|
This file is available on a Cryptome DVD offered by Cryptome. Donate $25 for a DVD of the Cryptome 10-year archives of 35,000 files from June 1996 to June 2006 (~3.5 GB). Click Paypal or mail check/MO made out to John Young, 251 West 89th Street, New York, NY 10024. Archives include all files of cryptome.org, cryptome2.org, jya.com, cartome.org, eyeball-series.org and iraq-kill-maim.org. Cryptome offers with the Cryptome DVD an INSCOM DVD of about 18,000 pages of counter-intelligence dossiers declassified by the US Army Information and Security Command, dating from 1945 to 1985. No additional contribution required -- $25 for both. The DVDs will be sent anywhere worldwide without extra cost. | |||
8 September 2006
-----------------------------------------------------------------------
[Federal Register: September 8, 2006 (Volume 71, Number 174)]
[Rules and Regulations]
[Page 53157-53266]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se06-25]
[[Page 53157]]
-----------------------------------------------------------------------
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 228, 229 et al.
Executive Compensation and Related Person Disclosure; Final Rule and
Proposed Rule
[[Page 53158]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 232, 239, 240, 245, 249 and 274
[Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06]
RIN 3235-AI80
Executive Compensation and Related Person Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission is adopting amendments
to the disclosure requirements for executive and director compensation,
related person transactions, director independence and other corporate
governance matters and security ownership of officers and directors.
These amendments apply to disclosure in proxy and information
statements, periodic reports, current reports and other filings under
the Securities Exchange Act of 1934 and to registration statements
under the Exchange Act and the Securities Act of 1933. We are also
adopting a requirement that disclosure under the amended items
generally be provided in plain English. The amendments are intended to
make proxy and information statements, reports and registration
statements easier to understand. They are also intended to provide
investors with a clearer and more complete picture of the compensation
earned by a company's principal executive officer, principal financial
officer and highest paid executive officers and members of its board of
directors. In addition, they are intended to provide better information
about key financial relationships among companies and their executive
officers, directors, significant shareholders and their respective
immediate family members. In Release No. 33-8735, published elsewhere
in the proposed rules section of this issue of the Federal Register, we
also request additional comments regarding the proposal to require
compensation disclosure for three additional highly compensated
employees.
DATES: Effective Date: November 7, 2006.
Comment Date: Comments regarding the request for comment in Section
II.C.3.b. of this document should be received on or before October 23,
2006.
Compliance Dates: Companies must comply with these disclosure
requirements in Forms 8-K for triggering events that occur on or after
November 7, 2006 and in Forms 10-K and 10-KSB for fiscal years ending
on or after December 15, 2006. Companies other than registered
investment companies must comply with these disclosure requirements in
Securities Act registration statements and Exchange Act registration
statements (including pre-effective and post-effective amendments), and
in any proxy or information statements filed on or after December 15,
2006 that are required to include Item 402 and 404 disclosure for
fiscal years ending on or after December 15, 2006. Registered
investment companies must comply with these disclosure requirements in
initial registration statements and post-effective amendments that are
annual updates to effective registration statements on Forms N-1A, N-2
(except those filed by business development companies) and N-3, and in
any new proxy or information statements, filed with the Commission on
or after December 15, 2006.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml.
): or Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-03-06 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington DC 20549-1090.
All submissions should refer to File Number S7-03-06. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/final/shtml). Comments are
also available for public inspection and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC, 20549. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Carolyn Sherman, or
Daniel Greenspan, at (202) 551-3500, in the Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-3010 or, with respect to questions regarding
investment companies, Kieran Brown in the Division of Investment
Management, at (202) 551-6784.
SUPPLEMENTARY INFORMATION: We are amending: Items 201,\1\ 306,\2\
401,\3\ 402,\4\ 403 \5\ and 404 \6\ of Regulations S-K \7\ and S-B,\8\
Item 601 \9\ of Regulation S-K, Item 1107 \10\ of Regulation AB,\11\
Item 304 \12\ of Regulation S-T,\13\ and Rule 100 \14\ of Regulation
BTR.\15\ We are also adding new Item 407 to Regulations S-K and S-B. In
addition, we are amending Rules 13a-11,\16\ 14a-3,\17\ 14a-6,\18\ 14c-
5,\19\ 15d-11 \20\ and 16b-3 \21\ under the Securities Exchange Act of
1934.\22\ We are adding Rules 13a-20 and 15d-20 under the Exchange Act.
We are further amending Schedule 14A \23\ under the Exchange Act, as
well as Exchange Act Forms 8-K,\24\ 10,\25\ 10SB,\26\ 10-Q,\27\ 10-
QSB,\28\ 10-K,\29\ 10-KSB \30\ and 20-F.\31\ Finally, we are amending
Forms SB-2,\32\ S-1,\33\ S-3,\34\ S-4 \35\ and S-11 \36\ under the
Securities Act of 1933,\37\ Forms N-
[[Page 53159]]
1A,\38\ N-2,\39\ and N-3 \40\ under the Securities Act and the
Investment Company Act of 1940,\41\ and Form N-CSR \42\ under the
Investment Company Act and the Exchange Act.
---------------------------------------------------------------------------
\1\ 17 CFR 229.201 and 17 CFR 228.201.
\2\ 17 CFR 229.306 and 17 CFR 228.306.
\3\ 17 CFR 229.401 and 17 CFR 228.401.
\4\ 17 CFR 229.402 and 17 CFR 228.402.
\5\ 17 CFR 229.403 and 17 CFR 228.403.
\6\ 17 CFR 229.404 and 17 CFR 228.404.
\7\ 17 CFR 229.10 et seq.
\8\ 17 CFR 228.10 et seq.
\9\ 17 CFR 229.601.
\10\ 17 CFR 229.1107.
\11\ 17 CFR 229.1100 et seq.
\12\ 17 CFR 232.304.
\13\ 17 CFR 232.10 et seq.
\14\ 17 CFR 245.100.
\15\ 17 CFR 245.100 et seq.
\16\ 17 CFR 240.13a-11.
\17\ 17 CFR 240.14a-3.
\18\ 17 CFR 240.14a-6.
\19\ 17 CFR 240.14c-5.
\20\ 17 CFR 240.15d-11.
\21\ 17 CFR 240.16b-3.
\22\ 15 U.S.C. 78a et seq.
\23\ 17 CFR 240.14a-101.
\24\ 17 CFR 249.308.
\25\ 17 CFR 249.210.
\26\ 17 CFR 249.210b.
\27\ 17 CFR 249.308a.
\28\ 17 CFR 249.308b.
\29\ 17 CFR 249.310.
\30\ 17 CFR 249.310b.
\31\ 17 CFR 249.220f.
\32\ 17 CFR 239.10.
\33\ 17 CFR 239.11.
\34\ 17 CFR 239.13.
\35\ 17 CFR 239.25.
\36\ 17 CFR 239.18.
\37\ 15 U.S.C. 77a et seq.
\38\ 17 CFR 239.15A and 274.11A.
\39\ 17 CFR 239.14 and 274.11a-1.
\40\ 17 CFR 239.17a and 274.11b.
\41\ 15 U.S.C. 80a-1 et seq.
\42\ 17 CFR 249.331 and 274.128.
---------------------------------------------------------------------------
Table of Contents
I. Background and Overview
II. Executive and Director Compensation Disclosure
A. Options Disclosure
1. Background
2. Required Option Disclosures
a. Tabular Disclosures
b. Compensation Discussion and Analysis
i. Timing of Option Grants
ii. Determination of Exercise Price
B. Compensation Discussion and Analysis
1. Intent and Operation of the Compensation Discussion and
Analysis
2. Instructions to Compensation Discussion and Analysis
3. ``Filed'' Status of Compensation Discussion and Analysis and
the ``Furnished'' Compensation Committee Report
4. Retention of the Performance Graph
C. Compensation Tables
1. Compensation to Named Executive Officers in the Last Three
Completed Fiscal Years--The Summary Compensation Table and Related
Disclosure
a. Total Compensation Column
b. Salary and Bonus Columns
c. Plan-Based Awards
i. Stock Awards and Option Awards Columns
ii. Non-Equity Incentive Plan Compensation Column
d. Change in Pension Value and Nonqualified Deferred
Compensation Earnings Column
i. Earnings on Deferred Compensation
ii. Increase in Pension Value
e. All Other Compensation Column
i. Perquisites and Other Personal Benefits
ii. Additional All Other Compensation Column Items
f. Captions and Table Layout
2. Supplemental Grants of Plan-Based Awards Table
3. Narrative Disclosure to Summary Compensation Table and Grants
of Plan-Based Awards Table
a. Narrative Description of Additional Material Factors
b. Request for Additional Comment on Compensation Disclosure for
up to Three Additional Employees
4. Exercises and Holdings of Previously Awarded Equity
a. Outstanding Equity Awards at Fiscal Year-End Table
b. Option Exercises and Stock Vested Table
5. Post-Employment Compensation
a. Pension Benefits Table
b. Nonqualified Deferred Compensation Table
c. Other Potential Post-Employment Payments
6. Officers Covered
a. Named Executive Officers
b. Identification of Most Highly Compensated Executive Officers;
Dollar Threshold for Disclosure
7. Interplay of Items 402 and 404
8. Other Changes
9. Compensation of Directors
D. Treatment of Specific Types of Issuers
1. Small Business Issuers
2. Foreign Private Issuers
3. Business Development Companies
E. Conforming Amendments
III. Revisions to Form 8-K and the Periodic Report Exhibit
Requirements
A. Items 1.01 and 5.02 of Form 8-K
1. Item 1.01--Entry into a Material Definitive Agreement
2. Item 5.02--Departure of Directors or Certain Officers;
Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers
B. Extension of Limited Safe Harbor under Section 10(b) and Rule
10b-5 to Item 5.02(e) of Form 8-K and Exclusion of Item 5.02(e) from
Form S-3 Eligibility Requirements
C. General Instruction D to Form 8-K
D. Foreign Private Issuers
IV. Beneficial Ownership Disclosure
V. Certain Relationships and Related Transactions Disclosure
A. Transactions with Related Persons
1. Broad Principle for Disclosure
a. Indebtedness
b. Definitions
2. Disclosure Requirements
3. Exceptions
B. Procedures for Approval of Related Person Transactions
C. Promoters and Control Persons
D. Corporate Governance Disclosure
E. Treatment of Specific Types of Issuers
1. Small Business Issuers
2. Foreign Private Issuers
3. Registered Investment Companies
F. Conforming Amendments
1. Regulation Blackout Trading Restriction
2. Rule 16b-3 Non-Employee Director Definition
3. Other Conforming Amendments
VI. Plain English Disclosure
VII. Transition
VIII. Paperwork Reduction Act
A. Background
B. Summary of Information Collections
C. Summary of Comment Letters and Revisions to Proposals
D. Revisions to Paperwork Reduction Act Burden Estimates
1. Securities Act Registration Statements, Exchange Act
Registration Statements, Exchange Act Annual Reports, Proxy
Statements and Information Statements
2. Exchange Act Current Reports
IX. Cost-Benefit Analysis
A. Background
B. Summary of Amendments
C. Benefits
D. Costs
X. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
XI. Final Regulatory Flexibility Act Analysis
A. Need for the Rules and Amendments
B. Significant Issues Raised by Public Comment
C. Small Entities Subject to the Rules and Amendments
D. Reporting, Recordkeeping and Other Compliance Requirements
E. Agency Action to Minimize Effect on Small Entities
XII. Statutory Authority and Text of the Amendments
I. Background and Overview
On January 27, 2006, we proposed revisions to our rules governing
disclosure of executive compensation, director compensation, related
party transactions, director independence and other corporate
governance matters, current reporting regarding compensation
arrangements and beneficial ownership.\43\ We received over 20,000
comment letters in response to our proposals. In general, commenters
supported the proposals and their objectives. We are adopting the rules
and amendments substantially as proposed, with certain modifications to
address a number of points that commenters raised.
---------------------------------------------------------------------------
\43\ Executive Compensation and Related Party Disclosure,
Release No. 33-8655 (Jan. 27, 2006) [71 FR 6542] (the ``Proposing
Release'').
---------------------------------------------------------------------------
The amendments to the compensation disclosure rules are intended to
provide investors with a clearer and more complete picture of
compensation to principal executive officers, principal financial
officers, the other highest paid executive officers and directors.
Closely related to executive officer and director compensation is the
participation by executive officers, directors, significant
shareholders and other related persons in financial transactions and
relationships with the company. We are also adopting revisions to our
disclosure rules regarding related party transactions and director
independence and board committee functions.
Finally, some compensation arrangements must be disclosed under our
rules relating to current reports on Form 8-K. Accordingly, we are
reorganizing and more appropriately focusing our requirements on the
type of compensation information that should be disclosed on a real-
time basis.
Since the enactment of the Securities Act and the Exchange Act,\44\
the
[[Page 53160]]
Commission has on a number of occasions explored the best methods for
communicating clear, concise and meaningful information about executive
and director compensation and relationships with the company.\45\ The
Commission also has had to reconsider executive and director
compensation disclosure requirements in light of changing trends in
executive compensation. Most recently, in 1992, the Commission adopted
amendments to the disclosure rules that eschewed a mostly narrative
disclosure approach adopted in 1983 in favor of formatted tables that
captured all compensation, while categorizing the various elements of
compensation and promoting comparability from year to year and from
company to company.\46\
---------------------------------------------------------------------------
\44\ Initially, disclosure requirements regarding executive and
director compensation were set forth in Schedule A to the Securities
Act and Section 12(b) of the Exchange Act, which list the type of
information to be included in Securities Act and Exchange Act
registration statements. Item 14 of Schedule A called for disclosure
of the ``remuneration, paid or estimated to be paid, by the issuer
or its predecessor, directly or indirectly, during the past year and
ensuing year to (a) the directors or persons performing similar
functions, and (b) its officers and other persons, naming them
wherever such remuneration exceeded $25,000 during any such year.''
Section 12(b) of the Exchange Act as enacted required disclosure of
``(D) the directors, officers, and underwriters, and each security
holder of record holding more than 10 per centum of any class of any
equity security of the issuer (other than an exempted security),
their remuneration and their interests in the securities of, and
their material contracts with, the issuer and any person directly or
indirectly controlling or controlled by, or under direct or indirect
common control with, the issuer;'' and ``(E) remuneration to others
than directors and officers exceeding $20,000 per annum.''
\45\ In 1938, the Commission promulgated its first executive and
director compensation disclosure rules for proxy statements. Release
No. 34-1823 (Aug. 11, 1938) [3 FR 1991]. At different times
thereafter, the Commission has adopted rules mandating narrative,
tabular, or combinations of narrative and tabular disclosure as the
best method for presenting compensation disclosure in a manner that
is clear and useful to investors. See, e.g., Release No. 34-3347
(Dec. 18, 1942) [7 FR 10653] (introducing first tabular disclosure);
Release No. 34-4775 (Dec. 11, 1952) [17 FR 11431] (introducing
separate table for pensions and deferred remuneration); Uniform and
Integrated Reporting Requirements: Management Remuneration, Release
No. 33-6003 (Dec. 4, 1978) [43 FR 58151] (the ``1978 Release'')
(expanding tabular disclosure to cover all forms of compensation);
and Disclosure of Executive Compensation, Release No. 33-6486 (Sept.
23, 1983) [48 FR 44467] (the ``1983 Release'') (limiting tabular
disclosure to cash remuneration).
\46\ Executive Compensation Disclosure, Release No. 33-6962
(Oct. 16, 1992) [57 FR 48126] (the ``1992 Release''); See also
Executive Compensation Disclosure; Securityholder Lists and Mailing
Requests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010] (the
``1993 Release''), at Section II.
---------------------------------------------------------------------------
We believe this tabular approach remains a sound basis for
disclosure. However, especially in light of the complexity of and
variations in compensation programs, the very formatted nature of those
rules has resulted in too many cases in disclosure that does not inform
investors adequately as to all elements of compensation. In those cases
investors may lack material information that we believe they should
receive.
We are thus today adopting an approach that builds on the strengths
of the requirements adopted in 1992 rather than discarding them.
However, today's amendments do represent a thorough rethinking of the
rules in place prior to these amendments, combining a broader-based
tabular presentation with improved narrative disclosure supplementing
the tables. This approach will promote clarity and completeness of
numerical information through an improved tabular presentation,
continue to provide the ability to make comparisons using tables, and
call for material qualitative information regarding the manner and
context in which compensation is awarded and earned.
The amendments that we publish today require that all elements of
compensation must be disclosed. We also have sought to structure the
revised requirements sufficiently broadly so that they will continue to
operate effectively as new forms of compensation are developed in the
future.
Under the amendments, compensation disclosure will now begin with a
narrative providing a general overview. Much like the overview that we
have encouraged companies to provide with their Management's Discussion
and Analysis of Financial Condition and Results of Operations
(MD&A),\47\ the new Compensation Discussion and Analysis calls for a
discussion and analysis of the material factors underlying compensation
policies and decisions reflected in the data presented in the tables.
This overview addresses in one place these factors with respect to both
the separate elements of executive compensation and executive
compensation as a whole. We are adopting the overview substantially as
proposed, but, in response to comments, we are requiring a separate
report of the compensation committee similar to the report required of
the audit committee,\48\ which will be considered furnished and not
filed.\49\
---------------------------------------------------------------------------
\47\ Item 303 of Regulation S-K [17 CFR 229.303]. See also
Commission Guidance Regarding Management's Discussion and Analysis
of Financial Condition and Results of Operations, Release No. 33-
8350 (Dec. 19, 2003) [68 FR 75055], at Section III.A.
\48\ The Audit Committee Report, required by Item 306 of
Regulations S-B [17 CFR 228.306] and S-K [17 CFR 229.306] prior to
these amendments, will now be required by Item 407(d) of Regulations
S-B and S-K.
\49\ The Compensation Committee Report that we adopt today is
not deemed to be ``soliciting material'' or to be ``filed'' with the
Commission or subject to Regulation 14A or 14C [17 CFR 240.14a-1 et
seq. or 240.14c-1 et seq.], other than as specified, or to the
liabilities of Section 18 of the Exchange Act [15 U.S.C. 78r],
except to the extent a company specifically requests that the report
be treated as filed or as soliciting material or specifically
incorporates it by reference into a filing under the Securities Act
or the Exchange Act, other than by incorporating by reference the
report from a proxy or information statement into the Form 10-K.
Instructions 1 and 2 to Item 407(e)(5).
---------------------------------------------------------------------------
Following the Compensation Discussion and Analysis, we have
organized detailed disclosure of executive compensation into three
broad categories:
Compensation with respect to the last fiscal year (and the
two preceding fiscal years), as reflected in an amended Summary
Compensation Table that presents compensation paid currently or
deferred (including options, restricted stock and similar grants) and
compensation consisting of current earnings or awards that are part of
a plan, and as supplemented by a table providing back-up information
for certain data in the Summary Compensation Table;
Holdings of equity-related interests that relate to
compensation or are potential sources of future gains, with a focus on
compensation-related equity interests that were awarded in prior years
and are ``at risk,'' whether or not these interests are in-the-money,
as well as recent realization on these interests, such as through
vesting of restricted stock or the exercise of options and similar
instruments; and
Retirement and other post-employment compensation,
including retirement and deferred compensation plans, other retirement
benefits and other post-employment benefits, such as those payable in
the event of a change in control.
We are requiring improved tabular disclosure for each of the above
three categories and appropriate narrative disclosure that provides
material information necessary to an understanding of the information
presented in the individual tables.\50\ We have made some modifications
from the proposal in response to comments.
---------------------------------------------------------------------------
\50\ This narrative disclosure, together with the Compensation
Discussion and Analysis noted above, will replace the narrative
discussion that was required in the Board Compensation Report on
Executive Compensation prior to these amendments. The narrative
disclosure, along with the rest of the amended executive officer and
director compensation disclosure, other than the new Compensation
Committee Report, will be company disclosure filed with the
Commission.
---------------------------------------------------------------------------
In Release No. 33-8735, published elsewhere in the proposed rules
section of this issue of the Federal Register and for which comments
are due on or before October 23, 2006, we also solicit additional
comments regarding the proposed disclosure requirement of the total
compensation and job description of up to an additional three most
highly compensated employees who are not
[[Page 53161]]
executive officers or directors but who earn more than the named
executive officers. In particular, we have specific requests for
comment as to whether the proposal should be modified to apply only to
large accelerated filers who would disclose the total compensation for
the most recent fiscal year and a description of the job position for
each of their three most highly compensated employees whose total
compensation is greater than any of the named executive officers,
whether or not such persons are executive officers. Under this
approach, employees who have no responsibility for significant policy
decisions within either the company, a significant subsidiary or a
principal business unit, division, or function, would be excluded from
the determination of the three most highly compensated employees and no
disclosure regarding them would be required.
Finally, we are adopting a director compensation table that is
similar to the amended Summary Compensation Table.\51\
---------------------------------------------------------------------------
\51\ We had proposed similar amendments, which we did not act
on, regarding director compensation in 1995. Streamlining and
Consolidation of Executive and Director Compensation Disclosure,
Release No. 33-7184 (Aug. 6, 1995) [60 FR 35633] (the ``1995
Release''), at Section I.B.
---------------------------------------------------------------------------
We also highlight in the release that the principles-based
disclosure rules we are adopting today, including but not limited to
the Compensation Discussion and Analysis section, may require
disclosure of various aspects of a company's use of options in
compensating its executives and directors, including any programs,
plans or practices a company may have with regard to the timing or
dating of option grants.
We are also modifying, as proposed, some of the Form 8-K
requirements regarding compensation. Form 8-K requires disclosure
within four business days of the entry into, amendment of, and
termination of, material definitive agreements that are entered into
outside of the ordinary course of business. Under our definition of
material contracts in Item 601 of Regulation S-K for the purposes of
determining what exhibits are required to be filed, many agreements
regarding executive compensation are deemed to be material agreements
entered into outside the ordinary course. When, in 2004, for purposes
of consistency, we looked to this definition for use in the Form 8-K
requirements, we incorporated all of these executive compensation
agreements into the Form 8-K disclosure requirements. Therefore, many
agreements regarding executive compensation, including some not related
to named executive officers, have been required to be disclosed on Form
8-K within four business days of the applicable triggering event.
Consistent with our intent that Form 8-K capture only events that are
unquestionably or presumptively material to investors, we are today
amending the Form 8-K requirements substantially as proposed.
We believe that executive and director compensation is closely
related to financial transactions and relationships involving companies
and their directors, executive officers and significant shareholders
and respective immediate family members. Disclosure requirements
regarding these matters historically have been interconnected, given
that relationships among these parties and the company can include
transactions that involve compensation or analogous features. Such
disclosure also represents material information in evaluating the
overall relationship with a company's executive officers and directors.
Further, this disclosure provides material information regarding the
independence of directors. The related party transaction disclosure
requirements were adopted piecemeal over the years and were combined
into one disclosure requirement beginning in 1982.\52\ In light of many
developments since then, including the increasing focus on corporate
governance and director independence, we believe it is necessary to
revise our requirements. Today's amendments update, clarify and
somewhat expand the related party transaction disclosure requirements.
The amendments fold into the disclosure requirements for related party
transactions what had been a separate disclosure requirement regarding
indebtedness of management and directors.\53\ Further, we are adopting
a requirement that calls for a narrative explanation of the
independence status of directors under a company's director
independence policies. We intend this requirement to be consistent with
recent significant changes to the listing standards of the nation's
principal securities trading markets.\54\ We also are consolidating
this and other corporate governance disclosure requirements regarding
director independence and board committees, including new disclosure
requirements about the compensation committee, into a single expanded
disclosure item.\55\
---------------------------------------------------------------------------
\52\ Disclosure of Certain Relationships and Transactions
Involving Management, Release No. 33-6441 (Dec. 2, 1982) [47 FR
55661] (the ``1982 Release'').
\53\ Prior to these amendments, related party transactions were
disclosed under Item 404(a) of Regulations S-K and S-B, while
indebtedness was separately required to be disclosed under Item
404(c) of Regulation S-K.
\54\ See, e.g., NASD and NYSE Rulemaking: Relating to Corporate
Governance, Release No. 34-48745 (Nov. 4, 2003) [68 FR 64154] (the
``NASD and NYSE Listing Standards Release''). This new requirement
will replace the disclosure requirement about director relationships
that could affect independence specified in Item 404(b) of
Regulation S-K prior to these amendments.
\55\ New Item 407 of Regulations S-K and S-B.
---------------------------------------------------------------------------
In order to ensure that these amended requirements result in
disclosure that is clear, concise and understandable for investors, we
are adding Rules 13a-20 and 15d-20 under the Exchange Act to require
that most of the disclosure provided in response to the amended items
be presented in plain English. This extends the plain English
requirements currently applicable to portions of registration
statements under the Securities Act to the disclosure required under
the items that we have amended, which impose requirements for Exchange
Act reports and proxy or information statements incorporated by
reference into those reports.
Finally, we are amending our beneficial ownership disclosure
requirements as proposed to require disclosure of shares pledged by
named executive officers, directors and director nominees, as well as
directors' qualifying shares.\56\
---------------------------------------------------------------------------
\56\ Item 403(b) of Regulations S-K and S-B.
---------------------------------------------------------------------------
II. Executive and Director Compensation Disclosure
Executive and director compensation disclosure has been required
since 1933, and the Commission has had disclosure rules in this area
applicable to proxy statements since 1938. In 1992, the Commission
proposed and adopted substantially revised rules that embody our
current requirements.\57\ In doing so, the Commission moved away from
narrative disclosure and back to using tables that permit comparability
from year to year and from company to company. As we noted in the
Proposing Release, although the reasoning behind this approach remains
fundamentally sound, significant changes are appropriate. Much of the
concern with the tables adopted in 1992 had also been their strength:
they were highly formatted and rigid.\58\ Thus, information not
specifically called for in the tables had sometimes not been provided.
For example, the highly formatted and specific approach had led some to
[[Page 53162]]
suggest that items that did not fit squarely within a ``box'' specified
by the rules need not have been disclosed.\59\ As another example,
because the tables did not call for a single figure for total
compensation, that information had generally not been provided prior to
today's amendments, although there had been considerable commentary
indicating that a single total figure is high on the list of
information that some investors wish to have. To preserve the strengths
of the former approach and build on them, we are taking several steps
in adopting amendments to Item 402,\60\ substantially as we proposed:
---------------------------------------------------------------------------
\57\ 1992 Release.
\58\ See, e.g., Council of Institutional Investors' Discussion
Paper on Executive Pay Disclosure, Executive Compensation
Disclosure: How it Works Now, How It Can Be Improved, at 11
(available at http://www.cii.org/site_files/pdfs/CII%20pay%20primer%20edited.pdf
).
\59\ For examples, see, e.g., The Corporate Counsel (Sept.-Oct.
2005) at 6-7; The Corporate Counsel (Sept.-Oct. 2004) at 7; but see
Alan L. Beller, Director, Division of Corporation Finance, U.S.
Securities and Exchange Commission, Remarks Before Conference of the
NASPP, The Corporate Counsel and the Corporate Executive (Oct. 20,
2004), available at http://www.sec.gov/news/speech/spch102004alb.htm.
\60\ The discussion that follows focuses on amendments to Item
402 of Regulation S-K, with Section II.D.1. explaining the different
amendments to Item 402 of Regulation S-B. References throughout the
following discussion are to Items of Regulation S-K, unless
otherwise indicated.
---------------------------------------------------------------------------
First, we are retaining the tabular approach to provide
clarity and comparability while improving the tabular disclosure
requirements;
Second, we are confirming that all elements of
compensation must be included in the tables;
Third, we are providing a format for the amended Summary
Compensation Table that requires disclosure of a single figure for
total compensation; and
Finally, we are requiring narrative disclosure comprising
both a general discussion and analysis of compensation and specific
material information regarding tabular items where necessary to an
understanding of the tabular disclosure.
A. Options Disclosure
1. Background
Many companies use stock options to compensate their employees,
including executives. In a simple stock option, a company may grant an
employee the right to purchase a specified number of shares of the
company's stock at a specific price, called the exercise price and
usually set as the market price of the company's stock on the grant
date. While some options require no future service from the employee,
most include vesting provisions, such that the employee does not earn
the option unless he remains employed by the company for a specified
period of service. Often a company will grant a specific number of
options that will then vest proportionately in staggered increments
over a set time period. For example, if the grant vests at a rate of
20% per year for five years, the option for the last 20% is earned by
the employee's provision of five years of services. Most options become
exercisable upon vesting and remain exercisable until their stated
expiration. Generally, upon termination of the employment relationship,
however, an employee loses unvested options, and has a limited term
(e.g., 90 days) to exercise vested options.\61\
---------------------------------------------------------------------------
\61\ More complex stock options can include provisions that
alter the terms of the instrument based on whether performance or
other targets are met.
---------------------------------------------------------------------------
Options have most often been issued ``at-the-money''--i.e., with an
exercise price equal to the market price of the underlying stock at the
date of grant--but may also be issued either ``in-the-money''--i.e.,
with an exercise price below the market price of the underlying stock
at the date of grant--or ``out-of-the-money''--i.e., with an exercise
price above the market price of the underlying stock at the date of
grant. An option holder benefits only when the company's stock price is
above the exercise price when the employee exercises the option. Hence,
setting a lower exercise price increases the value of the option.
As some commentators have observed, using options for compensation
purposes may have advantages. These commentators point out that, unlike
salary and bonus compensation, stock option compensation does not
require the payment of cash by the company, and therefore can be
particularly attractive to companies for which cash is a scarce
resource. Stock option compensation may also provide an incentive for
employees to work to increase the company's stock price. Additionally,
some companies may be able to use stock option compensation to help
retain employees, because an employee with unvested in-the-money
options forfeits their potential value if he leaves the company's
employ.
At the same time, other commentators stress that option
compensation is not without costs and disadvantages. Options granted to
employees, if ultimately exercised with the resulting issuance of the
underlying stock, give rise to a dilution of the interests in the
company held by existing stockholders. Options that are not in-the-
money may not provide a retention benefit, and some managers believe
that options that fall out-of-the-money (or are ``underwater'') not
only fail to motivate employees but, in fact, can result in poor
employee morale and resultant turnover, especially at companies where
option compensation is an important component of total compensation. In
addition, options with shorter vesting periods or longer term options
approaching their vesting dates may provide incentives to employees to
focus on increasing the company's stock price in the short term rather
than working toward achieving longer term business goals and objectives
that would enable the company to achieve and sustain future success.
The Commission does not seek to encourage or discourage the use of
stock options or any other particular form of executive compensation.
The federal securities laws, however, do require full and fair
disclosure of compensation information to the extent material or
required by Commission rule.
2. Required Option Disclosures
The Commission acknowledged the importance to investors of proper
disclosure of executives' option compensation throughout the Proposing
Release. The existing body of rules regarding disclosure of executive
stock option grants, however, has not previously contained a line-item
requirement with respect to information regarding programs, plans or
practices concerning the selection of stock option grant dates or
exercise prices.\62\ The disclosure we proposed in January, along with
related disclosure we also adopt today, should provide investors with
more information about option compensation.\63\ We have summarized
[[Page 53163]]
below the various provisions of the rules that we adopt today that
relate to options disclosure.\64\
---------------------------------------------------------------------------
\62\ Our existing rules for companies' disclosure do prohibit
material misrepresentations of option grant dates, as well as any
resulting material misstatements of affected financial statements.
Companies are also required under our existing rules to disclose any
material information that may be necessary to make their other
disclosures, in the light of the circumstances under which they are
made, not misleading. See, e.g., Rule 12b-20 under the Exchange Act
[17 CFR 240.12b-20].
\63\ We note that Exchange Act Rule 16a-3 [17 CFR 240.16a-3]
setsforth the general reporting requirements under Exchange Act
Section 16(a). Prior to August 2002, a number of transactions
between an issuer and its officers or directors--such as the
granting of options--were required to be disclosed following the end
of the fiscal year in which the transaction took place although
individuals could disclose those transactions earlier if they chose
to. In implementing Section 403(a) of the Sarbanes-Oxley Act of
2002, in August 2002, the Commission required immediate disclosure
of these transactions for the first time. As a result, since August
2002, grants, awards and other acquisitions of equity-based
securities from the issuer, including those pursuant to employee
benefit plans (which were previously reportable on an annual basis
on Form 5) have been required to be reported by officers and
directors on Form 4 within two business days. Ownership Reports and
Trading by Officers, Directors and Principal Security Holders,
Release No. 34-46421 (Aug. 27, 2002) [56 FR 56461] at Section II.B.
\64\ We also note that under our rules regarding disclosure of
director compensation, the concerns and considerations for
disclosure of option timing or dating practices in the executive
compensation realm would also apply when the recipients of the stock
option grants are directors of the company.
---------------------------------------------------------------------------
a. Tabular Disclosures
The following disclosures are required in the tables we adopt
today. These provisions are discussed in more detail later in the
section relating to each particular table.
As proposed and adopted, grants of stock options will be
disclosed in the Summary Compensation Table at their fair value on the
date of grant, as determined under FAS 123R. By basing the executive
compensation disclosure on the full grant date fair value computed in
accordance with FAS 123R, companies will give shareholders an accurate
picture of the value of options at the time they are actually granted
to the highest-paid executive officers.\65\
---------------------------------------------------------------------------
\65\ Item 402(c)(2)(vi).
---------------------------------------------------------------------------
A separate table including disclosure of equity awards,
the Grants of Plan-Based Awards Table, requires disclosure of the grant
date as determined pursuant to FAS 123R.\66\ The grant date is
generally considered the day the decision is made to award the option
as long as recipients of the award are notified promptly. Even if the
option's exercise price is set based on trading prices as of an earlier
date or dates, the grant date does not change.
---------------------------------------------------------------------------
\66\ Item 402(d)(2)(ii) and Item 402(a)(6)(iv).
---------------------------------------------------------------------------
If the exercise price is less than the closing market
price of the underlying security on the date of the grant, a separate,
adjoining column would have to be added to this table showing that
market price on the date of the grant.\67\
---------------------------------------------------------------------------
\67\ Item 402(d)(2)(vii).
---------------------------------------------------------------------------
If the grant date is different from the date the
compensation committee or full board of directors takes action or is
deemed to take action to grant an option, a separate, adjoining column
would have to be added to this table showing the date the compensation
committee or full board of directors took action or was deemed to take
action to grant the option.\68\
---------------------------------------------------------------------------
\68\ Item 402(d)(2)(ii).
---------------------------------------------------------------------------
Further, if the exercise or base price of an option grant is not
the closing market price per share on the grant date, we require a
description of the methodology for determining the exercise or base
price.\69\
---------------------------------------------------------------------------
\69\ Instruction 3 to Item 402(d).
---------------------------------------------------------------------------
b. Compensation Discussion and Analysis
Companies will also be required to address matters relating to
executives' option compensation in the new Compensation Discussion and
Analysis section, particularly as they relate to the timing and pricing
of stock option grants. Without being an exhaustive list, several of
the examples provided in Item 402(b)(2) illustrate how these types of
issues and questions might be covered in a company's disclosure. For
example, Item 402(b)(2)(iv) shows that how the determination is made as
to when awards are granted could be required disclosure. This example
was included in part to note that material information to be disclosed
under Compensation Discussion and Analysis may include the reasons a
company selects particular grant dates for awards, such as for stock
options. Similarly, other examples we provide in Item 402(b)(2)
illustrate how the material information to be disclosed under
Compensation Discussion and Analysis might need to include the methods
a company uses to select the terms of awards, such as the exercise
prices of stock options.
i. Timing of Option Grants
We understand that some companies grant options in coordination
with the release of material non-public information. If the company had
since the beginning of the last fiscal year, or intends to have during
the current fiscal year, a program, plan or practice to select option
grant dates for executive officers in coordination with the release of
material non-public information, the company should disclose that in
the Compensation Discussion and Analysis section. For example, a
company may grant awards of stock options while it knows of material
non-public information that is likely to result in an increase in its
stock price, such as immediately prior to a significant positive
earnings or product development announcement. Such timing could occur
in at least two ways:
The company grants options just prior to the release of
material non-public information that is likely to result in an increase
in its stock price (whether the date of that release of material non-
public information is a regular date or otherwise pre-announced, or
not); or
The company chooses to delay the release of material non-
public information that is likely to result in an increase in its stock
price until after a stock option grant date.
Although the facts would be slightly different, a company also may
coordinate its grant of stock options with the release of negative
material non-public information. Again, such timing could occur in at
least two ways:
The company delays granting options until after the
release of material non-public information that is likely to result in
a decrease in its stock price; or
The company chooses to release material non-public
information that is likely to result in a decrease in its stock price
prior to an upcoming stock option grant.
The Commission does not express a view as to whether or not a
company may or may not have valid and sufficient reasons for such
timing of option grants, consistent with a company's own business
purposes. Some commentators have expressed the view that following
these practices may enable a company to receive more benefit from the
incentive or retention effect of options because recipients may value
options granted in this manner more highly or because doing so provides
an immediate incentive for employee retention because an employee who
leaves the company forfeits the potential value of unvested, in-the-
money options. Other commentators believe that timing option grants in
connection with the release of material non-public information may
unfairly benefit executives and employees.
Regardless of the reasons a company or its board may have, the
Commission believes that in many circumstances the existence of a
program, plan or practice to time the grant of stock options to
executives in coordination with material non-public information would
be material to investors and thus should be fully disclosed in keeping
with the rules we adopt today. Consistent with principles-based
disclosure, companies should consider their own facts and circumstances
and include all relevant material information in their corresponding
disclosures.\70\ If the company has such a program, plan or practice,
the company should disclose that the board of directors or compensation
committee may grant options at times when the board or committee is in
possession of material non-public information. Companies might also
need to consider disclosure about how the board or compensation
committee takes such information into
[[Page 53164]]
account when determining whether and in what amount to make those
grants.
---------------------------------------------------------------------------
\70\ Relevant material information might include disclosure in
response to the examples in Item 402(b)(2) in the Compensation
Discussion and Analysis section, discussed below.
---------------------------------------------------------------------------
Although it is not an exhaustive list, there are some elements and
questions about option timing to which we believe a company should pay
particular attention when drafting the appropriate corresponding
disclosure.
Does a company have any program, plan or practice to time
option grants to its executives in coordination with the release of
material non-public information?
How does any program, plan or practice to time option
grants to executives fit in the context of the company's program, plan
or practice, if any, with regard to option grants to employees more
generally?
What was the role of the compensation committee in
approving and administering such a program, plan or practice? How did
the board or compensation committee take such information into account
when determining whether and in what amount to make those grants? Did
the compensation committee delegate any aspect of the actual
administration of a program, plan or practice to any other persons?
What was the role of executive officers in the company's
program, plan or practice of option timing?
Does the company set the grant date of its stock option
grants to new executives in coordination with the release of material
non-public information?
Does a company plan to time, or has it timed, its release
of material non-public information for the purpose of affecting the
value of executive compensation?
Disclosure would also be required where a company has not
previously disclosed a program, plan or practice of timing option
grants, but has adopted such a program, plan or practice or has made
one or more decisions since the beginning of the past fiscal year to
time option grants.
ii. Determination of Exercise Price
Separate from these timing issues, some companies may have a
program, plan or practice of awarding options and setting the exercise
price based on the stock's price on a date other than the actual grant
date. Such a program, plan or practice would also require disclosure,
including, as appropriate, in the tables described in II.A.2.a above
and in the Compensation Discussion and Analysis section. Again, as with
the timing matters discussed above, companies should consider their own
facts and circumstances and include all relevant material information
in their corresponding disclosures.
Similar to such a practice of setting the exercise price based on a
date other than the actual grant date, some companies have provisions
in their option plans or have followed practices for determining the
exercise price by using formulas based on average prices (or lowest
prices) of the company's stock in a period preceding, surrounding or
following the grant date. In some cases these provisions may increase
the likelihood that recipients will be granted in-the-money options. As
these provisions or practices relate to a material term of a stock
option grant, they should be discussed in the Compensation Discussion
and Analysis section.
B. Compensation Discussion and Analysis
We are adopting a new Compensation Discussion and Analysis
section.\71\ As we proposed, this section will be an overview providing
narrative disclosure that puts into context the compensation disclosure
provided elsewhere.\72\ Commenters generally supported the new
Compensation Discussion and Analysis section.\73\ This overview will
explain material elements of the particular company's compensation for
named executive officers by answering the following questions:
---------------------------------------------------------------------------
\71\ Item 402(b). In addition to the narrative Compensation
Discussion and Analysis, we are amending the rules so that, to the
extent material, additional narrative disclosure will be provided
following certain tables to supplement the disclosure in the table.
See, e.g., Section II.C.3.a., discussing the narrative disclosure to
the Summary Compensation Table and the Grants of Plan-Based Awards
Table. We are also requiring disclosure of compensation committee
procedures and processes as well as information regarding
compensation committee interlocks and insider participation in
compensation decisions as part of new Item 407 of Regulation S-K.
See Section V.D., below.
\72\ See Jeffrey N. Gordon, Executive Compensation: What's the
Problem, What's the Remedy? The Case for Compensation Discussion and
Analysis, 30 J. Corp. L. 695 (2005) (arguing that the Commission
should require proxy disclosure that includes a ``Compensation
Discussion and Analysis'' section that collects and summarizes all
the compensation elements for senior executives, providing a
``bottom line assessment'' of the different compensation elements
and an explanation as to why the board thinks such compensation is
warranted).
\73\ See, e.g., letters from British Columbia Investment
Management Corporation (``BCIMC''); Leo J. Burns (``L. Burns''); CFA
Centre for Financial Market Integrity, dated April 13, 2006 (``CFA
Centre 1''); Chamber of Commerce of the United States of America
(``Chamber of Commerce''); Board of Fire and Police Pension
Commissioners of the City of Los Angeles (``F&P Pension Board'');
F&C Asset Management; Foley & Lardner LLP (``Foley''); Hermes
Investment Management Limited; Governance for Owners USA, Inc.
(``Governance for Owners''); International Association of Machinists
and Aerospace Workers (``IAM''); Board of Trustees of the
International Brotherhood of Electrical Workers Pension Benefit Fund
(``IBEW PBF''); International Brotherhood of Teamsters
(``Teamsters''); Remuneration Committee of the International
Corporate Governance Network; Investment Company Institute
(``ICI''); Institutional Shareholder Services (``ISS''); jointly,
California Public Employees' Retirement System, California State
Teachers' Retirement System, Co-operative Insurance Society--UK, F&C
Asset Management--UK, Illinois State Board of Investment, London
Pensions Fund Authority--UK, New York State Common Retirement Fund,
New York City Pension Funds, Ontario Teachers' Pension Plan, PGGM
Investments--Netherlands, Public Sector and Commonwealth Super (PSS/
CSS)--Australia, RAILPEN Investments--UK, State Board of
Administration (SBA) of Florida, Stichting Pensioenfonds ABP--
Netherlands, UniSuper Limited--Australia, and Universities
Superannuation Scheme--UK (``Institutional Investors Group''); The
Pension Boards--United Church of Christ (``PB-UCC''); State of
Wisconsin Investment Board; and T. Rowe Price Associates, Inc.
---------------------------------------------------------------------------
What are the objectives of the company's compensation
programs?
What is the compensation program designed to reward?
What is each element of compensation?
Why does the company choose to pay each element?
How does the company determine the amount (and, where
applicable, the formula) for each element?
How do each element and the company's decisions regarding
that element fit into the company's overall compensation objectives and
affect decisions regarding other elements?
As proposed, the second question also asked what the compensation
program is designed not to reward. Commenters stated that compensation
committees often may not consider this objective in developing
compensation programs, expressing concern that the question could
generate potentially limitless disclosure that would not add meaning to
disclosure of what the compensation program is designed to award.\74\
In response to this concern, we have not included this question in the
rule as adopted.
---------------------------------------------------------------------------
\74\ See, e.g., letters from American Bar Association, Committee
on Federal Regulation of Securities (``ABA''); Committee on
Securities Regulation of the New York City Bar (``NYCBA''); and
WorldatWork (``WorldatWork'').
---------------------------------------------------------------------------
1. Intent and Operation of the Compensation Discussion and Analysis
The purpose of the Compensation Discussion and Analysis disclosure
is to provide material information about the compensation objectives
and policies for named executive officers without resorting to
boilerplate disclosure. The Compensation Discussion and Analysis is
intended to put into perspective for investors the numbers and
narrative that follow it.
[[Page 53165]]
As described in the Proposing Release and as adopted, the
Compensation Discussion and Analysis requirement is principles-based,
in that it identifies the disclosure concept and provides several
illustrative examples. Some commenters suggested that a principles-
based approach would be better served without examples, on the theory
that ``laundry lists'' would lead to boilerplate.\75\ Other commenters
expressed the opposite view--that more specific description of required
disclosure topics would more effectively elicit meaningful
disclosure.\76\
---------------------------------------------------------------------------
\75\ See, e.g., letter from Curt Kollar (``C. Kollar'').
\76\ See, e.g., letters from CFA Centre 1 and Hewitt Associates
LLC (``Hewitt'').
---------------------------------------------------------------------------
As we explained in the Proposing Release, overall we designed the
proposals to state the requirements sufficiently broadly to continue
operating effectively as future forms of compensation develop, without
suggesting that items that do not fit squarely within a ``box''
specified by the rules need not be disclosed. We believe that the
adopted principles-based Compensation Discussion and Analysis,
utilizing a disclosure concept along with illustrative examples,
strikes an appropriate balance that will effectively elicit meaningful
disclosure, even as new compensation vehicles develop over time.
We wish to emphasize, however, that the application of a particular
example must be tailored to the company and that the examples are non-
exclusive. We believe using illustrative examples helps to identify the
types of disclosure that may be applicable. A company must assess the
materiality to investors of the information that is identified by the
example in light of the particular situation of the company. We also
note that in some cases an example may not be material to a particular
company, and therefore no disclosure would be required. Because the
scope of the Compensation Discussion and Analysis is intended to be
comprehensive, a company must address the compensation policies that it
applies, even if not included among the examples. The Compensation
Discussion and Analysis should reflect the individual circumstances of
a company and should avoid boilerplate disclosure.
We have adopted, substantially as proposed, the following examples
of the issues that would potentially be appropriate for the company to
address in given cases in the Compensation Discussion and Analysis:
Policies for allocating between long-term and currently
paid out compensation;
Policies for allocating between cash and non-cash
compensation, and among different forms of non-cash compensation;
For long-term compensation, the basis for allocating
compensation to each different form of award;
How the determination is made as to when awards are
granted, including awards of equity-based compensation such as options;
What specific items of corporate performance are taken
into account in setting compensation policies and making compensation
decisions;
How specific elements of compensation are structured and
implemented to reflect these items of the company's performance and the
executive's individual performance;
The factors considered in decisions to increase or
decrease compensation materially;
How compensation or amounts realizable from prior
compensation are considered in setting other elements of compensation
(e.g., how gains from prior option or stock awards are considered in
setting retirement benefits);
The impact of accounting and tax treatments of a
particular form of compensation;
The company's equity or other security ownership
requirements or guidelines and any company policies regarding hedging
the economic risk of such ownership;
Whether the company engaged in any benchmarking of total
compensation or any material element of compensation, identifying the
benchmark and, if applicable, its components (including component
companies); and
The role of executive officers in the compensation
process.
At the suggestion of a commenter,\77\ we have expanded the example
addressing how specific forms of compensation are structured to reflect
company performance to also address implementation. We have made a
similar change with regard to the example regarding the executive's
individual performance.\78\ As adopted, this example includes not only
whether discretion can be exercised (either to award compensation
absent attainment of the relevant performance goal(s) or to reduce or
increase the size of any award or payout), as proposed, but also
whether such discretion has been exercised. By doing this, we move to
the Compensation Discussion and Analysis overview an example of a
material factor that had been proposed for the narrative disclosure
that follows the Summary Compensation Table,\79\ and expand its scope
so that it is no longer limited to non-equity incentive plans. Because
of the policy significance of decisions to waive or modify performance
goals, we believe that they are more appropriately discussed in the
Compensation Discussion and Analysis.
---------------------------------------------------------------------------
\77\ See letter from ABA.
\78\ We have also reordered this example, so it is clearer that
the items of company performance referenced are the ones noted in
the immediately preceding example.
\79\ This example had been proposed as Item 402(f)(1)(iv).
---------------------------------------------------------------------------
As discussed in Section II.A. above, a company's policies, programs
and practices regarding the award of stock options and other equity-
based instruments to compensate executives may require disclosure and
discussion in the Compensation Discussion and Analysis. As with all
disclosure in the Compensation Discussion and Analysis, a company must
evaluate the specific facts and circumstances of its grants of options
and equity-based instruments and provide such disclosure if it supplies
material information about the company's compensation objectives and
policies for named executive officers.
Further in response to comment,\80\ we have revised the example
addressing how the determination is made as to when awards are granted
so that it is not limited to equity-based compensation, as was
proposed, but we clarify in the rule as adopted that it would include
equity-based compensation, such as stock options.\81\ Regarding the
example noting the impact of accounting and tax treatments of a
particular form of compensation, some commenters urged that companies
be required to continue to disclose their Internal Revenue Code Section
162(m) policy.\82\ The adoption of this example should not be construed
to eliminate this discussion. Rather, this example indicates more
broadly that any tax or accounting treatment, including but not limited
to Section 162(m), that is material to the company's compensation
policy or decisions with respect to a named
[[Page 53166]]
executive officer is covered by Compensation Discussion and Analysis.
Tax consequences to the named executive officers, as well as tax
consequences to the company, may fall within this example.
---------------------------------------------------------------------------
\80\ See letter from ABA.
\81\ This example is discussed in more detail above in Section
II.A., the discussion of stock option disclosure.
\82\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co., Inc., dated March 9, 2006 (``Frederic W. Cook & Co.'');
Thomas Rogers; and WorldatWork. The Commission has construed the
Board Compensation Committee Report on Executive Compensation (which
had been required to be furnished by Item 402(k) prior to these
amendments) to require discussion of this policy. 1993 Release at
Section III.
---------------------------------------------------------------------------
In addition, we have followed commenters' recommendations to add
the following specific examples addressing additional factors:
Company policies and decisions regarding the adjustment or
recovery of awards or payments if the relevant company performance
measures upon which they are based are restated or otherwise adjusted
in a manner that would reduce the size of an award or payment; \83\ and
---------------------------------------------------------------------------
\83\ See, e.g., letters from Amalgamated Bank Long-View Funds
(``Amalgamated''); CFA Centre 1; and Council of Institutional
Investors, dated March 29, 2006 (``CII''). Section 304 of the
Sarbanes-Oxley Act of 2002 [codified at 15 U.S.C. 7243] provides
that if a company is required to prepare an accounting restatement
due to the material noncompliance of the issuer, as a result of
misconduct, with any financial reporting requirement under the
securities laws, the principal executive officer and principal
financial officer of the company shall reimburse the company for any
bonus or other incentive-based or equity-based compensation received
by that person from the company during the 12-month period following
the first public issuance or filing with the Commission (whichever
first occurs) of the financial document embodying such financial
reporting requirement, and any profits realized from the sale of
securities of the company during that 12-month period. This example
would not necessarily be limited to policies covering only
situations contemplated by Section 304.
---------------------------------------------------------------------------
The basis for selecting particular events as triggering
payment with respect to post-termination agreements (e.g., the
rationale for providing a single trigger for payment in the event of a
change-in-control).\84\
---------------------------------------------------------------------------
\84\ See letter from Anonymous, dated April 10, 2006.
---------------------------------------------------------------------------
Commenters also requested clarification as to whether Compensation
Discussion and Analysis is limited to compensation for the last fiscal
year, like the former Board Compensation Committee Report on Executive
Compensation that was required prior to these amendments.\85\ While the
Compensation Discussion and Analysis must cover this subject, the
Compensation Discussion and Analysis may also require discussion of
post-termination compensation arrangements, on-going compensation
arrangements, and policies that the company will apply on a going-
forward basis.\86\ Compensation Discussion and Analysis should also
cover actions regarding executive compensation that were taken after
the last fiscal year's end. Actions that should be addressed might
include, as examples only, the adoption or implementation of new or
modified programs and policies or specific decisions that were made or
steps that were taken that could affect a fair understanding of the
named executive officer's compensation for the last fiscal year.
Moreover, in some situations it may be necessary to discuss prior years
in order to give context to the disclosure provided.
---------------------------------------------------------------------------
\85\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; and Mercer Human Resource Consulting, Inc., dated April 10,
2006 (``Mercer'').
\86\ Forward looking information in the Compensation Discussion
and Analysis will fall within the safe harbors for disclosure of
such information. See, e.g., Securities Act Section 27A [15 U.S.C.
77z-2] and Exchange Act Section 21E [15 U.S.C. 78u-5].
---------------------------------------------------------------------------
The Compensation Discussion and Analysis should be sufficiently
precise to identify material differences in compensation policies and
decisions for individual named executive officers where appropriate.
Where policies or decisions are materially similar, officers can be
grouped together. Where, however, the policy or decisions for a named
executive officer are materially different, for example in the case of
a principal executive officer, his or her compensation should be
discussed separately.
2. Instructions to Compensation Discussion and Analysis
We are adopting instructions to make clear that the Compensation
Discussion and Analysis should focus on the material principles
underlying the company's executive compensation policies and decisions,
and the most important factors relevant to analysis of those policies
and decisions, without using boilerplate language or repeating the more
detailed information set forth in the tables and related narrative
disclosures that follow. The instructions also provide that the
Compensation Discussion and Analysis should concern the information
contained in the tables and otherwise disclosed.\87\ Because this
section is intended to provide meaningful analysis, it may specifically
refer to the tabular or other disclosures where helpful to make the
discussion more robust. A commenter raised a concern that the
instruction not to repeat information set forth in the other
disclosures might somehow limit the disclosure made in Compensation
Discussion and Analysis.\88\ We have revisited this instruction, which
is intended to encourage analysis and to forestall mere repetition of
the information in the tables, to provide that repetition and
boilerplate language should be avoided. The instruction does not
prohibit or discourage discussion of that specific information.
---------------------------------------------------------------------------
\87\ Instruction 2 to Item 402(b).
\88\ See letter from ABA.
---------------------------------------------------------------------------
We are adopting an instruction to make clear that, as was the case
with the Board Compensation Committee Report on Executive Compensation
required prior to the adoption of these amendments, companies are not
required to disclose target levels with respect to specific
quantitative or qualitative performance-related factors considered by
the compensation committee or the board of directors, or any other
factors or criteria involving confidential trade secrets or
confidential commercial or financial information, the disclosure of
which would result in competitive harm to the company.\89\ Some
commenters objected that this instruction would impair the quality of
information disclosed by making it difficult to assess the link between
pay and company performance, and suggested that competitive harm would
be mitigated if disclosure were required on an after-the-fact basis,
after the performance related to the award is measured.\90\ Different
commenters stated that performance targets often are based on
confidential, competitively sensitive business plans, and that
requiring disclosure could encourage the use of more generic targets
that could hinder a company's goal of pay-for-performance.\91\ Other
commenters observed that companies rarely use a performance metric for
a single year or plan cycle, but select measures because of their
relevance to the company's business strategy over several years, so
that even disclosure on an after-the-fact basis could reveal
proprietary business information that would be useful to
competitors.\92\ Having considered these comments, we remain persuaded
that this disclosure, even on an after-the-fact basis could pose
significant risk of competitive harm and we are therefore not requiring
it in those cases in which the factors or criteria considered involve
confidential trade secrets or confidential commercial or financial
information, the disclosure of which would result in competitive harm
to the company.
---------------------------------------------------------------------------
\89\ Instruction 4 to Item 402(b). Prior to these amendments,
Instruction 2 to Item 402(k) had provided a similar exclusion for
this type of information.
\90\ See, e.g., letters from American Federation of Labor and
Congress of Industrial Organizations, dated April 5, 2006 (``AFL-
CIO''); CII; Governance for Owners; IAM; and The Honorable Barney
Frank, United States Representative (MA).
\91\ See, e.g., letter from Sullivan & Cromwell LLP
(``Sullivan'').
\92\ See, e.g., letter from Mercer.
---------------------------------------------------------------------------
As noted in the Proposing Release, in applying this instruction, we
intend the standard for companies to use in making a determination that
this information
[[Page 53167]]
does not have to be disclosed to be the same one that would apply when
companies request confidential treatment of confidential trade secrets
or confidential commercial or financial information that otherwise is
required to be disclosed in registration statements, periodic reports
and other documents filed with us.\93\ Under this approach, to the
extent a performance target has otherwise been disclosed publicly, non-
disclosure pursuant to this instruction would not be permitted. To make
these standards clearer and respond to commenters' concerns that
companies may exploit the instruction to exclude information in
inappropriate circumstances, we are revising this instruction as
adopted to clearly apply the same standard as for confidential
treatment requests. Companies will not be required, however, to submit
confidential treatment requests in order to rely on the
instruction.\94\ To mitigate commenters' concerns that omission of
specific performance targets would impair the quality of disclosure,
the instruction requires additional disclosure regarding the
significance of the undisclosed target. Specifically, if the company
uses target levels for specific quantitative or qualitative
performance-related factors, or other factors or criteria that it does
not disclose in reliance on the instruction, the company must discuss
how difficult it will be for the executive or how likely it will be for
the company to achieve the undisclosed target levels or other factors.
In addition, as discussed below, the Compensation Discussion and
Analysis will be considered soliciting material and will be filed with
the Commission. This disclosure will be subject to review by the
Commission and its staff. Therefore, if a company uses target levels
that otherwise would need to be disclosed but does not disclose them in
reliance on the instruction, the company may be required to demonstrate
to the Commission or its staff that the particular factors or criteria
involve confidential trade secrets or confidential commercial or
financial information and why disclosure would result in competitive
harm. If the Commission or its staff ultimately determines that a
company has not met these standards, then the company will be required
to disclose publicly the factors or criteria used. In response to a
commenter's concern,\95\ we have also added an instruction to clarify
that disclosure of a target level that applies a non-GAAP financial
measure will not be subject to the general rules regarding disclosure
of non-GAAP financial measures but the company must disclose how the
number is calculated from the audited financial statements.\96\
---------------------------------------------------------------------------
\93\ See Securities Act Rule 406 [17 CFR 230.406], Exchange Act
Rule 24b-2 [17 CFR 240.24b-2], Exemption 4 of the Freedom of
Information Act [5 U.S.C. 552(b)(4)], and Rule 80(b)(4) promulgated
under the Freedom of Information Act [17 CFR 200.80(b)(4)].
\94\ While the instruction adopted today, like the instruction
that it replaces, does not require a company to seek confidential
treatment under the procedures in Securities Act Rule 406 and
Exchange Act Rule 24b-2 with regard to the exclusion of the
information from the disclosure provided in response to this item,
the standards specified in Securities Act Rule 406, Exchange Act
Rule 24b-2, Exemption 4 of the Freedom of Information Act and Rule
80(b)(4) promulgated under the Freedom of Information Act still
apply and are subject to review and comment by the staff of the
Commission.
\95\ See letter from ABA.
\96\ Instruction 5 to Item 402(b). The non-GAAP financial
measure provisions are specified in Regulation G [17 CFR 244.100-
102], Item 10(e) of Regulation S-K [17 CFR 229.10] and Item 10(h) of
Regulation S-B [17 CFR 228.10].
---------------------------------------------------------------------------
One commenter stated that the Compensation Discussion and Analysis
of a new public company should be permitted to be a prospective-only
discussion.\97\ While we agree the most significant disclosure in that
situation may be future plans, we do not believe a prospective-only
discussion is appropriate. Instead, companies may emphasize the new
plans or policies.
---------------------------------------------------------------------------
\97\ See letter from ABA.
---------------------------------------------------------------------------
3. ``Filed'' Status of Compensation Discussion and Analysis and the
``Furnished'' Compensation Committee Report
We proposed that the Compensation Discussion and Analysis would be
considered a part of the proxy statement and any other filing in which
it was included. Unlike the Board Compensation Committee Report on
Executive Compensation that was required prior to these amendments, we
proposed that the Compensation Discussion and Analysis would be
soliciting material and would be filed with the Commission. Therefore,
it would be subject to Regulation 14A or 14C and to the liabilities of
Section 18 of the Exchange Act.\98\ In addition, to the extent that the
Compensation Discussion and Analysis and any of the other disclosure
regarding executive officer and director compensation or other matters
are included or incorporated by reference into a periodic report, the
disclosure would be covered by the certifications that principal
executive officers and principal financial officers are required to
make under the Sarbanes-Oxley Act of 2002.\99\ Likewise, a company's
disclosure controls and procedures \100\ apply to the preparation of
the company's proxy statement and Form 10-K, including the Compensation
Discussion and Analysis.
---------------------------------------------------------------------------
\98\ 15 U.S.C. 78r.
\99\ Exchange Act Rules 13a-14 [17 CFR 240.13a-14] and 15d-14
[17 CFR 240.15d-14]. See also Certification of Disclosure in
Companies' Quarterly and Annual Reports, Release No. 34-46427 (Aug.
29, 2002) [67 FR 57275], at n. 35 (the ``Certification Release'')
(stating that ``the certification in the annual report on Form 10-K
or 10-KSB would be considered to cover the Part III information in a
registrant's proxy or information statement as and when filed'').
\100\ Exchange Act Rules 13a-15 [17 CFR 240.13a-15] and 15d-15
[17 CFR 240.15d-15].
---------------------------------------------------------------------------
We noted in the Proposing Release that in adopting the rules that
have applied since 1992, the Commission took into account comments that
the Board Compensation Committee Report on Executive Compensation
should be furnished rather than filed to allow for more open and robust
discussion in the reports.\101\ The Board Compensation Committee
Reports on Executive Compensation that were provided prior to today's
amendments in general did not suggest that this treatment resulted in
such discussion, nor the more transparent disclosure that the comments
suggested would result.\102\ Further, we noted that we believe that it
is appropriate for companies to take responsibility for disclosure
involving board matters as with other disclosure.
---------------------------------------------------------------------------
\101\ 1992 Release, at Section II.H.
\102\ See also Martin D. Mobley, Compensation Committee Reports
Post-Sarbanes-Oxley: Unimproved Disclosure for Executive
Compensation Policies and Practices, 2005 Colum. Bus. L. Rev. 111
(2005).
---------------------------------------------------------------------------
Some commenters supported the proposal to have the Compensation
Discussion and Analysis filed, noting among other things that filing
should lead to increased accuracy and better disclosure.\103\ Other
commenters objected to this treatment, claiming that certification by
principal executive officers and principal financial officers with
regard to the disclosure included in the annual report on Form 10-K,
including particularly the Compensation Discussion and Analysis, would
inappropriately insert these officers into the compensation
[[Page 53168]]
committee's deliberative process, potentially calling into question the
committee's independence.\104\ Further, many commenters expressed the
view that the Compensation Discussion and Analysis should, in effect,
be the report of the compensation committee, submitted under the names
of its members, for which they should be accountable.\105\
---------------------------------------------------------------------------
\103\ See, e.g., letters from AFL-CIO; American Federation of
State, County and Municipal Employees; California Public Employees'
Retirement System (``CalPERS''); Paul Hodgson, Senior Research
Associate, Executive and Board Compensation, the Corporate Library
(``Corporate Library''); Connecticut Retirement Plans and Trust
Funds, dated April 10, 2006 (``CRPTF''); Southwestern Pennsylvania
and Western Maryland Area Teamsters and Employers Pension Fund
(``Teamsters PA/MD''); Teamsters Local 671 Health Services and
Insurance Plan (``Teamsters Local 671''); Walden Asset Management
(``Walden''); and Western PA Teamsters & Employers Welfare Fund
(``Western PA Teamsters Fund'').
\104\ See, e.g., letters from The Corporate & Securities Law
Committee and the Employment & Labor Law Committee of the
Association of Corporate Counsel (``ACC''); Compass Bancshares, Inc.
(``Compass Bancshares''); National Association of Manufacturers
(``NAM''); Peabody Energy Corporation (``Peabody Energy''); and
WorldatWork.
\105\ See, e.g., letters from Jesse Brill, Chair of
CompensationStandards.com and Chair of the National Association of
Stock Plan Professionals, dated March 1, 2006 (``J. Brill 1''); CFA
Centre 1; CRPTF; Frederic W. Cook & Co.; and Hewitt.
---------------------------------------------------------------------------
Some of these objections may reflect a misconception of the purpose
of the Compensation Discussion and Analysis. Although the Compensation
Discussion and Analysis discusses company compensation policies and
decisions, the Compensation Discussion and Analysis does not address
the deliberations of the compensation committee, and is not a report of
that committee. Consequently, in certifying the Compensation Discussion
and Analysis, principal executive officers and principal financial
officers will not need to certify as to the compensation committee
deliberations.
However, in response to concerns of commenters that compensation
committees should continue to be focused on the executive compensation
disclosure process, we are adopting a Compensation Committee Report
similar to the Audit Committee Report.\106\ Drawing on commenters'
suggestions for a new Compensation Committee Report,\107\ the rules we
adopt today require the compensation committee to state whether:
---------------------------------------------------------------------------
\106\ We are moving the audit committee report previously
required by Item 306 of Regulations S-K and S-B to Item 407(d) under
the amendments adopted today. See Section V.D., below.
\107\ See, e.g., letters from J. Brill 1; California State
Teachers' Retirement System (``CalSTRS''); CFA Centre 1; and
Professor William J. Heisler.
---------------------------------------------------------------------------
The compensation committee has reviewed and discussed the
Compensation Discussion and Analysis with management; and
Based on the review and discussions, the compensation
committee recommended to the board of directors that the Compensation
Discussion and Analysis be included in the company's annual report on
Form 10-K and, as applicable, the company's proxy or information
statement.
Unlike the Audit Committee Report, the Compensation Committee
Report will be required to be included or incorporated by reference
into the company's annual report on Form 10-K, so that it is presented
along with the Compensation Discussion and Analysis when that
disclosure is provided in the Form 10-K or incorporated by reference
from a proxy or information statement.\108\ Like the Audit Committee
Report, the Compensation Committee Report will only be required one
time during any fiscal year.\109\ The name of each member of the
company's compensation committee (or, in the absence of a compensation
committee, the persons performing equivalent functions or the entire
board of directors) must appear below the disclosure.\110\ This report
will be ``furnished'' rather than ``filed.'' The principal executive
officer and principal financial officer will be able to look to the
Compensation Committee Report in providing their certifications
required under Exchange Act Rules 13a-14 and 15d-14.\111\
---------------------------------------------------------------------------
\108\ The audit committee report is only required in a company
proxy or information statement relating to an annual meeting of
security holders at which directors are to be elected (or special
meeting or written consents in lieu of such meeting). See
Instruction 3 to Item 407(d).
\109\ Instruction 3 to Item 407(e)(5). The audit committee
instruction is specified in Instruction 2 to Item 407(d).
\110\ Item 407(e)(5)(ii).
\111\ We note that one commenter suggested that the Compensation
Discussion and Analysis should not be required of companies that
have only registered the offer and sale of debt securities. See
letter from Financial Security Assurance Holdings Ltd. The
Compensation Discussion and Analysis is intended to put into
perspective for investors the numbers and narrative that follow it.
This section will provide a broader discussion than just that of the
relationship of compensation to the performance of the company as
reflected by stock price. Therefore, we believe it is appropriate
for all companies that are not small business issuers or foreign
private issuers filing on forms specified for their use to include
the information.
---------------------------------------------------------------------------
4. Retention of the Performance Graph
In light of the Compensation Discussion and Analysis requirement,
we proposed to eliminate both the Board Compensation Committee Report
on Executive Compensation and the Performance Graph.\112\ The report
and the graph were intended to be related and to show the relationship,
if any, between compensation and corporate performance, as reflected by
stock price. The rules we adopt today eliminate the Board Compensation
Committee Report on Executive Compensation, as we proposed, in favor of
the more comprehensive Compensation Discussion and Analysis and the new
Compensation Committee Report, as described immediately above.\113\
---------------------------------------------------------------------------
\112\ Prior to these amendments, the Board Compensation
Committee Report on Executive Compensation had been required by Item
402(k) and the Performance Graph had been required by Item 402(l).
\113\ Section II.B.3.
---------------------------------------------------------------------------
Given the widespread availability of stock performance information
about companies, industries and indexes through business-related Web
sites or similar sources, we proposed to eliminate the requirement for
the Performance Graph in the belief that it was outdated, particularly
since the disclosure in the Compensation Discussion and Analysis
regarding the elements of corporate performance that a given company's
policies might reach is intended to allow broader discussion than just
that of the relationship of compensation to the performance of the
company as reflected by stock price. Many commenters objected to
eliminating the Performance Graph, however, stating that it provides an
easily accessible visual comparison of a company's performance relative
to its peers and the market, and provides a standardized source for
this type of information.\114\ In light of the significance of this
disclosure to a broad spectrum of commenters, we have decided to retain
the Performance Graph in the amendments we adopt today.
---------------------------------------------------------------------------
\114\ See, e.g., letters from CalSTRS; CFA Centre 1; CII; IUE-
CWA Pension Fund and 401(k) Plan (``IUE-CWA''); John W. Hamm; NYCBA;
Standard Life Investments Limited (``Standard Life''); and Vivient
Consulting LLC.
---------------------------------------------------------------------------
However, we remain of the view that the Performance Graph should
not be presented as part of executive compensation disclosure. In
particular, as noted above, the disclosure in the Compensation
Discussion and Analysis regarding the elements of corporate performance
that a given company's policies consider is intended to encourage
broader discussion than just that of the relationship of executive
compensation to the performance of the company as reflected by stock
price. Presenting the Performance Graph as compensation disclosure may
weaken this objective. Accordingly, we have decided to retain the
requirements for the Performance Graph, but have moved them to the
disclosure item entitled ``Market Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters.'' \115\ As
[[Page 53169]]
retained, the Performance Graph will continue to be ``furnished''
rather than ``filed.'' The Performance Graph will be required only in
the company's annual report to security holders that accompanies or
precedes a proxy or information statement relating to an annual meeting
of security holders at which directors are to be elected (or special
meeting or written consents in lieu of such meeting), and will not be
deemed to be soliciting material under the proxy rules or incorporated
by reference into any filing except to the extent that the company
specifically incorporates it.\116\
---------------------------------------------------------------------------
\115\ New Item 201(e) of Regulation S-K [17 CFR 229.201(e)] will
require the Performance Graph. Consistent with our belief that the
Performance Graph should not be linked to the compensation
disclosure, we have not retained the portion of the language that
was included in Instruction 4 to Item 402(l) prior to these
amendments, which conditioned that other performance measures in
addition to total return may be included in the graph only so long
as the compensation committee (or persons performing equivalent
functions or the entire board if there is no such committee)
provided a description of the link between the measure and the level
of compensation in the Board Compensation Committee Report on
Executive Compensation. As a result, companies may include other
performance measures, such as return on average common shareholders'
equity, so long as the meaning of any such measures is clear from
the Performance Graph and any related legend or other disclosure.
\116\ Instructions 7 and 8 to Item 201(e). A ``small business
issuer'' as defined in Regulation S-B, is not required to provide
the Performance Graph. Instruction 6 to Item 201(e). Because Nasdaq
has registered as a national securities exchange under Section 6 of
the Exchange Act [15 U.S.C. 78f], the former separate reference to
``Nasdaq market'' is not retained. See Release No. 34-53128 (Jan.
13, 2006) ordering that the application of The NASDAQ Stock Market
LLC for registration as a national securities exchange be granted.
We also adopt a conforming revision to Rules 304(d) and (e) of
Regulation S-T [17 CFR 232.304(d) and (e)], and we make technical
revisions to those rules to correctly reference Item 22(b)(7)(ii) of
Form N-1A and to eliminate the references to ``prospectuses.''
---------------------------------------------------------------------------
C. Compensation Tables
To enhance the benefits of the tabular approach to eliciting
compensation disclosure,\117\ we proposed to reorganize and streamline
the tables to provide a clearer and more logical picture of total
compensation and its elements for named executive officers. We are
adopting reorganized compensation tables and related narrative
disclosure that cover three broad categories:
---------------------------------------------------------------------------
\117\ The tabular disclosure and related narrative disclosure
under amended Item 402 applies, as it did prior to today's
amendments, to named executive officers, with amended Item 402(k)
applying to directors, as described in Section II.C.9. below. As
discussed below in Section II.C.6.a., we are adopting certain
changes to the definition of named executive officer.
---------------------------------------------------------------------------
1. Compensation with respect to the last fiscal year (and the two
preceding fiscal years), as reflected in a revised Summary Compensation
Table that presents compensation paid currently or deferred (including
options, restricted stock and similar grants) and compensation
consisting of current earnings or awards that are part of a plan, and
as supplemented by one table providing back-up information for certain
data in the Summary Compensation Table; \118\
2. Holdings of equity-based interests that relate to compensation
or are potential sources of future compensation, focusing on
compensation-related equity-based interests that were awarded in prior
years \119\ and are ``at risk,'' as well as recent realization on these
interests, such as through vesting of restricted stock or the exercise
of options and similar instruments; \120\ and
---------------------------------------------------------------------------
\118\ The table supplementing the Summary Compensation Table is
the Grants of Plan-Based Awards Table, discussed below in Section
II.C.2., which combines into a single table the disclosure of the
proposed Grants of Performance-Based Awards Table and the proposed
Grants of All Other Equity Awards Table. The accompanying narrative
disclosure requirement is discussed below in Section II.C.3.a.
\119\ Under the disclosure rules as adopted, these interests
will be disclosed as current compensation for those prior years.
\120\ Information regarding holdings of such equity-based
interests that relate to compensation will be disclosed in the
Outstanding Equity Awards at Fiscal Year-End Table, discussed below
in Section II.C.4.a. Information regarding realization on holdings
of equity-based interests will be required in the Option Exercises
and Stock Vested Table discussed below in Section II.C.4.b.
---------------------------------------------------------------------------
3. Retirement and other post-employment compensation, including
retirement and deferred compensation plans, other retirement benefits
and other post-employment benefits, such as those payable in the event
of a change in control.\121\
---------------------------------------------------------------------------
\121\ Disclosure regarding retirement and post-employment
compensation is required in the Pension Benefits Table, discussed
below in Section II.C.5.a., the Nonqualified Deferred Compensation
Table, discussed below in Section II.C.5.b., and the narrative
disclosure requirement for other potential post-employment payments
discussed below in Section II.C.5.c.
---------------------------------------------------------------------------
Reorganizing the tables along these themes should help investors
understand how compensation components relate to each other. At the
same time, we are retaining the ability for investors to use the tables
to compare compensation from year to year and from company to company.
As we noted in the Proposing Release, by more clearly organizing
the compensation tables to explain how the elements relate to each
other, we may in some situations be requiring disclosure of both
amounts earned (or potentially earned) and amounts subsequently paid
out. This approach raises the possible perception of ``double
counting'' some elements of compensation in multiple tables. However, a
particular item of compensation only appears once in the Summary
Compensation Table. In order to explain the item of compensation, it
may also appear in one or more of the other tables. We believe the
possible perception of double disclosure is outweighed by the clearer
and more complete picture the disclosure in the additional tables will
provide to investors. We strongly encourage companies to use the
narrative following the tables (and where appropriate the Compensation
Discussion and Analysis) to explain how disclosures relate to each
other in their particular circumstances.
Commenters stated their general support for the format and
presentation of the proposed tables.\122\ We are adopting the tables
substantially as proposed with some revisions, as noted below, in
response to comments.
---------------------------------------------------------------------------
\122\ See, e.g., letters from CFA Centre 1; jointly, Jennifer
Clowes, Lindsey Erskine, Kendra Freeck and Kapri Malesich; F&P
Pension Board; IAM; IBEW PBF; Plumbers & Pipefitters National
Pension Fund; and Standard Life.
---------------------------------------------------------------------------
1. Compensation to Named Executive Officers in the Last Three Completed
Fiscal Years--The Summary Compensation Table and Related Disclosure
Under today's amendments, the Summary Compensation Table continues
to serve as the principal disclosure vehicle regarding executive
compensation. This table, as amended, shows the named executive
officers' compensation for each of the last three years, whether or not
actually paid out. Consistent with the requirements prior to today's
amendments, the amended Summary Compensation Table continues to require
disclosure of compensation for each of the company's last three
completed fiscal years.\123\
---------------------------------------------------------------------------
\123\ Prior to today's amendments, an instruction to Item 402(b)
permitted the exclusion of information for fiscal years prior to the
last completed fiscal year if the company was not a reporting
company pursuant to Exchange Act Section 13(a) or 15(d) at any time
during that year, unless the company previously was required to
provide information for any such year in response to a Commission
filing requirement. This instruction has been retained and
redesignated as Instruction 1 to Item 402(c) in the amended rule.
---------------------------------------------------------------------------
As we proposed, the amendments add disclosure of a figure
representing total compensation, as reflected in other columns of the
Summary Compensation Table, and simplify the presentation from that of
the table prior to these amendments. As described in greater detail
below, the amendments also provide for a supplemental table disclosing
additional information about grants of plan-based awards. Narrative
disclosure will follow the two tables, providing disclosure of material
information necessary to an understanding of the information disclosed
in the tables.
[[Page 53170]]
Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in
pension value
Name and Non-equity and All other
principal Year Salary ($) Bonus ($) Stock awards Option awards incentive plan nonqualified compensation Total ($)
position ($) ($) compensation deferred ($)
($) compensation
earnings ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
--------------------------------------------------------------------------------------------------------------------------------------------------------
PEO \124\
--------------------------------------------------------------------------------------------------------------------------------------------------------
PFO \125\
--------------------------------------------------------------------------------------------------------------------------------------------------------
A
--------------------------------------------------------------------------------------------------------------------------------------------------------
B
--------------------------------------------------------------------------------------------------------------------------------------------------------
C
--------------------------------------------------------------------------------------------------------------------------------------------------------
a. Total Compensation Column
We are modifying the Summary Compensation Table to provide a
clearer picture of total compensation. As we proposed, we are requiring
that all compensation be disclosed in dollars and that a total of all
compensation be provided.\126\ The new ``Total'' column aggregates the
total dollar value of each form of compensation quantified in the other
columns (revised columns (c) through (i)). This column responds to
concerns that investors, analysts and other users of Item 402
disclosure have not been able to compute aggregate amounts of
compensation using the disclosure in the table as specified prior to
these amendments in a manner that was accurate or comparable across
years or companies. Many commenters expressed their support for the
proposal to include a Total column.\127\
---------------------------------------------------------------------------
\124\ ``PEO'' refers to principal executive officer. See Section
II.C.6.a. below for a description of the proposed named executive
officers for whom compensation disclosure is required.
\125\ ``PFO'' refers to principal financial officer.
\126\ Instruction 2 to Item 402(c) (requiring all compensation
values in the Summary Compensation Table to be reported in dollars
and rounded to the nearest dollar). Prior to today's amendments,
some stock-based compensation was disclosed in per share increments
rather than in dollar amounts. Instruction 2 to Item 402(c) further
requires, where compensation was paid or received in a different
currency, footnote disclosure identifying that currency and
describing the rate and methodology used for conversion to dollars.
\127\ See, e.g., letters from CFA Centre 1; CII; Frederic W.
Cook & Co.; ISS; Standard Life; and Walden. In addition, over 20,000
form letters from individuals specifically supported this proposal.
See Letter Type A, available at http://www.sec.gov/rules/proposed/s70306.shtml
.
---------------------------------------------------------------------------
Other commenters expressed concerns that, as proposed, the total
number was an amalgam of dissimilar types of compensation.\128\ These
concerns centered on the mix of compensation elements reported in the
Summary Compensation Table being measured at different times and having
different valuation methods, so that a Total column in effect would
combine ``apples'' with ``oranges.'' \129\ To address this issue, some
commenters suggested dividing the Total column into two separate
columns reporting Total Earned Compensation and Total Contingent
Compensation.\130\ Others recommended two separate Summary Compensation
Tables--one for compensation that had been earned or realized and
another for compensation that remained contingent or an
opportunity.\131\
---------------------------------------------------------------------------
\128\ See, e.g., letters from Fenwick & West LLP (``Fenwick'');
Chamber of Commerce; and Hodak Value Advisors, LLC (``Hodak Value
Advisors'').
\129\ See, e.g., letters from Caterpillar Inc. and Corporate
Library.
\130\ See, e.g., letters from Business Roundtable (``BRT'') and
Mercer.
\131\ See, e.g., letters from Eli Lilly and Company (``Eli
Lilly''); Hewitt; Society of Corporate Secretaries & Governance
Professionals (``SCSGP''); Towers Perrin, dated April 10, 2006
(``Towers Perrin''); and Watson Wyatt Worldwide (``Watson Wyatt'').
---------------------------------------------------------------------------
As we noted in the Proposing Release, the Summary Compensation
Table is designed to disclose all compensation. Each element of
compensation is only disclosed once in the Summary Compensation Table,
although it may also be disclosed in some of the other tables. We
realize that the timing of when particular items of compensation are
disclosed in the Summary Compensation Table varies depending on the
form of the compensation.\132\ Given the various forms and complexities
of compensation and the different periods they may be designed to
relate to,\133\ it is unavoidable that the timing of disclosure may
vary from element to element in this table.\134\
---------------------------------------------------------------------------
\132\ Compensation is generally calculated in a manner that
reflects the cost of the compensation to the company and its
shareholders.
\133\ See, e.g., letter from ABA (noting that option grants made
early in the year may be viewed by the compensation committee
primarily as an award for the prior year's performance or as an
incentive for future performance).
\134\ The approach as to the timing of disclosure that we
proposed and that we adopt today is the same approach that has been
used in the Summary Compensation Table since it was first proposed
in 1992. See Executive Compensation Disclosure, Release No. 33-6940
(June 23, 1992) [57 FR 29582] (noting that the Summary Compensation
Table will ``provide shareholders a concise, comprehensive overview
of compensation awarded, earned or paid in the reporting period'').
---------------------------------------------------------------------------
[[Page 53171]]
We note that some commenters were particularly concerned that non-
equity incentive plan awards are reported when earned, while equity
incentive plan awards are reported based on grant date value when
awarded.\135\ No single accepted standard for measuring non-equity
incentive plan awards at grant date currently exists. Some commenters
nonetheless suggested that we require grant date fair value estimates
of non-equity incentive plan awards in the Summary Compensation
Table.\136\ We do not believe it is appropriate at this time for us to
develop such a standard expressly for compensation disclosure purposes.
Nevertheless, we believe that the Summary Compensation Table that we
adopt today, including a total of all of the various elements
presented, provides meaningful disclosure to investors and allows for
comparability between companies and within a company.
---------------------------------------------------------------------------
\135\ See, e.g., letters from ACC; Amalgamated; BDO Seidman, LLP
(``BDO Seidman''); CII; IUE-CWA; and Mercer.
\136\ See, e.g., letters from CII; IUE-CWA; and CRPTF.
Information about the amounts that could be earned under non-equity
incentive plans is required to be disclosed in the Grants of Plan-
Based Awards Table when such awards are granted.
---------------------------------------------------------------------------
However, in response to comments, we have created a separate column
for the annual change in actuarial value of defined benefit plans and
earnings on nonqualified deferred compensation.\137\ As proposed, these
compensation elements would have been included in the aggregate amount
reported in the All Other Compensation column. We believe that
presenting these items in a separate column will permit investors and
other users of the Summary Compensation Table to readily identify
elements included in the Total column that may relate principally to
longevity of service. These items will not be used to determine the
officers included in the table.\138\
---------------------------------------------------------------------------
\137\ See Section II.C.1.d.i. below, which describes a
modification of the proposed Summary Compensation Table disclosure
of nonqualified deferred compensation earnings to present only the
above-market or preferential portion in this table.
\138\ See Section II.C.6.b. below describing how in response to
commenters this column is excluded from total compensation for the
purpose of identifying named executive officers.
---------------------------------------------------------------------------
We proposed that the new column disclosing total compensation would
appear as the first column providing compensation information.\139\
Some commenters suggested moving this column to the right of the table,
so that it would follow--rather than precede--the relevant component
numbers.\140\ In response to these comments, we have moved the Total
column to the final column in the table.
---------------------------------------------------------------------------
\139\ Columns (a) and (b) specify the executive officer and the
year in question.
\140\ See,e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; and SCSGP.
---------------------------------------------------------------------------
b. Salary and Bonus Columns
The first columns providing compensation information that we are
requiring are the salary and bonus columns (columns (c) and (d),
respectively), which are retained substantially in their previous form.
However, we are adopting some changes, as proposed, that will give an
investor a clearer picture of the total amount earned.
As we proposed, compensation that is earned, but for which payment
will be deferred, must be included in the salary, bonus or other
column, as appropriate. A new instruction, applicable to the entire
Summary Compensation Table, provides that if receipt of any amount of
compensation is currently payable but has been deferred for any reason,
the amount so deferred must be included in the appropriate column.\141\
This treatment is no longer limited to salary and bonus, as it was
prior to these amendments, and under the amended rules this treatment
applies regardless of the reason for the deferral.\142\
---------------------------------------------------------------------------
\141\ Instruction 4 to Item 402(c).
\142\ Prior to the amendments, this requirement was triggered
only if the officer elected the deferral. We are amending this
requirement as we proposed to cover all deferrals, no matter who has
initiated the deferrals.
---------------------------------------------------------------------------
We also proposed that the amount so deferred must be disclosed in a
footnote to the applicable column. As described below, the amount
deferred will also generally be reflected as a contribution in the
deferred compensation presentation.\143\ The proposed footnote
disclosure was intended to clarify the extent to which amounts
disclosed in the Nonqualified Deferred Compensation Table described
below represent compensation already reported, rather than additional
compensation. Because commenters thought it could lead to potential
double counting, we have not adopted this proposed footnote
requirement.\144\
---------------------------------------------------------------------------
\143\ See Section II.C.5.b., describing the Nonqualified
Deferred Compensation Table. Disclosure of these amounts as
contributions will now be required for nonqualified deferred
compensation plans. This disclosure will not be required for
qualified plans. Nonqualified deferred compensation plans and
arrangements provide for the deferral of compensation that does not
satisfy the minimum coverage, nondiscrimination and other rules that
``qualify'' broad-based plans for favorable tax treatment under the
Internal Revenue Code.
\144\ See, e.g., letter from WorldatWork. As described in
Section II.C.5.b. below, however, we have adopted the corresponding
footnote proposed for the Nonqualified Deferred Compensation Table.
---------------------------------------------------------------------------
As proposed, we have eliminated the delay that existed under the
former rules where salary or bonus for the most recent fiscal year is
determined following compliance with Item 402 disclosure. Under our new
rules, where salary or bonus cannot be calculated as of the most recent
practicable date, a current report under Item 5.02 of Form 8-K will be
triggered by a payment, decision or other occurrence as a result of
which either of such amounts become calculable in whole or part.\145\
The Form 8-K will include disclosure of the salary or bonus amount and
a new total compensation figure including that salary or bonus amount.
---------------------------------------------------------------------------
\145\ New Item 5.02(f) of Form 8-K and Instruction 1 to Item
402(c)(2)(iii) and (iv). Prior to these amendments, in the event
that such amounts were not determinable at the most recent
practicable date, they were generally reported in the annual report
on Form 10-K or proxy statement for the following fiscal year. We
believe providing the information more quickly is appropriate and
are therefore adopting the use of a current report on Form 8-K.
Instruction 1 to Item 402(c)(2) (iii) and (iv) requires that the
company disclose in a footnote that the salary or bonus is not
calculable through the latest practicable date and the date that the
salary or bonus is expected to be determined. We proposed to include
this requirement in an instruction to proposed paragraph (e) of Item
5.02 of Form 8-K. We are adopting it as a separate paragraph of Item
5.02 in order to make it clearer that it is a separate triggering
event.
---------------------------------------------------------------------------
c. Plan-Based Awards
As we proposed, the next three columns--Stock Awards, Option Awards
and Non-Equity Incentive Plan Compensation--cover plan-based awards.
i. Stock Awards and Option Awards Columns
As proposed and adopted, the Stock Awards column (column (e))
discloses stock-related awards that derive their value from the
company's equity securities or permit settlement by issuance of the
company's equity securities and, as we have clarified, are thus within
the scope of FAS 123R for financial reporting, such as restricted
stock, restricted stock units, phantom stock, phantom stock units,
common stock equivalent units or other similar instruments that do not
have option-like features.\146\ Valuation is based on the
[[Page 53172]]
grant date fair value of the award determined pursuant to FAS 123R for
financial reporting purposes. Stock awards granted pursuant to an
equity incentive plan are also included in this column to ensure
consistent reporting of stock awards and to ensure their inclusion in
the revised Summary Compensation Table.\147\
---------------------------------------------------------------------------
\146\ Generally speaking, a restricted stock award is an award
of stock subject to vesting conditions, such as performance-based
conditions or conditions based on continued employment for a
specified period of time. This type of award is referred to as
``nonvested equity shares'' in FAS 123R. Phantom stock, phantom
stock units, common stock equivalent units and other similar awards
are typically awards where an executive obtains a right to receive
payment in the future of an amount based on the value of a
hypothetical, or notional, amount of shares of common equity (or in
some cases stock based on that value). To the extent that the terms
of phantom stock, phantom stock units, common stock equivalents or
other similar awards include option-like features, the awards will
be required to be included in the Option Awards column. Prior to
these amendments, restricted stock awards were valued in the Summary
Compensation Table by multiplying the closing market price of the
company's unrestricted stock on the date of grant by the number of
shares awarded.
\147\ Prior to these amendments, these performance-based stock
awards could be reported at the company's election as incentive plan
awards under what was then specified in Instruction 1 to Item
402(b)(2)(iv). Our amendments today eliminate this alternative.
---------------------------------------------------------------------------
Awards of options, stock appreciation rights, and similar equity-
based compensation instruments that have option-like features that, as
we have clarified, are within the scope of FAS 123R, must be disclosed
in the Option Awards column (column (f)) in a manner similar to the
treatment of stock and other equity-based awards under the
amendments.\148\ Instead of the disclosure of the number of securities
underlying the awards as was the case prior to today's amendments, this
column requires disclosure of the grant date fair value of the award as
determined pursuant to FAS 123R. In order to calculate a total dollar
amount of compensation, the value rather than the number of securities
underlying an award must be used. The FAS 123R valuation must be used
whether the award itself is in the form of stock, options or similar
instruments or the award is settled in cash but the amount of payment
is tied to performance of the company's stock.\149\
---------------------------------------------------------------------------
\148\ A stock appreciation right usually gives the executive the
right to receive the value of the increase in the price of a
specified number of shares over a specified period of time. These
awards may be settled in cash or in shares.
\149\ As proposed, we are eliminating the requirement that had
been specified in Options/SAR Grants in Last Fiscal Year Table under
Item 402(c)(2)(vi) to report the potential realizable value of each
option grant under 5% or 10% increases in value or the present value
of each grant (computed under any option pricing model). These
alternative disclosures are no longer necessary insofar as the grant
date fair value of equity-based awards is included in the Summary
Compensation Table.
---------------------------------------------------------------------------
Under FAS 123R, the compensation cost is initially measured based
on the grant date fair value of an award,\150\ and generally recognized
for financial reporting purposes over the period in which the employee
is required to provide service in exchange for the award (generally the
vesting period). Some commenters suggested that rather than requiring
disclosure of the grant date fair value of equity awards, we should
require a company to disclose just the portion of the award expensed in
the company's financial statements.\151\ These commenters expressed
concerns that disclosing the full grant date fair value would be
inconsistent with the company's financial statements, would overstate
compensation earned related to service rendered for the year, and would
be inconsistent with the presentation of non-equity incentive plan
compensation. Other commenters expressed support for requiring
companies to report the full grant date fair value in the year of the
award because it would provide a more complete representation of
compensation.\152\
---------------------------------------------------------------------------
\150\ Under FAS 123R, the classification of an award as an
equity or liability award is an important aspect of the accounting
because the classification will affect the measurement of
compensation cost. Awards with cash-based settlement, repurchase
features, or other features that do not result in an employee
bearing the risks and rewards normally associated with share
ownership for a specified period of time would be classified as
liability awards under FAS 123R. For an award classified as an
equity award under FAS 123R, the compensation cost recognized is
fixed for a particular award, and absent modification, is not
revised with subsequent changes in market prices or other
assumptions used for purposes of the valuation. In contrast,
liability awards are initially measured at fair value on the grant
date, but for purposes of recognition in financial statement
reporting are then re-measured at each reporting date through the
settlement date under FAS 123R. These re-measurements would not be
the basis for executive compensation disclosure under our amended
rules, unless the award has been modified, as described later in
this release.
\151\ See, e.g., letters from the SEC Regulations Committee of
the American Institute of Certified Public Accountants (``AICPA'');
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.; Chamber of
Commerce; Computer Sciences Corporation (``Computer Sciences'');
Deloitte & Touche LLP; Ernst & Young LLP (``E&Y''); Fenwick; Foley;
HR Policy Association (``HRPA''); American Bar Association, Joint
Committee on Employee Benefits (``ABA-JCEB''); and KPMG LLP
(``KPMG'').
\152\ See, e.g., letters from CalPERS; CFA Centre 1; CRPTF; L.
Burns; Governance for Owners; Laborers International Union of North
America; Nancy Lucke Ludgus (``N. Ludgus''); Institutional Investors
Group; State Board of Administration (SBA) of Florida (``SBAF'');
Teamsters Local 671; Teamsters PA/MD; United Church Foundation, Inc.
(``UCF''); Washington State Investment Board (``WSIB''); and Western
PA Teamsters Fund.
---------------------------------------------------------------------------
We are adopting these columns substantially as proposed.\153\ Under
our amendments, the compensation cost calculated as the grant date fair
value will be shown as compensation in the year in which the grant is
made.\154\ As we stated in the Proposing Release, we believe that this
approach is more consistent with the purpose of executive compensation
disclosure. We are adopting an approach that subscribes to the
measurement method of FAS 123R based on grant date fair value, but also
provides for immediate disclosure of compensation. This timing of
disclosure of option awards remains the same as it has been since 1992.
The only change is that the awards are now disclosed in dollars rather
than numbers of units or shares. Disclosing these awards as they are
expensed for financial statement reporting purposes would not mirror
the timing of disclosure of non-equity incentive plan compensation.
While we have imported a financial statement reporting principle to
enable disclosure of compensation costs, executive compensation
disclosure must continue to inform investors of current actions
regarding plan awards--a function that would not be fulfilled applying
financial reporting recognition timing. If a company does not believe
that the full grant date fair value reflects compensation earned,
awarded or paid during a fiscal year, it can provide appropriate
explanatory disclosure in the accompanying narrative section.
Furthermore, disclosing grant date fair value will give investors a
clearer picture of the value of any in-the-money awards. As we
proposed, the number of shares underlying an award and other details
regarding the award must be disclosed in a separate table covering
grants of plan-based awards supplementing the Summary Compensation
Table.\155\ This supplemental table, which combines the disclosure that
would have been required by the proposed Grants of Performance-Based
Awards Table and Grants of All Other Equity Awards Table, discloses
equity awards granted pursuant to incentive plans separately from other
equity awards.
---------------------------------------------------------------------------
\153\ Item 402(c)(2)(v) and (vi).
\154\ FAS 123R requires a company to aggregate individuals
receiving awards into relatively homogenous groups with respect to
exercise and post-vesting employment termination behaviors for the
purpose of determining expected term, for example executives and
non-executives. The rules we adopt today are not intended to change
the method used to value employee stock options for purposes of FAS
123R or to affect the judgments as to reasonable groupings for
purposes of determining the expected term assumption required by FAS
123R. Under the rules we adopt today, where a company uses more than
one group, the measurement of grant date fair value for purposes of
Item 402 would be derived using the expected term assumption for the
group that includes the named executive officers (or the group that
includes directors for purposes of Item 402(k)).
\155\ See Section II.C.2., discussing the Grants of Plan-Based
Awards Table required by Item 402(d).
---------------------------------------------------------------------------
We are adopting as proposed an instruction that requires a footnote
referencing the discussion of the relevant assumptions in the notes to
the company's financial statements or the discussion of relevant
assumptions in the MD&A.\156\ The same instruction also
[[Page 53173]]
provides that the referenced sections will be deemed to be part of the
disclosure provided pursuant to Item 402. The referenced sections
containing this disclosure are required in the company's annual report
to shareholders that must precede or accompany the company's proxy
statement.\157\ In the case of Internet disclosure of proxy materials,
companies could provide hyperlinks from the proxy statement to the
referenced sections contained in the annual report.\158\ While some
commenters recommended requiring these valuation assumptions to be
presented in the proxy statement,\159\ we believe that investors will
be able to easily access this information without requiring it to be
repeated from other documents.
---------------------------------------------------------------------------
\156\ Instruction 1 to Item 402(c)(2)(v) and (vi).
\157\ See Exchange Act Rule 14a-3 [17 CFR 240.14a-3].
\158\ In addition, in December 2005, we proposed rules that
would allow companies and other persons to use the Internet to
satisfy proxy material delivery requirements. Internet Availability
of Proxy Materials, Release No. 34-52926 (Dec. 8, 2005) [70 FR
74597].
\159\ See, e.g., letters from Buck Consultants; CII; Frederic W.
Cook & Co.; and IUE-CWA.
---------------------------------------------------------------------------
We proposed that previously awarded options or freestanding stock
appreciation awards that the company repriced or otherwise materially
modified during the last fiscal year be disclosed in the Summary
Compensation Table based on the total fair value of the award as so
modified. Under FAS 123R, only the incremental fair value, computed as
of the repricing or modification date, is recognized for such an award.
Several commenters recommended conforming Summary Compensation Table
reporting to the incremental fair value recognition approach of FAS
123R, objecting that the proposed total fair value approach would
inappropriately double count the fair value of many modified
awards.\160\ As adopted, the new rules reflect this
recommendation.\161\ Grants of reload or restorative options, however,
are reportable based on total grant date fair value because they are
new awards that do not replace previously cancelled awards.\162\
---------------------------------------------------------------------------
\160\ See, e.g., letters from AICPA; Cleary Gottlieb Steen &
Hamilton LLP (``Cleary''); Compass Bancshares; Cravath, Swaine &
Moore LLP (``Cravath''); Hewitt; KPMG; Leggett & Platt, Incorporated
(``Leggett & Platt''); SCSGP; and Sullivan.
\161\ Instruction 2 to Item 402(c)(2)(v) and (vi).
\162\ Generally speaking, reload or restorative options are
grants of new options that are granted automatically when an
executive exercises the old option. Reload or restorative options
are treated as new grants under FAS 123R.
---------------------------------------------------------------------------
We proposed that all earnings, such as dividends, be included in
the Stock Awards and Option Awards columns when paid. Several
commenters noted that the value of the right to receive dividends is
factored into the grant date fair value computed under FAS 123R.\163\
If the stock award or option award entitles the holder to receive
dividends, then such ``dividend protection'' is included in the grant
date fair value computed under FAS 123R. We are persuaded by the
commenters that subsequent disclosure of the value of dividends in
these circumstances, as they are received, would repeat in the same
table compensation that was previously disclosed. Therefore, we have
revised the requirement. However, we note that if the stock award or
option award does not entitle the holder to receive dividends, then
``dividend protection'' is not included in the grant date fair value
computed under FAS 123R. Accordingly, the value of any dividends
received would not have been previously disclosed in the Summary
Compensation Table as part of the grant date fair value of the award.
In order to appropriately capture the compensation in these latter
circumstances, we are adopting a requirement to disclose any earnings
on stock awards or option awards that are not included in the grant
date fair value computation for those awards in the All Other
Compensation column of the Summary Compensation Table when the
dividends or other earnings are paid.\164\ In addition, the material
terms of any equity award (including whether dividends will be paid,
the applicable dividend rate and whether that rate is preferential) may
be factors to be discussed in the related narrative section.\165\
---------------------------------------------------------------------------
\163\ See, e.g., letters from Cleary; Emerson Electric Co.
(``Emerson''); Foley; Hewitt; SCSGP; and Towers Perrin.
\164\ Item 402(c)(2)(ix)(G).
\165\ Item 402(e)(1)(iii), discussed in Section II.C.3.a. below.
---------------------------------------------------------------------------
We had proposed a definition of ``non-stock incentive plan'' that
some commenters stated would result in confusing and potentially
anomalous treatment of some awards.\166\ To clarify the reporting
treatment of different types of awards, we have:
---------------------------------------------------------------------------
\166\ See, e.g., letter from ABA.
---------------------------------------------------------------------------
Adopted a separate definition of ``equity incentive plan''
as ``an incentive plan or portion of an incentive plan under which
awards are granted that fall within the scope of FAS 123R''; \167\ and
---------------------------------------------------------------------------
\167\ Item 402(a)(6)(iii). An equity incentive plan includes
plans that have a performance or market condition. As defined in
Appendix E of FAS 123R, a performance condition is ``a condition
affecting the vesting, exercisability, exercise price or other
pertinent factors used in determining the fair value of an award
that relates to both (a) an employee's rendering service for a
specified (either explicitly or implicitly) period of time and (b)
achieving a specified performance target that is defined solely by
reference to the employer's own operations (or activities).
Attaining a specified growth rate in return on assets, obtaining
regulatory approval to market a specified product, selling shares in
an initial public offering or other financing event, and a change in
control are examples of performance conditions for purposes of this
Statement. A performance target also may be defined by reference to
the same performance measure of another entity or group of entities.
For example, attaining a growth rate in earnings per share that
exceeds the average growth rate in earnings per share of other
entities in the same industry is a performance condition for
purposes of this Statement. A performance target might pertain
either to the performance of the enterprise as a whole or to some
part of the enterprise, such as a division or an individual
employee.'' An award also would be considered to have a performance
condition if it is subject to a market condition, which is ``a
condition affecting the exercise price, exercisability, or other
pertinent factors used in determining the fair value of an award
under a share-based payment arrangement that relates to the
achievement of (a) a specified price of the issuer's shares or a
specified amount of intrinsic value indexed solely to the issuer's
shares or (b) a specified price of the issuer's shares in terms of a
similar (or index of similar) equity security (securities).'' An
award that vests on an accelerated basis upon the occurrence of a
change in control is not considered an award under an equity
incentive plan if (a) the award contains no other performance or
market conditions and (b) the award would otherwise vest based on
the completion of a specified employee service period.
---------------------------------------------------------------------------
Defined ``non-equity incentive plan'' as ``an incentive
plan or portion of an incentive plan that is not an equity incentive
plan.'' \168\
---------------------------------------------------------------------------
\168\ Item 402(a)(6)(iii). See also discussion of the definition
of ``incentive plan'' at Section II.C.1.f. below.
---------------------------------------------------------------------------
ii. Non-Equity Incentive Plan Compensation Column
The Non-Equity Incentive Plan Compensation column (column (g)) will
report, as proposed, the dollar value of all amounts earned during the
fiscal year pursuant to non-equity incentive plans.\169\ This column
includes all other incentive plan awards not included in the stock
awards and option awards columns.\170\ Compensation awarded under an
incentive plan that is not within the scope of FAS 123R will be
disclosed in the Summary Compensation Table in the year when the
relevant specified performance criteria under the plan are satisfied
and the compensation earned, whether or
[[Page 53174]]
not payment is actually made to the named executive officer in that
year.
---------------------------------------------------------------------------
\169\ Item 402(c)(2)(vii). An incentive plan generally provides
for compensation intended to serve as an incentive for performance
to occur over a specified period, whether such performance is
measured by reference to financial performance of the company or an
affiliate, the company's stock price, or any other performance
measure. See Item 402(a)(6)(iii) for the definition of ``incentive
plan.''
\170\ Awards disclosed in this column, column (g), are not
covered by FAS 123R for financial reporting purposes because they do
not involve share-based payment arrangements. Awards that involve
share-based payment arrangements should be disclosed in the Stock
Awards or Option Awards columns, as appropriate.
---------------------------------------------------------------------------
The grant of an award under a non-equity incentive plan will be
disclosed in the supplemental Grants of Plan-Based Awards Table in the
year of grant, which may be some year prior to the year in which
compensation under the non-equity incentive plan is reported in the
Summary Compensation Table.\171\ As noted above, several commenters
recommended Summary Compensation Table reporting of non-equity
incentive plan awards on a grant date fair value basis, consistent with
the reporting of equity incentive plans.\172\ However, because there is
not one clearly required or accepted standard for measuring the value
at grant date of these non-equity incentive plan awards that reflects
the applicable performance contingencies, as there is for equity-based
awards with FAS 123R, we are not including such a value in the Summary
Compensation Table. Instead, we continue the disclosure approach of
reflecting these items of compensation when earned.\173\
---------------------------------------------------------------------------
\171\ See Section II.C.2., discussing the Grants of Plan-Based
Awards Table.
\172\ See, e.g., letters from Amalgamated; Anonymous
Compensation Consultant; BDO Seidman; CII; CRPTF; Mercer; and
Teamsters Local 671. See discussion at Section II.C.1.a. above.
\173\ Prior to these amendments, Items 402(b)(2)(iv)(C) and
402(e) required disclosure of long-term incentive plan payouts when
earned.
---------------------------------------------------------------------------
Once the disclosure has been provided in the Summary Compensation
Table when the specified performance criteria have been satisfied and
the compensation earned, and the grant of the award has been disclosed
in the Grants of Plan-Based Awards Table, no further disclosure will be
specifically required when payment is actually made to the named
executive officer. Some commenters objected to Summary Compensation
Table reporting of awards for which the relevant performance condition
has been satisfied that remain subject to forfeiture conditions (such
as conditions requiring continued service or conditions that provide
for forfeiture based on future company performance).\174\ We continue
to believe that satisfaction of the relevant performance condition
(including an interim performance condition in a long term plan) is the
event that is material to investors for Summary Compensation Table
reporting purposes. We encourage companies to use the related narrative
section to disclose material features that are not reflected in the
tabular disclosure including, for example, subsequent forfeitures of
amounts reported in the table with respect to previous fiscal
years.\175\
---------------------------------------------------------------------------
\174\ See, e.g., letters from Mercer; Watson Wyatt; and Richard
E. Wood.
\175\ Commenters' issues concerning the scope of awards
reportable in this column, in particular as compared to compensation
reportable in the bonus column, are discussed in Section II.C.1.f.
below.
---------------------------------------------------------------------------
As proposed and adopted, earnings on outstanding non-equity
incentive plan awards are also included in the Non-Equity Incentive
Plan Compensation column and identified and quantified in a footnote to
the table.\176\
---------------------------------------------------------------------------
\176\ Item 402(c)(2)(vii). These earnings were reportable prior
to today's amendments in the Other Annual Compensation or All Other
Compensation columns of the Summary Compensation Table under Items
402(b)(2)(iii)(C)(3) and 402(b)(2)(v)(C), respectively.
---------------------------------------------------------------------------
d. Change in Pension Value and Nonqualified Deferred Compensation
Earnings Column
As we proposed, we are expanding the Summary Compensation Table to
include information regarding the aggregate increase in actuarial value
to the named executive officer of all defined benefit and actuarial
plans (including supplemental plans) accrued during the year and
earnings on nonqualified deferred compensation. However, as mentioned
above, we have decided to present this information in a separate column
rather than include it in the All Other Compensation column as
proposed.\177\ Footnote identification and quantification of the full
amount of each element is required.\178\ Any amount attributable to the
defined benefit and actuarial plans that is a negative number should be
disclosed by footnote, but should not be reflected in the amount
reported in the column.\179\
---------------------------------------------------------------------------
\177\ See the discussion of the Total column in Section
II.C.1.a. above and the discussion of determination of named
executive officers in Section II.C.6. below.
\178\ Instruction 3 to Item 402(c)(2)(viii). In contrast, as
proposed to be disclosed in the All Other Compensation Column,
separate identification and quantification of each element would
have been required only if the element exceeded $10,000, although
the amounts would have been included in that column without regard
to size.
\179\ Instruction 3 to Item 402(c)(2)(viii).
---------------------------------------------------------------------------
i. Earnings on Deferred Compensation
We proposed to require disclosure of all earnings on compensation
that is deferred on a basis that is not tax-qualified, including non-
tax qualified defined contribution retirement plans.\180\ Prior to our
amendments, these earnings were required to be disclosed only to the
extent of any portion that was ``above-market or preferential.'' This
limitation generated criticism that the rule prior to today's
amendments permitted companies to avoid disclosure of substantial
compensation.
---------------------------------------------------------------------------
\180\ Nonqualified defined contribution and other nonqualified
deferred compensation plans are plans providing for deferral of
compensation that do not satisfy the minimum coverage,
nondiscrimination and other rules that ``qualify'' broad-based plans
for favorable tax treatment under the Internal Revenue Code. A
typical 401(k) plan, by contrast, is a qualified deferred
compensation plan.
---------------------------------------------------------------------------
Some commenters supported this proposal.\181\ However, many
commenters asserted that the Summary Compensation Table should continue
to require disclosure only of earnings at above-market or preferential
rates.\182\ Commenters stated that differences in earnings on
nonqualified deferred compensation among executives may result entirely
from the executives' investment acumen and decisions as to amounts to
defer. Commenters further claimed that deferred amounts invested at
market rates are conceptually no different from amounts invested
directly by an executive. Absent providing an above-market return,
contributing additional amounts or guaranteeing investment returns,
commenters asserted that the company has no role in the annual growth
of the account.
---------------------------------------------------------------------------
\181\ See, e.g., letters from CFA Centre 1 and jointly, Lucian
A. Bebchuk, Jesse M. Fried and Robert J. Jackson, Jr. (``Professor
Bebchuk, et al.'').
\182\ See, e.g., letters from American Academy of Actuaries'
Pension Committee (``Academy of Actuaries''); BRT; Frederic W. Cook
& Co.; Computer Sciences; Kimball International, Inc.; NAM; and
Sullivan.
---------------------------------------------------------------------------
We are persuaded that Summary Compensation Table disclosure of
nonqualified deferred compensation earnings should continue to be
limited to the above-market or preferential portion.\183\ As under the
rule prior to these amendments, the above-market or preferential
portion is determined for interest by reference to 120% of the
applicable federal long-term rate and for dividends by reference to the
dividend rate on the company's common stock.\184\ Footnote or narrative
disclosure of the company's criteria for determining any portion
considered to be above-market may be provided. The above-market or
preferential earnings in this column would always be positive, as it
would not be possible for above-market or preferential losses to occur.
---------------------------------------------------------------------------
\183\ Item 402(c)(2)(viii)(B).
\184\ Instruction 2 to Item 402(c)(2)(viii), which is based on
the language which had appeared in Instructions 3 and 4 to Item
402(b)(2)(iii)(C) prior to these amendments.
---------------------------------------------------------------------------
However, we do not overlook the fact that the company is obligated
to pay the executive the entire amount of the nonqualified deferred
compensation account, which represents a claim on company assets and is
part of a plan that provides the executive with tax
[[Page 53175]]
benefits.\185\ To reflect this obligation, we have decided to require
disclosure of all earnings on nonqualified deferred compensation in the
separate Nonqualified Deferred Compensation Table, as we proposed.\186\
The disclosure required by that table discloses the rate at which the
company's obligation grows on an annual basis.
---------------------------------------------------------------------------
\185\ Nonqualified defined contribution and other nonqualified
deferred compensation plans are generally unfunded, and their
taxation is governed by Section 409A of the Internal Revenue Code
[26 U.S.C. 409A].
\186\ This separate table is discussed in Section II.C.5.b.
below.
---------------------------------------------------------------------------
Further, the method of calculating earnings on deferred
compensation plans is an example of a factor that may be material and
therefore described in the narrative disclosure to the Summary
Compensation Table and the Grants of Plan-Based Awards Table.\187\
---------------------------------------------------------------------------
\187\ See Section II.C.3.a. below.
---------------------------------------------------------------------------
ii. Increase in Pension Value
We proposed to require Summary Compensation Table disclosure of the
aggregate increase in actuarial value to the executive officer of
defined benefit and actuarial plans (including supplemental plans)
accrued during the year.
In contrast to defined contribution plans, for which the Summary
Compensation Table requires disclosure of company contributions, the
rules prior to our amendments did not require disclosure of the annual
change in value of defined benefit plans, such as pension plans, in
which the named executive officers participated.\188\ The annual
increase in actuarial value of these plans may be a significant element
of compensation that is earned on an annual basis, thus we proposed to
include it in the computation of total compensation.
---------------------------------------------------------------------------
\188\ A typical defined contribution plan is a retirement plan
in which the company and/or the executive makes contributions of a
specified amount, and the amount that is paid out to the executive
depends on the return on investments from the contributed amounts. A
typical defined benefit plan is a retirement plan in which the
company pays the executive specified amounts at retirement which are
not tied to investment performance of the contributions that fund
the plan.
---------------------------------------------------------------------------
Such disclosure is necessary to permit the Summary Compensation
Table to reflect total compensation for the year. Such disclosure also
permits a full understanding of the company's compensation obligations
to named executive officers, given that defined benefit plans guarantee
what can be a lifetime stream of payments and allocate risk of
investment performance to the company and its shareholders. In addition
commentators have noted that the absence of such a disclosure
requirement creates an incentive to shift compensation to pensions,
results in the understatement of non-performance-based compensation,
and distorts pay comparisons between executives and between companies.
We are adopting the requirement substantially as proposed.\189\ As
proposed and adopted, an instruction specifies that this disclosure
applies to each plan that provides for the payment of retirement
benefits, or benefits that will be paid primarily following retirement,
including but not limited to tax-qualified defined benefit plans and
supplemental executive retirement plans, but excluding defined
contribution plans.\190\ The retirement section, discussed below,
provides more information regarding these covered plans.\191\
---------------------------------------------------------------------------
\189\ Item 402(c)(2)(viii)(A).
\190\ Instruction 1 to Item 402(c)(2)(viii). Defined benefit
plans include, for example, cash balance plans in which the
retiree's benefit may be determined by the amount represented in an
account rather than based on a formula referencing salary while
still employed.
\191\ See Section II.C.5.a., discussing the Pension Benefits
Table.
---------------------------------------------------------------------------
Some commenters raised issues regarding computation of the amount
to be disclosed.\192\ In response to these comments, we have revised
the language of the requirement as adopted to clarify that the
disclosure applies to the change, from the pension plan measurement
date used for the company's audited financial statements for the prior
completed fiscal year to the pension plan measurement date used for the
company's audited financial statements for the covered fiscal year, in
the actuarial present value of the named executive officer's
accumulated benefit under all defined benefit and actuarial pension
plans (including supplemental plans). The disclosure therefore includes
both:
---------------------------------------------------------------------------
\192\ See, e.g., letters from Academy of Actuaries; Frederick W.
Cook & Co.; ABA-JCEB; and Mercer.
---------------------------------------------------------------------------
The increase in value due to an additional year of
service, compensation increases, and plan amendments (if any); and
The increase (or decrease) in value attributable to
interest.
As discussed below, this disclosure relates to the disclosure
provided in the Pension Benefits Table \193\ and promotes company-to-
company comparability. In computing the amount to be disclosed, the
company must use the assumptions it uses for financial reporting
purposes under generally accepted accounting principles.\194\
---------------------------------------------------------------------------
\193\ Item 402(h), discussed in Section III.C.5.a. below.
\194\ Instruction 1 to Item 402(c)(2)(viii) and Instruction 2 to
Item (h)(2). Regarding such key assumptions as itnerest rate, form
of benefit, number of years of service, level of compensation used
to determine the benefit and mortality tables, a company must use
the same assumptions as it applies pursuant to Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions (FAS 87) both for this Summary
Compensation Table column and the separate Pension Benefits Table.
---------------------------------------------------------------------------
Other commenters objected to this item's potential to ``distort''
the Total column and the determination of named executive
officers.\195\ As described above, we continue to believe that
inclusion of this element in the table is necessary to permit the
Summary Compensation Table to reflect total compensation. However, we
have addressed commenters' concerns by segregating this item and above-
market or preferential earnings on nonqualified deferred compensation
from the All Other Compensation column, presenting their sum in a
separate column so that it will be deducted from the total for purposes
of determining the named executive officers.\196\
---------------------------------------------------------------------------
\195\ See, e.g., letters from Eli Lilly and SCSGP.
\196\ See Section II.C.6. below..
---------------------------------------------------------------------------
e. All Other Compensation Column
The next column in the Summary Compensation Table discloses all
other compensation not required to be included in any other
column.\197\ This approach allows the capture of all compensation in
the Summary Compensation Table and also allows a total compensation
calculation. We confirm that disclosure of all compensation is clearly
required under the rules.\198\
---------------------------------------------------------------------------
\197\ Item 402(c)(2)(ix).
\198\ The only exception, as discussed below, is for perquisites
and personal benefits if they aggregate less than $10,00 for a named
executive officer. The 1992 Release, at Section II.A.4., also noted
``the revised item includes an express statement that it requires
disclosure of all compensation to the named executive officers and
directors for services rendered in all capacities to the registrant
and its subsidiaries.'' See also Item 402(a)(2) as stated prior to
these amendments. Further, as described above, Summary Compensation
Table disclosure of nonqualified deferred compensation earnings is
limited to the above-market or preferential portion of earnings. As
was previously the case before these amendments, companies may omit
information regarding group life, health, hospitalization and
medical reimbursement plans that do not discriminate in scope, terms
or operation in favor of executive officers or directors of the
company and that are available generally to all salaried employees.
See Item 402(a)(6)(ii).
---------------------------------------------------------------------------
As proposed, we are clarifying the disclosure required in the All
Other Compensation column (revised column (i)) in two principal
respects:
Consistent with the requirement that the Summary
Compensation Table
[[Page 53176]]
disclose all compensation, we state explicitly that compensation not
properly reportable in the other columns reporting specified forms of
compensation must be reported in this column; and
To simplify the Summary Compensation Table and eliminate
confusing distinctions between items currently reported as ``Annual''
and ``Long Term'' compensation, we have moved into this column all
items formerly reportable as ``Other Annual Compensation.'' \199\
---------------------------------------------------------------------------
\199\ Prior to today's amendments, Item 402(b)(2)(iii)(c) had
required the separate column entitled ``Other Annual Compensation.''
---------------------------------------------------------------------------
We also are requiring that each item of compensation included in
the All Other Compensation column that exceeds $10,000 be separately
identified and quantified in a footnote. We believe that the $10,000
threshold balances our desire to avoid disclosure of clearly de minimis
matters against the interests of investors in the nature of items
comprising compensation. Each item of compensation less than that
amount will be included in the column (other than aggregate perquisites
and other personal benefits less than $10,000 as discussed below), but
is not required to be identified by type and amount.\200\ Items to be
disclosed in the All Other Compensation column include, but are not
limited to, the items discussed below.
---------------------------------------------------------------------------
\200\ See Section II.C.1.e.i. regarding separate standards for
identification of perquisites and other personal benefits.
---------------------------------------------------------------------------
i. Perquisites and Other Personal Benefits
Perquisites and other personal benefits are included in the All
Other Compensation column. As we proposed, we are adopting changes to
the disclosure of perquisites and other personal benefits to improve
disclosure and facilitate computing a total amount of compensation. Our
amendments require the disclosure of perquisites and other personal
benefits unless the aggregate amount of such compensation is less than
$10,000. Some commenters thought this threshold was too high; \201\
while other commenters thought it was too low.\202\ While we realize
that this threshold may result in the total amount of compensation
reportable in the Summary Compensation Table being slightly less than a
complete total amount of compensation, we believe $10,000 is a
reasonable balance between investors' need for disclosure of total
compensation and the burden on a company to track every benefit, no
matter how small. Prior to today's amendments, the rule permitted
omission of perquisites and other personal benefits if the aggregate
amount of such compensation was the lesser of either $50,000 or 10% of
the total of annual salary and bonus, allowing omission of too much
information that investors may consider material.
---------------------------------------------------------------------------
\201\ See, e.g., letters from Association of BellTel Retirees
(``ABTR''); AFL-CIO; Amalgamated; Association of US West Retirees
(``AUSWR''); Corporate Library; ISS; UCF; and Walden.
\202\ See e.g., letters from Buck Consultants; Chamber of
Commerce; Compass Bancshares; Computer Sciences; Eli Lilly; Emerson;
Hodak Value Advisors; C. Kollar; NAM; and SCSGP.
---------------------------------------------------------------------------
The amendments we adopt today require, as proposed, footnote
disclosure that identifies perquisites and other personal benefits.
Prior to these amendments, the rule required identification and
quantification only of perquisites and other personal benefits that
were 25% of the total amount for each named executive officer.\203\ We
have modified this requirement so that, unless the aggregate value of
perquisites and personal benefits is less than $10,000, any perquisite
or other personal benefit must be identified and, if it is valued at
the greater of $25,000 or ten percent of total perquisites and other
personal benefits, its value must be disclosed.\204\ Consistent with
our objective to streamline the Summary Compensation Table, the revised
threshold is intended to avoid requiring separate quantification of
perquisites having de minimis value. Where perquisites are subject to
identification, they must be described in a manner that identifies the
particular nature of the benefit received. For example, it is not
sufficient to characterize generally as ``travel and entertainment''
different company-financed benefits, such as clothing, jewelry,
artwork, theater tickets and housekeeping services.
---------------------------------------------------------------------------
\203\ The requirement had been set forth in Instruction 1 to
Item 402(b)(2)(iii)(C) prior to these amendments.
\204\ Instruction 4 to Item 402(c)(2)(ix).
---------------------------------------------------------------------------
As was formerly the case, tax ``gross-ups'' or other reimbursement
of taxes owed with respect to any compensation, including but not
limited to perquisites and other personal benefits, must be separately
quantified and identified in the tax reimbursement category described
below, even if the associated perquisites or other personal benefits
are eligible for exclusion or would not require identification or
footnote quantification under the rule.
In the Proposing Release, we provided interpretive guidance about
factors to be considered in determining whether an item is a perquisite
or other personal benefit. One commenter suggested that the Commission
engage in a separate rulemaking to adopt a definition of perquisites in
Regulation S-K.\205\ As we noted in the Proposing Release, for decades
questions have arisen as to what is a perquisite or other personal
benefit required to be disclosed. We continue to believe that it is not
appropriate for Item 402 to define perquisites or personal benefits,
given that different forms of these items continue to develop, and thus
a definition would become outdated. As stated in the Proposing Release,
we are concerned that sole reliance on a bright line definition in our
rules might provide an incentive to characterize perquisites or
personal benefits in ways that would attempt to circumvent the bright
lines. Many commenters sought additional or modified interpretive
guidance, including guidance with respect to an item that is integrally
and directly related to the performance of the executive's duties but
has a personal benefit aspect as well.\206\ Accordingly, we are
providing additional explanation regarding how to apply this guidance.
The amendments we adopt today require perquisites and personal benefits
to be disclosed for both named executive officers and directors.\207\
Further, the disclosure requirements we adopt regarding potential
payments upon termination or change-in-control include disclosure of
perquisites.\208\ Accordingly, this discussion also applies in the
context of each of these disclosure requirements.
---------------------------------------------------------------------------
\205\ See letter from Chamber of Commerce.
\206\ See, e.g., letter from SCSGP.
\207\ For directors, the disclosure will be required in the
Director Compensation Table discussed below in Section II.C.9.
\208\ Item 402(j), discussed in Section II.C.5.c. below.
---------------------------------------------------------------------------
Among the factors to be considered in determining whether an item
is a perquisite or other personal benefit are the following:
An item is not a perquisite or personal benefit if it is
integrally and directly related to the performance of the executive's
duties.
Otherwise, an item is a perquisite or personal benefit if
it confers a direct or indirect benefit that has a personal aspect,
without regard to whether it may be provided for some business reason
or for the convenience of the company, unless it is generally available
on a non-discriminatory basis to all employees.
We believe the way to approach this is by initially evaluating the
first prong of the analysis. If an item is integrally and directly
related to the performance of the executive's duties, that is the end
of the analysis--the item is not a perquisite or personal benefit and
no
[[Page 53177]]
compensation disclosure is required. Moreover, if an item is integrally
and directly related to the performance of an executive's duties under
this analysis, there is no requirement to disclose any incremental cost
over a less expensive alternative. For example, with respect to
business travel, it is not necessary to disclose the cost differential
between renting a mid-sized car over a compact car.
Because of the integral and direct connection to job performance,
the elements of the second part of the analysis (e.g., whether there is
also a personal benefit or whether the item is generally available to
other employees) are irrelevant. An example of such an item could be a
``Blackberry'' or a laptop computer if the company believes it is an
integral part of the executive's duties to be accessible by e-mail to
the executive's colleagues and clients when out of the office. Just as
these devices represent advances over earlier technology (such as
voicemail), we expect that as new technology facilitates the extent to
which work is conducted outside the office, additional devices may be
developed that will fall into this category.
The concept of a benefit that is ``integrally and directly
related'' to job performance is a narrow one. The analysis draws a
critical distinction between an item that a company provides because
the executive needs it to do the job, making it integrally and directly
related to the performance of duties, and an item provided for some
other reason, even where that other reason can involve both company
benefit and personal benefit. Some commenters objected that
``integrally and directly related'' is too narrow a standard,
suggesting that other business reasons for providing an item should not
be disregarded in determining whether an item is a perquisite.\209\ We
do not adopt this suggested approach. As we stated in the Proposing
Release, the fact that the company has determined that an expense is an
``ordinary'' or ``necessary'' business expense for tax or other
purposes or that an expense is for the benefit or convenience of the
company is not responsive to the inquiry as to whether the expense
provides a perquisite or other personal benefit for disclosure
purposes. Whether the company should pay for an expense or it is
deductible for tax purposes relates principally to questions of state
law regarding use of corporate assets and of tax law; our disclosure
requirements are triggered by different and broader concepts.
---------------------------------------------------------------------------
\209\ See, e.g., letters from NACCO Industries, Inc. (``NACCO
Industries'') and NAM.
---------------------------------------------------------------------------
As we noted in the Proposing Release, business purpose or
convenience does not affect the characterization of an item as a
perquisite or personal benefit where it is not integrally and directly
related to the performance by the executive of his or her job.
Therefore, for example, a company's decision to provide an item of
personal benefit for security purposes does not affect its
characterization as a perquisite or personal benefit. A company policy
that for security purposes an executive (or an executive and his or her
family) must use company aircraft or other company means of travel for
personal travel, or must use company or company-provided property for
vacations, does not affect the conclusion that the item provided is a
perquisite or personal benefit.
If an item is not integrally and directly related to the
performance of the executive's duties, the second step of the analysis
comes into play. Does the item confer a direct or indirect benefit that
has a personal aspect (without regard to whether it may be provided for
some business reason or for the convenience of the company)? If so, is
it generally available on a non-discriminatory basis to all employees?
For example, a company's provision of helicopter service for an
executive to commute to work from home is not integrally and directly
related to job performance (although it would benefit the company by
getting the executive to work faster), clearly bestows a benefit that
has a personal aspect, and is not generally available to all employees
on a non-discriminatory basis. As we have noted, business purpose or
convenience does not affect the characterization of an item as a
perquisite or personal benefit where it is not integrally and directly
related to the performance by the executive of his or her job.
A company may reasonably conclude that an item is generally
available to all employees on a non-discriminatory basis if it is
available to those employees to whom it lawfully may be provided. For
this purpose, a company may recognize jurisdictionally based legal
restrictions (such as for foreign employees) or the employees'
``accredited investor'' \210\ status. In contrast, merely providing a
benefit consistent with its availability to employees in the same job
category or at the same pay scale does not establish that it is
generally available on a non-discriminatory basis to all employees.
---------------------------------------------------------------------------
\210\ ``Accredited investor'' is defined in Securities Act Rule
501(a)[17 CFR 230.501(a)] for purposes of Regulation D [17 CFR
230.501-508].
---------------------------------------------------------------------------
Applying the concepts that we outline above, examples of items
requiring disclosure as perquisites or personal benefits under Item 402
include, but are not limited to: club memberships not used exclusively
for business entertainment purposes, personal financial or tax advice,
personal travel using vehicles owned or leased by the company, personal
travel otherwise financed by the company, personal use of other
property owned or leased by the company, housing and other living
expenses (including but not limited to relocation assistance and
payments for the executive or director to stay at his or her personal
residence), security provided at a personal residence or during
personal travel, commuting expenses (whether or not for the company's
convenience or benefit), and discounts on the company's products or
services not generally available to employees on a non-discriminatory
basis.
Beyond the examples provided, we assume that companies and their
advisors, who are more familiar with the detailed facts of a particular
situation and who are responsible for providing materially accurate and
complete disclosure satisfying our requirements, can apply the two-step
analysis to assess whether particular arrangements require disclosure
as perquisites or personal benefits. In light of the importance of the
subject to many investors, all participants should approach the subject
of perquisites and personal benefits thoughtfully.\211\
---------------------------------------------------------------------------
\211\ The Commission has taken action in circumstances where
perquisites were not properly disclosed. See SEC v. Greg A. Gadel
and Daniel J. Skrypek, Litigation Release No. 19720 (June 7, 2006)
and In the Matter of Tyson Foods, Inc. and Donald Tyson, Litigation
Release No. 19208 (Apr. 28, 2005).
---------------------------------------------------------------------------
The amendments we adopt today, as proposed, call for aggregate
incremental cost to the company as the proper measure of value of
perquisites and other personal benefits.\212\ Some commenters instead
recommended valuing perquisites based on current market values.\213\
Consistent with our
[[Page 53178]]
approach of disclosing a company's compensation costs, we remain of the
view that perquisites should be valued based on aggregate incremental
cost.
---------------------------------------------------------------------------
\212\ Instruction 4 to Item 402(c)(2)(is).
\213\ See e.g., letters from ABTR; AUSWR; CH; Computer Sciences;
Pearl Meyer & Partners; and Institutional Investors Group. As we
stated in the Proposing Release, the amount attributed to
perquisites and other personal benefits for federal income tax
purposes is not the incremental cost for purposes of our disclosure
rules unless, independently of the tax characterization, it
constitutes such incremental cost. Therefore, for example, the cost
of aircraft travel attributed to an executive for federal income tax
purposes is not generally the incremental cost of such a perquisite
or personal benefit for purposes of our disclosure rules. See IRS
Regulation Sec. 1.61-21(g) [26 CFR 1.61-21(g)] regarding Internal
Revenue Service guidelines for imputing taxable personal income to
an employee who travels for personal reasons on corporate aircraft.
These complex regulations are known as the Standard Industry Fare
Level or SIFL rules.
---------------------------------------------------------------------------
Finally, commenters observed that investors cannot fully understand
disclosed perquisite amounts without disclosure of the methodology used
to compute them.\214\ We agree that this disclosure will improve
investors' ability to compare the cost of perquisites from company to
company. The rule as adopted requires footnote disclosure of the
methodology for computing the aggregate incremental cost for the
perquisites.\215\
---------------------------------------------------------------------------
\214\ See, e.g., letter from Mercer.
\215\ Instruction 4 to Item 402(c)(2)(ix).
---------------------------------------------------------------------------
ii. Additional All Other Compensation Column Items
We are adopting as proposed a requirement that items to be
disclosed in the All Other Compensation column include, but are not
limited to, the following items: \216\
---------------------------------------------------------------------------
\216\ All of these items were required to be disclosed either
under All Other Compensation or under Other Annual Compensation
proir to these amendments.
---------------------------------------------------------------------------
Amounts paid or accrued pursuant to a plan or arrangement
in connection with any termination (or constructive termination) of
employment or a change in control; \217\
---------------------------------------------------------------------------
\217\ Unlike the text of Item 402(b)(2)(v)(A) prior to these
amendments, Item 402(c)(2)(ix)(D) as amended does not refer to
amounts payable under post-employment benefits. Instruction 5 to
Item 402(c)(2)(ix) provides that an accrued amount is an amount for
which payment has become due, such as a severance payment currently
owed by the company to an executive officer. These items, as well as
amounts that are payable in the future, are also the subject of
disclosure as post-termination compenstaion, as described in Section
II.C.5.c. below. For any compensation as a result of a business
combination, other than pursuant to a plan or arrangement in
connection with any termination of employment or change-in-control,
such as a retention bonus, acceleration of option or stock vesting
period, or performance-based compensation intended to serve as an
incentive for named executive officers to acquire other companies or
enter into a merger agreement, disclosure will now be requlired in
the appropriate Summary Compensation Table column and in the other
tables or narrative disclosure where the particular element of
compensation is required to be disclosed.
---------------------------------------------------------------------------
Annual company contributions or other allocations to
vested and unvested defined contribution plans; \218\
---------------------------------------------------------------------------
\218\ Item 402(c)(2)(ix)(E).
---------------------------------------------------------------------------
The dollar value of any insurance premiums paid by the
company with respect to life insurance for the benefit of a named
executive officer; \219\
---------------------------------------------------------------------------
\219\ Item 402(c)(2)(ix)(F). Because the amendments call for
disclosure of the dollar value of any life insurance premiums,
rather than only premiums with respect to term life insurance (as
was required prior to these amendments), the requirement that had
been previously specified in Item 402(b)(2)(v)(E)(1) and (2) to
disclose the value of any remaining premiums with respect to
circumstances where the named executive officer has an interest in
the policy's cash surrender value is not retained in the amended
rule.
---------------------------------------------------------------------------
``Gross-ups'' or other amounts reimbursed during the
fiscal year for the payment of taxes; \220\ and
---------------------------------------------------------------------------
\220\ Item 402(c)(2)(ix)(B).
---------------------------------------------------------------------------
For any security of the company or its subsidiaries
purchased from the company or its subsidiaries (through deferral of
salary or bonus) at a discount from the market price of such security
at the date of purchase, unless that discount is available generally
either to all security holders or to all salaried employees of the
company, the compensation cost, if any, computed in accordance with FAS
123R.\221\
---------------------------------------------------------------------------
\221\ Item 402(c)(2)(ix)(C). This requirement as adopted has
been revised from the proposal to clarify that no amount of
compensation is required to be disclosed if there is no compensation
cost computed for the discounted securities purchase in accordance
with FAS 123R. For example, under FAS 123R, if the discount is five
percent or less, all qualified employees can participate in the
offer and there are no option features, then there is no
compensation cost to recognize for financial reporting purposes and
thus no compensation is reported for this item in the All Other
Compensation column.
---------------------------------------------------------------------------
An additional requirement to include the dollar value of any
dividends or other earnings paid on stock or option awards when the
dividends or earnings were not factored into the grant date fair value
has been adopted for this column as discussed above.\222\
---------------------------------------------------------------------------
\222\ Item 402(c)(2)(ix)(G).
---------------------------------------------------------------------------
In response to commenters' concerns about double counting pension
benefits,\223\ we have not retained the aspect of proposed Instruction
2 to this column that would have required disclosure of pension
benefits paid to the named executive officer during the period covered
by the table.\224\ As adopted, an instruction provides that benefits
paid pursuant to defined benefit and actuarial plans are not reportable
as All Other Compensation unless accelerated pursuant to a change in
control.\225\ Similarly, distributions of nonqualified deferred
compensation are not reportable as All Other Compensation.
---------------------------------------------------------------------------
\223\ See, e.g., letter from Cravath.
\224\ We have moved this disclosure requirement to the Pension
Benefits Table, described in Section II.C.5.a. below.
\225\ Instruction 2 to Item 402(c)(2)(ix).
---------------------------------------------------------------------------
f. Captions and Table Layout
Before today's amendments, a portion of the table was labeled as
``annual compensation'' and another portion as ``long term
compensation.'' These captions created distinctions that may have been
confusing to both users and preparers of the Summary Compensation
Table. As proposed, the amendments we adopt today do not separately
identify some columns as ``annual'' and other columns as ``long term''
compensation. Consistent with this change, as described above, we are
merging the current Other Annual Compensation column into the new All
Other Compensation column, and include current earnings information
regarding non-equity incentive plan compensation in the column for that
form of award.
In eliminating this distinction, we also revise the former
definition of ``long term incentive plan'' to eliminate any distinction
between a ``long term'' plan and one that may provide for periods
shorter than one year. Like the captions, the former approach created
distinctions that may have been confusing to users and preparers. As
proposed and adopted, the amendments define an ``incentive plan'' as
any plan providing compensation intended to serve as incentive for
performance to occur over a specified period.\226\ The related
definition of ``incentive plan award'' as an award provided under an
incentive plan is also adopted as proposed.\227\
---------------------------------------------------------------------------
\226\ Item 402(a)(6)(iii).
\227\ Id.
---------------------------------------------------------------------------
Noting that companies formerly reported as ``bonuses'' awards that
would be short-term incentive plan awards under this definition,
commenters requested guidance as to what distinguishes items reportable
as non-equity incentive plan compensation from those reportable as
bonuses under the amended rules.\228\ An award would be considered
``intended to serve as an incentive for performance to occur over a
specified period'' if the outcome with respect to the relevant
performance target is substantially uncertain at the time the
performance target is established and the target is communicated to the
executive. Compensation pursuant to such a non-equity award would be
reported in the Summary Compensation Table as non-equity incentive plan
compensation and the grant of the award would be reported as a non-
equity incentive plan award in the Grants of Plan-Based Awards
Table.\229\ In contrast, a cash
[[Page 53179]]
award based on satisfaction of a performance target that was not pre-
established and communicated, or the outcome of which is not
substantially uncertain, would be reportable in the Summary
Compensation Table as a bonus.
---------------------------------------------------------------------------
\228\ See, e.g., letters from Hewitt; Mercer; NACCO Industries;
and SCSGP.
\229\ This table is described in Section II.C.2. immediately
below. Further, no longer reporting compensation pursuant to these
awards as ``bonus'' in the Summary Compensation Table does not
affect the determination of named executive officers because, as
described in Section II.C.6.b. below, that determination is not
limited to consideration of salary and bonus.
---------------------------------------------------------------------------
2. Supplemental Grants of Plan-Based Awards Table
Following the Summary Compensation Table, we proposed two
supplemental tables to explain information in the Summary Compensation
Table. The proposed tables were derived from two tables required under
the rules prior to these amendments.
The first table we proposed to supplement the Summary Compensation
Table would have included information regarding non-stock grants of
incentive plan awards, stock-based incentive plan awards and awards of
options, restricted stock and similar instruments under plans that are
performance-based (and thus provide the opportunity for future
compensation if conditions are satisfied).\230\ The second table we
proposed to supplement the Summary Compensation Table would have shown
the equity-based compensation awards granted in the last fiscal year
that are not performance-based, such as stock, options or similar
instruments where the payout or future value is tied to the company's
stock price, and not to other performance criteria.\231\
---------------------------------------------------------------------------
\230\ Proposed Item 402(d).
\231\ Proposed Item 402(e), containing much of the information
that was required prior to these amendments by the Option/SAR Grants
Table (formerly specified in Item 402(c)).
---------------------------------------------------------------------------
Because much of the information for each proposed table is
consistent, we have followed the recommendation of a commenter to
simplify the disclosure format by combining the proposed disclosure in
a single table.\232\
---------------------------------------------------------------------------
\232\ See letter from Hewitt.
Grants of Plan-Based Awards
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated future payouts under non-equity Estimated future payouts under equity All other All other
incentive plan awards incentive plan awards stock option
-------------------------------------------------------------------------------------- awards: awards: Exercise or
Number of Number of base price
Name Grant date shares of securities of option
Threshold Target ($) Maximum ($) Threshold Target Maximum stock or underlying awards ($/
($) () () () units options Sh)
() ()
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
--------------------------------------------------------------------------------------------------------------------------------------------------------
PEO
--------------------------------------------------------------------------------------------------------------------------------------------------------
PFO
--------------------------------------------------------------------------------------------------------------------------------------------------------
A
--------------------------------------------------------------------------------------------------------------------------------------------------------
B
--------------------------------------------------------------------------------------------------------------------------------------------------------
C
--------------------------------------------------------------------------------------------------------------------------------------------------------
Disclosure in this table complements Summary Compensation Table
disclosure of grant date fair value of stock awards and option awards
by disclosing the number of shares of stock or units comprising or
underlying the award. This supplemental table shows the terms of grants
made during the current year, including estimated future payouts for
both equity incentive plans and non-equity incentive plans, with
separate disclosure for each grant.\233\
---------------------------------------------------------------------------
\233\ Instruction 1 to Item 402(d).
---------------------------------------------------------------------------
To simplify the presentation further, we have eliminated some of
the proposed columns. Because the narrative section identifies the
material terms of an award reported in this table as an example of a
material factor to be described,\234\ and thus will cover the same
information, we have eliminated the proposed columns reporting vesting
date, or performance or other period until vesting or payout. As a
commenter noted, vesting information typically cannot be reported
easily in a single line in a table.\235\ Similarly, because the
modifications we are making to the Outstanding Equity Awards at Fiscal
Year-End Table require that table to report the expiration dates of
options and similar awards,\236\ we are eliminating the proposed
expiration date column. Finally, the proposed column reporting the
dollar amount of consideration paid for the award, if any, is not
adopted, reflecting comments that this column would be used only
rarely.\237\ Instead, in those rare instances where consideration is
paid for an award, this disclosure will be provided in a footnote to
the appropriate column.\238\
---------------------------------------------------------------------------
\234\ Item 402(e)(1)(iii), described in Section II.C.3.a.
immediately below.
\235\ See letter from ABA.
\236\ See Section II.C.4.a. below.
\237\ Proposed Item 402(d)(2)(v). See, e.g., letters from
Frederic W. Cook & Co. and SCSGP.
\238\ Instruction 5 to Item 402(d).
---------------------------------------------------------------------------
As proposed, the Grants of All Other Equity Awards Table would have
permitted aggregation of option grants with the same exercise or base
price. We have not adopted such an instruction for this table, based on
our belief that grant-by-grant disclosure is the most appropriate
approach, particularly given our particular disclosure concerns
regarding option grants. For incentive plan awards, threshold, target
and maximum payout information should be provided, but if the award
provides only for a single estimated payout, that amount should be
reported as the target.\239\ Where there is a tandem grant of two
instruments, only one of which is granted under an incentive plan, only
[[Page 53180]]
the instrument that is not granted under an incentive plan is reported
in the table, with the tandem feature noted.\240\ Because the rules as
adopted require Summary Compensation Table disclosure of the
incremental fair value, computed in accordance with FAS 123R, of
options, stock appreciation rights and similar option-like instruments
granted in connection with a repricing transaction, rather than the
total fair value as we had proposed, grants of these instruments are
not reported in this table.\241\ Disclosure should be provided in the
Compensation Discussion and Analysis and the narrative disclosures for
the Summary Compensation Table and Grants of Plan-Based Awards, as
appropriate, regarding awards granted in connection with repricing
transactions.
---------------------------------------------------------------------------
\239\ Instruction 2 to Item 402(d).
\240\ Instruction 4 to Item 402(d).
\241\ See discussion at Section II.C.1.c.i. above.
---------------------------------------------------------------------------
As proposed and adopted, if the per-share exercise or base price of
options, stock appreciation rights and similar option-like instruments
is less than the market price of the underlying security on the grant
date, a separate column must be added showing market price on the grant
date.\242\ Some commenters objected to our proposal to calculate grant
date market price for this purpose using the closing price per share of
the underlying security on that date. These commenters stated that
plans requiring awards to be granted with an exercise price equal to
the underlying security's grant date fair market value may define
``fair market value'' based on a formula related to the average market
price on the grant date or a range of days either before or after the
grant date.\243\ Our proposed departure from the rule prior to these
amendments, which permitted use of such formulas even for securities
traded on an established market,\244\ was considered, and along with
the requirement to disclose the grant date, reflects the significance
of issues in awards of option grants.\245\ Moreover, commenters
expressed concern regarding the manipulation of option grant dates to
achieve below-market exercise prices.\246\ The rule as adopted uses the
measure for grant date market price of the underlying security that we
proposed, modified to specify that the grant date closing market price
per share is the last sale price on the principal United States market
for the security on the specified date.\247\ Moreover, if the exercise
or base price is not the grant date closing market price per share, we
require a description of the methodology for determining the exercise
or base price either by footnote to the table or in the accompanying
narrative section.\248\ Further reflecting the significance of grant
date issues in awards of option grants and in response to
comments,\249\ we are also providing that if the date on which the
compensation committee (or a committee of the board of directors
performing a similar function or the full board of directors) takes
action or is deemed to take action to grant equity-based awards is
different from the date of grant, a column must be added to disclose
the date of action.\250\ For these purposes, the ``date of grant'' or
``grant date'' is the grant date determined for financial statement
reporting purposes pursuant to FAS 123R.\251\ Finally, in combining the
proposed tables, we have adopted an instruction specifying that if a
non-equity incentive plan award is denominated in units or other
rights, then a separate, adjoining column would be required to disclose
the units or other rights awarded.\252\
---------------------------------------------------------------------------
\242\ Item 402(d)(2)(vii).
\243\ See, e.g., letters from Cravath; Eli Lilly; and Sidley
Austin LLP (``Sidley Austin'').
\244\ This requirement had been set forth in Instruction 6 to
Item 402(c) prior to today's amendments.
\245\ See the discussion of options disclosure in Section II.A.,
above.
\246\ See, e.g., letter from CFA Centre for Financial Market
Integrity, dated May 30, 2006 (``CFA Centre 2'').
\247\ Because the concept of closing market price is used in a
number of provisions of Item 402, we are adopting a definition of
the term closing market price in Item 402(a)(6)(v). A foreign
company complying with this requirement may instead look to the
principal foreign market in which the underlying securities trade.
\248\ Instruction 3 to Item 402(d).
\249\ See, e.g., letter from CFA Centre 2.
\250\ Item 402(d)(2)(ii).
\251\ Item 402(a)(6)(iv).
\252\ Instruction 6 to Item 402(d).
---------------------------------------------------------------------------
3. Narrative Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table
a. Narrative Description of Additional Material Factors
As we proposed, we are requiring narrative disclosure following the
Summary Compensation Table and the Grants of Plan-Based Awards Table in
order to give context to the tabular disclosure. A company will be
required to provide a narrative description of any additional material
factors necessary to an understanding of the information disclosed in
the tables.\253\ Unlike the Compensation Discussion and Analysis, which
focuses on broader topics regarding the objectives and implementation
of executive compensation policies, the narrative disclosures following
the Summary Compensation Table and other tables focus on and provide
specific context to the quantitative disclosure in the tables. For
example, narrative disclosure following a table might explain material
aspects of a plan that are not evident from the quantitative tabular
disclosure and are not addressed in the Compensation Discussion and
Analysis.
---------------------------------------------------------------------------
\253\ Item 402(e)(1). The standard of materiality that applies
in Item 402(e) is that of Basic v. Levinson, 485 U.S. 224 (1988) and
TSC Industries v. Northway, 426 U.S. 438 (1976).
---------------------------------------------------------------------------
The material factors that require disclosure will vary depending on
the facts and circumstances. As one example, such material factors
might include descriptions of the material terms in the named executive
officers' employment agreements as those descriptions might provide
material information necessary to an understanding of the tabular
disclosure. The narrative disclosure covers written or unwritten
agreements or arrangements.\254\ Requiring this disclosure in proximity
to the Summary Compensation Table is intended to make the tabular
disclosure more meaningful. Mere filing of employment agreements (or
summaries of oral agreements) may not be adequate to disclose material
factors depending on the circumstances. As stated in the Proposing
Release, provisions regarding post-termination compensation need to be
addressed in the narrative section only to the extent disclosure of
such compensation is required in the Summary Compensation Table;
otherwise these provisions will be disclosable as post-termination
compensation.\255\
---------------------------------------------------------------------------
\254\ Item 402(e)(1)(i).
\255\ Item 402(j), described in Section II.C.5.c.
---------------------------------------------------------------------------
The factors that could be material include each repricing or other
material modification of any outstanding option or other equity-based
award during the last fiscal year. This disclosure addresses not only
option repricings, but also other significant changes to the terms of
equity-based awards.\256\ As proposed, we are eliminating the former
ten-year option repricing table.\257\ In its place, the narrative
disclosure following the Summary Compensation Table will describe, to
the extent material and necessary to an understanding of the tabular
disclosure, repricing, extension of exercise periods, change of vesting
or forfeiture conditions, change or
[[Page 53181]]
elimination of applicable performance criteria, change of the bases
upon which returns are determined, or any other material
modification.\258\
---------------------------------------------------------------------------
\256\ Item 402(e)(1)(ii).
\257\ The ten-year option repricing table had been required by
Item 402(i) prior to its elimination with these amendments. We
believe that the narrative disclosure requirement will provide
investors with material information regarding repricings and
modifications and eliminate the arguably dated information contained
in the former ten-year option repricing table.
\258\ As described in Section II.C.1.c.i. above, the tabular
disclosure will report the incremental fair value of the
modification for financial reporting purposes. However, narrative
disclosure will not apply to any repricing that occurs through a
pre-existing formula or mechanism in the plan or award that results
in the periodic adjustment of the option or stock appreciation right
exercise or base price, an antidilution provision, or a
recapitalization or similar transaction equally affecting all
holders of the class of securities underlying the options or stock
appreciation rights. Instruction 1 to Item 402(e).
---------------------------------------------------------------------------
Narrative text accompanying the tables will also describe, to the
extent material and necessary to an understanding of the tabular
disclosure, award terms relating to disclosure provided in the Grants
of Plan-Based Awards Table. This could include, for example, a general
description of the formula or criteria to be applied in determining the
amounts payable, the vesting schedule, a description of the
performance-based conditions and any other material conditions
applicable to the award, whether dividends or other amounts would be
paid, the applicable rate and whether that rate is preferential.\259\
As noted above and consistent with current disclosure requirements,
however, companies will not be required to disclose any factor,
criteria, or performance-related or other condition to payout or
vesting of a particular award that involves confidential trade secrets
or confidential commercial or financial information, disclosure of
which would result in competitive harm to the company.\260\
---------------------------------------------------------------------------
\259\ Item 402(e)(1)(iii), which combines some information that
had been required by Instruction 2 to Item 402(b)(2)(iv) with
information that had been required by Instruction 1 to Item 402(e)
as they were stated in the rule before these amendments.
\260\ We have adopted Instruction 2 to Item 402(e)(1), which
specifically applies to the narrative disclosure of Item 402(e)(1)
the same standard applicable to Compensation Discussion and Analysis
for determining whether disclosure would result in competitive harm
for the company. See Section II.B.2., above, for a discussion of
this standard.
---------------------------------------------------------------------------
We proposed that this example also include material assumptions
underlying the determination of the amount of increase in the actuarial
value of defined benefit and actuarial plans. However, in light of the
modifications we are adopting, we have concluded that the better place
to discuss these assumptions is in the narrative section accompanying
the Pension Benefits Table.\261\
---------------------------------------------------------------------------
\261\ See Section II.C.5.a. below.
---------------------------------------------------------------------------
Further, in response to commenters' concerns regarding the
computation of total compensation and the expanded basis for
determining the most highly compensated officers,\262\ we specify as an
additional example an explanation of the level of salary and bonus in
proportion to total compensation.\263\
---------------------------------------------------------------------------
\262\ See Section II.C.1.a. above and Section II.C.6.b. below.
\263\ Item 402(e)(1)(iv).
---------------------------------------------------------------------------
b. Request for Additional Comment on Compensation Disclosure for up to
Three Additional Employees
As part of this narrative disclosure requirement, we had proposed
an additional item that would have required disclosure for up to three
employees who were not executive officers during the last completed
fiscal year and whose total compensation for the last completed fiscal
year was greater than that of any of the named executive officers.\264\
We received extensive comment on this proposal. Some commenters
supported the proposal or suggested that it should go further.\265\
Many commenters expressed concern that the benefits of this disclosure
to investors would be negligible, yet compliance might require the
outlay of considerable company resources.\266\ Some commenters
expressed concern that the proposed disclosure would raise privacy
issues or negatively impact competition for employees.\267\ While we
continue to consider whether to adopt such a requirement as part of the
executive compensation disclosure rules, in Release No. 33-8735 we are
requesting additional comment as to whether potential modifications
would address the concerns that commenters have raised.
---------------------------------------------------------------------------
\264\ Proposed Item 402(f)(2).
\265\ See, e.g., letters from Corporate Library; The Greenlining
Institute; Institutional Investor Group; and SBAF.
\266\ See, e.g., letters from ABA; Chamber of Commerce; Eli
Lilly; Leggett & Platt; N. Ludgus; and Mercer.
\267\ See, e.g., letters from ABA-JCEB; BRT; jointly, CBS
Corporation, The Walt Disney Company, NBC Universal, News
Corporation, and Viacom, Inc. (``Entertainment Industry Group'');
Committee on Corporate Finance of Financial Executives International
(``FEI''); Chamber of Commerce; Cleary; CNET Networks, Inc. (``CNET
Networks''); Compass Bancshares; Compensia; Cravath; DreamWorks
Animation SKG (``DreamWorks''); Eli Lilly; Emerson; Fenwick; The
Financial Services Roundtable (``FSR''); Professor Joseph A.
Grundfest, dated April 10, 2006 (``Grundfest''); ICI; Intel
Corporation (``Intel''); Kellogg Company (``Kellogg''); Kennedy &
Baris, LLP (``Kennedy''); Mercer; Peabody Energy; Pearl Meyer &
Partners; Securities Industry Association (``SIA''); Sullivan;
SCSGP; and WorldatWork.
---------------------------------------------------------------------------
We note in particular that some commenters questioned the
materiality of the information that would have been required by the
proposal, given that the covered employees would not be in policy-
making positions as executive officers.\268\ After considering the
issues raised by these commenters, we remain concerned about disclosure
with respect to employees, particularly within very large companies,
whether or not they are executive officers, whose total compensation
for the last completed fiscal year was greater than that of one or more
of the named executive officers. If any of these employees exert
significant policy influence at the company, at a significant
subsidiary of the company or at a principal business unit, division, or
function of the company, then investors seeking a fuller understanding
of a company's compensation program may believe that disclosure of
these employees' total compensation is important information.\269\
Knowing the compensation, and job positions within the organization, of
these highly compensated policy-makers whose total compensation for the
last fiscal year was greater than that of a named executive officer,
should assist in placing in context and permit a better understanding
of the compensation structure of the named executive officers and
directors.
---------------------------------------------------------------------------
\268\ See, e.g., letters from CalSTRS; Cleary; CNET Networks;
Compass Bancshares; DreamWorks; Entertainment Industry Group; Fried,
Frank, Harris, Shriver & Jacobson LLP (``Fried Frank''); FSR;
Hewitt; ICI; Intel; Kellogg; Kennedy; Leggett & Platt; Peabody
Energy; Pearl Meyer & Partners; SCSGP; SIA; Stradling Yocca Carlson
& Rauth (``Stradling Yocca''); Top Five Data Services, Inc. (``Top
Five Data''); Towers Perrin; and Walden.
\269\ The Commission expressed similar concerns in 1978, when it
stated ``a key employee or director of a subsidiary might be the
highest-paid person in the entire corporate structure and have
managerial responsibility for major aspects of the registrant's
overall operations.'' 1978 Release. See n. 327 for a discussion of
the term ``executive officer.'' In light of some of the comments
that we received, we have clarified that the definition of
``executive officer'' includes all individuals in a registrant
policy-making role. See, e.g., letters from SCSGP and Cravath.
---------------------------------------------------------------------------
Our intention is to provide investors with information regarding
the most highly compensated employees who exert significant policy
influence by having responsibility for significant policy decisions.
Responsibility for significant policy decisions could consist of, for
example, the exercise of strategic, technical, editorial, creative,
managerial, or similar responsibilities. Examples of employees who
might not be executive officers but who might have responsibility for
significant policy decisions could include the director of the news
division of a major network; the principal creative leader of the
entertainment function of a media conglomerate; or the head of a
principal business unit developing a significant technological
innovation. By contrast, we are convinced by commenters that a
[[Page 53182]]
salesperson, entertainment personality, actor, singer, or professional
athlete who is highly compensated but who does not have responsibility
for significant policy decisions would not be the type of employee
about whom we would seek disclosure. Nor, as a general matter, would
investment professionals (such as a trader, or a portfolio manager for
an investment adviser who is responsible for one or more mutual funds
or other clients) be deemed to have responsibility for significant
policy decisions at the company, at a significant subsidiary or at a
principal business unit, division or function simply as a result of
performing the duties associated with those positions. On the other
hand, an investment professional, such as a trader or portfolio
manager, who does have broader duties within a firm (such as, for
example, oversight of all equity funds for an investment adviser) may
be considered to have responsibility for significant policy decisions.
We continue to consider whether it is appropriate to require some
level of narrative disclosure so that shareholders will have
information about these most highly compensated employees. This
consideration includes the appropriate level of information about these
employees and their compensation in light of their roles.
As to issues regarding privacy and competition for employees, to
the extent that commenters objected that the disclosure could result in
a competitor stealing a company's top ``talent,'' \270\ we have tried
to address these concerns by focusing the disclosure on persons who
exert significant policy influence within the company or significant
parts of the company.
---------------------------------------------------------------------------
\270\ See, e.g., letter from Entertainment Industry Group. In
addition, we note our intention is not to suggest that these
additional employees, whether or not they are executive officers,
are individuals whose compensation is required to be reported under
the Exchange Act ``by reason of such employee being among the 4
highest compensated officers for the taxable year,'' as stated in
Internal Revenue Code Section 162(m)(3)(B) [26 U.S.C. 162(m)(3)(B)].
See letter from Cleary (expressing concern that the additional
individuals not fall within the purview of Section 162(m) of the
Internal Revenue Code).
---------------------------------------------------------------------------
Request for Comment
We request additional comment on the proposal to require
compensation disclosure for up to three additional employees. In
addition to general comment, we encourage commenters to address the
following specific questions:
Would the rule more appropriately require disclosure of
the employees described above if it were structured in the following or
similar manner:
For each of the company's three most highly compensated employees,
whether or not they were executive officers during the last completed
fiscal year, whose total compensation for the last completed fiscal
year was greater than that of any of the named executive officers,
disclose each such employee's total compensation for that year and
describe the employee's job position, without naming the employee;
provided, however, that employees with no responsibility for
significant policy decisions within the company, a significant
subsidiary of the company, or a principal business unit, division, or
function of the company are not included when determining who are each
of the three most highly compensated employees for the purposes of this
requirement, and therefore no disclosure is required under this
requirement for any employee with no responsibility for significant
policy decisions within the company, a significant subsidiary of the
company, or a principal business unit, division, or function of the
company?
Would it be appropriate to determine the highest paid
employees in the same manner that named executive officers are
determined, by calculating total compensation but excluding pension
plan benefits and above-market or preferential earnings on nonqualified
deferred compensation plans, and by comparing that amount to the same
amount earned by the named executive officers (excluding the amount
required to be disclosed for those named executive officers pursuant to
paragraph (c)(2)(viii) of Item 402)? If so, should the total amount
disclosed include these amounts as it does for named executive
officers? Should the pension benefit and above-market earnings be
separately disclosed in a footnote so investors can calculate the
amounts used in determining highest paid employees?
Would modifying the proposed rule to apply only to large
accelerated filers\271\ properly focus this disclosure obligation on
companies that are more likely to have these additional highly
compensated employees? Would that modification address concerns that
the proposed rule would impose disproportionate compliance burdens by
limiting the disclosure obligation to companies that are presumptively
better able to track the covered employees? Would a different
limitation as to applicability be appropriate?
---------------------------------------------------------------------------
\271\ The term large accelerated filer is defined in Exchange
Act Rule 12b-2 [17 CFR 240.12b-2].
---------------------------------------------------------------------------
Is information regarding highly compensated employees,
including those who are not executive officers, material to investors?
In answering this question, commenters are encouraged to address the
following additional questions:
[cir] Would modifications limiting the disclosure to employees who
make significant policy decisions within the company, a significant
subsidiary of the company, or a principal business unit, division, or
function of the company appropriately focus the disclosure on employees
for whom compensation information is material to investors?
[cir] Would the approach that we are considering provide investors
with material information about how policy-making responsibilities are
allocated within a company? Are the examples describing responsibility
for significant policy decisions too broad or too narrow?
[cir] Would the proposed rule, with the modifications described
above, provide investors with material information necessary to
understand the company's compensation policies and structure? How
should we address those concerns?
[cir] What is typically the role of the compensation committee in
determining or approving the compensation of the additional employees
if they are not executive officers? If the compensation committee does
not oversee their compensation, is the additional employee compensation
information material to investors? What types of decisions would
investors make based on this information?
Would the proposed rule, with the modifications described
above, raise privacy issues or negatively impact competition for
employees in a manner that would outweigh the materiality of the
disclosure to investors?
Should we require that the three additional employees be
named? If not, what additional information should be required? Should
more information be required regarding the employee's compensation or
job position?
Should we define ``responsibility for significant policy
decisions''? Should we use another test to describe those employees who
exert a significant policy influence on the company? Do the examples
provided above help identify and delimit the number of employees whose
compensation would be subject to disclosure under this provision? What
would help companies identify these employees?
What additional work and costs are involved in collecting
the information necessary to identify the three additional employees?
What are the types of costs, and in what amounts? In what way can the
proposal be further modified to mitigate the costs?
[[Page 53183]]
In connection with the original proposal, we solicited
comment on all aspects of the proposal, including this one. No
commenter supplied cost estimates. We are now considering whether to
limit this provision to only large accelerated filers. For some large
accelerated filers, the number of employees potentially subject to this
requirement may already be known or easy to identify. Other, more
complex companies may need to establish systems to identify such
employees. Every large accelerated filer would need to evaluate whether
any employees exerted significant policy influence at the company, at a
significant subsidiary or at a principal business unit, division or
function and would have to track their compensation in order to comply
with the proposed requirement. These monitoring costs may be new to
some companies. We believe the cost of actually disclosing the
compensation would be incremental and minimal. The monitoring and
information collection costs are likely to be greatest in the first
year and significantly less in later years. We also assume that costs
would largely be borne internally, although some companies may seek the
advice of outside counsel in determining which employees meet the
standard for disclosure. In that event, for purposes of seeking
comment, we estimate that 1,700 \272\ companies will on average retain
outside counsel for 8 hours in the first year and 2 hours in each of
two succeeding years, at $400 per hour, for a total estimated average
annual cost of approximately $3 million. Assuming all large accelerated
filers spend 60 hours in the first year and 10 hours in each of the two
succeeding years, with an average internal cost of $175 per hour, the
total average annual burden of collecting and monitoring employee
compensation would be approximately 45,000 hours, or approximately $8
million. The total average annual cost is therefore estimated to be $11
million. We invite comment on this estimate and its assumptions.
---------------------------------------------------------------------------
\272\ We estimate there are approximately 1,700 companies that
are large accelerated filers. See Revisions to Accelerated Filer
Definition and Accelerated Deadlines for Reporting Periodic Reports,
Release No. 33-8644 (Dec. 21, 2005) [70 FR 76626], at Section V.A.2.
---------------------------------------------------------------------------
4. Exercises and Holdings of Previously Awarded Equity
The next section of the revised executive compensation disclosure
provides investors with an understanding of the compensation in the
form of equity that has previously been awarded and remains
outstanding, and is unexercised or unvested. As proposed, this section
also discloses amounts realized on this type of compensation during the
most recent fiscal year when, for example, a named executive officer
exercises an option or his or her stock award vests. We are adopting
substantially as proposed two tables: one table shows the amounts of
awards outstanding at fiscal year-end, and the other shows the exercise
or vesting of equity awards during the fiscal year.\273\ In response to
comment, we are requiring additional information regarding out-of-the-
money awards.
a. Outstanding Equity Awards at Fiscal Year-End Table
---------------------------------------------------------------------------
\273\ Some of this information had been required in the
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-
End Option/SAR Value Table, which was required under Item 402(d)
prior to adoption of these amendments.
---------------------------------------------------------------------------
As we noted in the Proposing Release, outstanding awards that have
been granted but the ultimate outcomes of which have not yet been
realized in effect represent potential amounts that the named executive
officer might or might not realize, depending on the outcome for the
measure or measures (for example, stock price or performance
benchmarks) to which the award relates. We are adopting a table that
will disclose information regarding outstanding awards, for example,
under stock option (or stock appreciation rights) plans, restricted
stock plans, incentive plans and similar plans and disclose the market-
based values of the rights, shares or units in question as of the
company's most recent fiscal year end.\274 \
---------------------------------------------------------------------------
\274\ Item 402(f). Under the rules prior to today's amendments,
such disclosure was provided only for holdings of outstanding stock
options and stock appreciation rights.
Outstanding Equity Awards at Fiscal Year-End
--------------------------------------------------------------------------------------------------------------------------------------------------------
Option awards Stock awards
---------------------------------------------------------------------------------------------------------------------------------------------
Equity Equity
Equity incentive incentive
Number of Number of incentive plan plan awards: plan awards:
securities securities awards: Number Number of Market value Number of Market or
Name underlying underlying of securities Option Option shares or of shares or unearned payout value
unexercised unexercised underlying exercise price expiration units of stock units of shares, units of unearned
options options () i>) unearned vested () vested ($) have not rights that
() vested have not
() vested ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
--------------------------------------------------------------------------------------------------------------------------------------------------------
PEO
--------------------------------------------------------------------------------------------------------------------------------------------------------
PFO
--------------------------------------------------------------------------------------------------------------------------------------------------------
A
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 53184]]
B
--------------------------------------------------------------------------------------------------------------------------------------------------------
C
--------------------------------------------------------------------------------------------------------------------------------------------------------
As proposed, the table included a column reporting aggregate dollar
amounts of in-the-money unexercised options.\275\ Some commenters
believed that this table should not include information on out-of-the-
money options because they believed that these awards have no value to
executives at the point they are out-of-the-money.\276\ Several other
commenters recommended disclosure of the number and key terms of out-
of-the-money instruments, so investors can understand the potential
compensation opportunity of these awards if the market price of the
underlying shares increases.\277\ We proposed to require expiration
date information in footnote disclosure. We note that some commenters
expressed concern that disclosure of expiration and vesting dates of
the instruments would be lengthy.\278\ However, because we agree with
other commenters that information regarding out-of-the-money options is
material to investors, we have revised the columns applicable to
unexercised options, stock appreciation rights and similar instruments
with option-like features to require disclosure of:
---------------------------------------------------------------------------
\275\ Proposed Item 402(g)(2)(iii).
\276\ See, e.g., letters from Frederic W. Cook & Co.; N. Ludgus;
and SCSGP.
\277\ See, e.g., letters from Amalgamated; Brian Foley &
Company, Inc. (``Brian Foley & Co.''); Buck Consultants; CII; Hodak
Value Advisors; IUE-CWA; and SBAF.
\278\ See, e.g., letters from Leggett & Platt; SCSGP; and Sidley
Austin.
---------------------------------------------------------------------------
The number of securities underlying unexercised
instruments that are exercisable;
The number of securities underlying unexercised
instruments that are unexercisable;
The exercise or base price; and
The expiration date.
After evaluating the comments received, we believe disclosure of
individual exercise prices and expiration dates is required to provide
a full understanding of the potential compensation opportunity. In
particular, with respect to out-of-the-money awards, this allows
investors to see the amount the stock price must rise and the amount of
time remaining for it to happen. Consequently, this disclosure is
required for each instrument, rather than on the aggregate basis that
was proposed.\279 \
---------------------------------------------------------------------------
\279\ Multiple awards may be aggregated where the expiration
date and the exercise and/or base price of the instruments is
identical. A single award consisting of a combination of options,
SARs and/or similar option-like instruments must be reported as
separate awards with respect to each tranche with a different
exercise and/or base price or expiration date. Instruction 4 to Item
402(f)(2). We have not adopted the proposed requirements to disclose
whether an option that expired after fiscal year-end had been
exercised, in response to comment that this would unnecessarily
deviate from the standard of reporting last fiscal year information.
See letter from ABA.
---------------------------------------------------------------------------
As suggested by another commenter, we also modify the table to
clarify that these columns apply to options and similar awards that
have been transferred other than for value.\280\ The proposal reflected
interpretations of the former rule that the transfer of an option or
similar award by an executive does not negate the award's status as
compensation that should be reported.\281\ Because an award that a
named executive officer transferred for value is not an award for which
the outcome remains to be realized, the rules adopted today instead
require disclosure in the Option Exercises and Stock Vested Table of
the amounts realized upon transfer for value.\282\
---------------------------------------------------------------------------
\280\ Instruction 1 to Item 402(f)(2). See letter from ABA.
\281\ See Registration of Securities on Form S-8, Release No.
33-7646 (Feb. 25, 1999) [64 FR 11103], at Section III.D.
\282\ Item 402(g), described in Section II.C.4.b. immediately
below.
---------------------------------------------------------------------------
In view of our approach in the Grants of Plan-Based Awards Table as
adopted and the purposes of this table in showing all outstanding
equity awards, we are adopting a column (column (d)) for reporting the
number of securities underlying unexercised options awarded under
equity incentive plans.\283\ We have also revised the format of the
table to more clearly delineate between the information regarding
option awards and the information regarding stock awards.
---------------------------------------------------------------------------
\283\ Item 402(f)(2)(iv).
---------------------------------------------------------------------------
The remaining disclosure, relating to numbers and market values of
nonvested stock and equity incentive plan awards, is adopted on an
aggregate basis, substantially as proposed. One commenter expressed the
view that the table should not include unearned performance-based
awards because it would be difficult to disclose a meaningful value
before the performance conditions are satisfied.\284\ Another commenter
requested clarification of valuation of awards that are performance-
based and nonvested, specifically whether value should be based on
actual performance to date or
[[Page 53185]]
on achieving target performance goals.\285\ As adopted, an instruction
provides that the number of shares reported in the appropriate columns
for equity incentive plan awards (columns (d) and (i)) or the payout
value reported in column (j) is based on achieving threshold
performance goals, except that if the previous fiscal year's
performance has exceeded the threshold, the disclosure shall be based
on the next higher performance measure (target or maximum) that exceeds
the previous fiscal year's performance. If the award provides only for
a single estimated payout, that amount should be reported. If the
target amount is not determinable, registrants must provide a
representative amount based on the previous fiscal year's
performance.\286\ We have also adopted an instruction clarifying that
stock or options under equity incentive plans are reported in columns
(d) or (i) and (j), as appropriate, until the relevant performance
condition has been satisfied. Once the relevant performance condition
has been satisfied, if stock remains unvested or the option
unexercised, the stock or options are reported in columns (b) or (c),
or (g) and (h), as appropriate.\287\
---------------------------------------------------------------------------
\284\ See letter from Sullivan.
\285\ See, e.g., letter from Hewitt.
\286\ Instruction 3 to Item 402(f).
\287\ Instruction 5 to Item 402(f).
---------------------------------------------------------------------------
b. Option Exercises and Stock Vested Table
We are adopting substantially as proposed a table that will show
the amounts received upon exercise of options or similar instruments or
the vesting of stock or similar instruments during the most recent
fiscal year. This table will allow investors to have a picture of the
amounts that a named executive officer realizes on equity compensation
through its final stage.\288\
---------------------------------------------------------------------------
\288\ This table is similar to a portion of the Aggregate
Options/SAR Exercises in Last Fiscal Year and FY-End Options/SAR
Values Table that was required prior to these amendments, except
unlike that table it also includes the vesting of restricted stock
and similar instruments. Commentators have noted a need for
comparable disclosure of restricted stock vesting.
Option Exercises and Stock Vested
----------------------------------------------------------------------------------------------------------------
Option awards Stock awards
------------------------------------------------------------------------------------------
Name Number of shares Number of shares
acquired on exercise Value realized on acquired on vesting Value realized on
() exercise ($) () vesting ($)
(a) (b) (c) (d) (e)
----------------------------------------------------------------------------------------------------------------
PEO
----------------------------------------------------------------------------------------------------------------
PFO
----------------------------------------------------------------------------------------------------------------
A
----------------------------------------------------------------------------------------------------------------
B
----------------------------------------------------------------------------------------------------------------
C
----------------------------------------------------------------------------------------------------------------
We proposed that this table include the grant date fair value of
these instruments that would have been disclosed in the Summary
Compensation Table for the year in which they were awarded. We proposed
this column to eliminate the possible impact of double disclosure by
showing amounts previously disclosed. We have adopted the table without
the grant date fair value column in response to commenters' concerns
that this column would confuse investors and increase the potential for
double counting.\289\ As described in the preceding section, in
response to comment that transfers of awards for value also are
realization events, amounts realized upon such transfers must be
included in columns (c) and (e) of this table.\290\ Finally, we have
reformatted the columns to make the presentation of stock and option
awards consistent with the presentation in other tables.
---------------------------------------------------------------------------
\289\ See, e.g., letters from Foley; SCSGP; and Stradling Yocca.
\290\ Item 402(g)(2)(iii) and (v).
---------------------------------------------------------------------------
5. Post-Employment Compensation
As we proposed, we are making significant revisions to the
disclosure requirements regarding post-employment compensation to
provide a clearer picture of this potential future compensation. As we
noted in the Proposing Release, executive retirement packages and other
post-termination compensation may represent a significant commitment of
corporate resources and a significant portion of overall compensation.
First, we are replacing the former pension plan table, alternative plan
disclosure and some of the other narrative descriptions with a table
regarding defined benefit pension plans and enhanced narrative
disclosure. We have revised the table from the table proposed. Second,
we are adding a table and narrative disclosure that will disclose
information regarding nonqualified defined contribution plans and other
deferred compensation. We have adopted this table substantially as
proposed. Finally, we are adopting revised requirements substantially
as proposed regarding disclosure of compensation arrangements triggered
upon termination and on changes in control.
a. Pension Benefits Table
We proposed significant revisions to the rules disclosing
retirement benefits to require disclosure of the estimate of retirement
benefits to be payable at normal retirement age and, if available,
early retirement. Disclosure under the rules prior to today's
amendments frequently did not provide investors
[[Page 53186]]
useful information regarding specific potential pension benefits
relating to a particular named executive officer.\291\ In particular,
it may have been difficult to understand which amounts related to any
particular named executive officer, obscuring the value of a
significant component of compensation.
---------------------------------------------------------------------------
\291\ The rules prior to today's amendments provided that, for
defined benefit or actuarial plans, disclosure was required under
Item 402(f) by way of a general table showing estimated annual
benefits under the plan payable upon retirement (including amounts
attributable to supplementary or excess pension award plans) for
specified compensation levels and years of service. This table did
not provide disclosure for any specific named executive officer.
This requirement applied to plans under which benefits were
determined primarily by final compensation (or average final
compensation) and years of service, and included narrative
disclosure. If named executive officers were subject to other plans
under which benefits were not determined primarily by final
compensation (or average final compensation), narrative disclosure
had been required prior to these amendments of the benefit formula
and estimated annual benefits payable to the officers upon
retirement at normal retirement age.
---------------------------------------------------------------------------
We therefore proposed a new table that would have required
disclosure of the estimated retirement benefits payable at normal
retirement age and, if available, early retirement, under defined
benefit plans. Under the proposal, benefits would have been quantified
based on the form of benefit currently elected by the named executive
officer, such as joint and survivor annuity or single life annuity.
Some commenters objected that the proposed revisions would result
in disclosure that would not be comparable and could be
manipulated.\292\ In particular, the calculation of benefits would
depend on such factors as the form of benefit payment, the named
executive officer's marital status, and the actuarial assumptions
applied, which would vary from company to company and plan to plan.
Explanations of the complicated methodologies involved could hinder
transparency.
---------------------------------------------------------------------------
\292\ See, e.g., letters from BRT; Chadbourne & Parke LLP
(``Chadbourne''); Cleary; and ABA-JCEB.
---------------------------------------------------------------------------
Some commenters suggested that the Commission prescribe standard
assumptions for calculating annual benefits for disclosure purposes,
such as a single life annuity and retirement at age 65, in order to
facilitate comparability.\293\ Other commenters suggested disclosure of
the present value of the current accrued benefit computed as of the end
of the company's last completed fiscal year,\294\ achieving
comparability by reporting the economic value of the benefit that the
executive has accumulated through the plan.
---------------------------------------------------------------------------
\293\ See, e.g., letters from ABA and NACCO Industries.
\294\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; Professor Bebchuk, et al.; and SBAF.
---------------------------------------------------------------------------
Because the latter approach achieves comparability and transparency
by disclosing a benefit that already has accrued, we view it as
preferable to an approach that would ``normalize'' disclosure based on
hypothetical annual benefit assumptions prescribed by the Commission
that might bear no relationship to the assumptions that the company
actually applies with respect to the plan. Furthermore, this approach
will make clearer the relationship of this table to the Summary
Compensation Table disclosure of increase in pension value. This
approach will also lessen the burden on companies, since they are
required to calculate the present value for the Summary Compensation
Table. Accordingly, the table we adopt today requires disclosure of the
actuarial present value of the named executive officer's accumulated
benefit under the plan and the number of years of service credited to
the named executive officer under the plan reported in the table, each
computed as of the same pension plan measurement date for financial
statement reporting purposes with respect to the audited financial
statements for the company's last completed fiscal year.\295\ This
disclosure applies without regard to the particular form(s) of benefit
payment available under the plan.
---------------------------------------------------------------------------
\295\ Item 402(h)(2)(iv). If the number of years of credited
service for a plan differs from the named executive officer's number
of actual years of service with the company, footnote quantification
of the difference and any resulting benefit augmentation is
required. Instruction 4 to Item 402(h)(2).
---------------------------------------------------------------------------
Whether or not the plan allows for a lump-sum payment, presentation
of the present value of the accrued plan benefit provides investors an
understanding of the cost of promised future benefits in present value
terms.\296\ Companies must use the same assumptions, such as interest
rate assumptions, that they use to derive the amounts disclosed in
conformity with generally accepted accounting principles, but would
assume that retirement age is normal retirement age as defined in the
plan, or if not so defined, the earliest time at which a participant
may retire under the plan without any benefit reduction due to
age.\297\ The estimates are to be based on current compensation, and as
such, future levels of compensation need not be estimated for purposes
of the calculation. The valuation method and all material assumptions
applied will be described in the narrative section accompanying this
table.\298\ A separate row will be provided for each plan in which a
named executive officer participates.\299\ For purposes of allocating
the current accrued benefit between tax qualified defined benefit plans
and related supplemental plans, a company will apply the applicable
Internal Revenue Code limitations in effect as of the pension plan
measurement date.\300\ At the suggestion of a commenter, we have
simplified the name of the table.\301\
---------------------------------------------------------------------------
\296\ Further, basing pension plan disclosure on the accumulated
benefit is consistent with nonqualified deferred compensation plan
disclosure, which, as described in Section II.C.5.b. immediately
below, reports an aggregate account balance.
\297\ Instruction 2 to Item 402(h)(2). Of course, the benefits
included in the plan document or the executive's contract itself is
not an assumption.
\298\ Item 402(h)(3) and Instruction 2 to Item 402(h)(2). This
requirement could be satisfied by reference to a discussion of those
assumptions in the company's financial statements, footnotes to the
financial statements, or Management's Discussion and Analysis. The
sections so referenced would be deemed a part of the disclosure
provided by this Item.
\299\ Instruction 1 to Item 402(h)(2).
\300\ Instruction 3 to Item 402(h).
\301\ See letter from ABA.
Pension Benefits
----------------------------------------------------------------------------------------------------------------
Number of years Present value of
Name Plan name credited service accumulated benefit Payments during last
() ($) fiscal year ($)
(a) (b) (c) (d) (e)
----------------------------------------------------------------------------------------------------------------
PEO
----------------------------------------------------------------------------------------------------------------
[[Page 53187]]
PFO
----------------------------------------------------------------------------------------------------------------
A
----------------------------------------------------------------------------------------------------------------
B
----------------------------------------------------------------------------------------------------------------
C
----------------------------------------------------------------------------------------------------------------
We have moved the disclosure proposed to be included in the Summary
Compensation Table of pension benefits paid to a named executive
officer during the last completed fiscal year to the Pension Benefits
Table so that pension benefits are disclosed only once in the Summary
Compensation Table.\302\ We remain of the view that disclosure of these
payments would be material to investors, particularly where the named
executive officer receives them while still employed by the
company.\303\
---------------------------------------------------------------------------
\302\ Item 402(h)(2)(v). See also Instruction 1 to Item
402(c)(2)(viii). We have included these amounts in this table rather
than the Summary Compensation Table since the increase in the value
of the pension benefit would have been previously disclosed in the
Summary Compensation Table.
\303\ Item 402(a)(5) as amended provides that a column may be
omitted if there is no compensation required to be reported in that
column in any fiscal year covered by that table.
---------------------------------------------------------------------------
The table will be followed by a narrative description of material
factors necessary to an understanding of each plan disclosed in the
table. Examples of such factors may include, in given cases, among
other things:
The material terms and conditions of benefits available
under the plan, including the plan's retirement benefit formula and
eligibility standards, and early retirement arrangements;\304\
---------------------------------------------------------------------------
\304\ For this purpose, ``normal retirement age'' means the
normal retirement age defined in the plan, or if not so defined, the
earliest time at which a participant may retire under the plan
without any benefit reduction due to age. ``Early retirement age''
means early retirement age as defined in the plan, or otherwise
available to the executive under the plan. Item 402(h)(3)(i) and
(ii).
---------------------------------------------------------------------------
The specific elements of compensation, such as salary and
various forms of bonus, included in applying the benefit formula,
identifying each such element;
Regarding participation in multiple plans, the different
purposes for each plan; and
Company policies with regard to such matters as granting
extra years of credited service.
b. Nonqualified Deferred Compensation Table
In order to provide a more complete picture of potential post-
employment compensation, we are adopting substantially as proposed a
new table to disclose contributions, earnings and balances under each
defined contribution or other plan that provides for the deferral of
compensation on a basis that is not tax-qualified. These plans may be a
significant element of retirement and post-termination compensation.
Prior to these amendments, the rules had elicited disclosure of the
compensation when earned and only the above-market or preferential
earnings on nonqualified deferred compensation.\305\ The full value of
those earnings and the accounts on which they are payable was not
subject to disclosure, nor were investors informed regarding the rate
at which these amounts, and the corresponding cost to the company,
grow.\306\
---------------------------------------------------------------------------
\305\ See Section II.C.1.d.i. above.
\306\ See Lucian A. Bebchuk and Jesse M. Fried, Stealth
Compensation via Retirement Benefits, 1 Berkeley Bus. L.J. 291, 314-
316 (2004).
---------------------------------------------------------------------------
As noted above, we are requiring disclosure in the Summary
Compensation Table only of the above-market or preferential portion of
earnings on compensation that is deferred on a basis that is not tax-
qualified. To provide investors with disclosure of the full amount of
nonqualified deferred compensation accounts that the company is
obligated to pay named executive officers, including the full amount of
earnings for the last fiscal year, we are also requiring new tabular
and narrative disclosure of nonqualified deferred compensation, as we
proposed.\307\
---------------------------------------------------------------------------
\307\ Item 402(i).
Nonqualified Deferred Compensation
----------------------------------------------------------------------------------------------------------------
Aggregate
Executive Registrant Aggregate withdrawals/ Aggregate balance
Name contributions in contributions in earnings in last distributions at last FYE ($)
last FY ($) last FY ($) FY ($) ($)
(a) (b) (c) (d) (e) (f)
----------------------------------------------------------------------------------------------------------------
PEO
----------------------------------------------------------------------------------------------------------------
PFO
----------------------------------------------------------------------------------------------------------------
[[Page 53188]]
A
----------------------------------------------------------------------------------------------------------------
B
----------------------------------------------------------------------------------------------------------------
C
----------------------------------------------------------------------------------------------------------------
One commenter noted that the title proposed--Nonqualified Defined
Contribution and Other Deferred Compensation Plans--suggested that tax
qualified plans that provide for deferral of compensation, such as
Section 401(k) plans, would be covered.\308\ We have adopted the
commenter's recommendation to modify the title to clarify that the
table covers only deferred compensation that is not tax-qualified, and
we have also shortened the title consistent with our amendments
regarding the Pension Benefits Table.
---------------------------------------------------------------------------
\308\ See letter from Foley.
---------------------------------------------------------------------------
As proposed and adopted, an instruction requires footnote
quantification of the extent to which amounts in the contributions and
earnings columns are reported as compensation in the year in question
and other amounts reported in the table in the aggregate balance column
were reported previously in the Summary Compensation Table for prior
years.\309\ This footnote provides information so that investors can
avoid ``double counting'' of deferred amounts by clarifying the extent
to which amounts payable as deferred compensation represent
compensation previously reported, rather than additional currently
earned compensation.\310\
---------------------------------------------------------------------------
\309\ Instruction to Item 402(i)(2).
\310\ As described in Section II.C.1.b. above, the rules as
adopted do not include the corresponding footnote that was proposed
for the Summary Compensation Table.
---------------------------------------------------------------------------
The table will be followed by a narrative description of material
factors necessary to an understanding of the disclosure in the
table.\311\ Examples of such factors may include, in given cases, among
other things:
---------------------------------------------------------------------------
\311\ Item 402(i)(3).
---------------------------------------------------------------------------
The type(s) of compensation permitted to be deferred, and
any limitations (by percentage of compensation or otherwise) on the
extent to which deferral is permitted;
The measures of calculating interest or other plan
earnings (including whether such measure(s) are selected by the named
executive officer or the company and the frequency and manner in which
such selections may be changed), quantifying interest rates and other
earnings measures applicable during the company's last fiscal year; and
material terms with respect to payouts, withdrawals and
other distributions.
Where plan earnings are calculated by reference to actual earnings
of mutual funds or other securities, such as company stock, it is
sufficient to identify the reference security and quantify its return.
This disclosure may be aggregated to the extent the same measure
applies to more than one named executive officer.
c. Other Potential Post-Employment Payments
We are adopting the significant revisions that we proposed to our
requirements to describe termination or change in control provisions.
The Commission has long recognized that ``termination provisions are
distinct from other plans in both intent and scope and, moreover, are
of particular interest to shareholders.'' \312\ Prior to today's
amendments, disclosure did not in many cases capture material
information regarding these plans and potential payments under them. We
therefore proposed and are adopting disclosure of specific aspects of
written or unwritten arrangements that provide for payments at,
following, or in connection with the resignation, severance, retirement
or other termination (including constructive termination) of a named
executive officer, a change in his or her responsibilities,\313\ or a
change in control of the company.
---------------------------------------------------------------------------
\312\ 1983 Release, at Section III.E.
\313\ We confirm that this aspect of the disclosure requirement
is not limited to a change in responsibilities in connection with a
change in control.
---------------------------------------------------------------------------
Our amendments call for narrative disclosure of the following
information regarding termination and change in control provisions:
\314\
---------------------------------------------------------------------------
\314\ Item 402(j).
---------------------------------------------------------------------------
the specific circumstances that would trigger payment(s)
or the provision of other benefits (references to benefits include
perquisites and health care benefits);
the estimated payments and benefits that would be provided
in each covered circumstance, and whether they would or could be lump
sum or annual, disclosing the duration and by whom they would be
provided; \315\
---------------------------------------------------------------------------
\315\ We have eliminated the $100,000 disclosure threshold that
was specified in the rule prior to today's amendments. For post-
termination perquisites, however, the same disclosure and
itemization thresholds used for the amended Summary Compensation
Table apply. See Section II.C.1.e.i. above. We have modified Item
402(j)(2) from the proposal in response to comments to clarify that
the required description covers both annual and lump sum payments.
See letter from ABA.
---------------------------------------------------------------------------
how the appropriate payment and benefit levels are
determined under the various circumstances that would trigger payments
or provision of benefits; \316\
---------------------------------------------------------------------------
\316\ We have modified Item 402(j)(3) from the proposal to
clarify the scope of the required disclosure. The proposal would
have required the company to describe and explain the specific
factors used to determine the appropriate payment and benefit levels
under the various triggering circumstances. A commenter suggested
that the proposed language was overly broad and ambiguous and could
result in mere repetition of the pension payout formula and
actuarial assumptions. See letter from ABA.
---------------------------------------------------------------------------
any material conditions or obligations applicable to the
receipt of payments or benefits, including but not limited to non-
compete, non-solicitation, non-disparagement or confidentiality
covenants; and
[[Page 53189]]
any other material factors regarding each such contract,
agreement, plan or arrangement.\317\
---------------------------------------------------------------------------
\317\ This would include, for example, disclosure of whether an
executive simultaneously receives both severance and retirement
benefits, a practice commonly known as a ``double dip.'' See letter
from WorldatWork.
---------------------------------------------------------------------------
The item contemplates disclosure of the duration of non-compete and
similar agreements, and provisions regarding waiver of breach of these
agreements, and disclosure of tax gross-up payments.
A company will be required to provide quantitative disclosure under
these requirements even where uncertainties exist as to amounts payable
under these plans and arrangements. We clarify that in the event
uncertainties exist as to the provision of payments and benefits or the
amounts involved, the company is required to make a reasonable estimate
(or a reasonable estimated range of amounts), and disclose material
assumptions underlying such estimates or estimated ranges in its
disclosure. In such event, the disclosure will be considered forward-
looking information as appropriate that falls within the safe harbors
for disclosure of such information.\318\
---------------------------------------------------------------------------
\318\ See, e.g., Securities Act Section 27A and Exchange Act
Section 21E.
---------------------------------------------------------------------------
We have modified the requirement somewhat in response to comments
that compliance with the proposal would involve multiple complex
calculations and projections based on circumstantial and variable
assumptions.\319\ We adopt commenters' suggestions that the
quantitative disclosure required be calculated applying the assumptions
that:
---------------------------------------------------------------------------
\319\ See, e.g., letters from Cleary; Foley; HRPA; and Top Five
Data.
---------------------------------------------------------------------------
the triggering event took place on the last business day
of the company's last completed fiscal year; and
the price per share of the company's securities is the
closing market price as of that date.\320\
---------------------------------------------------------------------------
\320\ Instruction 1 to Item 402(j). See, e.g., letters from
Emerson; Foley; and Frederic W. Cook & Co.
---------------------------------------------------------------------------
We have also revised the rule to provide that if a triggering event
has occurred for a named executive officer who was not serving as a
named executive officer at the end of the last completed fiscal year,
disclosure under this provision is required for that named executive
officer only with respect to the actual triggering event that
occurred.\321\ These modifications will both facilitate company
compliance and provide investors with disclosure that is more
meaningful. We further clarify that health care benefits are included
in this requirement, and quantifiable based on the assumptions used for
financial reporting purposes under generally accepted accounting
principles.\322\
---------------------------------------------------------------------------
\321\ Instruction 4 to Item 402(j). See letter from ABA.
\322\ Item 402(j)(1) and Instruction 2 to Item 402(j). These
would be the assumptions applied under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 106,
Employer's Accounting for Postretirement Benefits Other Than
Pensions (FAS 106). See, e.g., letters from Peabody Energy and
WorldatWork.
---------------------------------------------------------------------------
We further clarify in response to comments that to the extent that
the form and amount of any payment or benefit that would be provided in
connection with any triggering event is fully disclosed in the Pension
Benefits Table or the Nonqualified Deferred Compensation Table and the
narrative disclosure related to those tables, reference may be made to
that disclosure.\323\ However, to the extent that the form or amount of
any such payment or benefit would be increased, or its vesting or other
provisions accelerated upon any triggering event, such increase or
acceleration must be specifically disclosed in this section.\324\ In
addition, we have added an instruction that companies need not disclose
payments or benefits under this requirement to the extent such payments
or benefits do not discriminate in scope, terms or operation, in favor
of a company's executive officers and are available generally to all
salaried employees.\325\
---------------------------------------------------------------------------
\323\ See letter from Academy of Actuaries.
\324\ Instruction 3 to Item 402(j).
\325\ Instruction 5 to Item 402(j).
---------------------------------------------------------------------------
6. Officers Covered
a. Named Executive Officers
As proposed, we are amending the disclosure rules so that the
principal executive officer, the principal financial officer \326\ and
the three most highly compensated executive officers other than the
principal executive officer and principal financial officer comprise
the named executive officers.\327\ In addition, as was the case prior
to these amendments, up to two additional individuals for whom
disclosure would have been required but for the fact that they were no
longer serving as executive officers at the end of the last completed
fiscal year shall be included.
---------------------------------------------------------------------------
\326\ We are adopting the nomenclature used in Item 5.02 of Form
8-K, which refers to ``principal executive officer'' and ``principal
financial officer.''
\327\ Item 402(a)(3). As defined in Securities Act Rule 405 [17
CFR 230.405] and Exchange Act Rule 3b-7 [17 CFR 240.3b-7], ``the
term 'executive officer,' when used with reference to a registrant,
means its president, any vice president of the registrant in charge
of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-
making function or any other person who performs similar policy-
making functions for the registrant. Executive officers of
subsidiaries may be deemed executive officers of the registrant if
they perform such policy-making functions for the registrant.''
Therefore, as was formerly the case, a named executive officer may
be an executive officer of a subsidiary or an employee of a
subsidiary who performs such policy-making functions for the
registrant. We have clarified this point in the provision describing
the determination of named executive officer. Instruction 2 to Item
402(a)(3).
---------------------------------------------------------------------------
As we noted in the Proposing Release, we believe that compensation
of the principal financial officer is important to shareholders
because, along with the principal executive officer, the principal
financial officer provides the certifications required with the
company's periodic reports and has important responsibility for the
fair presentation of the company's financial statements and other
financial information.\328\ Like the principal executive officer,
disclosure about the principal financial officer will be required even
if he or she was no longer serving in that capacity at the end of the
last completed fiscal year.\329\ As was the case for the chief
executive officer prior to today's amendments, all persons who served
as the company's principal executive officer or principal financial
officer during the last completed fiscal year are named executive
officers.
---------------------------------------------------------------------------
\328\ Exchange Act Rules 13a-14 and 15d-14.
\329\ Paragraphs (a)(3)(i) and (a)(3)(ii) of Item 402 provide
that all individuals who served as a principal executive officer and
principal financial officer or in similar capacities during the last
completed fiscal year must be considered named executive officers.
Item 402(a)(4) specifies that if the principal executive officer or
principal financial officer served in that capacity for only part of
a fiscal year, information must be provided as to all of the
individual's compensation for the full fiscal year. Item 402(a)(4)
also specifies that if a named executive officer (other than the
principal executive officer or principal financial officer) served
as an executive officer of the company (whether or not in the same
position) during any part of the fiscal year, then information is
required as to all compensation of that individual for the full
fiscal year.
---------------------------------------------------------------------------
We are not requiring compensation disclosure for all of the
officers listed in Items 5.02(b) and (c) of Form 8-K.\330\ Those Form
8-K Items were adopted to provide current disclosure in the event of an
appointment, resignation, retirement or termination of the specified
officers, based on the principle that changes in employment status of
these particular officers are unquestionably or presumptively material.
At the time when a decision is made regarding the employment status of
a particular officer, it will not always be clear who will be the named
executive officers for the current year.
[[Page 53190]]
Given these factors, it is reasonable for the two groups not to be
identical.
---------------------------------------------------------------------------
\330\ These are the registrant's principal executive officer,
president, principal financial officer, principal accounting
officer, principal operating officer or any person performing
similar functions. As described in Section III.A. below, the rules
we adopt today also amend Item 5.02 of Form 8-K.
---------------------------------------------------------------------------
b. Identification of Most Highly Compensated Executive Officers; Dollar
Threshold for Disclosure
In the rule prior to today's amendments, the determination of the
most highly compensated executive officers was based solely on total
annual salary and bonus for the last fiscal year, subject to a $100,000
disclosure threshold. We proposed to revise the dollar threshold for
disclosure of named executive officers other than the principal
executive officer and the principal financial officer to $100,000 of
total compensation for the last fiscal year. Given the proliferation of
various forms of compensation other than salary and bonus, we believe
that total compensation would more accurately identify those officers
who are, in fact, the most highly compensated.
Several commenters objected to using total compensation to identify
named executive officers.\331\ In particular, commenters stated that
this measure would minimize the importance of the compensation
committee's compensation decisions for the most recent year and include
significant elements beyond the committee's control, such as the
increase in pension value and earnings on nonqualified deferred
compensation. Some commenters recommended continuing to rely solely on
salary and bonus, stating that these measures more accurately reflect
the executives who are most highly valued in the company and permit
greater year-to-year consistency.\332\ Other commenters expressed
concern that including episodic option awards would result in more
frequent changes to the named executive officer roster.\333\
---------------------------------------------------------------------------
\331\ See, e.g., letters from ACC; Emerson; Leggett & Platt;
SCSGP; and Unitrin.
\332\ See, e.g., letters from Frederic W. Cook & Co. and Intel.
\333\ See, e.g., letter from Intel.
---------------------------------------------------------------------------
We are persuaded that it is appropriate to exclude from the named
executive officer determination compensation elements that principally
reflect executives' decisions to defer compensation and wealth
accumulation in pension plans, or are unduly influenced by age or years
of service. However, as we stated in the Proposing Release, basing
identification of named executive officers solely on the compensation
reportable in the salary and bonus categories may provide an incentive
to re-characterize compensation. Further, limiting the determination to
salary and bonus is not consistent with our decision to eliminate the
distinction between ``annual'' and ``long-term'' compensation in the
Summary Compensation Table.\334\ We realize that this may result in
more frequent changes to the officers designated as named executive
officers, but believe that it will provide a clearer picture of
compensation at a company. Accordingly, we require the most highly
compensated executive officers to be determined based on total
compensation, reduced by the sum of the increase in pension values and
nonqualified deferred compensation above-market or preferential
earnings reported in column (h) of the Summary Compensation.\335\
---------------------------------------------------------------------------
\334\ See Section II.C.1.f. above, discussing the effect of this
change on compensation formerly reported as ``bonus.''
\335\ Instruction 1 to Item 402(a)(3).
---------------------------------------------------------------------------
Prior to these amendments, companies were permitted to exclude an
executive officer (other than the chief executive officer) due to
either an unusually large amount of cash compensation that was not part
of a recurring arrangement and was unlikely to continue, or cash
compensation relating to overseas assignments attributed predominantly
to such assignments.\336\ Because payments attributed to overseas
assignments have the potential to skew the application of Item 402
disclosure away from executives whose compensation otherwise properly
would be disclosed, we are retaining this basis for exclusion, as we
proposed. However, we believe that other compensation that is ``not
recurring and unlikely to continue'' should be considered compensation
for disclosure purposes. There has been inconsistent interpretation of
the ``not recurring and unlikely to continue'' standard, and it is
susceptible to manipulation. We therefore are eliminating this basis
for exclusion, as we proposed.\337\
---------------------------------------------------------------------------
\336\ This exclusion had been set forth in Instruction 3 to Item
402(a)(3) prior to these amendments.
\337\ Instruction 3 to Item 402(a)(3).
---------------------------------------------------------------------------
7. Interplay of Items 402 and 404
We are amending Item 402 so that it requires disclosure of all
transactions between the company and a third party where the primary
purpose of the transaction is to furnish compensation to a named
executive officer as proposed. Also as proposed, amended Item 402 will
no longer exclude from its disclosure requirements information about
compensatory transaction that had been disclosed under the related
person transaction disclosure requirements of Item 404.\338\ Further,
instructions to amended Item 404 clarify what compensatory transactions
with executive officers and directors need not be disclosed under Item
404.\339\
---------------------------------------------------------------------------
\338\ These relevant provisions were set forth in paragraphs
(a)(2) and (a)(5) of Item 402 before today's amendments. Because
paragraph (a)(5) of Item 402 as it had been stated prior to these
amendments was otherwise redundant with paragraph (a)(2) of Item 402
as that provision had been stated, we are eliminating the language
that had been set forth in paragraph (a)(5) in its entirety and
making a conforming amendment to paragraph (a)(2) of Item 402.
\339\ See Instruction 5 to Item 404(a), discussed in Section
V.A.3., below.
---------------------------------------------------------------------------
As noted in the Proposing Release, the result of these amendments
may be that in some cases compensation information will be required to
be disclosed under Item 402, while the related person transaction
giving rise to that compensation is also disclosed under Item 404. We
believe that the possibility of additional disclosure in the context of
each of these respective items is preferable to the possibility that
compensation is not properly and fully disclosed under Item 402.
8. Other Changes
Before today's amendments, a company was permitted to omit from
Item 402 disclosure of ``information regarding group life, health,
hospitalization, medical reimbursement or relocation plans that do not
discriminate in scope, terms or operation, in favor of executive
officers or directors of the registrant and that are available
generally to all salaried employees.'' \340\ Because relocation plans,
even when available generally to all salaried employees, are
susceptible to operation in a discriminatory manner that favors
executive officers, this exclusion may have deprived investors of
disclosure of significant compensatory benefits. For this reason, we
are deleting relocation plans from this exclusion, as we proposed. For
the same reason, as we proposed, we are also deleting relocation plans
from the exclusion from portfolio manager compensation in forms used by
management investment companies to register under the Investment
Company Act and offer securities under the Securities Act.\341\ We also
are revising the definition of ``plan'' so that it is more principles-
based, as we proposed.\342\ Finally, in order to
[[Page 53191]]
simplify the language of the individual requirements, we have
consolidated into one provision the definitions for the terms stock,
option and equity as used in Item 402.\343\
---------------------------------------------------------------------------
\340\ This language appeared in Item 402(a)(7)(ii) prior to
today's amendments, which generally defined the term ``plan.''
\341\ Amendment to Instruction 2 to Item 15(b) of Form N-1A;
amendment to Instruction 2 to Item 21.2 of Form N-2; amendment to
Instruction 2 to Item 22(b) of Form N-3.
\342\ Item 402(a)(6)(ii).
\343\ Item 402(a)(6)(i).
---------------------------------------------------------------------------
9. Compensation of Directors
Director compensation has continued to evolve from simple
compensation packages mostly involving cash compensation and attendance
fees to more complex packages, which can also include equity-based
compensation, incentive plans and other forms of compensation.\344\ In
light of this complexity, we proposed to require formatted tabular
disclosure for director compensation, accompanied by narrative
disclosure of additional material information. In doing so, we
revisited an approach that the Commission proposed in 1995 but did not
adopt at that time.\345\
---------------------------------------------------------------------------
\344\ See, e.g., National Association of Corporate Directors and
Pearl Meyer & Partners, 2003-2004 Director Compensation Survey
(2004); National Association of Corporate Directors, Report of the
NACD Blue Ribbon Commission On Director Compensation (2001); and
Dennis C. Carey, et al, How Should Corporate Directors Be
Compensated?, Investment Dealers' Digest Inc.--Special Issue: Boards
and Directors (Jan. 1996).
\345\ 1995 Release. The 1995 proposed amendment was coupled with
a proposed amendment to permit companies to reduce the detailed
executive compensation information provided in the proxy statement
by instead furnishing that information in the Form 10-K. We did not
act upon these proposed amendments.
---------------------------------------------------------------------------
Director compensation has continued to evolve since 1995 so that we
are today adopting a Director Compensation Table, which resembles the
revised Summary Compensation Table, but presents information only with
respect to the company's last completed fiscal year. Consistent with
the modifications to the Summary Compensation Table, this table moves
pension and nonqualified deferred compensation plan disclosure from All
Other Compensation to a separate column.\346\ Because the same
instructions as provided in the Summary Compensation Table govern
analogous matters in the Director Compensation Table, our modifications
to those instructions also apply to this table.
---------------------------------------------------------------------------
\346\ As noted in n. 303 above, Item 402(a)(5) provides that a
column may be omitted if there is no compensation required to be
reported in that column.
Director Compensation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in pension
value and
Fees earned or Non-equity nonqualified All other
Name paid in cash ($) Stock awards ($) Option awards ($) incentive plan deferred compensation ($) Total ($)
compensation ($) compensation
earnings
(a) (b) (c) (d) (e) (f) (g) (h)
--------------------------------------------------------------------------------------------------------------------------------------------------------
A
--------------------------------------------------------------------------------------------------------------------------------------------------------
B
--------------------------------------------------------------------------------------------------------------------------------------------------------
C
--------------------------------------------------------------------------------------------------------------------------------------------------------
D
--------------------------------------------------------------------------------------------------------------------------------------------------------
E
--------------------------------------------------------------------------------------------------------------------------------------------------------
As proposed and adopted, director fees earned or paid in cash would
be reported separately from fees paid in stock. The All Other
Compensation column of the Director Compensation Table includes, but is
not limited to:
All perquisites and other personal benefits if the total
is $10,000 or greater;
All tax reimbursements;
For any security of the company or its subsidiaries
purchased from the company or its subsidiaries (through deferral of
fees or otherwise) at a discount from the market price of such security
at the date of purchase, unless the discount is generally available to
all security holders or to all salaried employees of the company, the
compensation cost, if any, computed in accordance with FAS 123R;
Amounts paid or accrued to any director pursuant to a plan
or arrangement in connection with the resignation, retirement or any
other termination of such director or a change in control of the
company;
Annual company contributions to vested and unvested
defined contribution plans;
All consulting fees;
Awards under director legacy or charitable awards
programs; \347\ and
---------------------------------------------------------------------------
\347\ Under director legacy programs, also known as charitable
award programs, registrants typically agree to make a future
donation to one or more charitable institutions in the director's
name, payable by the company upon a designated event such as death
or retirement. The amount to be disclosed in the table shall be the
annual cost of such promises and payments, with footnote disclosure
of the total dollar amount and other material terms of each such
program. Instruction 1 to Item 402(k)(2)(vii).
---------------------------------------------------------------------------
The dollar value of any insurance premiums paid by, or on
behalf of, the company for life insurance for the director's benefit.
An additional requirement to include the dollar value of any
dividends or other earnings paid in stock or option awards when the
dividend or earnings were not factored into the grant date fair value
has been adopted for this column as discussed above.
In addition to the disclosure specified in the columns of the
table, we proposed to require, by footnote to the appropriate column,
disclosure for each director of the outstanding equity awards at fiscal
year end as would be required if the Outstanding Equity Awards at
Fiscal Year-End table for named executive officers were required for
directors. In response to a comment that this disclosure would be
provided
[[Page 53192]]
in the narrative accompanying the table, we have simplified the
relevant instruction to require footnote disclosure only of the
aggregate numbers of stock awards and option awards outstanding at
fiscal year end.\348\ As with the Summary Compensation Table, the new
rules make clear that all compensation must be included in the
table.\349\ As is the case with the current director disclosure
requirement, companies will not be required to include in the director
disclosure any amounts of compensation paid to a named executive
officer and disclosed in the Summary Compensation Table with footnote
disclosure indicating what amounts reflected in that table are
compensation for services as a director.\350\ An instruction to the
Director Compensation Table permits the grouping of multiple directors
in a single row of the table if all of their elements and amounts of
compensation are identical.\351\
---------------------------------------------------------------------------
\348\ Instruction to Item 402(k)(2)(iii) and (iv). See letter
from ABA.
\349\ The only exception is if all perquisites received by the
director total less than $10,000, they do not need to be disclosed.
Further, as described above for the Summary Compensation Table,
disclosure of nonqualified deferred compensation earnings is limited
to the above-market or preferential portion.
\350\ Instruction 3 to Item 402(c).
\351\ Instruction to Item 402(k)(2).
---------------------------------------------------------------------------
Following the table, narrative disclosure will describe any
material factors necessary to an understanding of the table. Such
factors may include, for example, a breakdown of types of fees.\352\ In
addition, as noted in Section II.A., disclosure regarding option timing
or dating practices may be necessary under this narrative disclosure
requirement when the recipients of the stock option grants are
directors of the company. As we proposed, we are not requiring a
supplemental Grants of Plan-Based Awards Table for directors.
---------------------------------------------------------------------------
\352\ Item 402(k)(3).
---------------------------------------------------------------------------
D. Treatment of Specific Types of Issuers
1. Small Business Issuers
The Item 402 amendments continue to differentiate between small
business issuers and other issuers, as we proposed. In adopting the
amendments, we recognize that the executive compensation arrangements
of small business issuers typically are less complex than those of
other public companies.\353\ We also recognize that satisfying
disclosure requirements designed to capture more complicated
compensation arrangements may impose new, unwarranted burdens on small
business issuers.\354\
---------------------------------------------------------------------------
\353\ These amendments apply only to small business issuers, as
defined by Item 10(a)(1) of Regulation S-B. The Commission's
Advisory Committee on Smaller Public Companies has recommended that
the Commission incorporate the scaled disclosure accommodations
currently available to small business issuers under Regulation S-B
into Regulation S-K and make them available to all microcap
companies. Final Report of the Advisory Committee on Smaller Public
Companies to the United States Securities and Exchange Commission
(Apr. 23, 2006). Any future consideration of this recommendation
would be the subject of a separate rulemaking.
\354\ Prior to today's amendments, under both Item 402 of
Regulation S7-B and Item 402 of Regulation S-K, a small business
issuer was not required to provide the Compensation Committee
Report, the Performance Graph, the Compensation Committee Interlocks
disclosure, the Ten-Year Option/SAR Repricings Table, and the Option
Grant Table columns disclosing potential realizable value or grant
date value. The rules prior to today's amendments also permitted
small business issuers to exclude the Pension Plan Table.
---------------------------------------------------------------------------
Some commenters addressing the proposed amendments to Item 402 of
Regulation S-B expressed the view that all companies whose shares are
publicly traded should have to meet the same reporting and disclosure
standards, regardless of their size, or urged that exemptions for
smaller public companies be limited,\355\ suggesting that they be
required to file some form of a basic Compensation Discussion and
Analysis.\356\ We are not following these recommendations, because the
executive compensation arrangements of small business issuers generally
are so much less complex than those of other public companies that they
do not warrant the more extensive disclosure requirements imposed on
companies that are not small business issuers and related regulatory
burdens that could be disproportionate for small business issuers.
---------------------------------------------------------------------------
\355\ See, e.g., letters from CII; CRPTF; IUE-CWA; SBAF; and
WSIB.
\356\ See, e.g., letters from ISS and Institutional Investors
Group.
---------------------------------------------------------------------------
Other commenters who supported the Commission's proposal to require
less extensive disclosure for companies subject to Regulation S-B
suggested that the Commission amend the definition of small business
issuer to encompass a larger group of smaller public companies, such as
by adopting the definition of ``smaller public company'' recommended by
the Advisory Committee on Smaller Public Companies, and scale back the
disclosure thresholds for all such smaller companies.\357\ We are not
following this recommendation at this time, but would instead defer
consideration until we can fully consider all recommendations of the
Advisory Committee.
---------------------------------------------------------------------------
\357\ See letters from America's Community Bankers (``ACB'');
Independent Community Bankers of America (``ICBA''); and SCSGP.
---------------------------------------------------------------------------
As proposed and adopted, small business issuers will be required to
provide, along with related narrative disclosure:
The Summary Compensation Table; \358\
---------------------------------------------------------------------------
\358\ Items 402(b) and 402(c) of Regulation S-B. Consistent with
the instructions to the narrative disclosure required by Item 402(e)
of Regulation S-K, we have added an instruction to Item 402(c) of
Regulation S-B so that disclosure is not required regarding any
repricing that occurs through specified provisions. Instruction to
Item 402(c) of Regulation S-B.
---------------------------------------------------------------------------
The Outstanding Equity Awards at Fiscal Year-End Table;
\359\ and
---------------------------------------------------------------------------
\359\ Item 402(d) of Regulation S-B.
---------------------------------------------------------------------------
The Director Compensation Table.\360\
---------------------------------------------------------------------------
\360\ Item 402(f) of Regulation S-B.
---------------------------------------------------------------------------
Small business issuers will be required to provide information in
the Summary Compensation Table only for the last two fiscal years. In
addition, small business issuers will be required to provide
information for fewer named executive officers, namely the principal
executive officer and the two most highly compensated officers other
than the principal executive officer.\361\ In light of our decision to
link the Summary Compensation Table pension plan disclosure to the
disclosure in the Pension Benefits Table, which is not required for
small business issuers, and in response to comment,\362\ we have
decided not to require that small business issuers include pension plan
disclosure in the Summary Compensation Table. Narrative discussion of a
number of items to the extent material replaces tabular or footnote
disclosure, for example identification of other items in the All Other
Compensation column and a description of post-employment payments and
other benefits.\363\ In light of our request in Release No. 33-8735 for
further comment on the proposed additional narrative disclosure
requirement regarding up to three highly compensated employees so that
it might apply only to large accelerated filers, we have not adopted
this proposal for Item 402 of Regulation S-B. Small business issuers
are not required to provide a Compensation
[[Page 53193]]
Discussion and Analysis or the related Compensation Committee
Report.\364\
---------------------------------------------------------------------------
\361\ Item 402(a) of Regulation S-B. Item 402(c)(7) of
Regulation S-B requires an identification to the extent material of
any item included under All Other Compensation in the Summary
Compensation Table. However, identification of an item will not be
considered material if it does not exceed the greater of $25,000 or
10% of all items included in the specified category. All items of
compensation are required to be included in the Summary Compensation
Table without regard to whether such items are required to be
identified.
\362\ See letter from ABA.
\363\ Items 402(c) and 402(e) of Regulation S-B.
\364\ We are also eliminating a provision of Item 402 of
Regulation S-K that allows small business issuers using forms that
call for Regulation S-K disclosure to exclude the disclosure
required by certain paragraphs of that Item. This provision had been
set forth in Item 402(a)(1)(i) of Regulation S-K prior to today's
amendments.
---------------------------------------------------------------------------
2. Foreign Private Issuers
Prior to today's amendments, a foreign private issuer was deemed to
comply with Item 402 of Regulation S-K if it provided the information
required by Items 6.B. and 6.E.2. of Form 20-F, with more detailed
information provided if otherwise made publicly available. We proposed
to continue this treatment of these issuers and clarify that the
treatment of foreign private issuers under Item 402 parallels that
under Form 20-F. Commenters supported this approach, stating that it
showed appropriate deference to a foreign private issuer's home country
requirements.\365\ We are adopting these requirements as proposed.\366\
---------------------------------------------------------------------------
\365\ See, e.g., letters from Federation of German Industries;
DaimlerChrysler AG; and jointly, Allianz AG, Deutsche Bank AG and
Siemens AG.
\366\ Item 402(a)(1).
---------------------------------------------------------------------------
3. Business Development Companies
As proposed, we are applying the same executive compensation
disclosure requirements to business development companies that we are
adopting for operating companies.\367\ We received no comments on this
proposal. Our amendments eliminate the inconsistency between Form 10-K,
on the one hand, which requires business development companies to
furnish all of the information required by Item 402 of Regulation S-K,
and the proxy rules and Form N-2, on the other, which require business
development companies to provide some of the information from Item 402
and other information that applies to registered investment companies.
---------------------------------------------------------------------------
\367\ Business development companies are a category of closed-
end investment companies that are not required to register under the
Investment Company Act [15 U.S.C. 80a-2(a)(48)].
---------------------------------------------------------------------------
Under the amendments, the registration statements of business
development companies will be required to include all of the
disclosures required by Item 402 of Regulation S-K for all of the
persons covered by Item 402.\368\ This disclosure will also be required
in the proxy and information statements of business development
companies if action is to be taken with respect to the election of
directors or with respect to the compensation arrangements and other
matters enumerated in Items 8(b) through (d) of Schedule 14A.\369\
Business development companies will also be required to make these
disclosures in their annual reports on Form 10-K.\370\
---------------------------------------------------------------------------
\368\ New Item 18.14 of Form N-2. Under the amendments, business
development companies will no longer be required to respond to Item
18.13 of Form N-2, and Item 18.13(c) of Form N-2 is being deleted.
Items 18.14 and 18.15 of Form N-2 are being redesignated as Items
18.15 and 18.16, respectively. As a result of the redesignation of
Item 18.15 of Form N-2, a change to the cross reference to this Item
in Instruction 8(a) of Item 24 of the form is also being made.
\369\ Amendment to Item 8 of Schedule 14A. Under the amendments,
business development companies will no longer be required to respond
to Item 22(b)(13) of Schedule 14A, and Item 22(b)(13)(iii) of
Schedule 14A is being deleted. Amendments to Item 22(b)(13) of
Schedule 14A.
\370\ Item 11 of Form 10-K.
---------------------------------------------------------------------------
As a result of these amendments, the persons covered by the
compensation disclosure requirements will be changed. The compensation
disclosure in the proxy and information statements and registration
statements of business development companies will be required to cover
the same officers as for operating companies, including the principal
executive officer and principal financial officer, as well as the three
most highly compensated executive officers that have total compensation
exceeding $100,000,\371\ instead of each of the three highest paid
officers of the company that have aggregate compensation from the
company for the most recently completed fiscal year in excess of
$60,000. In addition, the registration statements of business
development companies will no longer be required to disclose
compensation of members of the advisory board or certain affiliated
persons of the company.
---------------------------------------------------------------------------
\371\ See Section II.C.6., above.
---------------------------------------------------------------------------
Finally, under the amendments, the proxy and information statements
and registration statements of business development companies will not
be required to include compensation from the ``fund complex.''
Previously, this information was required in some circumstances.\372\
---------------------------------------------------------------------------
\372\ See instructions 4 and 6 to Item 22(b)(13)(i) of Schedule
14A; and instructions 4 and 6 to Item 18.13(a) of Form N-2 (prior to
today's amendments requiring certain entries in the compensation
table in the proxy and information statements and registration
statements of business development companies to include compensation
from the fund complex).
---------------------------------------------------------------------------
E. Conforming Amendments
The Item 402 amendments necessitate conforming amendments to the
Items of Regulations S-K and S-B and the proxy rules that cross
reference amended paragraphs of Item 402. On this basis, we are
amending:
the Item 201(d) of Regulations S-K and S-B and proxy rule
references to the Item 402 definition of ``plan;'' \373\
the Item 601(b)(10) of Regulation S-K reference to the
Item 402 treatment of foreign private issuers; \374\ and
---------------------------------------------------------------------------
\373\ Amendments to: Instruction 2 to paragraph (d) of Item 201
of Regulation S-B; Instruction 2 to paragraph (d) of Item 201 of
Regulation S-K; Exchange Act Rules 14a-6(a)(4) and 14c-5(a)(4); and
Instruction 1 to Item 10 of Schedule 14A.
\374\ Amendment to Item 601(b)(10)(iii)(C)(5).
---------------------------------------------------------------------------
the proxy rule references to Item 402 retirement plan
disclosure.\375\
III. Revisions to Form 8-K and the Periodic Report Exhibit Requirements
As part of our broader effort to revise our executive and director
compensation disclosure requirements, we proposed revisions to Item
1.01 of Form 8-K. This item requires real-time disclosure about an
Exchange Act reporting company's entry into a material definitive
agreement outside of the ordinary course of the company's business, as
well as any material amendment to such an agreement. Our staff's
experience since Item 1.01 became effective in 2004 suggests that this
item has elicited executive compensation disclosure regarding types of
matters that do not appear always to be unquestionably or presumptively
material, which is the standard we set for the expanded Form 8-K
disclosure events.\376\ We therefore proposed to revise Items 1.01 and
5.02 of Form 8-K to require real-time disclosure of employee
compensation events that more clearly satisfy this standard. We are
adopting the revisions substantially as proposed.
---------------------------------------------------------------------------
\375\ Amendments to Item 10(b)(1)(ii) and Instruction to Item
10(b)(1)(ii) of Schedule 14A.
\376\ We stated in Section I of Additional Form 8-K Disclosure
Requirements and Acceleration of Filing Date, Release No 33-8400
(Mar. 16, 2004) [69 FR 15594] (the ``Form 8-K Adopting Release''):
``The revisions that we adopt today will benefit markets by
increasing the number of unquestionably or presumptively material
events that must be disclosed currently.''
---------------------------------------------------------------------------
In addition to the amendments to Items 1.01 and 5.02 of Form 8-K,
we proposed to revise General Instruction D of Form 8-K to permit
companies in most cases to omit the Item 1.01 heading if multiple items
including Item 1.01 are applicable, so long as all of the substantive
disclosure required by Item 1.01 is included. We are adopting this
provision as proposed.
A. Items 1.01 and 5.02 of Form 8-K
Item 1.01 of Form 8-K requires an Exchange Act reporting company to
disclose, within four business days, the company's entry into a
material definitive agreement outside of its ordinary course of
business, or any
[[Page 53194]]
amendment of such agreement that is material to the company. When we
initially proposed this item, several commenters stated that it would
be difficult to determine, within the shortened Form 8-K filing period,
whether a particular definitive agreement met the materiality threshold
of Item 1.01, and whether the agreement was outside of the ordinary
course of business.\377\ Some of these commenters suggested that we
apply to Item 1.01 the standards used in pre-existing Item 601(b)(10)
of Regulation S-K, which governs the filing as exhibits to Commission
reports of material contracts entered into outside the ordinary course,
because these standards had been in place for many years and were
familiar to reporting companies.\378\
---------------------------------------------------------------------------
\377\ See, e.g., letters on Additional Form 8-K Disclosure
Requirements and Acceleration of Filing Date, Release No. 33-8106
(June 17, 2002) [67 FR 42914] in File No. S7-22-02 from the
Committee on Federal Regulation of Securities, Section of Business
Law of the American Bar Association, dated September 12, 2002;
Cleary, Gottlieb, Steen & Hamilton, dated August 26, 2002; Intel
Corporation, dated August 26, 2002; Professor Joseph A. Grundfest,
et al. dated October 3, 2002; Perkins Coie LLP, dated August 26,
2002; Shearman & Sterling, dated August 30, 2002; and Sullivan &
Cromwell, dated August 26, 2002.
\378\ See, e.g., letter in File No. S7-22-02 from the Section of
Business Law of the American Bar Association.
---------------------------------------------------------------------------
In response to the concerns raised by these comments, we adopted
Item 1.01 of Form 8-K so that it uses the standards of Item 601(b)(10)
to determine the types of agreements that are material to a company and
not in the ordinary course of business. Item 601(b)(10) of Regulation
S-K requires a company to file, as an exhibit to Securities Act and
Exchange Act filings, material contracts that are not made in the
ordinary course of business and are to be performed in whole or part at
or after the filing of the registration statement or report, or were
entered into not more than two years before the filing. Item
601(b)(10)(iii) refers specifically to employment compensation
arrangements and established a company's obligation to file the
following as exhibits:
any management contract or any 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 (or if not set forth in any formal
document, a written description thereof) in which any director or any
named executive officer (as defined by Item 402(a)(3) of Regulation S-
K) participates;
any other management contract or any other compensatory
plan, contract, or arrangement in which any other executive officer of
the company participates, unless immaterial in amount or significance;
and
any compensation 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
in which any employee (whether or not an executive officer of the
company) participates unless immaterial in amount or significance.\379\
---------------------------------------------------------------------------
\379\ Item 601(b)(10)(iii) of Regulation S-K. We note the
provision in Item 601(b)(10)(iii)(A) that carves out any plan,
contract or arrangement in which named executive officers and
directors do not participate that is ``immaterial in amount or
significance.'' In 1980, the Commission adopted amendments to
Regulation S-K that consolidated all of the exhibit requirements of
various disclosure forms into a single item in Regulation S-K.
Amendments Regarding Exhibit Requirements, Release No. 33-6230 (Aug.
27, 1980) [45 FR 58822], at Section II.B. This item was a forerunner
of the current Item 601. As part of that 1980 adopting release, the
definition of material contract contained in the new item was also
revised in an effort to reduce the number of remunerative plans or
arrangements that must be filed. Not long after, though, the staff
discovered that rather than reduce the number of exhibits filed, the
provision actually had the opposite effect. The staff found that the
revised definition of material contract ``has resulted in
registrants filing a large volume of varied remunerative contracts
involving directors and executive officers, contracts which are not
material and which would not have been filed under the previously
existing `material in amount or significance' standard.'' Technical
Amendment Regarding Exhibit Requirement, Release No. 33-6287 (Feb.
6, 1981) [46 FR 11952], at Section I. Therefore, in February 1981,
the Commission added ``unless immaterial in amount or significance''
to the definition of ``material contracts'' as applied to
remunerative plans, contracts or arrangements participated in by
executives who are not named executive officers. Id. We reiterate
that this phrase was intended to indicate that whether plans,
contracts or arrangements in which executive officers other than
named executive officers participate are required to be disclosed
under Item 601(b)(10) must be determined on the basis of
materiality.
---------------------------------------------------------------------------
Therefore, entry into these types of contracts triggered the filing
of a Form 8-K within four business days. Importantly, the requirement
for directors and named executive officers does not include an
exception for those that are ``immaterial in amount or significance.''
The incorporation of the Item 601(b)(10) standards into Item 1.01 of
Form 8-K has therefore significantly affected executive compensation
disclosure practices. Prior to the Form 8-K amendments in 2004, it was
customary for a company's annual proxy statement to be the primary
vehicle for disclosure of executive and director compensation
information. However, Item 1.01 of Form 8-K as originally adopted has
resulted in executive compensation disclosures that are much more
frequent and accelerated than those included in a company's proxy
statement. In addition, particularly because of the terms of Item
601(b)(10), Item 1.01 of Form 8-K triggered compensation disclosure of
the types of matters that, in some cases, appear to have fallen short
of the ``unquestionably or presumptively material'' standard associated
with the expanded Form 8-K disclosure items. Companies and their
counsel have raised concerns that the expanded Form 8-K requirements
have resulted in real-time disclosure of compensation events that
should be disclosed, if at all, in a company's proxy statement for its
annual meeting or as an exhibit to the company's next periodic report,
such as the Form 10-Q or Form 10-K.
As we stated in the Proposing Release, we believe that much of the
disclosure regarding employment compensation matters required in real-
time under the Form 8-K requirements is viewed by investors as
material. However, we also believe it is appropriate to restore a more
balanced approach to this aspect of Form 8-K, an approach which is
designed to elicit unquestionably or presumptively material information
on a real-time basis, but seeks to limit Form 8-K required disclosure
of information below that threshold.
Accordingly, we are adopting amendments to Form 8-K that will
uncouple Item 601(b)(10)(iii) of Regulation S-K from the current
disclosure requirements of Form 8-K. As proposed, we are eliminating
employment compensation arrangements from the scope of Item 1.01
altogether and expanding Item 5.02 of Form 8-K to cover only those
compensatory arrangements with executive officers and directors that we
believe are unquestionably or presumptively material. Commenters
generally supported these proposed amendments.\380\ We are adopting
these amendments substantially as proposed.
---------------------------------------------------------------------------
\380\ See, e.g., letters from ABA; Chamber of Commerce; N.
Ludgus; Committee on Securities Regulation of the Business Law
Section of the New York State Bar Association; SCSGP; and Sullivan.
---------------------------------------------------------------------------
1. Item 1.01--Entry Into a Material Definitive Agreement
Specifically, we are deleting the last sentence of former
Instruction 1 to Item 1.01 of Form 8-K, which references the portions
of Item 601(b)(10) of Regulation S-K that specifically relate to
management compensation and compensatory plans. In place of the deleted
sentence, we are adding a sentence specifying that agreements
[[Page 53195]]
involving the subject matter identified in Item 601(b)(10)(iii)(A) and
(B) of Regulation S-K need not be disclosed under amended Item 1.01 of
Form 8-K. This change also will apply to the disclosure of terminations
of material definitive agreements under Item 1.02 of Form 8-K, which
references the definition of ``material definitive agreement'' in Item
1.01 of Form 8-K.\381\ Instead of being required to be disclosed based
on the general requirements with regard to material definitive
agreements in Item 1.01 and Item 1.02 of Form 8-K, employment
compensation arrangements will now be covered under Item 5.02 of Form
8-K, as amended.
---------------------------------------------------------------------------
\381\ Item 1.02(b) states: ``For purposes of this Item 1.02, the
term material definitive agreement shall have the same meaning as
set forth in Item 1.01(b).''
---------------------------------------------------------------------------
2. Item 5.02--Departure of Directors or Certain Officers; Election of
Directors; Appointment of Certain Officers; Compensatory Arrangements
of Certain Officers
Item 5.02 generally requires disclosure within four business days
of the appointment or departure of directors and specified officers. In
particular, Item 5.02(b) has required disclosure if a company's
principal executive officer, president, principal financial officer,
principal accounting officer, principal operating officer, or any
person performing similar functions, retires, resigns or is terminated
from that position and Item 5.02(c) has required disclosure if a
company appoints a new principal executive officer, president,
principal financial officer, principal accounting officer, principal
operating officer, or any person performing similar functions. Item
5.02 has also required disclosure if a director retires, resigns, is
removed, or declines to stand for re-election.\382\ Before adopting
today's amendments, the required disclosure under Item 5.02 included a
brief description of the material terms of any employment agreement
between the company and the officer and a description of disagreements,
if any.
---------------------------------------------------------------------------
\382\ Items 5.02(a) and (b) of Form 8-K.
---------------------------------------------------------------------------
As proposed, we are modifying Item 5.02 to capture generally the
information already required under that item, as well as additional
information regarding material employment compensation arrangements
involving named executive officers that, prior to today's amendments,
would be called for under Item 1.01.
With respect to the additional disclosure that we are requiring for
named executive officers under amended Item 5.02, one commenter noted
that because the definition of ``named executive officer'' is
determined with reference to a company's last completed fiscal year,
greater clarity is needed to determine how the standard should be
applied for current Form 8-K reporting throughout the year.\383\ The
commenter suggested that companies might find it difficult to identify
their named executive officers for purposes of real-time disclosure
under Item 5.02 during the period following the completion of their
last fiscal year but prior to preparing their proxy statements or Forms
10-K in the new fiscal year. Accordingly, we are including a new
Instruction to Item 5.02 that will clarify that for purposes of this
Item the named executive officers are the persons for whom disclosure
was required in the most recent filing with the Commission that
required disclosure under Item 402(c) of Regulation S-K or Item 402(b)
of Regulation S-B, as applicable.\384\
---------------------------------------------------------------------------
\383\ See letter from ABA.
\384\ Instruction 4 to Item 5.02.
---------------------------------------------------------------------------
In general, our revisions to Form 8-K will both modify the overall
requirements for disclosure of employment compensation arrangements on
Form 8-K and locate all such disclosure under a single item. We are
accomplishing this by taking the following steps:
Expanding the information regarding retirement,
resignation or termination to include all persons falling within the
definition of named executive officers for the company's previous
fiscal year, whether or not included in the list specified in Item 5.02
prior to these amendments; \385\
---------------------------------------------------------------------------
\385\ Item 5.02(b) of Form 8-K will continue to cover the
officers currently specified therein, whether or not named executive
officers for the previous or current years, and all directors.
---------------------------------------------------------------------------
Expanding the disclosure items covered under Item 5.02
beyond employment agreements to require a brief description of any
material plan, contract or arrangement to which a covered officer or
director is a party or in which he or she participates that is entered
into or materially amended in connection with any of the triggering
events specified in Item 5.02(c) and (d), or any grant or award to any
such covered person, or modification thereto, under any such plan,
contract or arrangement in connection with any such event; \386\
---------------------------------------------------------------------------
\386\ Items 5.02(c)(3) and (d)(5). Plans, contracts or
arrangements (but not material amendments or grants or awards or
modifications thereto) may be denoted by reference to the
description in the company's most recent annual report on Form 10-K
or proxy statement.
---------------------------------------------------------------------------
With respect to the principal executive officer, the
principal financial officer, or persons falling within the definition
of named executive officer for the company's previous fiscal year,
expanding the disclosure items to include a brief description of any
material new compensatory plan, contract or arrangement, or new grant
or award thereunder (whether or not written), and any material
amendment to any compensatory plan, contract or arrangement (or any
modification to a grant or award thereunder), whether or not such
occurrence is in connection with a triggering event specified in Item
5.02. Grants or awards or modifications thereto will not be required to
be disclosed if they are consistent with the terms of previously
disclosed plans or arrangements and they are disclosed the next time
the company is required to provide new disclosure under Item 402 of
Regulation S-K; \387\ and
---------------------------------------------------------------------------
\387\ Item 5.02(e) and Instruction 2 to Item 5.02(e).
---------------------------------------------------------------------------
Adding a requirement for disclosure of salary or bonus for
the most recent fiscal year that was not available at the latest
practicable date in connection with disclosure under Item 402 of
Regulation S-K.\388\ This disclosure will also require a new total
compensation recalculation to reflect the new salary or bonus
information.
---------------------------------------------------------------------------
\388\ Item 5.02(f). See Section II.C.1.b. above for a discussion
of the reporting delay that exists under the current disclosure
rules when bonus and salary are not determinable at the most recent
practicable date.
---------------------------------------------------------------------------
In the case of each of these disclosure items for amended Item
5.02, we emphasize that we are requiring that a brief description of
the specified matter be included. We have observed that in response to
the requirements to disclose the entry into material definitive
agreements under Item 1.01, some companies have included disclosure
that resembles an updating of the disclosure required under former Item
402 of Regulation S-K. In the context of current disclosure under Form
8-K, we are seeking disclosure that informs investors of specified
material events and developments. However, the information we are
seeking does not require the information necessary to comply with Item
402.
In response to comments received,\389\ we have revised Instruction
2 to new Item 5.02(e) from the text we proposed and created a new Item
5.02(f), as described above. The revised Instruction 2 to Item 5.02(e)
that we are adopting: (i) Changes or eliminates prior references to
``original terms'' and uses instead the phrase ``previously disclosed
terms,'' in order to minimize
[[Page 53196]]
ambiguity; and (ii) clarifies that, for purposes of the Instruction, no
distinction should be made between awards granted under cash or equity-
based plans. New Item 5.02(f) responds to comments we received that our
proposed Instruction 3 to 5.02(e) should be codified as a separate item
because it called for disclosure (determining salary or bonus amounts
for a completed fiscal year) that otherwise may not be required under
Item 5.02(e).\390\
---------------------------------------------------------------------------
\389\ See letter from ABA.
\390\ See letter from ABA.
---------------------------------------------------------------------------
B. Extension of Limited Safe Harbor Under Section 10(b) and Rule 10b-5
to Item 5.02(e) of Form 8-K and Exclusion of Item 5.02(e) From Form S-3
Eligibility Requirements
We are extending the safe harbors regarding Section 10(b) and Rule
10b-5 and Form S-3 eligibility in the event that a company fails to
timely file reports required by Item 5.02(e) of Form 8-K.
In March 2004, we adopted a limited safe harbor from liability
under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder for
failure to timely file reports required by Form 8-K Items 1.01, 1.02,
2.03, 2.04, 2.05, 2.06, 4.02(a) and 6.03. Because we believed that
these items may require management to make rapid materiality and
similar judgments within the condensed timeframe required for filing of
a Form 8-K, we established a safe harbor that applies until the filing
due date of the company's quarterly or annual report for the period in
question. We concluded that the risk of liability under these
provisions for the failure to timely file was disproportionate to the
benefit of real-time disclosure and therefore justified the need for a
limited safe harbor of a fixed duration. For the same reasons, we
believe that the safe harbor should also extend to Item 5.02(e) of Form
8-K. We therefore are amending Exchange Act Rules 13a-11(c) and 15d-
11(c) accordingly.
In addition, a company forfeits its eligibility to use Form S-3 if
it fails to timely file all reports required under Exchange Act Section
13(a) or 15(d) during the 12 month period prior to filing of the
registration statement.\391\ For the same reasons, when adopting the
expanded Form 8-K rules in 2004, we revised the Form S-3 eligibility
requirements so that a company would not lose its eligibility to use
Form S-3 registration statements if it failed to timely file reports
required by the Form 8-K items to which the Section 10(b) and Rule 10b-
5 safe harbor applies.\392\ In particular, the burden resulting from a
company's sudden loss of eligibility to use Form S-3 could be a
disproportionately large negative consequence of an untimely Form 8-K
filing under one of the specified items.\393\ We believe that this safe
harbor should be extended to Item 5.02(e) of Form 8-K and, therefore,
we are amending General Instruction I.A.3.(b) of Form S-3, which
pertains to the eligibility requirements for use of Form S-3 to reflect
this position.
---------------------------------------------------------------------------
\391\ General Instruction I.A.3 to Form S-3.
\392\ Form 8-K Adopting Release, at Section II.E.
\393\ Id.
---------------------------------------------------------------------------
C. General Instruction D to Form 8-K
We are adopting the revision to General Instruction D as proposed.
Frequently, an event may trigger a Form 8-K filing under multiple
items, particularly under both Item 1.01 and another item. General
Instruction D to Form 8-K permits a company to file a single Form 8-K
to satisfy one or more disclosure items, provided that the company
identifies by item number and caption all applicable items being
satisfied and provides all of the substantive disclosure required by
each of the items. In order to promote prompt filings on Form 8-K and
avoid potential non-compliance with Form 8-K due to inadvertent
exclusions of captions, we are amending General Instruction D to permit
companies to omit the Item 1.01 heading in a Form 8-K that also
discloses any other item, so long as the substantive disclosure
required by Item 1.01 is included in the Form 8-K. This would not
extend to allowing a company to omit any other caption if the Item 1.01
caption is included.
D. Foreign Private Issuers
We are amending the exhibit instructions to Form 20-F so that
foreign private issuers will be required to file an employment or
compensatory plan with management or directors (or portion of such
plan) only when the foreign private issuer either is required to
publicly file the plan (or portion of it) in its home country or if the
foreign private issuer has otherwise publicly disclosed the plan.\394\
---------------------------------------------------------------------------
\394\ We are also making a similar revision to Item
601(b)(10)(iii)(C)(5) of Regulation S-K.
---------------------------------------------------------------------------
Under Item 6.B.1 of Form 20-F, a foreign private issuer must
disclose the compensation of directors and management on an aggregate
basis and, additionally, on an individual basis, unless individual
disclosure is not required in the issuer's home country and is not
otherwise publicly disclosed by the foreign private issuer. Under the
exhibit instructions to Form 20-F prior to our amendments, management
contracts or compensatory plans in which directors or members of
management participate generally were required to be filed as exhibits,
unless the foreign private issuer provided compensation information on
an aggregate basis and not on an individual basis. Under those pre-
amendment provisions, an issuer that provided any individualized
compensation disclosure was required to file as an exhibit to Form 20-F
management employment agreements that potentially relate to matters
that have not otherwise been disclosed.
Our amendment of the exhibit instructions to Form 20-F \395\ is
intended to be consistent with the existing disclosure requirements
under Form 20-F relating to executive compensation matters for foreign
private issuers. In the same way that executive compensation disclosure
under Form 20-F largely mirrors the disclosure that a foreign private
issuer makes under home country requirements or voluntarily, so too the
public filing of management employment agreements as an exhibit to Form
20-F under our amendments will mirror the public availability of such
agreements under home country requirements or otherwise. In addition,
we believe that the amendments may encourage foreign private issuers to
provide more compensation disclosure in their filings with the
Commission by eliminating privacy concerns associated with filing an
individual's employment agreement when such agreement is not required
to be made public by a home country exchange or securities regulator.
As foreign disclosure related to executive remuneration varies in
different countries but continues to improve,\396\ the revisions
recognize that trend and provide for greater harmonization of
international disclosure standards with respect to executive
compensation in a manner consistent with other requirements of Form 20-
F.
---------------------------------------------------------------------------
\395\ New Instruction 4(c)(v) to Exhibits to Form 20-F.
\396\ Many jurisdictions now require or encourage disclosure of
executive compensation information. For example, enhanced disclosure
of executive remuneration is included as part of the European
Commission's 2003 Company Law Action Plan. See Guido Ferrarini and
Niamh Moloney, Executive Remuneration in the EU: The Context for
Reform, European Corporate Governance Institute, Law Working Paper
N. 32/2005 (April 2005).
---------------------------------------------------------------------------
IV. Beneficial Ownership Disclosure
Item 403 requires disclosure of company voting securities
beneficially owned by more than five percent holders,\397\ and company
equity securities beneficially owned by
[[Page 53197]]
directors, director nominees and named executive officers.\398\ These
disclosure requirements provide investors with information regarding
concentrated holdings of voting securities and management's equity
stake in the company, including securities for which these holders have
the right to acquire beneficial ownership within 60 days.\399\ Item 403
also requires disclosure of arrangements known to the company that may
result in a change in control of the company.\400\
---------------------------------------------------------------------------
\397\ Item 403(a).
\398\ Item 403(b).
\399\ As specified in Exchange Act Rule 13d-3(d)(1) [17 CFR
240.13d-3(d)(1)].
\400\ Item 403(c).
---------------------------------------------------------------------------
As proposed, we are amending Item 403(b) \401\ by adding a
requirement for footnote disclosure of the number of shares pledged as
security by named executive officers, directors and director
nominees.\402\ To the extent that shares beneficially owned by named
executive officers, directors and director nominees are used as
collateral, these shares may be subject to material risk or
contingencies that do not apply to other shares beneficially owned by
these persons. These circumstances have the potential to influence
management's performance and decisions.\403\ As a result, we believe
that the existence of these securities pledges could be material to
shareholders. Because significant shareholders who are not members of
management are in a different relationship with other shareholders and
have different obligations to them, the amendments do not require
disclosure of their pledges pursuant to Item 403(a), other than pledges
that may result in a change of control currently required to be
disclosed.\404\ The amendments also specifically require disclosure of
beneficial ownership of directors' qualifying shares, which was not
required prior to these amendments, because we believe the beneficial
ownership disclosure should include a complete tally of the securities
beneficially owned by directors.
---------------------------------------------------------------------------
\401\ Item 403(b) of Regulation S-K and Item 403(b) of
Regulation S-B are both amended in the same manner.
\402\ This was similar to a proposal the Commission made in
2002. See Form 8-K Disclosure of Certain Management Transactions,
Release No. 33-8090 (Apr. 12, 2002) [67 FR 19914].
\403\ See, e.g., Marianne M. Jennings, The Disconnect Between
and Among Legal Ethics, Business Ethics, Law, and Virtue: Learning
Not to Make Ethics So Complex, 1 U. St. Thomas L.J. 995, 1010
(Spring 2004) (arguing that the extension of loans to the CEO of
WorldCom, which were collateralized by WorldCom shares owned by the
CEO, contributed to WorldCom's financial demise). Regarding
commenters' views, contrast letters from Frederic W. Cook & Co.; PB-
UCC; and SBAF with letters from FSR; NACCO Industries; Unitrin; and
Compass Bancshares.
\404\ Item 403(c) of Regulation S-K. See also Items 6 and 7(3)
of Schedule 13D [17 CFR 240.13d-101].
---------------------------------------------------------------------------
One commenter recommended that we expand this section to also
require disclosure of hedging arrangements whereby the executive has
altered his or her economic interest in the securities that he or she
beneficially owns.\405\ These transactions frequently involve the
purchase or sale of a derivative security that the named executive
officer would be required to report within two business days under
Section 16(a) of the Exchange Act.\406\ Because information concerning
these transactions frequently would be available on a prompt basis in
the Section 16(a) filings and companies would disclose their policies
regarding these transactions in Compensation Discussion and
Analysis,\407\ we have not followed the commenter's recommendation.
---------------------------------------------------------------------------
\405\ See letter from ABA.
\406\ 15 U.S.C. 78p(a).
\407\ See Item 402(b)(2)(xiii) of Regulation S-K, discussed in
Section II.B.1., above.
---------------------------------------------------------------------------
V. Certain Relationships and Related Transactions Disclosure
As we explained in the Proposing Release, we believe that, in
addition to disclosure regarding executive compensation, a materially
complete picture of financial relationships with a company involves
disclosure regarding related party transactions. Therefore, we are also
adopting significant revisions to Item 404 of Regulation S-K,
previously titled ``Certain Relationships and Related Transactions.''
In 1982, various provisions that had been adopted in a piecemeal
fashion and had been subject to frequent amendment were consolidated
into Item 404 of Regulation S-K.\408\ Today we are amending Item 404 of
Regulation S-K and S-B to streamline and modernize this disclosure
requirement, while making it more principles-based. Although the
amendments significantly modify this disclosure requirement, its
purpose--to elicit disclosure regarding transactions and relationships,
including indebtedness, involving the company and related persons and
the independence of directors and nominees for director and the
interests of management--remains unchanged.
---------------------------------------------------------------------------
\408\ See the 1982 Release. For a discussion of these
provisions, see also Disclosure of Certain Relationships and
Transactions Involving Management, Release No. 33-6416 (July 9,
1982) [47 FR 31394], at Section II.
---------------------------------------------------------------------------
As discussed in greater detail below, the amendments have four
parts: \409\
---------------------------------------------------------------------------
\409\ The discussion that follows focuses on changes to
Regulation S-K, with Section V.E.1. explaining the modifications to
Regulation S-B. References throughout the following discussion are
to Items of Regulation S-K, unless otherwise indicated.
---------------------------------------------------------------------------
Item 404(a) contains a general disclosure requirement for
related person transactions, including those involving indebtedness.
Item 404(b) requires disclosure regarding the company's
policies and procedures for the review, approval or ratification of
related person transactions.
Item 404(c) requires disclosure regarding promoters and
certain control persons of a company.\410\
---------------------------------------------------------------------------
\410\ Prior to adoption of these amendments, disclosure
regarding promoters was required under Item 404(d).
---------------------------------------------------------------------------
Item 407 consolidates corporate governance disclosure
requirements.\411\ Also, Item 407(a) requires disclosure regarding the
independence of directors, including whether each director and nominee
for director of the company is independent, as well as a description by
specific category or type of any transactions, relationships or
arrangements not disclosed under paragraph (a) of Item 404 that were
considered when determining whether each director and nominee for
director is independent.
---------------------------------------------------------------------------
\411\ These matters previously were required to be disclosed
pursuant to various provisions, including Item 7 of Schedule 14A and
Items 306, 401(h), (i) and (j), 402(j) and 404(b). We are
eliminating as proposed the requirement for disclosure regarding
specific director and director nominee relationships that had been
set forth in Item 404(b) prior to today's amendments, in favor of
the disclosures regarding director independence required by Item
407(a).
---------------------------------------------------------------------------
A. Transactions With Related Persons
We are adopting amendments to Item 404 to make the certain
relationships and related transactions disclosure requirements clearer
and easier to follow. The revisions retain the principles for
disclosure of related person transactions that were previously
specified in Item 404(a), but no longer include all of the instructions
that served to delineate what transactions are reportable or excludable
from disclosure based on bright lines that can depart from a more
appropriate materiality analysis. Instead, Item 404(a) as amended
consists of a general statement of the principle for disclosure,
followed by specific disclosure requirements and instructions. The
instructions to Item 404(a) explain the related persons covered by the
Item, the scope of transactions covered by the Item, the method for
computation of the amount involved in the transaction, special
requirements regarding indebtedness, the interaction with Item 402, the
materiality of certain interests, and the circumstances in which
disclosure need not be provided.
[[Page 53198]]
Item 404(a) as adopted extends to disclosure of indebtedness, by
consolidating the disclosure formerly required under Item 404(a)
regarding transactions involving the company and related persons with
the disclosure regarding indebtedness which had been separately
required by Item 404(c) prior to these amendments. We have consolidated
these two provisions substantially as proposed in order to eliminate
confusion regarding the circumstances in which each item applied and to
streamline duplicative portions of Item 404.
1. Broad Principle for Disclosure
Item 404(a) as proposed and adopted articulates a broad principle
for disclosure; it states that a company must provide disclosure
regarding:
Any transaction since the beginning of the company's last
fiscal year, or any currently proposed transaction;
In which the company was or is to be a participant;
In which the amount involved exceeds $120,000; and
In which any related person had or will have a direct or
indirect material interest.
As proposed, amended Item 404(a) no longer includes an instruction
that is repetitive of the general materiality standard applicable to
the Item.\412\ By omitting this instruction, we do not intend to change
the materiality standard applicable to Item 404(a). The materiality
standard for disclosure embodied in Item 404(a) prior to these
amendments is retained; a company must disclose based on whether the
related person had or will have a direct or indirect material interest
in the transaction. The materiality of any interest will continue to be
determined on the basis of the significance of the information to
investors in light of all the circumstances.\413\ As was the case
before adoption of amended Item 404(a), the relationship of the related
persons to the transaction, and with each other, the importance of the
interest to the person having the interest and the amount involved in
the transaction are among the factors to be considered in determining
the materiality of the information to investors.
---------------------------------------------------------------------------
\412\ Prior to today's amendments, Instruction 1 to Item 404(a)
had stated that ``[t]he materiality of any interest is to be
determined on the basis of the significance of the information to
investors in light of all the circumstances of the particular case.
The importance of the interest to the person having the interest,
the relationship of the parties to the transaction with each other
and the amount involved in the transactions are among the factors to
be considered in determining the significance of the information to
investors.''
\413\ See Basic v. Levinson and TSC Industries v. Northway.
---------------------------------------------------------------------------
We are also eliminating as proposed an instruction to Item 404(a)
which had indicated that the dollar threshold is not a bright line
materiality standard.\414\ It remains true, however, that when the
amount involved in a transaction exceeds the prescribed threshold
($120,000 under the amended rule we adopt today), a company should
evaluate whether the related person has a direct or indirect material
interest in the transaction to determine if disclosure is required. We
eliminated the instruction because it was repetitive of the general
materiality standard applicable to the Item. We believe that
application of the materiality principles under the Item are more
consistent with a principles-based approach and will lead to more
appropriate disclosure outcomes than application of the instruction
that was eliminated. By deleting this instruction, we do not intend to
change the materiality standard applicable to Item 404(a). As was the
case with Item 404(a) prior to adoption of these amendments, there may
be situations where, although the instructions to Item 404(a) do not
expressly provide that disclosure is not required, the interest of a
related person in a particular transaction is not a direct or indirect
material interest. In that case, information regarding such interest
and transaction is not required to be disclosed under Item 404(a).
---------------------------------------------------------------------------
\414\ Prior to today's amendments, Instruction 9 to Item 404(a)
had stated that ``There may be situations where, although these
instructions do not expressly authorize nondisclosure, the interest
of a person specified in paragraphs (a)(1) through (4) in a
particular transaction or series of transactions is not a direct or
indirect material interest. In that case, information regarding such
interest and transaction is not required to be disclosed in response
to this paragraph.''
---------------------------------------------------------------------------
In addition, as proposed the amendments:
Call for disclosure if a company is a ``participant'' in a
transaction, rather than if it is ``a party'' to the transaction, as
``participant'' more accurately connotes the company's involvement;
Modify the $60,000 threshold for disclosure to $120,000 to
adjust for inflation;
Include a defined term for ``transaction'' to provide that
it includes a series of similar transactions and to make clear its
broad scope; and
Include a defined term for ``related persons.'' \415\
---------------------------------------------------------------------------
\415\ The ``related persons'' covered by the amended Item are
discussed below in Section V.A.1.b.
---------------------------------------------------------------------------
As was the case before these amendments, disclosure is required for
three years in registration statements filed pursuant to the Securities
Act or the Exchange Act.\416\
---------------------------------------------------------------------------
\416\ However, if the disclosure is being incorporated by
reference into a registration statement on Form S-4, the additional
two years of disclosure will not be required, as specified in
Instruction 1 to Item 404.
---------------------------------------------------------------------------
One commenter questioned whether changing the test of company
involvement from being a ``party'' to a transaction to being a
``participant'' in a transaction is intended to be a substantive
change.\417\ The purpose of this change is to more accurately connote
the company's involvement in a transaction by clarifying that being a
``participant'' encompasses situations where the company benefits from
a transaction but is not technically a contractual ``party'' to the
transaction.\418\
---------------------------------------------------------------------------
\417\ See letter from Sullivan. See also letter from SCSGP.
\418\ For example, disclosure would be required if a company
benefits from a transaction with a related person that the company
has arranged and in which it participates, notwithstanding the fact
that it is not a party to a contract.
---------------------------------------------------------------------------
Commenters expressed diverse views on the appropriate disclosure
threshold. While some commenters supported increasing the threshold for
disclosure from $60,000 to $120,000,\419\ others recommended retaining
the $60,000 threshold,\420\ using a minimal dollar threshold,\421\ not
including any de minimis dollar threshold,\422\ or increasing the
threshold even further through use of a sliding scale.\423\ We believe
that a fixed dollar amount for the disclosure threshold will provide
the most certainty as to the size of transactions that must be tracked
for disclosure purposes under Item 404,\424\ and that increasing the
dollar amount of the threshold based on inflation is appropriate given
the amount of time that has elapsed since it was last set nearly
twenty-five years ago.
---------------------------------------------------------------------------
\419\ See, e.g., letters from BRT and Sullivan.
\420\ See, e.g., letters from Amalgamated and CalSTRS.
\421\ See letter from Teamsters (recommending a $250 disclosure
threshold).
\422\ See, e.g., letters from CII and ISS.
\423\ See letter from SCSGP recommending a disclosure threshold
for companies that are not small business issuers of the greater of
$120,000 or a percentage (which it believes could be as low as two
percent) of consolidated gross revenues of the recipient for certain
types of transactions.
\424\ The disclosure threshold in amended Item 404(a) of
Regulation S-B is the lesser of $120,000 or one percent of the
average of the small business issuer's total assets at year-end for
the last three completed fiscal years because we believe that
transactions that are below $120,000 can be significant for small
business issuers given their relative size.
---------------------------------------------------------------------------
Finally, the rule changes include as proposed a technical
modification. Prior to today's amendments, Item 404(a) stated that
disclosure was required
[[Page 53199]]
regarding situations involving ``the registrant or any of its
subsidiaries.'' Because companies must include subsidiaries in making
materiality determinations in all circumstances, the reference to
``subsidiaries'' is superfluous, and we have therefore eliminated it.
This modification does not change the scope of disclosure required
under the Item.\425\
---------------------------------------------------------------------------
\425\ For the same reason, we have eliminated as proposed the
references to ``subsidiaries'' in the ``compensation committee
interlocks and insider participation in compensation decisions''
disclosure requirement adopted in Item 407(e)(4). This revision does
not change the scope of disclosure required under the rule.
---------------------------------------------------------------------------
a. Indebtedness
Section 402 of the Sarbanes-Oxley Act prohibits most personal loans
by a company to its officers and directors.\426\ This development
raises the issue of whether disclosure of indebtedness of the sort
required under our rules prior to the amendments should be maintained.
We believe that the approach to disclosure of indebtedness involving
related persons that we adopt today is appropriate because of the scope
of the direct and indirect interests covered by our disclosure
requirements, because related persons include persons not covered by
the prohibitions, and because there are certain exceptions to the
prohibitions. We have, however, eliminated the distinction between
indebtedness and other types of related person transactions.
---------------------------------------------------------------------------
\426\ Codified in Section 13(k) of the Exchange Act [15 U.S.C.
78m(k)].
---------------------------------------------------------------------------
As a result of integrating what had been required to be disclosed
under paragraph (c) of Item 404 into paragraph (a) of Item 404, the
rule proposals would have changed the situations in which indebtedness
disclosure is necessary by requiring disclosure of indebtedness
transactions with regard to all related persons covered by the related
person transaction disclosure requirement, including significant
shareholders.\427\ Some commenters questioned whether disclosure of
indebtedness of significant shareholders would be useful to investors
and whether companies would have access to the information necessary to
provide this disclosure.\428\ In response to these comments, the
amendments do not require disclosure of indebtedness transactions of
significant shareholders (or their immediate family members).\429\
Another result of integrating the disclosure requirements that had been
specified in paragraph (c) of Item 404 into paragraph (a) of Item 404,
is that the rule changes set a $120,000 threshold and require
disclosure if there is a direct or indirect material interest in an
indebtedness transaction, while prior to these amendments Item 404(c)
required disclosure of all indebtedness exceeding $60,000.\430\ For
example, under amended Item 404(a) disclosure is required if an
executive officer had a material indirect interest in an indebtedness
transaction (exceeding $120,000) between the company and another entity
due to that executive officer's ownership interest in the other entity.
Disclosure of material indirect interests of related persons in
transactions involving the company will be required by Item 404(a) as
amended, just as it was prior to adoption of these amendments. We
believe that disclosure requirements for indebtedness and for other
related person transactions should be congruent. In particular, we
believe that loans by companies other than financial institutions
should be treated like any other related person transactions; however,
as discussed below,\431\ we address certain ordinary course loans by
financial institutions in an instruction to Item 404(a).
---------------------------------------------------------------------------
\427\ Prior to today's amendments, the related person
transaction disclosure requirement in Item 404(a) covered
significant shareholders, while the indebtedness disclosure
requirement in Item 404(c) did not. The significant shareholders
covered by Item 404(a) as adopted will continue to be any security
holder who is known to the company to beneficially own more than
five percent of any class of the company's voting securities. See
Instruction 1.b.i. to Item 404(a).
\428\ See, e.g., letter from Sullivan. See also, letter from
SCSGP.
\429\ See Instruction 4.b. to Item 404(a). Disclosure would be
required, however, if the significant shareholder (or such
shareholder's immediate family member) was also a related person
specified in Instruction 1.a. to Item 404(a), for example, if the
significant shareholder was also an executive officer.
\430\ Prior to these amendments, Item 404(c) also had required
disclosure of some specific indirect interests of directors,
nominees for director, and executive officers of the company in
indebtedness through corporations, organizations, trusts, and
estates. Disclosure of these specific interests had been required by
subparagraphs (c)(4) and (c)(5) of Item 404. Under the amendments,
these subparagraphs have been eliminated as duplicative and the need
for disclosure in these situations will be determined using a
materiality analysis under the principle for disclosure in Item
404(a).
\431\ See Section V.A.3. below.
---------------------------------------------------------------------------
b. Definitions
We have defined the terms ``transaction,'' ``related person'' and
``amount involved'' substantially as proposed in order to streamline
Item 404(a) and to clarify the broad scope of financial transactions
and relationships covered by the rule.
The term ``transaction'' has a broad scope in Item 404(a).\432\
This term is not to be interpreted narrowly, but rather broadly
includes, but is not limited to, any financial transaction, arrangement
or relationship or any series of similar transactions, arrangements or
relationships. The definition of ``transaction'' also specifically
notes that the term includes indebtedness and guarantees of
indebtedness.
---------------------------------------------------------------------------
\432\ Instruction 2 to Item 404(a).
---------------------------------------------------------------------------
The definition of ``related person'' identifies the persons
covered, and clarifies the time periods during which they are covered.
The term ``related person'' \433\ means any person who was in any of
the following categories at any time during the specified period for
which disclosure under paragraph (a) of Item 404 is required:
---------------------------------------------------------------------------
\433\ Instruction 1 to Item 404(a).
---------------------------------------------------------------------------
Any director or executive officer of the company and his
or her immediate family members; and
If disclosure were provided in a proxy or information
statement relating to the election of directors, any nominee for
director and the immediate family members of any nominee for director.
In addition, a security holder known to the company to beneficially
own more than five percent of any class of the company's voting
securities or any immediate family member of any such person, when a
transaction in which such security holder or family member had a direct
or indirect material interest occurred or existed, is also a related
person.
The definition of ``related person'' that we have adopted will
require disclosure of related person transactions involving the company
and a person (other than a significant shareholder or immediate family
member of such shareholder) that occurred during the last fiscal year,
if the person was a ``related person'' during any part of that
year.\434\ A person who had a position or relationship giving rise to
the person being a ``related person'' during only part of the last
fiscal year may have had a material interest in a transaction with the
company during that year. While prior to these amendments Item 404(a)
did not indicate whether disclosure was required for the transaction in
this situation, the history of Item 404 suggests that disclosure was
required if the requisite relationship existed at the time of the
transaction, even if the person was no longer a related person at the
end of the year.\435\ We believe
[[Page 53200]]
that, because of the potential for abuse and the close proximity in
time between the transaction and the person's status as a ``related
person,'' it is appropriate to require disclosure for transactions in
which the person had a material interest occurring at any time during
the fiscal year. For example, it is possible that a material interest
of a person in a transaction during this timeframe could influence the
person's performance of his or her duties.
---------------------------------------------------------------------------
\434\ As proposed, the principle for disclosure that we have
adopted only applies to nominees for director if disclosure is being
provided in a proxy or information statement involving the election
of directors. Also, as proposed, ongoing disclosure is not required
regarding nominees for director who were not elected (unless a
nominee has been nominated again for director).
\435\ This position, which had been included in the proxy rule
provisions that were the precursor to Item 404, was deleted from
those provisions in 1967 as duplicative of a note that applied to
all of the disclosure required in Schedule 14A (including the
related party disclosure requirement in Schedule 14A). Adoption of
Amendments to Proxy Rules and Information Rules, Release No. 34-8206
(Dec. 14, 1967) [32 FR 20960], at ``Schedule 14A--Item7(f).'' Before
today's amendments, Note C to Schedule 14A provided that
``[i]nformation need not be included for any portion of the period
during which such person did not hold any such position or
relationship, provided a statement to that effect is made.'' We have
amended Note C to Schedule 14A as proposed so that it will no longer
apply to disclosure of related person transactions.
---------------------------------------------------------------------------
We believe that transactions with persons who have been or who will
become significant shareholders (or their immediate family members),
but are not at the time of the transaction, raise different
considerations and are harder to track, and thus we are excluding them
as proposed. Disclosure will be required, however, regarding a
transaction that begins before a significant shareholder becomes a
significant shareholder, and continues (for example, through the on-
going receipt of payments) on or after the time that the person becomes
a significant shareholder.
We are adopting the definition of ``immediate family member'' as
proposed. Under Item 404(a), the term ``immediate family member'' means
any child, stepchild, parent, stepparent, spouse, sibling, mother-in-
law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, and any person (other than a tenant or employee) sharing
the household of any director, nominee for director, executive officer,
or significant shareholder of the company. The amended definition
differs from the former definition in that it includes stepchildren,
stepparents, and any person (other than a tenant or employee) sharing
the household of a director, nominee for director, executive officer,
or significant shareholder of the company.\436\
---------------------------------------------------------------------------
\436\ The persons included in these additions to the definition
are also included in the definition of ``family member'' in General
Instruction A.1.(a)(5) to Securities Act Form S-8.
---------------------------------------------------------------------------
The amended definition of ``amount involved'' is adopted as
proposed.\437\ The definition incorporates two concepts that were
included in Item 404 prior to these amendments regarding how to
determine the ``amount involved'' in transactions, and clarifies that
the amounts reported must be in dollars even if the amount was set or
expensed in a different currency. As adopted, the term ``amount
involved'' means the dollar value of the transaction, or series of
similar transactions, and includes:
---------------------------------------------------------------------------
\437\ Instruction 3 to Item 404(a).
---------------------------------------------------------------------------
In the case of any lease or other transaction providing
for periodic payments or installments, the aggregate amount of all
periodic payments or installments due on or after the beginning of the
company's last fiscal year, including any required or optional payments
due during or at the conclusion of the lease or other transaction
providing for periodic payments or installments; \438\ and
---------------------------------------------------------------------------
\438\ Prior to today's amendments, Instruction 3 to Item 404(a)
had provided guidance regarding computing the amount involved in
lease or other agreements providing for periodic payments or
installments.
---------------------------------------------------------------------------
In the case of indebtedness, the largest aggregate amount
of all indebtedness outstanding at any time since the beginning of the
company's last fiscal year and all amounts of interest payable on it
during the last fiscal year.\439\
---------------------------------------------------------------------------
\439\ Prior to today's amendments, the basis for determining the
amount involved in indebtedness transactions had been set forth in
Item 404(c).
---------------------------------------------------------------------------
2. Disclosure Requirements
Subparagraphs of Item 404(a) as adopted provide the disclosure
requirements for related person transactions. The company will be
required to describe the transaction, including:
The person's name and relationship to the company;
The person's interest in the transaction with the company,
including the related person's position or relationship with, or
ownership in, a firm, corporation, or other entity that is a party to
or has an interest in the transaction; and
The approximate dollar value of the amount involved in the
transaction and of the related person's interest in the
transaction.\440\
---------------------------------------------------------------------------
\440\ Because of the manner in which the amount involved in the
transaction is calculated for indebtedness, as discussed above,
disclosure with respect to indebtedness will include the largest
aggregate amount of principal outstanding during the period for
which disclosure is provided, as well as the amount of principal and
interest paid during the period for which disclosure is provided,
the aggregate amount of principal outstanding as of the latest
practicable date, and the rate or amount of interest payable on the
indebtedness. Item 404(a)(5).
---------------------------------------------------------------------------
Companies will also be required to disclose any other information
regarding the transaction or the related person in the context of the
transaction that is material to investors in light of the circumstances
of the particular transaction.
As was the case prior to adoption of these amendments, the dollar
value of the related person's interest in the transaction will be
computed without regard to the amount of the profit or loss involved in
the transaction.\441\ One commenter pointed out that the proposals
expanded the application of this provision to also cover the
computation of the ``amount involved'' when the provision was moved
from an instruction into the body of Item 404(a).\442\ In streamlining
Item 404(a), we did not intend to change the scope of the prior
instruction. Therefore, the final rule clarifies the context in which
profit or loss is not to be considered.
---------------------------------------------------------------------------
\441\ Item 404(a)(4).
\442\ See letter from Sullivan.
---------------------------------------------------------------------------
Consistent with the principles-based approach that we are applying
to related person transaction disclosure, we are eliminating an
instruction that, in the case of a related person transaction involving
a purchase or sale of assets by or to the company otherwise than in the
ordinary course of business, called for specific disclosure of the cost
of the assets to the purchaser, and if acquired within two years of the
transaction, the cost of the assets to the seller and related
information about the price of the assets. We note, however, that if
such information is material under the revised standards of Item
404(a), because, for example, the recent purchase price to the related
person is materially less than the sale price to the company, or the
sale price to the related person is materially more than the recent
purchase price to the company, disclosure of such prior purchase price
and related information about the prices could be required.
Prior to adoption of today's amendments, disclosure was required
under Item 404(c) regarding amounts possibly owed to the company under
Section 16(b) of the Exchange Act.\443\ We believe that the purpose of
related person transaction disclosure differs from the purpose of
Section 16(b), and one commenter expressed support for eliminating this
requirement.\444\ Accordingly, the rule amendments eliminate this
former Section 16(b)-related disclosure requirement.
---------------------------------------------------------------------------
\443\ This requirement had been set forth in Instruction 4 to
Item 404(c) prior to these amendments.
\444\ See letter from SCSGP.
---------------------------------------------------------------------------
3. Exceptions
Some categories of transactions do not fall within the principle
for disclosure
[[Page 53201]]
and therefore Item 404(a) as amended includes disclosure exceptions
that we believe are consistent with our principles-based approach.\445\
The first category of transactions involves compensation. Disclosure of
compensation to an executive officer will not be required if:
---------------------------------------------------------------------------
\445\ Instructions 4, 5, 6 and 7 to Item 404(a).
---------------------------------------------------------------------------
The compensation is reported pursuant to Item 402 of
Regulation S-K; or
The executive officer is not an immediate family member
and such compensation would have been reported under Item 402 as
compensation earned for services to the company if the executive
officer was a named executive officer, and such compensation had been
approved, or recommended to the board of directors of the company for
approval, by the compensation committee of the board of directors (or
group of independent directors performing a similar function) of the
company.\446\
---------------------------------------------------------------------------
\446\ Instruction 5.a. to Item 404(a).
---------------------------------------------------------------------------
As proposed, this disclosure exception would have required
compensation committee approval of an executive officer's compensation
if that executive officer's compensation was not reported under Item
402. However, one commenter noted that in accordance with listing
standards, compensation committees may only need to recommend to the
board of directors, rather than approve, the compensation of executive
officers (other than the chief executive officer).\447\ We believe that
it is appropriate for this disclosure exception to apply a standard
that is consistent with the listing standards and we have thus modified
this exception from the proposal accordingly. Finally, as proposed
disclosure of compensation to a director will not be required if the
compensation is reported pursuant to the director compensation
disclosure requirement in Item 402(k).\448\
---------------------------------------------------------------------------
\447\ See letter from NYCBA.
\448\ Instruction 5.b. to Item 404(a).
---------------------------------------------------------------------------
As we explained in the Proposing Release, since the disclosure
either would be reported under Item 402, or would not be required under
Item 402, we do not believe that these particular compensation
transactions fall within our Item 404 disclosure principle, or they
will have already been disclosed. Transactions involving compensation
that do not fall within these exceptions, such as compensation of
immediate family members, are within the scope of the principle for
disclosure in amended Item 404(a).\449\ These exceptions thus clarify
the limited situations in which disclosure of compensation to related
persons is not required under Item 404.
---------------------------------------------------------------------------
\449\ One commenter believed that the proposals would have
eliminated disclosure of related person transactions involving the
employment of immediate family members. See letter from CRPTF. Item
404(a), as amended, continues to require disclosure of these types
of related person transactions when the threshold for disclosure has
been met and the immediate family member has or will have a direct
or indirect material interest.
---------------------------------------------------------------------------
The second category of transactions involves three types of
situations that we believe do not raise the potential issues underlying
our principle for disclosure. First, in the case of transactions
involving indebtedness, as proposed we have adopted amendments so that
the following items of indebtedness may be excluded from the
calculation of the amount of indebtedness and need not be disclosed
because they do not have the potential to impact the parties as do the
transactions for which disclosure is required: Amounts due from the
related person for purchases of goods and services subject to usual
trade terms, for ordinary business travel and expense payments and for
other transactions in the ordinary course of business.\450\ Also, in
the case of a transaction involving indebtedness, the amendments
provide, as proposed, that if the lender is a bank, savings and loan
association, or broker-dealer extending credit under Federal Reserve
Regulation T \451\ and the loans are not disclosed as nonaccrual, past
due, restructured or potential problems,\452\ disclosure under
paragraph (a) of Item 404 may consist of a statement, if correct, that
the loans to such persons satisfied the following conditions:
---------------------------------------------------------------------------
\450\ Instruction 4.a. to Item 404(a), which is based on
Instruction 2 to Item 404(c) as it was stated prior to today's
amendments.
\451\ 12 CFR part 220.
\452\ See Item III.C.1. and 2. of Industry Guide 3, Statistical
Disclosure by Bank Holding Companies [17 CFR 229.802(c)].
---------------------------------------------------------------------------
They were made in the ordinary course of business;
They were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with persons not related to the lender; and
They did not involve more than the normal risk of
collectibility or present other unfavorable features.\453\
---------------------------------------------------------------------------
\453\ Instruction 4.c. to Item 404(a).
---------------------------------------------------------------------------
This exception is based on the exception that was included in
Instruction 3 to Item 404(c) prior to these amendments, and has been
modified as proposed to be more consistent with the prohibition of the
Sarbanes-Oxley Act on personal loans to officers and directors.\454 \
---------------------------------------------------------------------------
\454\ Specifically, the language that was in Instruction 3 to
paragraph (c) of Item 404 prior to these amendments has been
modified to replace the reference ``comparable transactions with
other persons'' with the phrase ``comparable loans with persons not
related to the lender.''
---------------------------------------------------------------------------
Second, we are adopting as proposed an instruction indicating that
a person who has a position or relationship with a firm, corporation,
or other entity that engages in a transaction with the company shall
not be deemed to have an indirect material interest within the meaning
of paragraph (a) of Item 404 if:
The interest arises only: (i) From the person's position
as a director of another corporation or organization that is a party to
the transaction; or (ii) from the direct or indirect ownership by such
person and all other related persons, in the aggregate, of less than a
ten percent equity interest in another person (other than a
partnership) which is a party to the transaction; or (iii) from both
such position and ownership; or
The interest arises only from the person's position as a
limited partner in a partnership in which the person and all other
related persons, have an interest of less than ten percent, and the
person is not a general partner of and does not have another position
in the partnership.\455 \
---------------------------------------------------------------------------
\455\ Instruction 6 to Item 404(a). This amendment is based on
the language that was in parts A and B of Instruction 8 to Item
404(a) prior to these amendments. This amendment omits the portion
of that instruction (Instruction 8.C.) regarding interests arising
solely from holding an equity or a creditor interest in a person
other than the company that is a party to the transaction, when the
transaction is not material to the other person. This exception may
have resulted in inappropriate non-disclosure of transactions
without regard to whether they were material to the company. In
addition, we are eliminating the language that had been set forth in
Instruction 6 to Item 404(a) prior to these amendments, which had
covered a subset of transactions now covered by Instruction 6, as
amended, and therefore was duplicative.
---------------------------------------------------------------------------
Finally, disclosure will not be required under paragraph (a) of
Item 404 in three other types of circumstances. First, disclosure will
not be required under paragraph (a) of Item 404 as to any transaction
where the rates or charges involved in the transaction are determined
by competitive bids, or the transaction involves the rendering of
services as a common or contract carrier, or public utility, at rates
or charges fixed in conformity with law or governmental authority.\456\
We had proposed to eliminate this exception because we considered such
bright-line presumptions as inconsistent with our principles-based
approach to the rule. We are persuaded, however, by a commenter who
indicated that the prior
[[Page 53202]]
exception embodied a conclusion that the terms of these types of
transactions would likely not be influenced by the related persons and
therefore should be excluded as not material.\457\ As a result, the
instruction is retained in the rule as adopted.
---------------------------------------------------------------------------
\456\ Instruction 7.a. to Item 404(a).
\457\ Letter from SCSGP.
---------------------------------------------------------------------------
Second, disclosure need not be provided under paragraph (a) of Item
404 if the transaction involves services as a bank depositary of funds,
transfer agent, registrar, trustee under a trust indenture, or similar
services.\458\ We had proposed to eliminate this exception. We are
persuaded by commenters' concerns that eliminating this exception may
be detrimental to financial institutions and may not result in
additional meaningful disclosure.\459\ Accordingly, we are retaining
this exception.
---------------------------------------------------------------------------
\458\ Instruction 7.b. to Item 404(a).
\459\ See, e.g., letters from American Bankers Association
(``American Bankers''); Compass Bancshares; and Whitney Holding
Corporation (``Whitney Holding'').
---------------------------------------------------------------------------
Third, we are adopting an exception indicating that disclosure need
not be provided pursuant to paragraph (a) of Item 404 if the interest
of the related person arises solely from the ownership of a class of
equity securities of the company and all holders of that class of
equity securities of the company received the same benefit on a pro
rata basis.\460\ Commenters expressed concern that our proposal to
eliminate the former exception \461\ would require disclosure if a
related person receives over $120,000 in dividends on company stock in
a year, even though those dividends are paid on the same terms as for
all other stockholders.\462\ We are persuaded by the commenters that
related person transaction disclosure is not necessary for transactions
where a related person receives pro rata dividends or returns on the
ownership of equity securities, and therefore we have adopted an
instruction to provide an exception from disclosure in these limited
circumstances.\463\
---------------------------------------------------------------------------
\460\ Instruction 7.c. to Item 404(a).
\461\ Before the adoption of these amendments, Instruction 7.C.
to Item 404(a) provided that no information was required under Item
404(a) for transactions where the interest of the related person
arose solely from the ownership of securities of the company and
such person received no extra or special benefit not shared on a pro
rata basis.
\462\ See, e.g., letters from SCSGP and Sullivan.
\463\ The instruction as adopted differs from the language of
Instruction 7.C. prior to these amendments in that it is limited to
ownership of a class of equity securities rather than securities
generally and focuses on benefits being provided pro rata to the
holders of that class rather than the absence of certain extra or
special benefits.
---------------------------------------------------------------------------
Some commenters requested that we create a new exception for
transactions undertaken in the ordinary course of business of the
company and conducted on the same terms that the company offers
generally in transactions with persons who are not related
persons.\464\ Former Item 404(a) did not include such an ``ordinary
course of business'' disclosure exception, and we are not persuaded
that it should be expanded to include one. In this regard, we note that
transactions which should properly be disclosed under Item 404(a) might
be excluded under an ordinary course of business exception, such as
employment of immediate family members of officers and directors.
However, we note that whether a transaction which was not material to
the company or the other entity involved and which was undertaken in
the ordinary course of business of the company and on the same terms
that the company offers generally in transactions with persons who are
not related persons, are factors that could be taken into consideration
when performing the materiality analysis for determining whether
disclosure is required under the principle for disclosure.
---------------------------------------------------------------------------
\464\ See, e.g., letters from SCSGP and Sullivan.
---------------------------------------------------------------------------
B. Procedures for Approval of Related Person Transactions
We are adopting a new requirement for disclosure of the policies
and procedures established by the company and its board of directors
regarding related person transactions substantially as proposed. State
corporate law and increasingly robust corporate governance practices
support or provide for such procedures in connection with transactions
involving conflicts of interest.\465\ We believe that this type of
information may be material to investors, and our amendments therefore
require disclosure of policies and procedures regarding related person
transactions under paragraph (b) of Item 404, as amended.
---------------------------------------------------------------------------
\465\ Del. Code Ann. tit. 8, Sec. 144 (2004). See also NYSE,
Inc. Listed Company Manual Section 307.00 and NASD Manual,
Marketplace Rules 4350(h) and 4360(i).
---------------------------------------------------------------------------
Specifically, the amendments require a description of the company's
policies and procedures for the review, approval or ratification of
transactions with related persons that are reportable under paragraph
(a) of Item 404. The description must include the material features of
these policies and procedures that are necessary to understand them.
While the material features of such policies and procedures will vary
depending on the particular circumstances, examples of such features
may include, in given cases, among other things:
The types of transactions that are covered by such
policies and procedures, and the standards to be applied pursuant to
such policies and procedures;
The persons or groups of persons on the board of directors
or otherwise who are responsible for applying such policies and
procedures; and
Whether such policies and procedures are in writing and,
if not, how such policies and procedures are evidenced.
Item 404(b) requires identification of any transactions required to
be reported under paragraph (a) of Item 404 where the company's
policies and procedures do not require review, approval or ratification
or where such policies and procedures have not been followed.
One commenter expressed concern that it is not reasonable or
customary for a company's related person transaction policy to extend
to transactions occurring before an individual becomes affiliated with
a company.\466\ In response, we have added an instruction indicating
that disclosure need not be provided pursuant to paragraph (b) of Item
404 regarding any transaction that occurred at a time before the
related person had the relationship that would trigger disclosure under
Item 404(a), if the transaction did not continue after the related
person had that relationship.\467\
---------------------------------------------------------------------------
\466\ See letter from NYCBA.
\467\ See Instruction to Item 404(b). For example, disclosure
would not be required under Item 404(b) in a company's Form 10-K for
the fiscal year ended December 31, 2005 of a transaction that
occurred in March 2005 between the company and an immediate family
member of a person who later became a director of the company in
August 2005. However, disclosure would be required under Item 404(a)
in this circumstance. This Instruction to Item 404(b) does not apply
to transactions of significant shareholders of the company, because
Item 404(a) does not require disclosure of transactions with
significant shareholders that are completed before they become
significant shareholders.
---------------------------------------------------------------------------
C. Promoters and Control Persons
As proposed and adopted, the amendments require a company to
provide disclosure regarding the identity of promoters and its
transactions with those promoters if the company had a promoter at any
time during the last five fiscal years.\468\ The disclosure will be
required in Securities Act registration statements on Form S-1 or on
Form SB-2 and Exchange Act Form 10 or Form 10-SB. The disclosure
includes:
---------------------------------------------------------------------------
\468\ Item 404(c).
---------------------------------------------------------------------------
The names of the promoters;
The nature and amount of anything of value received by
each promoter from the company and the nature and amount
[[Page 53203]]
of any consideration received by the company; and
Additional information regarding any assets acquired by
the company from a promoter.
The amendments are consistent with the previous disclosure
requirements regarding promoters. However, prior to these amendments
this disclosure was not required if the company had been organized more
than five years ago, even if the company otherwise had a promoter
within the last five years. Our staff's experience in reviewing
registration statements, especially of smaller companies, suggests that
the more appropriate five-year test for which the disclosure should be
provided relates to the period of time during which the company had a
promoter, as our revision provides, rather than the date of
organization of the company.\469\ We are also requiring the same
disclosure that is required for promoters for any person who acquired
control, or is part of a group that acquired control, of an issuer that
is a shell company.\470\ We are revising the title of this item to
include the term control persons in order to clarify the scope of the
disclosure requirement.
---------------------------------------------------------------------------
\469\ We also adopt as proposed similar revisions to the
disclosure requirement referencing promoters in Item 401(g)(1) of
Regulation S-K. In addition, as proposed our revisions add Form SB-2
to the list of registration statement forms in Item 404 for which
promoter disclosure is required. While this revision updates the
registration statement forms listed in Item 404, it does not change
the promoter disclosure requirement of Form SB-2.
\470\ Item 404(c)(2). The term ``group'' has the same meaning as
in Exchange Act Rule 13d-5(b)(1) [17 CFR 240.13d-5(b)(1)], that is,
any two or more persons that agree to act together for the purpose
of acquiring, holding, voting or disposing of equity securities of
an issuer. The term ``shell company'' is defined in Securities Act
Rule 405 and Exchange Act Rule 12b-2.
---------------------------------------------------------------------------
D. Corporate Governance Disclosure
We are consolidating our disclosure requirements regarding director
independence and related corporate governance disclosure requirements
under a single disclosure item and updating such disclosure
requirements regarding director independence to reflect our current
requirements and current listing standards.\471\ Prior to these
amendments, Item 404(b) had required disclosure of specific business
relationships between a director or nominee for director and the
company that could bear on the ability of directors and nominees for
director to exercise independent judgment in the performance of their
duties. We proposed to eliminate the disclosure requirement that was
stated under paragraph (b) of Item 404 in favor of more direct
disclosure about the determination of the independence of directors and
nominees for director, including information supplementing the amended
related person transaction disclosure that would permit qualitative
assessment of those independence determinations. While one commenter
suggested that we retain a revised version of paragraph (b) to Item 404
as it was stated prior to these amendments,\472\ we continue to believe
that disclosure focused on the determinations made regarding director
independence is the appropriate approach. The comprehensive director
independence disclosure requirement that we are adopting today
recognizes the significant development of independence requirements
since the disclosure requirements in former paragraph (b) of Item 404
were originally adopted. As directed by the Sarbanes-Oxley Act of 2002,
we adopted a rule requiring national securities exchanges and national
securities associations to adopt listing standards requiring
independent audit committees meeting the standards of our rule.\473\
Further, in 2003 and 2004, we approved amendments to additional listing
standards, including those of the New York Stock Exchange and
Nasdaq,\474\ that imposed specific additional independence standards
for boards of directors, and the compensation and nominating committees
or persons performing similar functions. Each listed company (unless
exempt) determines whether its directors and committee members are
independent based on definitions that it adopts which, at a minimum,
are required to comply with the listing standards applicable to the
company.
---------------------------------------------------------------------------
\471\ Item 407 of Regulations S-K and S-B. As adopted, Item 407
consolidates corporate governance disclosure requirements located in
several places under our rules and the principal markets' listing
standards, including in particular requirements that had been
specified in Items 306, 401(h), (i) and (j), 402(j) and 404(b) of
Regulation S-K and Item 7 of Schedule 14A under the Exchange Act
prior to these amendments. We are not making any changes to the
substance of the requirements under Item 306, Item 401(h), (i) or
(j), or Item 402(j) as part of this consolidation. However, as
proposed, Item 407 reorders some provisions that were specified in
Item 306 and reflects the relevant Public Company Accounting
Oversight Board rules. See PCAOB Rulemaking: Public Company
Accounting Oversight Board; Order Approving Proposed Technical
Amendments to Interim Standards Rules, Release No. 34-49624 (Apr.
28, 2004) [69 FR 24199]; and Order Regarding Section 101(d) of the
Sarbanes-Oxley Act of 2002, Release No. 33-8223 (Apr. 25, 2003) [68
FR 2336].
\472\ Letter from Fenwick.
\473\ See Section 10A(m) of the Exchange Act [15 U.S.C. 78j-
1(m)]; Exchange Act Rule 10A-3 [17 CFR 240.10A-3]; and Standards
Relating to Listed Company Audit Committees, Release No. 33-8220
(Apr. 9, 2003) (the ``Audit Committee Release'') [68 FR 18788].
\474\ NASD and NYSE Listing Standards Release. The other
exchanges have also adopted corporate governance listing standards.
See Order Granting Approval of Proposed Rule Change by the American
Stock Exchange LLC and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 2 Relating to Enhanced
Corporate Governance Requirements Applicable to Listed Companies,
Release No. 34-48863 (Dec. 1, 2003) [68 FR 68432]; Notice of Filing
and Order Granting Accelerated Approval of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock Exchange,
Inc. Relating to Corporate Governance, Release No. 34-49881 (June
17, 2004) [69 FR 35408]; Order Approving Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago
Stock Exchange, Inc. Relating to Governance of Issuers on the
Exchange, Release No. 34-49911 (June 24, 2004) [69 FR 39989]; Notice
of Filing and Order Granting Accelerated Approval of Proposed Rule
Change by the Boston Stock Exchange, Inc. to Amend Chapter XXVII,
Section 10 of the Rules of the Board of Governors by Adding
Requirements Concerning Corporate Governance Standards of Exchange-
Listed Companies, Release No. 34-49955 (July 1, 2004) [69 FR 41555];
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendment Nos. 1 and 2 Thereto by the Chicago Board
Options Exchange, Incorporated, Relating to Enhanced Corporate
Governance Requirements for Listed Companies, Release No. 34-49995
(July 9, 2004) [69 FR 42476]; Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change and Amendment Nos. 1
and 2 Thereto by National Stock Exchange Relating to Corporate
Governance, Release No. 34-49998 (July 9, 2004) [69 FR 42788]; and
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
by the Pacific Exchange, Inc. to Amend the Corporate Governance
Requirements for PCX Listed Companies, Release No. 34-50677 (Nov.
16, 2004) [69 FR 68205].
The Commission has previously received a rulemaking petition
submitted by the AFL/CIO, which requested the Commission to amend
Items 401 and 404 of Regulation S-K to require disclosure about
transactions with non-profit organizations (letter dated Dec. 12,
2001 from Richard Trumka, Secretary-Treasurer, AFL/CIO, File No. 4-
499, available at http://www.sec.gov/rules/petitions/petn4-499.pdf) and a
rulemaking petition submitted by the Council of Institutional
Investors, which requested amendments to Item 401 of Regulation S-K
to require disclosure of certain transactions between directors,
executive officers and nominees (letter dated Oct. 1, 1997, as
amended Oct. 19, 1998, from Sarah A.B. Teslik, Executive Director,
Council of Institutional Investors, File No. 4-404). We believe
these requests have in large part been addressed by revised listing
standards instituted by the exchanges, so that we are not now taking
additional action under these petitions.
---------------------------------------------------------------------------
The amendments we are adopting today, substantially as proposed,
include a disclosure requirement to identify the independent directors
of the company (and, in the case of disclosure in proxy or information
statements relating to the election of directors, nominees for
director) under the definition for determining board independence
applicable to it.\475\ The amendments also require disclosure of any
members of the compensation, nominating and audit committees that the
company has not identified as independent under the definition of
[[Page 53204]]
independence for that board committee applicable to it.\476\
---------------------------------------------------------------------------
\475\ Item 407(a).
\476\ Id. If the company does not have a separately designated
compensation, nominating or audit committee or committee performing
similar functions, it must provide this disclosure regarding
independence under committee independence standards with respect to
all members of the board of directors.
---------------------------------------------------------------------------
More specifically, if the company is an issuer \477\ with
securities listed, or for which it has applied for listing, on a
national securities exchange \478\ or in an automated inter-dealer
quotation system of a national securities association \479\ which has
requirements that a majority of the board of directors be independent,
Item 407(a) requires disclosure of those directors and director
nominees that the company identifies as independent (and committee
members not identified as independent), using the definition for
independence for directors (and for committee members) that it uses for
determining compliance with the applicable listing standards. If the
company is not a listed issuer, we are requiring disclosure of those
directors and director nominees that the company identifies as
independent (and committee members not identified as independent) using
the definition for independence for directors (and for committee
members) of a national securities exchange or a national securities
association, specified by the company. The company will be required to
apply the same definition consistently to all directors and also to use
the independence standards of the same national securities exchange or
national securities association for purposes of determining the
independence of members of the compensation, nominating and audit
committees.\480\
---------------------------------------------------------------------------
\477\ Under the amendments, ``listed issuer'' has the same
meaning as in Exchange Act Rule 10A-3.
\478\ Under the amendments, ``national securities exchange''
means a national securities exchange registered pursuant to Section
6(a) of Exchange Act [15 U.S.C. 78f(a)].
\479\ Under the amendments, ``inter-dealer quotation system''
means an automated inter-dealer quotation system of a national
securities association registered pursuant to Section 15A(a) of the
Exchange Act [15 U.S.C. 78o-3(a)], and a ``national securities
association'' means a national securities association registered
pursuant to Section 15A(a) of the Exchange Act [15 U.S.C. 78o-3(a)]
that has been approved by the Commission (as that definition may be
modified or supplemented). Inter-dealer quotation systems such as
the OTC Bulletin Board, the Pink Sheets and the Yellow Sheets, which
do not maintain or impose listing standards and do not have listing
agreements or arrangements with the issuers whose securities are
quoted through them, are not within this definition. See Section
II.F.1. in the Audit Committee Release.
\480\ Similar disclosure had been required pursuant to Item
7(d)(2)(ii) and Item 7(d)(3)(iv) of Schedule 14A prior to these
amendments. As part of our consolidation of these provisions into
new Item 407, we adopt revised language for these provisions that
reflects the general approach discussed above with regard to
disclosure of director independence for board and committee
purposes.
---------------------------------------------------------------------------
One commenter pointed out the rule proposals did not make clear
what disclosure would be required for listed issuers that relied upon
an exemption from independence requirements, most notably a
``controlled company'' exemption.\481\ To clarify the disclosure
required in this situation, we added a requirement to the amendments
that if the company is a listed issuer whose securities are listed on a
national securities exchange or in an inter-dealer quotation system
which has requirements that a majority of the board of directors be
independent, and also has exemptions to those requirements (for board
or committee member independence) upon which the company relied, the
company must disclose the exemption relied upon and explain the basis
for its conclusion that such exemption is applicable.\482\ Similar
disclosure is required for those companies that are not listed issuers
but would qualify for an exemption under the listing standards
selected. In addition, this instruction clarifies that small business
issuers listed on exchanges where at least half of the members of the
board of directors, rather than a majority, are required to be
independent must comply with the disclosure requirements specified in
Item 407(a).\483\
---------------------------------------------------------------------------
\481\ Letter from NYCBA.
\482\ Instruction 1 to Item 407(a).
\483\ See Section 121.B.(2)(c) of the American Stock Exchange
Company Guide; paragraph (g) of Chapter XXVII, Listed Securities,
Section 10, Corporate Governance, of the Rules of the Board of
Governors of the Boston Stock Exchange; and Rule 19(a)(1) of Article
XXVIII, Listed Securities, of the Chicago Stock Exchange Rules.
---------------------------------------------------------------------------
The amendments require as proposed that an issuer which has adopted
definitions of independence for directors and committee members must
disclose whether those definitions are posted on the company's Web
site, and if they are not include the definitions as an appendix to the
company's proxy or information statement at least once every three
years or if the policies have been materially amended since the
beginning of the company's last fiscal year.\484\ Further, if the
policies are not on the company's Web site, or included as an appendix
to the company's proxy or information statement, the company must
disclose in which of the prior fiscal years the policies were included
in the company's proxy or information statement.
---------------------------------------------------------------------------
\484\ Item 407(a)(2).
---------------------------------------------------------------------------
In addition, the amendments require, for each director or director
nominee identified as independent, a description, by specific category
or type, of any transactions, relationships or arrangements not
disclosed pursuant to paragraph (a) of Item 404 that were considered by
the board of directors of the company in determining that the
applicable independence standards were met. Under our proposals,
disclosure of the specific details of each such transaction,
relationship or arrangement would have been required. Several
commenters objected to providing this disclosure, given the potential
for extensive detail about these types of transactions, relationships
or arrangements, and some suggested instead providing disclosure by
category or type of transaction.\485\ In response to the commenters, we
have revised the disclosure requirement to permit transactions,
relationships or arrangements of each director or director nominee to
be described by the specific category or type. Consistent with the rule
proposals, the amended rule requires that the disclosure be made on a
director by director basis, with separate disclosure of categories or
types of transactions, relationships or arrangements for each director
and director nominee. We have also adopted an instruction indicating
that the description of the category or type must be sufficiently
detailed so that the nature of the transactions, relationships or
arrangements is readily apparent.\486\
---------------------------------------------------------------------------
\485\ See, e.g., letters from Chamber of Commerce; FSR; and
Sidley Austin.
\486\ Instruction 3 to Item 407(a).
---------------------------------------------------------------------------
As proposed, this independence disclosure is required for any
person who served as a director of the company during any part of the
year for which disclosure must be provided,\487\ even if the person no
longer serves as director at the time of filing the registration
statement or report or, if the information is in a proxy statement, if
the director's term of office as a director will not continue after the
meeting. In this regard, we believe that the independence status of a
director is material while the person is serving as director, and not
just as a matter of reelection.\488\
---------------------------------------------------------------------------
\487\ Instruction 2 to Item 407(a) has been revised to clarify
this requirement. As proposed, disclosure under these amendments
will not be required for persons no longer serving as a director in
registration statements under the Securities Act or the Exchange Act
filed at a time when the company is not subject to the reporting
requirements of Exchange Act Section 13(a) or 15(d). As proposed,
disclosure will not be required of anyone who was a director only
during the time period before the company made its initial public
offering if he or she was no longer a director at the time of the
offering.
\488\ For this reason, we are not incorporating the concept
previously found in Instruction 4 to Item 404(b) into Item 407(a) as
adopted.
---------------------------------------------------------------------------
[[Page 53205]]
We also amend the disclosure requirements regarding the audit
committee and nominating committee applicable prior to these amendments
in order to eliminate duplicative committee member independence
disclosure and to update the required audit committee charter
disclosure requirements for consistency with the more recently adopted
nominating committee charter disclosure requirements.\489\ As a result,
as proposed the audit committee charter will no longer be required to
be delivered to security holders if it is posted on the company's Web
site.\490\ We also are moving the disclosure required by Section 407 of
the Sarbanes-Oxley Act regarding audit committee financial experts to
Item 407, although as proposed we are not making any substantive
changes to that requirement.\491\
---------------------------------------------------------------------------
\489\ However, we are not revising the provision that the Audit
Committee Report is furnished and not filed.
\490\ Item 407(d)(1) and Instruction 2 to Item 407.
\491\ Item 407(d)(5).
---------------------------------------------------------------------------
The amendments require new disclosures regarding the compensation
committee that are similar to the disclosures required regarding audit
and nominating committees of the board of directors.\492\ The company
must state whether the compensation committee has a charter, and if it
does make the charter available through its Web site or proxy materials
in one of the ways that the audit and nominating committee charters may
be made available. As proposed, the company will be required to
describe its processes and procedures for the consideration and
determination of executive and director compensation including:
---------------------------------------------------------------------------
\492\ These compensation committee disclosure requirements are
included in Item 407(e).
---------------------------------------------------------------------------
The scope of authority of the compensation committee (or
persons performing the equivalent functions);
The extent to which the compensation committee (or persons
performing the equivalent functions) may delegate any authority to
other persons, specifying what authority may be so delegated and to
whom;
Any role of executive officers in determining or
recommending the amount or form of executive and director compensation;
and
Any role of compensation consultants in determining or
recommending the amount or form of executive and director compensation,
identifying such consultants, stating whether such consultants are
engaged directly by the compensation committee (or persons performing
the equivalent functions) or any other person, describing the nature
and scope of their assignment, and the material elements of the
instructions or directions given to the consultants with respect to the
performance of their duties under the engagement.
Several commenters viewed this item as redundant with the
Compensation Discussion and Analysis required under Item 402, and
suggested that they be combined.\493\ While this item and the
Compensation Discussion and Analysis both involve the determination of
executive officer compensation, they have different focuses. Item
407(e) focuses on the company's corporate governance structure that is
in place for considering and determining executive and director
compensation--such as the scope of authority of the compensation
committee and others in making these determinations, as well as the
resources utilized by the committee. In contrast, the Compensation
Discussion and Analysis focuses on material information about the
compensation policies and objectives of the company and seeks to put
the quantitative disclosure about named executive officer compensation
into perspective. We believe it is appropriate to discuss each of these
matters separately and, accordingly, we have not combined them.
---------------------------------------------------------------------------
\493\ See, e.g., letters from J. Brill 1; Hewitt; Mercer; Pearl
Meyer & Partners; and SCSGP.
---------------------------------------------------------------------------
As for the required disclosure regarding compensation consultants,
some commenters objected to the proposed requirements,\494\ while other
commenters suggested expanding the requirement to include, among other
things, a discussion of the work performed by the compensation
consultant for the company or others.\495\ In addition, some commenters
suggested deleting the requirement in proposed Item 407(e) that
companies identify any executive officer of the company that the
compensation consultants contacted in carrying out their
assignment.\496\ We continue to believe that the involvement of
compensation consultants and their interaction with the compensation
committee is material information that should be required. However, we
are persuaded that disclosure regarding any executive officers of the
company that the compensation consultants contacted in carrying out
their assignment is not necessary. Therefore, we are adopting the
compensation consultant disclosure requirement in Item 407(e) as
proposed, except for the required disclosure regarding contacts with
executive officers, which has not been adopted.\497\
---------------------------------------------------------------------------
\494\ See, e.g., letters from Buck Consultants; Chamber of
Commerce; Hewitt; Pearl Meyer & Partners; Mercer; and Steven Hall &
Partners.
\495\ See, e.g., letters from Brian Foley & Co.; 3C-Compensation
Consulting Consortium; BCIMC; CFA Centre 1; Governance for Owners;
Michelle Leder; James McFadden; Institutional Investor Group; SBAF;
and Theodore Schlissel.
\496\ See, e.g., letters from Compensia; FedEx Corporation;
Hewitt; and Mercer.
\497\ Under the rules as adopted, disclosure would also not be
required under this Item if an employee of a consulting firm met
with company management to work on matters not involving
compensation. See letter from Hewitt.
---------------------------------------------------------------------------
Further, the amendments consolidate into this compensation
committee disclosure requirement the disclosure requirements regarding
compensation committee interlocks and insider participation in
compensation decisions, as proposed.\498\
---------------------------------------------------------------------------
\498\ Prior to these amendments, disclosure regarding
compensation committee interlocks and insider participation in
compensation decisions was required by Item 402(j).
---------------------------------------------------------------------------
Finally, for registrants other than registered investment
companies, the amendments eliminate an existing proxy disclosure
requirement regarding directors who have resigned or declined to stand
for re-election \499\ which is no longer necessary since it has been
superseded by a disclosure requirement in Form 8-K.\500\ For registered
investment companies, which do not file current reports on Form 8-K,
the requirement has been moved to Item 22(b) of Schedule 14A.\501\ Also
as proposed, the amendments combine various proxy disclosure
requirements regarding board meetings and committees into one
location.\502\ In addition, we are adopting as proposed two
instructions to Item 407 to combine repetitive provisions, one relating
to independence disclosure, and the other relating to board committee
charters.\503\
---------------------------------------------------------------------------
\499\ Prior to these amendments, this disclosure was required by
Item 7(g) of Schedule 14A.
\500\ Item 5.02(a) of Form 8-K.
\501\ Item 22(b)(17) of Schedule 14A.
\502\ Item 407(b) includes disclosure requirements previously
specified in paragraphs (d)(1), (f), and (h)(3) of Item 7 of
Schedule 14A.
\503\ Instructions 1 and 2 to Item 407. Instruction 2 also
includes as proposed a requirement that the charter be provided if
it is materially amended.
---------------------------------------------------------------------------
E. Treatment of Specific Types of Issuers
1. Small Business Issuers
We are adopting amendments to Item 404 of Regulation S-B
substantially as proposed. Amended Item 404 of Regulation S-B is
substantially similar to amended Item 404 of Regulation S-K, except for
the following two matters:
Paragraph (b) of Item 404 of Regulation S-K relating to
policies and procedures for reviewing related person transactions is
not included in Regulation S-B, and
Regulation S-B provides for a disclosure threshold of the
lesser of
[[Page 53206]]
$120,000 or one percent of the average of the small business issuer's
total assets at year-end for the last three completed fiscal
years,\504\ to require disclosure for small business issuers that may
have material related person transactions even though smaller than the
absolute dollar amount of $120,000.
---------------------------------------------------------------------------
\504\ We are revising Item 404(a) of Regulation S-B from the
proposal to clarify that the determination of a small business
issuer's total assets for purposes of this Item shall be made as of
the issuer's fiscal year-end for its last three completed fiscal
years.
---------------------------------------------------------------------------
Both amended items consist of disclosure requirements regarding
related person transactions and promoters. These provisions of Item 404
of Regulation S-B are substantially identical to those of Item 404 of
Regulation S-K, except for certain changes conforming amended Item 404
of Regulation S-B to former Item 404 of Regulation S-B. These changes
consist of the following:
Retaining in amended Item 404 of Regulation S-B an
instruction in former Item 404 of Regulation S-B regarding underwriting
discounts and commissions;\505\ and
---------------------------------------------------------------------------
\505\ Instruction 8 to Item 404(a) of Regulation S-B.
---------------------------------------------------------------------------
Not including an instruction in amended Item 404 of
Regulation S-B regarding the treatment of foreign private issuers that
is included in amended Item 404 of Regulation S-K.\506\
---------------------------------------------------------------------------
\506\ This is consistent with the requirements of Regulation S-B
prior to these amendments.
---------------------------------------------------------------------------
The two year time period for disclosure embodied in Item 404 of
Regulation S-B prior to these amendments was retained in the principle
for disclosure in proposed Item 404(a) of Regulation S-B. Amended Item
404(a) of Regulation S-B continues to require two years of disclosure,
but does so by including an instruction to Item 404(a) of Regulation S-
B \507\ requiring a second year of disclosure, rather than by including
the two year time period in the principle for disclosure in Item 404(a)
of Regulation S-B as was proposed. This change from the proposal
clarifies that for purposes of applying the definition of ``related
person'' to determine whether disclosure is required of a transaction
that occurred prior to a person having the relationship that resulted
in the person becoming a related person, a one year time period should
be used rather than a two year time period.\508\ This change from the
proposal also results in the structure of Item 404(a) of Regulation S-B
more closely resembling the structure of Item 404(a) of Regulation S-K,
particularly in situations where Item 404(a) of Regulation S-K applies
to time periods longer than one year.
---------------------------------------------------------------------------
\507\ Instruction 9 to Item 404(a) of Regulation S-B.
\508\ For example, if an employee had a material interest in a
transaction with the small business issuer which occurred in
February 2005 and then became an executive officer in July 2005,
disclosure would be required in the small business issuer's Form 10-
KSB for the fiscal year ended December 31, 2005. However, if the
transaction had occurred in February 2004, disclosure would not be
required in the small business issuer's 2005 Form 10-KSB.
---------------------------------------------------------------------------
In addition, amended Item 404 of Regulation S-B retains a paragraph
requiring disclosure of a list of all parents of the small business
issuer showing the basis of control and as to each parent, the
percentage of voting securities owned or other basis of control by the
small business issuer's immediate parent, if any.\509\
---------------------------------------------------------------------------
\509\ Item 404(b) of Regulation S-B.
---------------------------------------------------------------------------
One conforming change that we are not making to Regulation S-B,
however, concerns the calculation of a related person's interest in a
given transaction. Prior to today's amendments, Item 404(a) of
Regulation S-B differed from Item 404(a) of Regulation S-K with respect
to, among other things, the calculation of the dollar value of a
person's interest in a related person transaction. Prior to these
amendments, Instruction 4 to Item 404(a) of Regulation S-K had
specifically provided that the amount of such interest was to be
computed without regard to the amount of profit or loss involved in the
transaction. In contrast, Item 404(a) of Regulation S-B contained no
such instruction prior to these amendments. We are adopting amendments
as proposed so that the method of calculation of a related person's
interest in a transaction will be the same for both Regulation S-B and
Regulation S-K. We believe that differences, if any, between the types
of transactions that small business issuers may engage in with related
persons as compared to transactions of larger issuers would not warrant
a different approach for calculating a related person's interest in a
transaction.
As proposed, new Item 407 of Regulation S-K is substantially
identical to new Item 407 of Regulation S-B,\510\ except that it would
not require disclosure regarding compensation committee interlocks and
insider participation in compensation decisions or the Compensation
Committee Report, since Regulation S-B did not require disclosure of
this information prior to adoption of these amendments.
---------------------------------------------------------------------------
\510\ The requirements that were specified in paragraphs (e),
(f), and (g) of Item 401 of Regulation S-B prior to these amendments
are now specified in paragraphs (d)(5), (d)(4) and (c)(3),
respectively, of Item 407 of Regulation S-B.
---------------------------------------------------------------------------
2. Foreign Private Issuers
Before today's amendments, a foreign private issuer would be deemed
to comply with Item 404 of Regulation S-K if it provided the
information required by Item 7.B. of Form 20-F. The amendments retain
this approach, but require that if more detailed information is
otherwise made publicly available or required to be disclosed by the
issuer's home jurisdiction or a market in which its securities are
listed or traded, that same information must also be disclosed pursuant
to Item 404.\511\
---------------------------------------------------------------------------
\511\ Instruction 2 to Item 404 of Regulation S-K.
---------------------------------------------------------------------------
3. Registered Investment Companies
We are revising Items 7 and 22(b) of Schedule 14A, substantially as
proposed, to reflect the reorganization that we have undertaken with
respect to operating companies. Under the amendments, information that
was required to be provided by registered investment companies under
Item 7 prior to the amendments is instead required by Item 22(b).\512\
The requirements of Item 7 that prior to the amendments applied to
registered investment companies regarding the nominating and audit
committees, board meetings, the nominating process, and shareholder
communications generally will be included in Item 22(b) by cross-
references to the appropriate paragraphs of new Item 407 of Regulation
S-K.\513\ The substance of these requirements has not been altered. In
addition, the revisions to Item 22(b) directly incorporate disclosures
relating to the independence of members of
[[Continued on page 53207]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 53207-53256]] Executive Compensation and Related Person Disclosure
[[Continued from page 53206]]
[[Page 53207]]
nominating and audit committees that are similar to those contained in
new Item 407(a) of Regulation S-K and contained in Item 7 prior to the
amendments.\514\ We are also adding instructions that are similar to
new Instruction 1 to Item 407(a).\515\
---------------------------------------------------------------------------
\512\ Amendments to Item 7(e) of Schedule 14A. Business
development companies will furnish the information required by Item
7 of Schedule 14A, in addition to the information required by Items
8 and 22(b) of Schedule 14A. See amendments to Items 7, 8, and 22(b)
of Schedule 14A.
\513\ Amendments to Items 22(b)(15)(i) and (ii)(A) and
22(b)(16)(i) of Schedule 14A. Amended Item 22(b)(15)(i) requires the
information required by new Items 407(b)(1) and (2) and (f),
corresponding to the information that registered investment
companies have been required to provide pursuant to Items 7(f) and
7(h) prior to today's amendments. Amended Item 22(b)(15)(ii)(A)
requires the information required by new Items 407(c)(1) and (2),
corresponding to the information that registered investment
companies have been required to provide pursuant to Items 7(d)(2)(i)
and 7(d)(2)(ii) (other than the nominating committee independence
disclosures required prior to today's amendments by Item
7(d)(2)(ii)(C)). Amended Item 22(b)(16)(i) requires closed-end
investment companies to provide the information required by new
Items 407(d)(1) through (3), corresponding to the information that
closed-end investment companies have been required to provide prior
to today's amendments pursuant to Item 7(d)(3) (other than the audit
committee independence disclosures required prior to today's
amendments by Items 7(d)(3)(iv)(A)(1) and (B)).
\514\ Amendments to Items 22(b)(15)(ii)(B) and (16)(ii) of
Schedule 14A. Amended Item 22(b)(15)(ii)(B) requires disclosure
about the independence of nominating committee members that is
similar to those required by Item 7(d)(2)(ii)(C) prior to today's
amendments and amended Item 22(b)(16)(ii) requires disclosure about
the independence of audit committee members that is similar to those
required by Items 7(d)(3)(iv)(A)(1) and (B) prior to today's
amendments.
\515\ Instruction to Item 22(b)(15)(ii)(B) of Schedule 14A;
Instruction to Item 22(b)(16)(ii) of Schedule 14A.
---------------------------------------------------------------------------
As proposed, we are also raising from $60,000 to $120,000 the
threshold for disclosure of certain interests, transactions, and
relationships of each director or nominee for election as director who
is not or would not be an ``interested person'' of an investment
company within the meaning of Section 2(a)(19) of the Investment
Company Act.\516\ This disclosure is required in investment company
proxy and information statements and registration statements. The
increase in the disclosure threshold corresponds to the increase in the
disclosure threshold for amended Item 404 from $60,000 to $120,000.
---------------------------------------------------------------------------
\516\ Amendments to Items 22(b)(7), 22(b)(8), and 22(b)(9) of
Schedule 14A; amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8)
of Form N-1A; amendments to Items 18.9, 18.10, and 18.11 of Form N-
2; amendments to Items 20(h), 20(i), and 20(j) of Form N-3.
---------------------------------------------------------------------------
F. Conforming Amendments
The changes to Item 404 necessitate conforming amendments to other
rules that refer specifically to Item 404.
1. Regulation Blackout Trading Restriction
We are adopting, as proposed, conforming changes to Regulation
Blackout Trading Restriction,\517\ also known as Regulation BTR, which
we originally adopted to clarify the scope and operation of Section
306(a) \518\ of the Sarbanes-Oxley Act of 2002 and to prevent evasion
of the statutory trading restriction.\519\ Rule 100 of Regulation BTR
defines terms used in Section 306(a) and Regulation BTR, including the
term ``acquired in connection with service or employment as a director
or executive officer.'' \520\ Under this definition as originally
adopted, one of the specified methods by which a director or executive
officer directly or indirectly acquires equity securities in connection
with such service is an acquisition ``at a time when he or she was a
director or executive officer, as a result of any transaction or
business relationship described in paragraph (a) or (b) of Item 404 of
Regulation S-K.'' \521\ To conform this provision of Regulation BTR to
the Item 404 amendments, we are amending Rule 100(a)(2) so that it
references only transactions described in paragraph (a) of Item 404, as
we proposed.
---------------------------------------------------------------------------
\517\ 17 CFR 245.100-104.
\518\ 15 U.S.C. 7244(a), entitled ``Prohibition of Insider
Trading During Pension Fund Blackout Periods.''
\519\ Insider Trades During Pension Fund Blackout Periods,
Release No. 34-47225 (Jan. 22, 2003) [68 FR 4337]. Section 306(a)
makes it unlawful for any director or executive officer of an issuer
of any equity security (other than an exempted security), directly
or indirectly, to purchase, sell, or otherwise acquire or transfer
any equity security of the issuer (other than an exempted security)
during any pension plan blackout period with respect to such equity
security, if the director or executive officer acquires the equity
security in connection with his or her service or employment as a
director or executive officer. This provision equalizes the
treatment of corporate executives and rank-and-file employees with
respect to their ability to engage in transactions involving issuer
equity securities during a pension plan blackout period if the
securities were acquired in connection with their service to, or
employment with, the issuer.
\520\ This term is defined in Rule 100(a) of Regulation BTR.
\521\ Rule 100(a)(2) of Regulation BTR.
---------------------------------------------------------------------------
2. Rule 16b-3 Non-Employee Director Definition
We also are adopting conforming amendments to the definition of
Non-Employee Director in Exchange Act Rule 16b-3.\522\ Section 16(b)
provides an issuer (or shareholders suing on its behalf) the right to
recover from an officer, director, or ten percent shareholder profits
realized from a purchase and sale of issuer equity securities within a
period of less than six months. However, Rule 16b-3 exempts
transactions between issuers of securities and their officers and
directors if specified conditions are met. In particular, acquisitions
from and dispositions to the issuer are exempt if the transaction is
approved in advance by the issuer's board of directors, or board
committee composed solely of two or more Non-Employee Directors.\523\
---------------------------------------------------------------------------
\522\ Exchange Act Rule 16b-3(b)(3)(ii), which defines a Non-
Employee Director of a closed-end investment company as ``a director
who is not an `interested person' of the issuer, as that term is
defined in Section 2(a)(19) of the Investment Company Act of 1940,''
is not amended.
\523\ Exchange Act Rules 16b-3(d)(1) and 16b-3(e).
---------------------------------------------------------------------------
Before adoption of these amendments, the definition of ``Non-
Employee Director,'' among other things, limited these directors to
those who:
Do not directly or indirectly receive compensation from
the issuer, its parent or subsidiary for consulting or other non-
director services, except for an amount that does not exceed the Item
404(a) dollar disclosure threshold;
Do not possess an interest in any other transaction for
which Item 404(a) disclosure would be required; and
Are not engaged in a business relationship required to be
disclosed under Item 404(b).
As described above, the Item 404 amendments substantially revise or
rescind the Item 404 provisions on which the Non-Employee Director
definition was based. To minimize potential disruptions and because no
problems were brought to our attention regarding any aspect of the
definition as it was stated before adoption of these amendments, we
proposed a conforming amendment that would delete the provision
referring to business relationships subject to disclosure under Item
404(b) as it was stated prior to today's amendments, without otherwise
revising the text of the rule.
In the interest of providing certainty regarding Non-Employee
Director status and to recognize corporate governance changes since the
definition was adopted, one commenter suggested basing the definition
instead on whether a director meets the independence standards under
the rules of the principal national securities exchange where the
company's securities are traded.\524\ If the company has no securities
traded on an exchange, the commenter suggested relying on the
director's eligibility to serve on the issuer's audit committee under
Exchange Act Section 10A(m) and Exchange Act Rule 10A-3.\525\ We are
not following the suggested approach. As we stated in the Proposing
Release, the standards for an exemption from Section 16(b) liability
should be readily determinable by reference to the exemptive rule, and
not variable depending upon where the issuer's securities are
listed.\526\ Further, basing the Non-Employee Director definition on
eligibility to serve on the issuer's audit committee could burden the
audit committee with a compensation committee function.
---------------------------------------------------------------------------
\524\ See letter from Sullivan.
\525\ 15 U.S.C. 78j-1(m) and 17 CFR 240.10A-3.
\526\ Proposing Release at n. 309.
---------------------------------------------------------------------------
As proposed and adopted, the Non-Employee Director definition
continues to permit consulting and similar arrangements subject to
limits measured by reference to the revised Item 404(a) disclosure
requirements. Because the disclosure threshold of Item 404(a) is raised
from $60,000 to $120,000, however, the effect in some cases may be to
permit previously ineligible
[[Page 53208]]
directors to be Non-Employee Directors. In other cases, where revised
Item 404(a) may require disclosure of director indebtedness and
disclosure of business relationships not subject to disclosure under
former Item 404(b), some formerly eligible directors may become
ineligible.
In response to concerns of commenters about the potential
difficulty of making a determination,\527\ we have revised the rule as
it was proposed to include an additional note to Rule 16b-3.\528\ The
Non-Employee Director definition contemplates that the director must
satisfy the definition's tests at the time he or she votes to approve a
transaction. For purposes of determining a director's status under
those tests that are based on Item 404(a), a company may rely on the
disclosure provided under Item 404 of Regulation S-K for the issuer's
most recent fiscal year contained in the most recent filing in which
Item 404 disclosure is presented.\529\ Where a transaction disclosed in
that filing was terminated before the director's proposed service as a
Non-Employee Director, that transaction will not bar such service. The
issuer must believe in good faith that any current or contemplated
transaction in which the director participates will not require Item
404(a) disclosure, based on information readily available to the issuer
and the director at the time such director proposes to act as a Non-
Employee Director. At such time as the issuer believes in good faith,
based on readily available information, that a current (or
contemplated) transaction with a director will require Item 404(a)
disclosure in a future filing, the director no longer is eligible to
serve as a Non-Employee Director. However, this determination does not
result in retroactive loss of a Rule 16b-3 exemption for a transaction
previously approved by the director while serving as a Non-Employee
director consistent with the note. In making determinations under the
note, an issuer may rely on information it obtains from the director,
for example pursuant to a response to an inquiry.
---------------------------------------------------------------------------
\527\ See, e.g., letter from SCSGP.
\528\ Note 4 to Rule 16b-3.
\529\ As under Rule 16b-3 prior to these amendments, each test
referring to Item 404 is measured by reference to Regulation S-K,
even if the disclosure requirements applicable to the company are
governed by Regulation S-B.
---------------------------------------------------------------------------
3. Other Conforming Amendments
The changes to Item 404, along with the consolidation of provisions
into Item 407, necessitate conforming amendments to various forms and
schedules under the Securities Act and the Exchange Act. The amendments
modify:
Forms that prior to these amendments required disclosure
of the information required by Item 404 to instead require disclosure
of the information required by amended Item 404 and new Item 407(a);
\530\
---------------------------------------------------------------------------
\530\ See amendments to Item 15 of Form SB-2, Item 11(n) of Form
S-1, Item 18(a)(7)(iii) and Item 19(a)(7)(iii) of Form S-4, Item 23
of Form S-11, Item 7 of Form 10, Item 13 of Form 10-K, Item 7 of
Form 10-SB and Item 12 of Form 10-KSB. The amendments to Forms SB-2,
10-SB and 10-KSB require disclosure of the information required by
amended Item 404 and new Item 407(a) of Regulation S-B.
---------------------------------------------------------------------------
Some forms that prior to these amendments required
disclosure of the information required by Item 404(a) or by Items
404(a) and (c), to instead require disclosure of the information
required by Items 404(a) and (b) as amended, or amended Item 404(a), as
appropriate; \531\
---------------------------------------------------------------------------
\531\ See amendment to Item 7(b) of Schedule 14A, which refers
to amended Items 404(a) and (b), and Item 22(b)(11) and the
Instruction to Item 22(b)(11) of Schedule 14A, and Item 5.02(c)(2)
of Form 8-K, which refer to amended Item 404(a). The amendments to
Form 8-K that reference Regulation S-B require disclosure of the
information required by amended Item 404(a) of Regulation S-B.
---------------------------------------------------------------------------
A form that prior to these amendments cross-referenced an
instruction in Item 404 which we are eliminating to instead include the
text of this instruction; \532\
---------------------------------------------------------------------------
\532\ See amendments to Item 23 of Form S-11.
---------------------------------------------------------------------------
Item 7 of Schedule 14A, to require disclosure of the
information required by new Item 407(a) rather than the disclosure that
was required prior to these amendments by Item 404(b), to eliminate
paragraphs (d)-(h) of Item 7 that were duplicative of new Item 407 and
replace them with a requirement to disclose information specified by
corresponding paragraphs of new Item 407;
Forms that prior to these amendments required disclosure
of the information required by Item 402 to instead require disclosure
of the information required by amended Item 402 and new Item 407(e)(4),
and, in the case of proxy statements and annual reports on Form 10-K,
new Item 407(e)(5); \533\
---------------------------------------------------------------------------
\533\ See amendments to Item 8 of Schedule 14A, Item 11(l) of
Form S-1, General Instruction I.B.4.(c) of Form S-3, Items
18(a)(7)(ii) and 19(a)(7)(ii) of Form S-4, Item 22 of Form S-11,
Item 6 of Form 10 and Item 11 of Form 10-K.
---------------------------------------------------------------------------
Some forms that prior to these amendments required
disclosure of the information required by Item 401 to instead require
disclosure of the information required by Item 401 as amended and
paragraphs (c)(3), (d)(4) and/or (d)(5) of new Item 407, as
appropriate; \534\
---------------------------------------------------------------------------
\534\ See amendments to General Instruction I.B.4.(c) of Form S-
3, and Item 10 of Form 10-K, which refer to Item 401 and paragraphs
(c)(3), (d)(4) and (d)(5) of new Item 407, and Item 7(b) of Schedule
14A, which refers to Item 401 and paragraphs (d)(4) and (d)(5) of
new Item 407. The amendments to Form 10-KSB require disclosure of
the information required by amended Item 401 and new Item 407(c)(3),
(d)(4) and (d)(5) of Regulation S-B. We are not making any changes
to the reference to Item 401 in Note G to Form 10-K, however,
because the portion of Item 401 applicable in Note G (certain
disclosure regarding executive officers) does not include the part
of Item 401 that we are combining into new Item 407.
---------------------------------------------------------------------------
Forms that prior to these amendments required disclosure
of the information required by Item 401(j), to instead require
disclosure of the information required by new Item 407(c)(3); \535\ and
---------------------------------------------------------------------------
\535\ See amendments to Item 5 in Part II of Form 10-Q, and Item
5 in Part II of Form 10-QSB. The amendments to Item 5 in Part II of
Form 10-QSB require disclosure of the information required by new
Item 407(c)(3) of Regulation S-B.
---------------------------------------------------------------------------
Item 10 of Form N-CSR to include a cross reference to new
Item 407(c)(2)(iv) of Regulation S-K and new Item 22(b)(15) of Schedule
14A, in lieu of the former reference to Item 7(d)(2)(ii)(G) of Schedule
14A.
In addition, conforming amendments have been made to a provision in
Regulation AB, which prior to these amendments required disclosure of
the information required by Items 401, 402 and 404, so that instead it
will require disclosure of the information required by amended Items
401, 402, 404 and paragraphs (a), (c)(3), (d)(4), (d)(5) and (e)(4) of
new Item 407.\536\
---------------------------------------------------------------------------
\536\ See amendments to Item 1107(e) of Regulation AB.
---------------------------------------------------------------------------
VI. Plain English Disclosure
We are adopting as proposed a requirement that most of the
disclosure called for by amended Items 402, 403, 404 and 407 be
provided in plain English. This plain English requirement will apply
when information responding to these items is included (whether
directly or through incorporation by reference) in reports required to
be filed under Exchange Act Sections 13(a) or 15(d). Commenters were
generally supportive of the plain English requirement,\537\ and some
commenters suggested extending the plain English requirements to the
proxy statement as a whole and to other Commission filings.\538\
---------------------------------------------------------------------------
\537\ See, e.g., letters from SCSGP; jointly, Angela Chappa,
Annie Gabel and Michelle Prater; SBAF; and Standard Life.
\538\ See, e.g., letters from SCSGP; Foley; and Mercer.
---------------------------------------------------------------------------
In 1998, we adopted rule changes requiring issuers preparing
prospectuses to write the cover page, summary and
[[Page 53209]]
risk factors section of prospectuses in plain English and apply plain
English principles to other portions of the prospectus.\539\ These
rules transformed the landscape of public offering disclosure and made
prospectuses more accessible to investors. We believe that plain
English principles should apply to the disclosure requirements that we
are adopting, so disclosure provided in response to those requirements
is easier to read and understand. Clearer, more concise presentation of
executive and director compensation, related person transactions,
beneficial ownership and corporate governance matters can facilitate
more informed investing and voting decisions in the face of complex
information about these important areas.
---------------------------------------------------------------------------
\539\ Plain English Disclosure, Release No. 33-7497 (Jan. 28,
1998) [63 FR 6369] (adopting revisions to Securities Act Rule 421
[17 CFR 230.421]). We have also required that risk factor disclosure
included in annual reports and Summary Term Sheets in business
combination filings be in plain English. See Item 1A. to Form 10-K
and Item 1001 of Regulation M-A [17 CFR 229.1001], respectively.
---------------------------------------------------------------------------
We are adding Exchange Act Rules 13a-20 and 15d-20 to require that
companies prepare their executive and director compensation, related
person transaction, beneficial ownership and corporate governance
disclosures included in Exchange Act reports using plain English,
including the following principles:
Present information in clear, concise sections, paragraphs
and sentences;
Use short sentences;
Use definite, concrete, everyday words;
Use the active voice;
Avoid multiple negatives;
Uuse descriptive headings and subheadings;
Use a tabular presentation or bullet lists for complex
material, wherever possible;
Avoid legal jargon and highly technical business and other
terminology;
Avoid frequent reliance on glossaries or defined terms as
the primary means of explaining information;
Define terms in the glossary or other section of the
document only if the meaning is unclear from the context;
Use a glossary only if it facilitates understanding of the
disclosure; and
In designing the presentation of the information, include
pictures, logos, charts, graphs, schedules, tables or other design
elements so long as the design is not misleading and the required
information is clear, understandable, consistent with applicable
disclosure requirements and any other included information, drawn to
scale and not misleading.
The new rule also provides additional guidance on drafting the
disclosure that would comply with plain English principles, including
guidance as to the following practices that companies should avoid:
Legalistic or overly complex presentations that make the
substance of the disclosure difficult to understand;
vague ``boilerplate'' explanations that are overly
generic;
complex information copied directly from legal documents
without any clear and concise explanation of the provision(s); and
disclosure repeated in different sections of the document
that increases the size of the document but does not enhance the
quality of the information.
Under the new rules, if disclosures about executive compensation,
beneficial ownership, related person transaction or corporate
governance matters are incorporated by reference into an Exchange Act
report from a company's proxy or information statement, the disclosure
is required to be in plain English in the proxy or information
statement.\540\ The plain English rules are part of the disclosure
rules applicable to filings required under Sections 13(a) and 15(d) of
the Exchange Act. We believe that these plain English requirements are
best administered by the Commission under these rules, and therefore we
are not at this time extending plain English requirements to the entire
proxy statement or to other Commission filings.
---------------------------------------------------------------------------
\540\ See, e.g., General Instruction G(3) to Form 10-K and
General Instruction E.3. to Form 10-KSB (specifying information that
may be incorporated by reference from a proxy or information
statement in an annual report on Form 10-K or 10-KSB).
---------------------------------------------------------------------------
We believe that several areas where commenters requested that
information be required in a specific format, such as tables, are best
addressed by application of our plain English principles. The plain
English rules adopted today specifically provide that, in designing the
presentation of the information, companies may include tables or other
design elements, so long as the design is not misleading and the
required information is clear, understandable, consistent with
applicable disclosure requirements, consistent with any other included
information, and not misleading.\541\ In response to our request for
comment, several commenters recommended using a separate supplemental
table, rather than footnotes, to identify the components of All Other
Compensation, including individual perquisites, reported in the Summary
Compensation Table.\542\ While we have not mandated such a separate
table, we encourage companies to use additional tables wherever tabular
presentation facilitates clearer, more concise disclosure. Several
commenters also requested that we specifically permit tabular
disclosure of the required potential post-employment payments
disclosure.\543\ Because of the difficulty of prescribing a single
format that would cover all circumstances, the rule as proposed and
adopted does not mandate tabular disclosure. However, consistent with
the plain English principles that we adopt today, we encourage
companies to develop their own tables to report post-termination
compensation if such tabular presentation facilitates clearer, more
concise disclosure. Similarly, while we do not require tabular
presentation of the narrative disclosure following the director
compensation table, such as a breakdown of director fees, consistent
with the plain English rules we adopt today, we encourage tabular
presentation where it facilitates an understanding of the disclosure.
Companies should also consider ways in which design elements such as
tables can facilitate the presentation of the related person
transaction disclosure and corporate governance disclosures.
---------------------------------------------------------------------------
\541\ Of course, the tables required under the rules we adopt
today must be included and cannot be modified except as specifically
allowed for in the rules. See Item 402(a)(5) of Regulation S-K and
Item 402(a)(4) of Regulation S-B.
\542\ See, e.g., letters from Amalgamated; CFA Centre 1; CII;
IUE-CWA; Mercer; and SBAF.
\543\ See, e.g., letters from Buck Consultants; Frederic W. Cook
& Co.; HRPA; ISS; Mercer; and The Value Alliance and Corporate
Governance Alliance.
---------------------------------------------------------------------------
VII. Transition
A number of commenters recommended that we adopt the rules by
September or October 2006 in order for companies to have sufficient
time to implement them for the 2007 proxy season.\544\ One commenter
expressed concern on how the transition would apply to Securities Act
registration statements.\545\ In keeping with these comments, we
believe we have adopted the new rules and amendments in sufficient time
for compliance in the 2007 proxy season. Therefore, the compliance
dates are as follows:
---------------------------------------------------------------------------
\544\ See, e.g., letters from ABA; ACC; Brian Foley & Co.; Jesse
Brill, Chair of CompensationStandards.com and Chair of the National
Association of Stock Plan Professionals, dated April 28, 2006; Buck
Consultants; Foley; Frederic W. Cook & Co.; Fried Frank; Mercer; and
Sullivan.
\545\ See letter from BDO Seidman.
---------------------------------------------------------------------------
[[Page 53210]]
For Forms 8-K, compliance is required for triggering
events that occur 60 days or more after publication in the Federal
Register;
For Forms 10-K and 10-KSB, compliance is required for
fiscal years ending on or after December 15, 2006;
For proxy and information statements covering registrants
other than registered investment companies, compliance is required for
any proxy or information statements filed on or after December 15, 2006
that are required to include Item 402 and 404 disclosure for fiscal
years ending on or after December 15, 2006;
For Securities Act registration statements covering
registrants other than registered investment companies and Exchange Act
registration statements (including pre-effective and post-effective
amendments, as applicable), compliance is required for registration
statements that are filed with the Commission on or after December 15,
2006 that are required to include Item 402 and 404 disclosure for
fiscal years ending on or after December 15, 2006;
For initial registration statements and post-effective
amendments that are annual updates to effective registration statements
that are filed on Forms N-1A, N-2 and N-3 (except those filed by
business development companies), compliance is required for
registration statements and post-effective amendments that are filed
with the Commission on or after December 15, 2006; and
For proxy and information statements covering registered
investment companies, compliance is required for any new proxy or
information statement filed on or after December 15, 2006.\546\
---------------------------------------------------------------------------
\546\ The amendments to the cross-references in Item 10 of Form
N-CSR will appear in the Form concurrent with the effective date of
the amendments to our proxy rules, and will be effective for a
particular registrant's Forms N-CSR that are filed after the filing
of any proxy statement that includes a response to new Item
407(c)(2)(iv) of Regulation S-K (as required by new Item 22(b)(15)
of Schedule 14A). The substance of the information required by the
Item has not been changed.
---------------------------------------------------------------------------
Commenters expressed some confusion concerning the periods for
which disclosure under the new rules and amendments will be required
during the transition from the former rules. As we noted in the
Proposing Release, companies will not be required to ``restate''
compensation or related person transaction disclosure for fiscal years
for which they previously were required to apply our rules prior to the
effective date of today's amendments. This means, for example, that
only the most recent fiscal year will be required to be reflected in
the revised Summary Compensation Table when the new rules and
amendments applicable to the Summary Compensation Table become
effective, and therefore the information for years prior to the most
recent fiscal year will not have to be presented at all. For the
subsequent year's Summary Compensation Table, companies will be
required to present only the most recent two fiscal years in the
Summary Compensation Table, and for the next and all subsequent years
will be required to present all three fiscal years in the Summary
Compensation Table.\547\ As another example, if a calendar year-end
company files its initial public offering on Form S-1 in November, the
initial filing will contain compensation disclosure regarding 2005
following the prior rules. If the registration statement does not
become effective until after the Item 402 disclosure must be updated,
then an amendment will have to be filed that includes the 2006
compensation information that complies with the rules we adopt today.
The Summary Compensation Table, however, will only contain the
information for 2006 and will not need to contain the information
restated from 2005.
---------------------------------------------------------------------------
\547\ The other amended executive and director compensation
disclosure requirements which relate to the last completed fiscal
year will not be affected by this transition approach. The Summary
Compensation Table will be treated differently because, as amended,
it requires disclosure of compensation to the named executive
officers for the last three fiscal years.
---------------------------------------------------------------------------
This transition approach will result in phased-in implementation of
the amended Summary Compensation Table and amended Item 404(a)
disclosure over a three-year period for Regulation S-K companies, and a
two-year period for Regulation S-B companies. During this phase-in
period, companies will not be required to present prior years'
compensation disclosure or Item 404(a) disclosure under the former
rules.
VIII. Paperwork Reduction Act
A. Background
The new rules and amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of
1995.\548\ We published a notice requesting comment on the collection
of information requirements in the Proposing Release, and we submitted
these requirements to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act.\549\ The titles for the
collection of information are: \550\
---------------------------------------------------------------------------
\548\ 44 U.S.C. 3501 et seq.
\549\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\550\ The paperwork burden from Regulations S-K and S-B is
imposed through the forms that are subject to the requirements in
those Regulations and is reflected in the analysis of those forms.
To avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens, for administrative convenience we estimate the burdens
imposed by each of Regulations S-K and S-B to be a total of one
hour.
---------------------------------------------------------------------------
(1) ``Regulation S-B'' (OMB Control No. 3235-0417);
(2) ``Regulation S-K'' (OMB Control No. 3235-0071);
(3) ``Form SB-2'' (OMB Control No. 3235-0418);
(4) ``Form S-1'' (OMB Control No. 3235-0065);
(5) ``Form S-4'' (OMB Control Number 3235-0324);
(6) ``Form S-11'' (OMB Control Number 3235-0067);
(7) ``Regulation 14A and Schedule 14A'' (OMB Control Number 3235-
0059);
(8) ``Regulation 14C and Schedule 14C'' (OMB Control Number 3235-
0057);
(9) ``Form 10'' (OMB Control No. 3235-0064);
(10) ``Form 10-SB'' (OMB Control No. 3235-0419);
(11) ``Form 10-K'' (OMB Control No. 3235-0063);
(12) ``Form 10-KSB'' (OMB Control No. 3235-0420);
(13) ``Form 8-K'' (OMB Control No. 3235-0060); and
(14) ``Form N-2'' (OMB Control No. 3235-0026).
We adopted all of the existing regulations and forms pursuant to
the Securities Act and the Exchange Act. In addition, we adopted Form
N-2 pursuant to the Investment Company Act. These regulations and forms
set forth the disclosure requirements for annual \551\ and current
reports, registration statements, proxy statements and information
statements that are prepared by issuers to provide investors with the
information they need to make informed investment decisions in
registered offerings and in secondary market transactions, as well as
informed voting decisions in the case of proxy statements.
---------------------------------------------------------------------------
\551\ The pertinent annual reports are those on Form 10-K or 10-
KSB.
---------------------------------------------------------------------------
Our amendments to the forms and regulations are intended to:
Provide investors with a clearer and more complete picture
of compensation awarded to, earned by or paid to principal executive
officers, principal financial officers, the highest paid executive
officers other than the principal executive officer and principal
financial officer, and directors;
[[Page 53211]]
Provide investors with better information about key
financial relationships among companies and their executive officers,
directors, significant shareholders and their respective immediate
family members;
Include more complete information about independence
regarding members of the board of directors and board committees;
Reorganize and modify the type of executive and director
compensation information that must be disclosed in current reports; and
Require most of the disclosure required under these
amendments to be provided in plain English.
The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
The information collection requirements related to annual and
current reports, registration statements, proxy statements and
information statements are mandatory. However, the information
collection requirements relating exclusively to proxy and information
statements will only apply to issuers subject to the proxy rules. There
is no mandatory retention period for the information disclosed, and the
information disclosed will be made publicly available on the EDGAR
filing system.
B. Summary of Information Collections
The amendments will increase existing disclosure burdens for annual
reports on Form 10-K \552\ and registration statements on Forms 10, S-
1, S-4 and S-11 by requiring:
---------------------------------------------------------------------------
\552\ The amended disclosure requirements regarding executive
and director compensation, beneficial ownership, related person
transactions and parts of the amended corporate governance
disclosure requirements are in Form 10-K, Schedule 14A and Schedule
14C. Form 10-K permits the incorporation by reference of information
in Schedule 14A or 14C to satisfy the disclosure requirements of
Form 10-K. The analysis that follows assumes that companies would
either provide the required disclosure in a Form 10-K only, if the
company is not subject to the proxy rules, or would incorporate the
required disclosure into the Form 10-K by reference to the proxy or
information statement if the company is subject to the proxy rules.
This approach takes into account the burden from the amended
disclosure requirements that are included in both the Form 10-K and
in Schedule 14A or Schedule 14C.
---------------------------------------------------------------------------
An expanded and reorganized Summary Compensation Table,
which will require expanded disclosure of a ``total compensation''
amount, and information necessary for computing the total amount of
compensation, such as the grant date fair value of equity-based awards
computed in accordance with FAS 123R, and the aggregate annual change
in the actuarial present value of the named executive officers'
accumulated benefit under defined benefit and actuarial pension plans;
Disclosure at lower thresholds of information regarding
perquisites and other personal benefits;
A more focused presentation of compensation plan awards in
a Grants of Plan-Based Awards Table, which builds upon former tabular
disclosures regarding long term incentive plans and awards of option
and stock appreciation rights to supplement the information required to
be included in the amended Summary Compensation Table;
Expanded disclosure regarding holdings and exercises by
named executive officers of previously awarded stock, options and
similar instruments (with disclosure regarding outstanding option
awards required on an award-by-award basis), including disclosure of
option exercise prices and expiration dates, as well as the amounts
(both the number of shares and the value) realized upon the exercise of
options and the vesting of stock;
Improved narrative disclosure accompanying data presented
in the executive compensation tables and a new Compensation Discussion
and Analysis section to explain material elements of compensation of
named executive officers;
With regard to Form 10-K, a short Compensation Committee
Report regarding the compensation committee's review and discussion
with management of the Compensation Discussion and Analysis, and the
compensation committee's recommendation to the board of directors
concerning the disclosure of the Compensation Discussion and Analysis
in the Form 10-K or proxy or information statement;
New tables and narrative disclosure regarding retirement
plans and nonqualified defined contribution and other deferred
compensation plans;
Expanded disclosure regarding post-employment payments
other than pursuant to retirement and deferred compensation plans;
A new table and improved narrative disclosure for director
compensation to replace the more general disclosure requirements in
place prior to these amendments;
Disclosure regarding additional related persons by
expanding the definition of ``immediate family member'' under an
amended related person transaction disclosure requirement;
New disclosure regarding a company's policies and
procedures for the review, approval or ratification of transactions
with related persons;
New disclosure regarding corporate governance matters such
as the independence of directors; and
Additional disclosure regarding pledges of securities by
officers and directors and directors' qualifying shares.
At the same time, the amendments will decrease existing disclosure
burdens for annual reports on Form 10-K and registration statements on
Forms 10, S-1, S-4 and S-11 by:
Eliminating tabular presentation regarding projected stock
option values under alternative stock appreciation scenarios;
Eliminating a generalized tabular presentation regarding
defined benefit plans, which will offset in part the increased burdens
regarding pension plan disclosure; and
Eliminating a disclosure requirement regarding specific
director relationships that could affect independence.
In addition, the amendments may increase or decrease existing
disclosure burdens, or not affect them at all, for annual reports on
Form 10-K and registration statements on Forms 10, S-1, S-4 and S-11,
depending on a company's particular circumstances, by:
Eliminating the requirement to include in proxy or
information statements a compensation committee report on the repricing
of options and stock appreciation rights and a table reporting on the
repricing of options and stock appreciation rights over the past ten
years, in favor of a narrative discussion of repricings, if any
occurred in the last fiscal year, which will be required to be included
or incorporated by reference (as applicable) in annual reports and
registration statements;
Increasing the dollar value threshold for determining if
related person transaction disclosure is required from $60,000 to
$120,000;
Narrowing the scope of an instruction that provides bright
line tests for determining whether transactions with related persons
are required to be disclosed in particular circumstances; and
Requiring disclosure about reliance on an exemption from
requirements for director independence when such an exemption is
available.
Specifically with respect to proxy and information statements, the
amendments will impose a new disclosure requirement regarding the
[[Page 53212]]
company's processes and procedures for the consideration and
determination of executive and director compensation with respect to
the compensation committee or persons performing the equivalent
functions, and disclosure regarding the availability of the
compensation committee's charter (if it has one), either as an appendix
to the proxy or information statement at least once every three fiscal
years or on the company's Web site. These amendments will not require a
compensation committee to establish or maintain a charter. The amended
disclosure that will be required regarding compensation committees is
similar to what is currently required for audit committees and
nominating committees. The amendments will decrease disclosure
requirements for proxy and information statements by eliminating a
disclosure requirement regarding the resignation of directors and a
compensation committee report on the repricing of options and stock
appreciation rights. The amendments require the Compensation Discussion
and Analysis disclosure in the annual report on Form 10-K and in proxy
or information statements to be accompanied by a short Compensation
Committee Report regarding the compensation committee's review and
discussion with management of the Compensation Discussion and Analysis,
and the compensation committee's recommendation to the board of
directors with regard to the disclosure of the Compensation Discussion
and Analysis. This new Compensation Committee Report, along with the
Compensation Discussion and Analysis, is required instead of the Board
Compensation Committee Report on Executive Compensation that was
previously required to be furnished with proxy and information
statements prior to these amendments. The extent to which eliminating
the former requirements to provide the Board Compensation Committee
Report on Executive Compensation and a compensation committee report on
the repricing of options and stock appreciation rights reduces burdens
for proxy and information statements will be offset to a substantial
extent, as discussed above, by the periodic reporting and proxy or
information statement requirements for Compensation Discussion and
Analysis, the new Compensation Committee Report and a narrative
disclosure requirement regarding repricings and other modifications of
outstanding awards. The Compensation Discussion and Analysis and
narrative disclosure requirement regarding repricings and other
modifications will be required to be included or incorporated by
reference in annual reports and registration statements, while the
Compensation Committee Report will only be required to be included or
incorporated by reference from the proxy or information statement in
the annual report on Form 10-K. We estimate that, on balance, the
changes that are specific to proxy or information statements will
result in some incremental burdens on proxy or information statement
collections of information, as described in more detail below.
The amendments will increase existing disclosure burdens for annual
reports on Form 10-KSB \553\ and registration statements on Forms 10-SB
and SB-2 filed by small business issuers by requiring:
---------------------------------------------------------------------------
\553\ The same analysis as discussed above with regard to the
relationship of Form 10-K to the disclosure required in proxy or
information statements is also applied to Form 10-KSB.
---------------------------------------------------------------------------
An expanded and reorganized Summary Compensation Table,
which will require expanded disclosure of a ``total compensation''
amount, and information necessary for computing the total amount of
compensation, such as the grant date fair value of equity-based awards
computed in accordance with FAS 123R;
Disclosure at lower dollar thresholds for information
regarding perquisites and other personal benefits;
Expanded disclosure regarding holdings by named executive
officers of previously awarded stock, options and similar instruments
(with disclosure regarding outstanding option awards required on an
award-by-award basis), including disclosure of option exercise prices
and expiration dates.
A new table for director compensation, to replace
narrative disclosure requirements that existed prior to these
amendments;
A narrative description of retirement plans;
Disclosure regarding additional related persons under the
amended related person transaction disclosure requirement;
New and reorganized disclosure regarding corporate
governance matters such as the independence of directors and members of
the nominating, compensation and audit committees of the board of
directors; and
Additional disclosure regarding pledges of securities by
officers and directors, and director qualifying shares.
At the same time, the amendments will decrease existing disclosure
burdens for annual reports on Form 10-KSB and registration statements
on Forms 10-SB and SB-2 filed by small business issuers by:
Reducing by two the number of named executive officers for
the purposes of executive compensation disclosure, to include only the
principal executive officer and the two most highly compensated
executive officers other than the principal executive officer;
Reducing the required information in the Summary
Compensation Table from three years to two years of data;
Eliminating tabular disclosure of grants of options and
stock appreciation rights in the last fiscal year;
Eliminating tabular disclosure regarding exercises of
options and stock appreciation rights; and
Eliminating tabular disclosure regarding long-term
incentive plan awards in the last fiscal year.
In addition, the amendments may increase or decrease, or not
affect, existing disclosure burdens for annual reports on Form 10-KSB
or registration statements on Forms 10-SB and SB-2 filed by small
business issuers depending on the small business issuer's particular
circumstances, by:
Eliminating the requirement to include a compensation
committee report on the repricing of options and stock appreciation
rights, in favor of a narrative discussion of repricings, if any
occurred in the last fiscal year, which will be required to be included
or incorporated by reference (as applicable) in annual reports and
registration statements;
Changing the dollar value threshold used for determining
if related person transaction disclosure is required from $60,000 to
the lesser of $120,000 or one percent of the average of the small
business issuer's total assets at year-end for the last three completed
fiscal years; and
Narrowing the scope of an instruction that provides bright
line tests for determining whether transactions with related persons
are required to be disclosed in particular circumstances.
The amendments may increase or decrease existing disclosure
burdens, or not affect them at all, depending on the particular
circumstances, for Forms N-1A, N-2, and N-3 by increasing to $120,000
the former $60,000 threshold in such forms for disclosure of certain
interests, transactions, and relationships of disinterested directors,
although as discussed below we do not believe the increase in the
disclosure threshold will significantly impact the hours of company
personnel time and cost of outside professionals in responding to
[[Page 53213]]
these items. The amendments will increase the existing disclosure
burdens for Form N-2 by requiring business development companies to
provide additional disclosure regarding compensation. However, the
amendments will decrease the existing disclosure burden by no longer
requiring compensation disclosure with respect to certain affiliated
persons and the advisory board of business development companies and by
no longer requiring business development companies to disclose certain
compensation from the fund complex.
The amendments will decrease the Form 8-K disclosure burdens, by
focusing the Form 8-K disclosure requirement on more presumptively
material employment agreements, plans or arrangements of the narrower
group of named executive officers, which should reduce the number of
current reports on Form 8-K filed each year relating to executive and
director compensation matters.
We do not believe that our amendments regarding exhibit filing
requirements for Form 20-F and our treatment of foreign private issuers
under the revised rules will impose any incremental increase or
decrease in the disclosure burden for these issuers.
C. Summary of Comment Letters and Revisions to Proposals
We requested comment on the Paperwork Reduction Act analysis
contained in the Proposing Release. We did not receive comments on our
Paperwork Reduction Act estimates; \554\ however, a number of
commenters expressed concerns that costs associated with the proposals
were understated. Commenters also raised concerns with costs and
burdens associated with particular aspects of the proposals.
---------------------------------------------------------------------------
\554\ One commenter noted our aggregate burden estimates in
commenting that the ``administrative costs'' noted in the Proposing
Release did not account for the need to overcome compliance risks
``where concern for satisfying new rules is multiplied by the
potential legal risks associated with sufficiency and completeness
under a regime of CEO and CFO certification.'' Letter from Hodak
Value Advisors.
---------------------------------------------------------------------------
One commenter indicated that the Commission needs to take into
consideration that the disclosure is more detailed and lengthy, and
realistically will require more preparation time by more people;
historically, the individuals involved in the process outside a company
have been attorneys and accountants who are preparing or reviewing the
documents, but compensation consultants and their advisors and special
counsel to the directors would be introduced into the process; and the
cost analysis does not reflect additional director time that will be
required to read the lengthy new disclosure.\555\ The commenter also
expressed the view that smaller to mid-size issuers will be negatively
affected disproportionately more than larger public companies, as
disclosure requirements increase and greater reliance on external
support is thus necessitated.
---------------------------------------------------------------------------
\555\ See letter from Chamber of Commerce.
---------------------------------------------------------------------------
Other commenters stated their belief that the Commission
underestimated the cost of the proposed disclosure requirements.\556\
One of these commenters cited the limited availability of information
from existing information systems and requested that the Commission
afford an adequate transition period to accommodate the proposed
changes,\557\ while another commenter suggested that the proposal would
notably impose a reporting and administrative burden that would add to
the already substantial reporting obligations imposed by the Sarbanes-
Oxley Act of 2002 and related rules.\558\ Another commenter noted that
companies will likely incur considerable costs in preparing the first
proxy statement under the revised rules, even if, as was proposed, they
do not have to ``restate'' compensation for prior years.\559\
---------------------------------------------------------------------------
\556\ See, e.g., letters from Computer Sciences; HRPA; N.
Ludgus; and Kathy B. Wheby.
\557\ See letter from Computer Sciences.
\558\ See letter from HRPA.
\559\ See letter from Sullivan.
---------------------------------------------------------------------------
Other commenters noted that specific aspects of the proposals would
result in significant costs or burdens, including:
Compensation Discussion and Analysis generally, as well as
the status of this disclosure as filed rather than furnished; \560\
---------------------------------------------------------------------------
\560\ See, e.g., letters from Hodak Value Advisors and Chamber
of Commerce.
---------------------------------------------------------------------------
Disclosure of the increase in actuarial value of pension
plans in the Summary Compensation Table and its inclusion in the
determination of named executive officer status; \561\
---------------------------------------------------------------------------
\561\ See, e.g., letters from E&Y and KPMG.
---------------------------------------------------------------------------
Lowering the disclosure threshold for perquisites and
other personal benefits to $10,000, and changing the threshold for
separate identification and quantification; \562\
---------------------------------------------------------------------------
\562\ See, e.g., letters from Hodak Value Advisors; ACC; Eli
Lilly; and NACCO Industries.
---------------------------------------------------------------------------
Footnote disclosure to the Outstanding Equity Awards at
Year-End Table regarding expiration and vesting dates; \563\
---------------------------------------------------------------------------
\563\ See, e.g., letters from ABA; Leggett & Platt; SCSGP; and
Sidley Austin.
---------------------------------------------------------------------------
Plan-by-plan disclosure of pension benefits; \564\
---------------------------------------------------------------------------
\564\ See, e.g., letters from ABA; Hewitt; HRPA; and Towers
Perrin.
---------------------------------------------------------------------------
Numerical estimates of termination or change in control
payments; \565\
---------------------------------------------------------------------------
\565\ See, e.g., letters from Sullivan; Kellogg; SCSGP; and
Chamber of Commerce.
---------------------------------------------------------------------------
Amendments to the related person transaction disclosure
requirement; \566\
---------------------------------------------------------------------------
\566\ See, e.g., letters from American Bankers; Whitney Holding;
SCSGP; and FSR.
---------------------------------------------------------------------------
Disclosure of director relationships (other than those
disclosed under the related person transaction disclosure requirement)
considered by the board of directors when making independence
determinations; \567\ and
---------------------------------------------------------------------------
\567\ See, e.g., letters from BRT; Chadbourne; Chamber of
Commerce; FSR; Intel; SCSGP; Sidley Austin; and Sullivan.
---------------------------------------------------------------------------
Disclosure regarding the use of compensation consultants
by the compensation committee \568\ as well as the contacts between
compensation consultants and executive officers of the company.\569\
---------------------------------------------------------------------------
\568\ See, e.g., letters from Chamber of Commerce and Compensia.
\569\ See, e.g., letters from Mercer and Compensia.
---------------------------------------------------------------------------
Some commenters also noted their belief that costs and burdens
arising from the proposals would disproportionately affect small
business issuers and smaller public companies.\570\
---------------------------------------------------------------------------
\570\ See, e.g., letters from ABA; ACB; ICBA; and SCSGP.
---------------------------------------------------------------------------
We have made substantive modifications to the proposals that
address, in part, the concerns expressed by commenters about costs.
Some of the changes in the final rules include:
Treating Compensation Discussion and Analysis as filed
(and not furnished), but requiring a separate Compensation Committee
Report over the names of compensation committee members as a means of
emphasizing the committee's involvement in the disclosure and providing
additional information to which the principal executive officer and
principal financial officer may look to in completing their
certifications;
Requiring disclosure of the actuarial present value of the
named executive officers' accumulated benefits under defined benefit
and actuarial pension plans in the Pension Benefits Table, which under
the final rules will include the actuarial present value of accumulated
benefits computed by utilizing assumptions used for financial reporting
purposes under generally accepted accounting principles (rather than
requiring disclosure of an estimate of the annual benefit payable upon
retirement as proposed), and requiring in the Summary Compensation
Table
[[Page 53214]]
the aggregate annual change in that value, so that the Summary
Compensation Table data will directly relate to the data presented in
the Pension Benefits Table;
Specifying that companies compute estimates of
compensation under post-termination arrangements applying the
assumptions that the triggering event occurred on the last day of the
company's last completed fiscal year and the price per share of the
company's securities is the closing market price on that day;
Specifying that companies must exclude the amounts for the
aggregate annual change in the actuarial present value of accumulated
benefits under defined benefit and actuarial pension plans and the
above-market or preferential earnings on nonqualified deferred
compensation when determining which executive officers are named
executive officers for the purposes of disclosure in the compensation
tables;
Including some instructions to the related person
disclosure requirement that were proposed to be eliminated, so that
some bright line standards for non-disclosure, as modified, continue to
apply with respect to specific transactions;
Requiring disclosure of director relationships (other than
any transactions, relationships or arrangements disclosed under the
related person transaction disclosure requirement) considered by the
board of directors when making independence determinations by specific
category or type, rather than by individual transactions, relationships
or arrangements as proposed; and
Not requiring that companies identify the executive
officers that compensation consultants have contacted as proposed.
Further, the final rules applicable to small business issuers are
adopted substantially as proposed, providing for significantly less
detailed disclosure regarding executive compensation for these
companies as compared to the disclosure required for larger issuers.
We made other modifications to the proposals in response to issues
raised by commenters that could, depending on the particular
circumstances, increase costs relative to the costs estimated for the
proposals. In this regard, the final rules:
Require expanded disclosure about option grants and
outstanding options, including disclosure of the date the compensation
committee or full board took action or was deemed to take action to
grant an award if that date is different from the grant date, a
description of the methodology for determining the exercise price of
options if the exercise price is not determined based on the closing
market price on the date of grant, and the amount of securities
underlying unexercised options, the exercise prices and the option
expiration dates for each outstanding option (rather than on an
aggregate basis as proposed);
Require disclosure of the Performance Graph (which would
have been eliminated under the proposals) in annual reports to security
holders that precede or accompany a proxy or information statement
relating to an annual meeting at which directors are to be elected; and