SEC Proposes New Disclosure Rules Relating to Executive Compensation and Other Matters

The Securities and Exchange Commission has authorized proposals (the "Proposals") to amend its disclosure requirements relating to executive compensation, related-party transactions, director compensation, director independence and securities ownership of officers and directors. If adopted, the Proposals would require extensive and complex new disclosures, particularly in the area of executive compensation.

The text of the Proposals is not yet available. The summary of the Proposals included in this SEC Update is based on a press release issued by the SEC (http://www.sec.gov/news/press/2006-10.htm) and the discussion held at a recent open meeting of the SEC at which the changes were formally proposed.

The Proposals would require that an issuer's compensation disclosures begin with a new section captioned "Compensation Discussion and Analysis." The proposed new section is intended as an overview in which the issuer would explain in one place its executive compensation policies and address questions such as: (i) what are the objectives of the issuer's compensation program, (ii) what is the program designed to reward, (iii) what are the various elements of the issuer's compensation program, (iv) how are compensation levels for Named Executive Officers set and (v) how does each element of compensation fit into the issuer's overall compensation program.

The new Compensation Discussion and Analysis section would replace the compensation committee report and the performance graph, each of which would no longer be required.

The Proposals would make substantial changes to the Summary Compensation Table, which would remain the principal medium for historical executive compensation disclosure. Most significantly, the Proposals would add a column captioned "Total Compensation." There, issuers would be required to disclose the total amount of an executive's compensation, which would be obtained by adding together the amounts disclosed in all of the other columns in the table.

As amended, the Summary Compensation Table would continue to include disclosure of compensation paid in the form of salary and bonus and would also require disclosure of the dollar value of all stock-based awards, including restricted stock and stock options. For purposes of ascribing a dollar value for option grants in the table, issuers would be required to use the grant date fair value as calculated under FAS 123(R).

The amended Summary Compensation Table would continue to include an "All Other Compensation" column, in which issuers would be required to include all elements of compensation not otherwise separately disclosed in the table. The Proposals would require issuers to include in the All Other Compensation column the aggregate increase in the actuarial value of pension plans accrued during the year as well as all earnings on deferred compensation that is not tax-qualified. Disclosure regarding perquisites, which is discussed further below,would also be included in the All Other Compensation column.

The Proposals would require issuers to provide a discussion following the Summary Compensation Table of all of the material factors that must be considered in order to understand the disclosure provided in the table. The instruction to this requirement would list items that companies should consider including in such a discussion, such as (i) the assumptions that were built into the methodology of calculating the grant date fair value of options under FAS 123(R) and (ii) the method for calculating earnings on deferred compensation.

The Proposals would also require that two supplemental tables relating to current-year equity grants supplement the Summary Compensation Table. These supplemental tables would report, respectively, (i) grants of performance-based awards and (ii) grants of all other equity awards.

As discussed above, disclosure regarding perquisites would be required to be included in the All Other Compensation column of the Summary Compensation Table. The threshold for disclosing perquisites would be reduced to $10,000 (the current threshold is the lesser of $50,000 and 10% of the total of a Named Executive Officer's annual salary and bonus). Interpretive guidance would be provided for determining what constitutes a perquisite for purposes of these disclosure requirements. Comments at the open meeting suggest that a benefit will not be considered to be a perquisite if it is "integrally related" to the performance of the executive officer's responsibilities as such.

Two new tables relating to outstanding equity interests held by Named Executive Officers would be required under the Proposals. In the first of these, the Outstanding Equity Awards at Fiscal Year-End Table, issuers would be required to disclose all equity awards held as of fiscal year end by each of their Named Executive Officers. In the second of these, the Option Exercises and Stock Vested Table, issuers would be required to disclose amounts realized by Named Executive Officers on equity compensation during the past year, such as through option exercises.

The Proposals would require that the following disclosures be made regarding post-termination payments to Named Executive Officers:

1. A Retirement Plan Potential Annual Payments and Benefits Table would be required to be included in compensation disclosure. In this table, issuers would be required to disclose the specific dollar amount of the benefits that would be payable to Named Executive Officers under certain retirement plans.

2. A Nonqualified Defined Contribution and Other Deferred Compensation Plans Table would be required. This table would disclose information, including year-end balance, executive contributions, company contributions, earnings and withdrawals for the most recent year, under the issuer's nonqualified defined contribution and other deferred compensation plans.

3. Issuers would be required to provide additional disclosure regarding payments and benefits (including perquisites) that would be payable upon a termination or change-in-control, including a quantification of any such potential payments and benefits under various termination scenarios.

The Proposals would amend the definition of the term "Named Executive Officer" so that it would include (i) the principal executive officer, (ii) the principal financial officer and (iii) the three most highly-compensated executive officers other than the principal executive officer and principal financial officer. It was also suggested at the open meeting that issuers would be required to provide disclosure regarding the compensation paid to up to three additional employees who are not executive officers who have total compensation that is higher than any of the executive officers in the Summary Compensation Table. The additional employees would not have to be identified by name; issuers would be required only to disclose total compensation and provide a job description.

The Proposals would change the manner in which relatedparty transactions are disclosed. Issuers would be required to include disclosure regarding their policies and procedures relating to the approval of related-party transactions. The threshold for disclosure of related-party transactions set forth in Item 404(a) of Regulation S-K would be increased from $60,000 to $120,000. It was suggested at the open meeting that disclosure in this area would be made more principlesbased, although it was not specified what changes would be made in this regard.

The Proposals would require issuers to include in their compensation disclosure a Director Compensation Table similar to the Summary Compensation Table. The Director Compensation Table, however,would include information only for the preceding fiscal year.

The Proposals would add new Item 407 to Regulation S-K. New Item 407 would consolidate in one place the corporate governance and independence-related disclosure requirements that are currently found in several different locations in the proxy rules. It would also require disclosure of a handful of additional items, such as descriptions of compensation committee procedures and relationships not otherwise disclosed that were considered in determining whether a director is independent. It is not clear yet how the requirement relating to independence disclosure would relate to similar requirements imposed by the New York Stock Exchange.

The Proposals would require that issuers disclose the number of shares, if any, that have been pledged by management.

The Proposals would result in changes to Form 8-K. Specifically, the Form would be amended so that all disclosure related to compensation would be contained in a single item. Separately, the Form would be amended to clarify which compensation-related matters would require disclosure on Form 8-K.

The Proposals would require issuers to prepare most of their compensation-related disclosure using "plain English" principles in organization, language and design.

Our expectation is that the text of the Proposals will be available within two to three weeks. The SEC has indicated that the comment period would extend for 60 days following the date of the publication of the Proposals in the Federal Register.

As of January 1, 2006, Sidley Austin Brown & Wood LLP changed its name to Sidley Austin LLP. In the United Kingdom and Hong Kong, the firm will be known as Sidley Austin, and in Tokyo, the firm will be known as Sidley Austin Gaikokuho Jimu Bengoshi Jimusho, in association with Nishikawa & Partners.

This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.