January 3, 2010
On December 16, 2009, the SEC approved revised disclosure rules relating to executive compensation and corporate governance practices at public companies. The final rules will be effective February 28, 2010 and will impact the 2010 proxy season for most registrants. The SEC Division of Corporation Finance has also published new Compliance and Disclosure Interpretations (CDIs) regarding transition to the final rules for the 2010 proxy season.
The final executive compensation and governance disclosure rules generally track the rules originally proposed by the SEC in July 2009 (previously discussed in our 7/16/09 WorkCite article. The final rules cover the following areas:
Compensation Risk Disclosure
The July 2009 proposed rules would have required public companies to discuss and analyze in their CD&As their compensation policies generally (including policies for non-executive employees) if risks arising from those policies “may have a material effect” on the company. The SEC’s final rules echo this requirement substantially as proposed, with these primary changes.
Stock and Option Valuation
The proposed rules would have required public companies to disclose the aggregate grant-date fair value of all stock and option awards made during a year in the Summary Compensation Table (and related Director Compensation Table) in accordance with FASB ASC Topic 718 (formerly FAS 123R), rather than the incremental annual value reported for the year’s financial statement purposes. Performance awards (as defined in FASB ASC Topic 718) would have been required to be disclosed as though maximum performance criteria had been achieved. The SEC’s final rules adopt this position substantially as proposed, with these principal changes.
Fee Disclosure for Compensation Consultants
For a compensation consultant who played a role in determining or recommending the amount or form of executive or director compensation and also provided additional services to a company, the proposed rules would have required the company to identify the consultant and to disclose the aggregate fees paid to the consultant along with a description of the additional services. The SEC’s final rules include this requirement with modifications that limit the scope of the disclosures.
Enhanced Director and Nominee Disclosure
The proposed rules would have required expanded disclosure about incumbent directors and director nominees. The SEC adopted the final rules regarding this requirement generally as proposed. The new disclosure will focus on the specific experience, skills and qualifications that qualify an individual to serve as a director for the company. The new disclosures represent a significant expansion given that companies currently are required to provide only brief biographical data for the previous five years for a director or nominee. In addition, any directorships held at public companies within the past five years will be disclosed instead of only current directorships under existing rules. The SEC has extended to ten years (from five years) the time period for disclosure of legal proceedings involving directors, director nominees, executive officers and individuals chosen to become executive officers. The primary differences from the proposed rules are:
Risk Oversight
Consistent with the emphasis of disclosing compensation risk management issues, the proposed rules would have required disclosure of the board’s role in the company’s risk management process. The final rules are substantially like the proposed rules, except for some language changes. Principally, references in the proposed rules to “risk management” have been changed to “risk oversight” as being more descriptive of the board’s function as to risk. The new risk oversight disclosure will need to address, for example, whether the board oversees risk management at the board or committee level. The disclosure will be focused on the organization and process, and will not require disclosure of actions taken by the board.
Board Leadership Structure
The SEC’s proposed rules considered expanding Item 407 of Regulation S-K and Item 7 of Schedule 14A to require a description of the company’s leadership structure. The SEC adopted this requirement in the final rules without substantive changes, other than a change to refer to “board leadership structure”. A company will be required to explain why the board leadership structure in place at the time of filing is best for the company, including why the principal executive officer and board chair positions are combined or separate. Moreover, each company will be required to disclose whether it has a lead independent director and the role the lead independent director plays in the board’s leadership.
Form 8-K Reporting of Voting Results
The SEC’s proposed rules considered transferring the requirement to disclose the voting results of any matter submitted to shareholders for vote from Form 10-Q and Form 10-K to Form 8-K. This change was adopted in the final rules. The main impact of the transfer is to accelerate substantially the disclosure of shareholder votes. If final voting results are not available within four business days, the rules require a Form 8-K filing of the preliminary voting results. An additional Form 8-K filing would be made when the voting results are final.
Effective Dates
The new rules are effective for any registrant with a fiscal year ending on or after December 20, 2009 that files its Form 10-K report or definitive proxy statement on or after February 28, 2010. A registrant with a fiscal year ending before December 20, 2009, or a registrant with a fiscal year ending on or after December 20, 2009 but that files both its 10-K and definitive proxy statement before February 28, 2010, is not required to comply with the new requirements. A registrant that is not required to comply may voluntarily choose to comply, provided that if it decides to comply with the new stock and option reporting requirements for the Summary Compensation Table, it must comply with all of the other new requirements as well. A new registrant that files its first registration statement on or after December 20, 2009 is also required to comply.
Reopened Comment Period on Proxy Access Proposal
In other actions, the SEC has reopened the comment period until January 19, 2010 on the proposal to change the rules for a company to include shareholder nominees for director in a proxy. The proposed rules would generally require a company to include disclosures about eligible director nominees submitted by eligible shareholders in the company’s proxy materials, so long as the shareholders are not seeking to change the control of the company or to gain more than a limited number of seats on the board. The details of the proposal are covered in our previous 6/30/09 WorkCite article.