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The Employee Ownership Update

Corey Rosen

February 21, 2002

(Corey Rosen)

SEC Finalizes Disclosure Rules

The Securities and Exchange Commission has finalized disclosure rules for equity compensation plans. The required disclosure is in addition to SFAS 123 accounting rules that already require companies to disclose substantial information about their plans. The SEC had initially proposed that disclosure be provided on a plan-by-plan basis, but, after comments, decided disclosure could be done on an aggregated basis. The rules also allow for aggregated disclosure of plans in cases of mergers or acquisitions that involve the assumption of existing equity plans. The new rules require companies to disclose information to shareholders on annual 10-K and 10-KSB forms, as well as in proxy and information statements. There would also be required disclosure proxy statements in years when companies are submitting any compensation plan, including cash compensation, for security holder action. Disclosure will apply to outstanding options, warrants and rights granted by companies to participants in equity compensation plans, as well as the number of securities remaining available for future issuance under these plans. The amendments require companies to provide this information separately for equity compensation plans that have not been approved by shareholders. Copies of plans must be filed with the SEC unless they are "immaterial in amount of significance."

If a company is required to include the disclosures in both 10-K and proxy filings, it can satisfy its Form 10-K obligation by referencing a definitive proxy statement, provided the proxy statement involves the election of directors and is filed not later than 120 days after the end of the fiscal year covered by the Form 10-K.

The disclosures would occur in a tabular presentation, described by the SEC as follows:
Equity Compensation Plan Information
Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rightsWeighted-average exercise price of outstanding options, warrants and rightsNumber 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
According to the SEC, "registrants must provide the disclosure with respect to any equity compensation plan effect as of the end of the registrant's last completed fiscal year that provides for the award of a registrant's securities or the grant of options, warrants or rights to purchase the registrant's securities to employees of the registrant or its parent, subsidiary or affiliated companies, or to any other person. The disclosure also is to be provided without regard to whether the securities to be issued under the equity compensation plan are authorized but unissued securities of the registrant or reacquired shares." This requirement does not affect equity compensation provided as part of a plan qualified under Section 401(a) of the Internal Revenue Code, such as a 401(k) plan, ESOP, or profit sharing plan that invests in company stock. The requirement also does not apply to foreign companies registering with the SEC.

According to the SEC release, the new rules are effective for annual Form 10-K or 10-KSB reports that "are to be filed for fiscal years ending on or after March 15, 2002 and for proxy and information statements for meetings of, or action by, security holders occurring on or after June 15, 2002." Companies can, of course, comply earlier than required.

For a complete copy of the guidelines, go here.

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