`[Federal Register Volume 67, Number 1 (Wednesday, January 2, 2002)]
[Rules and Regulations]
[Pages 232-248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32078]



[[Page 231]]

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Part VI





Securities and Exchange Commission





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17 CFR Parts 228, 229, 240, and 249



Disclosure of Equity Compensation Plan Information; Final Rules

  Federal Register / Vol. 67, No. 1 / Wednesday, January 2, 2002 / 
Rules and Regulations  

[[Page 232]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 240 and 249

[Release Nos. 33-8048, 34-45189; File No. S7-04-01]
RIN 3235-AI01


Disclosure of Equity Compensation Plan Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: We are adopting amendments to the Securities Exchange Act of 
1934 disclosure requirements applicable to annual reports filed on 
Forms 10-K and 10-KSB and to proxy and information statements. The 
amendments will enhance disclosure of the number of outstanding 
options, warrants and rights granted by registrants to participants in 
equity compensation plans, as well as the number of securities 
remaining available for future issuance under these plans. The 
amendments require registrants to provide this information separately 
for equity compensation plans that have not been approved by their 
security holders, and to file with us copies of these plans unless 
immaterial in amount of significance.

DATES: Effective Date: February 1, 2002. Compliance Dates: Registrants 
must comply with the new disclosure requirements for their annual 
reports on Forms 10-K or 10-KSB 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. Registrants voluntarily may comply with the new disclosure 
requirements before the compliance dates.
    Comments: Comments on the ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
should be received by February 1, 2002.

FOR FURTHER INFORMATION CONTACT: Mark A. Borges, Special Counsel, 
Office of Rulemaking, Division of Corporation Finance, by telephone at 
(202) 942-2910, or in writing at the Securities and Exchange 
Commission, 450 Fifth Street NW, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Items 201 \1\ 
and 601 \2\ of Regulation S-B,\3\ Items 201 \4\ and 601 \5\ of 
Regulation S-K \6\ and Form 10-K, \7\ Form 10-KSB \8\ and Schedule 14A 
\9\ under the Securities Exchange Act of 1934.\10\ Schedule 14C \11\ 
under the Exchange Act also is affected by the amendments.\12\
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    \1\ 17 CFR 228.201.
    \2\ 17 CFR 228.601.
    \3\ 17 CFR 228.10 et seq.
    \4\ 17 CFR 229.201.
    \5\ 17 CFR 229.601.
    \6\ 17 CFR 229.10 et seq.
    \7\ 17 CFR 249.310.
    \8\ 17 CFR 249.310b.
    \9\ 17 CFR 240.14a-101.
    \10\ 15 U.S.C. Sec. 78a et seq.
    \11\ 17 CFR 240.14c-101.
    \12\ Item 1 of Schedule 14C requires that a registrant yfurnish 
the information called for by all of the items of Schedule 14A 
(other than Items 1(c), 2, 4 and 5) which would be applicable to any 
matter to be acted upon at the meeting if proxies were to be 
solicited in connection with the meeting.
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I. Introduction

    As the use of equity compensation has increased during the last 
decade,\13\ so have concerns about its impact on registrants and their 
security holders.\14\ Equity compensation grants and awards may result 
in a significant reallocation of ownership between existing security 
holders and management and employees.\15\ Our current rules do not 
require disclosure in a single location of the total number of 
securities that a registrant has remaining available for issuance under 
all of its equity compensation plans. Also, because these plans may be 
implemented without the approval of security holders, it is possible 
that investors may not be able to determine the total size of a 
registrant's equity compensation program.
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    \13\ A study of stock-based pay practices at the nation's 200 
largest corporations indicates that these companies allocated 15.2% 
of outstanding shares (calculated on a fully-diluted basis) for 
management and employee equity incentives in 2000, compared to only 
6.9% in 1989. See Pearl Meyers & Partners, Inc., 2000 Equity Stake, 
Study of Management Equity Participation in the Top 200 Corporations 
(2000).
    \14\ See Eric D. Roiter, The NYSE Wrestles with Shareholder 
Approval of Stock Option Plans, Corp. Gov. Adv., Vol. 8, No. 1 
(Jan./Feb. 2000), at 1. See also, for example, Justin Fox, The 
Amazing Stock Option Sleight of Hand, Fortune, June 25, 2001, at 86.
    \15\ In its most recent study, the Investor Responsibility 
Research Center found that the average potential dilution for the 
1,500 companies in the ``S&P Super 1,500'' (the combination of the 
S&P 500, the S&P MidCap 400 and the S&P SmallCap 600) was 14.6% in 
2000, compared to 11.6% in 1997; an increase of approximately 26%. 
The increase was even greater for S&P 500 companies, with average 
potential dilution rising to 13.1% in 2000, compared to 9.2% in 
1995. See Investor Responsibility Research Center, Potential 
Dilution--2000, The Potential Dilution from Stock Plans at the S&P 
Super 1,500 Companies (2000) (the ``IRRC Dilution Study'').
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    In January 2001, we proposed amendments to our equity compensation 
disclosure rules, where our intent was to furnish investors with a more 
understandable presentation of a registrant's equity compensation 
program.\16\ We received 31 comment letters in response to the 
proposals.\17\ While a majority of commenters supported the proposals, 
several questioned the need for disclosure that was, in their view, 
substantially equivalent to disclosure already required in registrants' 
audited financial statements. In addition, many of the supportive 
commenters offered suggestions for refining the proposals to better 
accomplish the goal of assuring that all material information about a 
registrant's equity compensation program is fully and clearly 
disclosed. We have made a number of changes to the proposals in 
response to these comments. These changes are discussed in Section II 
of this release.
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    \16\ The amendments were proposed in Release No. 33-7944 (Jan. 
26, 2001) [66 FR 8732] (the ``Proposing Release'').
    \17\ The commenters included 11 individual and institutional 
investors, eight registrants and registrant associations (one 
registrant submitted two letters), one self-regulatory organization 
and 10 members of the executive compensation consulting, accounting 
and legal communities. These comment letters and a summary of 
comments prepared by our staff are available for public inspection 
and copying in our Public Reference Room, 450 Fifth Street, NW, 
Washington, DC 20549, in File No. S7-04-01. Public comments 
submitted electronically and the summary of comments are available 
on our Web site http://www.sec.gov.
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    As a result of today's amendments, registrants must include a new 
table in their annual reports on Form 10-K,\18\ as well as in their 
proxy statements \19\ in years when they are submitting a compensation 
plan for security holder action. This table requires information about 
two categories of equity compensation plans: plans that have been 
approved by security holders and plans that have not been approved by 
security holders. With respect to each category, a registrant must 
disclose the number of securities to be issued upon the exercise, and 
the weighted-average exercise price, of all outstanding options, 
warrants and rights, as well as the number of securities remaining 
available for future issuance under the registrant's equity 
compensation plans.\20\
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    \18\ The discussion of Form 10-K in this release also includes 
Form 10-KSB.
    \19\ The discussion of proxy statements in this release also 
includes Schedule 14C information statements.
    \20\ To help investors better understand equity compensation, 
our Office of Investor Education and Assistance will create 
educational materials about the available disclosure on equity 
compensation programs (including the information available in 
financial statements).

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II. Discussion of Amendments

A. Content of Disclosure

1. Required Disclosure
    Under the original proposals described in the Proposing Release, 
registrants were to disclose in tabular form several categories of 
information about their equity compensation plans, including the number 
of securities authorized for issuance under each plan, the number of 
securities issued, plus the number of securities to be issued upon the 
exercise of outstanding options, warrants or rights granted, under each 
plan during the last fiscal year, the number of securities to be issued 
upon the exercise of outstanding options, warrants or rights granted 
other than in the last fiscal year and the number of securities 
remaining available for future issuance under each plan. The proposals 
would have required registrants to list each plan separately in the 
table. We also sought comment as to whether any additional categories 
of information should be included in the table.
    In response to concerns that the proposals would be costly and 
burdensome to implement and duplicative of some of the information 
required in registrants' financial statements, we have eliminated the 
first two proposed categories of disclosure. We have made a number of 
other changes as well, including a change that permits registrants to 
present the required information on an aggregated basis. These changes 
are discussed in detail below.
    In addition to comments suggesting that we scale back the proposed 
disclosure, we also received comments citing the need for additional 
types of disclosure not originally proposed. For example, several 
commenters suggested that we add a column to the proposed table showing 
the weighted-average exercise price of outstanding options, warrants 
and rights.\21\ These commenters asserted that investors need this 
information to assess the dilutive effect of a registrant's equity 
compensation program.\22\ To enable investors to better understand 
dilution and to enhance the visibility of exercise price information, 
we have added a column to the table requiring disclosure of the 
weighted-average exercise price of all outstanding compensatory 
options, warrants and rights.\23\
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    \21\ See, for example, the Letter dated March 26, 2001 from the 
Council of Institutional Investors (the ``CII Letter''), the Letter 
dated April 24, 2001 from the Association for Investment Management 
and Research and the Letter dated April 16, 2001 from the 
Association of the Bar of the City of New York (the ``NYC Bar 
Letter'').
    \22\ While the impact of outstanding options, warrants and 
rights is contained in the presentation of diluted earnings-per-
share required by Statement of Financial Accounting Standards No. 
128, Earnings-Per-Share (Feb. 1997) (``SFAS 128''), this disclosure 
does not necessarily isolate ``compensatory'' instruments. 
Typically, the diluted earnings-per-share figure combines the 
dilutive effect of compensatory options, warrants and rights with 
that of other outstanding convertible securities.
    \23\ See new Item 201(d)(2)(ii) of Regulation S-B [17 CFR 
228.201(d)(2)(ii)] and new Item 201(d)(2)(ii) of Regulation S-K [17 
CFR 229.201(d)(2)(ii)]. This weighted-average exercise price 
information may be different from that contained in a registrant's 
financial statements as required by Statement of Financial 
Accounting Standards No. 123, Accounting for Stock-Based 
Compensation (Oct. 1995) (``SFAS 123'') because the information 
includes grants and awards to non-employees while the information 
required by SFAS 123 may not. See n. 55 below.
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    As adopted, the amendments require a registrant to provide 
investors with the following tabular disclosure:

                                      Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------------
                                                                                           Number of securities
                                                                                         remaining available for
                                       Number of securities to      Weighted-average      future issuance under
            Plan category              be issued upon exercise     exercise price of       equity compensation
                                       of outstanding options,    outstanding options,       plans (excluding
                                         warrants and rights      warrants and rights    securities reflected in
                                                                                               column (a))
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                                       (a)....................  (b)....................  (c)
----------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
 security holders
Equity compensation plans not
 approved by security holders
    Total
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    Registrants must provide the disclosure with respect to any equity 
compensation plan\24\ in effect\25\ 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.\26\ 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.
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    \24\ This includes any equity compensation plan that provides 
for grants and awards to employees or non-employees in exchange for 
consideration in the form of goods or services as described in SFAS 
123.
    \25\ For purposes of the amendments, we consider an equity 
compensation plan to be in effect as long as securities remain 
available for future issuance under the plan, or as long as options, 
warrants or rights previously granted under the plan remain 
outstanding.
    \26\ Disclosure is required without regard to whether 
participants are employees (including officers) or non-employees 
(such as directors, consultants, advisors, vendors, customers, 
suppliers or lenders).
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2. Aggregated Disclosure
    Several commenters suggested that we permit registrants to provide 
the required tabular disclosure on an aggregate, rather than a plan-by-
plan, basis.\27\ These commenters indicated that it would be unduly 
burdensome for many registrants if plans had to be listed separately in 
the table.\28\ Another commenter expressed similar concerns if 
registrants were required to itemize plans assumed as the result of 
mergers, consolidations or other acquisition transactions.\29\ We are 
persuaded that plan-by-plan disclosure may be

[[Page 234]]

burdensome for many registrants.\30\ Accordingly, we have revised the 
table to permit registrants to aggregate disclosure in two general 
categories:
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    \27\ See, for example, the Letter dated May 7, 2001 from the 
American Bar Association (the ``ABA Letter''), the Letter dated 
April 2, 2001 from Lucent Technologies Inc. and the Letter dated May 
22, 2001 from the New York State Bar Association (the ``NY State Bar 
Letter'').
    \28\ One commenter estimated that, based upon the number of 
equity compensation plans it administers, compliance could cost an 
additional $300,000 annually for printing and distribution. See the 
Letter dated April 9, 2001 from Lucent Technologies Inc. (the 
``Second Lucent Letter'').
    \29\ See the Letter dated February 27, 2001 from Intel 
Corporation (the ``Intel Letter'').
    \30\ In addition, information on the number and identity of a 
registrant's equity compensation plans should be available in the 
footnotes to the registrant's financial statements as part of its 
required SFAS 123 disclosure. See paragraph 46 of SFAS 123.
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     equity compensation plans approved by security holders; 
and
     equity compensation plans not approved by security 
holders.\31\
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    \31\ See new Item 201(d)(1) of Regulation S-B [17 CFR 
228.201(d)(1)] and new Item 201(d)(1) of Regulation S-K [17 CFR 
229.201(d)(1)].
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    In the Proposing Release, we sought comment as to whether, when a 
registrant is submitting a new or existing equity compensation plan for 
security holder action, the required proxy statement disclosure should 
include that plan.\32\ Several commenters suggested that we expand the 
table to include information about an existing plan upon which further 
action is being taken (for example, where a registrant is seeking the 
approval of security holders for an increase in the number of 
securities authorized for issuance under the plan).\33\ These 
commenters indicated that, absent this requirement, a registrant 
amending an existing equity compensation plan otherwise might avoid 
disclosing information about the securities previously authorized for 
issuance under the plan. We are persuaded that registrants should 
include this information in the table.
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    \32\ These plans otherwise are subject to the disclosure 
requirements of Item 10 of Schedule 14A. Item 10 requires a 
description of the material features of, and tabular disclosure of 
the benefits receivable or allocable under, the plan being acted 
upon, as well as additional information regarding specific types of 
plans.
    \33\ See, for example, the CII Letter, the Letter dated March 
28, 2001 from the State of Wisconsin Investment Board (the ``SWIB 
Letter'') and the Letter dated March 29, 2001 from the Teachers 
Insurance and Annuity Association--College Retirement Equities Fund 
(the ``TIAA-CREF Letter'').
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    Accordingly, where action is being taken to amend an existing 
equity compensation plan, the table should include information about 
the securities previously authorized for issuance under the plan; that 
is, the number of securities to be issued upon the exercise, and the 
weighted-average exercise price, of outstanding options, warrants and 
rights previously granted under the plan and the number of securities 
remaining available for future issuance under the plan.\34\ A 
registrant should not include in the table the number of additional 
securities that are the subject of the plan amendment for which the 
registrant is seeking security holder approval.
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    \34\ See Instruction 1 to new Item 10(c) of Schedule 14A.
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3. Individual Arrangements and Assumed Plans
    In the Proposing Release, we sought comment as to whether 
aggregated disclosure of individual equity compensation 
arrangements\35\ was appropriate. We also asked whether aggregated 
disclosure should be permitted where a registrant had assumed an equity 
compensation plan in connection with a merger, consolidation or other 
acquisition transaction. Several commenters supported aggregated 
disclosure of individual arrangements,\36\ and one commenter was in 
favor of aggregating the disclosure of individual arrangements with the 
disclosure of equity compensation plans.\37\ Other commenters favored 
permitting aggregated disclosure of assumed plans.\38\ Consistent with 
the concept of aggregated plan disclosure, we have revised the table to 
permit registrants to combine information about individual 
arrangements\39\ and assumed plans (where further grants and awards can 
be made under these plans)\40\ with information about other plans, all 
in the appropriate disclosure category.
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    \35\ For these purposes, an individual equity compensation 
arrangement includes a ``plan'' for a single person as defined by 
Item 402(a)(7)(ii) of Regulation S-K [17 CFR 229.402(a)(7)(ii)] (``A 
plan may be applicable to one person.''), as well as an individual 
``written compensation contract'' (see, for example, the Securities 
Act Rule 405 [17 CFR 230.405] definition of the term ``employee 
benefit plan'').
    \36\ See, for example, the NY State Bar Letter and the TIAA-CREF 
letter.
    \37\ See the ABA Letter.
    \38\ See the Intel Letter, the Letter dated August 17, 2001 from 
Leonard S. Stein and the Letter dated August 26, 2001 from Hendrick 
Vater.
    \39\ See Instruction 4 to new Item 201(d) of Regulation S-B [17 
CFR 228.201(d)] and Instruction 4 to new Item 201(d) of Regulation 
S-K [17 CFR 229.201(d)].
    \40\ See Instruction 5 to new Item 201(d) of Regulation S-B and 
Instruction 5 to new Item 201(d) of Regulation S-K. In the case of 
individual options, warrants and rights assumed in connection with a 
merger, consolidation or other acquisition transaction, registrants 
should disclose the number of securities underlying the assumed 
options, warrants and rights and the related weighted-average 
exercise price information on an aggregated basis in a footnote to 
the table. Id.
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4. Non-Security Holder-Approved Plans
    As adopted, the amendments require a registrant to identify and 
describe briefly, in narrative form, the material features of each 
equity compensation plan in effect as of the end of the last completed 
fiscal year that was adopted without security holder approval.\41\ 
While several commenters supported this requirement,\42\ one commenter 
suggested that we permit registrants to cross-reference the portion of 
their required SFAS 123 disclosure containing descriptions of their 
non-security holder-approved plans to satisfy this requirement.\43\ 
Because it streamlines compliance and ensures that investors have 
annual \44\ access to this information, we are permitting registrants 
to satisfy the disclosure requirement in this manner.\45\ The cross-
reference should identify the specific plan or plans in the required 
SFAS 123 disclosure that have not been approved by security holders. In 
view of this change, we have eliminated the provision that would have 
permitted a registrant to satisfy this disclosure requirement by simply 
identifying the filing containing a narrative description of the plan 
in the years following the initial disclosure.
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    \41\ See new Item 201(d)(3) of Regulation S-B [17 CFR 
228.201(d)(3)] and new Item 201(d)(3) of Regulation S-K [17 CFR 
229.201(d)(3)].
    \42\ See, for example, the CII Letter, the Letter dated April 2, 
2001 from the Investment Company Institute and the TIAA-CREF Letter.
    \43\ See the NYC Bar Letter. Similar cross-referencing is 
permitted under Item 101(b) (financial information about segments) 
and Item 101(d) (financial information about geographic areas) of 
Regulation S-K [17 CFR 229.101(b) and (d)].
    \44\ As originally proposed, the plan description would have 
been provided only once--following the year of adoption. The 
Proposing Release contemplated that, in subsequent years, 
registrants simply would identify the prior filing containing the 
plan description. Since SFAS 123 requires plan descriptions to be 
provided annually, the information will be available each year.
    \45\ See Instruction 7 to new Item 201(d) of Regulation S-B and 
Instruction 7 to new Item 201(d) of Regulation S-K. Paragraph 46 of 
SFAS 123 requires a description of each stock-based compensation 
plan, including the general terms of awards under the plan, such as 
vesting requirements, the maximum term of options granted and the 
number of shares authorized for grants of options or other equity 
instruments. See also paragraph 362 of SFAS 123. If the SFAS 123 
plan description does not contain all of the material features of 
the plan, cross-referencing is not permitted.
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5. Foreign Registrants
    Some commenters inquired about the applicability of the proposals 
to foreign registrants. Historically, we have applied a more flexible 
standard to foreign registrants than domestic registrants in the area 
of executive compensation disclosure. For example, foreign registrants 
need not disclose executive compensation information on an individual 
basis unless they disclose it in that manner under home country law or 
otherwise.\46\ We do not find it necessary to vary from our historical 
treatment of executive compensation disclosure for foreign 
registrants,\47\ and,

[[Page 235]]

thus, we do not extend the amendments to foreign registrants at this 
time.\48\
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    \46\ See Item 6.B of Form 20-F [17 CFR 249.220f]. Item 6.B 
requires disclosure of compensation information about a foreign 
private issuer's directors and senior management on an aggregated 
basis, including the amount of compensation paid and benefits in 
kind granted.
    \47\ Item 6.E.2 of Form 20-F requires a foreign private issuer 
to ``describe any arrangements for involving the employees in the 
capital of the company, including any arrangement that involves the 
issue or grant of options or shares or securities of the company.''
    \48\ In addition, while the use of equity compensation by 
foreign companies is increasing, it still trails use by U.S. 
companies. See Towers Perrin, Stock Options Around the World (2001).
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B. Relationship to Accounting Disclosure

    We have made significant changes to the proposals in response to 
arguments by several commenters that the current accounting literature 
provides for adequate disclosure about stock-based compensation.\49\ We 
agree that we should strive to minimize redundant disclosure under 
generally accepted accounting principles and our rules, where 
practical. Accordingly, we have revised the proposals and will not 
require disclosure of
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    \49\ See the Letter dated April 2, 2001 from Arthur Andersen 
LLP, the Letter dated April 17, 2001 from the American Institute of 
Certified Public Accountants, the Letter dated March 29, 2001 from 
Emerson Electric Co., the Letter dated March 26, 2001 from the 
Institute of Management Accountants, the Letter dated April 12, 2001 
from Microsoft Corporation, the Letter dated April 2, 2001 from 
PricewaterhouseCoopers LLP, the NY State Bar Letter and the Letter 
dated March 30, 2001 from Verizon Communications. These commenters 
also pointed out that duplicative disclosure is inconsistent with 
initiatives that we jointly have undertaken with the accounting 
profession to simplify disclosure and eliminate redundancies in 
financial reporting. See FASB Business Reporting Research Project, 
Report of GAAP-SEC Disclosure Requirements Working Group (2001), 
available at http://www.rarc.rutgers.edu/fasb/brrp/BRRP3pl.PDF.
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     The number of securities authorized for issuance under 
each equity compensation plan; \50\ and
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    \50\ This information is required by paragraph 46 of SFAS 123.
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     The number of securities issued, plus the number of 
securities to be issued upon the exercise of outstanding options, 
warrants or rights granted, under each plan during the last fiscal 
year.\51\
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    \51\ This information is required by paragraphs 47(a) and (c) of 
SFAS 123.
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    The revised table will provide useful information to investors that 
is not always readily available in a registrant's financial 
statements.\52\ This includes
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    \52\ See Report of the New York Stock Exchange Special Task 
Force on Stockholder Approval Policy (Oct. 1999) (the ``NYSE Task 
Force Report''), at 14, available at http://www.nyse.com/pdfs/policy.pdf.
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     An indication of whether an equity compensation plan has 
been approved by security holders; \53\
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    \53\ While SFAS 123 requires an entity to provide a description 
of each stock-based compensation plan, these descriptions need not 
indicate whether a plan has been approved by security holders. See 
paragraphs 46 and 362 of SFAS 123.
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     The total number of securities available for future 
issuance under a registrant's equity compensation program; \54\ and
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    \54\ Paragraph 46 of SFAS 123 provides for disclosure of the 
number of shares authorized for grants of options or other equity 
instruments pursuant to stock-based compensation plans. It does not 
specifically require disclosure of the current number of authorized 
shares available for grant. In addition, it may be difficult for 
investors to determine this number. Currently, a registrant 
submitting an equity compensation plan for security holder action 
need not provide any specific disclosure about its other equity 
compensation plans. In its annual study on stock plan dilution, the 
Investor Responsibility Research Center found that approximately 22% 
of the companies surveyed did not disclose the number of shares 
available for future issuance under their employee stock plans. See 
the IRRC Dilution Study.
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     The number of options and other securities granted or 
awarded to non-employees for compensatory purposes.\55\
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    \55\ Paragraph 46 of SFAS 123 provides that ``[a]n entity that 
uses equity instruments to acquire goods or services other than 
employee services shall provide disclosures similar to those 
required [for employee transactions] to the extent that those 
disclosures are important in understanding the effects of those 
transactions on the financial statements'' (emphasis added). 
Consequently, a registrant has discretion to exclude non-employee 
grants and awards of equity instruments from its SFAS 123 
disclosure. In addition, registrants need not apply the disclosure 
provisions of SFAS 123 to immaterial items, as determined based on a 
registrant's particular circumstances. See paragraph 244 of SFAS 
123.
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    Because this information may be important to investors in making 
informed voting and investment decisions, we believe it is appropriate 
to require all registrants subject to Exchange Act reporting to 
disclose it regularly.
    Even where information, such as the number of securities to be 
issued upon the exercise, and the weighted-average exercise price, of 
outstanding options, warrants and rights, otherwise is available, it is 
not transparent to investors.\56\ The amendments enhance the 
accessibility of this information, thereby making it easier for 
investors to assess the impact of a registrant's equity compensation 
policies and practices. Moreover, the amendments present the 
information in categories--plans that have been approved by security 
holders and plans that have not been approved by security holders--that 
investors have requested.\57\
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    \56\ See, for example, the NYSE Task Force Report, n. 52 above, 
at 14 (``The requisite information [to make dilution calculations] 
is not consistently available in any one place or format in 
corporate disclosure documents * * * .), the Letter dated April 2, 
2001 from the Association of Publicly Traded Companies (``[t]he 
sheer volume and complexity of most corporate compensation 
proposals, coupled with stock option plans, makes it difficult for 
the average investor to interpret and effectively utilize the 
information provided.'') and the TIAA-CREF Letter (``[l]ack of 
transparency * * * limits the ability of shareholders * * * to 
protect themselves against plans that can be highly dilutive.'').
    \57\ See the Proposing Release at n. 17.
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    The following table reflects the current relevant SFAS 123 
disclosure requirements for stock-based compensation \58\ and the new 
disclosure required by the amendments being adopted today, as adjusted 
to minimize redundancy between the two.
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    \58\ This table does not describe all of the information that 
registrants must disclose under SFAS 123.

--------------------------------------------------------------------------------------------------------------------------------------------------------
 Equity compensation disclosure                                                                           Location of disclosure (financial statements/
              Item                Required by SFAS 123    Required by Item 201    Required by Item 601            form 10-K/proxy by statement)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Description of general terms of  Yes (para. 46)........  No....................  No....................  Financial Statements.
 each plan.
Number of securities authorized  Yes (para. 46)........  No....................  No....................  Financial Statements.
 for grants of options or other
 equity instruments.
Number and weighted-average
 exercise price of:
    Options outstanding at       Yes (para. 47a).......  No....................  No....................  Financial Statements.
     beginning of year.
    Options outstanding at end   Yes (para. 47a).......  Yes*..................  No....................  Financial Statements/Form 10-K/Proxy
     of year.                                                                                             Statement.**
    Options exercisable at end   Yes (para. 47a).......  No....................  No....................  Financial Statements.
     of year.
    Options granted during year  Yes (para. 47a).......  No....................  No....................  Financial Statements.
    Options exercised during     Yes (para. 47a).......  No....................  No....................  Financial Statements.
     year.
    Options forfeited during     Yes (para. 47a).......  No....................  No....................  Financial Statements.
     year.
    Options expired during year  Yes (para. 47a).......  No....................  No....................  Financial Statements.

[[Page 236]]

 
Terms of significant             Yes (para. 47f).......  No....................  No....................  Financial Statements.
 modifications of outstanding
 awards.
Range of exercise prices for     Yes (para. 48)........  No....................  No....................  Financial Statements.
 outstanding options.
Weighted-average exercise price  Yes (para. 48)........  Yes*..................  No....................  Financial Statements/Form 10-K/Proxy
 of outstanding options and                                                                               Statement.**
 similar instruments.
Weighted-average remaining       Yes (para. 48)........  No....................  No....................  Financial Statements.
 contractual life of
 outstanding options.
Number of securities remaining   No....................  Yes*..................  No....................  Form 10-K/Proxy Statement.**
 available for future issuance.
Description of material terms    No....................  Yes...................  No....................  Form 10-K/Proxy Statement.**
 of each plan that has not been
 approved by security holders.
Filing of compensatory plans in  No....................  No....................  Yes...................  Form 10-K.
 which named executive officers
 and directors participate and
 any other compensatory plan
 unless immaterial.
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Disclosed by category: plans approved by security holders and plans not approved by security holders.
**May be incorporated by reference into the annual report on Form 10-K by including in proxy statement.

C. Location of Disclosure

    As proposed, registrants were to include the table in the proxy 
statement whenever they submitted a compensation plan for security 
holder action and in the annual report on Form 10-K in all other years. 
In the Proposing Release, we sought comment as to whether the proposed 
location of the disclosure was appropriate. Most commenters suggested 
that, for consistency and to avoid confusion, we should require 
disclosure in the same document each year.\59\ Citing the relevance of 
the information when electing directors, several commenters suggested 
that we require disclosure in the proxy statement in all instances, 
even if a registrant were not submitting a compensation plan for 
security holder action.\60\ Other commenters, on the other hand, 
recommended that we require the disclosure only in the annual report on 
Form 10-K.\61\
---------------------------------------------------------------------------

    \59\ In the Proposing Release, we also sought comment as to 
whether the table should be required in registration statements 
filed under the Securities Act of 1933 [15 U.S.C. Secs. 77a et 
seq.]. While no commenter favored a blanket requirement for all 
registration statements, two commenters suggested that registrants 
include the table in registration statements filed in connection 
with initial public offerings. See the NYC Bar Letter and the NY 
State Bar Letter. Two commenters expressly opposed a registration 
statement disclosure requirement. See the ABA Letter and the Letter 
dated June 11, 2001 from the New York Stock Exchange (the ``NYSE 
Letter''). Generally, registrants already include information about 
the possible effects of future sales of securities, including 
outstanding options, in registration statements for initial public 
offerings to the extent that this information is material. Item 506 
of Regulation S-K [17 CFR 229.506] requires specific information in 
a registration statement filed in connection with an initial public 
offering about dilution, as well as with respect to common equity 
securities that have been acquired by officers and directors. In 
addition, Item 201(a)(2) of Regulation S-K [17 CFR 229.201(a)(2)] 
requires disclosure of the amount of common equity that is subject 
to outstanding options or warrants. Further information is available 
pursuant to the disclosure required by Item 402 of Regulation S-K. 
Accordingly, except where the table is part of an annual report on 
Form 10-K or 10-KSB that is incorporated by reference into a 
prospectus, we are not extending the disclosure requirements to 
registration statements at this time. See Instruction 10 to new Item 
201(d) of Regulation S-B and Instruction 10 to new Item 201(d) of 
Regulation S-K.
    \60\ See, for example, the ABA Letter, the CII Letter and the 
SWIB Letter.
    \61\ See, for example, the Letter dated March 29, 2001 from 
Ernst &Young LLP, the Second Lucent Letter and the NYC Bar Letter.
---------------------------------------------------------------------------

    Although the idea of requiring the disclosure in a single location 
is appealing, we have elected not to do so for several reasons. If we 
adopted a requirement that the table appear only in proxy statements, a 
significant number of companies whose reporting obligations arise 
solely under Section 15(d) of the Exchange Act \62\ would not be 
subject to the requirement. These companies are not required to prepare 
and file proxy statements. Further, we are not persuaded that, as a 
general rule, the proposed disclosure is material to voting decisions 
by security holders other than those relating to compensation 
plans.\63\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. Sec. 78o(d).
    \63\ Some commenters argued that even where a registrant is not 
submitting a compensation plan for security holder action, the new 
disclosure contains relevant information with respect to the 
backgrounds and compensation of directors and executive officers 
that should be available for evaluation in connection with the 
election of directors. In general, we find the relevance of the new 
disclosure to be somewhat attenuated from decisions regarding the 
election of directors. Moreover, there would be little connection 
when a nominee has not served previously as a director of the 
registrant. Finally, the relevance of the new disclosure to 
decisions concerning the remuneration of directors and officers also 
is questionable because the table requires general information that 
does not specifically identify director and executive officer 
awards.
---------------------------------------------------------------------------

    We also do not believe that the table should be located exclusively 
in the annual report on Form 10-K. Although the annual report on Form 
10-K is filed with us, a registrant is not required to deliver it to 
security holders.\64\ Thus, security holders must take some affirmative 
action to obtain the information.\65\ In addition, limiting the table 
to the annual report on Form 10-K would misplace the disclosure in 
those cases when the information would be useful to investors in 
assessing the merits of a compensation plan submitted for security 
holder action.\66\
---------------------------------------------------------------------------

    \64\ Registrants are required, however, to provide security 
holders with an annual report to security holders pursuant to 
Exchange Act Rule 14a-3(b) [17 CFR 240.14a-3(b)] when soliciting 
proxies in connection with an annual meeting of security holders at 
which directors are to be elected. Typically, this annual report to 
security holders includes the financial statements of the 
registrant, including the required SFAS 123 disclosure. In some 
instances, registrants use their annual report on Form 10-K to 
satisfy this delivery requirement. See Exchange Act Rule 14a-3(d) 
[17 CFR 240.14a-3(d)].
    \65\ Under Exchange Act Rule 14a-3(b)(10) [17 CFR 240.14a-
3(b)(10)], a registrant must include in its proxy statement or 
annual report an undertaking to provide without charge to each 
security holder solicited, upon written request, a copy of the 
registrant's annual report on Form 10-K. Once filed, the annual 
report on Form 10-K also is available via our Electronic Data 
Gathering, Analysis and Retrieval, or EDGAR, system.
    \66\ Another possible location for the table is the annual 
report to security holders required by Exchange Act Rule 14a-3(b). 
This alternative has several drawbacks, however. First, because it 
is not considered a ``filed'' document, the annual report is not 
subject to the express civil liability provisions of Section 18 of 
the Exchange Act [15 U.S.C. Sec. 78r]. See Exchange Act Rule 14a-
3(c) [17 CFR 240.14a-3(c)]. Second, as with proxy statements, the 
disclosure would not apply to registrants subject to reporting 
solely under Section 15(d) of the Exchange Act. Finally, because 
principally financial information is required to be included in the 
annual report, non-financial disclosure such as the table would 
appear out of place.

---------------------------------------------------------------------------

[[Page 237]]

    We have concluded that the best way to promote consistency, clarity 
and relevant placement of the new information is to require that the 
table be included each year in a registrant's annual report on Form 10-
K \67\ and, additionally, in the proxy statement when the registrant is 
submitting a compensation plan for security holder action.\68\ In 
situations where a registrant is required to include the information in 
both filings, it may satisfy its Form 10-K disclosure obligation by 
incorporating the required information by reference from its definitive 
proxy statement, if that 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.\69\
---------------------------------------------------------------------------

    \67\ See revised Item 12 of Part III of Form 10-K and revised 
Item 11 of Part III of Form 10-KSB.
    \68\ See new Item 10(c) of Schedule 14A. Proxy or information 
statement disclosure is triggered by the submission of any 
compensation plan for security holder action, including cash-only 
plans.
    \69\ Similar incorporation by reference is permitted with 
respect to the other disclosure items required by Part III of Form 
10-K and 10-KSB. See General Instruction E(3) to Form 10-KSB and 
General Instruction G(3) to Form 10-K.
---------------------------------------------------------------------------

D. Filing Copies of Non-Security Holder-Approved Plans

    In the Proposing Release, we sought comment as to whether, in lieu 
of, or in addition to, the narrative disclosure required for an equity 
compensation plan that has been adopted without the approval of 
security holders, a registrant should be required to file a copy of the 
plan as an exhibit to the registrant's annual report on Form 10-K for 
the fiscal year in which the plan was adopted.\70\ Several commenters 
favored a filing requirement in addition to requiring registrants to 
provide narrative disclosure of the ``material features'' of non-
security holder-approved equity compensation plans.\71\
---------------------------------------------------------------------------

    \70\ See Section II.A.4 above.
    \71\ See, for example, the CII Letter, the SWIB Letter and the 
TIAA-CREF Letter. Other commenters suggested that we require 
registrants to file copies of all equity compensation plans (whether 
or not approved by security holders). See the ABA Letter and the 
NYSE Letter.
---------------------------------------------------------------------------

    Item 601(b)(10) of Regulation S-K \72\ requires registrants to file 
material contracts as exhibits to many of their documents filed under 
the Securities Act of 1933 (the ``Securities Act'') and the Exchange 
Act. Of particular relevance is the provision in Item 601(b)(10)(iii) 
stating that ``any management contract or other compensatory plan, 
contract or arrangement, including but not limited to plans relating to 
options, warrants or rights, pension, retirement or deferred 
compensation or bonus, incentive or profit sharing * * * in which any 
director or any of the named executive officers of the registrant * * * 
participates shall be deemed material and shall be filed.'' \73\ Item 
601(b)(10)(iii) also states that ``any other management contract or any 
other compensatory plan, contract, or arrangement in which any other 
executive officer of the registrant participates shall be filed unless 
immaterial in amount or significance.'' \74\ Some commenters expressed 
concern that non-security holder-approved plans, many of which exclude 
executive officers and directors, often do not fall within these 
provisions.\75\
---------------------------------------------------------------------------

    \72\ 17 CFR 229.601(b)(10).
    \73\ 17 CFR 229.601(b)(10)(iii)(A). Nondiscriminatory, broad-
based compensatory plans, contracts or arrangements are exempt from 
this requirement. See Item 601(b)(10)(iii)(B)(4) [17 CFR 
229.601(b)(10)(iii)(B)(4)].
    \74\ Id.
    \75\ See, for example, the CII Letter and the Letter dated March 
29, 2001 from the Office of the State Comptroller of the State of 
New York.
---------------------------------------------------------------------------

    We believe this concern has merit. Accordingly, we have amended 
Item 601(b)(10) to require registrants to file any equity compensation 
plan adopted without the approval of security holders in which any 
employee (whether or not an executive officer or director of the 
registrant) participates, unless immaterial in amount or 
significance.\76\ Compliance with this requirement should ensure that 
significant non-security holder-approved plans are available to 
investors.\77\ Coupled with the required narrative description of non-
security holder-approved plans, investors should have access to 
complete information about a registrant's principal equity compensation 
plans.
---------------------------------------------------------------------------

    \76\ See new Item 601(b)(10)(iii)(B) of Regulation S-B [17 CFR 
228.601(b)(10)(iii)(B)] and new Item 601(b)(10)(iii)(B) of 
Regulation S-K [17 CFR 229.601(b)(10)(iii)(B)]. This is consistent 
with our action in 1981 amending then-Item 7 of Regulation S-K to 
reformulate the definition of ``material contracts'' as applied to 
remunerative plans, contracts or arrangements. See Release No. 33-
6287 (Feb. 6, 1981) [46 FR 11952]. Previously, we had indicated that 
remuneration plans in which directors or executive officers of the 
registrant did not participate generally did not need to be filed as 
exhibits. See Release No. 33-6230, Section II.A.2.b.i. (Aug. 27, 
1980) [45 FR 58822].
    \77\ With respect to an existing non-security holder-approved 
equity compensation plan subject to new Item 601(b)(10)(iii)(B) of 
Regulation S-B or new Item 601(b)(10)(iii)(B) of Regulation S-K that 
is in effect as of the effective date of these amendments and that 
has not been filed previously, a copy of the plan must be filed as 
an exhibit to the annual report on Form 10-K or 10-KSB filed by the 
registrant for its first fiscal year ending on or after March 15, 
2002.
---------------------------------------------------------------------------

III. Paperwork Reduction Act Analysis

    The amendments contain ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995, \78\ or PRA. 
We published a notice requesting comment on the collection of 
information requirements in the Proposing Release, and submitted these 
requirements to the Office of Management and Budget, or OMB, for 
review.\79\ Subsequently, OMB approved the proposed information 
collection requirements.
---------------------------------------------------------------------------

    \78\ 44 U.S.C. Sec. 3501 et seq.
    \79\ Publication and submission were in accordance with 44 
U.S.C. Sec. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    As discussed in Section I above, we received several comment 
letters on the proposals. We have made a number of changes to the 
proposals in response to these comments. Accordingly, we are revising 
our previous burden estimates. We are submitting the revised estimates 
to the OMB for approval.\80\ An agency may not conduct or sponsor, and 
a person is not required to respond to, an information collection 
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \80\ The titles for the collections of information affected by 
the amendments are (1) ``Regulation 14A (Commission Rules 14a-1 
through 14b-2 and Schedule 14A),'' (2) ``Regulation 14C (Commission 
Rules 14c-1 through 14c-7 and Schedule 14C),'' (3) ``Form 10-K,'' 
(4) ``Form 10-KSB,'' (5) ``Regulation S-B'' and (6) ``Regulation S-
K.''
---------------------------------------------------------------------------

A. Summary of Amendments

    The amendments require tabular disclosure of the number of 
securities to be issued upon the exercise, and the weighted-average 
exercise price, of all outstanding options, warrants and rights under a 
registrant's equity compensation plans, as well as the number of 
securities remaining available for future issuance under these plans 
and certain related information. Disclosure is to be made in two 
categories: plans that have been approved by security holders and plans 
that have not been approved by security holders. Registrants must 
include the table in their annual reports on Form 10-K or 10-KSB, and, 
additionally, in their proxy or information statements in years when 
they are submitting a compensation plan for security holder action. 
Registrants also must file copies of their non-security holder-approved 
plans with us, unless immaterial in amount or significance. Preparing 
and filing an annual report on Form 10-K or 10-KSB is a collection of 
information. Similarly, preparing, filing and disseminating a proxy or 
information statement is a collection of information.\81\ The 
collection of

[[Page 238]]

information is mandatory for all registrants and there is no mandatory 
retention period for the information collected. The collection of 
information will not be kept confidential.
---------------------------------------------------------------------------

    \81\ The likely respondents subject to the collections of 
information include entities whose reporting obligations arise under 
the Exchange Act. The reporting requirements of Section 13 of the 
Exchange Act [15 U.S.C. Sec. 78m], as well as the proxy disclosure 
requirements of Section 14 of the Exchange Act, apply to entities 
that have securities registered under Section 12 of the Exchange Act 
[15 U.S.C. Sec. 78l]. The reporting requirements of Section 15(d) of 
the Exchange Act apply to entities with effective registration 
statements under the Securities Act that are not otherwise subject 
to the registration requirements of Section 12 of the Exchange Act.
---------------------------------------------------------------------------

B. Summary of Comment Letters and Revisions to Proposals

    We requested comment on the PRA analysis contained in the Proposing 
Release. We received six comment letters specifically addressing the 
estimated paperwork burden associated with the collections of 
information.\82\ These commenters indicated that the amount of time 
required to comply with the proposals would be significant for many 
registrants and substantially greater than our estimates. One commenter 
estimated that, if adopted, the proposals would add at least four pages 
to its disclosure documents and, where the disclosure appeared in the 
proxy statement, would result in additional printing costs of $100,000 
and additional mailing costs of $200,000 for the extra pages.\83\ 
Another commenter suggested that we offset any increased costs to 
registrants by eliminating current requirements that do not result in 
the disclosure of useful information.\84\ A third commenter suggested 
that we consider providing a model form of disclosure for small 
businesses to reduce their compliance burden.\85\
---------------------------------------------------------------------------

    \82\ See the Letter dated April 17, 2001 from the American 
Institute of Certified Public Accountants (the ``AICPA Letter''), 
the Letter dated April 2, 2001 from the Association of Publicly-
Traded Companies (the ``APTC Letter''), the Letter dated April 2, 
2001 from Lucent Technologies Inc. (the ``First Lucent Letter''), 
the Letter dated May 22, 2001 from the New York State Bar 
Association, the Letter dated August 17, 2001 from Leonard S. Stein 
(the ``Stein Letter'') and the Letter dated August 26, 2001 from 
Hendrick Vater.
    \83\ See the Letter dated April 9, 2001 from Lucent Technologies 
Inc.
    \84\ See the APTC Letter.
    \85\ See the Stein Letter.
---------------------------------------------------------------------------

    In response to these comments, we have made a number of changes to 
the proposals, including eliminating two of the proposed tabular 
columns and permitting aggregated disclosure. We also are permitting 
registrants with non-security holder-approved plans to describe the 
material terms of these plans by cross-referencing to their SFAS 123 
disclosure. These changes will streamline compliance and, 
correspondingly, reduce the burden on registrants. While the amendments 
require the filing of non-security holder-approved equity compensation 
plans unless immaterial in amount or significance, this should not 
increase the burden for registrants significantly as these documents 
are readily available and will be filed electronically.

C. Revisions to Reporting and Cost Burden Estimates

    As a result of the changes described above and a change in one of 
our underlying assumptions,\86\ the reporting and cost burden estimates 
for the collections of information have changed. Accordingly, we have 
revised the estimated information collection requirements that were 
originally submitted to the OMB. With respect to Forms 10-K and 10-KSB, 
we have increased our estimate by 1,174 hours in the case of Form 10-K 
and increased our estimate by 707 hours in the case of Form 10-KSB. 
With respect to Schedules 14A and 14C, we have decreased our estimate 
by 13,139 hours in the case of Schedule 14A and decreased our estimate 
by 139 hours in the case of Schedule 14C.
---------------------------------------------------------------------------

    \86\ We have changed our assumption about the number of 
registrants with equity compensation plans that, in any year, either 
adopt a new plan or amend an existing plan to increase the number of 
securities authorized for issuance under the plan. In the Proposing 
Release, we estimated that 50% of the registrants with equity 
compensation plans would either adopt a new plan or amend an 
existing plan each year. Based on the available survey data, we have 
revised this assumption to 30%. See n. 91 below.
---------------------------------------------------------------------------

    Our estimates are based on several assumptions. First, we estimate 
that approximately 60%\87\ of the registrants that file an annual 
report on either Form 10-K or 10-KSB maintain equity compensation plans 
and will be required to provide the new disclosure table.\88\ We also 
estimate that approximately 20%\89\ of these registrants maintain non-
security holder-approved equity compensation plans and, thus will be 
required to describe the material features of these plans and file 
copies with us unless immaterial in amount or significance.\90\ We 
further estimate that, in any year, 30%\91\ of the registrants with 
equity compensation plans will either adopt a new plan or amend an 
existing plan to increase the number of securities authorized for 
issuance under the plan, thereby triggering proxy or information 
statement disclosure.\92\ In this situation,

[[Page 239]]

we have assumed that a registrant will include the required disclosure 
in its proxy or information statement and incorporate that disclosure 
by reference into its annual report on Form 10-K or 10-KSB. We estimate 
that approximately 28%\93\ of the registrants filing annual reports on 
Form 10-K or 10-KSB are subject to Section 13 of the Exchange Act by 
virtue of Section 15(d) of the Exchange Act and, thus, do not file 
proxy or information statements,\94\ and that approximately 98%\95\ of 
the registrants file proxy, rather than information, statements in 
connection with their annual meeting of security holders at which 
directors are to be elected.\96\ Finally, we estimate that preparation 
of the required tabular disclosure will take two burden hours and, 
where required, preparation of the description of the material features 
of a non-security holder-approved equity compensation plan will take 
two burden hours.\97\
---------------------------------------------------------------------------

    \87\ This estimate is made after a review of available survey 
data, which varies widely. For example, in its most recent study of 
the ``S&P Super 1,500'' (the combination of the S&P 500, the S&P 
MidCap 400 and the S&P SmallCap 600), the Investor Responsibility 
Research Center determined that, of the 1,157 companies examined, 
1,142 (98.7%) awarded equity to some portion of their employees. See 
Investor Responsibility Research Center, Potential Dilution--2000, 
The Potential Dilution from Stock Plans at the S&P Super 1,500 
Companies (2000). In contrast, a Pilot Survey conducted by the 
Bureau of Labor Statistics in 1999 determined that 22% of publicly-
held companies offered stock options to their employees. This survey 
sampled 2,100 ``establishments,'' of which approximately 1 in 10 
were publicly-held companies. See Bureau of Labor Statistics, Pilot 
Survey on the Incidence of Stock Options in Private Industry in 
1999, (Oct. 11, 2000), available at http://www.bls.gov/ncs/ocs/sp/ncnr0001.txt. Further, in the Proposing Release we sought comment as 
to whether our estimates of the burden of the proposed collections 
of information were accurate. We received no comment letters 
responding to that request. Because of variations in the available 
data, we also have estimated the reporting and cost burdens for the 
proposed collections of information assuming that 98% of the 
registrants that file annual reports on Form 10-K or 10-KSB maintain 
an equity compensation plan and are subject to the required 
disclosure. See nn. 108 and 110 below.
    \88\ Based on the actual number of registrants filing annual 
reports on Form 10-K and 10-KSB, we estimate that 6,229 registrants 
that file on Form 10-K (10,381  x  60%) maintain equity compensation 
plans (``Form 10-K Filers'') and 2,185 registrants that file on Form 
10-KSB (3,641  x  60%) maintain equity compensation plans (``Form 
10-KSB Filers'').
    \89\ In the Proposing Release, we estimated that this figure was 
25%. The available survey data does not appear to be representative 
of the general registrant population. See William M. Mercer, Inc., 
Equity Compensation Survey (2001) (48% of survey respondents (83 
participants) maintained non-security holder-approved stock option 
plans for employees below management level; 60% of such plans most 
prevalent in large companies (more than 5,000 employees)); iQuantic, 
Inc., Trends in Equity Compensation 1996-2000 (2000) (27.3% of 
survey respondents in 1999 (161 participants) maintained non-
security holder-approved stock option plans, compared to 3.2% before 
1996). After discussions with several compensation professionals, we 
reduced our estimate to 20%.
    \90\ We estimate that of the Form 10-K Filers, 1,246 (6,229  x  
20%) maintain a non-security holder-approved equity compensation 
plan (``Form 10-K Filers with Non-Approved Plans'') and 4,983 (6,229 
 x  80%) do not (``Form 10-K Filers with Only Approved Plans''). We 
estimate that of the Form 10-KSB Filers, 437 (2,185  x  20%) 
maintain a non-security holder-approved equity compensation plan 
(``Form 10-KSB Filers with Non-Approved Plans'') and 1,748 (2,185 
x  80%) do not (``Form 10-KSB Filers with Only Approved Plans'').
    \91\ This estimate is based on a review of available survey 
data. In its most recent study, the Investor Responsibility Research 
Center determined that, of 1,157 companies studied in calendar year 
2000, 337 (29%) presented proposals for new or amended equity 
compensation plans to security holders. See Investor Responsibility 
Research Center, Potential Dilution--2000, The Potential Dilution 
from Stock Plans at the S&P Super 1,500 Companies (2000). In its 
most recent study, Pearl Meyers & Partners found that new plan 
authorizations among the top 200 companies were submitted by 58 
companies in 2000 (29%). See Pearl Meyers & Partners, Inc., 2000 
Equity Stake, Study of Management Equity Participation in the Top 
200 Corporations (2000).
    \92\ We estimate that of the Form 10-K Filers with Only Approved 
Plans, 1,495 (4,983  x  30%) submit a new or amended equity 
compensation plan for security holder approval annually (``Form 10-K 
Filers with Only Approved Plans Subject to Section 14'') and of the 
Form 10-K Filers with Non-Approved Plans, 374 (1,246  x  30%) submit 
a new or amended equity compensation plan for security holder 
approval annually (``Form 10-K Filers with Non-Approved Plans 
Subject to Section 14''). Similarly, we estimate that of the Form 
10-KSB Filers with Only Approved Plans, 524 (1,748  x  30%) submit a 
new or amended equity compensation plan for security holder approval 
annually (``Form 10-KSB Filers with Only Approved Plans Subject to 
Section 14'') and of the Form 10-KSB Filers with Non-Approved Plans, 
131 (437  x  30%) submit a new or amended equity compensation plan 
for security holder approval annually (``Form 10-KSB Filers with 
Non-Approved Plans Subject to Section 14'').
    \93\ This estimate is based on a comparison of the actual number 
of registrants filing annual reports on Form 10-K or 10-KSB during 
the 2000 fiscal year (10,381 + 3,641 = 14,022) with the actual 
number of registrants filing proxy or information statements during 
the 2000 fiscal year (9,892 + 253 = 10,145), or 10,145/14,022.
    \94\ Thus, we have subtracted 419 registrants (1,495  x  28%) 
from the group of Form 10-K Filers with Only Approved Plans Subject 
to Section 14, 105 registrants (374  x  28%) from the group of Form 
10-K Filers with Non-Approved Plans Subject to Section 14, 147 
registrants (524  x  28%) from the group of Form 10-KSB Filers with 
Only Approved Plans Subject to Section 14 and 37 registrants (131 
x  28%) from the group of Form 10-KSB Filers with Non-Approved Plans 
Subject to Section 14.
    \95\ This estimate is based on a comparison of the actual number 
of registrants filing proxy statements during the 2000 fiscal year 
(9,982) with the actual number of registrants filing information 
statements during the same period (253), or 9,982/10,145.
    \96\ Thus, we estimate that of the 1,076 Form 10-K Filers with 
Only Approved Plans Subject to Section 14, 1,054 (1,076  x  98%) 
will file proxy statements and 22 will file information statements, 
of the 269 Form 10  x  K Filers with Non-Approved Plans Subject to 
Section 14, 264 (269  x  98%) will file proxy statements and five 
will file information statements, of the 377 Form 10-KSB Filers with 
Only Approved Plans Subject to Section 14, 369 (377  x  98%) will 
file proxy statements and eight will file information statements and 
of the 94 Form 10-KSB Filers with Non-Approved Plans Subject to 
Section 14, 92 (94  x  98%) will file proxy statements and two will 
file information statements.
    \97\ Even though we have streamlined compliance in order to 
reduce the burden on registrants, we have not reduced the number of 
estimated burden hours to prepare the required disclosure. This 
decision is in response to comments that our initial burden hour 
estimate was too low. See the AICPA Letter and the First Lucent 
Letter.
---------------------------------------------------------------------------

    Our revised estimate of the total burden hours of the required 
collections of information is set forth in the following table.

                                                              Table--Burden Hour Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Filings/year                   Estimated burden hours/filing       Estimated burden hours/
                                                -------------------------------------------------------------------------------           year
                                                                            Estimated                                          -------------------------
                                                               Estimated     filings                                 Adjusted
                      Form                        Estimated     filings     subject to     Before       Adjusted   for tabular
                                                   filings/    subject to  tabular and   amendments   for tabular      and         Before       After
                                                     year       tabular     narrative                  disclosure   narrative    amendments   amendments
                                                               disclosre    disclosrue                              disclosure
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         (A)          (B)          (C)         (D)        (E)\98\      (F)\99\        (G) =        (H) =
                                                                                                                                  (A) x (D)  (B) x (E) +
                                                                                                                                               (C) x (F)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0-K............................................       10,381  \100\ 3,907    \101\ 977         430          430.4        430.6    4,463,830    4,469,691
10-KSB.........................................        3,641  \102\ 1,371    \103\ 343         294          294.4        294.6    1,070,454    1,072,511
14A............................................        9,892  \104\ 1,423    \105\ 356          18.2         18.3         18.4      179,966      182,101
14C............................................          253     \106\ 30       \107\7          18.1         18.2         18.3        4,582        4,626
                                                --------------------------------------------------------------------------------------------------------
    Total......................................  ...........  ...........  ...........  ............  ...........  ...........    5,718,832    5,728,929
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[[Page 240]]

    In addition to the internal hours they will expend,\108\ we expect 
that registrants will retain outside counsel to assist in the 
preparation of the required disclosures.\109\ The total dollar cost of 
complying with Form 10-K and Form 10-KSB, revised to include outside 
counsel costs expected from the amendments, is estimated to be 
$2,345,268,300 for Form 10-K, an increase of $1,758,300 from the 
current annual burden of $2,343,510,000, and $562,605,100 for Form 10-
KSB, an increase of $617,100 from the current annual burden of 
$561,988,000. The total dollar cost of complying with Regulations 14A 
and 14C, revised to include outside counsel costs expected from the 
amendments, are estimated to be $93,254,500 for Regulation 14A, an 
increase of $640,500 from the current annual burden of $92,614,000, and 
$2,382,200 for Regulation 14C, an increase of $13,200 from the current 
annual burden of $2,369,000.\110\
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    \98\ We estimate that registrants will prepare 50% of the 
required disclosure and outside counsel will prepare the remaining 
50%. Accordingly, this estimate reflects the addition of one burden 
hour to prepare the required tabular disclosure. See n. 97 above and 
the accompanying text.
    \99\ We estimate that registrants will prepare 50% of the 
required disclosure and outside counsel will prepare the remaining 
50%. Accordingly, this estimate reflects the addition of two burden 
hours to prepare the required tabular and narrative disclosure. See 
n. 97 above and the accompanying text.
    \100\ We arrived at this estimate by taking the number of Form 
10-K Filers (see n. 88 above) and subtracting (a) the number of Form 
10-K Filers with Non-Approved Plans (see n. 90 above) and (b) the 
number of Form 10-K Filers with Only Approved Plans Subject to 
Section 14 (see nn. 92 and 94 above), or (6,229 - 1,246 - 1,076).
    \101\ We arrived at this estimate by taking the number of Form 
10-K Filers with Non-Approved Plans (see n. 90 above) and 
subtracting the number of Form 10-K Filers with Non-Approved Plans 
Subject to Section 14 (see nn. 92 and 94 above), or (1,246 - 269).
    \102\ We arrived at this estimate by taking the number of Form 
10-KSB Filers (see n. 88 above) and subtracting (a) the number of 
Form 10-KSB Filers with Non-Approved Plans (see n. 90 above) and (b) 
the number of Form 10-KSB Filers with Only Approved Plans Subject to 
Section 14 (see nn. 92 and 94 above), or (2,185 - 437 - 377).
    \103\ We arrived at this estimate by taking the number of Form 
10-KSB Filers with Non-Approved Plans (see n. 90 above) and 
subtracting the number of Form 10-KSB Filers with Non-Approved Plans 
Subject to Section 14 (see nn. 92 and 94 above), or (437 - 94).
    \104\ We arrived at this estimate by taking the number of Form 
10-K Filers with Only Approved Plans Subject to Section 14 that will 
file proxy statements and adding the number of Form 10-KSB Filers 
with Only Approved Plans Subject to Section 14 that will file proxy 
statements (see n. 96 above), or (1,054 + 369).
    \105\ We arrived at this estimate by taking the number of Form 
10-K Filers with Non-Approved Plans Subject to Section 14 that will 
file proxy statements and adding the number of Form 10-KSB Filers 
with Non-Approved Plans Subject to Section 14 that will file proxy 
statements (see n. 96 above), or (264 + 92).
    \106\ We arrived at this estimate by taking the number of Form 
10-K Filers with Only Approved Plans Subject to Section 14 that will 
file information statements and adding the number of Form 10-KSB 
Filers with Only Approved Plans Subject to Section 14 that will file 
information statements (see n. 96 above), or (22 + 8).
    \107\ We arrived at this estimate by taking the number of Form 
10-K Filers with Non-Approved Plans Subject to Section 14 that will 
file information statements and adding the number of Form 10-KSB 
Filers with Non-Approved Plans Subject to Section 14 that will file 
information statements (see n. 96 above), or (5 + 2).
    \108\ Assuming that 98% of the registrants that file annual 
reports on Form 10-K or 10-KSB maintain an equity compensation plan 
and are subject to the required disclosure, the estimated burden 
hours per year resulting from the amendments would be 16,511 hours, 
increasing this estimate to 5,735,343 hours.
    \109\ One-half of the total burden resulting from the amendments 
is reflected as burden hours and the remainder is reflected in the 
total cost of complying with the information collection 
requirements. We have used an estimated hourly rate of $300.00 to 
determine the estimated cost to respondents of the disclosure 
prepared by outside counsel. We arrived at this hourly rate estimate 
after consulting with several private law firms.
    \110\ These cost burden increases reflect a change in our 
assumption of the number of registrants with equity compensation 
plans that either adopt a new plan or amend an existing plan to 
increase the number of securities authorized for issuance under the 
plan (see n. 85 above) and a change in the estimated hourly rate of 
outside counsel. With respect to Forms 10-K and 10-KSB, we increased 
our estimate by $937,300 in the case of Form 10-K and increased our 
estimate by $483,100 in the case of Form 10-KSB. With respect to 
Schedules 14A and 14C, we decreased our estimate by $8,089,500 in 
the case of Schedule 14A and decreased our estimate by $209,800 in 
the case of Schedule 14C. Assuming that 98% of the registrants that 
file annual reports on Form 10-K or 10-KSB maintain an equity 
compensation plan and are subject to the required disclosure, the 
estimated cost burden per year resulting from the amendments would 
be $4,946,400.
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D. Request for Comment

    We request comment in order to (a) evaluate whether the collections 
of information are necessary for the proper performance of our 
functions, including whether the information will have practical 
utility, (b) evaluate the accuracy of our estimate of the burden of the 
collections of information, (c) determine whether there are ways to 
enhance the quality, utility and clarity of the information to be 
collected and (d) evaluate whether there are ways to minimize the 
burden of the collections of information on those who respond, 
including through the use of automated collection techniques or other 
forms of information technology.\111\
    Any member of the public may direct to us any comments concerning 
the accuracy of this burden estimate and any suggestions for reducing 
this burden. Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
send a copy of the comments to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, 450 Fifth Street NW., Washington, DC 20549, 
with reference to File No. S7-04-01. Requests for materials submitted 
to the OMB by us with regard to this collection of information should 
be in writing, refer to File No. S7-04-01 and be submitted to the 
Securities and Exchange Commission, Records Management, Office of 
Filings and Information Services, 450 Fifth Street NW., Washington, DC 
20549. Because the OMB is required to make a decision concerning the 
collections of information between 30 and 60 days after publication, 
your comments are best assured of having their full effect if the OMB 
receives them within 30 days of publication.
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    \111\ Comments are requested pursuant to 44 U.S.C. 
3506(c)(2)(B).
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IV. Costs and Benefits of Final Rules

A. Background

    The use of equity compensation, particularly stock options, has 
grown significantly during the last decade.\112\ Consequently, existing 
security holders may face higher levels of dilution of their ownership 
interests as some companies issue more shares of their stock to 
employees.\113\ Since the distribution of equity may result in a 
significant reallocation of ownership in an enterprise between existing 
security holders and management and employees, investors have a strong 
interest in understanding a registrant's equity compensation 
program.\114\
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    \112\ A study of stock-based pay practices at the nation's 200 
largest corporations indicates that these companies allocated 15.2% 
of outstanding shares (calculated on a fully-diluted basis) for 
management and employee equity incentives in 2000, compared to only 
6.9% in 1989. See Pearl Meyers & Partners, Inc., 2000 Equity Stake, 
Study of Management Equity Participation in the Top 200 Corporations 
(2000). Both the size of individual awards and the number of 
companies that use equity broadly throughout the organization have 
increased significantly. See Core, Guay and Larcker, Executive 
Equity Compensation and Incentives: A Survey, Working Paper, 
University of Pennsylvania (2001), at 5-7.
    \113\ This question should be considered in the context of any 
open market stock repurchase program that has been instituted by a 
registrant. Repurchases by its own securities by a registrant under 
such a program may mitigate the dilutive effects of the registrant's 
equity compensation program.
    \114\ There is evidence that companies with high levels of 
dilution earn lower market-adjusted returns in future periods than 
companies with comparatively lower levels of dilution. See Garvey 
and Milbourn, Do Stock Prices Incorporate the Potential Dilution of 
Employee Stock Options?, Working Paper, Claremont Graduate 
University & Washington University in St. Louis (2001), at 2-3. But 
see Core, Guay and Larcker, Executive Equity Compensation and 
Incentives: A Survey, Working Paper, University of Pennsylvania 
(2001) (discussing the difficulty in documenting a relationship 
between equity compensation and corporate performance).
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    Until recently, security holder approval was required for most 
equity compensation plans. However, as approval requirements have been 
relaxed\115\ and as opposition to these plans has grown,\116\ an 
increasing number of registrants have adopted stock option plans 
without the approval of security holders,\117\ thus potentially 
obscuring investors' ability to assess the dilutive effect of a 
registrant's equity compensation program. Our current rules do not 
require that a registrant disclose specific information about its non-
security holder-approved equity compensation plans.\118\ Nor do current

[[Page 241]]

financial reporting disclosure rules require that non-security holder-
approved plans be identified.\119\
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    \115\ See Release No. 34-41479 (June 4, 1999) [64 FR 31667] 
(under NYSE listing standards, security holder approval not required 
if plan is ``broadly-based''; that is, at least a majority of the 
registrant's full-time employees are eligible to participate and at 
least a majority of the shares underlying options actually granted 
are to employees who are not officers or directors); Release No. 34-
37260 (May 31, 1996) [61 FR 30376] (security holder approval 
requirement of Exchange Act Rule 16b-3 [17 CFR 240.16b-3] 
eliminated). See also the Proposing Release at n. 21.
    \116\ According to the Investor Responsibility Research Center, 
the average negative vote on stock option plans submitted for 
security holder action in 2000 was 20.7%, up from 17.4% in 1997. In 
addition, in 2000 a relatively large number of stock plan proposals 
were rejected. See Investor Responsibility Research Center, 
Potential Dilution--2000, The Potential Dilution from Stock Plans at 
the S&P Super 1,500 Companies (2000) (the ``IRRC Dilution Study'').
    \117\ See Gillan, Option-based Compensation: Panacea or 
Pandora's Box?, Journal of Applied Corporate Finance (2001) 115-128.
    \118\ Our rules require proxy statement disclosure of the 
material features of a compensation plan being submitted for 
security holder action. See Item 10(a)(1) of Schedule 14A. This 
disclosure does not reach a plan that is never submitted for 
security holder action. While Item 402(c) of Regulation S-B [17 CFR 
228.402(c)] and Item 402(c) of Regulation S-K [17 CFR 229.402(c)] 
require disclosure of the number of stock options granted during the 
last fiscal year, this disclosure only covers the named executive 
officers of the registrant (as defined in the item). See also Item 
402(b)(2)(iv)(B) of Regulation S-B [17 CFR 228.402(b)(2)(iv)(B)] and 
Item 402(b)(2)(iv)(B) of Regulation S-K [17 CFR 
229.402(b)(2)(iv)(B)].
    \119\ Although financial reporting disclosure requirements 
concerning stock-based compensation are extensive, they do not 
require the identification of non-security holder-approved equity 
compensation plans. See paragraph 46 of Statement of Financial 
Accounting Standards No. 123, Accounting for Stock-Based 
Compensation (Oct. 1995) (``SFAS 123''). Given its recent 
comprehensive project on accounting for stock-based compensation and 
its current lengthy agenda, it is not expected that the FASB will 
revisit this subject in the immediate future. Thus, it is unlikely 
that the FASB could address this matter through a technical 
enhancement of its disclosure requirements in the near term.
---------------------------------------------------------------------------

    Consequently, it is often difficult for investors to determine 
whether they have adequate information about a registrant's equity 
compensation program. In response to ongoing investor concerns,\120\ in 
January 2001 we proposed amendments to our rules to enhance the quality 
of information available to investors about equity compensation 
plans.\121\
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    \120\ See the Proposing Release at n. 17. See also the Letter 
dated October 16, 2001 from Sarah A.B. Teslik, Executive Director, 
Council of Institutional Investors to Jonathan G. Katz.
    \121\ Certain equity awards, such as stock bonuses and 
restricted stock purchases for a nominal price, may, in some 
situations, be more dilutive from an economic standpoint than 
options, warrants and rights. While the amendments apply to all 
types of equity compensation, for two reasons our discussion focuses 
primarily on stock options. First, they represent the most popular 
form of equity compensation used today. It is estimated that more 
than 80% of the securities reserved for conversion and exercise by 
U.S. registrants relate to stock options. See Huson, Scott and Wier, 
Earnings Dilution and the Explanatory Power of Earnings for Returns, 
The Accounting Review (2001). Second, most alternative forms of 
equity compensation involve issued securities. Consequently, their 
dilutive effect may already have occurred and is likely to be 
reflected in the basic earnings-per-share computation and security 
holders' equity data.
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B. Response to Comment Letters

    In the Proposing Release, we noted that registrants would incur 
costs in complying with the proposals. We also noted that these costs, 
to the extent that they could be estimated, would not be significant, 
as the required disclosure can be derived from information that is 
readily available to registrants through the routine administration of 
their equity compensation programs. We requested comment on the costs 
and benefits of the proposals. Of the comment letters we received, 22 
respondents discussed the costs and benefits associated with the 
proposals.\122\ Most of the comment letters addressed these matters in 
general terms.
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    \122\ These commenters included seven individual and 
institutional investors, four registrants and registrant 
associations, one self-regulatory organization and 10 members of the 
executive compensation consulting, accounting and legal communities.
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    Several respondents asserted that, because the proposals duplicated 
disclosure already required in registrants' audited financial 
statements, the cost of providing information to investors would 
increase without any useful benefit.\123\ In response to these 
comments, we have revised the proposals to eliminate redundant 
disclosure and to minimize the overlap with financial reporting 
requirements, thereby reducing the cost of compliance. As discussed in 
Subsection C below, the amendments will enhance the quality of the 
disclosure available to investors about the dilutive effect of 
registrants' equity compensation programs.
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    \123\ See, for example, the Letter dated April 2, 2001 from 
Arthur Andersen LLP (the ``AA Letter''), the Letter dated April 17, 
2001 from the American Institute of Certified Public Accountants 
(the ``AICPA Letter''), the Letter dated March 29, 2001 from Emerson 
Electric Co., the Letter dated April 12, 2001 from Microsoft 
Corporation and the Letter dated April 2, 2001 from 
PricewaterhouseCoopers LLP (the ``PWC Letter'').
---------------------------------------------------------------------------

    Other respondents, while generally supporting the proposals, 
suggested that we scale back the required disclosure to reduce 
compliance costs. For example, some respondents indicated that 
requiring plan-by-plan disclosure would create an undue burden for 
registrants without providing an incremental benefit to investors.\124\ 
In response to these comments, we have revised the proposals to permit 
aggregated disclosure of information about plans and individual equity 
compensation arrangements and to allow the required narrative summary 
of a non-security holder-approved stock option plan to be provided by a 
cross-reference to a description of the plan in a registrant's 
financial statements.\125\ Some respondents suggested that we expand 
the required disclosure to include additional information, such as 
weighted-average exercise price data and information about existing 
equity compensation plans being submitted for security holder action. 
They also requested that we require the filing of non-security holder-
approved equity compensation plans. We have made these changes.\126\
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    \124\ See, for example, the Letter dated March 29, 2001 from 
Ernst & Young LLP and the Letter dated April 2, 2001 from Lucent 
Technologies Inc.
    \125\ See Sections II.A.2, II.AB.3 and II.A.4 above.
    \126\ See Sections II.A.1 and II.A.2 above.
---------------------------------------------------------------------------

    Most respondents suggested that the proposed disclosure be required 
in the same document each year, to both streamline compliance and to 
minimize investor confusion. While we carefully considered this 
suggestion, ultimately we concluded that these concerns were outweighed 
by the need for consistent application of the disclosure to all 
registrants.\127\ Accordingly, the required disclosure is to be 
provided each year in a registrant's annual report on Form 10-K or 10-
KSB and, additionally, in the proxy or information statement in years 
when the registrant is submitting a compensation plan for security 
holder action.
---------------------------------------------------------------------------

    \127\ See Section II.C above.
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C. Benefits

1. Disclosure of Non-Security Holder-Approved Plans
    New Item 201(d)(1) of Regulation S-K and Regulation S-B requires 
registrants to disclose whether they have one or more non-security 
holder-approved stock option plans by separately providing information 
about the dilutive effects of these plans. New Item 201(d)(3) of 
Regulation S-K and Regulation S-B requires that this disclosure be 
accompanied by a narrative summary of the material features of each 
non-security holder-approved plan. Also, as amended Item 601(b)(10) of 
Regulation S-K and Regulation S-B requires registrants to file a copy 
of any non-security holder-approved equity compensation plan with us 
unless the plan is immaterial in amount or significance.
    Presently, it is difficult for investors to ascertain whether a 
registrant has adopted a non-security holder approved stock option 
plan.\128\ If a plan is broad-based, restricts or prohibits the 
participation of officers and directors and does not permit the grant 
of tax-qualified stock options, for instance, it is unlikely to require 
security holder approval. Frequently, investors must examine the 
required public filings of a registrant made over several years in 
order to identify the registrant's stock option plans and determine if 
they have been approved by security holders. Even when a non-security 
holder-approved plan is identified, information about the plan may be 
limited since it may not be subject to our disclosure rules and may not 
be filed with us. The amendments will enable investors to ascertain if 
a registrant has adopted a non-security holder approved plan and 
highlight a

[[Page 242]]

description of the plan's material features.
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    \128\ Available information on non-security holder-approved 
stock option plans is sparse. See William M. Mercer, Inc. Equity 
Compensation Survey (2001) (48% of survey respondents (83 
participants) maintained non-security holder-approved stock option 
plan for employees below management level; such plans (60%) most 
prevalent in large companies (more than 5,000 employees); iQuantic, 
Inc., Trends in Equity Compensation 1996-2000 (2000) (27.3% of 
survey respondents in 1999 (161 participants) maintained non-
security holder-approved stock option plans, compared to 3.2% before 
1996).
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2. Tabular Disclosure
    New Item 201(d)(1) of Regulation S-K and Regulation S-B requires 
registrants to disclose, for their entire equity compensation program 
as in effect as of the end of the last completed fiscal year, the 
number of securities underlying, and the weighted-average exercise 
price of, outstanding options, warrants and rights and the number of 
securities remaining available for future issuance. This disclosure is 
to be made separately for plans approved by security holders and plans 
that have not been approved by security holders.
    The required disclosure will assist investors in assessing the 
potential dilution from a registrant's equity compensation program in 
two ways. First, the required disclosure of the number of securities to 
be issued upon the exercise, and weighted-average exercise price, of 
all outstanding options, warrants and rights will enable investors to 
view this information in two categories: plans approved by security 
holders and plans not approved by security holders. While numerical and 
weighted-average exercise price information is presently available in 
the footnotes to a registrant's audited financial statements, this 
disclosure does not separately identify the potential dilutive effect 
of any non-security-holder approved stock option plans.
    Second, disclosure of the number of securities available for future 
issuance under a registrant's equity compensation plans will enable 
investors to better calculate the ``overhang \129\ resulting from the 
registrant's entire equity compensation program. Under existing 
disclosure requirements, it is not always possible to make this 
calculation.\130\ This information may be useful to investors where the 
cost of a registrant's equity compensation plan exceeds its incentive 
effects. The new disclosure also will enhance the ability of investors 
and others, such as proxy review firms, to monitor the impact of a 
board of directors' actions concerning equity compensation matters. 
Access to this information will make it easier for investors to 
determine both the portion of the current value of a business that will 
be transferred to option holders upon exercise and the potential 
allocation of future cash flow rights.\131\
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    \129\ This measure may be formulated in different ways. For 
purposes of this discussion, ``overhang'' means the sum of the 
number of securities underlying outstanding options, warrants and 
rights plus the number of securities remaining available for future 
issuance under the registrant's existing equity compensation plans, 
and is often expressed as a percentage of the total number of 
outstanding securities.
    \130\ It may be difficult for investors to calculate the 
``overhang'' of a registrant's equity compensation program because 
the number of securities available for future issuance under the 
registrant's plans may not be disclosed or apparent. Currently, a 
registrant submitting an equity compensation plan for security 
holder action need not provide any specific disclosure about its 
other equity compensation plans. Moreover, in its annual study on 
stock plan dilution, the Investor Responsibility Research Center 
found that approximately 22% of the companies surveyed did not 
disclose the number of shares available for future issuance under 
their employee stock plans. See the IRRC Dilution Study.
    \131\ While the full dilutive impact of these authorized but 
unissued securities cannot be assessed until derivative instruments 
have been granted and the prices for which the underlying securities 
may be issued can be compared to existing market values, this 
information, combined with knowledge of the minimum exercise price 
at which these instruments may be granted, may provide useful 
insight into the potential future economic consequences of the 
program.
---------------------------------------------------------------------------

    While the economic impact of outstanding options, warrants and 
rights is incorporated into the presentation of diluted earnings-per-
share under SFAS 128, this calculation differs from the new disclosure 
in several ways. First, it does not isolate ``compensatory'' 
instruments. Typically, the diluted earnings-per-share figure combines 
the dilutive effect of compensatory options, warrants and rights with 
that of other outstanding convertible securities. Second, SFAS 128 
employs the so-called ``treasury stock method'' to compute diluted 
earnings-per-share. Among other things, this methodology excludes 
``out-of-the-money'' options and warrants from the computation and 
requires certain assumptions about the timing of option exercises and 
the use of the assumed proceeds of exercise to arrive at the total 
number of potentially dilutive securities. Finally, while weighted-
average exercise price information is available for various option 
groupings under SFAS 123, it does not differentiate between equity 
compensation plans that have been approved by security holders and 
plans that have not been approved by security holders.

D. Costs

    The amendments will increase the cost of preparing annual reports 
on Form 10-K and 10-KSB and proxy and information statements. 
Registrants must compile the required information, place it in the 
appropriate category and prepare the required table. In addition, 
registrants with non-security holder-approved stock option plans must 
prepare a narrative summary of the material features of each plan and 
file a copy of any material plan with us. Registrants also will incur 
an increase in printing and distribution costs as a result of the 
amendments.
    While several respondents indicated that the cost estimates in the 
Proposing Release were too low,\132\ only one provided an alternative 
cost estimate. This respondent stated that compliance could result in 
additional costs approximating $300,000 in years when disclosure was 
required in its proxy statement.\133\ The respondent's estimate is no 
longer relevant because of the substantial revisions that we have made 
to the proposals, as discussed in Subsection B above.
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    \132\ See, for example, the AA Letter, the AICPA Letter, the 
Letter dated May 22, 2001 from the New York State Bar Association 
and the PWC Letter.
    \133\ See the Letter dated April 9, 2001 from Lucent 
Technologies Inc.
---------------------------------------------------------------------------

    The required disclosure will provide investors both with new 
information and with an alternative means for analyzing currently 
available information. With respect to the dilution disclosure, we 
believe that the compliance costs are warranted because this 
information is not otherwise available to investors. Moreover, these 
costs should be minimal because this information can be derived from 
information that is readily available to registrants through the 
routine administration of their equity compensation programs.
    With respect to the information concerning non-security holder-
approved stock option plans, much of the required tabular disclosure, 
such as the number of outstanding options, warrants and rights and the 
related weighted-average exercise price data, is already maintained for 
purposes of satisfying financial reporting requirements. The amendments 
merely require registrants to disclose this information on the basis of 
whether or not the related plan has been approved by security holders. 
In addition, many registrants summarize the material features of their 
equity compensation plans to satisfy their SFAS 123 disclosure 
obligations. Indeed, one respondent indicated that the amendments would 
result in only minimal additional costs to registrants because, in 
their experience, most registrants already maintain the required 
information in order to comply with SRO rules and for effective plan 
administration.\134\
---------------------------------------------------------------------------

    \134\ See the ABA Letter.
---------------------------------------------------------------------------

    Although the amendments will increase the length of registrants' 
annual reports on Form 10-K and 10-KSB, as well as their proxy and 
information statements, generally this should not have a major impact 
on a registrant's

[[Page 243]]

printing and distribution costs. We have revised the proposals to 
reduce and standardize the size of the required tabular disclosure. 
These revisions should ensure that registrants do not incur significant 
additional printing and postage charges to prepare and distribute their 
proxy or information statements to security holders. While in most 
instances, the required disclosure should not exceed one-third of a 
page, where a registrant has one or more non-security holder-approved 
stock option plans, the disclosure may be longer. These registrants may 
incur additional expense to print and distribute their proxy or 
information statement materials. While we do not expect these costs to 
be significant, we have estimated these amounts to be approximately 
$750 per registrant.\135\
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    \135\ This estimate is based on the Letter dated April 9, 2001 
from Lucent Technologies, Inc., in which the commenter estimated 
that providing four additional pages of disclosure to its over five 
million security holders would result in additional printing costs 
of $100,000 and additional mailing costs of $200,000. Assuming that 
the required disclosure consists of one additional page and that a 
registrant has 50,000 security holders, the registrant may incur 
additional costs of $750 to prepare and distribute the additional 
disclosure.
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    For the reasons discussed above, we do not believe that the 
amendments will lead to significant compliance costs for 
registrants.\136\ Notwithstanding the foregoing, we have adjusted our 
initial cost estimates to reflect the revisions made to the proposals. 
Because the size and scope of equity compensation programs vary among 
registrants, it is difficult to provide an accurate cost estimate with 
which all parties will agree; however, we estimate that each of the 
approximately 8,400 registrants \137\ subject to the amendments will 
spend an average of approximately one to two hours each year and incur 
an average annual cost of approximately $393 \138\ to prepare the 
disclosure. Thus, the aggregate cost of the amendments is estimated to 
be approximately $3,300,000.
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    \136\ Since all registrants are required to make the same 
disclosure, the amendments will impose the same dollar costs on each 
registrant. Accordingly, for small entities the relative burden of 
compliance will be higher than for large entities.
    \137\ This figure is based on our estimate that 60% of the 
actual number of registrants filing annual reports on Form 10-K or 
10-KSB (14,022 registrants) maintain equity compensation plans. This 
estimate is made after a review of available survey data, which 
varies widely. For example, in its most recent study of the ``S&P 
Super 1,500'' (the combination of the S&P 500, the S&P MidCap 400 
and the S&P SmallCap 600), the Investor Responsibility Research 
Center determined that, of the 1,157 companies examined, 1,142 
(98.7%) awarded equity to some portion of their employees. See 
Investor Responsibility Research Center, Potential Dilution--2000, 
The Potential Dilution from Stock Plans at the S&P Super 1,500 
Companies (2000). In contrast, a Pilot Survey conducted by the 
Bureau of Labor Statistics in 1999 determined that 22% of publicly-
held companies offered stock options to their employees. This survey 
sampled 2,100 ``establishments,'' of which approximately 1 in 10 
were publicly-held companies. See Bureau of Labor Statistics, Pilot 
Survey on the Incidence of Stock Options in Private Industry in 
1999, (Oct. 11, 2000), available at http://www.bls.gov/ncs/ocs/sp/ncnr0001.txt.
    \138\ We arrived at this estimate by assuming that approximately 
80% of these registrants will be required to provide the tabular 
disclosure only and 20% of these registrants will be required to 
describe the material features of their non-security holder-approved 
plans as well. See n. 90 above and the accompanying text. Thus, 80% 
of the registrants will incur an average annual outside counsel cost 
of $300 (80% of 8,400 x $300 = $2,016,000) while 20% will incur an 
average annual outside cost of $600 (20% of 8,400 x $600 = 
$1,008,000). In addition, we estimate that approximately 365 
registrants with non-security holder-approved plans will incur 
additional printing and distribution costs of $750 each, or 
$273,750. See n. 135 above. The sum of these amounts averaged over 
8,400 registrants equals $393.
---------------------------------------------------------------------------

E. Conclusion

    Based on the information provided in the comment letters and our 
own analysis, we believe that the amendments will enhance the quality 
of disclosure available to investors about registrants' equity 
compensation plans, thereby leading to better-informed investment and 
voting decisions. These benefits are difficult to quantify. We also 
believe that these benefits will justify the minimal costs of 
compliance.

V. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis, or FRFA, has been 
prepared in accordance with the Regulatory Flexibility Act.\139\ This 
FRFA relates to rule amendments adopted under the Exchange Act that 
revise the disclosure requirements with respect to registrants' equity 
compensation plans. Specifically, the amendments revise Item 201 of 
Regulation S-B, Item 201 of Regulation S-K and Form 10-K, Form 10-KSB, 
Exchange Act Rule 14a-3 and Schedule 14A under the Exchange Act to 
require tabular disclosure of the number and weighted-average exercise 
price of all outstanding options, warrants and rights under a 
registrant's equity compensation plans, as well as the number of 
securities remaining available for future issuance under these plans 
and certain related information. Disclosure is to be made in two 
categories: plans that have been approved by security holders and plans 
that have not been approved by security holders. Registrants must 
include the table in their annual reports on Form 10-K or 10-KSB, as 
well as in their proxy or information statements in years when they are 
submitting a compensation plan for security holder action. Copies of 
most equity compensation plans will be required to be filed with us for 
public inspection.
---------------------------------------------------------------------------

    \139\ 5 U.S.C. Sec. 603.
---------------------------------------------------------------------------

A. Need for the Amendments

    The increased use of equity compensation has raised investor 
concerns about the potential dilutive effect of a registrant's equity 
compensation plans, the absence of full disclosure to security holders 
about these plans and the adoption of many plans without the approval 
of security holders. These concerns may be especially acute for 
investors in small entities, which use equity compensation in order to 
attract and retain key employees and to preserve scarce cash 
resources.\140\ The amendments enhance the quality of information 
available to investors about a registrant's equity compensation plans.
---------------------------------------------------------------------------

    \140\ A recent study of approximately 250 companies conducted by 
the National Center for Employee Ownership found that 55% of the 
respondents had less than 200 employees (with 17% having less than 
31 employees) and that 55% of the respondents had less than $40 
million in annual revenue (with 14% having annual revenues of $1.1 
million or less). See National Center for Employee Ownership, An 
Overview of How Companies are Granting Stock Options (2001).
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comment

    A summary of the Initial Regulatory Flexibility Analysis, or IRFA, 
appeared in the Proposing Release.\141\ We requested comment on any 
aspect of the IRFA, including the number of small businesses that would 
be affected by the proposals, the nature of the impact, how to quantify 
the number of small entities that would be affected and how to quantify 
the impact of the proposals. We received no comment letters responding 
to that request.
---------------------------------------------------------------------------

    \141\ See the Proposing Release at Section V.
---------------------------------------------------------------------------

C. Small Entities Subject to the Amendments

    Exchange Act Rule 0-10 \142\ defines the term ``small business'' to 
be an issuer that, on the last day of its most recent fiscal year, has 
total assets of $5 million or less.\143\ There are approximately 770 
issuers that are subject to the reporting requirements of Section 13 of 
the Exchange Act that have assets of $5 million or less.\144\ Only 
small businesses that have a reporting obligation under the Exchange 
Act and adopt or maintain an equity compensation plan will be subject 
to the amendments. We estimate that there are approximately 460 
entities that have

[[Page 244]]

total assets of $5 million or less that meet this criteria.\145\
---------------------------------------------------------------------------

    \142\ 17 CFR 240.0-10(c).
    \143\ A similar definition is provided under Securities Act Rule 
157 [17 CFR 230.157].
    \144\ This estimate is based on filings with the Commission.
    \145\ This figure is based on our estimate that 60% of the 
registrants that file an annual report on either Form 10-K or 10-KSB 
maintain equity compensation plans and will be required to provide 
the new tabular disclosure. See n. 87 above.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The amendments impose new reporting requirements by requiring 
specific annual disclosure by all registrants, including ``small 
businesses,'' concerning their equity compensation plans in effect as 
of the end of the most recently completed fiscal year. Consequently, 
the amendments will increase the costs associated with the preparation 
of the disclosure included in annual reports on Form 10-K or 10-KSB and 
furnished to security holders in proxy and information statements. 
Specifically, the amendments require registrants to disclose the number 
and weighted-average exercise price of all outstanding options, 
warrants and rights under a registrant's equity compensation plans, as 
well as the number of securities remaining available for future 
issuance under these plans and certain related information. Disclosure 
is to be made in two categories: plans that have been approved by 
security holders and plans that have not been approved by security 
holders. Since this information can be derived from information that is 
readily available to registrants through the routine administration of 
their equity compensation programs, we do not expect these additional 
costs to be significant.
    We do not anticipate that the amendments will impose any 
significant recordkeeping requirements in addition to those already 
required under the Exchange Act. The information to be disclosed can be 
derived from information that is readily available to registrants 
through the routine administration of their equity compensation 
programs. All registrants with equity compensation plans have various 
legal, financial reporting and other disclosure obligations that 
require maintenance of information regarding these plans similar to 
that covered by the amendments.

E. Agency Action To Minimize Effect on Small Entities

    As required by Sections 603 and 604 of the Regulatory Flexibility 
Act, we have considered alternatives that would accomplish the stated 
objectives, while minimizing any significant adverse impact on small 
entities. In connection with the amendments, we considered several 
alternatives, including the following:
     Establishing different compliance and reporting 
requirements that take into account the resources of small entities;
     Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    Overall, the amendments are intended to assist investors in 
understanding a registrant's equity compensation policies and 
practices. The quality of information available about the potential 
dilutive effect of a registrant's equity compensation plans is relevant 
to investors in both small and large entities. Different compliance or 
reporting requirements for small entities are not appropriate because 
small entities may use equity compensation plans to a greater extent 
than large entities to preserve scarce cash resources.\146\ In 
addition, it is not feasible to further clarify, consolidate or 
simplify the amendments for small entities because the amendments 
require only minimal information about a registrant's equity 
compensation plans. Because uniformity and comparability are important, 
especially where small entities have equity compensation plans, we do 
not propose to use performance standards to specify different 
requirements for small entities. Finally, we believe that the 
amendments should apply equally to all entities required to disclose 
information, in order to safeguard protection of all investors.
---------------------------------------------------------------------------

    \146\ See n. 140 above.
---------------------------------------------------------------------------

VI. Analysis of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \147\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule will have on competition. In addition, Section 23(a)(2) 
prohibits us from adopting any rule that will impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. We have considered the amendments in light of the 
standards in Section 23(a)(2). We requested comment on any anti-
competitive effects of the proposals. We received no comment letters 
responding to that request.
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

    The amendments may have a disparate impact on registrants that use 
equity compensation extensively, such as smaller firms or registrants 
in certain industry sectors (such as high-technology companies), as 
compared to registrants with limited or no equity compensation 
programs.\148\ Thus, we are sensitive to the concern that registrants 
with a greater compliance obligation will be placed at a competitive 
disadvantage. In addition, several commenters, while not specifically 
addressing this issue, did argue that the new disclosure would be 
duplicative of information currently required to be included in 
registrants' audited financial statements. In response to these 
concerns, we have revised the proposals to eliminate redundant 
requirements and to streamline the compliance process. Because these 
changes should enable registrants to keep compliance costs low, we do 
not believe that the amendments will impose a significantly 
disproportionate cost on smaller firms or high-technology companies.
---------------------------------------------------------------------------

    \148\ See n. 140 above.
---------------------------------------------------------------------------

    Section 2(b) of the Securities Act and Section 3(f) of the Exchange 
Act \149\ require us, when engaging in rulemaking requiring us to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition and 
capital formation. We have considered the amendments in light of the 
standards in these provisions. We requested comment on how the 
proposals would affect efficiency, competition and capital formation. 
We received no comment letters responding to that request.
---------------------------------------------------------------------------

    \149\ 15 U.S.C. Sec. 77b(b) and 78c(f).
---------------------------------------------------------------------------

    It is widely believed that equity compensation, particularly 
instruments such as stock options, can be used to align the interests 
of employees and security holders, thereby promoting effective 
corporate governance.\150\ Because an equity compensation plan may 
necessarily have an unintended dilutive effect on the existing 
ownership interests, however, it is important that the plan be closely 
monitored to ensure that its cost is commensurate with its benefit to 
investors. The amendments are intended to enhance the quality of 
disclosure about registrants' equity compensation programs that is 
available

[[Page 245]]

to investors. Increasing the transparency of these programs should 
result in better monitoring by investors. This should result in better 
corporate governance, thereby increasing the efficiency of the 
organization. This should promote capital formation.
---------------------------------------------------------------------------

    \150\ See, for example, the American Benefits Council, Taking 
Stock in Employee Benefits: The Democratization of Broad-Based Stock 
Plans (Feb. 2001), at 2-3.
---------------------------------------------------------------------------

VII. Statutory Authority

    The amendments contained in this release are being adopted under 
the authority set forth in Sections 3(b) and 19(a) of the Securities 
Act and Sections 12, 13, 14(a), 15(d) and 23(a) of the Exchange Act.

List of Subjects in 17 CFR Parts 228, 229, 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Rule Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The general authority citation for Part 228 continues to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 
78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37 
and 80b-11, unless otherwise noted.

    2. Section 228.201 is amended by adding paragraph (d) before the 
Instruction to read as follows:


Sec. 228.201  (Item 201) Market for Common Equity and Related 
Stockholder Matters.

* * * * *
    (d) Securities authorized for issuance under equity compensation 
plans. (1) In the following tabular format, 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 
(including individual compensation arrangements) under which equity 
securities of the small business issuer are authorized for issuance, 
aggregated as follows:
    (i) All compensation plans previously approved by security holders; 
and
    (ii) All compensation plans not previously approved by security 
holders.

                                      Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------------
                                                                                           Number of securities
                                                                                         remaining available for
                                       Number of securities to      Weighted-average      future issuance under
            Plan category              be issued upon exercise     exercise price of       equity compensation
                                       of outstanding options,    outstanding options,       plans (excluding
                                         warrants and rights      warrants and rights    securities reflected in
                                                                                               column (a))
----------------------------------------------------------------------------------------------------------------
                                       (a)....................  (b)....................  (c)
----------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
 security holders
Equity compensation plans not
 approved by security holders
    Total
----------------------------------------------------------------------------------------------------------------

    (2) The table shall include the following information as of the end 
of the most recently completed fiscal year for each category of equity 
compensation plan described in paragraph (d)(1) of this Item:
    (i) The number of securities to be issued upon the exercise of 
outstanding options, warrants and rights (column (a));
    (ii) The weighted-average exercise price of the outstanding 
options, warrants and rights disclosed pursuant to paragraph (d)(2)(i) 
of this Item (column (b)); and
    (iii) Other than securities to be issued upon the exercise of the 
outstanding options, warrants and rights disclosed in paragraph 
(d)(2)(i) of this Item, the number of securities remaining available 
for future issuance under the plan (column (c)).
    (3) For each compensation plan under which equity securities of the 
small business issuer are authorized for issuance that was adopted 
without the approval of security holders, describe briefly, in 
narrative form, the material features of the plan.

    Instructions to Paragraph (d). 
    1. Disclosure shall be provided with respect to any compensation 
plan and individual compensation arrangement of the small business 
issuer (or parent, subsidiary or affiliate of the small business 
issuer) under which equity securities of the small business issuer 
are authorized for issuance to employees or non-employees (such as 
directors, consultants, advisors, vendors, customers, suppliers or 
lenders) in exchange for consideration in the form of goods or 
services as described in Statement of Financial Accounting Standards 
No. 123, Accounting for Stock-Based Compensation, or any successor 
standard. No disclosure is required with respect to:
    a. Any plan, contract or arrangement for the issuance of 
warrants or rights to all security holders of the small business 
issuer as such on a pro rata basis (such as a stock rights offering) 
or
    b. Any employee benefit plan that is intended to meet the 
qualification requirements of Section 401(a) of the Internal Revenue 
Code (26 U.S.C. 401(a)).
    2. For purposes of this paragraph, an ``individual compensation 
arrangement'' includes, but is not limited to, the following: a 
written compensation contract within the meaning of ``employee 
benefit plan'' under Sec. 230.405 of this chapter and a plan 
(whether or not set forth in any formal document) applicable to one 
person as provided under Item 402(a)(7)(ii) of Regulation S-B 
(Sec. 228.402(a)(7)(ii)).
    3. If more than one class of equity security is issued under its 
equity compensation plans, a small business issuer should aggregate 
plan information for each class of security.
    4. A small business issuer may aggregate information regarding 
individual compensation arrangements with the plan information 
required under paragraph (d)(1)(i) and (ii) of this item, as 
applicable.
    5. A small business issuer may aggregate information regarding a 
compensation plan assumed in connection with a merger, consolidation 
or other acquisition transaction pursuant to which the small 
business issuer may make subsequent grants or awards of its equity 
securities with the plan information required under paragraph 
(d)(1)(i) and (ii) of this Item, as applicable. A small business 
issuer shall disclose on an aggregated basis in a footnote to the 
table the information required under paragraph (d)(2)(i) and (ii) of 
this Item with respect to any individual options, warrants or rights 
assumed in connection with a merger, consolidation or other 
acquisition transaction.
    6. To the extent that the number of securities remaining 
available for future issuance disclosed in column (c) includes 
securities available for future issuance under any compensation plan 
or individual compensation arrangement other than upon the exercise 
of an option, warrant or right, disclose the number of securities 
and type of

[[Page 246]]

plan separately for each such plan in a footnote to the table.
    7. If the description of an equity compensation plan set forth 
in a small business issuer's financial statements contains the 
disclosure required by paragraph (d)(3) of this Item, a cross-
reference to such description will satisfy the requirements of 
paragraph (d)(3) of this Item.
    8. If an equity compensation plan contains a formula for 
calculating the number of securities available for issuance under 
the plan, including, without limitation, a formula that 
automatically increases the number of securities available for 
issuance by a percentage of the number of outstanding securities of 
the small business issuer, a description of this formula shall be 
disclosed in a footnote to the table.
    9. Except where it is part of a document that is incorporated by 
reference into a prospectus, the information required by this 
paragraph need not be provided in any registration statement filed 
under the Securities Act.

* * * * *

    3. Section 228.601 is amended by redesignating paragraph 
(b)(10)(ii)(B) as paragraph (b)(10)(ii)(C) and by adding new paragraph 
(b)(10)(ii)(B) to read as follows:


Sec. 228.601  (Item 601) Exhibits.

* * * * *
    (b) Description of Exhibits * * *
    (10) Material Contracts * * *
    (ii) * * *
    (B) Any compensatory plan, contract or arrangement adopted without 
the approval of security holders pursuant to which equity may be 
awarded, including, but not limited to, options, warrants or rights (or 
if not set forth in any formal document, a written description 
thereof), in which any employee (whether or not an executive officer of 
the small business issuer) participates shall be filed unless 
immaterial in amount or significance. A compensation plan assumed by a 
small business issuer in connection with a merger, consolidation or 
other acquisition transaction pursuant to which the small business 
issuer may make further grants or awards of its equity securities shall 
be considered a compensation plan of the small business issuer for 
purposes of the preceding sentence.
* * * * *

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    4. The general authority citation for Part 229 is revised to read 
as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll(d), 79e, 
79n, 79t, 80a-8, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a), and 
80b-11, unless otherwise noted.
* * * * *

    5. The authority citation following Sec. 229.201 is removed.

    6. Section 229.201 is amended by adding paragraph (d) before the 
Instructions to Item 201 to read as follows:


Sec. 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 following tabular format, 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 
(including individual compensation arrangements) under which equity 
securities of the registrant are authorized for issuance, aggregated as 
follows:
    (i) All compensation plans previously approved by security holders; 
and
    (ii) All compensation plans not previously approved by security 
holders.

                                      Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------------
                                                                                           Number of securities
                                                                                         remaining available for
                                       Number of securities to      Weighted-average      future issuance under
            Plan category              be issued upon exercise     exercise price of       equity compensation
                                       of outstanding options,    outstanding options,       plans (excluding
                                         warrants and rights      warrants and rights    securities reflected in
                                                                                               column (a))
----------------------------------------------------------------------------------------------------------------
                                       (a)....................  (b)....................  (c)
----------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
 security holders
Equity compensation plans not
 approved by security holders
    Total............................
----------------------------------------------------------------------------------------------------------------

    (2) The table shall include the following information as of the end 
of the most recently completed fiscal year for each category of equity 
compensation plan described in paragraph (d)(1) of this Item:
    (i) The number of securities to be issued upon the exercise of 
outstanding options, warrants and rights (column (a));
    (ii) The weighted-average exercise price of the outstanding 
options, warrants and rights disclosed pursuant to paragraph (d)(2)(i) 
of this Item (column (b)); and
    (iii) Other than securities to be issued upon the exercise of the 
outstanding options, warrants and rights disclosed in paragraph 
(d)(2)(i) of this Item, the number of securities remaining available 
for future issuance under the plan (column (c)).
    (3) For each compensation plan under which equity securities of the 
registrant are authorized for issuance that was adopted without the 
approval of security holders, describe briefly, in narrative form, the 
material features of the plan.

    Instructions to Paragraph (d). 
    1. Disclosure shall be provided with respect to any compensation 
plan and individual compensation arrangement of the registrant (or 
parent, subsidiary or affiliate of the registrant) under which 
equity securities of the registrant are authorized for issuance to 
employees or non-employees (such as directors, consultants, 
advisors, vendors, customers, suppliers or lenders) in exchange for 
consideration in the form of goods or services as described in 
Statement of Financial Accounting Standards No. 123, Accounting for 
Stock-Based Compensation, or any successor standard. No disclosure 
is required with respect to:
    a. Any plan, contract or arrangement for the issuance of 
warrants or rights to all security holders of the registrant as such 
on

[[Page 247]]

a pro rata basis (such as a stock rights offering) or
    b. Any employee benefit plan that is intended to meet the 
qualification requirements of Section 401(a) of the Internal Revenue 
Code (26 U.S.C. 401(a)).
    2. For purposes of this paragraph, an ``individual compensation 
arrangement'' includes, but is not limited to, the following: a 
written compensation contract within the meaning of ``employee 
benefit plan'' under Sec. 230.405 of this chapter and a plan 
(whether or not set forth in any formal document) applicable to one 
person as provided under Item 402(a)(7)(ii) of Regulation S-K 
(Sec. 229.402(a)(7)(ii)).
    3. If more than one class of equity security is issued under its 
equity compensation plans, a registrant should aggregate plan 
information for each class of security.
    4. A registrant may aggregate information regarding individual 
compensation arrangements with the plan information required under 
paragraph (d)(1)(i) and (ii) of this Item, as applicable.
    5. A registrant may aggregate information regarding a 
compensation plan assumed in connection with a merger, consolidation 
or other acquisition transaction pursuant to which the registrant 
may make subsequent grants or awards of its equity securities with 
the plan information required under paragraph (d)(1)(i) and (ii) of 
this Item, as applicable. A registrant shall disclose on an 
aggregated basis in a footnote to the table the information required 
under paragraph (d)(2)(i) and (ii) of this Item with respect to any 
individual options, warrants or rights assumed in connection with a 
merger, consolidation or other acquisition transaction.
    6. To the extent that the number of securities remaining 
available for future issuance disclosed in column (c) includes 
securities available for future issuance under any compensation plan 
or individual compensation arrangement other than upon the exercise 
of an option, warrant or right, disclose the number of securities 
and type of plan separately for each such plan in a footnote to the 
table.
    7. If the description of an equity compensation plan set forth 
in a registrant's financial statements contains the disclosure 
required by paragraph (d)(3) of this Item, a cross-reference to such 
description will satisfy the requirements of paragraph (d)(3) of 
this Item.
    8. If an equity compensation plan contains a formula for 
calculating the number of securities available for issuance under 
the plan, including, without limitation, a formula that 
automatically increases the number of securities available for 
issuance by a percentage of the number of outstanding securities of 
the registrant, a description of this formula shall be disclosed in 
a footnote to the table.
    9. Except where it is part of a document that is incorporated by 
reference into a prospectus, the information required by this 
paragraph need not be provided in any registration statement filed 
under the Securities Act.
* * * * *

    7. Section 229.601 is amended by redesignating paragraph 
(b)(10)(iii)(B) as paragraph (b)(10)(iii)(C) and by adding new 
paragraph (b)(10)(iii)(B) to read as follows:


Sec. 229. 601 (Item 601)  Exhibits.

* * * * *
    (b) Description of Exhibits * * *
    (10) Material Contracts * * *
    (iii) * * *
    (B) Any compensatory plan, contract or arrangement adopted without 
the approval of security holders pursuant to which equity may be 
awarded, including, but not limited to, options, warrants or rights (or 
if not set forth in any formal document, a written description 
thereof), in which any employee (whether or not an executive officer of 
the registrant) participates shall be filed unless immaterial in amount 
or significance. A compensation plan assumed by a registrant in 
connection with a merger, consolidation or other acquisition 
transaction pursuant to which the registrant may make further grants or 
awards of its equity securities shall be considered a compensation plan 
of the registrant for purposes of the preceding sentence.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    8. The general authority citation for Part 240 is revised to read, 
in part, as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *

    9. The authority citation following Sec. 240.14a-3 is removed.

    10. Section 240.14a-3 is amended by revising paragraph (b)(9) to 
read as follows:


Sec. 240.14a-3  Information to be furnished to security holders.

* * * * *
    (b) * * *
    (9) The report shall contain the market price of and dividends on 
the registrant's common equity and related security holder matters 
required by Item 201(a), (b) and (c) of Regulation S-K 
(Sec. 229.201(a), (b) and (c) of this chapter).
* * * * *

    11. In Sec. 240.14a-101, amend Item 10 of Schedule 14A by adding 
paragraph (c) before the undesignated heading Instructions and revise 
Item 14(d)(4) of Schedule 14A to read as follows:


Sec. 240.14a-101  Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 10. Compensation Plans. * * *
* * * * *
    (c) Information regarding plans and other arrangements not 
subject to security holder action. Furnish the information required 
by Item 201(d) of Regulation S-K (Sec. 229.201(d) of this chapter).
    Instructions to paragraph (c).
    1. If action is to be taken as described in paragraph (a) of 
this Item with respect to the approval of a new compensation plan 
under which equity securities of the registrant are authorized for 
issuance, information about the plan shall be disclosed as required 
under paragraphs (a) and (b) of this Item and shall not be included 
in the disclosure required by Item 201(d) of Regulation S-K 
(Sec. 229.201(d) of this chapter). If action is to be taken as 
described in paragraph (a) of this Item with respect to the 
amendment or modification of an existing plan under which equity 
securities of the registrant are authorized for issuance, the 
registrant shall include information about securities previously 
authorized for issuance under the plan (including any outstanding 
options, warrants and rights previously granted pursuant to the plan 
and any securities remaining available for future issuance under the 
plan) in the disclosure required by Item 201(d) of Regulation S-K 
(Sec. 229.201(d) of this chapter). Any additional securities that 
are the subject of the amendments or modification of the existing 
plan shall be disclosed as required under paragraphs (a) and (b) of 
this Item and shall not be included in the Item 201(d) disclosure.
* * * * *
    Item 14. Mergers, consolidations, acquisitions and similar 
matters. * * *
* * * * *
    (d) Information about parties to the transaction: registered 
investment companies and business development companies. * * *
* * * * *
    (4) Information required by Item 201(a), (b) and (c) of 
Regulation S-K (Sec. 229.201(a), (b) and (c) of this chapter), 
market price of and dividends on the registrant's common equity and 
related stockholder matters;
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    12. The authority citation for Part 249 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
* * * * *

    13. By amending Form 10-K (referenced in Sec. 249.310) by revising 
Item 12 of Part III to read as follows:

    Note:  The text of Form 10-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.


[[Page 248]]


Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934
* * * * *
Part III
* * * * *
    Item 12. Security Ownership of Certain Beneficial Owners and 
Management and Related Stockholder Matters.
    Furnish the information required by Item 201(d) of Regulation S-K 
(Sec. 229.201(d) of this chapter) and by Item 403 of Regulation S-K 
(Sec. 229.403 of this chapter).
* * * * *

    12. By amending Form 10-KSB (referenced in Sec. 249.310b) by 
revising Item 11 of Part III to read as follows:

    Note:  The text of Form 10-KSB does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-KSB
* * * * *
Part III
* * * * *
    Item 11. Security Ownership of Certain Beneficial Owners and 
Management and Related Stockholder Matters.
    Furnish the information required by Item 201(d) of Regulation S-B 
and by Item 403 of Regulation S-B.
* * * * *

    By the Commission.

    Dated: December 21, 2001.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-32078 Filed 12-31-01; 8:45 am]
BILLING CODE 8010-01-P`