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January 18, 2006Client Alert

SEC Proposes to Change Rules Relating to Executive Compensation Disclosure

Yesterday the Securities and Exchange Commission voted to publish for comment proposed amendments to disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters. These proposed rules would primarily impact the disclosure required in annual proxy statements, annual reports and registration statements.

The proposed rules themselves have not yet been published, so this summary is based on the release made by the SEC
following yesterday's open meeting. The release can be found at www.sec.gov/news/press/2006-10.htm.

The proposed rules will not become final in time to apply to the current proxy season for public companies with December 31 fiscal years. We do expect there will be extensive comments during the 60-day comment period. In any event, the proposed rules provide an indication of the SEC's thinking and concerns in these areas. The Commission summarized the goal of the proposed rules as "wage clarity" not "wage control."

Executive and Director Compensation

The proposed rules combine revised tabular disclosure with additional required narrative disclosure in an effort to elicit clearer and more complete disclosure. The key changes under the proposed rules in this area include:

  • the list of Named Executive Officers now must include the company's principal financial officer, regardless of compensation levels;
  • a new narrative "Compensation Discussion and Analysis" section has been proposed to address the objectives of compensation programs and the important factors underlying compensation policies and decisions. This appears to be a bit broader than the discussion previously required under the Compensation Committee Report;
  • the Summary Compensation Table has been expanded to include a column showing a dollar value for stock-based awards (including stock options) and a "total compensation" column;
  • the following information now must be disclosed in tabular form:
    • grants of performance-based awards during the preceding 3 fiscal years;
    • grants of other equity awards during the preceding 3 fiscal years;
    • retirement plan potential payments and benefits and defined contribution and other deferred compensation plans; and
    • director compensation.

Together the new tables will disclose in more detail the named executive officers' participation, benefits, contributions and balances in such plans and directors' compensation; and

  • detailed disclosure of payments and benefits payable upon termination or change in control would be required (this expands on the current requirement to summarize these provisions as a part of the summary of executives' employment agreements).

Related Party Transactions. The proposed rules update, clarify and slightly expand the disclosure requirements regarding related party transactions. Specifically, companies will now need to disclose their policies and procedures for approving related party transactions. Also, there will be a slight expansion of the categories of related persons. On the other hand, the threshold for required disclosure will be increased from $60,000 to $120,000.

Director Independence. The proposed rules will combine the current disclosure requirements with respect to board meetings and committees, including nominating and audit committees, with requirements to disclose:

  • which directors and nominees are considered independent;
  • the relationships that were considered in determining the independence of individual directors and nominees; and
  • the identification of members of the audit, nominating and compensation committees who are not independent.     

Other Proposals. The release notes other revisions to the disclosure rules set forth in the proposed rules, including a required disclosure of equity securities of the company which are pledged by management and a revision to Form 8-K which would consolidate all required disclosure regarding employment arrangements under a single item and clarify the employment arrangements and material amendments which must be reported on Form 8-K.

Finally, it should be noted that the proposed rules will require that narrative disclosure in all of these areas must comply with the SEC's plain English principles in
organization, design and language.

*  *  *

To the extent that the text of the proposed rules, when published, differs from the summary above or contains anything new of material interest, we will summarize and analyze the rules when they are published. The proposed rules will be published for comment for a specified period, so if you wish to provide an official comment to the SEC, we would be happy to assist you. Finally, we will, of course, summarize and analyze the final rules when they are adopted by the SEC.

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