SEC Staff Updates Disclosure Interpretations

The SEC’s Division of Corporation Finance has updated its Compliance & Disclosure Interpretations (C&DIs) regarding Regulation S-K. Although many of the items were republished without change, several were revised and a few are entirely new. Some of the most useful guidance appears in C&DIs relating to compensation disclosures. The following is a brief overview of a few of the compensation issues addressed:

• The term “benchmarking” generally refers to the use of compensation data from other companies “as a reference point on which – either wholly or in part – to base, justify or provide a framework for a compensation decision.” Simply reviewing broad-based surveys generally is not considered “benchmarking.”



• If performance targets are not material in the context of the compensation policies or decisions, they need not be disclosed in the CD&A. If the targets are material, disclosure is required unless it would reveal confidential commercial or financial information or trade secrets and result in competitive harm. The test for “competitive harm” is whether a third party could use the targets to extrapolate information regarding the issuer’s business or strategy and use it to the issuer’s disadvantage.
  
  
• Disclosures regarding the compensation committee must include a discussion of any role of compensation consultants in setting executive or director compensation. In contrast, the CD&A should discuss the consultant’s role only if it was material in the compensation-setting process.

The C&DIs also include updated interpretations on a number of other issues which will be of interest to our clients. Given the number of changes, we will not attempt to address them all here, but we encourage you to review these C&DIs as you prepare new filings. Some of the more important discussions cover:

• the application of “smaller reporting company” rules to majority-owned subsidiaries
• the application of Item 303 (MD&A) to smaller reporting companies
• the treatment of net exercises, settlements, and forfeitures under
  Item 703
• errors in CEO/CFO certifications that would require filing an amended periodic report
• excluding a recently acquired entity from management’s evaluation of disclosure controls and procedures, and
• item 308T(b) disclosure in Forms 10-Q.

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For further information about this Alert, please contact:

Mark Hoffman

Barbara Nepf

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