A COMPREHENSIVE SUMMARY OF THE SEC’S REVAMPED EXECUTIVE COMPENSATION DISCLOSURE RULES · 2006. 2....

© McGuireWoods, LLP 2006 1

A COMPREHENSIVE SUMMARY OF THE SEC’S REVAMPED EXECUTIVE COMPENSATION DISCLOSURE RULES

On January 27, 2006, the Securities and Exchange Commission proposed extensive and far reaching amendments to the disclosure requirements for executive and director compensation and related matters. The proposals are contained in Releases 33-8655 and 34-53185 [http://www.sec.gov/rules/proposed/33-8655.pdf] (the “Proposals”). The Proposals would require a comprehensive new disclosure by a public company about its compensation policies and require substantial changes to the summary compensation table and related items. A number of additional changes are proposed to disclosures about related party transactions, director independence and other corporate governance matters and security ownership of officers and directors. The Proposals would apply to disclosure in proxies, registration statements and other SEC filings (such as Form 8-K). Highlights of the Proposals include:

• A new management “Compensation Disclosure and Analysis” which would replace the Compensation Committee Report and performance graph.

• The Summary Compensation Table would be expanded, including a “total compensation” column.

• New disclosures would be added about the value of equity grants when made and when exercised.

• The disclosure of perks would be expanded and become more detailed. • The number and nature of supplemental tables would be expanded,

including two new retirement/deferred compensation tables. • The principal financial officer would be included as a named executive

officer, even if not in the top five officers by compensation. • Director compensation would be disclosed on a summary compensation

table with footnotes. • All disclosures would have to be in “plain English”. • Disclosure about compensation committee governance and operations

would be expanded. • Disclosure of transactions with related persons would be expanded,

although the threshold for disclosure would be raised from $60,000 to $120,000.

OVERVIEW OF PROPOSALS The purpose of the Proposals is to provide more detailed and comprehensive disclosure of compensation paid to executives and directors. Under the


Proposals, executive compensation disclosure in Item 402 of Regulation S-K would be structured into four segments:

1. The Compensation Discussion and Analysis would provide a narrative overview of compensation policies and decisions made under those policies.

2. The Summary Compensation Table would provide a look at total compensation paid, including the value of any equity grants that would vest in the future.

3. Two new tables would provide more information on outstanding equity grants and information on amounts realized when equity grants were exercised or vested during the year.

4. New tabular disclosure would cover retirement benefits and nonqualified deferred compensation in greater detail and would require estimates of payments in the event of severance or a change in control.

All of the new tables would be followed by narrative explanations. One area in which the SEC clearly intends to change prevailing practices is in the disclosure of perks. The Proposals are consistent with recent SEC statements of its focus on expanding disclosure of perks. Between a reduced $10,000 threshold for reporting and interpretative advice about the SEC’s view of benefits that may be treated as a perk, perk disclosure would be substantially expanded. Compensation paid to directors would now be shown on a separate table similar to the Summary Compensation Table. More items would be covered, such as amounts attributable to director charitable award programs. The Proposals also address other aspects of compensation disclosure, in particular the rules on related parties and related transactions in Item 404 of Regulation S-K. The Proposals would be more principle-based and require more decisions about the materiality of a transaction. The $60,000 threshold for disclosure would be increased to $120,000 to adjust for inflation. Under the Proposals, corporate governance disclosures would be updated. Disclosures would be required about the compensation committee that would be similar to current disclosures about the audit and nominating committees. Also, the Proposals would amend the Form 8-K requirements to reduce the number of Form 8-K filings required on compensation matters. The SEC has made numerous requests for comments and the comment period would close 60 days after the releases are published in the Federal Register. If adopted, the new rules would be effective 60 to 120 days after final publication, depending on the filing provision involved. If adopted, the rules would be in effect for the 2007 proxy season.


WHAT TO DO NOW? It is likely that the new rules will be adopted substantially in their current form. Therefore, all compensation decisions affecting 2006 compensation would be disclosed in 2007 proxies under these new rules. Companies should start now to evaluate their compensation policies, procedures and structures in light of the new requirements. Additional advice on how the proposed rules could affect 2006 activities is found throughout this memo. The memorandum is divided into the following sections: Page A. Compensation Disclosure & Analysis 4 B. Named Executive Officer Changes 6 C. Revised Summary Compensation Table 7

1. The New Table and its Requirements 8 2. Narrative Disclosure 15 3. The Supplemental Annual Compensation Tables 16

D. New Equity Compensation Tables 19 E. Tables for Post-Employment Compensation 21 F. Small Business Issuers 25 G. Director Compensation Table 26 H. Plain English Requirement 27 I. Corporate Governance Disclosure 27 J. Related Person Disclosures 29 K. Form 8-K Changes 32 L. Transition Provisions/Effective Dates 33 M. Action Items 34


Table Locator – The tables required under the Proposals are reproduced in the memorandum. Copies of the tables are located on the following pages: Page Summary Compensation Table 8 Grants of Performance-Based Awards 17 Grants of All Other Equity Awards 18 Outstanding Equity Awards at Fiscal Year-End 20 Option Exercises and Stock Vested 21 Retirement Plan Potential Annual Payments and Benefits 22 Nonqualified Defined Contribution and Other Deferred Compensation Plans 23 Director Compensation Table 26 A. COMPENSATION DISCLOSURE & ANALYSIS

The centerpiece of the new disclosure called for by the Proposals would be the Compensation Discussion and Analysis (CD&A). The CD&A is intended to provide a similar function for compensation disclosure to that provided for financial disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations that appears in a company’s annual report (“MD&A”). The CD&A would provide a general overview and a discussion and analysis of the material factors underlying compensation policies and decisions. The implementation of those decisions would then be reflected in the data presented in the various tables and accompanying narrative discussion. The CD&A would replace the current Compensation Committee Report and Performance Graph. The CD&A requirements would be described in a revised Item 402 of Regulation S-K. The company would be required to explain in the CD&A all elements of compensation of named executive officers, including responses to the following specific items:

• The objectives of the company’s compensation programs; • What the compensation program is designed to reward and not reward; • Each element of compensation; • Why the company chooses to pay each element; • How the company determines the amount for each element to pay; and • How each compensation element and the company’s decisions regarding

that element fit into the company’s overall compensation objectives and affect decisions regarding other elements.

The CD&A should focus on material principles underlying executive compensation policies and decisions and not use boilerplate language. The purpose is not to repeat the more detailed information that would follow in the tables and accompanying narrative discussion. While the information to be disclosed in the CD&A would vary depending upon facts and circumstances, the


SEC has included in the proposed rule 13 examples of the type of information that might be covered:

• The policies for allocating between long-term and currently paid out compensation;

• The policies for allocating between cash and non-cash compensation, and among different forms of non-cash compensation;

• For equity-based compensation, how the determination is made as to when awards are granted;

• What specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions;

• How specific forms of compensation are structured to reflect individual performance, describing the elements of individual performance and/or contribution that are taken into account;

• How specific forms of compensation are structured to reflect corporate performance, including whether discretion can be exercised either to award compensation absent attainment of the goal or to reduce or increase the size of the award;

• The factors considered in decisions to increase or decrease compensation materially;

• How amounts realizable from prior compensation are considered in setting other elements of compensation;

• The impact of accounting and tax treatments on particular compensation;

• Stock ownership guidelines and 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 determining executive compensation.

Consistent with current requirements for the Compensation Committee Report, companies would not be required to disclose target levels with respect to specific quantitative or qualitative performance-related factors considered in determining executive compensation. In addition, companies would not be required to disclose any factors or criteria involving confidential commercial or business information, the disclosure of which would have an adverse effect on the company.

Observation: While most companies will have addressed these and other issues in their compensation setting, the CD&A may require a more comprehensive and well articulated statement of the policies than currently exists.


Unlike the Compensation Committee Report and the Performance Graph, which it replaces, the CD&A would be “filed” for purposes of the proxy rules and incorporation by reference into 1934 and 1933 Act filings.

B. NAMED EXECUTIVE OFFICER CHANGES The Proposals would retain the requirement that disclosures be made only in respect to five named executive officers (NEOs). Unlike the current rules, however, the Proposals specifically require one of the NEOs to be the “principal financial officer” of the company. This should not constitute a major departure from current practice, however, since the principal financial officer in many cases would already be included as one of the most highly compensated officers of the company. The SEC proposal would also re-designate the current chief executive officer as the “principal executive officer.” The titles of principal executive officer and principal financial officer are consistent with usage in the Sarbanes-Oxley Act certification provisions. The remaining three named executive officers would be the three most highly compensated executive officers other than the principal executive officer and the principal financial officer. As under the current rules, disclosure would also be required for up to two additional individuals who would have been named executive officers but for the fact that they no longer served as executive officers at the end of the last fiscal year. The threshold for disclosure would remain at $100,000. If one of the three most highly compensated executive officers only served as an executive officer for part of the year, disclosure would be required of the officer’s total compensation for the entire year. However, there is a significant change in the calculation of compensation for this purpose. The three most highly compensated officers of a company would be identified based on their “total compensation” for the last fiscal year (as indicated

Observation: In setting up their decision-making process for compensation in 2006, companies should be mindful of the disclosures that would be required in the CD&A and should consider documenting how they have addressed some of the specific issues that would need to be discussed.

Observation: The fact that the CD&A would be filed may require increased attention to documentation, both to support certifications by the CEO and CFO under the Sarbanes-Oxley Act and to permit underwriters and counsel to conduct adequate due diligence and deliver opinions in connection with securities offerings.


in column (c) of the revised Summary Compensation Table). Under the current rules, this determination is made based on salary and bonus amounts only.

As is also currently the case for the chief executive officer, the Proposals would require that all persons who served as either the company’s principal executive officer or principal financial officer during the last fiscal year would be required to be treated as named executive officers. Thus, unlike current practice, additional disclosures would be required if more than one individual served as the principal financial officer of the company during the last fiscal year. Even if a principal executive or principal financial officer only served in that capacity for part of the year, disclosure would be required in respect to the officer’s total compensation for the entire year. In another change, the total compensation and positions (but not the names) of up to three additional individuals are also required to be disclosed in the narrative disclosure that accompanies the Summary Compensation Table, if such individuals had higher total compensation than any of the NEOs. Finally, under the Proposals, companies would no longer be permitted to exclude an officer from being a named executive officer on the basis that the officer received an unusually large amount of cash compensation that was not part of a recurring arrangement and was unlikely to continue. This is consistent with the new focus on total compensation. However, companies could continue to exclude executive officers from being named executive officers due to the officer receiving cash compensation attributed primarily to an overseas assignment. C. REVISED SUMMARY COMPENSATION TABLE One of the biggest changes contemplated under the new Proposals is a major reorganization of the Summary Compensation Table. The Proposals would:

• eliminate the current division between annual and long-term

compensation; • add a column for the disclosure of each named executive officer’s

“total compensation”; • for all equity grants made during the year, require disclosure of the fair

value of the grant as determined under Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (FAS 123R);

Observation: Since “total compensation” includes many more types of compensation than salary and bonus, the SEC proposal may make it more difficult to determine in advance the group of three most highly compensated officers. Also, since the total compensation number will now include the fair value of stock options, it is more likely that officers would exceed the $100,000 threshold.


• require that the Summary Compensation Table be supplemented by two new tables for the disclosure of specific terms relating to equity awards and performance-based awards;

• require that all material information regarding these three tables be further disclosed and explained in a narrative section that would accompany each of the tables; and

• retain the current requirement that disclosure be provided for each of the company’s last three fiscal years.

1. The New Table and its Requirements This is what the revised Summary Compensation Table would look like

under the Proposals:

SUMMARY COMPENSATION TABLE

Name and Principal Position

(a)

Year

(b)

Total ($)

(c)

Salary($)

(d)

Bonus($)

(e)

Stock Awards

($)

(f)

Option Awards

($)

(g)

Non-Stock Incentive Plan Compensation

($)

(h)

All Other Compensation

($)

(i)

PEO ____

PFO ____

A ____

B ____

C ____

Total Compensation Column Column (c) in the revised Summary Compensation Table would be used for disclosure of the named executive officers’ “total compensation” for each of the company’s last three fiscal years. The “total compensation” figure would be the sum of the figures appearing in columns (d) through (i) of the table. Unlike the current Summary Compensation Table, which provides for disclosure of certain amounts in terms of the number of underlying securities, the “total compensation” figure (like all figures in the revised Summary Compensation Table) would be disclosed as a dollar amount.

The SEC proposal clearly requires that all compensation of the named executive officers be disclosed (except, as discussed below, for perquisites with an aggregate value of less than $10,000), even if the same compensation is disclosed pursuant to another item (such as Item 404 regarding related party


transactions) or in another table (such as the Nonqualified Defined Contribution and Other Deferred Compensation table, discussed below). The SEC, recognizing that this could result in “double-counting” of compensation in certain cases, contemplates that companies would use footnotes and the narrative disclosure sections to identify and explain any duplicate reporting of compensation. Salary and Bonus Columns Columns (d) and (e) in the revised Summary Compensation Table would be used for disclosure of the named executive officers’ salary and bonus for each of the last three fiscal years. The Proposals would generally retain the current disclosure of salary and bonus in its existing form, with two important changes.

First, the Proposals would require that the amount of any salary, bonus or any other compensation that has been earned, but the receipt of which has been deferred until a future year, be reported in the appropriate column in the Summary Compensation Table and also disclosed in a separate footnote to the table. Unlike current Item 402, under which deferred amounts are only reported in separate footnotes when the named executive officer elects to defer the amounts, the Proposals would require separate footnote treatment for all deferred amounts, even if the deferral was not made at the election of the named executive officer. The Proposals contemplate that the amount disclosed in such a footnote would also generally be reflected as a “contribution” in the separate Nonqualified Defined Contribution and Other Deferred Compensation Plan Table (explained below). Corresponding footnotes to the Nonqualified Defined Contribution and Other Deferred Compensation Plan Table would identify the portions of the “contributions” and “earnings” entries that have been reported as compensation in the same-year Summary Compensation Table, as well as the portions of the “aggregate balance” entries that have been reported as compensation in prior-year Summary Compensation Tables.

Second, where the amount of salary or bonus cannot be determined as of the latest practicable date prior to the issuance of the Summary Compensation Table, the SEC proposal would require that this be disclosed in a footnote to the table, along with the expected date on which such salary or bonus would be determined. Once the amount of the salary or bonus has been determined or paid, the SEC proposal would require the company to file a Form 8-K which would disclose the salary or bonus amount along with a new total compensation figure including such amount. (In contrast, under the current rules, disclosure of

Observation: One item not included in the revised Summary Compensation Table is earnings on prior contributions to qualified defined contribution plans (such as 401(k) plans) while earnings on nonqualified deferred compensation are included. This difference probably reflects that there is no additional company cost related to earnings on a qualified defined contribution plan.


salary or bonus amounts that cannot be calculated as of the latest practicable date is typically delayed until the next Form 10-K or proxy statement is filed.) Stock Awards Column Column (f) of the revised table would require disclosure of the aggregate value of all stock-based awards that derive value based on the issuer’s equity securities or that provide for settlement in the form of the issuer’s equity securities. These awards include restricted stock, restricted stock units, phantom stock and phantom stock units, common stock equivalent units and other equity awards granted during the fiscal year that do not have “option-like features” (referred to hereafter as “non-option awards”). Both performance-based awards and awards that are not performance-based would be reported in this column.

The value to be reported for such non-option awards is determined based on their “fair value” on the date they were granted. Fair value must be computed in accordance with the valuation standards of FAS 123R. The reported value must also include the amount of any earnings on the awards, such as actual dividends or dividend equivalents, whether paid during the year or payable in a future year. Such dividends and other earnings must be separately quantified in a footnote.

A footnote would also be required to explain the assumptions used in determining fair value under FAS 123R. This could be accomplished by reference to the issuer’s financial statements or the footnotes to those statements, or by references to the discussion of those assumptions in the MD&A disclosure in the issuer’s annual report.

Option Awards Column Column (g) would report the aggregate fair value of stock options, stock appreciation rights (SARs) and similar option-like awards granted during the last fiscal year. Value is determined based on grant date fair value in accordance with the FAS 123R valuation standards, similar to non-option equity awards

Observation: The Proposals would require reporting of the full fair value of an award (measured as of its grant date), even though FAS 123R may allow that value to be ratably expensed over a specified period. The SEC has acknowledged that this approach creates a difference between when value is reported on financial statements and Item 402 disclosure, but has taken the position that full value reporting in the year of grant is “more consistent with the purposes of executive compensation disclosure.” This point is debatable and the SEC is likely to receive comments arguing that value should instead be reported in a manner consistent with expense recognition for financial accounting purposes. In addition, the SEC has invited comments on whether certain adjustments should be made to the FAS 123R valuation standards in determining value for purposes of this table.


reported in column (f). The FAS 123R valuation standards would apply even if the award is settled in cash so long as the amount of the cash payment is tied to the performance of the issuer’s stock. The value of all earnings on such awards, such as dividend equivalents, must be included in the reported value. If options or SARs were repriced or were “materially modified” during the year, the fair value of those awards as of the date of such repricing or modification also must be reported.

Non-Stock Incentive Plan Compensation Column Column (h) of the revised Summary Compensation Table would be used for disclosure of the named executive officers’ non-stock incentive plan awards. This column is similar to the “LTIP payouts” column in the current table, but would include annual and “short-term” awards (other than those included in the Bonus column) as well as “long-term” awards.

A “non-stock incentive plan award” is generally an award where the relevant performance measure under the incentive plan is not based on the price of the company’s equity securities or the award may not be settled by issuance of the company’s equity securities. This would include, for instance, cash bonuses based on individual performance factors. An “incentive plan” is generally any plan that provides for compensation intended to serve as an incentive for performance to occur over a specified performance period (without any distinction between “long term” incentive plans and incentive plans with performance periods lasting a year or less).

Unlike proposed columns (f) and (g) which would require disclosure of equity awards and option awards based on the grant-date fair value of such awards, disclosure of non-stock incentive plan awards in column (h) would be required to be made in the year in which the non-stock incentive plan award is earned (whether or not payment is actually made in such year). However, the SEC proposal would also require the material terms of all non-stock incentive plan awards to be disclosed in the year of grant in the separate Grants of Performance-Based Awards Table, discussed below.

Observation: The requirement that the full value of the repriced or modified option be reported in the table is another example of how the Proposals would often require reporting of a larger amount than would be required for financial accounting purposes. FAS 123R, by contrast, requires recognition of only the incremental additional cost of the modified award.


If non-stock incentive plan awards are earned and disclosed in one year, but actually paid in a subsequent year, then the amount of the payment in the subsequent year would not need to be disclosed anywhere in the revised Summary Compensation Table for the year of payment. Earnings (if any) on outstanding non-stock incentive plan awards would also be required to be disclosed under column (h). All Other Compensation Column The final column (i) in the revised Summary Compensation Table would be used to disclose any other compensation not required to be disclosed in any other column. The Proposals expressly state that the disclosure of all compensation would be required, the only exception being perquisites with an aggregate value of less than $10,000. Thus, column (i) would serve as a “catch-all” for any amounts of compensation not properly reportable in the other columns on the table. The SEC has purposefully designed this column to be broad in scope, to prevent the omission of amounts of compensation that technically might fall outside the categories covered elsewhere in the table. Although this has been required under the current summary compensation table, the SEC implies in the Proposals that current practices may not have been as comprehensive as the SEC intends. In addition, under the SEC proposal, any single item of compensation disclosed in column (i) with a value in excess of $10,000 would need to be separately identified by type and quantified in a footnote (except for perks which have a special rule). Example: In 2006, if an NEO received earnings on deferred compensation of $8,000, an increase in actuarial value of his defined benefit pension plan of $11,000, a company-provided country club membership worth $7,000 and no other perks, then the company would report $19,000 in column (i) for this officer, with a footnote that separately disclosed that $11,000 of this amount was due to an actuarial increase in the officer’s defined benefit pension plan. (The $7,000 country club membership does not need to be disclosed, since it is a perquisite

Observation: The Proposals do not make any specific recommendation regarding footnotes to column (h) of the revised Summary Compensation Table that would serve to identify and explain any non-stock incentive plan awards, the projected future value of which had already been disclosed in prior-year Grants of Performance-Based Awards Tables. Nevertheless, we would recommend that companies consider adding such footnotes to their revised Summary Compensation Tables, in order to avoid potential double-counting of non-stock incentive plan awards when earned.


and the aggregate value of all perquisites to this officer was less than $10,000 (see below). The Proposals discuss two specific items that would be disclosed in column (i) that differ from the current instructions: earnings on deferred compensation and increase in pension value. The Proposals would require all earnings on amounts deferred under nonqualified defined contribution and other deferred compensation plans (defined benefit deferred compensation plans are discussed below) to be disclosed in column (i). Under current Item 402, only earnings that are “above-market or preferential” are required to be disclosed. The SEC proposal broadens this to include all earnings, whether or not above-market or preferential, but would permit companies to identify in a footnote the portion of any earnings it determined to be above-market or preferential, provided it explained the criteria that led to this determination.

The Proposals also would require that the aggregate increase of the actuarial value of a named executive officer’s defined benefit plans be disclosed in column (i). This would include the increase of the actuarial value in both qualified and nonqualified defined benefit plans, commonly known as SERPs. This would represent a change from current Item 402, which does not require disclosure of the increase in value of defined benefit plans. Material information about the qualified and nonqualified defined benefit plans in which a named executive officer participates would also be required to be disclosed in a separate Retirement Plan Potential Annual Payments and Benefits Table, discussed below. In addition, the Proposals list a number of other items that would need to be disclosed in column (i), including:

• Amounts paid or accrued during the year in connection with any termination of employment or a change in control (post-employment compensation that is payable in the future is disclosed separately, as discussed in Section IV(c) below);

• Company contributions to defined contribution plans (such as matching contributions to a company 401(k) plan);

Observation: Earnings on nonqualified defined contribution and other deferred compensation plans would also be required to be disclosed in the Nonqualified Defined Contribution and Other Deferred Compensation Plan Table, discussed below. To avoid potential “double counting” of these amounts, we would recommend adding a footnote to column (i) that would identify any earnings amounts that were also being separately reported under the Nonqualified Defined Contribution and Other Deferred Compensation Plan Table.


• The dollar value of any insurance premiums paid by the company with respect to life insurance for the benefit of a named executive officer (the current requirement to disclose the value of remaining premiums on term life insurance in which the named executive has an interest in the cash surrender value would be eliminated);

• Tax gross-ups; and • The compensation cost associated with company securities purchased

at a discount. Perks The SEC has been increasingly focused on the current disclosure of perquisites and other personal benefits (“perks”) for several years. An example is the SEC’s 2005 enforcement action involving Tysons Foods. The treatment of perks in the Proposals makes it clear that the SEC is looking for substantially expanded disclosures of perks. In the preamble, the SEC notes the importance of this subject to many investors. There are two significant aspects to the treatment of perks in the Proposals. One is a substantial reduction in the thresholds for disclosure. The other is the SEC’s interpretative advice about perks. To determine when disclosure is required, there are three important points:

• Perks would be included in the total dollar figure in the “All Other Compensation” column (column (i) of the revised Summary Compensation Table) if the perks have a total value of $10,000 or more (down from a threshold of the lesser of $50,000 or 10% of annual salary and bonus).

• If the $10,000 threshold is met, all perks would have to be identified by type in a footnote.

• In the footnote, the amount of the perk would have to be shown if the perk was valued at the greater of $25,000 or ten percent of the total perks (currently required only if the perk is 25% of total perks).

The identification of a perk generally would have more specificity involved than is common practice today. For example, a “travel and entertainment” category in a footnote could not cover different company-financed benefits, such as theater tickets and personal travel expenses. The other clear consequence of the new rules would be an expansive reach for what constitutes a perk. The SEC does not provide a definition of a perk but provides interpretative advice that offers two guiding principles to identify whether a “benefit” is a “perk”:

• A benefit is not a perk “if it is integrally and directly related to the performance of the executive’s duties,” such as an office, secretarial support, or a reserved parking space.


• Otherwise, a benefit is a perk 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.”

The SEC lists a number of benefits that it considers to be perks, including club memberships not used exclusively for business, personal travel using company vehicles, relocation assistance, security provided during personal travel, commuting expenses, and discounts on the company’s products or services not generally available to employees on a non-discriminatory basis. In particular, the SEC notes that a company requirement for security purposes that an executive use company aircraft for personal travel does not affect the treatment of that travel as a perk. The list of benefits that are clearly not perks to the SEC is much smaller, including travel to business meetings, business entertainment, and security during business travel. The Proposals would not change the current method of valuing perks. The value would be the aggregate incremental cost to the company. Federal income tax treatment would not control either the treatment of a benefit as a perk or the amount of the perk for disclosure purposes.

Transition Rule The Summary Compensation Table would continue to provide information on a rolling three-year period: the last completed fiscal year and the two prior years. However, there would be a three-year transition for the new table format. In 2007, only one year of compensation would be reported in the table. A company would not be required to restate any prior year compensation disclosure to comply with the new requirements.

2. Narrative Disclosure

The Proposals would require companies to provide additional narrative disclosure of any material factors necessary to an understanding of the information disclosed in the Summary Compensation Table. The Proposals

Observation: The valuation of certain perks has drawn much attention in recent years. For example, company practices vary widely in valuing personal use of corporate aircraft under the aggregate incremental cost method. Comments on the Release may request that the SEC suggest valuation standards that would be required for this purpose.

Observation: While a company could voluntarily include the prior two years on the 2007 disclosure, the company would want to ensure that the disclosure for the prior years meets all of the new requirements.


mention several types of “material factors” that might be suitable for the narrative disclosure section:

• the terms of a named executive officers’ employment agreements, if such terms would be required for an understanding of items disclosed in the table (the SEC specifically states that the mere filing of employment agreements may be insufficient to meet this requirement);

• a description of any repricings or other material modifications (such as extensions of exercise periods, changes in vesting or forfeiture conditions, changes to applicable performance criteria, etc.) to any outstanding options or other stock-based awards that occurred during the year;

• any assumptions material for determining the increase in actuarial value of a defined benefit plan or the earnings under a nonqualified defined contribution plan.

Narrative disclosure would also be required in respect to the Grants of Performance-Based Awards Table and the Grants of All Other Equity Awards Table. These narrative disclosure requirements are described below with respect to each of these tables.

3. The Supplemental Annual Compensation Tables The new Summary Compensation Table would be accompanied by two additional tables, referred to in the Proposals as “supplemental tables.” The first table would provide additional information concerning the equity and non-equity awards that are performance-based and for aggregate values have been reported in columns (f), (g) and (h) of the Summary Compensation Table. The second supplemental table would describe all equity awards that are not performance-based.

The SEC considered it necessary to include these tables because the revised Summary Compensation Table only includes the value of awards and not other key features, such as the number of shares underlying those awards. The supplemental tables would be required to have accompanying footnote and narrative disclosure, as discussed below. The Grants of Performance-Based Awards Table would include information on all performance-based awards that could be payable in the future. The awards covered would include incentive plan awards not payable in stock, stock-based incentive plan awards and awards of options, restricted stock and other equity where payment would be performance-based.


GRANTS OF PERFORMANCE-BASED AWARDS

Estimated future payouts

Name

(a)

Performance Based Stock and Stock-based Incentive Plans: number of shares, units or other rights

(#)

(b)

Performance Based Options: number of securities underlying Options

(#)

(c)

Non-Stock Incentive Plan Awards: number of units or other rights

(#)

(d)

Dollar amount of consideration paid for award, if any

($)

(e)

Grant Date for Stock or Option Awards

(f)

Performance or other period until vesting or payout and Option Expiration Date

(g)

Threshold ($) or (#)

(h)

Target ($) or (#)

(i)

Maximum ($) or (#)

(j)

PEO PFO A B C

The table is similar in format to the current LTIP table, but requires a much broader array of information. The SEC has again turned to FAS 123R to define performance-based awards as awards subject to either a performance condition or a market condition. In general, a performance condition is a target defined by the employer’s own operations or activity (such as an internal rate of return). A market condition is based on the issuer’s share price, including comparison to an index. The performance condition or market condition can affect any element of the award, including vesting, exercise price or amount payable. The table would cover only the named executive officers. Each separate grant to a named executive officer would be shown on a separate line. There would be up to nine columns of substantive information as shown above: (b) Number of shares or units of performance-based stock or equity rights other than options. (c) Number of performance-based options and SARs. (d) Number of units or dollars granted under any nonstock plan. (e) Dollar amount, if any, paid by the named executive officer for the award. (f) Grant date for stock or option. (g) Performance or other time period until payout and the option/SAR expiration date. (h)-(j) Dollar value of the estimated future payout or estimated number of shares. This may be presented as threshold, target and maximum amounts. The narrative disclosure following the table would provide significant information about each award. In addition to a general description of the formula or criteria to be applied in determining the amounts payable, the disclosure may need to cover such information as:

• the plan under which the award is made;


• any vesting schedule, • whether dividends would be paid and information on the dividend rate,

and • a description of the performance-based conditions and any other material

conditions applicable to the award (but no confidential information), Repriced or materially modified options that are performance-based would be disclosed under this table as a new grant. The entire value would be shown, without any reduction for previously disclosed value of the old option. Special rules for tandem performance – nonperformance grants would require reporting of each element only once. The Grants of All Other Equity Awards Table would contain information concerning equity awards that are not disclosed in the Grants of Performance-Based Awards table because they are not performance-based or subject to a market condition (as those terms are defined for purposes of FAS 123R). As a result, the table would describe key aspects of stock options, SARs, restricted stock and restricted stock units, phantom stock and other equity awards granted during the past fiscal year that do not have any performance conditions attached to them.

GRANTS OF ALL OTHER EQUITY AWARDS

Name

(a)

Number of Securities Underlying

Options Granted

(#)

(b)

Exercise or Base Price

($/SH)

(c)

Expiration Date

(d)

Number of Shares of Stock or

Units Granted

(#)

(e)

Vesting Date

(f)

Grant Date

(g) PEO PFO A B C

Separate lines are required to report information for each award that was made during the year to a named executive officer. However, option grants can be aggregated onto a single line so long as they all have the same exercise price and expiration date. In a departure from the formalistic requirements of the current rules, the new rules would require that the table be modified to add an additional column after column (c) if the exercise price of an award is less than the fair market value of the underlying security on the date of grant. In such a circumstance, the value of the underlying security on the grant date would need to be reported in the new column.


As noted above, additional footnote and narrative disclosure would be required to accompany the table. First, the other material terms of each award would need to be described in a footnote for each award. This includes a description of when an option is first exercisable, whether there are any tandem awards (and if so, the value of the award and the number of securities under the tandem award), reload features, tax-reimbursement provisions and provisions which would accelerate or waive exercisability conditions (such as in the event of a change in control). Second, any provision which could cause the exercise price of an option to be lowered (other than under a general anti-dilution provision) would be required to be described in either a footnote or related narrative disclosure.

Finally, narrative disclosure would be required to describe how any option, SAR or other equity-based award was repriced or materially modified. Examples of material modifications that could trigger such disclosure include extension of exercise periods, changes to vesting conditions and changes in how dividends or dividend equivalents are treated under the award. Certain types of repricings do not require disclosure. These include (1) repricings that occur through a pre-existing formula or plan provision that results in periodic adjustment of the exercise price of an option or SAR, (2) a general anti-dilution provision in the award or in the plan under which it was granted or (3) changes to the award as a result of a recapitalization or similar transaction that affects all holders of that class of securities. D. NEW EQUITY COMPENSATION TABLES In an expansion of the existing disclosure requirements, the Proposals would require disclosure of the all of the equity compensation awards held by a named executive officer at the end of the fiscal year and the amount of benefits that had been realized under such awards during the year. These two new tables replace the “Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values” table under the current rules, and expand upon the types of information currently contained in that table. The Outstanding Equity Awards at Fiscal Year End Table would require disclosure of each named executive officer’s equity awards as of the end of the fiscal year. It would include both awards that are subject to performance conditions and non-performance-based awards. The new table would look as follows:

Observation: Discounted stock options are generally unattractive due to adverse federal income tax and financial accounting treatment. Consequently, it is not expected that many issuers would need to modify the table to reflect how the exercise price differed from the fair market value of the stock at the time of grant with one possible exception. In the instructions, the fair market value for this purpose would be the closing market price on the date of grant. If any other price were used for an option (such as an average or the closing on the date prior to grant), disclosure of a “discount” might be triggered.


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Name

(a)

Number of securities underlying unexercised Options

(#) Exercisable/ Unexercisable

(b)

In-the-money amount of unexercised Options

($) Exercisable/ Unexercisable

(c)

Number of shares or units of Stock held that have not vested

(#)

(d)

Market value of nonvested shares or units of Stock held that have not vested

($)

(e)

Incentive Plans: Number of nonvested shares, units or other rights held

(#)

(f)

Incentive Plans: Market or payout value of nonvested shares, units or other rights held

($)

(g) PEO PFO A B C

As with the Summary Compensation Table and supplemental tables described above, specific footnote disclosure would be required for this table. First, a footnote would need to explain the expiration dates of options, SARs and similar option-like awards, separately identifying those awards that are exercisable and those awards that are not yet exercisable. If an expiration date occurs after the fiscal year to which the disclosure relates but before the disclosure is made, the footnote would need to state whether the option had been exercised or expired. This reflects the SEC’s desire to make the proxy disclosure more current. Footnote disclosure would also be required for columns (e), (f) and (g) to report the vesting dates for non-option awards (such as restricted stock) and for awards under incentive plans. Vesting would need to be separately identified by award. The Option Exercises and Stock Vested Table would require disclosure for each NEO of the options and SARs that were exercised during the year, as well as other types of equity awards that vested during the year, such as restricted stock and restricted stock units. A separate “options” line and “stock” line in the table distinguishes between these types of awards.

The new table would look as follows:


OPTION EXERCISES AND STOCK VESTED

Name of Executive

Officer

(a)

Number of Shares Acquired on

Exercise or Vesting (#)

(b)

Value Realized Upon Exercise or

Vesting ($)

(c)

Grant Date Fair Value Previously Reported in Summary Compensation Table

($)

(d)

PEO - Options Stock

PFO - Options

Stock A - Options

Stock

B - Options

Stock

C - Options

Stock

The value reported in column (c) for the shares received upon exercise or which vested during the year is based on the market value of those shares at the time of exercise or vesting, as applicable. If any other consideration is paid at the time of exercise or vesting (such as a tax reimbursement payment), that amount is not reported in this table but must instead be included in the All Other Compensation (column (i)) of the Summary Compensation Table).

The last column of the table helps compare the FAS 123R fair value of the award which was previously reported in the Summary Compensation Table to the market value of the shares realized by the named executive officer under the award. E. TABLES FOR POST-EMPLOYMENT COMPENSATION The Proposals include significant revisions to the manner in which post-employment compensation is currently disclosed. Under the Proposals, the current pension plan table and narrative disclosure would be replaced by a new Retirement Plan Potential Annual Payments and Benefits Table. A second new table, the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table, would also be added. Finally, the proposal would also require narrative and quantitative disclosure about arrangements under which named executive officers could receive payments upon termination of employment or a change in control.


The Retirement Plan Potential Annual Payments and Benefits Table would replace the current disclosure under Item 402, which consists of a general table showing estimated benefits payable upon retirement at set compensation levels and years of service. The new table would disclose estimated annual retirement payments for each named executive officer for each defined benefit or actuarial plan (both qualified and nonqualified) in which the officer participates, followed by narrative disclosure.

RETIREMENT PLAN POTENTIAL ANNUAL PAYMENTS AND BENEFITS

Name

(a)

Plan Name

(b)

Number of years credited service

(#)

(c)

Normal retirement age

(#)

(d)

Estimated normal retirement annual benefit

($)

(e)

Early retirement age

(#)

(f)

Estimated early retirement annual benefit

($)

(g) PEO PFO A B C

The estimated annual benefit at normal retirement (and, if applicable, early retirement) would be based on the named executive officer’s current election as to the form of benefit payment (such as a type of annuity or a lump sum) and current salary, carried forward to the officer’s early or normal retirement date. Each separate plan would be reported on a separate line. Early and normal retirement ages would be as defined in the relevant plan. If years of service credited under the plan differed from the officer’s actual years of service with the company, the difference would be required to be noted and any additional benefit resulting from any additional credited years of service would be required to be quantified in a footnote to the table. The table would be required to be supplemented by additional narrative disclosure, in which material factors necessary to an understanding of each plan would need to be described. The SEC indicated that these “material factors” might include, for instance:

• All material terms and conditions of each disclosed plan, including benefit formulas, eligibility standards, and early retirement provisions;

• If a lump sum option is available, the amount of the lump sum that would have been payable to the named executive officers as of the end of the last fiscal year, including the valuation method and any material assumptions used to calculate the lump sum;


• The specific elements of compensation used in determining the named executive officers’ benefits;

• If a single officer participates in more than one plan, the reason for each plan; and

• Any company policies regarding the crediting of additional years of service.

The Nonqualified Defined Contribution and Other Deferred Compensation Plan Table would disclose employer and employee contributions to, earnings under, and aggregate balances of nonqualified defined contribution plans and other deferred compensation plans, as follows:

NONQUALIFIED DEFINED CONTRIBUTION

AND OTHER DEFERRED COMPENSATION PLANS

Name

(a)

Executive contributions

in last FY ($)

(b)

Registrant contributions

in last FY ($)

(c)

Aggregate earnings in

last FY ($)

(d)

Aggregate withdrawals/ distributions

($)

(e)

Aggregate balance at last

FYE ($)

(f)

PEO PFO A B C

Unlike the current Item 402, all earnings would be disclosed, regardless of whether they were determined to be above-market or preferential. A company would use footnotes to identify and explain portions of “contributions” and “earnings” entries that were also being reported on the same-year Summary Compensation Table, as well as to identify portions of the “aggregate balance” entry that had been reported on Summary Compensation Tables for the named executive officer in prior years.

The Nonqualified Defined Contribution and Other Deferred Compensation Table would also be supplemented by additional narrative disclosure, in which any material factors necessary to an understanding of the table would be disclosed. The SEC listed several examples of such material factors, including:

Observation: Because of Section 409A of the Internal Revenue Code, many companies froze old nonqualified retirement plans, such as SERPs, as of 2004 and started new plans for 2005 and later years. These plans would require separate lines on the table and separate narrative disclosure of the terms. If these plans are merged, the separate lines could be eliminated but not the separate narrative descriptions of those plans.


• Types of compensation that may be deferred and any limitations on the amounts of compensation that may be deferred;

• The measures for determining earnings under the plan, including the frequency and manner in which such measures may be changed, with quantification of any earnings measures applicable during the last fiscal year; and

• Terms regarding payouts, withdrawals and distributions.

Other Potential Post-Employment Payments Under the Proposals, potential post-employment compensation that is or may become payable upon an actual or constructive termination of employment or a change in control of the company would be required to be disclosed separately in narrative format. The current $100,000 threshold for disclosure for post-employment payable compensation would be eliminated and the current disclosure rules would be expanded to include disclosure of the following:

• The specific circumstances that would trigger termination or change-in-

control payments; • The estimated payments and benefits that would be provided in each

circumstance, including the form and the source of such payments; • Any specific factors used to determine the payment and benefit levels; • Any material conditions on receipt of payments, including the type and

duration of any restrictive covenants and provisions regarding the waiver and breach of these covenants;

• The amounts of any related tax gross-ups; and • Any other material factors necessary for understanding the termination

and change-in-control arrangements.

Observation: Section 409A of the Internal Revenue Code defines “nonqualified deferred compensation plan” very broadly. Section 409A applies to all nonqualified arrangements under which compensation is promised in one year and payable in a future year, whether such arrangements are written or unwritten, or whether they are broad-based or cover only a single individual. Companies will want to consider carefully the potential disclosure of any arrangement subject to Section 409A.


Although the current $100,000 disclosure threshold for potential post- employment payments has been eliminated, there is still a $10,000 disclosure threshold for the aggregate amount of any post-employment perquisites. Quantitative disclosure regarding estimated payments and benefits is required even where uncertainties exist as to the amounts that may be payable. In the case of any uncertainty, the company would be required to make reasonable estimates regarding the amount of payments and benefits and to disclose the material assumptions underlying such estimates.

F. SMALL BUSINESS ISSUERS The Proposals would make amendments to Item 402 of Regulation S-B for small business issuers, although the disclosure requirements would be substantially lower. Small business issuers would be required to provide only the Summary Compensation Table and the Outstanding Awards at Fiscal Year-End Table, with related narrative disclosures. Importantly, a Compensation Disclosure and Analysis (CD&A) would not be required.

Observation: The narrative disclosure section accompanying the Summary Compensation Table would describe employment agreements, which frequently contain termination and change-in-control provisions. To coordinate with these disclosures, disclosure of termination and change-in-control provisions in employment agreements should be made in the narrative disclosure section accompanying the Summary Compensation Table only when termination or change-in-control compensation under these provisions has been paid during the year and is being disclosed in the appropriate place in the Summary Compensation Table (generally, column (i)). Where the termination or change-in-control provision has not yet been triggered, the disclosure regarding it should be made in the narrative section describing potential post-employment payments.

Observation: A number of variables need to be taken into account to calculate the value of certain future payments. For example, the valuation of tax gross-up provisions require assumptions about future tax rates, the value of future benefits and how certain aspects of the excess parachute tax rules would apply to those benefits. The SEC is likely to receive comments asking for some relief from reporting the value of payments which depend on numerous uncertain variables. However, it is not clear whether the SEC will be receptive to providing such special relief.


The disclosures would be for only two fiscal years and for a maximum of four NEOs. The principal executive officer, principal financial officer and up to two other officers would be covered. Other footnote and narrative requirements would be simplified. G. DIRECTOR COMPENSATION TABLE Under the Proposals, disclosure concerning director compensation would be governed by S-K Item 402(l) (S-B Item 402(f) for small business issuers). Companies would be required to provide both tabular and narrative disclosure of all compensation paid to or earned by a director for service as a director. Tabular disclosures would be presented in a new Director Compensation Table in the format shown below. Although similar to the Summary Compensation Table, the Director Compensation Table would provide information for the last completed fiscal year only.

Name

Total ($)

Fees earned

or paid in cash ($)

Stock

Awards ($)

Option Awards

($)

Non-Stock Incentive Plan Compensation

($)

All Other

Compensation ($)

The All Other Compensation column of the proposed Director Compensation Table would include, but not be limited to:

• perks and other personal benefits if they total greater than $10,000; • earnings on compensation that is deferred on a basis that is not tax-

qualified; • the compensation cost (calculated in accordance with FAS 123R) for

any security purchased from the company or its subsidiary at a discount from the market price on the date of purchase, unless the discount is generally available to all security holders or to all salaried employees of the company;

• annual company contributions to vested and unvested defined contribution and other deferred compensation plans;

• awards under director legacy or charitable awards programs; and • the dollar value of any insurance premiums paid by, or on behalf of, the

company for life insurance for the director’s benefit. In addition to disclosures specifically required by the columns in the Director Compensation Table, companies would be required to provide footnote disclosure of the outstanding equity awards at fiscal year end for each director. This disclosure would be similar to the existing disclosures required in the Outstanding Equity Awards at Fiscal Year-End table for named executive officers.


Directors could be grouped in a single row of the table if all elements and amounts of compensation are identical. Following the table, narrative disclosure would describe any material factors necessary to an understanding of the table such as a breakdown of types of fees. H. PLAIN ENGLISH REQUIREMENT The Proposals would require that disclosures under Items 402, 403, 404 and 407 be provided in “plain English” when the disclosure is included in reports required to be filed under Exchange Act Sections 13(a) or 15(d). The “plain English” requirement would be embodied in Exchange Act Rules 13a-20 and 15d-20. The SEC underscored the “plain English” principles that would apply, including the following:

• present information in clear, concise sections, paragraphs and sentences; • use short sentences; • use definite, concrete, everyday words; • use the active voice; • avoid multiple negatives; • use 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, • in designing the presentation of the information, include pictures, logos,

charts, graphs, schedules, tables or other design elements. I. CORPORATE GOVERNANCE DISCLOSURE The Proposals would consolidate the disclosure requirements regarding director independence and related corporate governance disclosure requirements under a single disclosure item. Item 407 of Regulations S-K and S-B would update disclosure requirements regarding director independence to reflect current requirements and listing standards. The Proposals require identification of the independent directors of the company (and, in the case of disclosure in proxy or information statements, nominees for director) under the definition for determining board independence applicable to it. The Proposals would also require disclosure of any members of the compensation, nominating and audit committee that the company had not identified as independent.

Observation: No disclosure is required in the director compensation discussion of any amounts paid to a named executive officer that are disclosed in the Summary Compensation Table with a footnote indicating the amounts that reflect compensation for services as a director.


An issuer that has adopted definitions of independence for directors and committee members would disclose whether those definitions are posted on the company’s Web site, or include the definitions as an appendix to the company’s proxy materials at least once every three years or if the policies have been materially amended since the beginning of the company’s last fiscal year. Further, if the policies are not on Web site or in the current proxy statement, the company would have to disclose in which of the prior fiscal years the policies were included in the proxy statement. For each director or director nominee identified as independent, any transactions, relationships or arrangements not disclosed under the Related Party disclosure requirements would be disclosed if they were considered by the board of directors in determining that the applicable independence standards were met. This independence disclosure would be required for any person who served as a director of the company during any part of the year, 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 would not continue after the meeting. The audit committee charter would no longer be required to be delivered to security holders if it is posted on the company’s Web site. The Proposals require similar disclosure regarding compensation committees as is currently required regarding audit and nominating committees of the board of directors. The company would also be required to describe the committee’s processes and procedures for the consideration and determination of executive and director compensation including a number of proposed specified items. The Proposals would include the disclosure currently required regarding compensation committee interlocks and insider participation in compensation decisions. For registrants other than registered investment companies, the Proposals would eliminate an existing proxy disclosure requirement about directors who have resigned or declined to stand for re-election (now covered by Form 8-K). For registered investment companies, which do not file Form 8-K, the requirement would be moved to Item 22(b) of Schedule 14A. Also, the Proposals would combine various proxy disclosure requirements regarding board meetings and committees into one location. Substantially similar disclosure requirements for related party transactions and promoters would apply for small business issuers except the requirement to disclose policies and procedures for reviewing related party transactions would not be included; and the disclosure threshold would be the lesser of $120,000 or


one percent of the average of the small business issuer’s total assets for the last three completed fiscal years. Committee disclosure for small business issuers would also be similar to that for other issuers, except that it would not require disclosure regarding compensation committee interlocks and insider participation in compensation decisions. J. RELATED PERSON DISCLOSURES The Proposals would also revise the disclosure rules regarding related party transactions and director independence and board committee functions in Item 404. The Proposals would modify the $60,000 threshold for disclosure to $120,000 to adjust for inflation. Principles Based Disclosure

The Proposals would change the approach to related party disclosure by basing the requirement upon a general statement of the principle for disclosure, followed by specific disclosure requirements and instructions. The intent is to have a more principles-based disclosure and eliminate some of the bright lines for disclosure. A company would disclose based on whether the related person had, or would have, a direct or indirect material interest in the transaction. The materiality of any interest would continue to be determined on the basis of the significance of the information to investors in light of all the circumstances and the significance of the interest to the person having the interest. The relationship of the related persons to the transaction, and with each other, and the amount involved in the transaction would be among the factors to be considered in determining the materiality of the information to investors.

Indebtedness

The Proposals would eliminate the current distinction between indebtedness and other types of related person transactions. As a result, the Proposals would change some situations in which indebtedness disclosure is required. First, disclosure of indebtedness transactions would be required with regard to all related persons covered by the related person transaction disclosure requirement, including significant shareholders. Second, the Proposals would require disclosure of all material indirect interests in indebtedness transactions of related persons, including significant shareholders and immediate family members.


Definitions The operation of the Proposals would depend upon definitions of the terms “transaction,” “related person” and “amount involved”. The term “transaction” would have a broad scope and would include, but not be limited to, any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships. The term “transactions” would include indebtedness and guarantees of debt.

The term “related person” is substantially the same list of persons as is covered by the current rules, except that the proposed definition would include stepchildren, stepparents, and any person (other than a tenant or employee) sharing the household of a related person. The proposed definition of “amount involved” would clarify that the amounts reported must be in dollars even if the amount was set or expensed in a different currency. Under the Proposals, the term “amount involved” would mean the dollar value of the transaction, or series of similar transactions, and would include:

• 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; and

• in the case of indebtedness, the largest aggregate principal 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.

Description of transaction The company would be required to describe the transaction, including:

• the person’s 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 dollar value of the amount involved in the transaction and of the related person’s interest in the transaction. Registrants would 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.


The Proposals would require disclosure for all transactions involving the company and a person (other than a significant shareholder or 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. In the case of significant shareholders, disclosure would be required as to a transaction which takes place after the person becomes a significant shareholder or which takes place before that time but continues after the person becomes a significant shareholder. As is currently the case, disclosure would be required for three years in registration statements filed pursuant to the Securities Act or the Exchange Act. The Proposals eliminate the current Section 16(b) disclosure requirement. Exceptions The Proposals would provide exceptions for certain categories of transactions. These exceptions include compensation to executive officers and directors, subject to the satisfaction of certain conditions. As is the case now, disclosure would be reduced for certain types of indebtedness and there would be exceptions for situations where the person’s interest in the transaction is indirect and minimal.

Procedures for Approval of Related Person Transactions The Proposals would require a description of the material features of the company’s policies and procedures for the review, approval or ratification of reportable transactions with related persons. While the material features of such policies and procedures would vary depending on the particular circumstances, examples of such features may include:

• 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.

The Proposals would also require identification of any transactions required to be reported where the company’s policies and procedures did not require review, approval or ratification or where such policies and procedures were not followed. Promoters

The Proposals would 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. The proposed


disclosure requirements are consistent with those currently required regarding promoters. The SEC is also proposing to require 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. Small Business Issuers Substantially similar disclosure requirements for related party transactions and promoters would apply for small business issuers except the requirement to disclose policies and procedures for reviewing related party transactions would not be included; and the disclosure threshold would be the lesser of $120,000 or one percent of the average of the small business issuer’s total assets for the last three completed fiscal years.

Committee disclosure for small business issuers would also be similar to that for other issuers, except that it would it would not require disclosure regarding compensation committee interlocks and insider participation in compensation decisions.

K. FORM 8-K CHANGES The Proposals would amend certain aspects of Form 8-K. First, employment compensation arrangements would no longer be required to be reported under Item 1.01 (Entry into a Material Definitive Agreement). Those matters would be covered under a modified, broader Item 5.02. Second, Item 1.02 (Termination of a Material Definitive Agreement) would be similarly amended to exclude employment compensation arrangements. The SEC has explained that the reason for these changes is due to concerns that Form 8-K disclosures do not appear always to be “unquestionably or presumptively material.” The changes to Items 1.01 and 5.02 are intended to require real-time disclosure of employee compensation events that more clearly satisfy this materiality standard.

A new Item 5.02(e) of Form 8-K would capture information regarding material employment compensation arrangements involving named executive officers that currently fall under Item 1.01. The new Item 5.02(e) would:

• expand the information regarding retirement, resignation or termination (a Item 5.02 triggering event) to include all NEOs for the company’s previous fiscal year, whether or not included in the list of officers currently specified in Item 5.02;

• 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 an Item 5.02 triggering event, or any grant or award to any covered person, or modification thereto, under any such plan, contract or arrangement in connection with any such event;


• in respect of the principal executive officer, the principal financial officer, or any named executive officer for the company’s previous fiscal year, expand the disclosure items to include a brief description of any material new compensatory plan, contract or arrangement, or new grant or award, and any material amendment to any compensatory plan, contract or arrangement (or any modification to a grant or award), whether or not that occurrence is in connection with an Item 5.02 triggering event. Grants or awards (or modifications thereto) would not be required to be disclosed if they are consistent with the terms of previously disclosed plans or arrangements and are disclosed in the next required Item 402 disclosure; and

• add a requirement for disclosure of salary and bonus for the most recent fiscal year that was not available at the latest practicable date in connection with the last Item 402 disclosure.

The SEC has emphasized that for Item 5.02(e) they are proposing that a brief description of the specified matter be included, noting that “some companies have included disclosure that resembles an updating of the disclosure required under current Item 402 of Regulation S-K.” The SEC is “seeking a disclosure that informs investors of specified material events and developments.”

The Proposals also would:

• extend to the new Item 5.02(e) the limited safe harbor under Section 10(b) and Rule 10b-5 currently applicable to other specified items under Form 8-K and excludes compliance with Item 5.02(e) from the Form S-3 eligibility requirements;

• permit companies to omit the Item 1.01 heading in a Form 8-K that discloses any other Item, so long as the substantive disclosure required by Item 1.01 is included in the Form 8-K; and

• revise the exhibit requirements under Form 20-F to require a foreign private issuer to file a copy of an employment agreement or compensatory plan with management or directors only when the foreign private issuer is required to publicly file the plan (or a portion of it) in its home country or has otherwise publicly disclosed the plan.

The proposed changes that would require most executive compensation and related party disclosures be made in “plain English” do not apply to the proposed disclosures under Item 5.02(e).

L. TRANSITION PROVISIONS/EFFECTIVE DATES The SEC has proposed that the new rules and amendments become effective following publication of the final adopting release in the Federal Register for:


• Forms 10-K and 10-KSB for fiscal years ending 60 days or more after publication;

• Forms 8-K for triggering events that occur 60 days or more after publication;

• Securities Act and Investment Company Act registration statements (including post-effective amendments) and Exchange Act registration statements that become effective 120 days or more after publication; and

• proxy statements that are filed 90 days or more after publication.

The Proposals would not require companies to “restate” compensation or related person transaction disclosure for fiscal years for which they previously were required to apply the current rules. Instead, the proposed Summary Compensation Table and transactions with related persons required by proposed Item 404(a) of Regulation S-K would be required only for the most recent fiscal year. This would result in phased-in implementation of the proposed Summary Compensation Table amendments and proposed Item 404(a) disclosure over a three-year period for Regulation S-K companies, and a two-year period for Regulation S-B companies.

M. ACTION ITEMS

The SEC intends for the new rules to be effective for the 2007 proxy season and they would be in effect sooner for other filings. Companies will want to start now to evaluate their compensation policies, procedures and structures in light of the new requirements. In particular, the CD&A will require a detailed, comprehensive, and well thought-out analysis of the purposes behind a company’s executive compensation practices, and how its individual plans and arrangements are designed to satisfy such purposes. Companies should begin drafting this CD&A well in advance of the 2007 proxy filing season to have sufficient time to gather the necessary information and perform the requisite comprehensive analysis. We anticipate that the initial preparation of the CD&A will require the involvement of many different constituencies (e.g., human resources, the company’s compensation committee, the committee’s compensation consultant(s), the company’s auditors, its internal and external lawyers, etc.). In implementing their compensation decisions for 2006, companies should be mindful of how such decisions will be disclosed in 2007 proxies under these new rules. Companies should consider documenting how they have addressed some of the specific issues that will need to be discussed in the CD&A and disclosed in the narrative discussions that follow the Summary Compensation table and other tables.


Also, because the final rules would take effect relatively soon after the final rule release, companies should be considering, and perhaps even implementing, changes now that take into account the proposed rules and amendments. Companies will need to start early to gather and analyze all the required information (for instance, identifying perks that need to be disclosed, quantifying amounts of compensation payable under severance or change-in-control arrangements, etc.). Companies that take a wait-and-see approach may not have time to make required or desired changes (e.g., changes to the compensation committee’s charter or its process for setting executive compensation) before the first disclosures would be required. The Proposals may have some impact on proxies and other filings in 2006. In particular, the SEC’s interpretative guidance on what personal benefits constitute a perk should be applied to current disclosures. This may result in larger numbers showing in 2006 proxies. Finally, some companies may want to consider voluntarily adopting selected aspects of the proposed new disclosure requirements for inclusion in this year’s proxy statement. The SEC has indicated that it would be permissible, for instance, to add a “total compensation” column to the existing summary compensation table in this year’s proxy statement, or to use other columns or tables from the Proposals (such as the directors’ compensation table) without replacing any of the existing required disclosures. McGuireWoods is available to assist companies, compensation committees and others to interpret and apply the Proposals. For assistance with respect to the Proposals, you can contact: Steven D. Kittrell Partner 1050 Connecticut Avenue N.W., Suite 1200 Washington, DC 20036-5317 T: 202.857.1701 [email protected] Jeffrey R. Capwell Partner 100 North Tryon Street, Suite 2900 Charlotte, North Carolina 28202-4011 T: 704.353.6256 [email protected] D. Michael Jones Partner 901 East Cary Street Richmond, Virginia 23219-4030 T: 804.775.1181 [email protected]

David N. Oakey Partner 901 East Cary Street Richmond, Virginia 23219-4030 T: 804.775.1022 [email protected] David H. Pankey Partner 1050 Connecticut Avenue N.W., Suite 1200 Washington, DC 20036-5317 T: 202.857.1716 [email protected] Jane Whitt Sellers Partner 100 North Tryon Street, Suite 2900 Charlotte, NC 28202-4011 T: 704.373.8967 [email protected]


James M. Anderson, III Partner 901 East Cary Street Richmond, Virginia 23219-4030 T: 804.775.1044 [email protected] James C. Williams Of Counsel 77 West Wacker Drive, Suite 4100 Chicago, Illinois 60601-1815 T: 312.641.3025 [email protected] Karl M. Strait Partner 901 East Cary Street Richmond, Virginia 23219-4030 T: 804.775.1133 [email protected]

La Tisha O. Chatman Associate 101 West Main Street, Suite 9000 Norfolk, Virginia 23510-1655 T: 757.640.3732 [email protected] G. William Tysse Associate 1050 Connecticut Avenue N.W., Suite 1200 Washington, DC 20036-5317 T: 202.857.1730 [email protected]

A COMPREHENSIVE SUMMARY OF THE SEC’S REVAMPED EXECUTIVE COMPENSATION DISCLOSURE RULES · 2006. 2....

Documents

Transcript of A COMPREHENSIVE SUMMARY OF THE SEC’S REVAMPED EXECUTIVE COMPENSATION DISCLOSURE RULES · 2006. 2....