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The SEC has updated its Compliance and Disclosure Interpretations (C&DIs) to address issues posed by its recently adopted governance and executive compensation disclosure enhancement rules.
The new rules were announced on January 20 and become effective on February 28, 2010. They will apply to most companies’ annual meetings in 2010. For a discussion of these new rules, please see our earlier Alerts here and here. As companies prepare to comply with these rules for the first time, the new C&DIs may assist companies in preparing their disclosures.
The new C&DIs are included in the SEC’s C&DIs regarding Regulation S-K, which are available here.
The new C&DIs regarding governance and executive compensation rules address the following:
- Disclosures of each director’s or nominee’s “specific experience, qualifications, attributes or skills" that led the board to conclude that such person should serve as a director may not be provided on a group basis, even if the directors or nominees share similar characteristics. 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 such 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.
- Companies with classified boards must still disclose a director's particular and specific experience, qualifications, attributes or skills led the board to conclude that the person should serve as a director as of the time of a filing containing such disclosure, even if the director is not up for re-election. A principle behind the new disclosure requirement is that the composition of the entire board is important information for shareholder voting decisions. The purpose of the disclosure requirement is to elicit current information about all director on the board, including on classified boards. For some boards of directors, particularly those that do not conduct annual self-evaluations, the new rule may require implementing additional disclosure controls and procedures to ensure that such 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.
- The grant date fair value of an equity award must be included even if it is forfeited during the same year it is granted. For example, if an equity award is forfeited in the same fiscal year it is granted because an executive officer leaves the company, the grant date fair value of the equity award should still be included in determining total compensation and the identification of named executive officers. The forfeiture would, however, likely be disclosed in a footnote to the table.
- The grant date fair value reported for equity awards subject to time-based vesting exclude the effect of estimated forfeitures. This is similar to the treatment of awards subject to performance conditions and consistent with applicable Financial Accounting Standards Board guidance regarding the grant date fair value of equity awards.
- The SEC staff recommends that the narrative disclosure of the registrant's compensation policies and practices as they relate to the registrant's risk management be presented together with the registrant's other Item 402 disclosure. New Item 402(s) of Regulation S-K does not specify where the disclosure should be presented. The SEC staff would have concerns if the Item 402(s) disclosure is difficult to locate or is presented in a fashion that obscures it. Keep in mind that the disclosure should not be included in CD&A, as it relates to compensation policies and practices beyond executive compensation. Also note that new Item 402(s) does not require a company to state affirmatively that risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect. Some companies may choose to disclose voluntarily information either about the process for the disclosure determination or the determination that no disclosure is required.
- When compensation consultants or their affiliates, in addition to providing advice or recommendations on the amount or form of executive or director compensation, have provided “additional services” in an amount in excess of $120,000, new Items 407(e)(3)(iii)(A) and (B) of Regulation S-K require several new disclosures. The determination as to whether services provided by a compensation consultant or its affiliates are for "determining or recommending the amount or form of executive and director compensation" or for "additional services" depends on the facts and circumstances. For instance, "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 consulting on broad-based plans or providing non-customized information relates to matters other than executive and director compensation, then the fees for such information would be for "additional services."
As companies make their first attempts to prepare disclosures under the enhanced governance and executive compensation disclosure rules, they should stay tuned to emerging practices and potential further SEC guidance. We are actively monitoring relevant developments to help public companies plan for these disclosures in their upcoming proxy statements, registration statements and other reports filed with the SEC.
This information is intended as a general overview and discussion of the subjects dealt with. The information provided here was accurate as of the day it was posted; however, the law may have changed since that date. This information is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper is not responsible for any actions taken or not taken on the basis of this information. Please refer to the full terms and conditions on our website.
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