finance
Michael R. McAlevey, Deputy Director, Division of Corporation Finance
Martin P. Dunn, Associate Director, Division of Corporation Finance
Mark A. Borges, Office of Chief Counsel, Division of Corporation Finance
Proposed Revised Table Format
EQUITY COMPENSATION PLAN INFORMATION
|Total Number of Shares as of Fiscal Year End|
|Category of Plans||(a)
Authorized for Issuance1
Remaining Available for Future Grant2
Subject to Outstanding Options3
Weighted Average Exercise Price per Share4
Total Number of Shares Granted During Last Fiscal Year5
|Plan(s) and individual arrangements being voted on at this meeting6|
|Plan(s) and individual arrangements previously approved by shareholders7|
|Plan(s) and individual arrangements not approved by shareholders7|
|1||Includes all shares reserved by the Board of Directors for issuance under the plan or individual arrangement over the term of the plan or individual arrangement, whether already issued pursuant to stock awards or option exercises, subject to outstanding but unexercised options or remaining available for future grant of stock awards or options, regardless of whether expired or cancelled awards may be returned to the plan or individual arrangement for future grant. Where the plan or individual arrangement authorizes a percentage of the registrant's outstanding stock in lieu of or in addition to a specified number of shares, this should be indicated by footnote. For plans assumed by the registrant in an acquisition, this number should include only the shares that remain available for future grant of stock awards or options by the registrant following the acquisition.|
|2||For each entry in this column, indicate by footnote how many of such shares may be awarded in the form of stock (as opposed to options). This would include stock bonuses and restricted stock that may be sold at less than fair market value.|
|3||Also includes shares that are reserved for exercise under outstanding stock appreciation rights ("SARs"), warrants and other rights that may be settled in stock. If the SARs, warrants or other rights are in tandem with options, they are to be accounted for as a single award.|
|4||Represents the aggregate exercise price of all outstanding SARs, options, warrants and other rights that may be settled in stock, divided by the total number of shares subject to such outstanding SARs, options, warrants and rights.|
|5||Includes (i) shares subject to SARs, options, warrants and other rights that may be settled in stock that were granted under the plan(s) and individual arrangements during the last fiscal year and (ii) shares that were awarded in the form of stock (as opposed to options) under the plan(s) during the last fiscal year. For each entry in this column, indicate by footnote how many of such shares fall into category (ii). If the SARs, warrants or other rights are in tandem with options, they are to be accounted for as a single award.|
|6||If no plans are being voted on at the meeting to which the proxy statement relates, this row may be omitted. If a plan amendment is being voted on at the meeting, this row should include information on all shares under the plan, not just the additional shares covered by the amendment.|
|7||Do not include plans or individual arrangements that expired or were terminated prior to the last fiscal year unless there are options, SARs, warrants or other rights that remained outstanding under the plan or individual arrangement during the fiscal year.|
Proposed Revised Language for Item 201(d)
of Regulation S-K
§229.201 (Item 201) Market price of and dividends on the registrant's common equity and related stockholder matters.
(d) Securities authorized for issuance under equity compensation plans.
(1) In the tabular format set forth below, provide the information specified in paragraph (d)(2) of this Item as of the end of the most recently completed fiscal year with respect to compensation plans and individual compensation arrangements of the registrant under which equity securities of the registrant are authorized for issuance, aggregated as follows:
(i) Plan(s) and individual arrangements being voted on at the meeting to which the proxy statement relates;
(ii) Plans(s) and individual arrangements previously approved by shareholders; and
(iii) Plan(s) and individual arrangements not previously approved by shareholders and not being voted on at the meeting to which the proxy statement relates pursuant to (d)(2)(i) above.
EQUITY COMPENSATION PLAN INFORMATION
[See Exhibit A for chart and footnotes]
(2) The table shall include the following information as of the end of the most recently completed fiscal year:
(i) For each of the three categories of plans and individual arrangements:
(A) The number of securities authorized by the Board of Directors for issuance under the plans and individual arrangements over the term of the plan or individual arrangement, including shares already issued, shares subject to outstanding but unexercised options, stock appreciation rights ("SARs"), warrants and other rights that may be settled in stock, and shares remaining available for future grant of stock awards, options, SARs, warrants and other rights that may be settled in stock, regardless of whether expired or cancelled awards may be returned to the plan or individual arrangement for future grant (column (a));
(B) Other than securities to be issued upon the exercise of outstanding options, SARs, warrants or other rights that may be settled in stock, the number of securities remaining available for future grant of stock awards, options, SARs, warrants and other rights that may be settled in stock under the plans and individual arrangements (column (b)).
(C) The number of securities issuable upon the exercise of outstanding options, SARs, warrants and other rights that may be settled in stock under the plans and individual arrangements (column (c));
(D) The weighted average exercise price of the outstanding rights set forth in column (c) (column (d)); and
(E) The number of securities issued pursuant to equity awards made under the plans and individual arrangements during the most recently completed fiscal year, plus the number of securities to be issued upon the exercise of options, SARs, warrants or other rights that may be settled in stock granted under the plan during the most recently completed fiscal year (column (e)).
(3) For each plan that was adopted during the most recently completed fiscal year that (i) was not previously approved by the shareholders and (ii) is not being submitted to the shareholders for a vote at the meeting to which the proxy statement relates, describe briefly, in narrative form, the material features of the plan.
Instructions to Item 201(d).
1. For purposes of this paragraph, the term plan shall be defined in accordance with Item 402(a)(7)(ii) of Regulation S-K (§229.402(a)(7)(ii)). Disclosure shall be provided for all plans and individual arrangements that provide for compensatory equity awards to employees, directors, consultants or other service providers.
2. No disclosure is required under this Item with respect to (i) any plan, contract, authorization or arrangement, whether or not set forth in any formal documents, for the issuance of warrants or rights on substantially similar terms to all security holders of the registrant generally that does not discriminate in favor of officers or directors of the registrant; (ii) plans or arrangements relating to awards that are not accounted for under SFAS 123 or APB 25; or (iii) plans that are qualified under ERISA and tax-qualified retirement plans that meet the requirements of Section 401(a) of the Internal Revenue Code.
3. Except where it is part of a document that is incorporated by reference into a prospectus or report, the information required by this paragraph (d) need not be provided in a registration statement filed under the Securities Act of 1933 or in a report filed under the Securities Exchange Act of 1934.