New Exchange Rules for Approval of Equity Plans

The SEC has approved new rules for the New York Stock Exchange and the NASDAQ for shareholder approval of equity plans. The rules are effective June 30, with very limited transition rules for some existing plans. For the NYSE, the new rules are Section 303A(8) of the Listed Company Manual. For the NASDAQ, the new rules are NASD Rules 4310(c)(17)(a) and 4320(e)(15)(A). The rules are very similar to each other. The most significant exception is that the NYSE rules prohibit broker voting on these issues; NADSAQ already does not allow broker voting on any issue. In effect, therefore, the two sets of rules are the same for broker voting as to shareholder approval of equity plans. Other inconsistencies are minor; probably the most significant is that the NYSE rules require the company to submit in writing to the SEC reasons why it is relying on one of the material modification exemptions; the NASDAQ is considering adding such a rule. A summary of the rules are as follows. Details can be found here on the SEC's site.

1. Scope: All new equity compensation plans, and any material revisions to these plans, must be approved by shareholders, with certain narrow exceptions, as outlined below.
2. Material modification: Material modifications of plans, with narrow exceptions, must be approved. This includes changes in terms, the number of shares, coverage, types of awards, and pricing or repricing unless specifically permitted by a plan. Changes that reduce employee rights and benefits do not require approval, however.
3. Employment inducement awards: If the company's independent compensation committee approves them, inducement awards to new hires may be made without shareholder approval. Disclosure is required, however.
4. Qualified plans and parallel excess plans for qualified plans: Employee Stock Ownership Plans, other Section 401 plans invested in company stock (401(k), profit sharing, and stock bonus plans), Section 423 Employee Stock Purchase Plans, and parallel plans that add benefits otherwise limited by contribution limits in these plans do not require approval.
5. Broker voting: In what may be the most significant hurdle of the new rules, broker-held shares in NYSE-listed companies cannot be voted by proxy by the brokers unless the beneficial owner provides specific instructions. This new rule is effective 90 days after the effective date of the rules. NASDAQ already does not allow such voting on any issue.