News

SEC Division of Corporation Finance Issues New Interpretations Regarding the New Compensation and Enhanced Disclosure Rules

News Brief
February 17, 2010

By Cydney Posner

Once again, the SEC Division of Corporation Finance has issued some new interpretations regarding the new compensation and enhanced disclosure rules.

Item 401 – Directors, Executive Officers, Promoters and Control Persons

  • Instruction 3 to Item 401(a) provides that if the information called for by paragraph (a) is being presented in a proxy or information statement, no information need be given respecting any director whose term of office as a director will not continue after the meeting to which the statement relates. Similarly, Item 401(e) disclosure is not required with respect to any director for whom the company is not required to provide Item 401(a) disclosure.

Item 402(a) – Executive Compensation; General

  • Whether a registrant with a calendar fiscal year end that seeks effectiveness for a Securities Act registration statement (or post-effective amendment) after December 31, 2009 but before its 2009 Form 10-K is due must include Item 402 disclosure for 2009 depends on whether the registration statement is on Form S-1 or Form S-3.

  • If the registration statement is on Form S-1, then the registrant must include Item 402 disclosure for 2009 before it can be declared effective.  In this case, Part I, Item 11(l) of Form S-1 specifically requires Item 402 information in the registration statement for the last completed fiscal year, and 2009 is the last completed fiscal year. General Instruction VII of Form S-1, which permits a registrant meeting certain requirements to incorporate by reference the Item 11 information, does not change this result because the registrant has not yet filed its Form 10-K for the most recently completed fiscal year, as required by VII.C.

  • On the other hand, there is no specific line item requirement in Form S-3 for Item 402 information, and information requirements for Form S-3 can be satisfied by incorporating by reference filed and subsequently filed Exchange Act documents. Accordingly, a non-automatic shelf registration statement on Form S-3 can be declared effective before the Form 10-K is due. (Compare that result with the result in Securities Act Forms C&DI 123.01, where effectiveness of a non-automatic shelf registration statement on Form S-3 is sought during the period between the filing of the Form 10-K and the definitive proxy statement. In that case, to have a complete Section 10(a) prospectus, the registrant must either file the definitive proxy statement before the Form S-3 is declared effective or include the officer and director information in the Form 10-K).

Item 402(c) – Executive Compensation; Summary Compensation Table

  • In April 2010, a company grants an equity award to an executive officer, and the terms of the award do not provide for acceleration of vesting if the executive officer leaves the company. The grant date fair value of the award is $1,000. In November 2010, the executive officer will leave the company, and the company modifies the officer's same equity award to provide for acceleration of vesting upon departure. The fair value of the modified award, computed under FASB ASC Topic 718, is $800, reflecting a decline in the company's stock price. In the 2010 stock column in the SCT, the company should report, consistent with Instruction 2 to Item 402(c)(2)(v) and (vi), the incremental fair value of the modified award, computed as of the modification date in accordance with FASB ASC Topic 718, as well as the grant date fair value of the original award. Applying the guidance in paragraph 55-116 of FASB ASC Section 718-20-55, incremental fair value is computed as follows: the fair value of the modified award at the date of modification minus the fair value of the original award at the date of modification equals the incremental fair value of the modified award. In this fact pattern, the fair value of the original award at the date of modification is zero, because the NEO left the company in November and the original award would not have vested. Therefore, the incremental fair value of the modified award is $800. As a result, the total amount reported is $1,800, which reflects the two compensation decisions the company made for this award in 2010. The same amount is included in the 2010 total compensation column in the SCT for purposes of identifying the company's 2010 NEOs pursuant to Items 402(a)(3)(iii) and (iv).

  • In contrast, if the award modification and executive's departure occurred in 2011, the company would report $1,000 in the 2010 stock column of the SCT for the grant date fair value of the original award. In the 2011 stock column, the company would report $800 for the incremental fair value of the modified award.

  • During 2010, an NEO receives an annual incentive plan award that is not within the scope of FASB ASC Topic 718 because there is no right to stock settlement embedded in the terms of the award. Therefore, it is a non-equity incentive plan award as defined in Rule 402(a)(6)(iii). The NEO elects to receive the award in stock. Instruction 2 to Item 402(c)(2)(iii) and (iv) does not apply because the award is an incentive plan award rather than a bonus. The company should report the award in the non-equity incentive plan award column (column (g)) of the SCT, reflecting the compensation the company awarded, with footnote disclosure of the stock settlement. Similarly, in the Grants of Plan-Based Awards Table, the company should report the award in the estimated future payouts under non-equity incentive plan awards columns (columns (c)-(e)). The stock received upon settlement should not also be reported in the Grants of Plan-Based Awards Table because that would double count the award.

  • Where awards permit the NEOs to elect payment of the award for 2010 performance in company stock rather than cash, with the election to be made during the first 90 days of 2010 and the company stock to have a grant date fair value equal to 110% of the award that would be paid in cash: (i) if an NEO elects stock payment, the award is reported in the 2010 SCT and Grants of Plan-Based Awards Table as an equity incentive award, even if the amount of the award is not determined until early 2011 (because all company decisions necessary to determine the value of the award are made in 2010); if an NEO elects cash payment, the award is reported in the 2010 SCT and Grants of Plan-Based Awards Table as a non-equity incentive plan award.

Item 5.07 Submission of Matters to a Vote of Security Holders

  • To calculate the four-business day filing period for an Item 5.07 Form 8-K, the date on which the shareholder meeting ends is the triggering event, and day one of the four-business day filing period is the day after the date on which the shareholder meeting ends. For example, if the meeting ends on Tuesday, day one would be Wednesday, and the four-business day filing period would end on Monday.

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