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SEC Issues New Rules on Disclosure of Equity
Compensation Plan Information
By Patrick Cannon
[April 2002]
In December 2001, the Securities and Exchange Commission ("SEC")
amended a number of rules under the Securities Exchange Act of 1934
to require additional disclosure of equity compensation plan information
by reporting companies. The amendments require enhanced disclosure
of the number of outstanding options, warrants and rights granted
by reporting companies to participants in equity compensation plans,
as well as the number of securities available for future issuance
under these plans. These changes are designed to help investors
better understand the potential impact of dilution on their holdings.
The amendments can be found on the SEC's website at http://www.sec.gov/rules/final/33-8048.htm.
While the amendments apply to all types of equity compensation,
SEC Release No. 33-8048 focuses primarily on stock options because
it is estimated that more than 80% of the securities reserved for
conversion and exercise by U.S. reporting companies relate to stock
options.
The SEC did not outline different compliance or reporting requirements
for small companies because small entities tend to use equity compensation
plans to a great extent than large entities because cash resources
tend to be scarce.
New Requirements
Reporting companies are now required to include a new table in
their annual reports on Form 10-K, as well as in their proxy statements
where they are submitting any compensation plan for shareholder
approval. The new table (shown below) must include information about
two categories of compensation plans: (1) plans that have been approved
by shareholders and (2) plans which have not been approved by shareholders.
| |
(a) |
(b) |
(c) |
| Plan category |
Number of securities to be issued upon exercise of outstanding
options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants
and rights |
Number of securities remaining available for future issuance
under equity compensation plans (excluding securities reflected
in column (a)) |
| Equity compensation plans approved by security holders |
|
|
|
| Equity compensation plans not approved by security holders |
|
|
|
| Total |
|
|
|
With respect to individual options, warrants and rights assumed
in connection with a merger, consolidation or other acquisition,
separate reporting is not required, but reporting companies must
add a footnote to the table disclosing the number of securities
underlying options, warrants and rights assumed in connection with
a merger, consolidation or other acquisition along with the related
weighted-average exercise price information on an aggregated basis.
If the number of securities available for future issuance as disclosed
in column (c) includes securities other than those issuable upon
the exercise of options, warrants or rights, the reporting company
must add a footnote which discloses the number of securities and
the type of arrangement separately.
Similarly, if the number of securities remaining available under
a plan is determined by a formula, a description of the formula
should be disclosed in a footnote.
For equity compensation plans that have not been approved by a
company's shareholders, the company must provide a brief narrative
summary of the material features of each such plan, and a copy of
each such plan must be filed as an exhibit unless the plan is immaterial
in amount or significance.
Effective and Compliance Dates
The amendments went into effect on February 1, 2002. Reporting
companies must comply with the new disclosure requirements for annual
reports filed for fiscal years ending on or after March 15, 2002
and for proxy and information statements for shareholder meetings
or actions occurring on or after June 15, 2002.
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