SEC issues new set of interps regarding new Item 407 of Reg S-K, Corporate Governance

By Cydney Posner

The SEC has also issued a new set of interps regarding new Item 407 of Reg S-K, Corporate Governance. These interps replace interps in the July 1997 Telephone Interps Manual related to provisions consolidated into Item 407. Some of the interps are restated versions of prior interps.

Item 407(a) —Director independence

• Non-listed issuers must provide the disclosure required by Item 407(a)(1)(ii), which requires that a non-listed issuer select an exchange and disclose which definition of director independence is used. If a non-listed issuer believes that its own independence definitions are more stringent than those of the exchange identified in the required Item 407(a)(1)(ii) disclosure, it may, in addition, disclose that belief and provide the disclosures called for by Item 407(a)(1)(i) based on its own definitions, provided that it also complies with Item 407(a)(2) regarding disclosure of its own definitions of independence.

Item 407(b) —Board meetings and committees; annual meeting attendance

• The "total number of meetings of the board of directors" specified as the basis for calculation of director’s attendance in Item 407(b)(1) does not include board action by written consent.

Item 407(c) —Nominating committee

• Item 407(c)(2) requires that the descriptions of the nominating committee’s processes, policies and nominee qualifications be included in the proxy statement. There is nothing in the rule that permits reference to website posting of this information and, as a result, a company may not indicate that this information is included in the company’s governance policies posted on the company’s website, in lieu of including descriptions of these processes, policies or minimum nominee qualifications in the proxy statement.
• Item 407(c)(2)(vii) requires the identification of the category of persons or entities that recommended each nominee for director, other than executive officers or nominees who are standing for re-election. A director who was named as a director by the board during the year and did not stand for election by shareholders last year would not be considered to be standing for "re-election." Rather, the nominee would be viewed to be nominated for election by shareholders for the first time, and, therefore, disclosure under Item 407(c)(2)(vii) would be required.

Item 407(d) –Audit committee

• Item 407(d)(3)(i)(D) requires the audit committee to state whether it recommended inclusion of the audited financial statements in the Form 10-K. This statement need not cover financial statements for periods prior to the last completed fiscal year.

Item 407(e) –Compensation committee

• Item 407(e)(3)(iii) requires that all compensation consultants with any role in determining or recommending the amount or form of executive or director compensation be disclosed. The disclosure should cover all compensation consultants engaged by the company that played such a role, not just those that consulted with the board of directors or the compensation committee.
• Item 407(e)(3) requires a "narrative description of the registrant’s processes and procedures for the consideration and determination of executive and director compensation including … (iii) [a]ny role of compensation consultants in determining or recommending the amount or form of executive and director compensation." Disclosing the name and role of a compensation consultant would not cause the consultant to be deemed an "expert" for the purposes of the Securities Act, nor would it cause any portion of the disclosure to be deemed to have been "expertized" by the compensation consultant. Therefore, a consent would not be required under Rule 436.
• Item 407(e)(5)(ii) requires that the name of each member of the compensation committee (or other board committee performing equivalent functions, or in the absence of any such committee, the entire board of directors) must appear below the required disclosure in the Compensation Committee Report. These names should include the members of the compensation committee (or the full board) who participated in the review, discussions and recommendation with respect to the CD&A. (Note the shift, in light of the change in the substance of the report, from the prior requirement to identify the names of directors who participated in the deliberations concerning compensation reported for the last year.) New members who did not participate in those activities and departed members who are no longer directors need not be included. Members who resigned from the compensation committee during the year, but remain directors of the issuer, may need to be named under the disclosure in the Compensation Committee Report.
• The Compensation Committee Report must be separately captioned to identify it clearly as specified in Item 407(e)(5). Where there are multiple committees on the board with responsibility for different components of compensation (e.g., a stock option committee) and those committees review and discuss the CD&A with management and, based on that review and discussion, recommend the inclusion of the CD&A in the registrant’s filings, each of these committees has a disclosure obligation under Item 407(e)(5).
• With respect to the disclosure required by Item 407(e)(4), Compensation Committee Interlocks and Insider Participation, if a registrant has no transactions or relationships that trigger a disclosure obligation and the only disclosure that the registrant is required to provide pursuant to that item is the identity of the members of the compensation committee, the registrant may omit the Item 407(e)(4) caption ("Compensation Committee Interlocks and Insider Participation").

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