SEC Approves the Adoption of Sweeping Compensation Disclosure Reform

The Securities and Exchange Commission (SEC) unanimously approved the adoption of sweeping amendments to the disclosure requirements for executive officer and director compensation and benefits. The SEC also approved the adoption of amendments relating to disclosure of related person transactions and certain other items as well as modification of the Form 8-K requirements for reporting compensation arrangements. The amendments affect the disclosure required in registration statements, proxy and information statements, periodic and current reports and certain other filings.

The SEC had previously proposed amendments to compensation disclosures in January 2006 (click here for our prior comprehensive memo on the proposal). Set forth below are certain expected changes to the previous proposal based on comments by the SEC and the Division of Corporation Finance at today's open meeting:

Executive Officer Compensation Disclosure

• The determination of which individuals, besides the CEO and CFO, constitute the other named executive officers (NEO's) will, as proposed, be based on the total compensation figure (rather than the current salary and bonus amounts) but will exclude changes in the actuarial present value of accumulated pension benefits and above-market or preferential earnings on nonqualified deferred compensation; and

• The proposed amendments concerning certain compensation disclosures related to an additional three highly-compensation individuals (other than the NEO's) were not adopted and a revised proposal is being submitted for public comments. The revised proposal will cover only large accelerated filers and will focus on individuals who have a significant policy making function with an issuer, a significant subsidiary or principal business unit, division or function.

Option Pricing and Timing Disclosure

• New disclosure requirements related to option granting practices will require that two columns be added to tables describing option grants -- one column to note if a grant date of an option differs from the date that the corporate action effecting the grant occurs and the other column to indicate if the exercise price of an option is less than the closing market price on the grant date;

• If an option exercise price differs from the closing market price on the date of grant then a description of the methodology for setting the exercise price must be disclosed;

• The new compensation disclosure and analysis (CD&A) section will require additional narrative disclosure about option grants to the NEO's generally and specifically must include information concerning: (a) the methods used to select the exercise prices, (b) whether any program, plan or practice exists to coordinate the granting of options with the release of material non-public information, (c) the role of the compensation committee in considering and administering any such program, plan or practice, (d) how the timing of grants to executives relates to the timing of grants to rank and file employees and (e) the role of executive officers in any timing program, plan or practice; and

• Disclosure is required if an issuer has not previously disclosed a timing program, plan or practice but has decided to implement such a program, plan or practice or has acted one or more times during the past fiscal year to coordinate the granting of options and the release of material non-public information.

Compensation Disclosure & Analysis and Performance Graph

• The new CD&A will be "filed" with the SEC and not merely "furnished" and thus is subject to the disclosure certification made by the principal executive and principal financial officers;

• While the CD&A section will replace the existing compensation committee report, a new compensation committee report (similar to the existing audit committee report) will be required over the signature of the members of the compensation committee and must include a statement as to whether the compensation committee has reviewed and discussed the CD&A with management and whether the committee recommends that the CD&A be included in the Form 10-K and proxy statement - this new compensation committee report will be "furnished" to the SEC; and

• The performance graph currently required to be included with the executive compensation disclosures will be retained but will appear in the annual report to shareholders rather than the proxy statement.

Effective Date

Companies will be required to comply with the new requirements as follows:

• Forms 8-K as to triggering events occurring after 60 days or more after publication of the amendments in the Federal Register;

• Forms 10-K for reports covering fiscal years that end on or after December 15, 2006;

• Most Securities Act, Exchange Act and Investment Company Act of 1940 registration statements filed on or after December 15, 2006; and

• Proxy statements filed on or after December 15, 2006 that are required to include information for fiscal years ending on or after December 15, 2006.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.