atified, the Audit Committee will reconsider its selection. Representatives of Ernst & <strong>You</strong>ng LLP <strong>are</strong>expected <strong>to</strong> be present at the <strong>annual</strong> meeting, will be available <strong>to</strong> answer sh<strong>are</strong>holder questions andwill have the opportunity <strong>to</strong> make a statement if they desire <strong>to</strong> do so.The Board of Direc<strong>to</strong>rs recommends that you vote FOR ratification of the selection of Ernst &<strong>You</strong>ng LLP as the independent audi<strong>to</strong>r of <strong>Piper</strong> <strong>Jaffray</strong> Companies and <strong>our</strong> subsidiaries <strong>for</strong> the ye<strong>are</strong>nding December 31, <strong>2006</strong>. Proxies will be voted FOR ratification of this selection unless otherwisespecified.ITEM 4 — SHAREHOLDER PROPOSALMr. Gerald R. Armstrong, 820 Sixteenth Street, No. 705, Denver, Colorado 80202-3227,(303) 355-1199, the owner of 93 sh<strong>are</strong>s of <strong>Piper</strong> <strong>Jaffray</strong> Companies common s<strong>to</strong>ck, has advised <strong>us</strong>that he plans <strong>to</strong> introduce the following resolution:‘‘That the sh<strong>are</strong>holders of PIPER JAFFRAY COMPANIES request its Board of Direc<strong>to</strong>rs <strong>to</strong>take those steps necessary <strong>to</strong> eliminate the classification of terms <strong>for</strong> its Board of Direc<strong>to</strong>rs <strong>to</strong>require that all Direc<strong>to</strong>rs stand <strong>for</strong> election <strong>annual</strong>ly. The Board declassification shall becompleted in a manner that does not affect the unexpired terms of the previo<strong>us</strong>ly-electedDirec<strong>to</strong>rs.The reasons given by the sh<strong>are</strong>holder <strong>for</strong> such resolution follow verbatim:‘‘The proponent of this resolution submitted the same proposal a year ago only <strong>to</strong> have itdeleted by management through what it called an ‘error.’ This is highly unlikely as theproponent has a certified mail receipt showing its timely delivery.‘‘Since that time, the proponent has been treated with disrespect by members of management.‘‘The proponent believes that management and direc<strong>to</strong>rs should treat sh<strong>are</strong>holders with thegreatest respect as it is their capital which has created the corporation employing them.‘‘I believe the election of direc<strong>to</strong>rs is the strongest way that sh<strong>are</strong>holders influence thedirec<strong>to</strong>rs of any corporation. Currently, PIPER JAFFRAY’S board is divided in<strong>to</strong> three classeswith each class sering staggered three-year terms. Beca<strong>us</strong>e of this structure, sh<strong>are</strong>holders mayonly vote <strong>for</strong> one-third of the direc<strong>to</strong>rs each year. This is not in the best interests ofsh<strong>are</strong>holders beca<strong>us</strong>e it reduces accountability and is an unnecessary take-over defense.‘‘PLEASE NOTE: AN ABSENCE OF ACCOUNTABILITY WAS SHOWN IN LAST YEAR’SPROXY STATEMENT.‘‘Many corporations have adopted one-year terms <strong>for</strong> their direc<strong>to</strong>rs including Dow Jones,Sprint, West Coast Bancorp, Bris<strong>to</strong>l-Myers Squibb, Pfizer, and North Valley Bancorp.‘‘WEST COAST BANCORP stated in its 2003 proxy statement: ‘Annual election willfacilitate the election of direc<strong>to</strong>rs who will, in the view of a majority of sh<strong>are</strong>holders, managethe company in the best interests of the company and its sh<strong>are</strong>holders.’‘‘PFIZER, INC. stated in its 2003 proxy statement: ‘The prposed amendment will allowsh<strong>are</strong>holders <strong>to</strong> review and express their opinions on the per<strong>for</strong>mance of all Direc<strong>to</strong>rs eachyear.’‘‘WISCONSIN ENERGY CORPORATION and XCEL ENERGY INC. adopted one yearterms <strong>for</strong> their direc<strong>to</strong>rs in <strong>annual</strong> meetings held in 2004. The proxy statement of WisconsinEnergy noted, ‘A classified Board has the effect of making it more difficult.... <strong>for</strong> s<strong>to</strong>ckholders<strong>to</strong> change a majority of direc<strong>to</strong>rs even when a majority of s<strong>to</strong>ckholders <strong>are</strong> dissatisfied withthe per<strong>for</strong>mance of incumbent direc<strong>to</strong>rs.36
‘‘If you believe that one-year terms <strong>for</strong> direc<strong>to</strong>rs will ca<strong>us</strong>e greater accountability, please vote‘FOR’ this proposal.’’The Board of Direc<strong>to</strong>rs unanimo<strong>us</strong>ly recommends a vote AGAINST the <strong>for</strong>egoing proposal <strong>for</strong>the following reasons:During 2005, the direc<strong>to</strong>rs disc<strong>us</strong>sed and weighed the potential benefits and risks <strong>to</strong> sh<strong>are</strong>holdersof declassifying the Board. They considered fac<strong>to</strong>rs articulated in the sh<strong>are</strong>holder proposal as well asother common arguments against a classified (or ‘‘staggered’’) board. They also considered the resultsof studies evidencing the increased takeover premiums that have been associated with takeoverdefenses including a classified board, the interaction of the classified board with other takeoverdefenses we adopted at the time of <strong>our</strong> spin-off from U.S. Bancorp, and the value <strong>to</strong> sh<strong>are</strong>holders ofhaving stability, continuity and preservation of skill on the Board, particularly in light of the complexnature of the securities ind<strong>us</strong>try and the time required <strong>to</strong> identify and recruit new, independentdirec<strong>to</strong>rs and <strong>to</strong> familiarize them with <strong>our</strong> b<strong>us</strong>iness. Ultimately, the Board concluded that the classifiedboard structure provides important benefits <strong>to</strong> sh<strong>are</strong>holders that outweigh the benefits of declassification.Accordingly, the Board recommends that sh<strong>are</strong>holders vote against the sh<strong>are</strong>holder proposalrequesting declassification of the Board.The longer direc<strong>to</strong>r terms resulting from a classified board allow direc<strong>to</strong>rs <strong>to</strong> gain, over time, adeep understanding of <strong>our</strong> b<strong>us</strong>iness and ensure that a majority of direc<strong>to</strong>rs always will be familiar with<strong>our</strong> b<strong>us</strong>iness. We believe that direc<strong>to</strong>rs who serve longer terms on the board have a greater incentive <strong>to</strong>foc<strong>us</strong> on the execution of long-term strategies <strong>for</strong> the growth of <strong>our</strong> b<strong>us</strong>iness. In addition, a classifiedboard ensures that the Board will have sufficient time <strong>to</strong> evaluate coercive proposals <strong>to</strong> take over thecompany beca<strong>us</strong>e a classified board cannot be replaced in one election cycle. This also enc<strong>our</strong>agespotential acquirers <strong>to</strong> engage in arms’ length negotiations with the Board and management. We believethat all of these fac<strong>to</strong>rs will help the Board maximize the creation of value <strong>for</strong> <strong>our</strong> sh<strong>are</strong>holders.Approval of the sh<strong>are</strong>holder proposal would not in itself declassify the Board. Rather, approvalwould serve only as a request that the Board take the necessary steps <strong>to</strong> eliminate the classified boardstructure and replace it with the <strong>annual</strong> election of direc<strong>to</strong>rs. Declassifying the Board would require anamendment <strong>to</strong> <strong>our</strong> certificate of incorporation, and the affirmative vote of the holders of not less than80% of <strong>our</strong> outstanding sh<strong>are</strong>s of common s<strong>to</strong>ck is required <strong>to</strong> approve such an amendment.The affirmative vote of the holders of a majority of the sh<strong>are</strong>s of <strong>our</strong> common s<strong>to</strong>ck present inperson or represented by proxy at the <strong>annual</strong> meeting and entitled <strong>to</strong> vote is necessary <strong>for</strong> approval ofthe sh<strong>are</strong>holder proposal requesting declassification of the Board and the <strong>annual</strong> election of alldirec<strong>to</strong>rs.The Board of Direc<strong>to</strong>rs recommends that you vote AGAINST the sh<strong>are</strong>holder proposal. Proxieswill be voted AGAINST the sh<strong>are</strong>holder proposal unless otherwise specified.SHAREHOLDER PROPOSALS FOR THE 2007 ANNUAL MEETINGIn order <strong>for</strong> a sh<strong>are</strong>holder proposal, including a direc<strong>to</strong>r nomination, <strong>to</strong> be considered <strong>for</strong>incl<strong>us</strong>ion in <strong>our</strong> proxy statement <strong>for</strong> the 2007 <strong>annual</strong> meeting of sh<strong>are</strong>holders, the written proposalm<strong>us</strong>t be received at <strong>our</strong> principal executive offices on or be<strong>for</strong>e November 16, <strong>2006</strong>. The proposalshould be addressed <strong>to</strong> <strong>Piper</strong> <strong>Jaffray</strong> Companies, Attention: James L. Chosy, Secretary, at 800 NicolletMall, Suite 800, Mail S<strong>to</strong>p J09N05, Minneapolis, Minnesota 55402. The proposal m<strong>us</strong>t comply withSecurities and Exchange Commission regulations regarding the incl<strong>us</strong>ion of sh<strong>are</strong>holder proposals incompany-sponsored proxy materials.In accordance with <strong>our</strong> bylaws, in order <strong>to</strong> be properly brought be<strong>for</strong>e the <strong>2006</strong> <strong>annual</strong> meeting,a sh<strong>are</strong>holder’s notice of the matter the sh<strong>are</strong>holder wishes <strong>to</strong> present m<strong>us</strong>t be delivered <strong>to</strong> <strong>our</strong>principal executive offices in Minneapolis, Minnesota, at the address identified in the precedingparagraph, not less than 90 nor more than 120 days prior <strong>to</strong> the first anniversary of the date of this37