SEC Issues Proxy Disclosure Enhancements Relating to Risk, Compensation and Corporate Governance

On December 16, 2009, the SEC adopted amendments that will become effective February 28, 2010, to the proxy disclosure rules and Form 8-K that require additional information to be disclosed to investors regarding compensation; risk; risk oversight by the board of directors; and the qualifications of members of the board of directors. Highlights of the SEC's release are as follows:

Compensation Disclosure:

Compensation and Risk Management —

• New Item 402(s) of Regulation S-K requires a company to disclose compensation practices and policies that create risks that are reasonably likely to have a material adverse affect on the company. The disclosure is to be a narrative and should address the relationship between compensation and risk in both a general and very detailed review, where necessary. Companies whose compensation policies and practices have little relationship to the risk the company takes will not be required to make an affirmative statement to that effect.

• Summary Compensation Table and Director Compensation Table in Item 402 of Regulation S-K will require that disclosure of the aggregate grant date fair value of equity awards be computed in accordance with FASB ASC Topic 718.¹ This change may affect the determination of a company's named executive officers. Awards that are subject to performance conditions will be disclosed consistently with a grant date estimation of compensation cost to be recognized over a service period, excluding the effect of forfeitures. A footnote to the table(s) will disclose the maximum amount of performance-based compensation an individual is eligible to receive, assuming the highest possible level of performance. Companies with a fiscal year ending on or after December 20, 2009, will be required to restate the Summary Compensation Table and Director Compensation Table for the previous three fiscal years. The restated tables must include recomputed disclosure for any of the named executive officers for the current fiscal year as well as for the prior two fiscal years, so as to facilitate year-to-year comparison.

• Item 401 of Regulation S-K will require companies to disclose on an individual basis for each director and nominee, the qualifications, particular experience, skills or other attributes that led the board to conclude that the person should be a director of the company. Further disclosure is required for each director and nominee of any directorship held at any publicly traded company or registered investment company in the previous five years. Similarly, the time period for disclosure of a director's involvement in legal proceedings has been extended from five years to 10 years, and additional legal proceedings were added to the list under item 401(f) of Regulation S-K. ²
  

• Item 407 of Regulation S-K will require further disclosure of the consideration of diversity in the nominations of directors. Diversity has not been defined by the SEC. Instead, the SEC release refers to both diversity in the skills, education and experience a director may have as well as diversity in gender, race or national origin. 
  

• Item 407 of Regulation S-K will require new disclosure regarding board leadership structure and the role of the board in risk oversight. The board leadership disclosure requires a company to discuss why it has chosen a particular leadership structure, the role that structure plays in risk oversight, and why that structure is best for the company. The disclosure could be addressed at the overall board level, but may also need to be addressed at the individual level, especially in a situation where one person supervising day-to-day risk reports to the board of directors with respect to risk management.

• Reporting of voting results from special or annual meetings has been moved from Forms 10-Q or 10-K to Form 8-K. The preliminary results must be released on Form 8-K within four days of the vote of shareholders. Final, definitive results must be released within four days of the company's possession of such results on an amendment to the Form 8-K which sets forth the preliminary results. New Item 5.07 to Form 8-K simplifies the information required to be provided regarding votes of the shareholders.

• Item 407 of Regulation S-K will require disclosure regarding compensation consultants who provide other consulting services to the company. Generally, if a consultant provides services other than executive and/or director compensation consulting to a company and receives fees for such other services in excess of $120,000, disclosure of both fees is required. The amendment has several technical aspects, including:

• if the board, compensation committee, or other person performing a similar function engages its own consultant to provide advice regarding the form and amounts of director and executive compensation, and the same consultant provides other services, not related to executive and director compensation, to the company, disclosure of the fees and other services is required if the fees for the other services, not related to executive and director compensation, are greater than $120,000 during the fiscal year; further disclosure is required regarding whether management recommended or approved the engagement for other services and whether or not the compensation committee or board has approved such services;
• if the board, compensation committee, or other person performing a similar function has not engaged its own consultant, fee disclosures are required if there is a consultant (including its affiliate(s)) providing executive and/or director compensation consulting as well as non-compensation related services, provided that the fees for the other  services exceed $120,000 during the fiscal year;
• fee and related disclosure for consultants working with management, including services regarding executive compensation or other services, is not required if the board has its own consultant; and
• service involving broad-based, non-discriminatory plans, such as 401(k) or health care plans, or the provision of information, such as surveys that are not customized for the company or are customized on parameters not developed by the consultant, are not considered executive and/or director compensation consulting services for the purpose of this disclosure requirement.

Generally, these new or enhanced disclosure requirements seek to provide investors with further information regarding risk oversight, compensation, qualifications of the board of directors and nominees, accelerated disclosure of voting results, and potential conflicts of interest with compensation consultant services.

What these New Rules Mean to You:

• Persons responsible for preparing the Summary Compensation Table and determining the Named Executive Officers will need to be educated on the new method for calculating the values of awards.
• Director and Officer Questionnaires will need to be revised to incorporate the new rules.
• Nominating committees, when selecting nominees to serve as directors of the company, should address the required experience and diversity factors that will need to be disclosed in the proxy statement regarding such nominees. 
• Compensation committees should address risk considerations with respect to the company's executive compensation plans and programs as they relate to the risks affecting the company.

For companies with a fiscal year that ends after December 20, 2009, the new amendments require that prior year's equity compensation be restated in accordance with the new rules so as to facilitate year-to-year comparison. We expect that there will be further SEC guidance as to the transition to and implementation of the new rules.

¹ FASB ASC Topic 718 was formerly referred to as FAS 123(R).
² Legal proceedings involving the settlement of a claim in a civil proceeding between private parties are not required to be disclosed.