SEC Votes to Adopt Changes to Disclosure Requirements Concerning
Executive Compensation and Related Matters
FOR IMMEDIATE RELEASE
2006-123
Washington, D.C., July 26, 2006 - The Securities and Exchange
Commission today voted to adopt changes to the rules requiring disclosure
of executive and director compensation, related person transactions,
director independence and other corporate governance matters, and security
ownership of officers and directors. These changes would affect disclosure
in proxy statements, annual reports and registration statements, as well
as the current reporting of compensation arrangements. The rules would
require that most of this disclosure be provided in plain English.
"With more than 20,000 comments, and counting, it is now official that
no issue in the 72 years of the Commission's history has generated such
interest," said SEC Chairman Christopher Cox. "The better information that
both shareholders and boards of directors will get as a result of these
new rules will help them make better decisions about the appropriate
amount to pay the men and women entrusted with running their companies.
Shareholders need intelligible disclosure that can be understood by a lay
reader without benefit of specialized expertise or the need for an
advanced degree. It's our job to see that they get it."
"Investors have made it clear that disclosure about executive
compensation and related matters is very important to them. The rule
changes and guidance the Commission today voted to approve will
significantly improve the quality and usefulness of the information that
investors receive about executive compensation," said John W. White,
Director of the SEC's Division of Corporation Finance. "Investors will now
be provided with one number for total annual compensation for each named
executive officer. The clarity and comparability of this one number will
be complemented by the principles-based narrative disclosures in our new
Compensation Discussion and Analysis section and by the requirement that
these disclosures be made in plain English. By taking up these critical
issues and addressing them in record time, the Commission has once again
shown its responsiveness to the continually evolving needs of American
investors."
1. Executive and Director Compensation
The amendments will refine the currently required tabular disclosure
and combine it with improved narrative disclosure to elicit clearer and
more complete disclosure of compensation of the principal executive
officer, principal financial officer, the three other highest paid
executive officers and the directors.
Compensation Discussion and Analysis
New company disclosure in the form of a Compensation Discussion and
Analysis will address the objectives and implementation of executive
compensation programs - focusing on the most important factors underlying
each company's compensation policies and decisions.
- The Compensation Discussion and Analysis will be filed and will thus
be a part of the disclosure subject to certification by a company's
principal executive officer and principal financial officer.
- A new furnished Compensation Committee Report will require a
statement of whether the compensation committee has reviewed and
discussed the Compensation Discussion and Analysis with management and,
based on this review and discussion, recommended that it be included in
the company's annual report on Form 10-K and proxy statement.
- The Performance Graph will be retained, but no longer coupled with
executive compensation disclosure. The requirement for the Performance
Graph will be moved to the disclosure rule covering the market price of
common equity and related matters, and the Performance Graph will be
required in annual reports to security holders that accompany or precede
proxy statements relating to annual meetings at which directors are to
be elected.
Tabular and Narrative Disclosure
Following the Compensation Discussion and Analysis section, executive
compensation disclosure will be organized into three broad categories:
compensation over the last three years; holdings of outstanding
equity-related interests received as compensation that are the source of
future gains; and retirement plans, deferred compensation and other
post-employment payments and benefits.
- The Summary Compensation Table (see attachment)
will be the principal disclosure vehicle for executive compensation,
showing compensation for each named executive officer over the last
three years. The Summary Compensation Table will be accompanied by
narrative disclosure and a Grants of Plan-Based Awards Table that will
help explain the compensation information presented in the table. The
Summary Compensation Table will include, in addition to columns for
salary and bonus:
- A dollar value for all equity-based awards, shown in separate
columns for stock and stock options, measured at grant date fair
value, computed pursuant to Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment ("FAS 123R"), to provide a more complete picture
of compensation and facilitate reporting total compensation;
- A column reporting the amount of compensation under non-equity
incentive plans;
- A column reporting the annual change in the actuarial present
value of accumulated pension benefits and above-market or preferential
earnings on nonqualified deferred compensation, so that these amounts
can be deducted from total compensation for purposes of determining
the named executive officers;
- A column showing the aggregate amount of all other compensation
not reported in the other columns of the table, including perquisites.
Perquisites will be included in the table unless the aggregate amount
is less than $10,000, and interpretive guidance will be provided for
determining what is a perquisite; and
- A column reporting total compensation.
As proposed, the accompanying narrative would have required
disclosure for up to three employees who were not executive officers
during the last completed fiscal year, but whose total compensation
was greater than that of any of the named executive officers. This
provision will be revised and reproposed for public comment. The new
proposal would require that the accompanying narrative disclosure
include the total compensation (excluding the same items that would be
deducted from total compensation for purposes of determining named
executive officers) and job positions of each of a company's three
most highly compensated employees, whether or not they were executive
officers during the last completed fiscal year, whose compensation for
the last completed fiscal year was greater than that of any of the
named executive officers included in the tables, except that employees
having no responsibility for significant policy decisions within the
company, a significant subsidiary, or a principal business unit,
division or function would be excluded when determining which
employees are among the most highly compensated. Under the revised
proposal, this provision would only apply to large accelerated filers.
- Disclosure regarding outstanding equity interests will
include:
- The Outstanding Equity Awards at Fiscal-Year End Table, which will
show outstanding awards representing potential amounts that may be
received in the future, including such information as the amount of
securities underlying exercisable and unexercisable options, the
exercise prices and the expiration dates for each outstanding option
(rather than on an aggregate basis); and
- The Option Exercises and Stock Vested Table, which will show
amounts realized on equity compensation during the last fiscal
year.
- Retirement plan and post-employment disclosure will
include:
- The Pension Benefits Table, which will require disclosure of the
actuarial present value of each named executive officer's accumulated
benefit under each pension plan, computed using the same assumptions
(except for the normal retirement age) and measurement period as used
for financial reporting purposes under generally accepted accounting
principles;
- The Nonqualified Deferred Compensation Table, which will require
disclosure with respect to nonqualified deferred compensation plans of
executive contributions, company contributions, withdrawals, all
earnings for the year (not just the above-market or preferential
portion) and the year-end balance; and
- A narrative description of any arrangement that provides for
payments or benefits at, following, or in connection with any
termination of a named executive officer, a change in
responsibilities, or a change in control of the company, including
quantification of these potential payments and benefits assuming that
the triggering event took place on the last business day of the
company's last fiscal year and the price per share was the closing
market price on that date.
Disclosure Regarding Option Grants
The Commission will provide in the Release additional guidance
regarding disclosure of company programs, plans and practices relating to
the granting of options, including in particular the timing of option
grants in coordination with the release of material nonpublic information
and the selection of exercise prices that differ from the underlying
stock's price on the grant date.
- Required disclosure will include clear tabular presentations of
option grants including:
- The Compensation Discussion and Analysis section will also require
enhanced narrative disclosure about option grants to executives.
Companies will be called upon to analyze and discuss, as appropriate,
material information such as the reasons a company selects particular
grant dates for awards or the methods a company uses to select the terms
of awards, such as the exercise prices of stock options.
- With regard to the timing of stock options in particular, companies
will be called upon in the guidance to answer questions such
as:
- Does a company have any program, plan or practice to time option
grants to its executives in coordination with the release of material
non-public information?
- How does any program, plan or practice to time option grants to
executives fit in the context of the company's program, plan or
practice, if any, with regard to option grants to employees more
generally?
- What was the role of the compensation committee in approving and
administering such a program, plan or practice? How did the board or
compensation committee take such information into account when
determining whether and in what amount to make those grants? Did the
compensation committee delegate any aspect of the actual
administration of a program, plan or practice to any other
persons?
- What was the role of executive officers in the company's program,
plan or practice of option timing?
- Does the company set the grant date of its stock option grants to
new executives in coordination with the release of material non-public
information?
- Does a company plan to time, or has it timed, its release of
material nonpublic information for the purpose of affecting the value
of executive compensation?
Disclosure will also be required where a company has not previously
disclosed a program, plan or practice of timing option grants to
executives, but has adopted such a program, plan or practice or has made
one or more decisions since the beginning of the past fiscal year to
time option grants.
- Similar disclosure standards will apply if a company has a program,
plan or practice of awarding options and setting the exercise price
based on the stock's price on a date other than the actual grant date or
if the company determines the exercise price of option grants by using
formulas based on average prices (or lowest prices) of the company's
stock in a period preceding, surrounding or following the grant date.
Director Compensation
Director compensation for the last fiscal year will be required in a
Director Compensation Table (along with related narrative), which will be
similar in format to the Summary Compensation Table described above.
2. Related Person Transactions, Director Independence and Other
Corporate Governance Matters
Related Person Transactions
The amendments will streamline and modernize the related person
transaction disclosure requirement, while also making it more
principles-based. The changes to this disclosure requirement will
include:
- Increasing the dollar threshold for transactions required to be
disclosed from $60,000 to $120,000;
- Requiring disclosure of a company's policies and procedures for the
review, approval or ratification of related person
transactions;
- Eliminating the distinction between indebtedness and other types of
related person transactions, and eliminating requirements for disclosure
of specific types of director relationships; and
- Specifying exceptions for some categories of transactions that do
not fall within the principle for disclosure under the related person
transaction disclosure requirement.
Director Independence and Other Corporate Governance Matters
A new Item 407 of Regulations S-K and S-B will consolidate existing
disclosure requirements regarding director independence and related
corporate governance matters, in most cases without substantive change,
and will also update disclosure requirements regarding director
independence to reflect the Commission's current requirements and current
listing standards. The disclosure under this requirement will include:
- Disclosure of whether each director and director nominee is
independent;
- A description, by specific category or type, of any transactions,
relationships or arrangements not disclosed as a related person
transaction that were considered by the board of directors when
determining if applicable independence standards were
satisfied;
- Disclosure of any audit, nominating and compensation committee
members who are not independent; and
- Disclosure about the compensation committee's processes and
procedures for the consideration of executive and director compensation.
3. Security Ownership of Officers and Directors
The amendments will require disclosure of the number of shares pledged
by management, and the inclusion of directors' qualifying shares in the
total amount of securities owned.
4. Form 8-K
The rules will modify the disclosure requirements in Form 8-K to
capture some employment arrangements and material amendments thereto only
for named executive officers. The rules will also consolidate all Form 8-K
disclosure regarding employment arrangements under a single item.
5. Plain English Disclosure in Proxy and Information Statements
The rules will require companies to prepare most of this information
using plain English principles in organization, language and design.
6. Registered Investment Companies and Business Development
Companies
The amendments will modify certain disclosure requirements for
registered investment companies and business development companies.
Specifically, the amendments will:
- Apply the executive compensation disclosure requirements for
operating companies in their entirety to business development
companies;
- Increase to $120,000 the current $60,000 threshold for disclosure of
certain interests, transactions, and relationships of independent
directors of registered investment companies, similar to the increase
proposed for operating companies with respect to related party
disclosure; and
- Reorganize the proxy rules applicable to investment companies to
reflect organizational changes proposed for operating companies.
7. Compliance
Compliance with these provisions will be required as follows.
- For Forms 8-K, compliance will be required for triggering events
that occur 60 days or more after publication in the Federal
Register;
- For Forms 10-K and 10-KSB, compliance will be required for fiscal
years ending on or after Dec. 15, 2006;
- For proxy and information statements covering registrants other than
registered investment companies, compliance will be required for any new
proxy or information statements filed on or after Dec. 15, 2006, that
are required to include Item 402 and 404 disclosure for fiscal years
ending on or after Dec. 15, 2006;
- For Securities Act registration statements covering registrants
other than registered investment companies and Exchange Act registration
statements (including pre-effective and post-effective amendments, as
applicable), compliance will be required for registration statements
that are filed with the Commission on or after Dec. 15, 2006, that are
required to include Item 402 and 404 disclosure for fiscal years ending
on or after Dec. 15, 2006;
- For initial registration statements and post-effective amendments
that are annual updates to effective registration statements that are
filed on Forms N-1A, N-2 and N-3 (except those filed by business
development companies), compliance will be required for registration
statements and post-effective amendments that are filed with the
Commission on or after Dec. 15, 2006; and
- For proxy and information statements covering registered investment
companies, compliance will be required for any new proxy or information
statement filed on or after Dec. 15, 2006.
***
The full text of the detailed release concerning these items will be
posted to the SEC Web site as soon as possible.
# # #
Additional materials: Summary
Compensation Table
http://www.sec.gov/news/press/2006/2006-123.htm
Modified:
07/26/2006 |