December 18, 2009Client Alert

SEC Adopts Rules Relating to Risk, Compensation and Corporate Governance

On December 16, 2009, the Securities and Exchange Commission (“SEC”) adopted final rules requiring enhanced disclosures relating to risk, compensation and corporate governance. The new rules become effective February 28, 2010 and will apply to the upcoming proxy season. Following is a brief summary.

  • Risk Management and Compensation Policies. Companies will be required to enhance their disclosures relating to how their compensation policies and practices relate to risk management efforts. These enhanced disclosures will help investors to evaluate whether the company’s compensation policies and practices incentivize excessive or inappropriate risk-taking. Companies also must discuss the board’s role in risk management oversight.

  • Board Leadership Structure. The new rules require companies to disclose more details relating to the board’s leadership structure, including whether the company has a combined or separate chief executive officer and chairman position or whether the company has a lead director. Companies are also expected to justify why the current structure is appropriate.

  • Greater Detail for Directors and Nominees. The new rules provide for enhanced disclosures relating to director and nominee experience. First, the company must disclose the director’s or nominee’s particular experience, qualifications, attributes, and skills which the board considered when deciding to ask the individual to become a director. Second, the rules require disclosure of any public company or registered investment company directorships held by a director or nominee during the past five years. Finally, disclosures must cover the director or nominee’s involvement in certain legal proceedings going back ten years, rather than the current five years. In addition, the list of legal proceedings covered by the disclosure rule has expanded.

  • Director Diversity. The new rules require a company to disclose whether, and if so how, a nominating committee considers diversity in identifying director nominees. If the nominating committee has a diversity policy, the disclosures should cover the implementation of the policy and its effectiveness.

  • Quicker Shareholder Voting Results. Under the new rules, shareholder voting results must be disclosed within four business days after the end of the shareholder meeting on Form 8-K, rather than waiting to disclose the results in the next quarterly report.

  • Summary Compensation Table. The SEC approved revisions to the reporting of stock and option awards in the Summary Compensation Table and the Director Compensation Table. Companies will have to report the value of options when they are awarded, instead of the current requirement to report the annual accounting charge.

  • Compensation Consultants. Under the new rules, in certain circumstances, particularly where the relationship may raise a potential conflict of interest, companies must disclose fees paid to compensation consultants.
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