• Bulletin 02-03, SEC to Require Increased Disclosure of Options and Other Equity Compensation
  • April 30, 2003
  • Law Firm: Pillsbury Winthrop LLP - Office
  • In response to ongoing investor concerns, the Securities and Exchange Commission (SEC) voted unanimously last month to expand the required disclosure of employee stock option plans and other equity compensation arrangements. SEC Release Nos. 33-8048, 34-45189 (Dec. 21, 2001). Under the new rules, domestic registrants must provide detailed information about their equity compensation plans in new tables in their annual reports on Forms 10-K and 10-KSB. This information must also be included in a registrant's proxy or information statement in years in which the registrant is submitting an equity compensation plan for shareholder approval.

    Domestic 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. The new rules also apply to proxy and information statements for meetings of, or action by, security holders occurring on or after June 15, 2002.

    New Rules To Require Tabular Disclosure Detailing Equity Compensation Plans

    The increased use in recent years of equity compensation such as employee stock option plans has raised investor concerns about certain plans being adopted, notwithstanding their dilutive effect on existing security holders' interests, in the absence of disclosure to or approval by the security holders. The new SEC rules seek to address these issues by requiring a registrant to disclose, in tabular form:

    • the number of securities to be issued upon the exercise of all outstanding options, warrants and rights under the registrant's equity compensation plans;

    • the weighted-average exercise price of these options, warrants and rights;

    • the number of securities remaining available for future issuance under these plans; and

    • other related information.

    A registrant must provide the disclosure tables with respect to any equity compensation plan in effect as of the end of its last completed fiscal year that provides for the award of its securities or the grant of options, warrants or rights to purchase its securities to employees or non-employees, including directors, consultants, vendors or suppliers. The disclosure is to be provided irrespective of whether the securities to be issued under the equity compensation plan are authorized but unissued securities or are reacquired securities.

    The new rules will give investors, in one location, useful information not always readily available in a registrant's financial statements. This information includes an indication of whether an equity compensation plan has been approved by security holders, the total number of securities available for future issuance under a registrant's equity compensation program and the number of options and other securities granted or awarded to non-employees for compensatory purposes.

    Plans Not Approved By Security Holders Distinguished

    The new rules permit registrants to aggregate disclosure in two general categories: plans that have been approved by security holders and plans that have not been approved by security holders. In permitting this bifurcation, the SEC was mindful of minimizing redundant disclosure with the current disclosure requirements in financial statements under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Oct. 1995) (SFAS 123).

    For each plan not approved by security holders, the new rules require a registrant to disclose the material features of the plan in effect as of the end of the last completed fiscal year, including the plan's dilutive effects. Registrants may satisfy this requirement by cross-referencing the portion of their SFAS 123 disclosures containing descriptions of plans not approved by security holders. In addition, registrants must file copies with the SEC of any plans not so approved, unless the plans are immaterial in amount or significance. Together, the required narrative disclosure and filing of plans not approved by security holders should provide investors with access to complete information about a registrant's principal equity compensation plans.

    Increased Disclosure Should Lead To Better-Informed Investors

    The growing use of equity compensation, particularly stock options, may expose shareholders to higher levels of dilution of their ownership interests, as some registrants issue more shares of their stock to employees. Since a distribution of equity may result in a significant reallocation of ownership between existing shareholders and management and employees, investors have a strong interest in understanding a company's total equity compensation program. The new rules -- which furnish investors with a more understandable and transparent presentation of a registrant's complete equity compensation program -- enhance the quality and accessibility of equity compensation disclosure, making it easier for investors to consider the effect of a registrant's equity compensation policies and practices and, consequently, to make better-informed investment and voting decisions.

    Although the new rules do not require 2001 calendar year-end registrants to comply with the new disclosure requirements in connection with the preparation of 2001 annual reports, those registrants may want to consider voluntarily complying with these new disclosure requirements as a shareholder relations matter.