SEC adopts enhanced proxy disclosure requirements

By Cydney Posner

Today, by a vote of four to one, the SEC adopted amendments to rules and forms under the Securities Act of 1933 and the Securities Exchange Act of 1934 requiring enhanced disclosures regarding compensation and other corporate governance matters.  These new disclosure rules will be effective for companies with fiscal years ending on or after December 20, 2009, and thus will be effective for this upcoming proxy season. The final rules may not be posted for a number of days (or even weeks), but the press release regarding the meeting is typically posted later in the day and will likely contain more detail or clarification. Chair Mary Schapiro also reiterated her commitment to bringing the proxy access proposal to the SEC for a decision early next year.

• The new rules will require a discussion of a company's compensation policies and practices applicable to any employees, not just NEOs, if those policies and practices create risks that are "reasonably likely to have a material adverse effect" on the company.  The disclosure threshold represents a change from the original proposal, which referred to policies that "may have a material effect."  Corp Fin Director Meredith Cross noted that this rule is generally intended to address financial impact, and Commissioner Walter commented that the concern was regarding the creation of risks that do not align with the overall best interests of the company. Since many have expressed the concern that this rule is especially difficult to apply outside of the financial services industry, the release will apparently include a number of examples of the approaches the staff has in mind to identify these types of risks. The release will also contain new language relating to disclosure of any offsetting or mitigating factors, such as clawbacks or hold-till-retirement provisions. To avoid confusion with the CD&A discussion that applies only to NEO compensation, the new disclosure will not appear in CD&A. This rule will not apply to smaller reporting companies. Director Cross commented that smaller, less complex companies are less likely to have disclosure under this requirement.

• In the Summary Compensation Table and Director Compensation Table, options and other equity comp will now be reported at their aggregate full grant date fair values as computed under the FASB Codification (Topic 718, for all those, like me, who can't make heads or tails of the FASB codification).  The SEC "recommends" that, to maintain a consistent presentation, companies recompute and reflect in the table the grants for the two preceding years for the NEOs in the table (i.e., no need to show changes for any prior NEOs not otherwise in the table). With regard to performance-based grants, an instruction will provide that value should be based upon the probable outcome; however, the maximum potential should be included in a footnote.

• With regard to qualifications of directors, the new rules will expand the required disclosure regarding qualifications of each nominee and director, detailing the particular experience, qualifications, attributes or skills that qualify that person to serve as a director of the company. Loosely speaking, the task is to explain why this person was selected to sit on the board of this company. (It appears that the proposal to require disclosure regarding qualifications to serve as a committee members was not adopted.) Interestingly, this is one of the two requirements that were problematic for Commissioner Casey, leading her to decline to support the proposal as a whole. In her view, the disclosure would not be meaningful because the requirement misapprehends how boards are assembled -- not on a person-by-person basis, but rather as whole.

• The new rules will require disclosure of any public company directorships held by each director and nominee at any time during the past five years.  

• The new rules will extend from five years to ten years the time period for which disclosure of "bad boy" legal proceedings is required. In addition, as a new requirement not included in the original proposal (and therefore, not in our D&O questionnaires), the types of legal proceedings covered will be expanded to include certain legal proceedings regarding mail, securities and other fraud and disciplinary actions by SROs.

• Also not included in the original proposal (although there was a question on the topic in the proposal) was a requirement to disclose how the nominating committee considers diversity in its director nominations, how that policy is implemented and how its effectiveness is assessed.  "Diversity" is not defined in the new rule, and apparently the release includes a discussion suggesting that each company may define it as broadly or narrowly as it chooses.  Although Commissioner Casey approved of the requirement to disclose policies on diversity, she objected to the requirement to discuss implementation and effectiveness.  Again, she viewed the requirement as "not "holistic" and overly intrusive.

• Under the new rules, each company will need to disclose its leadership structure and the reasons why the company believes it is the best structure for the company, including whether and why the company has chosen to combine or separate the principal executive officer and board chair positions and whether and why it has a lead independent director, as well as the specific role the lead independent director plays in the leadership of the company. 

• The new rules will require enhanced disclosure about the board's role in risk oversight. Director Cross explained that the requirement is intended to elicit information about how the risk management function is implemented, whether through the board as a whole or through a committee, the interaction among the various components charged with oversight, the reporting relationships and how the board, or board committee, oversees risk.

• To provide some transparency regarding potential consultant conflicts of interest, the new rules will require disclosure about the fees paid to board compensation consultants that also provide other services to the company, if the fees for those services exceed $120,000, including disclosure of the amount of all fees, whether the decision to engage or the selection was made by management and/or approved by the board or committee.   There is an exception in the event the compensation consultant's only role is in connection with consulting on broad-based plans that do not discriminate in favor of executive officers or directors, such as 401(k) plans or health insurance plans, or where services are limited to providing standard surveys that are not customized by the consultant.

• To ensure more timely reporting of voting results, the new rules will transfer the requirement to disclose voting results from Forms 10-Q and 10-K to Form 8-K, due within four business days after the end of the meeting at which the vote was held. If final results are not available within the required timeframe, companies will need to disclose on Form 8-K the preliminary voting results within four business days after the preliminary voting results are determined and then file an amended report on Form 8-K within four business days after the final voting results are certified.   Director Cross commented that, if a company has concerns that the preliminary results may be inaccurate or misleading, it should explain the reason in the 8-K.