SEC posts new interps on the new executive comp disclosure rules

By Cydney Posner

The SEC has just issued new interps on the new executive comp disclosure rules.  Hopefully, there will be more to come.

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

• For each director and nominee, Item 401(e)(1) requires disclosure of that person's "specific experience, qualifications, attributes or skills" that led the board to conclude that the person should serve as a director. A company should not provide these disclosures on a group basis, even if the directors or nominees share similar characteristics, such as all of them are audit committee financial experts or all of them are current or former CEOs of major companies. The disclosure of each director's or nominee's experience, qualifications, attributes or skills must be provided on an individual basis. For each person, a company must disclose why the person's particular and specific experience, qualifications, attributes or skills led the board to conclude that the person should serve as a director of the company, in light of the company's business and structure, at the time that a filing containing the disclosure is made. For example, it would not be sufficient to disclose simply that a person should serve as a director because he or she is an audit committee financial expert. Instead, a company should describe the particular and specific experience, qualifications, attributes or skills that led the board to conclude that this particular person should serve as a director at the time that a filing containing the disclosure is made.

•  Under Item 401(e)(1), where a company has a classified board, for each director who is not up for re-election, the evaluation of the director's particular and specific experience, qualifications, attributes or skills and the conclusion as to why the director should continue serving on the board should be as of the time that a filing containing the disclosure is made (i.e., you don't go back to the date of original or last nomination). Because the composition of the entire board is important information for shareholder voting decisions, the purpose of this disclosure requirement is to elicit current information about all directors on the board, including on classified boards. For some boards of directors, particularly those that do not conduct annual self-evaluations, this requirement may necessitate implementing additional disclosure controls and procedures to ensure that the information about directors who are not up for re-election at the upcoming shareholders' meeting is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. 

Item 402(a) - Executive Compensation; General

• If a company granted an equity award to an executive officer in 2009 and the same award is forfeited during 2009 because the executive officer leaves the company, the company should still include the grant date fair value of this award for purposes of determining 2009 total compensation and identifying 2009 named executive officers.

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

• Instruction 3 to the Stock Awards and Option Awards columns specifies that the value reported for awards subject to performance conditions excludes the effect of estimated forfeitures. Even though it is no longer expressly stated in the instructions applicable to time-vested awards, the grant date fair value reported for awards subject to time-based vesting also excludes the effect of estimated forfeitures. FASB ASC Paragraph 718-10-30-27 provides, in relevant part, that "service conditions that affect vesting are not reflected in estimating the fair value of an award at the grant date because those conditions are restrictions that stem from the forfeitability of instruments to which employees have not yet earned the right."

Item 402(s) Narrative disclosure of the registrant's compensation policies and practices as they relate to the registrant's risk management

• The requirement to provide narrative disclosure of compensation policies and practices as they relate to risk management is not required to be in CD&A, and the new rules do not specify where the disclosure should be presented. However, to ease investor understanding, the staff recommends that Item 402(s) disclosure be presented together with the other Item 402 disclosure. The staff would have concerns if the Item 402(s) disclosure is difficult to locate or is presented in a fashion that obscures it.

Item 407 - Corporate Governance

• The "additional services" provided by executive compensation consultants that are subject to the disclosure requirements of Items 407(e)(3)(iii)(A) and (B) are not limited to services for non-executives.

• If a compensation consultant's role is limited to consulting on broad-based plans that do not discriminate in favor of executive officers or directors and to providing information that either is not customized for a particular registrant or is customized based on parameters that are not developed by the compensation consultant, and about which the consultant does not provide advice, then those services do not need to be disclosed under Item 407(e)(3)(iii), so long as these are the only services provided by the consultant. If the consultant's role extends beyond these two types of services, then disclosure of all of the consultant's services, including consulting on broad-based plans and providing non-customized information, will be required under Item 407(e)(3)(iii), subject to the $120,000 disclosure threshold. Whether the fees for these two types of services are considered to be for "determining or recommending the amount or form of executive and director compensation" or for "additional services" depends on the facts and circumstances of each service. Fees for consulting on broad-based, non-discriminatory plans in which executive officers or directors participate and for providing information relating to executive and director compensation, such as survey data (in each case, that would otherwise qualify for the exclusion from disclosure if they are the only services provided), are considered to be fees for "determining or recommending the amount or form of executive and director compensation" for purposes of reporting fees under the rule. However, "consulting" on broad-based non-discriminatory plans does not also include any related services, such as benefits administration, human resources services, actuarial services and merger integration services, all of which are "additional services" subject to the disclosure requirements of Items 407(e)(3)(iii)(A) and (B). In addition, if the non-customized information relates to matters other than executive and director compensation, then the fees for such information would be for "additional services."

Proxy Disclosure Enhancements Transition

• If the annual meeting of shareholders takes place before February 28, 2010 and the Form 10-K or Form 10-Q is due on or after February 28, 2010, the results of the meeting should be reported in the "Other Information" Item of each form, rather than in the "Submission of Matters to a Vote of Security Holders" Item, which will be rescinded from Form 10-K and Form 10-Q on February 28, 2010.

• A reporting issuer with a fiscal year ending on or after December 20, 2009 files a Securities Act or Exchange Act registration statement on or after December 20, 2009. In general, compliance with the Reg S-K amendments would be required for that registration statement in order for it to be declared effective on or after February 28, 2010. However, if the registration statement is on Form S-3, it will incorporate by reference the issuer's 2009 Form 10-K. As indicated in an earlier interp on the transition rules, the issuer's Form 10-K and proxy statement must be in compliance with the new proxy disclosure requirements if filed on or after February 28, 2010, and its proxy statement, if filed on or after February 28, 2010, must be in compliance with the new proxy disclosure requirements, even if it files its 2009 Form 10-K before February 28, 2010.

   

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