Executive Compensation and Related Party Disclosure, 6542-6631 [06-946]
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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 228, 229, 239, 240, 245,
249 and 274
[Release Nos. 33–8655; 34–53185; IC–
27218; File No. S7–03–06]
RIN 3235–AI80
Executive Compensation and Related
Party Disclosure
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
SUMMARY: The Securities and Exchange
Commission is proposing amendments
to the disclosure requirements for
executive and director compensation,
related party transactions, director
independence and other corporate
governance matters and security
ownership of officers and directors.
These amendments would apply to
disclosure in proxy and information
statements, periodic reports, current
reports and other filings under the
Securities Exchange Act of 1934 and to
registration statements under the
Exchange Act and the Securities Act of
1933. We also propose to require that
disclosure under the amended items
generally be provided in plain English.
The proposed amendments are intended
to make proxy statements, reports and
registration statements easier to
understand. They are also intended to
provide investors with a clearer and
more complete picture of the
compensation earned by a company’s
principal executive officer, principal
financial officer and highest paid
executive officers and members of its
board of directors. In addition, they are
intended to provide better information
about key financial relationships among
companies and their executive officers,
directors, significant shareholders and
their respective immediate family
members.
Comments should be received on
or before April 10, 2006.
ADDRESSES: Comments may be
submitted by any of the following
methods:
DATES:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–03–06 on the subject line;
or
• Use the Federal Rulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
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Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number S7–03–06. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/proposed/
shtml). Comments are also available for
public inspection and copying in the
Commission’s Public Reference Room,
100 F Street, NE, Washington, DC
20549. All comments received will be
posted without change; we do not edit
personal identifying information from
submissions. You should submit only
information that you wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT:
Anne Krauskopf, Carloyn Sherman, or
Daniel Greenspan, at (202) 551–3500, in
the Division of Corporation Finance,
U.S. Securities and Exchange
Commission, 100 F Street, NE,
Washington, DC 20549–3010 or, with
respect to questions regarding
investment companies, Kieran Brown in
the Division of Investment Management,
at (202) 551–6784.
SUPPLEMENTARY INFORMATION: We
propose to amend: Items 201,1 306,2
401,3 402,4 403 5 and 404 6 of
Regulations S–K 7 and S–B,8 Item 601 9
of Regulation S–K, Item 1107 10 of
Regulation AB,11 and Rule 100 12 of
Regulation BTR.13 We also propose to
add new Item 407 to Regulations S–K
and S–B. In addition, we propose to
amend Rules 13a–11,14 14a–6,15 14c–
5,16 15d–11 17 and 16b–3 18 under the
Securities Exchange Act of 1934.19 We
propose to add Rules 13a–20 and 15d–
20 under the Exchange Act. We further
propose to amend Schedule 14A 20
under the Exchange Act, as well as
Exchange Act Forms 8–K,21 10,22
10SB,23 10–Q,24 10–QSB,25 10–K,26 10–
KSB 27 and 20–F.28 Finally, we propose
to amend Forms SB–2,29 S–1,30 S–3,31
S–4 32 and S–11 33 under the Securities
Act, Forms N–1A,34 N–2,35 and N–3 36
under the Securities Act and the
Investment Company Act of 1940,37 and
Form N–CSR 38 under the Investment
Company Act and the Exchange Act.
Table of Contents
I. Background and Overview of the Proposals
II. Executive and Director Compensation
Disclosure
A. Compensation Discussion and Analysis
1. Intent and Operation of the Proposed
Compensation Discussion and Analysis
2. Proposed Instructions to Compensation
Discussion and Analysis
3. ‘‘Filed’’ Status of Compensation
Discussion and Analysis
4. Proposed Elimination of the
Performance Graph and the
Compensation Committee Report
B. Compensation Tables
1. Compensation to Named Executive
Officers in the Last Three Completed
Fiscal Years—The Summary
Compensation Table and Related
Disclosure
a. Total Compensation Column
b. Salary and Bonus Columns
c. Plan-Based Awards
i. Stock Awards and Option Awards
Columns
ii. Non-Stock Incentive Plan Compensation
Column
d. All Other Compensation Column
i. Earnings on Deferred Compensation
ii. Increase in Pension Value
iii. Perquisites and Other Personal Benefits
iv. Additional All Other Compensation
Column Items
e. Captions and Table Layout
2. Supplemental Annual Compensation
Tables
a. Grants of Performance-Based Awards
Table
b. Grants of All Other Equity Awards Table
3. Narrative Disclosure to Summary
Compensation Table and Supplemental
Tables
1 17
20 17
2 17
21 17
CFR 229.201 and 17 CFR 228.201.
CFR 229.306 and 17 CFR 228.306.
3 17 CFR 229.401 and 17 CFR 228.401.
4 17 CFR 229.402 and 17 CFR 228.402.
5 17 CFR 229.403 and 17 CFR 228.403.
6 17 CFR 229.404 and 17 CFR 228.404.
7 17 CFR 229.10 et seq.
8 17 CFR 228.10 et seq.
9 17 CFR 229.601.
10 17 CFR 229.1107.
11 17 CFR 229.1100 et seq.
12 17 CFR 245.100.
13 17 CFR 245.100 et seq.
14 17 CFR 240.13a–11.
15 17 CFR 240.14a–6.
16 17 CFR 240.14c–5.
17 17 CFR 240.15d–11.
18 17 CFR 240.16b–3.
19 15 U.S.C. 78a et seq.
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CFR 240.14a–101.
CFR 249.308.
22 17 CFR 249.210.
23 17 CFR 249.210b.
24 17 CFR 249.308a.
25 17 CFR 249.308b.
26 17 CFR 249.310.
27 17 CFR 249.310b.
28 17 CFR 249.220f.
29 17 CFR 239.10.
30 17 CFR 239.11.
31 17 CFR 239.13.
32 17 CFR 239.25.
33 17 CFR 239.18.
34 17 CFR 239.15A and 274.11A.
35 17 CFR 239.14 and 274.11a–1.
36 17 CFR 239.17a and 274.11b.
37 15 U.S.C. 80a–1 et seq.
38 17 CFR 249.331 and 274.128.
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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules
4. Exercises and Holdings of Previously
Awarded Equity
a. Outstanding Equity Awards at Fiscal
Year-End
b. Option Exercises and Stock Vesting
5. Post-Employment Compensation
a. Retirement Plan Potential Annual
Payments and Benefits Table
b. Nonqualified Defined Contribution and
Other Deferred Compensation Plans
Table
c. Other Potential Post-Employment
Payments
6. Officers Covered
a. Named Executive Officers
b. Identification of Most Highly
Compensated Officers; Dollar Threshold
for Disclosure
7. Interplay of Items 402 and 404
8. Other Proposed Changes
9. Compensation of Directors
C. Treatment of Specific Types of Issuers
1. Small Business Issuers
2. Foreign Private Issuers
3. Business Development Companies
D. Conforming Amendments
E. General Comment Requests on the Item
402 Proposals
III. Proposed Revisions to Form 8–K and the
Periodic Report Exhibit Requirements
A. Proposed Revisions to Items 1.01 and
5.02 of Form 8–K
B. Proposed Extension of Limited Safe
Harbor under Section 10(b) and Rule
10b-5 to Item 5.02(e) of Form 8–K and
Exclusion of that Item from Form S–3
Eligibility Requirements
C. General Instruction D to Form 8–K
D. Foreign Private Issuers
IV. Beneficial Ownership Disclosure
V. Certain Relationships and Related
Transactions Disclosure
A. Transactions with Related Persons
1. Broad Principle for Disclosure
a. Indebtedness
b. Definitions
2. Disclosure Requirements
3. Exceptions
B. Procedures for Approval of Related
Person Transactions
C. Promoters
D. Corporate Governance Disclosure
E. Treatment of Specific Types of Issuers
1. Small Business Issuers
2. Foreign Private Issuers
3. Registered Investment Companies
F. Conforming Amendments
1. Regulation Blackout Trading Restriction
2. Rule 16b-3 Non-Employee Director
Definition
3. Other Conforming Amendments
VI. Plain English Disclosure
VII. Transition
VIII. Paperwork Reduction Act
A. Background
B. Summary of Information Collections
C. Paperwork Reduction Act Burden
Estimates
1. Securities Act Registration Statements,
Exchange Act Registration Statements
and Exchange Act Annual Reports
2. Exchange Act Current Reports
D. Request for Comment
IX. Cost-Benefit Analysis
A. Background
B. Summary of Proposals
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C. Benefits
D. Costs
E. Request for Comment
X. Consideration of Burden on Competition
and Promotion of Efficiency,
Competition and Capital Formation
XI. Initial Regulatory Flexibility Act Analysis
A. Reasons for the Proposed Action
B. Objectives
C. Legal Basis
D. Small Entities Subject to the Proposed
Amendments
E. Reporting, Recordkeeping and Other
Compliance Requirements
F. Duplicative, Overlapping or Conflicting
Federal Rules
G. Significant Alternatives
H. Solicitation of Comment
XII. Small Business Regulatory Enforcement
Fairness Act
XIII. Statutory Authority and Text of the
Proposed Amendments
I. Background and Overview of the
Proposals
We are proposing revisions to our
rules governing disclosure of executive
compensation, director compensation,
related party transactions, director
independence and other corporate
governance matters and current
reporting regarding compensation
arrangements. The proposed revisions to
the compensation disclosure rules are
intended to provide investors with a
clearer and more complete picture of
compensation to principal executive
officers, principal financial officers, the
other highest paid executive officers and
directors.
Closely related to executive officer
and director compensation is the
participation by executive officers,
directors, significant shareholders and
other related persons in financial
transactions and relationships with the
company. We are also proposing to
revise our disclosure rules regarding
related party transactions and director
independence and board committee
functions.
Finally, some compensation
arrangements must be disclosed under
our recently revised rules relating to
current reports on Form 8-K. We
propose to reorganize and more
appropriately focus our requirements on
the type of compensation information
that should be disclosed on a real-time
basis.
Since the enactment of the Securities
Act and the Exchange Act,39 the
39 Initially, disclosure requirements regarding
executive and director compensation were set forth
in Schedule A to the Securities Act and Section
12(b) of the Exchange Act, which list the type of
information to be included in Securities Act and
Exchange Act registration statements. Item 14 of
Schedule A called for disclosure of the
‘‘remuneration, paid or estimated to be paid, by the
issuer or its predecessor, directly or indirectly,
during the past year and ensuing year to (a) the
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Commission has on a number of
occasions explored the best methods for
communicating clear, concise and
meaningful information about executive
and director compensation and
relationships with the issuer.40 The
Commission also has had to reconsider
executive and director compensation
disclosure requirements in light of
changing trends in executive
compensation. Most recently, in 1992,
the Commission adopted amendments
to the disclosure rules that eschewed a
mostly narrative disclosure approach
adopted in 1983 in favor of formatted
tables that captured all compensation,
while categorizing the various elements
of compensation and promoting
comparability from year to year and
from company to company.41
We believe this tabular approach
remains a sound basis for disclosure.
However, especially in light of the
complexity of and variations in
compensation programs, the very
formatted nature of the current rules
results in too many cases in disclosure
that does not inform investors
adequately as to all elements of
compensation. In those cases investors
may lack material information that we
believe they should receive.
We are thus today proposing an
approach that builds on the strengths of
directors or persons performing similar functions,
and (b) its officers and other persons, naming them
wherever such remuneration exceeded $25,000
during any such year.’’ Section 12(b) of the
Exchange Act as enacted required disclosure of ‘‘(D)
the directors, officers, and underwriters, and each
security holder of record holding more than 10 per
centum of any class of any equity security of the
issuer (other than an exempted security), their
remuneration and their interests in the securities of,
and their material contracts with, the issuers and
any person directly or indirectly controlling or
controlled by, or under direct or indirect common
control with the issuer;’’ and ‘‘(E) remuneration to
others than directors and officers exceeding $20,000
per annum.’’
40 In 1938, the Commission promulgated its first
executive and director compensation disclosure
rules for proxy statements. Release No. 34–1823
(Aug. 11, 1938). At different times thereafter, the
Commission has adopted rules mandating narrative,
tabular, or combinations of narrative and tabular
disclosure as the best method for presenting
compensation disclosure in a manner that is clear
and useful to investors. See e.g., Release No. 34–
3347 (Dec. 18, 1942) [7 FR 10653] (introducing first
tabular disclosure); Release No. 34–4775 (Dec. 11,
1952) [17 FR 11431] (introducing separate table for
pensions and deferred remuneration); Uniform and
Integrated Reporting Requirements: Management
Remuneration, Release No. 33–6003 (Dec. 4, 1978)
[43 FR 58151] (expanding tabular disclosure to
cover all forms of compensation); and Disclosure of
Executive Compensation, Release No. 33–6486
(Sept. 23, 1983) [48 FR 44467] (the ‘‘1983 Release’’)
(limiting tabular disclosure to cash remuneration).
41 Executive Compensation Disclosure, Release
No. 33–6962 (Oct. 16, 1992) [57 FR 48125] (the
‘‘1992 Release’’); See also Executive Compensation
Disclosure; Securityholder Lists and Mailing
Requests, Release No. 33–7032 (Nov. 22, 1993) [58
FR 63010], at Section II.
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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules
the current requirements rather than
discarding them. However, today’s
proposals do represent a thorough
rethinking of our current rules that
would combine a broader-based tabular
presentation with improved narrative
disclosure supplementing the tables.
This proposed approach would promote
clarity and completeness of numerical
information through an improved
tabular presentation, continue to
provide the ability to make comparisons
using tables, and call for material
qualitative information regarding the
manner and context in which
compensation is awarded and earned.
The proposals that we publish for
comment today would require that all
elements of compensation must be
disclosed. We also seek to structure the
revised requirements sufficiently
broadly so that, if they are adopted, they
will continue to operate effectively as
new forms of compensation are
developed in the future.
Under our proposals, compensation
disclosure would begin with a narrative
providing a general overview. Much like
the overview that we have encouraged
companies to provide with their
Management’s Discussion and Analysis
of Financial Condition and Results of
Operations (MD&A),42 the proposed
Compensation Discussion and Analysis
would call for a discussion and analysis
of the material factors underlying
compensation policies and decisions
reflected in the data presented in the
tables. This overview would address in
one place these factors with respect to
both the separate elements of executive
compensation and executive
compensation as a whole.
Following the Compensation
Discussion and Analysis, we propose to
organize detailed disclosure of
executive compensation into three
broad categories:
• Compensation with respect to the
last fiscal year (and the two preceding
fiscal years), as reflected in a revised
Summary Compensation Table that
presents compensation paid currently or
deferred (including options, restricted
stock and similar grants) and
compensation consisting of current
earnings or awards that are part of a
plan, and as supplemented by two
tables providing back-up information for
certain data in the Summary
Compensation Table;
• Holdings of equity-related interests
that relate to compensation or are
42 Item 303 of Regulation S–K [17 CFR 229.303].
See also Commission Guidance Regarding
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Release No.
33–8350 (Dec. 19, 2003) [68 FR 75055], at Section
III.A.
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potential sources of future gains, with a
focus on compensation-related equity
interests that were awarded in prior
years (and disclosed as current
compensation for those years) and are
‘‘at risk,’’ as well as recent realization on
these interests, such as through vesting
of restricted stock and similar
instruments or the exercise of options
and similar instruments; and
• Retirement and other postemployment benefits, including
retirement and defined contribution and
other deferred compensation plans,
other retirement benefits and other postemployment benefits, such as those
payable in the event of a change in
control.
We propose to require improved
tabular disclosure for each of the above
three categories that would be
supplemented by appropriate narrative
that provides material information
necessary to an understanding of the
information presented in the individual
tables.43 We are also proposing a new
disclosure requirement of the total
compensation and job description of up
to an additional three most highly
compensated employees who are not
executive officers or directors but who
earn more than the highest paid
executive officers.
Finally, we propose a director
compensation table that is similar to the
proposed Summary Compensation
Table.44
We also propose to modify some of
the recently expanded Form 8–K
requirements regarding compensation.
Form 8–K requires disclosure on a
current basis of the entry into,
43 As discussed in more detail below, this
narrative disclosure, together with the
Compensation Discussion and Analysis noted
above, would replace the currently required
Compensation Committee Report and the
Performance Graph. Unlike the current
requirements under which both the report and the
graph, although physically included in the proxy
statement, need only be furnished to the
Commission, the proposed narrative disclosure,
along with the rest of the proposed executive officer
and director compensation, would be company
disclosure filed with the Commission.
Current Item 402(a)(9) of Regulation S–K provides
that the Compensation Committee Report and
Performance Graph ‘‘shall not be deemed to be
‘‘soliciting material’’ or to be ‘‘filed’’ with the
Commission or subject to Regulations 14A or 14C
[17 CFR 240.14a–1 et seq. or 240.14c–1 et seq.],
other than as provided in this item, or to the
liabilities of section 18 of the Exchange Act [15
U.S.C. 78r], except to the extent that the registrant
specifically requests that such information be
treated as soliciting material or specifically
incorporates it by reference into a filing under the
Securities Act or the Exchange Act.’’
44 We made similar proposals, which we did not
act on, regarding director compensation in 1995.
Streamlining and Consolidation of Executive and
Director Compensation Disclosure, Release No. 33–
7184 (Aug. 6, 1995) [60 FR 35633] (the ‘‘1995
Release’’), at Section I.B.
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amendment of, and termination of,
material definitive agreements entered
into outside the ordinary course of
business within four business days of
the triggering event. Under our preexisting definitions of material
contracts, many agreements regarding
executive compensation are deemed to
be material agreements entered into
outside the ordinary course, and when,
for purposes of consistency, we adopted
those definitions for use in the
expanded Form 8–K requirements, we
incorporated all of these executive
compensation agreements into the
current disclosure requirements.
Therefore, many agreements regarding
executive compensation, including
some not related to named executive
officers, are required to be disclosed
within four business days of the
applicable triggering event. Consistent
with our intent in adopting the
expanded Form 8–K to capture only
events that are unquestionably or
presumptively material to investors, we
believe it is appropriate to modify the
Form 8–K requirements.
We believe that executive and director
compensation is closely related to
financial transactions and relationships
involving companies and their directors,
executive officers and significant
shareholders and respective immediate
family members. Disclosure
requirements regarding these matters
historically have been interconnected,
given that relationships among these
parties and the company can include
transactions that involve compensation
or analogous features. Such disclosure
also represents material information in
evaluating the overall relationship with
a company’s executive officers and
directors. Further, this disclosure
provides material information regarding
the independence of directors. The
current related party transaction
disclosure requirements were adopted
piecemeal over the years and were
combined into one disclosure
requirement beginning in 1982.45 In
light of the many developments since
then, including the increasing focus on
corporate governance and director
independence, we believe it is necessary
to revise our requirements. Today’s
proposals include amendments to
update, clarify and slightly expand the
related party transaction disclosure
requirements. The proposed
amendments would fold into the
disclosure requirements for related
party transactions the currently separate
45 Disclosure of Certain Relationships and
Transactions Involving Management, Release No.
33–6441 (Dec. 2, 1982) [47 FR 55661] (the ‘‘1982
Release’’).
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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules
disclosure requirement regarding
indebtedness of management and
directors.46 Further, we propose a
requirement that calls for a narrative
explanation of the independence status
of directors under a company’s director
independence policies, consistent with
recent significant changes to the listing
standards of the nation’s principal
securities trading markets.47 We also
propose to consolidate this and other
corporate governance disclosure
requirements regarding director
independence and board committees
into a single expanded disclosure
item.48
In order to ensure that these amended
requirements result in disclosure that is
clear, concise and understandable for
investors, we propose to add Rules 13a–
20 and 15d–20 under the Exchange Act
to require that most of the disclosure
provided in response to the amended
items be presented in plain English.
This proposal would extend the plain
English requirements currently
applicable to portions of registration
statements under the Securities Act to
the disclosure required under the
amended items in Exchange Act reports
and proxy or information statements
incorporated by reference into those
reports.
Finally, we propose to amend our
beneficial ownership disclosure
requirements to require disclosure of
shares pledged by named executive
officers, directors and director
nominees, as well as directors’
qualifying shares.
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II. Executive and Director
Compensation Disclosure
As discussed above, executive and
director compensation disclosure has
been required since 1933, and the
Commission has had disclosure rules in
this area since 1938. In 1992, the
Commission proposed and adopted
substantially revised rules that embody
our current requirements.49 In doing so,
the Commission moved away from
narrative disclosure and back to using
tables that permit comparability from
year to year and from company to
company. We believe that while the
46 Related party transactions are currently
disclosed under Items 404(a) of Regulations S–K
and S–B. Indebtedness is currently disclosed under
Item 404(c) of Regulation S–K.
47 See, e.g., NASD and NYSE Rulemaking:
Relating to Corporate Governance, Release No. 34–
48745 (Nov. 4, 2003) [68 FR 64154] (the ‘‘NASD and
NYSE Listing Standards Release’’). This proposal
would replace our existing disclosure requirement
about director relationships that can affect
independence.
48 Proposed Item 407 of Regulation S–K and
Regulation S–B.
49 1992 Release.
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reasoning behind this approach remains
fundamentally sound, significant
changes are appropriate. Much of the
concern with the current tables is also
their strength: they are highly formatted
and rigid.50 Thus, information not
specifically called for in the tables is
sometimes not provided. For example,
the highly formatted and specific
approach has led some to suggest that
items that do not fit squarely within a
‘‘box’’ specified by the rules need not be
disclosed.51 As another example,
because the tables do not call for a
single figure for total compensation, that
information is generally not provided,
although there is considerable
commentary indicating that a single
total figure is high on the list of
information that some investors wish to
have. To preserve the strengths of the
current approach and build on them, we
propose several steps:
• First, retaining the tabular approach
to provide clarity and comparability
while improving the tabular disclosure
requirements;
• Second, confirming that all
elements of compensation must be
included in the tables;
• Third, providing a format for the
Summary Compensation Table that
requires disclosure of a single figure for
total compensation; and
• Finally, requiring narrative
disclosure comprising both a general
discussion and analysis of
compensation and specific material
information regarding tabular items
where necessary to an understanding of
the tabular disclosure.52
A. Compensation Discussion and
Analysis
We propose requiring a new
Compensation Discussion and Analysis
section.53 This section would be an
50 See,
e.g., Council of Institutional Investors’
Discussion Paper on Executive Pay Disclosure,
Executive Compensation Disclosure: How It Works
Now, How It Can Be Improved, at 11 (available at
www.cii.org/site_files/pdfs/
CII%20pay%20primer%20edited.pdf).
51 For examples, see, e.g., The Corporate Counsel
(Sept.–Oct. 2005) at 6–7; The Corporate Counsel
(Sept.–Oct. 2004) at 7; but see Alan L. Beller,
Director, Division of Corporation Finance, U.S.
Securities and Exchange Commission, Remarks
Before Conference of the NASPP, The Corporate
Counsel and the Corporate Executive (October 20,
2004) (indicating that the explicit language of the
current rules requires disclosure of such items),
available at www.sec.gov/news/speech/
spch102004alb.htm.
52 The discussion that follows focuses on changes
to Item 402 of Regulation S–K, with Section II.C.1
explaining the different modifications proposed for
Item 402 of Regulation S–B. References throughout
the following discussion are to current or proposed
Items of Regulation S–K, unless otherwise
indicated.
53 Proposed Item 402(b). In addition to the
narrative Compensation Discussion and Analysis,
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overview that would provide narrative
disclosure that puts into context the
compensation disclosure provided
elsewhere.54 This overview would
explain material elements of the
particular company’s compensation for
named executive officers by answering
the following questions:
• What are the objectives of the
company’s compensation programs?
• What is the compensation program
designed to reward and not reward?
• What is each element of
compensation?
• Why does the company choose to
pay each element?
• How does the company determine
the amount (and, where applicable, the
formula) for each element?
• How does each element and the
company’s decisions regarding that
element fit into the company’s overall
compensation objectives and affect
decisions regarding other elements?
1. Intent and Operation of the Proposed
Compensation Discussion and Analysis
The purpose of the Compensation
Discussion and Analysis disclosure
would be to provide material
information about the compensation
objectives and policies for named
executive officers without resorting to
boilerplate disclosure. The
Compensation Discussion and Analysis
is intended to put into perspective for
investors the numbers and narrative that
follow it.
The proposed Compensation
Discussion and Analysis requirement
would be principles-based, in that it
identifies the disclosure concept and
provides several illustrative examples.
The application of a particular example
must be tailored to the company.
However, the scope of the
we are proposing revisions to the rules so that, to
the extent material, additional narrative disclosure
would be provided following certain tables to
supplement the disclosure in the table. See, e.g.,
Section II.B.3., discussing the narrative disclosure
to the Summary Compensation Table and
supplemental tables. We are also proposing
disclosure of compensation committee procedures
and processes as well as information regarding
compensation committee interlocks and insider
participation in compensation decisions as part of
proposed Item 407 of Regulation S–K. See Section
V.D., below.
54 See Jeffrey N. Gordon, Executive
Compensation: What’s the Problem, What’s the
Remedy? The Case for Compensation Discussion
and Analysis, 30 J. Corp. L. (forthcoming Spring
2006) (arguing that the SEC should require proxy
disclosure that includes a ‘‘Compensation
Discussion and Analysis’’ section that collects and
summarizes all the compensation elements for
senior executives, providing a ‘‘bottom line
assessment’’ of the different compensation elements
and an explanation as to why the board thinks such
compensation is warranted). Also available at
https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=686464.
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Compensation Discussion and Analysis
is intended to be comprehensive, so that
it would call for discussion of posttermination as well as in-service
compensation arrangements.55
Boilerplate disclosure would not
comply with the proposed item.
Examples of the issues that would
potentially be appropriate for the
company to address in given cases in
the Compensation Discussion and
Analysis include the following:
• Policies for allocating between longterm and currently paid out
compensation;
• Policies for allocating between cash
and non-cash compensation, and among
different forms of non-cash
compensation;
• For long-term compensation, the
basis for allocating compensation to
each different form of award;
• For equity-based compensation,
how the determination is made as to
when the award is granted;
• What specific items of corporate
performance are taken into account in
setting compensation policies and
making compensation decisions;
• How specific elements of
compensation are structured to reflect
these items of the company’s
performance and the executive’s
individual performance;
• The factors considered in decisions
to increase or decrease compensation
materially;
• How compensation or amounts
realizable from prior compensation (e.g.,
gains from prior option or stock awards)
are considered in setting other elements
of compensation (e.g., how gains from
prior option or stock awards are
considered in setting retirement
benefits);
• The impact of accounting and tax
treatments of a particular form of
compensation;
• The company’s equity or other
security ownership requirements or
guidelines (specifying applicable
amounts and forms of ownership), and
any company policies regarding hedging
the economic risk of such ownership;
• Whether the company engaged in
any benchmarking of total
compensation or any material element
of compensation, identifying the
benchmark and, if applicable, its
components (including component
companies); and
• The role of executive officers in the
compensation process.
55 Forward looking information in the
Compensation Discussion and Analysis would fall
with the safe harbor for disclosure of such
information. See Securities Act Section 27A [15
U.S.C. 77z–2] and Exchange Act Section 21E [15
U.S.C. 78u–5]).
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The Compensation Discussion and
Analysis should be sufficiently precise
to identify material differences in
compensation policies and decisions for
individual named executive officers
where appropriate. Where policies or
decisions are materially similar, officers
could be grouped together. Where,
however, the policy for an executive
officer is materially different, for
example in the case of a principal
executive officer, his or her
compensation would be discussed
separately.
2. Proposed Instructions to
Compensation Discussion and Analysis
We are proposing instructions to
make clear that the Compensation
Discussion and Analysis should focus
on the material principles underlying
the company’s executive compensation
policies and decisions, and the most
important factors relevant to analysis of
those policies and decisions, without
using boilerplate language or repeating
the more detailed information set forth
in the tables and related narrative
disclosures that follow. We also propose
to include an instruction to make clear,
as is currently the case, that companies
are not required to disclose target levels
with respect to specific quantitative or
qualitative performance-related factors
considered by the compensation
committee or the board of directors, or
any factors or criteria involving
confidential commercial or business
information, the disclosure of which
would have an adverse effect on the
company, similar to the instruction with
respect to the Compensation Committee
Report today. In applying this
instruction, we intend the standard for
companies to use when determining
whether disclosure would have an
adverse effect on the company to be the
same one that would apply when
companies request confidential
treatment of confidential trade secrets
and commercial or financial information
that otherwise is required to be
disclosed in registration statements,
periodic reports and other documents
filed with us.56 Similarly, to the extent
a performance target has otherwise been
disclosed publicly, disclosure under
Item 402 would be required.
56 See Securities Act Rule 406 [17 CFR 230.406]
and Exchange Act Rule 24b–2 [17 CFR 240.24b–2]
(incorporating the criteria for non-disclosure set
forth in Exemption 4 of the Freedom of Information
Act [5 U.S.C. 552(b)(4)] and Exchange Act Rule
80(b)(4) [17 CFR 200.80(b)(4)]). Today’s proposed
rules, like the current rules, would not require a
company to seek confidential treatment under the
procedures in Securities Act Rule 406 and
Exchange Act Rule 24b–2.
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3. ‘‘Filed’’ Status of Compensation
Discussion and Analysis
The Compensation Discussion and
Analysis will be considered a part of the
proxy statement and any other filing in
which it is included. Unlike the current
Compensation Committee Report and
Performance Graph, which would be
eliminated under our proposals, as
discussed below, the proposed
Compensation Discussion and Analysis
would be soliciting material and would
be filed with the Commission.
Therefore, it would be subject to
Regulations 14A or 14C and to the
liabilities of Section 18 of the Exchange
Act.57 In addition, to the extent that the
Compensation Discussion and Analysis
and any of the other disclosure
regarding executive officer and director
compensation or other matters is
included or incorporated by reference
into a periodic report, the disclosure
would be covered by the certifications
that principal executives officers and
principal financial officers are required
to make under the Sarbanes-Oxley Act
of 2002.58
In adopting the current rules in 1992,
the Commission took into account
comments that the Compensation
Committee Report should be furnished
rather than filed to allow for a more
open and robust discussion in the
reports.59 Little that we see in current
Compensation Committee Reports
suggests that this treatment has resulted
in such discussions, or at least the more
transparent disclosure that the
comments suggested would result.
Further, we believe that it is appropriate
for companies to take responsibility for
disclosure involving board matters as
with other disclosure.
4. Proposed Elimination of the
Performance Graph and the
Compensation Committee Report
In light of the Compensation
Discussion and Analysis proposal, we
propose to eliminate the Performance
Graph and the Compensation
Committee Report that currently are
required by our rules.60 The graph and
57 15
U.S.C. 78r.
Act Rules 13a–14 [17 CFR 240.13a–
14] and 15d–14 [17 CFR 240.15d–14]. See also
Certification of Disclosure in Companies’ Quarterly
and Annual Reports, Release No. 34–46427 (Aug.
29, 2002) [67 FR 57275], at note 35 (the
‘‘Certification Release’’) (stating that ‘‘the
certification in the annual report on Form 10–K or
10–KSB would be considered to cover the Part III
information in a registrant’s proxy or information
statement as and when filed’’).
59 1992 Release, at Section II.H.
60 The Compensation Committee Report is
currently required by Item 402(k) and the
Performance Graph is currently required by Item
402(l).
58 Exchange
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the report were intended to be
intertwined and their purpose was to
show the relationship, if any, between
compensation and corporate
performance, as reflected by stock price.
Unfortunately, the Compensation
Committee Report today often results in
boilerplate disclosure that is of little
benefit to investors.61 Further, given the
widespread availability of stock
performance information about
companies, industries and indexes
through business-related Web sites or
similar sources, we believe that the
requirement for the Performance Graph
is outdated, particularly since the
disclosure in the Compensation
Discussion and Analysis regarding the
elements of corporate performance that
a given company’s policies might reach
is intended to allow broader discussion
than just that of the relationship of
compensation to the performance of the
company as reflected by stock price.
Request for Comment
• Does the proposed Compensation
Discussion and Analysis provide
companies with the same flexibility as
MD&A to provide a clear picture to
investors?
• Are there any further changes that
we can make to avoid boilerplate
disclosure about executive
compensation?
• Is there any significant impact by
not having the report over the names of
the compensation committee of the
board of directors? If so, please explain
in detail.
• Would any significant impact result
from treating the Compensation
Discussion and Analysis as filed and not
furnished? A commenter that prefers
furnishing over filing should describe
any benefits that would be obtained by
treating the material as furnished. In
particular, such a commenter should
describe those benefits in the context of
the expected benefits of the
Commission’s decision in 1992 to treat
the report of the Compensation
Committee as furnished and should
address whether and why those benefits
were achieved or not achieved.
• Are there any other specific items
we should list in the rule as possibly
material information? Are there any
items that are listed that should not be?
• Are there any items that we should
explicitly mandate be disclosed by
every issuer?
• Should performance targets
continue to be excludable based on the
61 See Martin D. Mobley, Compensation
Committee Reports Post-Sarbanes-Oxley:
Unimproved Disclosure for Executive
Compensation Policies and Practices, 2005 Colum.
Bus. L. Rev. 111 (2005).
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potential adverse competitive effect on
the company of their disclosure? Why or
why not? If so, what should be the
standard for exclusion? Are there any
other items that should be excludable
based on potential adverse competitive
effect on the company of their
disclosure?
• Should we retain the Performance
Graph?
B. Compensation Tables
We believe that much about the
tabular approach to eliciting
compensation disclosure is sound.62 We
also believe, however, that the tables
should be reorganized and streamlined
to provide a clearer and more logical
picture of total compensation and its
elements for named executive officers.
We propose reorganizing the
compensation tables and their related
narrative disclosure into three broad
categories:
1. Compensation with respect to the
last fiscal year (and the two preceding
fiscal years), as reflected in a revised
Summary Compensation Table that
presents compensation paid currently or
deferred (including options, restricted
stock and similar grants) and
compensation consisting of current
earnings or awards that are part of a
plan, and as supplemented by two
tables providing back-up information for
certain data in the Summary
Compensation Table; 63
2. Holdings of equity-based interests
that relate to compensation or are
potential sources of future
compensation, focusing on
compensation-related equity-based
interests that were awarded in prior
years 64 and are ‘‘at risk,’’ as well as
recent realization on these interests,
such as through vesting of restricted
stock or the exercise of options and
similar instruments; 65 and
62 The tabular disclosure and related narrative
disclosure under proposed Item 402 would apply,
as does existing Item 402, to named executive
officers. As discussed below in Section II.B.6.a., we
are proposing certain changes to the definition of
named executive officer.
63 The two tables that would supplement the
Summary Compensation Table would be the Grants
of Performance-Based Awards Table, discussed
below in Section II.B.2.a., and the Grants of All
Other Equity Awards Table, discussed below in
Section II.B.2.b. A proposed narrative disclosure
requirement accompanying these three tables is
discussed below in Section II.B.3.
64 Under the proposals, these interests would be
disclosed as current compensation for those prior
years.
65 Information regarding holdings of such equitybased interests that relate to compensation would
be disclosed in the Outstanding Equity Awards at
Fiscal Year-End Table, discussed below in Section
II.B.4.a. Information regarding realization on
holdings of equity-related interests would be
required to be disclosed in the Option Exercises and
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3. Retirement and other postemployment compensation, including
retirement and deferred compensation
plans, other retirement benefits and
other post-employment benefits, such as
those payable in the event of a change
in control.66
Reorganizing the tables along these
themes should help investors
understand how compensation
components relate to each other. At the
same time we would retain the ability
for investors to use the tables to
compare compensation from year to
year and from company to company.
We note that in more clearly
organizing the compensation tables to
explain how the elements relate to each
other, we may in some situations be
requiring disclosure of both amounts
earned (or potentially earned) and
amounts subsequently paid out. This
approach raises the risk of ‘‘double
counting’’ some elements of
compensation. However, we believe the
risk inherent in such double disclosure
is outweighed by the clearer and more
complete picture it would provide to
investors. We would encourage
companies to use the narrative
following the tables (and where
appropriate the Compensation
Discussion and Analysis) to explain
how disclosures relate to each other in
their particular circumstances.
1. Compensation to Named Executive
Officers in the Last Three Completed
Fiscal Years—The Summary
Compensation Table and Related
Disclosure
Under today’s proposals, the
Summary Compensation Table would
continue to serve as the principal
disclosure vehicle regarding executive
compensation. This table, with the
proposed revisions, would show the
named executive officers compensation
for each of the last three years, whether
or not actually paid out. Consistent with
current requirements, the revised
Summary Compensation Table would
continue to require disclosure of
compensation for each of the company’s
last three completed fiscal years.67
Stock Vested Table discussed below in Section
II.B.4.b.
66 The proposed disclosure regarding retirement
and post-employment compensation would be
required in the Retirement Plan Potential Annual
Payments and Benefits Table, discussed below in
Section II.B.5.a., the Nonqualified Defined
Contribution and Other Deferred Compensation
Plans Table, discussed below in Section II.B.5.b.,
and the narrative disclosure requirement for other
potential post-employment payments discussed
below in Section II.B.5.c.
67 Current Instruction to Item 402(b), permitting
exclusion of information for fiscal years prior to the
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However, the proposals would require
disclosure of a figure representing total
compensation, as reflected in other
columns of the Summary Compensation
Table, and would simplify the
presentation from that in the current
table. As described in greater detail
below, the proposals also provide for
two supplementary tables disclosing
additional information about grants of
performance-based awards and all other
equity awards, respectively. Narrative
disclosure would follow the three
tables, providing disclosure of material
information necessary to an
understanding of the information
disclosed in the tables.
SUMMARY COMPENSATION TABLE
Name and principal position
Year
Total
($)
(a)
(b)
Salary
($)
Bonus
($)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(d)
(e)
(f)
(g)
(h)
(i)
(c)
PEO 68 ..................................
PFO 69 ..................................
A ...........................................
B ...........................................
C ...........................................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
be disclosed in dollars and that a total
of all compensation be provided.70 The
• Should the Summary Compensation
new column disclosing total
Table continue as it currently does to
compensation would appear as the first
require disclosure of compensation for
column providing compensation
each of the company’s last three fiscal
information—column (c).71 This column
years, or is only the last completed
would aggregate the total dollar value of
fiscal year necessary in light of the
each form of compensation quantified in
availability of historical data on
the columns that would follow it
compensation through the
(columns (d) through (i)). The proposed
Commission’s EDGAR system and other
‘‘Total’’ column would respond to
sources?
concerns that investors, analysts and
• Should we require all of the
other users of Item 402 disclosure
proposed disclosures discussed below
cannot compute aggregate amounts of
in addition to those in the Summary
compensation using current disclosure
Compensation Table, or does the
in a manner that is accurate or is
Summary Compensation Table itself
comparable across years or companies.
provide an adequate picture of
Request for Comment
compensation? Is there some other
combination of the Summary
• Should we include a requirement to
Compensation Table with other
disclose a total compensation amount?
proposed disclosures that would fulfill
our objectives?
• Will a total compensation number
provide investors with meaningful
a. Total Compensation Column
information about compensation? If not,
We propose to modify the Summary
why? Would disclosure of a total
Compensation Table to provide a clearer compensation number result in any
picture of total compensation. We
unintended consequences? If so, how
propose requiring that all compensation can they be mitigated?
• Should total compensation be
calculated in a different manner from
that proposed? For example, with
respect to stock-based and option-based
awards, should exercise or vesting date
valuations be used instead?
• Is the proposed new instruction
which would direct that all
compensation values are to be reported
in U.S. dollars necessary? Are there
particular circumstances we should
address regarding disclosure of
compensation in foreign currencies?
last completed fiscal year if the registrant was not
a reporting company pursuant to Exchange Act
Sections 13(a) or 15(d) at any time during that year,
unless the registrant previously was required to
provide information for any such year in response
to a Commission filing requirement, would be
retained and redesignated as proposed Instruction
1 to Item 402(c).
disclosed in per share increments rather than in
dollar amounts. The instruction would further
require, where compensation was paid or received
in a different currency, footnote disclosure
identifying that currency and describing the rate
and methodology used for conversion to dollars.
71 Columns (a) and (b) would, as is currently the
case, specify the executive officer and the year in
question.
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68 ‘‘PEO’’ refers to principal executive officer. See
Section II.B.6.a. below for a description of the
proposed named executive officers for whom
compensation disclosure would be required.
69 ‘‘PFO’’ refers to principal financial officer.
70 Proposed Instruction 2 to Item 402(c) (requiring
all compensation values in the Summary
Compensation Table to be reported in dollars).
Currently, some stock-based compensation is
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b. Salary and Bonus Columns
The next columns we are proposing
are the salary and bonus columns
(columns (d) and (e), respectively),
which would be retained substantially
in their current form. However, we
propose certain changes that should
give an investor a clearer picture of the
total amount earned, the amount
deferred for the year, and the total
amount of deferred compensation that
may be paid out at a later date.
Compensation that is earned, but for
which payment will be deferred, would
be included in the salary, bonus or other
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column, as appropriate.72 A new
instruction, applicable to the entire
Summary Compensation Table, would
provide that if receipt of any amount of
compensation is currently payable
(which must be included in the
appropriate column) but has been
deferred for any reason, the amount so
deferred must be disclosed in a footnote
to the applicable column.73 As
described below, the amount deferred
would also generally be reflected as a
contribution in the deferred
compensation presentation.74 The new
footnote disclosure of amounts deferred
would help to clarify the extent to
which amounts disclosed in the
proposed Nonqualified Defined
Contribution and Other Deferred
Compensation Plans Table described
below represent compensation already
reported, rather than additional
compensation.
We are also proposing a change
eliminating the delay that exists under
current rules where salary and bonus for
the most recent fiscal year are
determined following compliance with
Item 402 disclosure. Under our
proposal, where salary and bonus
cannot be calculated as of the most
recent practicable date, a current report
under Item 5.02 of Form 8–K would be
triggered by a payment, decision or
other occurrence as a result of which
such amounts become calculable in
whole or part.75 The Form 8–K would
include disclosure of the salary or bonus
72 This is the case today for salary and bonus.
This aspect of current Instruction 1 to Item
402(b)(2)(iii)(A) and (B) will be expanded and
redesignated as Proposed Instruction 4 to Item
402(c).
73 Currently, the requirement is triggered only if
the officer elects the deferral. We propose to revise
this to cover all deferrals no matter who has
initiated them.
74 See Section II.B.5.b., describing the
Nonqualified Defined Contribution and Other
Deferred Compensation Plans Table. Disclosure of
these amounts as contributions would be required
for nonqualified deferred compensation plans. This
disclosure would not be required for qualified
plans. Nonqualified deferred compensation plans
and arrangements provide for the deferral of
compensation that does not satisfy the minimum
coverage, nondiscrimination and other rules that
‘‘qualify’’ broad-based plans for favorable tax
treatment under the Internal Revenue Code.
75 Proposed Instruction 3 to Item 5.02(e) of Form
8–K and proposed Instruction 1 to Item 402(c)(2)(iv)
and (v). Currently, in the event that such amounts
are not determinable at the most recent practicable
date, they are generally reported in the annual
report on Form 10–K or proxy statement for the
following fiscal year. We believe providing the
information more quickly is appropriate and are
therefore proposing the use of a current report on
Form 8–K. Proposed Instruction 1 to Item
402(c)(2)(iv) and (v) would require that the
company disclose in a footnote that the salary or
bonus is not calculable through the latest
practicable date and the date that the salary or
bonus is expected to be determined.
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amount and a new total compensation
figure including that salary or bonus
amount.
Request for Comment
• Is the proposed presentation of
deferred compensation in the Summary
Compensation Table and related
footnotes, along with the proposals
outlined below, the best means for
communicating the portion of
compensation that is deferred?
• Are there ways that we could better
clarify how the amounts that would be
identified as deferred in a footnote to
the Summary Compensation Table
relate to the amounts that would be
required in the Nonqualified Defined
Contribution and Other Deferred
Compensation Plans Table?
• Is the proposed change to Form 8–
K to eliminate the delay in disclosing
salary or bonus when they cannot be
calculated as of the most recent
practicable date appropriate?
c. Plan-Based Awards
The next three proposed columns—
Stock Awards, Option Awards and NonStock Incentive Plan Compensation —
cover plan-based awards.
i. Stock Awards and Option Awards
Columns
The Stock Awards Column (proposed
column (f)) would disclose stock-related
awards that derive their value from the
company’s equity securities or permit
settlement by issuance of the company’s
equity securities, such as restricted
stock, restricted stock units, phantom
stock, phantom stock units, common
stock equivalent units or other similar
instruments that do not have option-like
features.76 Valuation would be based on
the grant date fair value of the award
determined pursuant to Financial
Accounting Standards Board Statement
of Financial Accounting Standards No.
123 (revised 2004), Share-Based
76 Generally speaking, a restricted stock award is
an award of stock subject to vesting conditions,
such as performance-based conditions or conditions
based on continued employment for a specified
period of time. This type of award is referred to an
‘‘nonvested equity shares’’ in FAS 123R. Phantom
stock, phantom stock units, common stock
equivalent units and other similar awards are
typically awards where an executive obtains a right
to receive payment in the future of an amount based
on the value of a hypothetical, or notional, amount
of shares of common equity (or in some cases stock
based on that value). To the extent that the terms
of phantom stock, phantom stock units, common
stock equivalents or other similar awards include
option-like features, the awards would be required
to be included in the Option Awards column.
Currently, restricted stock awards are valued in the
Summary Compensation Table by multiplying the
closing market price of the company’s unrestricted
stock on the date of grant by the number of shares
awarded.
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Payment (FAS 123R) for financial
reporting purposes. Stock awards
subject to performance-based conditions
would also be included in this column
to ensure consistent reporting of stock
awards and to ensure their inclusion in
the proposed Summary Compensation
Table.77
Awards of options, stock appreciation
right grants, and similar stock-based
compensation instruments that have
option-like features (proposed column
(g)) would be disclosed in a manner
similar to the proposed treatment of
stock and other stock-based awards.78
Instead of the current disclosure of the
number of securities underlying the
awards, this column would require
disclosure of the grant date fair value of
the award as determined pursuant to
FAS 123R for financial reporting
purposes. In order to calculate a total
dollar amount of compensation, the
value rather than the number of
securities underlying an award must be
used. The FAS 123R valuation would be
used whether the award itself is in the
form of stock, options or similar
instruments or the award is settled in
cash but the amount of payment is tied
to performance of the company’s stock.
We propose to eliminate the current
requirement in the Options/SAR Grants
in Last Fiscal Year Table to report the
potential realizable value of each option
grant under 5% or 10% increases in
value or the present value of each grant
(computed under any option pricing
model),79 because these alternative
disclosures would no longer be
necessary if the grant date fair value of
equity-based awards is included in the
Summary Compensation Table.
A new instruction would require a
footnote referencing the discussion of
the relevant assumptions in the notes to
the company’s financial statements or to
the discussion of relevant assumptions
in the MD&A.80 The same proposed
instruction would also provide that the
referenced sections will be deemed to be
part of the disclosure provided pursuant
to Item 402. The referenced sections
containing this disclosure are required
in the company’s annual report to
77 These performance-based stock awards can
currently be reported at the company’s election as
incentive plan awards. See current Instruction 1 to
Item 402(b)(2)(iv). Our proposal would eliminate
this option. See the discussion of what are
considered performance-based conditions in note
87, below.
78 A stock appreciation right usually gives the
executive the right to receive the value of the
increase in the price of a specified number of shares
over a specified period of time. These awards may
be settled in case or in shares.
79 Current Item 402(c)(2)(vi).
80 Proposed Instruction 1 to Item 402(c)(2)(vi) and
(vii).
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shareholders that must precede or
accompany the company’s proxy
statement.81 In the case of Internet
disclosure of proxy materials,
companies could provide hyperlinks
from the proxy statement to the
referenced sections contained in the
annual report.82
Under FAS 123R, the compensation
cost is initially measured based on the
grant date fair value of an award.83 The
key measurement principle behind the
accounting standard, measuring stockbased payments at grant date fair value,
is also followed in our proposals. Under
FAS 123R, the compensation cost
calculated as the fair value is generally
recognized for financial reporting
purposes over the period in which the
employee is required to provide service
in exchange for the award (generally the
vesting period). Under our proposals,
the compensation cost calculated as the
grant date fair value will be shown as
compensation in the year in which the
grant is made. We believe that this
approach is more consistent with the
purpose of executive compensation
disclosure. We are in effect proposing
an approach that subscribes to the
measurement method of FAS 123R
based on grant date fair value, but that
also provides for immediate disclosure
of compensation as preferable for
compensation reporting purposes to the
timing of recognition of the
compensation cost for the company’s
financial statement reporting purposes.
To consolidate related elements of
compensation, the Stock Awards and
Option Awards columns would also
require disclosure of the earnings on
outstanding awards in the respective
81 See
Exchange Act Rule 14a-3 [17 CFR 240.14a-
3].
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82 We
recently proposed rules that would allow
companies and other persons to use the Internet to
satisfy proxy material delivery requirements.
Internet Availability of Proxy Materials, Release No.
34–52926 (Dec. 8, 2005) [70 FR 74597].
83 Under FAS 123R, the classification of an award
as an equity or liability award is an important
aspect of the accounting because the classification
will affect the measurement of compensation cost.
Awards with cash-based settlement, repurchase
features, or other features that do not allow an
employee to bear the risks and rewards normally
associated with share ownership for a specified
period of time would be classified as liability
awards under FAS 123R. For an award classified as
an equity award under FAS 123R, the compensation
cost recognized is fixed for a particular award, and
absent modification, is not revised with subsequent
changes in market prices or other assumptions used
for purposes of the valuation. In contrast, liability
awards are initially measured at fair value on the
grant date, but for purposes of recognition in
financial statement reporting are then re-measured
at each reporting date through the settlement date
under FAS 123R. These re-measurements would not
be the basis for executive compensation disclosure
unless the award has been modified, as described
later in this proposal.
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categories.84 New instructions would
require footnote identification and
quantification of all earnings, whether
the earnings were paid during the fiscal
year, payable during the period but
deferred, or payable by their terms at a
later date but earned during the year.85
Previously awarded options or
freestanding stock appreciation awards
that the company repriced or otherwise
materially modified during the last
fiscal year would be disclosed based on
the total fair value of the award as so
modified.86
If the award has no performance
conditions, but instead vests with the
passage of time and continued
employment, then the number of shares
underlying the award and other details
regarding the award would be disclosed
in a separate table covering grants of
equity awards supplementing the
Summary Compensation Table.87 If the
84 These earnings are currently reportable in the
Other Annual Compensation or All Other
Compensation columns of the Summary
Compensation Table. Current Item
402(b)(2)(iii)(C)(2) requires disclosure of earnings
on restricted stock, options, and SARs paid during
the fiscal year (or payable during that period but
deferred at the election of the named executive
officer), to the extent those earnings are abovemarket or preferential. The proposal would require
disclosure of all such earnings, rather than merely
any above-market or preferential portion. Current
item 402(b)(2)(iii)(C)(3) requires similar disclosure
of all earnings on long-term incentive plan
compensation. See also current Item 402(b)(2)(v)(B)
and (C).
85 Proposed Instruction 3 to Item 402(c)(2)(vi) and
(vii) and Proposed Instruction 2 to Item
402(c)(2)(viii).
86 See current instruction 3 to Item 402(b)(2)(iv)
and proposed Instruction 2 to Item 402(c)(2)(vi) and
(vii). Under FAS 123R, unlike under our proposal,
only the incremental compensation cost is
recognized for a modified award.
87 See Section II.B.2.b., discussing the Grants of
All Other Equity Awards Table required by
proposed Item 402(c). As defined in Appendix E of
FAS 123R, a performance condition is ‘‘a condition
affecting the vesting, exercisability, exercise price
or other pertinent factors used in determining the
fair value of an award that relates to both (a) an
employee’s rendering service for a specified (either
explicitly or implicitly) period of time and (b)
achieving a specified performance target that is
defined solely by reference to the employer’s own
operations (or activities). Attaining a specified
growth rate in return on assets, obtaining regulatory
approval to market a specified product, selling
shares in an initial public offering or other
financing event, and a change in control are
examples of performance conditions for puropses of
this Statement. A performance target also may be
defined by reference to the same performance
measure of another entity or group of entities. For
example, attaining a growth rate in earnings per
share that exceeds the average growth rate in
earnings per share of other entities in the same
industry is a performance condition for purposes of
this Statement. A performance target might pertain
either to the performance of the enterprise as a
whole or to some part of the enterprise, such as a
division or an individual employee.’’ An award also
would be considered to have a performance
condition if it is subject to a market condition,
which is ‘‘a condition affecting the exercise price,
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award has a performance condition,
then the details on the estimated future
payouts will be disclosed in a second
separate supplemental table covering
grants of performance-based awards.88
Request for Comment
• Is the proposed presentation of
stock awards that do not have optionlike features in the Summary
Compensation Table the best means for
presenting restricted stock and similar
awards?
• Is FAS 123R the appropriate
approach for valuing equity-based
awards, including restricted stock,
restricted stock units, phantom stock,
phantom stock units, common stock
equivalent units, options, stock
appreciation rights and other similar
awards for purposes of Item 402
disclosure? If not, why not and what
other valuation methods would be
appropriate? Would any other valuation
method provide the same
comparability? If a different approach
were used, would investors be confused
by differences between the grant date
fair value for financial reporting
purposes and the value in the
compensation tables? 89
• Should the expected term
assumption used in computing the grant
date fair value for financial statement
purposes under FAS 123R also be used
in measuring the value of an individual
named executive officer’s compensation
for the purposes of Item 402? Or, should
an expected term assumption used to
determine an individual named
executive officer’s compensation be
used if it differs from the expected term
assumption used for FAS 123R
purposes? 90 Should companies use the
exercisability, or other pertinent factors used in
determining the fair value of an award under a
share-based payment arrangement that relates to the
achievement of (a) a specified price of the issuer’s
shares or a specified amount of intrinsic value
indexed solely to the issuer’s shares or (b) a
specified price of the issuer’s shares in terms of a
similar (or index of similar) equity security
(securities).’’
88 See Section II.B.2.a., discussing the Grants of
Performance-Based Awards Table.
89 See, e.g., Jonathan Weil and Betsy McKay, Coke
Developed a New Way to Value Options, But
Company Will Return to its Classic Formula, Wall
St. J., Mar. 7, 2003, at C3 (highlighting potential
issue of using one valuation methodology for
financial statements and another for executive
compensation disclosure).
90 FAS 123R requires a company to aggregate
individuals receiving awards into relatively
homogeneous groups with respect to exercise and
post-vesting employment termination behaviors for
the purpose of determining expected term; for
example executives and non-executives. Our
proposals today are not intended to change the
method used to value employee share options for
purposes of FAS 123R or to affect the judgments as
to reasonable groups for purposes of determining
the expected term assumption required by GAS
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full term rather than an expected term
assumption for calculations for named
executive officers? Would the
complexity of such an approach for
investors or the additional burden on
companies outweigh any advantages,
such as possible increased
comparability among companies, of
adjusting assumptions?
• Is the timing of reporting stockbased compensation in our proposals
the best approach? Should stock-based
compensation instead be reflected in
Item 402 according to the same time
schedule by which it is recognized for
a company’s financial statement
reporting purposes?
• Should the valuation method and
all of the assumptions regarding the
valuation also be disclosed in the proxy
statement when they are required to be
disclosed, described and analyzed
elsewhere in a document furnished to
shareholders, including in the notes to
the financial statements?
• We propose treating a modification
of an award as a new award and
requiring disclosure of the total grant
date fair value at the time of
modification. Would it be more
appropriate to require only disclosure of
incremental compensation as is the
approach under FAS 123R?
• Should we eliminate as proposed
the current instruction allowing
performance-based stock awards to be
reported at the company’s election as
incentive plan awards? If not, please
explain whether the availability of this
election is helpful to and not confusing
to investors.
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ii. Non-Stock Incentive Plan
Compensation Column
We propose that the Non-Stock
Incentive Plan Compensation column
(proposed column (h)) would report the
dollar value of all other amounts earned
during the fiscal year pursuant to
incentive plans.91 This column would
be limited to awards where the relevant
performance measure under the
incentive plan is not based on the price
of the company’s equity securities or the
award may not be settled by issuance of
123R. Under our proposals, where a company uses
more than one group, the measurement of grant date
fair value for purposes of Item 402 would be
derived using the expected term assumption for the
group that includes the named executive officers (or
the group that includes directors for purposes of
proposed Item 402(l)).
91 Proposed Item 402(c)(2)(viii). An incentive
plan generally provides for compensation intended
to serve as an incentive for performance to occur
over a specific period, whether such performance
is measured by reference to financial performance
of the company or an affiliate, the company’s stock
price, or any other measure. See proposed Item
402(a)(6)(iii) for definitions of ‘‘incentive plan’’ and
‘‘non-stock incentive plan.’’
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a company’s equity securities; those
awards would instead be disclosed in
the Stock Awards and Option Awards
columns discussed above.92
Performance-based compensation under
a long-term plan that is not tied to the
performance of the company’s stock (but
instead is tied to other measures such as
a return on assets, return on equity,
performance of a division, or other such
measures) would be disclosed in the
Summary Compensation Table in the
year when the relevant specified
performance criteria under the plan are
satisfied and the compensation earned,
whether or not payment is actually
made to the named executive officer in
that year. The grant of an award
(providing for future compensation if
such performance measures are
satisfied) under such a plan would be
disclosed in the supplemental Grants of
Performance-Based Awards Table in the
year of grant, which would generally be
some year prior to the year in which
performance-based compensation under
the plan is reported in the Summary
Compensation Table.93 Because there is
not one clearly required or accepted
standard for measuring the value at
grant date of these non-stock based
performance-based awards that reflects
the applicable performance
contingencies, as there is for equitybased awards with FAS 123R, we do not
propose to include such a value in the
Summary Compensation Table, but
instead would continue the current
disclosure format of reflecting these
items of compensation when earned.94
As with the Stock Awards and Option
Awards columns, earnings on
outstanding awards of other incentive
plans would also be included in the
Non-Stock Incentive Plan Compensation
column.
Request for Comment
• Since there is not one clearly
required or accepted standard for
measuring the value at grant date of
those cash awards that reflect
92 Awards disclosed in this column are not
covered by FAS 123R for financial reporting
purposes because they do not involve share-based
payment arrangements. Awards that involve sharebased payment arrangements would be disclosed in
the Stock Awards or Option Awards columns, as
appropriate.
93 See Section II.B.2.a., discussing the Grants of
Performance-Based Awards Table. Under the
proposals, once the disclosure has been provided in
the Summary Compensation Table when the
specified performance criteria have been satisfied
and the compensation earned, and the grant of the
award has been disclosed in the Grants of
Performance-Based Awards Table, no further
disclosure would be required under proposed Item
402 when payment is actually made to the named
executive officer.
94 Current Items 402(b)(2)(iv)(C) and 402(e).
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performance contingencies, is our
approach to include the amounts in the
Summary Compensation Table when
earned appropriate? Are there particular
models or standards that would provide
a basis for measuring the value of these
types of awards at grant date that we
should consider incorporating into our
rules?
• Should earnings on outstanding
awards be reported as proposed in the
applicable award column or should they
be reported in another way, such as in
separate or different columns?
d. All Other Compensation Column
The final column in the Summary
Compensation Table would disclose all
other compensation not required to be
included in any other column. This
approach would allow the capture of all
current compensation in the Summary
Compensation Table and also would
allow a total compensation calculation.
We confirm that disclosure of all
compensation would clearly be required
under the proposals.95
We propose to clarify the disclosure
required in the All Other Compensation
Column (proposed column (i)) in two
principal respects:
• Consistent with the requirement
that the Summary Compensation Table
disclose all compensation, we would
state explicitly that compensation not
properly reportable in the other
columns reporting specified forms of
compensation must be reported in this
column; and
• To simplify the Summary
Compensation Table and eliminate
confusing distinctions between items
currently reported as ‘‘Annual’’ and
‘‘Long Term’’ compensation, we would
move into this column all items
currently reportable as ‘‘Other Annual
Compensation.’’ 96
We also propose that each item of
compensation included in the All Other
Compensation column that exceeds
$10,000 be separately identified and
quantified in a footnote. We believe that
the $10,000 threshold balances our
desire to avoid disclosure of clearly de
minimis matters against the interests of
investors in the nature of items
comprising compensation. Each item of
compensation less than that amount
would be included in the column (other
than aggregate perquisites and other
95 The only exception, as discussed below, would
be perquisites and personal benefits if they
aggregated less than $10,000 for a named executive.
The 1992 Release, at Section II.A.4, also noted ‘‘the
revised item includes an express statement that it
requires disclosure of all compensation to the
named executive officers and directors for services
rendered in all capacities to the registrant and its
subsidiaries.’’ See also current Item 402(a)(2).
96 Current Item 402(b)(2)(iii)(c).
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personal benefits less than $10,000 as
discussed below), but would not be
required to be identified by type and
amount.97 Items that would be disclosed
in the All Other Compensation column
would include, but would not be
limited to, the items discussed below.
compensation that is deferred on a basis
that is not tax-qualified or should we
require disclosure only of above-market
or preferential earnings? If the latter,
please explain why such an approach is
more useful or informative for investors
than our proposed approach.
Request for Comment
• Should all compensation no matter
how de minimis be required to be
disclosed? Will companies be able to
track this information without undue
burden? Is $10,000 the appropriate
threshold for separate identification and
quantification?
ii. Increase in Pension Value
We propose requiring in the All Other
Compensation Column the aggregate of
increase in actuarial value to the
executive officer of defined benefit and
actuarial plans (including supplemental
plans) accrued during the year.103
An instruction would specify that this
disclosure applies to each plan that
provides for the payment of retirement
benefits, or benefits that will be paid
primarily following retirement,
including but not limited to taxqualified defined benefit plans and
supplemental employee retirement
plans, but excluding defined
contribution plans.104 The retirement
section, discussed below, would
provide more information regarding
these covered plans.105 In contrast to
defined contribution plans, for which
the Summary Compensation Table
requires disclosure of company
contributions,106 Item 402 does not
currently require disclosure of the
annual increase in value of defined
benefit plans, such as pension plans, in
which the named executive officers
participate.107 The annual increase in
actuarial value of these plans may be a
significant element of compensation
that is earned on an annual basis, thus
we believe it is appropriate to include
these values in the computation of total
compensation.
Such disclosure is necessary to permit
the Summary Compensation Table to
reflect total compensation for the year.
Such disclosure would also permit a full
i. Earnings on Deferred Compensation
We propose requiring disclosure in
the All Other Compensation column of
all earnings on compensation that is
deferred on a basis that is not taxqualified, including non-tax qualified
defined contribution retirement plans.98
Currently, these earnings must be
disclosed only to the extent of any
portion that is ‘‘above-market or
preferential.’’ 99 This limitation has
generated criticism that Item 402
permits companies to avoid disclosure
of substantial compensation.100
Separate footnote identification and
quantification of all such earnings
would be required if the amount
exceeds $10,000.101 A company would
be permitted to identify by footnote the
portion of any earnings that it
considered to be paid at an abovemarket rate, provided that the footnote
explained the company’s criteria for
determining the portion considered
‘‘above-market.’’ 102
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Request for Comment
• Should we require, as proposed,
disclosure of all earnings on
97 See Section II.B.1.d.iii. regarding separate
standards for identification of perquisites and other
personal benefits.
98 Proposed Item 402(c)(2)(ix)(B).
99 Current Items 402(b)(2)(iii)(C)(2) and
402(b)(2)(v)(B). An instruction specifies that interest
is above-market only if the rate exceeds 120% of the
applicable federal long-term rate. Furthermore,
earnings disclosure is currently required in the
Other Annual Compensation column or the All
Other Compensation column, depending upon
when paid or payable, complicating the preparation
process and generating confusion among users of
the Summary Compensation Table.
100 See, e.g., Ellen E. Schultz, Buried Treasure:
Well-Hidden Perk Means Big Money for Top
Executives, Wall St. J., Oct. 11, 2002, at A1.
101 Proposed Instruction 3 to Item 402(c)(2)(ix).
Consistent with current requirements, if applicable
interest rates vary depending upon conditions such
as a minimum period of continued service, the
reported amount should be calculated assuming
satisfaction of all conditions to receiving interest at
the highest rate. Proposed Instruction 5 to Item
402(c)(2)(ix), which is derived from current
Instruction 3 to Item 402(b)(2)(iii)(C).
102 Proposed Instruction 5 to Item 402(c)(2)(ix).
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103 Proposed
Item 402(c)(2)(ix)(G).
Instruction 6 to Item 402(c)(2)(ix).
Defined benefit plans include, for example, cash
balance plans in which the retiree’s benefit may be
determined by the amount represented in an
account rather than based on a formula referencing
salary while still employed.
105 See Section II.B.5.a., discussing the proposed
Retirement Plan Potential Annual Payments and
Benefits Table.
106 Current Item 402(b)(2)(v)(D), which requires
annual registrant contributions or other allocations
to vested and unvested defined contribution plans
to be disclosed in the All Other Compensation
column.
107 A typical defined contribution plan is a
retirement plan in which the company and/or the
executive makes contributions of a specified
amount, and the amount that is paid out to the
executive depends on the return on investments
from the contributed amounts. A typical defined
benefit plan is a retirement plan in which the
company pays the executive specified amounts at
retirement which are not tied to investment
performance of the contributions that fund the plan.
104 Proposed
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understanding of the company’s
compensation obligations to named
executive officers, given that defined
benefit plans guarantee what can be a
lifetime stream of payments and allocate
risk of investment performance to the
company and its shareholders. In
addition, commentators have noted that
the absence of such a disclosure
requirement creates an incentive to shift
compensation to pensions, results in the
understatement of non-performancebased compensation, and distorts pay
comparisons between executives and
between companies.
Request for Comment
• Is disclosure of any additional
information necessary to provide
investors with meaningful information
about the compensation earned
annually through these plans?
• Is there any particular form of
defined benefit or actuarial plan for
which the proposed disclosure format is
not suitable? If so, how could the
proposed disclosure requirement be
adapted for such plans?
• Should this disclosure instead be
provided as a separate column in the
Summary Compensation Table?
• Is the aggregate increase in accrued
actuarial value the best measure for
disclosing annual compensation earned
under defined benefit and actuarial
plans? If not, why? What other method
should be used?
• Rather than requiring disclosure of
the value based on the executive
officer’s benefit, should we require
disclosure based on the company’s cost
for the plan? Under our proposals,
disclosure of assumptions would be
considered by companies in the
narrative disclosure following the
Summary Compensation Table and
supplementary tables. Are there other
preferable approaches? Should we
otherwise require disclosure of any of
the details of the calculation?
• Is it possible to provide meaningful
disclosure about total compensation
absent tabular disclosure of the
compensation earned annually through
these plans? If so, how? Would such an
approach be preferable?
iii. Perquisites and Other Personal
Benefits
Perquisites and other personal
benefits would be included in the All
Other Compensation column. We
propose changes to disclosure of
perquisites and other personal benefits
to improve disclosure and facilitate
computing a total amount of
compensation. We propose to require
the disclosure of perquisites and other
personal benefits unless the aggregate
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amount of such compensation is less
than $10,000. We realize this may result
in the total amount of compensation
reportable in the Summary
Compensation Table being slightly less
than a complete total amount of
compensation, but we believe $10,000 is
a reasonable balance between investors’
need for disclosure of total
compensation and the burden on a
company to track every benefit, no
matter how small. The current provision
permits omission of perquisites and
other personal benefits if the aggregate
amount of such compensation is the
lesser of either $50,000 or 10% of the
total of annual salary and bonus.108 We
believe this current rule permits the
omission of too much information that
investors may consider material.
We propose requiring footnote
disclosure that identifies perquisites
and other personal benefits. We propose
modifying the current requirement that
only perquisites and other personal
benefits that are 25% of the total
amount for each named executive
officer are required to be identified and
quantified. We propose modifying this
requirement so that, unless the aggregate
value of perquisites and personal
benefits is less than $10,000, any
perquisite or other personal benefit is
identified and, if it is valued at the
greater of $25,000 or ten percent of total
perquisites and other personal benefits,
its value would be disclosed.109
Consistent with our objective to
streamline the Summary Compensation
Table, the revised threshold is intended
to avoid requiring separate
quantification of perquisites having de
minimis value. As is the case today, tax
‘‘gross-ups’’ or other reimbursement of
taxes owed with respect to any
compensation, including but not limited
to perquisites and other personal
benefits, would be separately quantified
and identified in the tax reimbursement
category described below, even if the
associated perquisites or other personal
benefits are eligible for exclusion or
would not require identification or
footnote quantification under the
proposal. Where perquisites are subject
to identification, they must be described
in a manner that identifies the particular
nature of the benefit received. For
example, it is not sufficient to
characterize generally as ‘‘travel and
entertainment’’ different companyfinanced benefits, such as clothing,
108 Current
Item 402(b)(2)(iii)(C)(1).
Instruction 3 to Item 402(c)(2)(ix).
Compare current Instruction 1 to Item
402(b)(2)(iii)(C).
109 Proposed
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jewelry, artwork, theater tickets and
housekeeping services.110
For decades questions have arisen as
to what is a perquisite or other personal
benefit required to be disclosed. We
continue to believe that it is not
appropriate for Item 402 to define
perquisites or personal benefits, given
that different forms of these items
continue to develop, and thus a
definition would become outdated.
Further, we are concerned that sole
reliance on a bright line definition in
our rules might provide an incentive to
characterize perquisites or personal
benefits in ways that would attempt to
circumvent the bright lines.111
In today’s proposals, perquisites and
personal benefits are required to be
disclosed for both named executive
officers and directors. This discussion
regarding perquisites and personal
benefits therefore applies in the context
of disclosure for both named executive
officers and directors.112 The concepts
of perquisites and personal benefits
should not be interpreted artificially
narrowly to avoid disclosure. Based on
our long experience with disclosure in
this area, we are providing interpretive
guidance that among the factors to be
considered in determining whether an
item is a perquisite or other personal
benefit are the following:
• An item is not a perquisite or
personal benefit if it is integrally and
directly related to the performance of
the executive’s duties.
• Otherwise, an item is a perquisite or
personal benefit if it confers a direct or
indirect benefit that has a personal
aspect, without regard to whether it may
be provided for some business reason or
for the convenience of the company,
110 See In the Matter of Tyson Foods, Inc. and
Donald Tyson, Litigation Release No. 34–51625
(Apr. 28, 2005) (failure to identify perquisites).
111 In the 1970s and early 1980s, the Commission
issued several interpretive releases regarding
executive compensation disclosure issues,
including disclosure of perquisites and personal
benefits. See Disclosure of Management
Remuneration, Release No. 33–5856 (Aug. 18, 1977)
[42 FR 43058]; Disclosure of Management
Remuneration, Release No. 33–5904 (Feb. 6, 1978)
[43 FR 6060]; Disclosure of Management
Remuneration, Release No. 33–6027 (Feb. 22, 1979)
[44 FR 16368]; Disclosure of Management
Remuneration, Release No. 33–6166 (Dec. 12, 1979)
[44 FR 74803]; and Interpretation of Rules Relating
to Disclosure of Management Remuneration,
Release No. 33–6364 (Dec. 3, 1981) [46 FR 60421].
In Section I of the 1983 Release, as part of a
substantial revision to Item 402 adopted at the time,
the Commission rescinded those interpretive
releases. Subsequently, neither the Commission nor
its staff has published interpretations addressing
what must be disclosed as a perquisite or personal
benefit.
112 For directors, the disclosure would be
required in the Director Compensation Table
discussed below in Section B.9.
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6553
unless it is generally available on a nondiscriminatory basis to all employees.
The concept of a benefit that is
‘‘integrally and directly related’’ to job
performance is a narrow one. As
discussed below, it may extend, among
other things, to office space at a
company business location, a reserved
parking space that is closer to business
facilities but not otherwise preferential
or additional clerical or secretarial
services devoted to company matters. It
does not extend to items that facilitate
job performance, such as use of
company-provided aircraft, yachts or
other watercraft, commuter
transportation services, additional
clerical or secretarial services devoted to
personal matters, or investment
management services. The fact that the
company has determined that an
expense is an ‘‘ordinary’’ or ‘‘necessary’’
business expense for tax or other
purposes or that an expense is for the
benefit or convenience of the company
is not responsive to the inquiry as to
whether the expense provides a
perquisite or other personal benefit for
disclosure purposes. Whether the
company should pay for an expense
relates principally to questions of state
law regarding use of corporate assets;
our disclosure requirements are
triggered by different and broader
concepts.
Applying the concepts that we outline
above, examples of items requiring
disclosure as perquisites or personal
benefits under Item 402 include, but are
not limited to: club memberships not
used exclusively for business
entertainment purposes, personal
financial or tax advice, personal travel
using vehicles owned or leased by the
company, personal travel otherwise
financed by the company, personal use
of other property owned or leased by the
company, housing and other living
expenses (including but not limited to
relocation assistance and payments for
the executive or director to stay at his
or her personal residence), security
provided at a personal residence or
during personal travel, commuting
expenses (whether or not for the
company’s convenience or benefit), and
discounts on the company’s products or
services not generally available to
employees on a non-discriminatory
basis.
In addition, as noted, business
purpose or convenience does not affect
the characterization of an item as a
perquisite or personal benefit where it is
not integrally and directly related to the
performance by the executive of his or
her job. Therefore, for example, a
company’s decision to provide an item
of personal benefit for security purposes
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does not affect its characterization as a
perquisite or personal benefit. A
company policy that for security
purposes an executive (or an executive
and his or her family) must use
company aircraft or other company
means of travel for personal travel, or
must use company or companyprovided property for vacations, does
not affect the conclusion that the item
provided is a perquisite or personal
benefit.
Examples of items that would not be
perquisites or personal benefits would
include, among other things, travel to
and from business meetings, other
business travel, business entertainment,
security during business travel, and
itemized expense accounts the use of
which is limited to business purposes.
In seeking to interpret current rules,
some legal advisers have put forward to
the Commission staff examples of
arrangements that they believe raise
issues requiring more detailed bright
line guidance regarding the definition of
perquisites. These examples include
larger offices or a level of secretarial
service not available to employees
generally. We believe that the factors
enumerated above provide sufficient
guidance in these areas. For example, an
office at the job location, even if larger
than that of other employees, is
integrally and directly related to
performance of the executive’s job, as is
secretarial service used for business
purposes, even if at a higher level than
other employees. On the other hand,
provision of additional secretarial
services, such as a second secretary, that
is not directly related to performance of
an executive’s job would be a perquisite
or personal benefit.
Beyond these examples, we assume
companies and their advisors, who are
more familiar with the detailed facts of
a particular situation and who are
responsible for providing materially
accurate and complete disclosure
satisfying our requirements, can assess
whether particular arrangements require
disclosure as perquisites or personal
benefits. In light of the importance of
the subject to many investors, all
participants should approach the
subject of perquisites and personal
benefits thoughtfully.113
Finally, we observe that the proposal
calls for aggregate incremental cost to
113 The Commission has recently taken action in
circumstances where perquisites were not properly
disclosed. See In the Matter of Tyson Foods, Inc.
and Donald Tyson, note 110 above. See also Alex
Berenson, From Coffee to Jets, Perks for Executives
Come Out in Court, N.Y. Times, Feb. 22, 2004, at
11 (citing criminal and civil litigation in which
perquisites were identified and commentators
discussing the benefits of improved perquisite
disclosure).
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the company and its subsidiaries as the
proper measure of value of perquisites
and other personal benefits.114 The
amount attributed to such benefits for
federal income tax purposes is not the
incremental cost for purposes of our
disclosure rules unless, independently
of the tax characterization, it constitutes
such incremental cost. Therefore, for
example, the cost of aircraft travel
attributed to an executive for federal
income tax purposes is not generally the
incremental cost of such a perquisite or
personal benefit for purposes of our
disclosure rules.115
Request for Comment
• Is $10,000 the proper minimum
below which disclosure of the total
amount of perquisites and personal
benefits should not be required? Should
there be no minimum? Should the
minimum be a higher amount, such as
$25,000 or $50,000? Should the current
minimum of the lesser of $50,000 or
10% of total salary and bonus be
retained? Would some other ratio be
more appropriate?
• Should all perquisites be required
to be separately identified when the
$10,000 aggregate threshold is exceeded,
as proposed?
• Is the greater of $25,000 or 10% of
the total amount of perquisites and
personal benefits the proper minimum
below which perquisites and personal
benefits should not be required to be
separately identified and their value
reported? Should there be a lower
minimum, such as $10,000, or no
minimum? Should the current
minimum of 25% of the total amount be
retained?
• Should perquisites and personal
benefits below the proposed threshold
be separately identified by category,
even if not separately quantified?
Alternatively, is separate identification
and quantification of all perquisites and
personal benefits so significant to
investors that no threshold should apply
for either purpose?
• We propose to retain the current
standard for valuing perquisites and
other personal benefits, based on the
aggregate incremental cost to the
company and its subsidiaries which has
applied since 1983.116 We believe that
this approach is consistent with the
approach we are taking otherwise in
114 Proposed
Instruction 4 to Item 402(c)(2)(ix).
IRS Regulation § 1.61–21(g) [26 CFR 1.61–
21(g)] regarding Internal Revenue Service
guidelines for imputing taxable personal income to
an employee who travels for personal reasons on
corporate aircraft. These complex regulations are
known as the Standard Industry Fare Level or SIFL
rules.
116 See the 1983 Release, at Section III.C.
115 See
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valuing compensation, including in
respect of share-based compensation.
Nevertheless, we realize that there may
be an issue whether the retail value of
what is received by the executive officer
or director, rather than the aggregate
incremental cost to the company, better
measures the compensation provided by
perquisites and other personal benefits.
Therefore we request comment as to
whether we should require perquisites
and other personal benefits to be valued
based on the retail price of the item or,
if none, the retail price of a
commercially available equivalent. In
determining the commercially available
equivalents, for example, for travel on
the company’s aircraft, the retail price of
a commercially available equivalent
would be the retail price to charter the
same model aircraft. First-class airfare
would not be considered equivalent to
travel on a private aircraft.
• Would the proposed valuation
standard facilitate Item 402 compliance
while providing meaningful
compensation disclosure? Is there any
other valuation methodology that is
preferable for valuing perquisites and
other personal benefits? If so, why?
• Under the proposals a ‘‘gross-up’’ or
other reimbursement of taxes owed with
respect to perquisites and other personal
benefits would be required to be
included in the table and separately
quantified and identified in the tax
reimbursement category if it meets the
relevant threshold, even if the
associated perquisites or other personal
benefits would not be required to be
included in the table or separately
quantified. Is separate identification of
items such as tax gross-ups material to
investors even if it is clear the amount
must be included in the All Other
Compensation column?
• Should Item 402 include a
definition of perquisites or other
personal benefits? If so, how should
perquisites or other personal benefits be
defined? How can we assure that new
perquisites will not be developed in a
manner intended to avoid the definition
and therefore disclosure? If such a
definition is principles-based, what
principles in addition to those described
in this release should be considered?
• We are providing interpretive
guidance above regarding perquisites
and personal benefits. Are there any
areas regarding perquisites and personal
benefits where we should consider
providing additional or different
interpretive guidance? Should any of
our interpretive guidance be codified?
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iv. Additional All Other Compensation
Column Items
The proposals also would specify that
items disclosed in the All Other
Compensation column would include,
but not be limited to, the following
items: 117
• Amounts paid or accrued pursuant
to a plan or arrangement in connection
with any termination (or constructive
termination) of employment or a change
in control; 118
• Annual company contributions or
other allocations to vested and unvested
defined contribution plans; 119
• The dollar value of any insurance
premiums paid by the company with
respect to life insurance for the benefit
of a named executive officer; 120
• ‘‘Gross-ups’’ or other amounts
reimbursed during the fiscal year for the
payment of taxes; 121 and
Name
Perquisites
and other
personal
benefits
Earnings on
deferred
compensation
(a)
(b)
• For any security of the company or
its subsidiaries purchased from the
company or its subsidiaries (through
deferral of fees or otherwise) at a
discount from the market price of such
security at the date of purchase, unless
that discount is available generally
either to all security holders or to all
salaried employees of the company, the
compensation cost computed in
accordance with FAS 123R.122
Request for Comment
• Are there other items that should be
specifically enumerated for inclusion in
the All Other Compensation Column? If
so, what are they and how should they
be valued and reported?
• Will the combination of the current
Other Annual Compensation Column
and the All Other Compensation
Column result in too many
compensation items being aggregated
and separately identified within one
6555
column of the table? Is there another
reason to continue to show the two
groups of items separately?
• Should we retain the treatment of
securities purchased at a discount in
current Item 402(b)(2)(iii)(C)(5), which
requires inclusion in the Other Annual
Compensation column of the dollar
value of the difference between the
price paid by a named executive officer
for any security of the company or its
subsidiaries purchased from the
company or its subsidiaries (through
deferral of salary or bonus, or
otherwise), and the fair market value of
such a security at the date of purchase?
If so, why?
• Because so many different types of
compensation would be reportable in
the ‘‘All Other Compensation’’ column,
would this disclosure be clearer if it
were presented as a supplemental table
in the following or similar format:
Tax reimbursements
Discounted
securities
purchases
Payments/
accruals on
termination
plans
Registrant
contributions to defined contribution
plans
Increase in
pension actuarial value
Insurance
premiums
Other
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(c)
PEO ..........
PFO ..........
A ...............
B ...............
C ...............
e. Captions and Table Layout
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Currently a portion of the table is
labeled as ‘‘annual compensation’’ and
another portion as ‘‘long term
compensation.’’ These captions create
distinctions that may be confusing to
both users and preparers of the
Summary Compensation Table. Today’s
proposal would not separately identify
some columns as ‘‘annual’’ and other
columns as ‘‘long term’’ compensation.
In eliminating this distinction, we also
propose to revise the definition of ‘‘long
term incentive plan’’ to eliminate any
distinction between a ‘‘long term’’ plan
and one that may provide for periods
shorter than one year, because, like the
117 These items are all currently required to be
disclosed either under All Other Compensation or
under Other Annual Compensation.
118 Unlike the current Item 402(b)(2)(v)(A)
requirement, proposed Item 402(c)(2)(ix)(E) does
not refer to amounts payable under postemployment benefits, because the focus for this
item is current year compensation rather than
aggregate amounts potentially payable in the future.
These items are also the subject of disclosure as
post-termination compensation, as described in
Section II.B.5., below. For any compensation as a
result of a business combination, other than
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captions, the current approach creates
distinctions that may be confusing to
users and preparers. The proposals
would thus define an ‘‘incentive plan’’
as any plan providing compensation
intended to serve as incentive for
performance to occur over a specified
period.123 Consistent with this change,
as described above, we propose to merge
the current Other Annual Compensation
column into the proposed All Other
Compensation column, and include
current information regarding incentive
plan compensation in the appropriate
column for the relevant form of award.
Request for Comment
pursuant to a plan or arrangement in connection
with any termination of employment or change-incontrol, such as a retention bonus, acceleration of
option or stock vesting periods, or performancebased compensation intended to serve as an
incentive for named executive officers to acquire
other companies or enter into a merger agreement,
disclosure would be required in the appropriate
Summary Compensation Table column and in the
other tables or narrative disclosure where the
particular element of compensation is required to
be disclosed.
119 Proposed Item 402(c)(2)(ix)(F).
120 Proposed Item 402(c)(2)(ix)(H). Because the
proposal calls for disclosure of the dollar value of
any life insurance premiums, rather than only
premiums with respect to term life insurance, as
currently required, the requirement of current Items
402(b)(2)(v)(E)(1) and (2) to disclose the value of
any remaining premiums with respect to
circumstances where the named executive officer
has an interest in the policy’s cash surrender value
would be deleted.
121 Proposed Item 402(c)(2)(ix)(C).
122 Proposed Item 402(c)(2)(ix)(D).
123 Proposed Item 402(a)(6)(iii).
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• Will these changes improve the
table? Are there any other changes to the
captions and table layout that would
improve the table?
2. Supplemental Annual Compensation
Tables
Following the Summary
Compensation Table, we propose
requiring two supplemental tables.
These two tables are intended to help
explain information in the Summary
Compensation Table and would be
derived from two tables currently
required.
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a. Grants of Performance-Based Awards
Table
The first table that would supplement
the Summary Compensation Table
would include information regarding
non-stock grants of incentive plan
awards, stock-based incentive plan
awards and awards of options, restricted
stock and similar instruments under
plans that are performance-based (and
thus provide the opportunity for future
compensation if conditions are
satisfied).124 This would ensure
consistent reporting treatment of these
performance-based awards, disclosing
information equivalent to that currently
required for grants of other long-term
incentive plan awards. For purposes of
this table, awards would be considered
performance-based if they are subject to
either a performance condition, or a
market condition, as those terms are
defined in FAS 123R.125
Disclosure in this table of grants of
incentive plan awards would
complement Summary Compensation
Table disclosure of grant date fair value
of stock awards and option awards, and
the disclosure of annual amounts earned
under non-stock based incentive
compensation. This supplemental table
would show the terms of grants made
during the current year, including
estimated future payouts, with separate
disclosure for each grant.126
GRANTS OF PERFORMANCE-BASED AWARDS
Name
Performance-based
stock and
stock-based
incentive
plans: number of
shares,
units or
other rights
(#)
Performance-based
options:
number of
securities
underlying
options
(#)
Non-stock
incentive
plan
awards:
number of
units or
other rights
(#)
Dollar
amount of
consideration paid
for award, if
any
($)
Grant date
for stock or
option
awards
Performance or
other period
until vesting
or payout
and option
expiration
date
Estimated future payouts
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Threshold
($) or (#)
Target
($) or (#)
Maximum
($) or (#)
(h)
(i)
(j)
PEO ..........
PFO ..........
A ...............
B ...............
C ...............
Request for Comment
• Will the proposed Grants of
Performance-Based Awards Table
effectively supplement the equity
awards and non-stock incentive plan
compensation information to be
disclosed in the Summary
Compensation Table? In particular,
should tabular disclosure be required of
any additional information relating to
performance-based equity awards and
non-stock incentive plan awards?
• Is the information required by
columns (b), (c) and (d) of this proposed
table redundant with the information
required in the Grants of PerformanceBased Awards Table describing
estimated future payouts to be required
in columns (h), (i) and (j) of the Table,
such that any of these columns should
be eliminated? Is any other tabular
information needed to describe
estimated future payouts in addition to
the information that would be required
in proposed columns (h), (i) and (j)?
• Are the references to the definitions
of ‘‘performance condition’’ and
‘‘market condition’’ in FAS 123R
appropriate in defining performancebased awards?
b. Grants of All Other Equity Awards
Table
The second table supplementing the
Summary Compensation Table would
show the equity-based compensation
awards granted in the last fiscal year
that are not performance-based, such as
stock, options or similar instruments
where the payout or future value is tied
to the company’s stock price, and not to
other performance criteria.127
GRANTS OF ALL OTHER EQUITY AWARDS
Exercise or
base price
($/Sh)
(a)
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Name
Number of
securities
underlying
options
granted
(#)
(b)
(c)
Expiration
date
Number of
shares of
stock or
units granted
(#)
Vesting date
Grant date
(d)
(e)
(f)
(g)
PEO ..................................................................................
PFO ..................................................................................
A .......................................................................................
B .......................................................................................
C .......................................................................................
124 This table would contain the information in
the current Long-Term Incentive Plan Awards
Table, augmented with information regarding
performance-based stock, option and similar
awards. See current Item 402(e). This table would
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also include awards with performance, market and
other conditions affecting the terms of the award
(exercise price, for example) rather than vesting.
125 See note 87.
126 Proposed Instruction 1 to Item 402(d).
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127 Proposed Item 402(e). Proposed Instruction 2
to Item 402(e) would require that if more than one
award is made to a named executive officer during
the last completed fiscal year, a separate line should
be used to disclose each award.
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Instructions would require options
and stock appreciation rights granted in
connection with a repricing transaction
to be included in the table, and footnote
descriptions of any material terms of a
grant.128 Because the Summary
Compensation Table would disclose
grant date fair value of the options,
stock appreciation rights or similar
instruments, the columns in the current
Option/SAR Grants in Last Fiscal Year
table requiring disclosure of that value
or, alternatively, potential realizable
value at assumed five percent and ten
percent annual rates of return, would be
eliminated.129 This table would also
supplement the Summary
Compensation Table disclosure of the
aggregate grant date fair value of stock,
units and similar instruments with
disclosure relating to the number of
underlying securities and other material
terms of the grants.
Request for Comment
• Will the Grants of All Other Equity
Awards Table, as proposed, effectively
supplement the option and stock grants
information to be disclosed in the
Summary Compensation Table? In
particular, should tabular disclosure be
required of any additional information
relating to these grants?
• Is this table or any aspect of it too
repetitive?
• Will it be clear to investors how the
two supplemental tables relate to the
Summary Compensation Table? If not,
how could we make that more clear?
• Are all plan-based awards covered
by the two supplemental tables? What
additional provisions would we need to
add to cover all such awards?
• Instead, would it be preferable to
have two separate versions of the
Summary Compensation Table, with
one showing all awards made during the
year and the other having exactly the
same columns showing all the amounts
earned by services during the year?
Would this approach increase the risk of
double counting? Would it be
duplicative as to cash salary and bonus
and other currently earned and paid
amounts and benefits?
128 Proposed
Instructions 3 and 4 to Item 402(e).
current Item 402(c)(2)(vi). We also propose
removing the column, required by current Item
402(c)(2)(iii), requiring disclosure of the percent
that the grant represents of total options and stock
appreciation rights granted to all employees during
the fiscal year. At this time, we do not believe that
this relatively narrow disclosure is independently
material to an understanding of a named executive
officer’s compensation.
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129 See
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3. Narrative Disclosure to Summary
Compensation Table and Supplemental
Tables
We propose requiring narrative
disclosure in order to give context to the
tabular disclosure following the
Summary Compensation Table, the
Grants of Performance-Based Awards
Table and the Grants of All Other Equity
Awards Table. A company would be
required to provide a narrative
description of any additional material
factors necessary to an understanding of
the information disclosed in the
tables.130 Unlike the Compensation
Discussion and Analysis, which would
focus on broader topics regarding the
objectives and implementation of
executive compensation policies, this
narrative disclosure would focus on and
provide context to the quantitative
disclosure in the tables. The material
factors will vary depending on the facts,
but may include, in given cases, among
other things, descriptions of the material
terms in the named executive officers’
employment agreements, which may be
a potential source of material
information necessary to an
understanding of the tabular disclosure.
The proposed narrative disclosure
would cover written or unwritten
agreements or arrangements. Requiring
this disclosure in proximity to the
Summary Compensation Table is
intended to make the tabular disclosure
more meaningful.131 Mere filing of
employment agreements (or summaries
of oral agreements) may not be adequate
to disclose material factors depending
on the circumstances.
The factors that could be material
include each repricing or other material
modification of any outstanding option
or other stock-based award during the
last fiscal year. This disclosure would
address not only option repricings, but
also other significant changes to the
terms of stock-based or other awards.
We propose to eliminate the current tenyear option repricing table.132 In its
130 Proposed Item 402(f)(1). Disclosure of
employment agreement information is currently
required by Item 402(h)(1). The standard of
materiality that would apply in proposed Item
402(f)(1) is that of Basic v. Levinson, 485 U.S. 224
(1988) and TSC Industries v. Northway, 426 U.S.
438 (1976).
131 Provisions regarding post-termination
compensation would need to be addressed in the
narrative section only to the extent disclosure of
such compensation is required in the Summary
Compensation Table; otherwise these provisions
would be disclosable as post-termination
compensation in the manner described in Section
II.B.5., below.
132 Current Item 402(i). We believe that the
disclosure requirement would provide investors
with material information regarding repricings and
modifications and eliminate the arguably dated
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6557
place, the narrative disclosure following
the Summary Compensation Table
would describe, to the extent material
and necessary to an understanding of
the tabular disclosure, repricing,
extension of exercise periods, change of
vesting or forfeiture conditions, change
or elimination of applicable
performance criteria, change of the
bases upon which returns are
determined, or any other material
modification. The tabular disclosure
would reflect the award’s total fair value
after any such modification as a new
award.133
Narrative text accompanying the
tables would also describe, to the extent
material and necessary to an
understanding of the tabular disclosure,
award terms relating to data provided in
the Grants of Performance-Based
Awards Table, which could include, for
example, a general description of the
formula or criteria to be applied in
determining the amounts payable, the
vesting schedule, a description of the
performance-based conditions and any
other material conditions applicable to
the award, whether dividends or other
amounts would be paid, the applicable
rate and whether that rate is
preferential. Consistent with current
disclosure requirements, however,
companies would not be required to
disclose any factor, criteria, or
performance-related or other condition
to payout or vesting of a particular
award that involves confidential
commercial or business information,
disclosure of which would adversely
affect the company’s competitive
position.134
information contained in the ten-year option
repricing table.
133 While this approach is different from that
required for accounting and financial statement
reporting purposes under FAS 123R, it does
proceed from the grant date fair value concept
embodied in that standard, and we believe it
provides more meaningful information for
executive compensation disclosure than the
financial statement reporting approach and is
consistent with our current requirement to treat
repricings as a new award. This treatment would
continue the current approach of essentially
treating a repricing as a new award in Instruction
3 to Item 402(b)(2)(iv). However, this approach
would not apply to any repricing that occurs
through a pre-existing formula or mechanism in the
plan or award that results in the periodic
adjustment of the option or stock appreciation right
exercise or base price, an antidilution provision, or
a recapitalization or similar transaction equally
affecting all holders of the class of securities
underlying the options or stock appreciation rights.
See Proposed Instruction 2 to Item 402(f)(1).
134 Proposed Item 402(f)(1)(iii), which combines
some information required by current Instruction 2
to Item 402(b)(2)(iv) with information required by
current Instruction 1 to Item 402(e). For a
discussion of the standard companies should use
when determining whether disclosure would have
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Another factor that may be necessary
to an understanding of the information
disclosed in the tables is any material
waiver or modification of any specified
performance target, goal or condition to
payout under any reported incentive
plan payout because each action can
materially affect previously disclosed
information about the plans. Companies
would be required to disclose as part of
this narrative discussion whether the
waiver or modification applied to one or
more specified named executive officers
or applied to all compensation subject
to the condition.135
Material factors necessary to an
understanding of the tabular disclosure
could also include information
regarding defined benefit and deferred
compensation plans. For example, such
information could include material
assumptions underlying the
determination of the amount of increase
in actuarial value of defined benefit or
actuarial plans or the provisions in a
plan or otherwise for determining
earnings on deferred compensation
plans, including defined contribution
plans, that are not tax-qualified.
We also propose an additional item
that would require disclosure for up to
three employees who were not
executive officers during the last
completed fiscal year and whose total
compensation for the last completed
fiscal year was greater than that of any
of the named executive officers.136 The
item would require disclosure of the
amount of each of such employee’s total
compensation for the most recent fiscal
year and a description of his or her job
position. The individuals would not
need to be named. We are proposing
this requirement so that shareholders
will have information about the use of
corporate assets to compensate
extremely highly paid employees in a
company. More detailed information
about these employees and their
compensation does not appear
appropriate in light of the fact that they
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an adverse impact on the company’s competitive
position, see Section II.A.2., above.
135 Proposed Item 402(f)(1)(iv).
136 Proposed Item 402(f)(2).
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do not have a policy making function at
the company.137
disclosure of this information consistent
with the overall goals of this proposal?
Request for Comment
• Will the proposed narrative
disclosure to the Summary
Compensation Table enhance an
understanding of the table?
• Are there any additional material
factors that should be listed as possibly
requiring disclosure in the narrative to
the Summary Compensation Table?
• Is the difference between the
proposed required narrative disclosure
and the Compensation Discussion and
Analysis requirement sufficiently clear?
How can it be made more clear?
• Should we require an additional
column in the Summary Compensation
Table where companies must indicate
by checkmark whether a particular
named executive officer has an
employment agreement, so that
investors will know to look for
disclosure about the agreement in the
narrative accompanying the table or to
look for the agreement as an exhibit to
a filing with us?
• Is the proposed treatment of
repricings the most appropriate
approach for executive compensation
disclosure purposes? Should the
treatment be consistent with the
reporting approach of FAS 123R? Would
tabular presentation rather than
discussion of material terms in the
narrative be preferable? In addition to
the disclosure proposed in the Summary
Compensation Table and the related
narrative, should we also require
quantification of the fair value of the
award both immediately before and
immediately after the repricing or other
modification?
• Would the proposed disclosure of
up to three employees who are not
executive officers but earn more in total
compensation than any of the named
executive officers be appropriate in the
narrative discussion? Should more
disclosure be required regarding these
employees and their compensation? Is
this information material to investors?
Will disclosure of this information,
particularly in the case of smaller
companies, cause competitive harm? Is
4. Exercises and Holdings of Previously
Awarded Equity
137 See note 162 below for a discussion of the
term ‘‘executive officer.’’
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The next section of proposed
executive compensation disclosure
would provide investors with an
understanding of the compensation in
the form of equity that has previously
been awarded and remains outstanding,
that is unexercised or unvested. This
section also would disclose amounts
realized on this type of compensation
during the most recent fiscal year when,
for example, a named executive officer
exercises an option or his or her stock
award vests. We propose two tables.
One table shows the amounts of prior
awards outstanding and the other shows
the exercise or vesting of equity awards
during the fiscal year.138
a. Outstanding Equity Awards at Fiscal
Year-End
Outstanding awards that have been
granted but the ultimate outcomes of
which have not yet been realized in
effect represent potential amounts that
the named executive officer might or
might not realize, depending on the
outcome for the measure or measures
(for example, stock price or performance
benchmarks) to which the award relates.
We are proposing a table that would
disclose information regarding
outstanding awards under, for example,
stock option (or stock appreciation
rights) plans, restricted stock plans,
incentive plans and similar plans and
disclose the market-based values of the
options, rights, shares or units in
question as of the company’s most
recent fiscal year end.139
138 Some of this information is currently required
in one table, the Aggregated Option/SAR Exercises
in Last Fiscal Year and Fiscal Year-End Option/SAR
Values Table required by current Item 402(d).
139 Proposed Item 402(g). Under current rules
such disclosure is provided only for holdings of
outstanding stock options and stock appreciation
rights. Consistent with current interpretations, this
table, like the Summary Compensation Table,
would reflect that the transfer of an option or
similar award by an executive does not negate the
award’s status as compensation that should be
reported. Registration of Securities on Form S–8,
Release No. 33–7646 (Feb. 25, 1999) [64 FR 11103],
at Section III.D.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Number of
securities underlying
unexercised
options
(#) exercisable/
unexercisable
In-the-money
amount of
unexercised
options
($) exercisable/
unexercisable
Number of
shares or
units of
stock held
that have
not vested
(#)
Market
value of
shares or
units of
stock held
that have
not vested
($)
Incentive
plans: number of nonvested
shares,
units or
other rights
held
(#)
Incentive
plans: market or payout value of
nonvested
shares,
units or
other rights
held
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
PEO .............................................................................
PFO .............................................................................
A ..................................................................................
B ..................................................................................
C ..................................................................................
With respect to options, stock
appreciation rights and similar
instruments, an instruction, which
would be the same as the current
standard, would indicate that these
instruments are ‘‘in-the-money’’ if the
market price of the underlying securities
exceeds the exercise or base price. The
in-the-money amount of options, stock
appreciation rights and similar
instruments would be calculated by
determining the difference, at fiscal
year-end, between the market price of
the underlying securities and the
exercise or base price.140 The market
value of stock (including restricted
stock, restricted stock units or other
similar instruments) and incentive plan
award holdings would be calculated by
multiplying the closing market price of
the company’s stock at the end of the
last completed fiscal year by the
respective numbers of stock or incentive
plan award holdings that were not then
vested.141
A new instruction would require
footnote disclosure of the expiration
dates of options, stock appreciation
rights and similar instruments held at
fiscal year-end, separately identifying
those that are exercisable and
unexercisable, and the vesting dates of
shares of stock (including restricted
stock, restricted stock units or other
similar instruments) and incentive plan
awards held at fiscal year-end. If the
expiration date of an option had
occurred after fiscal year-end but before
the date on which the disclosure is
made, the footnote would need to state
whether the option had been exercised
or had expired.142
Request for Comment
• Will the proposed Outstanding
Equity Awards at Fiscal Year-End Table
provide material information for
investors regarding the named executive
officers’ outstanding awards?
• Should the table include the value
of out-of-the-money options and stock
appreciation rights? Why or why not? If
such instruments were included, how
would the value be calculated and
presented?
• Should we require, as proposed,
that options or similar awards that have
been transferred by an executive must
still be included in the table? Should
continued disclosure depend on the
nature of the transfer or the identity of
the transferee?
b. Option Exercises and Stock Vesting
We are proposing a table that would
show the amounts received upon
exercise of options or similar
instruments or the vesting of stock or
similar instruments during the most
recent fiscal year. This table would
allow investors to have a picture of the
amounts that a named executive officer
realizes on equity compensation
through its final stage.143
OPTION EXERCISES AND STOCK VESTED
Name of Executive Officer
Number of
shares acquired on
exercise or
vesting
(#)
Value realized upon
exercise or
vesting
($)
Grant date
fair value
previously
reported in
summary
compensation table
($)
(a)
(b)
(c)
(d)
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PEO—Options .........................................................................................................................................
Stock ........................................................................................................................................................
PFO—Options ..........................................................................................................................................
Stock ........................................................................................................................................................
140 Proposed Instruction 1 to Item 402(g)(2),
which is based on current Instruction 1 to Item
402(d)(2).
141 Proposed Instruction 3 to Item 402(g)(2). This
standard is based on the current Summary
Compensation Table footnote disclosure regarding
restricted stock, expanded to cover restricted stock
units and incentive plans. Current Instruction 2 to
Item 402(b)(2)(iv).
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142 Proposed
Instruction 2 to Item 402(g)(2).
table is similar to a portion of the current
Aggregate Options/SAR Exercises in Last Fiscal
Year and FY-End Options/SAR Values Table,
except unlike that table it would also include the
vesting of restricted stock and similar instruments.
Commentators have noted a need for comparable
disclosure of restricted stock vesting. See, e.g.,
Phyllis Plitch, Restricted Stock Grants Cloud
143 This
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Executive Pay Tally, Wall St. J. Online Edition, Jan.
26, 2005. The number and value of unexercised
options and stock appreciation rights, included in
the current option exercises table, would be shown
in the proposed Outstanding Equity Awards at
Fiscal Year-End Table described immediately
above. See current Item 402(d).
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OPTION EXERCISES AND STOCK VESTED—Continued
Name of Executive Officer
Number of
shares acquired on
exercise or
vesting
(#)
Value realized upon
exercise or
vesting
($)
Grant date
fair value
previously
reported in
summary
compensation table
($)
(a)
(b)
(c)
(d)
A—Options ...............................................................................................................................................
Stock ........................................................................................................................................................
B—Options ...............................................................................................................................................
Stock ........................................................................................................................................................
C—Options ..............................................................................................................................................
Stock ........................................................................................................................................................
The grant date fair value of these
instruments would have been disclosed
in the Summary Compensation Table for
the year in which they were awarded.
Therefore, to eliminate the impact of
double disclosure, this table would
show that amount from applicable
previous years from the Summary
Compensation Table.
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Request for Comment
• In light of the proposed disclosure
in the Summary Compensation Table of
the grant date fair value of the awards,
is separate reporting of the amounts
realized upon exercise or vesting
appropriate? Would it provide material
information? Would separate reporting
of the market value at exercise or
vesting confuse users of financial
statements and perhaps cause them to
call into question the original grant date
fair value estimate?
• Would the proposed separate
column for grant date fair value
previously reported for the same award
eliminate potential confusion about the
amount of compensation provided by
options, stock appreciation rights, stock
and similar instruments? Are there other
ways we could make this clear, such as
an explanatory footnote to the table?
• Will investors understand that the
value of equity compensation had
already been disclosed in the form of
144 15
U.S.C. 78p(a).
for defined benefit or actuarial
plans, disclosure consists of a general table showing
estimated annual benefits under the plan payable
upon retirement (including amounts attributable to
supplementary or excess pension award plans) for
specified compensation levels and years of service.
The table does not provide disclosure for any
specific named executive officer. See current Item
145 Currently,
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the grant-date fair value of equity-based
awards? Are other sources of this
information, such as reports filed by
officers and directors pursuant to
Section 16(a) of the Exchange Act,144
adequate to inform investors of the
information contained in this table?
• Would it be preferable to combine
proposed Outstanding Equity Awards at
Fiscal Year-End Table and the proposed
Option Exercises and Stock Vested
Table into one table?
proposing revised requirements
regarding disclosure of compensation
arrangements triggered upon
termination and on changes in control.
a. Retirement Plan Potential Annual
Payments and Benefits Table
5. Post-Employment Compensation
We are proposing significant revisions
to the disclosure regarding postemployment compensation to provide a
clearer picture of this potential future
compensation. Executive retirement
packages and other post-termination
compensation may represent a
significant commitment of corporate
resources and a significant portion of
overall compensation. First, we are
proposing to replace the current pension
plan table, alternative plan disclosure
and some of the other narrative
descriptions with a table regarding
defined benefit pension plans and
enhanced narrative disclosure. Second,
we are proposing a table and narrative
disclosure that will disclose information
regarding non-qualified defined
contribution plans and other deferred
compensation. Finally, we are
We are proposing significant revisions
to the rules disclosing retirement
benefits to require disclosure of the
estimate of retirement benefits to be
payable at normal retirement age and, if
available, early retirement.145 Current
disclosure frequently does not provide
investors useful information regarding
specific potential pension benefits.
Current disclosure may make it difficult
for the reader to understand which
amounts relate to any particular named
executive officer, and may thus obscure
the value of a significant component of
compensation.
As a result, we propose a new table
disclosing estimated annual retirement
payments under defined benefit plans
for each named executive officer,
followed by narrative disclosure.146 A
separate line of tabular disclosure
would be required for each plan in
which a named executive officer
participates that provides for the
payment of specified retirement
benefits, or benefits that will be paid
primarily following retirement.147
402(f)(1). This requirement is for plans under which
benefits are determined primarily by final
compensation (or average final compensation) and
years of service, and includes narrative disclosure.
If named executive officers are subject to other
plans under which benefits are not determined
primarily by final compensation (or average final
compensation), narrative disclosure is required of
the benefit formula and estimated annual benefits
payable to the officers upon retirement at normal
retirement age. See current Item 402(f)(2).
146 Proposed Item 402(i).
147 These would include, but not be limited to,
tax-qualified defined benefit plans, supplemental
employee retirement plans and cash balance plans,
but would exclude defined contribution plans, for
which we propose disclosure as described below.
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6561
RETIREMENT PLAN POTENTIAL ANNUAL PAYMENTS AND BENEFITS
Plan name
(a)
(b)
(c)
Normal retirement age
(#)
Estimated
normal retirement annual benefit
($)
Early retirement age
(#)
Estimated
early retirement annual
benefit
($)
(d)
Name
Number of
years credited service
(#)
(e)
(f)
(g)
PEO ..................................................................................
PFO ..................................................................................
A .......................................................................................
B .......................................................................................
C .......................................................................................
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An instruction would provide that
quantification of benefits should reflect
the form of benefit currently elected by
the named executive officer, such as
joint and survivor annuity or single life
annuity, specifying that form in a
footnote. Where the named executive
officer is not yet eligible to retire, the
dollar amount of annual benefits to
which he or she would be entitled upon
becoming eligible would be computed
assuming that the named executive
officer continued to earn the same
amount of compensation as reported for
the company’s last fiscal year. If a
named executive officer left during the
year, the dollar amounts of annual
benefits to which he or she would be
entitled would be required to be
disclosed.
‘‘Normal retirement age’’ would mean
the normal retirement age defined in the
plan, or if not so defined, the earliest
time at which a participant may retire
under the plan without any benefit
reduction due to age. ‘‘Early retirement
age’’ would be defined similarly as early
retirement age as defined in the plan, or
otherwise available to the executive.148
If the credited years of service for the
executive under any plan differ from the
actual years of service with the
company, a footnote quantifying the
difference and any resulting benefit
increase would be required.149
The table would be followed by a
narrative description of material factors
necessary to an understanding of each
plan disclosed in the table. Examples of
such factors in the proposed rule may
148 Proposed
Instruction 3 to Item 402(i).
Instruction 2 to Item 402(i).
150 Nonqualified defined contribution and other
deferred compensation plans are plans providing
for deferral of compensation that do not satisfy the
minimum coverage, nondiscrimination and other
rules that ‘‘qualify’’ broad-based plans for favorable
149 Proposed
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include, in given cases, among other
things:
• The material terms and conditions
of benefits available under the plan,
including the plan’s retirement benefit
formula and eligibility standards, and
early retirement arrangements;
• If the executive or company may
elect a lump sum distribution, the
amount of such distribution that would
be available on election as of the end of
the company’s last fiscal year,
disclosing the valuation method and
material assumptions applied in
quantifying such amount;
• The specific elements of
compensation, such as salary and
various forms of bonus, included in
applying the benefit formula,
identifying each such element;
• Regarding participation in multiple
plans, the reasons for each plan; and
• Company policies with regard to
such matters as granting extra years of
credited service.
the named executive officer currently is
eligible to retire under the plan with a
lump sum distribution?
• Is there any particular form of plan
for which the proposed disclosure
format is not suitable? If so, how could
the proposed disclosure requirement be
adapted for such plans?
b. Nonqualified Defined Contribution
and Other Deferred Compensation Plans
Table
Request for Comment
• Should any other information
(including information that may be
disclosed in the narrative) be included
in the proposed table? Should any of the
information we propose to require to be
disclosed be excluded?
• Should this item require
quantification of the aggregate actuarial
value of a plan benefit as of the end of
the company’s last fiscal year without
regard to whether the plan permits a
lump sum distribution? If so, why?
Alternatively, would this information
provide meaningful disclosure only if
In order to provide a more complete
picture of potential post-employment
compensation, we are proposing a new
table to disclose contributions, earnings
and balances under nonqualified
defined contribution and other deferred
compensation plans. These plans may
be a significant element of retirement
and post-termination compensation.150
Our current rules elicit disclosure of the
compensation when earned and only
the above-market earnings on
nonqualified deferred compensation.151
The full value of those earnings and the
accounts on which they are payable are
not currently subject to disclosure, nor
are shareholders and investors informed
regarding the rate at which these
amounts—and the corresponding cost to
the company—are growing.152
Therefore, as noted above, we are
proposing to require disclosure in the
Summary Compensation Table of all
earnings on compensation that is
deferred on a basis that is not taxqualified and are also proposing new
tabular and narrative disclosure of
nonqualified deferred compensation.153
tax treatment under the Internal Revenue Code. A
typical 401(k) plan, by contrast, is a qualified
deferred compensation plan. Nonqualified defined
contribution and other deferred compensation plans
are generally unfunded, and their taxation is
governed by Section 409A of the Internal Revenue
Code [26 U.S.C. 409A].
151 See Section II.B.1.d.i. above.
152 See Lucian A. Bebchuk and Jesse M. Fried,
Stealth Compensation via Retirement Benefits, 1
Berkeley Bus. L.J. 291, 314–316 (2004); See also The
Corporate Counsel (Sept.–Oct. 2005) at 6–7 and
Gretchen Morgenson, Executive Pay, Hiding Behind
Small Print, N.Y. Times, Feb. 8, 2004, § 3, at 1.
153 Proposed Item 402(j).
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NONQUALIFIED DEFINED CONTRIBUTION AND OTHER DEFERRED COMPENSATION PLANS
Name
Executive
contributions in last
FY
($)
Registrant
contributions in last
FY
($)
Aggregate
earnings in
last FY
($)
Aggregate
withdrawals/
distributions
($)
Aggregate
balance at
last FYE
($)
(a)
(b)
(c)
(d)
(e)
(f)
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PEO .........................................................................................................
PFO ..........................................................................................................
A ...............................................................................................................
B ...............................................................................................................
C ..............................................................................................................
An instruction would require footnote
quantification of the extent to which
amounts in the contributions and
earnings columns are reported as
compensation in the year in question
and other amounts reported in the table
in the aggregate balance column were
reported previously in the Summary
Compensation Table for prior years.154
This would complement the proposed
instruction to the Summary
Compensation Table that would require
footnote disclosure of amounts for
which receipt has been deferred.155
Together, these footnotes would operate
to provide information so that investors
can avoid ‘‘double counting’’ of deferred
amounts by clarifying the extent to
which amounts payable as deferred
compensation represent compensation
previously reported, rather than
additional currently earned
compensation.
The table would be followed by a
narrative description of material factors
necessary to an understanding of the
disclosure in the table.156 Examples of
such factors in the proposed rule may
include, in given cases, among other
things:
• The type(s) of compensation
permitted to be deferred, and any
limitations (by percentage of
compensation or otherwise) on the
extent to which deferral is permitted;
• The measures of calculating interest
or other plan earnings (including
whether such measure(s) are selected by
the named executive officer or the
company and the frequency and manner
in which such selections may be
changed), quantifying interest rates and
other earnings measures applicable
during the company’s last fiscal year;
and
• Material terms with respect to
payouts, withdrawals and other
distributions.
154 Proposed
Instruction to Item 402(j)(2).
Instruction 4 to Item 402(c),
described in Section II.B.1.b., above, regarding the
Summary Compensation Table.
156 Proposed Item 402(j)(3).
155 Proposed
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Request for Comment
• Should tabular or narrative
disclosure require presentation of any
additional information necessary for
investors to clearly understand
nonqualified deferred compensation?
For example:
—Should the dollar amount of aggregate
interest or other earnings accrued
from inception of the named
executive officer’s participation in the
plan through the end of the
company’s last fiscal year be
disclosed in the proposed table?
—Is a narrative description of the tax
implications for both the participant
and the company necessary to a
material understanding of these
plans?
• In addition to the footnote required
by the proposed instruction, are any
other provisions necessary or
appropriate to avoid ‘‘double counting’’
of previously reported compensation
that will have been deferred?
• Should only above market or
preferential earnings be included in the
table? If so, why would such disclosure
be more useful or informative to
investors?
• Is any of the proposed new
disclosure unnecessary? If so, please
explain.
c. Other Potential Post-Employment
Payments
We are proposing significant revisions
to our requirements to describe
termination or change in control
provisions. The Commission has long
recognized that ‘‘termination provisions
are distinct from other plans in both
intent and scope and, moreover, are of
particular interest to shareholders.’’ 157
Currently, disclosure does not in many
cases capture material information
regarding these plans and potential
payments under them. We therefore
propose disclosure of specific aspects of
any written or unwritten arrangement
157 1983
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that provides for payments at, following,
or in connection with the resignation,
severance, retirement or other
termination (including constructive
termination) of a named executive
officer, a change in his or her
responsibilities, or a change in control
of the company. Our proposals would
call for narrative disclosure of the
following information regarding
termination and change in control
provisions: 158
• The specific circumstances that
would trigger payment(s) under the
termination or change-in-control
arrangements or the provision of other
benefits (references to benefits include
perquisites);
• The estimated payments and
benefits that would be provided in each
termination circumstance, and whether
they would or could be lump-sum or
annual, disclosing the duration and by
whom they would be provided; 159
• The specific factors used to
determine the appropriate payment and
benefit levels under the various
circumstances that would trigger
payments or provision of benefits;
• Any material conditions or
obligations applicable to the receipt of
payments or benefits, including but not
limited to non-compete, nonsolicitation, non-disparagement or
confidentiality covenants; and
• Any other material features
necessary for an understanding of the
provisions.
The item contemplates disclosure of the
duration of non-compete and similar
agreements, and provisions regarding
waiver of breach of these agreements,
and disclosure of tax gross-up
payments.
As proposed, a company would be
required to provide quantitative
158 Proposed Item 402(k), which would replace
current Item 402(h)(2).
159 We propose to eliminate the current $100,000
disclosure threshold. With respect to posttermination perquisites, however, the same
disclosure and itemization thresholds proposed for
the Summary Compensation Table would apply.
See Section II.B.1.d.iii, above.
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disclosure under these requirements
even where uncertainties exist as to
amounts payable under these plans and
arrangements. In the event that
uncertainties exist as to the provision of
payments or benefits or the amounts
involved, the company would be
required to make reasonable estimates
and disclose material assumptions
underlying such estimates in its
disclosure. In such event, the disclosure
would be considered forward-looking
information as appropriate that falls
within the safe harbor for disclosure of
such information.160
Request for Comment
• Should we, as proposed, eliminate
the current $100,000 threshold for
disclosure for compensatory plans or
arrangements providing payments upon
termination or change-in-control?
• Should the proposed item
specifically require narrative disclosure
of any additional information? If so,
what information and why?
• Would a tabular format result in
more effective disclosure of any of this
information? If so, how should such a
table be constructed so that it is easily
understood, given the wide variability
of the factors determining payments?
For example, should such a table have
separate columns for cash payments,
stock payments, and perquisites;
separate lines for each potential
termination event; and narrative
disclosure of other material terms, such
as duration, renewal and applicable
covenants?
• Should we require companies to
provide quantitative disclosure as
proposed? If not, how can there be
assurance that investors can understand
the significant amounts of compensation
that may be involved?
6. Officers Covered
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a. Named Executive Officers
We propose to have the principal
executive officer, the principal financial
officer 161 and the three most highly
compensated executive officers other
than the principal executive officer and
principal financial officer comprise the
named executive officers.162 In addition,
160 See Securities Act Section 27A and Exchange
Act Section 21E.
161 We propose to adopt the nomenclature used
most recently in Item 5.02 of Form 8–K, which
refers to ‘‘principal executive officer’’ and
‘‘principal financial officer.’’
162 Proposed Item 402(a)(3). Currently, the named
executive officers for whom disclosure is required
include the company’s chief executive officer and
the four most highly compensated executive officers
excluding the chief executive officer. As defined in
Securities Act Rule 405 [17 CFR 230.405] and
Exchange Act Rule 3b–7 [17 CFR 240.3b–7], ‘‘the
term ‘executive officer,’ when used with reference
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as is currently the case, up to two
additional individuals for whom
disclosure would have been required
but for the fact that they were no longer
serving as executive officers at the end
of the last completed fiscal year would
be included.
We believe that compensation of the
principal financial officer is important
to shareholders because, along with the
principal executive officer, the principal
financial officer provides the
certifications required with the
company’s periodic reports and has
important responsibility for the fair
presentation of the company’s financial
statements and other financial
information.163 Like the principal
executive officer, disclosure about the
principal financial officer would be
required even if he or she was no longer
serving in that capacity at the end of the
last completed fiscal year.164 As is
currently the case for the chief executive
officer, all persons who served as the
company’s principal executive officer or
principal financial officer during the
last completed fiscal year would be
named executive officers.
We do not propose to require
compensation disclosure for all of the
officers listed in Item 5.02 of Form 8–
K.165 Item 5.02 of Form 8–K was
adopted to provide current disclosure in
the event of an appointment,
resignation, retirement or termination of
the specified officers, based on the
principle that changes in employment
to a registrant, means its president, any vice
president of the registrant in charge of a principal
business unit, division or function (such as sales,
administration or finance), any other officer who
performs a policy making function or any other
person who performs similar policy making
functions for the registrant. Executive officers of
subsidiaries may be deemed executive officers of
the registrant if they perform such policy making
functions for the registrant.’’ Therefore, as is
currently the case today, a named executive officer
may be an executive officer of a subsidiary.
163 Exchange Act Rules 13a–14 and 15d–14.
164 Proposed paragraphs (a)(3)(i) and (a)(3)(ii) of
Item 402 would provide that all individuals who
served as a principal executive officer and principal
financial officer or in similar capacities during the
last completed fiscal year must be considered
named executive officers. Proposed Instruction 4 to
Item 402(a)(3) would specify that if the principal
executive officer or principal financial officer
served in that capacity for only part of a fiscal year,
information must be provided as to all of the
individual’s compensation for the full fiscal year.
Proposed Instruction 4 to Item 402(a)(3) would also
specify that if a named executive officer (other than
the principal executive officer or principal financial
officer) served as an executive officer of the
company (whether or not in the same position)
during any part of the fiscal year, then information
is required as to all compensation of that individual
for the full fiscal year.
165 These are the registrant’s principal executive
officer, president, principal financial officer,
principal accounting officer, principal operating
officer or any person performing similar functions.
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6563
status of these particular officers are
unquestionably or presumptively
material. At the time when a decision is
made regarding the employment status
of a particular officer, it will not always
be clear who will be the named
executive officers for the current year.
Given these factors, it is reasonable for
the two groups not to be identical.
Request for Comment
• Should the principal financial
officer be specifically included as a
named executive officer?
• Would the proposed named
executive officers be those executive
officers whose compensation is material
to investors? Is only the compensation
of the principal executive officer
material? The principal executive officer
and the principal financial officer?
• Should Item 402 specifically
require disclosure of the compensation
of any other officers listed in Form 8–
K Item 5.02? If so, which officers and
why? If we were to require Item 402
disclosure regarding compensation of
additional Item 5.02 officers, should we
also require Item 402 disclosure for two
or three additional officers who receive
the highest compensation?
• Are there any other specific
executive officers, such as the general
counsel or principal accounting officer,
who should be specifically identified as
named executive officers? If so, which
officers and why?
• Should we retain, as proposed, the
current requirement that up to two
additional individuals for whom
disclosure would have been required
but for the fact that they were no longer
serving as executive officers at the end
of the year be included in the
disclosure?
• Is the continuation of the current
requirement for five named executive
officers appropriate? Should that
number be higher or lower?
b. Identification of Most Highly
Compensated Officers; Dollar Threshold
for Disclosure
We propose to identify the most
highly compensated executive officers
on the basis of total compensation for
the most recent fiscal year.166 We also
propose to revise the dollar threshold
for disclosure of named executive
officers other than the principal
executive officer and the principal
financial officer to $100,000 of total
compensation for the last fiscal year.167
Both the determination of the most
highly compensated officers and the
$100,000 disclosure threshold are
166 Proposed
Instruction 1 to Item 402(a)(3).
167 Id.
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currently based only on total annual
salary and bonus for the last fiscal
year.168 Given the proliferation of
various forms of compensation other
than salary and bonus, we believe that
total compensation more accurately
identifies those officers who are, in fact,
the most highly compensated.
Moreover, basing identification of
named executive officers solely on the
compensation reportable in the salary
and bonus categories may provide an
incentive to re-characterize
compensation.
Under the current rules, companies
are permitted to exclude an executive
officer (other than the chief executive
officer) due to either an unusually large
amount of cash compensation that is not
part of a recurring arrangement and is
unlikely to continue, or cash
compensation relating to overseas
assignments attributed predominantly to
such assignments.169 Because payments
attributed to overseas assignments have
the potential to skew the application of
Item 402 disclosure away from
executives whose compensation
otherwise properly would be disclosed,
we propose to retain this basis for
exclusion. However, we believe that
other compensation that is ‘‘not
recurring and unlikely to continue’’
should be considered compensation for
disclosure purposes. There has been
inconsistent interpretation of the ‘‘not
recurring and unlikely to continue’’
standard, and it is susceptible to
manipulation. We therefore propose to
eliminate this basis for exclusion.170
Request for Comment
• Are there any particular
circumstances or categories of
companies for which a measure other
than total compensation should be
applied to identify the most highly
compensated executive officers? If so,
what measure should be applied and
why? Is $100,000 the correct disclosure
threshold?
• Should payments attributable to
overseas assignments be included in
determining the most highly
compensated officers, given that the
purpose of such payments typically is to
compensate for disadvantageous
currency exchange rates or high costs of
living?
• Are there any particular
circumstances, such as commissions for
executives responsible for sales, for
which the ‘‘not recurring and unlikely
to continue’’ standard should be
retained?
168 Current
Instruction 1 to Item 402(a)(3).
Instruction 3 to Item 402(a)(3).
170 Proposed Instruction 3 to Item 402(a)(3).
169 Current
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7. Interplay of Items 402 and 404
We propose that Item 402 require
disclosure of all transactions between
the company and a third party where
the primary purpose of the transaction
is to furnish compensation to a named
executive officer. Currently, while Item
402 states that such compensation is
reportable under Item 402, even if also
called for by another requirement, Item
402 also provides that information may
be excluded if a transaction has been
reported in response to Item 404.171
This provision may cause Item 402
disclosure to omit compensation that a
transaction disclosed under Item 404
provides to executives. We propose to
eliminate that exclusion from Item
402.172 We also propose instructions to
Item 404 that would clarify what
compensation does not need to be
reported under Item 404.173 In some
cases the result may nevertheless be that
compensation information is disclosed
under Item 402 while a related person
transaction giving rise to that
compensation is disclosed under Item
404. We believe the possibility of
additional disclosure in the context of
each of the respective items is preferable
to the possibility that compensation is
not properly and fully disclosed under
Item 402.
Request for Comment
• In light of the amendments to Item
404 that we also propose, are there any
circumstances for which the current
exclusion from Item 402 disclosure for
transactions reported under Item 404
should be retained? If so, why?
8. Other Proposed Changes
A company is currently permitted to
omit from Item 402 disclosure
‘‘information regarding group life,
health, hospitalization, medical
reimbursement or relocation plans that
do not discriminate in scope, terms or
operation, in favor of executive officers
or directors of the company and that are
available generally to all salaried
employees.’’ 174 Because relocation
plans, even when available generally to
all salaried employees, are susceptible
to operation in a discriminatory manner
that favors executive officers, this
exclusion may deprive investors of
disclosure of significant compensatory
171 Current
Items 402(a)(2) and 402(a)(5).
current Item 402(a)(5) otherwise is
redundant with current Item 402(a)(2), we propose
to rescind Item 402(a)(5) in its entirety. We propose
a conforming amendment to Item 402(a)(2).
173 Proposed Instructions 5 and 6 to Item 404(a).
174 Current Item 402(a)(7)(ii), which generally
defines the term ‘‘plan.’’
172 Because
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benefits.175 For this reason, we propose
to delete relocation plans from this
exclusion. For the same reason, we are
also deleting relocation plans from the
exclusion from portfolio manager
compensation in forms used by
management investment companies to
register under the Investment Company
Act and offer securities under the
Securities Act.176 We also propose to
revise the definition of ‘‘plan’’ so that it
is more principles-based.177
Request for Comment
• Should relocation plans be required
to be disclosed as compensation?
Should group life, health,
hospitalization and medical
reimbursement also be included in
reportable compensation? Can these
plans be operated in a manner that may
obscure compensation disclosure? Are
there other plans or benefits that should
be excluded from the disclosure
requirements of Item 402? If so, why?
• Should management investment
companies be required to disclose all
relocation plans as portfolio manager
compensation? Should all group life,
health, hospitalization, medical
reimbursement, and pension and
retirement plans and arrangements also
be included in compensation that is
disclosed for portfolio managers of
management investment companies?
9. Compensation of Directors
Director compensation has continued
to evolve from simple compensation
packages mostly involving cash
compensation and attendance fees to
more complex packages, which can also
include share-based compensation,
incentive plans and other forms of
compensation.178 In light of this
complexity, we have determined to
propose formatted tabular disclosure for
director compensation, accompanied by
narrative disclosure of additional
material information. In doing so, we
are revisiting an approach that the
175 See, e.g., Ellen Simon, At Corporate Helm,
Extra Benefits Still Alive and Well, Assoc. Press,
Apr. 26, 2004; and Carrie Johnson, Former Tyco
Executive Takes Stand in Trial, Wash. Post, Feb. 11,
2004, at E2.
176 Proposed amendment to Instruction 2 to Item
15(b) of Form N–1A; proposed amendment to
Instruction 2 to Item 21.2 of Form N–2; proposed
amendment to Instruction 2 to Item 22(b) of Form
N–3.
177 Proposed Item 402(a)(6)(ii).
178 See, e.g., National Association of Corporate
Directors and Pearl Meyer & Partners, 2003–2004
Director Compensation Survey (2004); National
Association of Corporate Directors, Report of the
NACD Blue Ribbon Commission On Director
Compensation (2001); and Dennis C. Carey, et al.,
How Should Corporate Directors Be Compensated?,
Investment Dealers’ Digest Inc.—Special Issue:
Boards and Directors (Jan. 1996).
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Commission proposed in 1995 but did
not adopt at that time.179 The
commenters supporting the proposal
generally believed that it was
appropriate to treat director
compensation similarly to executive
compensation.180 The commenters
opposing the proposal believed that
non-executive directors were generally
compensated uniformly, and therefore
breaking out compensation for each
director in a table often could yield
repetitious data.181
Director compensation has continued
to evolve since 1995 so that we are again
6565
proposing a Director Compensation
Table, which would resemble the
proposed Summary Compensation
Table, but would present information
only with respect to the company’s last
completed fiscal year.
DIRECTOR COMPENSATION
(a)
A
B
C
D
E
Total
(b)
(c)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(d)
Name
Fees
earned or
paid in cash
($)
(e)
(f)
(g)
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
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The All Other Compensation column
of the proposed Director Compensation
Table would include, but not be limited
to:
• All perquisites and other personal
benefits if the total is $10,000 or greater;
• All earnings on compensation that
is deferred on a basis that is not taxqualified;
• All tax reimbursements;
• Annual company contributions or
other allocations to vested and unvested
defined contribution plans;
• For any security of the company or
its subsidiaries purchased from the
company or its subsidiaries (through
deferral of fees or otherwise) at a
discount from the market price of such
security at the date of purchase, unless
the discount is generally available to all
security holders or to all salaried
employees of the company, the
compensation cost computed in
accordance with FAS 123R;
• Aggregate annual increase in
actuarial value of all defined benefit and
actuarial pension plans;
• Annual company contributions to
vested and unvested defined
contribution and other deferred
compensation plans;
• All consulting fees;
• Awards under director legacy or
charitable awards programs; 182 and
• The dollar value of any insurance
premiums paid by, or on behalf of, the
company for life insurance for the
director’s benefit.
In addition to the disclosure specified
in the columns of the table, companies
would be required to disclose, for each
director, by footnote to the appropriate
column, the outstanding equity awards
at fiscal year end as would be required
if the Outstanding Equity Awards at
Fiscal Year-End table for named
executive officers were required for
directors.183 The same instructions as
provided in the Summary
Compensation Table would govern
analogous matters in the Director
Compensation Table. As with the
Summary Compensation Table, the
proposed rules make clear that all
compensation must be included in the
table.184 As is the case with the current
director disclosure requirement,
companies would not be required to
include in the director disclosure any
amounts of compensation paid to a
named executive officer and disclosed
in the Summary Compensation Table
with footnote disclosure indicating what
amounts reflected in that table are
compensation for services as a director.
A proposed instruction to the Director
Compensation Table would permit the
grouping of directors in a single row of
the table if all of their elements and
amounts of compensation are
identical.185
Following the table, narrative
disclosure would describe any material
factors necessary to an understanding of
the table. Such factors may include, for
example, a breakdown of types of
fees.186 We are not proposing the
supplemental tables for directors.
179 1995 Release. The 1995 proposal was coupled
with a proposal to permit companies to reduce the
detailed executive compensation information
provided in the proxy statement by instead
furnishing that information in the Form 10–K. We
did not act upon the proposals.
180 The Commission received approximately 153
letters supporting the proposal. Of those, 133, all
individuals, expressed their views via a brief
statement submitted using a form letter. Additional
supporting commenters included corporations,
associations, unions, and security holder resource
providers. See, e.g., comment letters on the 1995
Release in File No. S7–14–95 from Bell Atlantic
Network Services, Inc.; Chevron Corporation; and
Scott Paper Company (generally offering support for
proposal). See also, e.g., coment letters from the
Amerian Bar Association; American Institute of
Certified Public Accountants; Association of
Investment Management and Research; American
Society of Corporate Secretaries; Instituional
Shareholder Services; and Ernst & Young LLP
(favoring tabular disclosure of director
compensation, but with suggested improvements to
proposed rules).
181 Approximately 20 commenters, primarily
corporations and associations, opposed the rules.
See, e.g., comment letters in File No. S7–14–95
from the American Corporate Counsel Association;
AT&T Corp.; The Business Roundtable;
Consolidated Edison Company of New York; Deere
& Communications, Inc.
182 Under director legacy programs, also known as
charitable award programs registrants typically
agree to make a future donation to one or more
charitable institutions in the director’s name,
payable by the registrant upon a designated event
such as death or retirement. The amount to be
disclosed in the table would be the annual cost of
such promises and payments, with footnote
disclosure of the total dollar amount and other
material terms of each such program.
183 Proposed Instruction to item 402(l)(2)(iv) and
(v).
184 The only exception would be if all perquisites
received by the director total less than $10,000, they
would not need to be disclosed.
185 Proposed Instruction to item 402(l)(2).
186 Proposed Item 402(l)(3).
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Request for Comment
• Does the proposed table organize
director compensation disclosure in a
format that is easy to understand?
• Do the proposed table and narrative
disclose information that is material to
an investor’s analysis of director
compensation? Should other tables be
required, such as the Grants of
Performance-Based Awards Table and
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the Grants of All Other Equity Awards
Table?
• Should named executive officers
who are also directors be omitted from
the table, with any compensation for
services as a director reported only in
the Summary Compensation Table, as is
currently the case? If so, should there be
some indication of their status as
directors and compensation related to
their director service in the Summary
Compensation Table, the Director
Compensation Table, or both? Should
the nature or extent of compensation to
the chairman of the board of directors be
presented differently from that of other
directors?
• With respect to disclosure of
perquisites, should the director
compensation apply the same $10,000
disclosure threshold as proposed for the
Summary Compensation Table? Should
separate identification and
quantification apply to director
perquisites?
• Does the proposed table cover any
forms of compensation that typically are
not awarded to directors and therefore
should be omitted? Should the
requirements be modified to make it
easier to capture forms of compensation,
if any, that develop in the future?
• Does the proposed table omit any
forms of compensation awarded to
directors that should be specifically
included or identified?
• Should narrative disclosure
regarding the company’s policies and
objectives with respect to director
compensation and share ownership or
retention policies accompany this table?
Should it be included in the
Compensation Discussion and Analysis?
• Would more specific footnote
disclosure, as opposed to the proposed
accompanying narrative, provide
additional material information
regarding director compensation?
Should there be supplemental tables for
directors, or should we require
disclosure of the number of shares,
units, options and other securities
awarded to directors in addition to the
grant date fair value of such awards?
C. Treatment of Specific Types of
Issuers
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1. Small Business Issuers
The Item 402 proposals would
continue to differentiate between small
business issuers and other issuers.187 In
187 The term small business issuer is defined by
Item 10(a)(1) of Regulation S–B. Currently, under
both Item 402 of Regulation S–B and Item 402 of
Regulation S–K, a small business issuer is not
required to provide the Compensation Committee
Report, the Performance Graph, the Compensation
Committee Interlocks disclosure, the Ten-Year
Option/SAR Repricings Table, and the Option Grant
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crafting the proposals, we recognize that
the executive compensation
arrangements of small business issuers
typically are less complex than those of
other public companies. We also
recognize that satisfying disclosure
requirements designed to capture more
complicated compensation
arrangements may impose new,
unwarranted burdens on small business
issuers.
As proposed, small business issuers
would be required to provide, along
with related narrative disclosure:
• The Summary Compensation
Table; 188
• The Outstanding Awards at Fiscal
Year-End Table; 189 and
• The Director Compensation
Table.190
Also as proposed, small business issuers
would only be required to provide
information in the Summary
Compensation Table for the last two
fiscal years. In addition, small business
issuers would be required to provide
information for fewer named executive
officers, namely the principal executive
officer and the two most highly
compensated officers other than the
principal executive officer.191 Narrative
discussion of a number of items to the
extent material would replace tabular or
footnote disclosure, for example
identification of other items in the All
Other Compensation column and a
description of post-employment
payments and other benefits.192 Small
business issuers would not be required
to provide a Compensation Discussion
and Analysis.193
Table columns disclosing potential realizable value
or grant date value. The current rules also permit
samll business issuers to exclude the Pension Plan
Table.
188 Proposed Items 402(b) and 402(c) of
Regulation S–B.
189 Proposed Item 402(d) of Regulation S–B.
190 Proposed Item 402(f) of Regulation S–B.
191 Proposed Item 402(a) of Regulation S–B.
Proposed Item 402(c)(1)(vii) of Regulation S–B
would require an identification to the extent
material of any item included under All Other
Compensation in the Summary Compensation
Table, however identification of an item wold not
be considered material under the proposal if it did
not exceed the greater of $25,000 or 10% of all
items included in the specified category. All items
of compensation would be requred to be included
in the Summary Compensatio Table without regard
to whether such items are required to be
indentified.
192 Proposed Item 402(c) and 402(e) of Regulation
S–B.
193 We would also eliminate the current provision
of Item 402 of Regulation S–K that allows small
business issuers using forms that call for Regulation
S–K disclosure to exclude the disclosure required
by certain paragraphs of that Item. Current Item
402(a)(1)(i) of Regulation S–K.
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Request for Comment
• Would reliance on narrative
disclosure adversely affect
comparability of disclosure among small
business issuers? Are there particular
forms of compensation that for this
reason should instead be presented in a
tabular format? If so, why?
• Should small business issuers be
categorically exempted from providing a
Compensation Discussion and Analysis?
Are there particular elements of the
proposed Compensation Discussion and
Analysis in Item 402 of Regulation S–K
that small business issuers should be
required to address? If so, which
elements and why?
• Are there other provisions of our
rule proposal that should not apply to
small business issuers?
• Should the Summary Compensation
Table require disclosure of
compensation for each of the last two
fiscal years, or is only the last
completed fiscal year necessary?
• Should compensation disclosure be
provided for a larger group of executive
officers than we have proposed? If so,
which officers and why?
• Should we require small business
issuers to provide an Option Exercises
and Stock Vested Table?
• Should the quantitative threshold
for identifying the most highly
compensated executive officers remain
the same in both Regulation S–B and
Regulation S–K? For example, if we
raise this threshold in Item 402 of
Regulation S–K, should it remain
$100,000 for Regulation S–B? Should
any other threshold be different for
small business issuers?
• Should small business issuers also
be required to identify perquisites and
personal benefits valued, in the
aggregate, in excess of $10,000 and to
quantify perquisites and personal
benefits valued at the greater of $25,000
or ten percent of total perquisites and
other personal benefits?
• Should we require the
supplemental tables to the Summary
Compensation Table?
• Are there other items that should be
specifically required to be discussed in
the proposed narrative disclosure for
small business issuers?
2. Foreign Private Issuers
Currently a foreign private issuer will
be deemed to comply with Item 402 of
Regulation S–K if it provides the
information required by Items 6.B. and
6.E.2. of Form 20–F, with more detailed
information provided if otherwise made
publicly available. The proposals would
continue this treatment of these issuers
and clarify that the treatment of foreign
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private issuers under Item 402 parallels
that under Form 20–F.
Request for Comment
• Should we eliminate the provision
which permits a foreign private issuer to
comply with Item 402 by complying
with the more limited disclosure
requirements under Form 20–F with
respect to management remuneration?
Should a foreign private issuer that is
required to comply with Item 402 (for
example, by filing an annual report on
Form 10–K) be required to provide all
of the information required under Item
402 instead of the information required
under Form 20–F?
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3. Business Development Companies
We are proposing to apply the same
executive compensation disclosure
requirements to business development
companies that we are proposing for
operating companies.194 Currently,
business development companies are
required to provide executive
compensation disclosure based, in part,
on the requirements that apply to
operating companies and, in part, on the
requirements that apply to investment
companies registered under the
Investment Company Act. Moreover, the
executive compensation disclosure
requirements for business development
companies are not uniform in Securities
Act registration statements, proxy and
information statements, and Form 10–K.
Under Form 10–K, business
development companies are required to
furnish all of the information required
by Item 402 of Regulation S–K for all of
the persons covered by Item 402.195 In
proxy and information statements,
business development companies are
required to provide for directors and
each of the three highest paid officers
that have aggregate compensation from
the company for the most recently
completed fiscal year in excess of
$60,000, certain information required by
Item 402 of Regulation S–K and certain
other information that registered
investment companies are required to
provide.196 In registration statements,
business development companies are
required to provide the same
information required in proxy
statements, but with respect to directors,
194 Business development companies are a
category of closed-end investment companies that
are not required to register under the Investment
Company Act [15 U.S.C. 80a–2(a)(48)].
195 Item 11 of Form 10–K.
196 Items 8 and 22(b)(13) of Schedule 14A. These
items require business development companies to
provide certain information required by Item
402(b)(2)(iv) and (c) of Regulation S–K, as well as
a compensation table and a brief description of the
material provisions of certain pension, retirement
and other plans.
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members of the advisory board, and
each of the three highest paid officers or
any affiliated person of the company
that have aggregate compensation from
the company for the most recently
completed fiscal year in excess of
$60,000.197
We are proposing to apply to business
development companies the same
executive compensation rules that apply
to operating companies because the
proposed disclosure requirements are
intended to provide investors with a
clearer and more complete picture of
executive compensation, and we are
concerned that this purpose would not
be achieved through piecemeal
application of some of the requirements.
Our proposal would also eliminate the
current inconsistency between Form
10–K, on the one hand, which requires
business development companies to
furnish all of the information required
by Item 402 of Regulation S–K, and the
proxy rules and Form N–2, on the other,
which require business development
companies to provide some of the
information from Item 402 and other
information that applies to registered
investment companies. Finally, we
believe that, similar to operating
companies, business development
companies should furnish
compensation disclosure on proxies
relating to the compensation
arrangements and other matters
enumerated in Items 8(b) through (d) of
Schedule 14A and not just in the case
of director elections as currently
required by Item 22(b)(13).
Under the proposals, the registration
statements of business development
companies would be required to include
all of the disclosures required by Item
402 of Regulation S–K for all of the
persons covered by Item 402.198 This
disclosure would also be required in the
proxy and information statements of
business development companies if
action is to be taken with respect to the
election of directors or with respect to
the compensation arrangements and
other matters enumerated in Items 8(b)
through (d) of Schedule 14A.199
197 Item
18.14 of Form N–2.
Item 18.15 of Form N–2. Under the
proposals, business development companies would
no longer be required to respond to Item 18.14 of
Form N–2, and Item 18.14(c) of Form N–2 would
be deleted. Current Items 18.15 and 18.16 of Form
N–2 would be redesignated as Items 18.16 and
18.17, respectively. As a result of the redesignation
of current Item 18.16 of Form N–2, a change to the
cross reference to this Item in Instruction 8(a) of
Item 24 of the form is also proposed.
199 Proposed amendment to Item 8 of Schedule
14A. Under the proposals, business development
companies would no longer be required to respond
to Item 22(b)(13) of Schedule 14A, and Item
22(b)(13)(iii) of Schedule 14A would be deleted.
198 Proposed
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Business development companies
would also be required to make these
disclosures in their annual reports on
Form 10–K.200
As a result of these proposed
amendments, the persons covered by
the compensation disclosure
requirements would be changed. The
compensation disclosure in the proxy
and information statements and
registration statements of business
development companies would be
required to cover the same officers as for
operating companies, including the
principal executive officer and principal
financial officer, as well as the three
most highly compensated executive
officers that have total compensation
exceeding $100,000,201 instead of each
of the three highest paid officers of the
company that have aggregate
compensation from the company for the
most recently completed fiscal year in
excess of $60,000. In addition, the
registration statements of business
development companies would no
longer be required to disclose
compensation of members of the
advisory board or certain affiliated
persons of the company.
Finally, under the proposals, the
proxy and information statements and
registration statements of business
development companies would not be
required to include compensation from
the ‘‘fund complex.’’ Currently, this
information is required in some
circumstances.202
Request for Comment
• Should business development
companies be required to comply with
the same compensation disclosure
requirements as operating companies or
registered investment companies, a
combination of the compensation
disclosure requirements for operating
companies and registered investment
companies, or some other set of
compensation disclosure requirements?
Should the same compensation
disclosure requirements apply to
business development companies in
registration statements, proxy and
information statements, and Form 10–
K? In addressing the appropriate
compensation disclosure requirements
for business development companies,
commenters are requested to address
Proposed amendments to Item 22(b)(13) of
Schedule 14A.
200 Item 11 of Form 10–K.
201 See Section II.B.6., above.
202 See Instructions 4 and 6 to Item 22(b)(13)(i) of
Schedule 14A; Instructions 4 and 6 to Item 18.14(a)
of Form N–2 (requiring certain entries in the
compensation table in the proxy and information
statements and registration statements of business
development companies to include compensation
from the fund complex).
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separately the persons covered by the
disclosure requirements and the
disclosures required with respect to
those persons. Commenters are also
requested to address separately
disclosures for executive officers and
directors.
• Should all business development
companies be subject to the same
executive compensation disclosure or
should we distinguish between smaller
and larger business development
companies? Should business
development companies be subject to
the executive compensation disclosure
requirements of Regulation S–B filers?
• Should we require disclosure of
compensation paid to affiliated persons
of a business development company and
members of the advisory board of the
company?
• Should we require disclosure of
certain compensation paid by the fund
complex that includes a business
development company?
D. Conforming Amendments
The Item 402 proposals necessitate
conforming amendments to the Items of
Regulations S–K and S–B and the proxy
rules that cross reference amended
paragraphs of Item 402. On this basis,
the rule proposals would amend:
• The Item 201(d) of Regulations S–
K and S–B and proxy rule references to
the Item 402 definition of ‘‘plan;’’ 203
• The Item 601(b)(10) of Regulation
S–K reference to the Item 402 treatment
of foreign private issuers; 204 and
• The proxy rule references to Item
402 retirement plan disclosure.205
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E. General Comment Requests on the
Item 402 Proposals
We request comment on any aspect of
these proposals. In particular:
• Would the proposals effectively
provide clearer, more complete
disclosure of executive and director
compensation? If not, what changes are
needed to accomplish this result?
• Are the proposals sufficiently
broad-based to continue to operate
effectively as new forms of
compensation are developed in the
future? If not, what changes are
necessary to achieve this flexibility?
• To clarify what other filed
documents provide information about
203 Proposed amendments to: Instruction 2 to
paragraph (d) of Item 201 of Regulation S–B;
Instruction 2 to paragraph (d) of Item 201 of
Regulation S–K; Exchange Act Rules 14a–6(a)(4)
and 14c–5(a)(4); and Instruction 1 to Item 10(c) of
Schedule 14A.
204 Proposed amendment to Item
601(b)(10)(iii)(C)(5).
205 Proposed amendments to Item 10(b)(1)(ii) and
the Instruction following Item 10(c) of Schedule
14A.
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executive compensation, should a
company be required to list in its annual
proxy statement for the election of
directors all other documents filed since
the last proxy statement (such as Forms
8–K and exhibits filed with Forms 10–
K and 10–Q) that contain this
information? Instead, should such a list
be provided solely as an EDGAR-filed
annex to the proxy statement?
• Would the presentation and content
of the executive and director
compensation disclosure be improved
by making the information available in
the form of interactive data? For
example, could an understanding of the
information reported in the proposed
tables be enhanced by the ability to
access more detailed information
regarding discrete amounts or items
reported in the tables? If the
presentation of interactive data would
be desirable, what would be the best
means for introducing interactive data
capabilities into the proposed Item 402
disclosure requirements? For example,
should we develop a data format that
could be used to submit the information
that has interactive capability while at
the same time having the information
readable on its face? Should we
consider having the information
provided using Extensible Business
Reporting Language, also known as
XBRL? Could the information be
provided in a form that permits
interactive capability in proxy and
information statements that are made
available on the Internet or otherwise
electronically?
III. Proposed Revisions to Form 8–K
and the Periodic Report Exhibit
Requirements
In March 2004, the Commission
adopted amendments to Form 8–K that
significantly expanded the number of
events that are reportable on Form 8–K
and reduced the reporting deadline for
most Form 8–K disclosure items to four
business days after the triggering
event.206 These amendments became
effective on August 23, 2004. As part of
our broader effort to revise our
executive and director compensation
disclosure requirements, we are
proposing revisions to Item 1.01 of Form
8–K, which currently requires this realtime disclosure about an Exchange Act
reporting company’s entry into a
material definitive agreement outside of
the ordinary course of the company’s
business, as well as any material
amendment to such an agreement. Our
206 Additional Form 8–K Disclosure Requirements
and Acceleration of Filing Date, Release No. 33–
8400 (Mar. 16, 2004) [69 FR 15593] (the ‘‘Form 8–
K Adopting Release’’).
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staff’s experience over the last year
suggests that this item has elicited
executive compensation disclosure
regarding types of matters that do not
appear always to be unquestionably or
presumptively material, which is the
standard we set for the expanded Form
8–K disclosure events.207 We therefore
propose to revise Items 1.01 and 5.02 to
require real-time disclosure of employee
compensation events that more clearly
satisfy this standard.
In addition to the proposed
amendments to Items 1.01 and 5.02 of
Form 8–K, we propose to revise General
Instruction D of Form 8–K to permit
companies in most cases to omit the
Item 1.01 heading if multiple items
including Item 1.01 are applicable, so
long as all of the substantive disclosure
required by Item 1.01 is included.
A. Proposed Revisions to Items 1.01 and
5.02 of Form 8–K
Item 1.01 of Form 8–K requires an
Exchange Act reporting company to
disclose, within four business days, the
company’s entry into a material
definitive agreement outside of its
ordinary course of business, or any
amendment of such agreement that is
material to the company. When we
initially proposed this item, several
commenters stated that it would be
difficult to determine, within the
shortened Form 8–K filing period,
whether a particular definitive
agreement met the materiality threshold
of Item 1.01, and whether the agreement
was outside of the ordinary course of
business.208 Some of these commenters
suggested that we apply to Item 1.01 the
standards used in pre-existing Item
601(b)(10) of Regulation S–K governing
the filing as exhibits to Commission
reports of material contracts entered
into outside the ordinary course because
these standards had been in place for
many years and were familiar to
reporting companies.209
In response to the concerns raised by
these comments, we adopted Item 1.01
of Form 8–K so that it used the
207 We stated in Section I of the Form 8–K
Adopting Release: ‘‘The revisions that we adopt
today will benefit markets by increasing the number
of unquestionably or presumptively material events
that must be disclosed currently.’’
208 See, e.g., comment letters on Additional Form
8–K Disclosure Requirements and Acceleration of
Filing Date, Release No. 33–8106 (June 17, 2002) [67
FR 42913] in File No. S7–22–02 from the
Committee on Federal Regulation of Securities,
Section of Business Law of the American Bar
Association; Cleary, Gottlieb, Steen & Hamilton;
Intel Corporation; Professor Joseph A. Grundfest, et
al.; Perkins Coie LLP; Sherman & Sterling; and
Sullivan & Cromwell.
209 See e.g., comment letter in File No. S7–22–02
from the Section of Business Law of the American
Bar Association.
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standards of Item 601(b)(10) to
determine the types of agreements that
are material to a company and not in the
ordinary course of business. Item
601(b)(10) of Regulation S–K requires a
company to file, as an exhibit to
Securities Act and Exchange Act filings,
material contracts that are not made in
the ordinary course of business and are
to be performed in whole or part at or
after the filing of the registration
statement or report, or were entered into
not more than two years before the
filing. The item refers specifically to
employment compensation
arrangements and establishes a
company’s obligation to file the
following as exhibits:
• Any management contract or any
compensatory plan, contract or
arrangement, including but not limited
to plans relating to options, warrants or
rights, pension, retirement or deferred
compensation or bonus, incentive or
profit sharing (or if not set forth in any
formal document, a written description
thereof) in which any director or any
named executive officer (as defined by
Item 402(a)(3) of Regulation S–K)
participates;
• Any other management contract or
any other compensatory plan, contract,
or arrangement in which any other
executive officer of the registrant
participates, unless immaterial in
amount or significance; and
• Any compensation plan, contract or
arrangement adopted without the
approval of security holders pursuant to
which equity may be awarded,
including, but not limited to, options,
warrants or rights in which any
employee (whether or not an executive
officer of the company) participates
unless immaterial in amount or
significance.210
210 Item 601(b)(10)(iii) of Regulation S-K. We note
the provision in Item 601(b)(10)(iii)(A) that carves
out any plan, contract or arrangement in which
named executive officers and directors do not
participate that is ‘‘immaterial in amount or
significance.’’ In 1980, the Commission adopted
amendments to Regulation S–K that consolidated
all of the exhibit requirements of various disclosure
forms into a single item in Regulation S–K.
Amendments Regarding Exhibit Requirements,
Release No. 33–6230 (Aug. 27, 1980) [45 FR 58822],
at Section II.B. This item was a forerunner of the
current Item 601. As part of that 1980 adopting
release, the definition of material contract
contained in the new item was also revised in an
effort to reduce the number of remunerative plans
or arrangements that must be filed. Not long after,
though, the staff discovered that rather than reduce
the number of exhibits filed, the provision actually
had the opposite effect. The staff found that the
revised definition of material contract ‘‘has resulted
in registrants filing a large volume of varied
remunerative contracts involving directors and
executive officers, contracts which are not material
and which would not have been filed under the
previously existing ‘material in amount or
significance’ standard.’’ Technical Amendment
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Therefore, entry into these types of
contracts triggers the filing of a Form 8–
K within four business days.
Importantly, the requirement for
directors and named executive officers
does not include an exception for those
that are ‘‘immaterial in amount or
significance.’’
The incorporation of the Item
601(b)(10) standards into Item 1.01 of
Form 8–K has therefore significantly
affected executive compensation
disclosure practices. Prior to the Form
8–K amendments, it was customary for
a company’s annual proxy statement to
be the primary vehicle for disclosure of
executive and director compensation
information. However, Item 1.01 of
amended Form 8–K has resulted in
executive compensation disclosures that
are much more frequent and accelerated
than those included in a company’s
proxy statement. In addition,
particularly because of the terms of Item
601(b)(10), Item 1.01 of Form 8–K has
triggered compensation disclosure of the
types of matters that, in some cases,
appear to fall short of the
‘‘unquestionably or presumptively
material’’ standard associated with the
expanded Form 8–K disclosure items.
Companies and their counsel have
raised concerns that the new Form 8–K
requirements have resulted in real-time
disclosure of compensation events that
should be disclosed, if at all, in a
company’s proxy statement for its
annual meeting or as an exhibit to the
company’s next periodic report, such as
the Form 10–Q or Form 10–K.211
We believe that much of the
disclosure regarding employment
compensation matters required in realtime under the new Form 8–K
requirements is viewed by investors as
material.212 However, we also believe
that it would be appropriate to restore
Regarding Exhibit Requirement, Release No. 33–
6287 (Feb. 6, 1981) 46 FR 11952], at Section I.
Therefore, in February 1981, the Commission added
‘‘unless immaterial in amount or significance’’ to
the definition of ‘‘material contracts’’ as applied to
remunerative plans, contracts or arrangements
participated in by executives that are not named
executive officers. Id. We reiterate that this phrase
was intended to indicate that whether plans,
contracts or arrangements which executive officers
other than named executive officers participate are
to be included in the requirements of 601(b)(10)
must be determined on the basis of materiality.
211 See, e.g., Melissa Klein Aguilar, This Side of
Caution: New Regs. Prompt 8–K Increases,
Compliance Week, Aug. 23, 2005; Scott S. Cohen,
Editorial: Debating the Materiality of ‘‘Material
Definitive Agreements,’’ Compliance Week, Feb. 8,
2005; and Patrick McGeehan, Now, an Advance
Look at Those Big Paychecks, N.Y. Times, Sept. 26,
2004, at 36.
212 See, e.g., Jerry Knight, Tiny SEC Filing Gave
a Big Hint to Vastera’s Plans, Wash. Post, Jan. 24,
2005, at E1; and Alex Berenson, Merck Offering Top
Executives Rich Way Out, N.Y. Times, Nov. 30,
2004, at A1.
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a more balanced approach to this aspect
of Form 8–K that is designed to elicit
unquestionably or presumptively
material information on a real-time
basis, but seeks to limit Form 8–K
disclosure of information below that
threshold. Accordingly, we propose to
amend Item 1.01 of Form 8–K to
eliminate employment compensation
arrangements and to cover such
arrangements under a modified broader
Item 5.02.213
Item 5.02 of Form 8–K currently
generally requires disclosure within
four business days of the appointment
or departure of directors and specified
officers. In particular, Item 5.02 requires
disclosure if a company’s principal
executive officer, president, principal
financial officer, principal accounting
officer, principal operating officer, or
any person performing similar
functions, retires, resigns or is
terminated from that position 214 or if a
company appoints a new principal
executive officer, president, principal
financial officer, principal accounting
officer, principal operating officer, or
any person performing similar
functions.215 Item 5.02 also requires
disclosure if a director retires, resigns, is
removed, or declines to stand for reelection.216 The required disclosure
currently includes a brief description of
the material terms of any employment
agreement between the registrant and
the officer and a description of
disagreements, if any.
We propose to modify Item 5.02 to
capture generally the currently required
information under that item, as well as
additional information regarding
material employment compensation
arrangements involving named
executive officers that currently fall
under Item 1.01. Our proposal will both
modify the overall requirements for
disclosure of employment compensation
arrangements on Form 8–K and locate
all such disclosure under a single item.
213 We propose deleting the last sentence of
current Instruction 1 to Item 1.01 of Form 8–K,
which references the portions of Item 601(b)(10)
that specifically relate to management
compensation and compensatory plans. In place of
the deleted sentence, we propose to add a sentence
specifying that agreements involving the subject
matter identified in Item 601(b)(10)(iii)(A) or (B) of
Regulation S–K need not be disclosed under Item
1.01 of Form 8–K. This change also will apply to
disclosure of terminations of material definitive
agreements under Item 1.02 of Form 8–K, which
references the definition of ‘‘material definitive
agreement’’ in Item 1.01 of Form 8–K. Instead of
being required to be disclosed based on the general
requirements with regard to material definitive
agreements in Item 1.01 and Item 1.02, employment
compensation arrangements would be covered
under Item 5.02 of Form 8–K.
214 Item 5.02(b) of Form 8–K.
215 Item 5.02(c) of Form 8–K.
216 Item 5.02(a) of Form 8–K.
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We propose to accomplish this by taking
the following steps:
• Expanding the information
regarding retirement, resignation or
termination to include all persons
falling within the definition of named
executive officers for the company’s
previous fiscal year, whether or not
included in the list currently specified
in Item 5.02; 217
• Expanding the disclosure items
covered under Item 5.02 beyond
employment agreements to require a
brief description of any material plan,
contract or arrangement to which a
covered officer or director is a party or
in which he or she participates that is
entered into or materially amended in
connection with any of the triggering
events specified in Item 5.02, or any
grant or award to any such covered
person, or modification thereto, under
any such plan, contract or arrangement
in connection with any such event; 218
• In respect of the principal executive
officer, the principal financial officer, or
persons falling within the definition of
named executive officer for the
company’s previous fiscal year,
expanding the disclosure items to
include a brief description of any
material new compensatory plan,
contract or arrangement, or new grant or
award thereunder (whether or not
written), and any material amendment
to any compensatory plan, contract or
arrangement (or any modification to a
grant or award thereunder), whether or
not such occurrence is in connection
with a triggering event specified in Item
5.02. Grants or awards or modifications
thereto will not be required to be
disclosed if they are consistent with the
terms of previously disclosed plans or
arrangements and they are disclosed the
next time the company is required to
provide new disclosure under Item 402
of Regulation S–K; and
• Adding a requirement for disclosure
of salary and bonus for the most recent
fiscal year that was not available at the
latest practicable date in connection
with disclosure under Item 402 of
Regulation S–K.219
In the case of each of these disclosure
items proposed for Item 5.02, we
emphasize that we are proposing that a
217 The Item would continue to cover the officers
specified therein, whether or not named executive
officers for the previous or current years, and all
directors.
218 Plans, contracts or arrangements (but not
material amendments or grants or awards or
modifications thereto) may be denoted by reference
to the description in the company’s most recent
annual report on Form 10–K or proxy statement.
219 See Section II.B.1.b. above for a discussion of
the reporting delay that exists under the current
disclosure rules when bonus and salary are not
determinable at the most recent practicable date.
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brief description of the specified matter
be included. We have observed that in
response to the current requirement
under Item 1.01, some companies have
included disclosure that resembles an
updating of the disclosure required
under current Item 402 of Regulation S–
K. In the context of current disclosure
under Form 8–K, we are seeking a
disclosure that informs investors of
specified material events and
developments. However, the
information we are seeking does not
perforce extend to the information
necessary to comply with Item 402.
Request for Comment
• Is there a particular benefit to
receiving information regarding
employment compensation on a current
basis rather than annually or quarterly?
What information is material in that
regard?
• Is disclosure of material
information about executive and
director compensation and related
person transactions avoided if
comprehensive disclosure of
compensation and related party
transactions only occurs annually?
Should we also require quarterly
disclosure of material changes to
information required by Items 402 and
404 in each company’s Form 10–Q?
• Would a quarterly update of
material changes to Item 402 and Item
404 disclosure provide meaningful
disclosure to investors that they cannot
get through other sources? If not, why?
• Would quarterly updates eliminate
the need for most of the current
disclosure about executive and director
compensation transactions provided
under Item 1.01 of Form 8–K? Should
the information we propose to require
under Item 5.02(e) of Form 8–K only be
required quarterly?
• Are the proposed revisions to Items
1.01 and 5.02 of Form 8–K the most
effective means to achieve an
appropriate balance regarding real-time
director and executive compensation
disclosure? Please describe any
suggested alternatives in detail.
• Should we require disclosure of all
amendments to the plans, contracts and
arrangements encompassed by our
proposed disclosure requirements under
Item 5.02(e) of Form 8–K? Only material
amendments?
B. Proposed Extension of Limited Safe
Harbor Under Section 10(b) and Rule
10b–5 to Item 5.02(e) of Form 8–K and
Exclusion of That Item From Form S–3
Eligibility Requirements
We propose to extend the safe harbors
regarding Section 10(b) and Rule 10b–5
and Form S–3 eligibility in the event
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that a company fails to timely file
reports required by Item 5.02(e) of Form
8–K. In the final rules for the new Form
8–K requirements, we adopted a limited
safe harbor from liability under Section
10(b) of the Exchange Act and Rule 10b–
5 thereunder for failure to timely file
reports required by Form 8–K Items
1.01, 1.02, 2.03, 2.04, 2.05, 2.06 and
4.02(a). The safe harbor applies until the
filing due date of the company’s
quarterly or annual report for the period
in question. As we stated at the time, we
believe that these items may require
management to make rapid materiality
and similar judgments within the
timeframe required for filing of a Form
8–K. Under those circumstances we
concluded that the risk of liability under
these provisions was sufficiently
disproportionate to justify the limited
safe harbor of fixed duration. For the
same reasons, we believe that the safe
harbor should also extend to proposed
Item 5.02(e) of Form 8–K. We therefore
propose to amend Exchange Act Rules
13a–11(c) and 15d–11(c) accordingly.
In addition, under our current rules,
a company forfeits its eligibility to use
Form S–3 if it fails to timely file all
reports required under Exchange Act
Sections 13(a) or 15(d) during the 12
months prior to filing of the registration
statement.220 For the same reasons,
when adopting the new Form 8–K rules,
we revised the Form S–3 eligibility
requirements so that a company would
not lose its eligibility to use Form S–3
registration statements if it failed to
timely file reports required by the Form
8–K items to which the Section 10(b)
and Rule 10b–5 safe harbor applies.221
In particular, the burden resulting from
a company’s sudden loss of eligibility to
use Form S–3 could be a
disproportionately large negative
consequence of an untimely Form 8–K
filing under one of the specified
items.222 We believe that this safe
harbor should be extended to proposed
Item 5.02(e) of Form 8–K. Therefore, we
propose to amend General Instruction
I.4 of Form S–3, which pertains to the
eligibility requirements for use of Form
S–3 to reflect this position.223
Request for Comment
• Should we extend the Section 10(b)
and Rule 10b–5 safe harbor and the
Form S–3 safe harbor to all of Item 5.02
or just the provision proposed?
220 General
221 Form
Instruction I.A.3 to Form S–3.
8–K Adopting Release, at Section II.E.
222 Id.
223 Because Form S–2 was eliminated effective
December 1, 2005, a similar proposed change to the
eligibility rules of Form S–2 is unnecessary.
Securities Offering Reform, Release No. 33–8591
(July 19, 2005) [70 FR 44721], at Section V.B.3.c.
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C. General Instruction D to Form 8–K
Frequently an event may trigger a
Form 8–K filing under multiple items,
particularly under both Item 1.01 and
another item. General Instruction D to
Form 8–K currently permits a company
to file a single Form 8–K to satisfy one
or more disclosure items, provided that
the company identifies by item number
and caption all applicable items being
satisfied and provides all of the
substantive disclosure required by each
of the items. In order to promote prompt
filings on Form 8–K and avoid potential
non-compliance with Form 8–K due to
inadvertent exclusions of captions, we
propose a revision to General
Instruction D to permit companies to
omit the Item 1.01 heading in a Form 8–
K also disclosing any other Item, so long
as the substantive disclosure required
by Item 1.01 is included in the Form 8–
K. This would not extend to allowing a
company to omit any other caption if
the Item 1.01 caption is included.
Request for Comment
• Is it appropriate to allow a company
to omit the Item 1.01 heading in a Form
8–K disclosing any other item?
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D. Foreign Private Issuers
We propose revising the exhibit
instructions to Form 20–F under which
foreign private issuers would be
required to file any employment or
compensatory plan with management or
directors (or portion of such plan) only
when the foreign private issuer either is
required to publicly file the plan (or
portion of it) in its home country or if
the foreign private issuer had otherwise
publicly disclosed the plan.224
Under Item 6.B.1 of Form 20–F, a
foreign private issuer must disclose the
compensation of directors and
management on an aggregate basis and,
additionally, on an individual basis,
unless individual disclosure is not
required in the issuer’s home country
and is not otherwise publicly disclosed
by the foreign private issuer. Under the
exhibit instructions to Form 20–F,
management contracts or compensatory
plans in which directors or members of
management participate generally must
be filed as exhibits, unless the foreign
private issuer provides compensation
information on an aggregate basis and
not on an individual basis. Under these
rules, an issuer that provides any
individualized compensation disclosure
is required to file as an exhibit to Form
20–F management employment
agreements that potentially relate to
224 We are also proposing a similar revision to
Item 601(b)(10)(iii)(C)(5) of Regulation S–K.
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matters that have not otherwise been
disclosed.
The proposed revision to the exhibit
instructions to Form 20–F 225 is
intended to be consistent with the
existing disclosure requirements under
Form 20–F relating to executive
compensation matters for foreign private
issuers. In the same way that executive
compensation disclosure under Form
20–F largely mirrors the disclosure that
a foreign private issuer makes under
home country requirements or
voluntarily, so too the public filing of
management employment agreements as
an exhibit to Form 20–F would under
our proposal mirror the public
availability of such agreements under
home country requirements or
otherwise. In addition, we believe that
the proposed amendments may
encourage foreign private issuers to
provide more compensation disclosure
in their SEC filings by eliminating
privacy concerns associated with filing
an individual’s employment agreement
when such agreement is not required to
be made public by a home country
exchange or securities regulator. As
foreign disclosure related to executive
remuneration varies in different
countries but continues to improve,226
the proposed revisions would recognize
that trend and provide for greater
harmonization of international
disclosure standards with respect to
executive compensation in a manner
consistent with other requirements of
Form 20–F.
Request for Comment
• Should we require the filing of
employment agreements by foreign
private issuers when individualized
compensation information is disclosed?
Should we instead require the filing of
those portions of management
employment agreements and plans that
relate to the information that is
disclosed on an individualized basis
regardless of whether those portions are
required to be made public in the
issuer’s home country or otherwise?
225 Proposed Instruction 4(c) to Exhibits to Form
20–F.
226 Many jurisdictions now require or encourage
disclosure of executive compensation information.
For example, enhanced disclosure of executive
remuneration is included as part of he European
Commission’s 2003 Company Law Action Plan. See
Guido Ferrarini and Niamh Moloney, Executive
Remuneration in the EU: The Context for Reform,
European Corporate Governance Institute, Law
Working Paper N. 32/2005 (April 2005).
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IV. Beneficial Ownership Disclosure
We propose to amend Item 403(b) 227
by adding a requirement for footnote
disclosure of the number of shares
pledged as security by named executive
officers, directors and director
nominees. To the extent that shares
beneficially owned by named executive
officers, directors and director nominees
are used as collateral, these shares may
be subject to material risk or
contingencies that do not apply to other
shares beneficially owned by these
persons. These circumstances have the
potential to influence management’s
performance and decisions.228 As a
result, we believe that the existence of
these securities pledges could be
material to shareholders.229 Because
significant shareholders who are not
members of management are in a
different relationship with other
shareholders and have different
obligations to them, the proposals
would not require disclosure of their
pledges pursuant to Item 403(a), other
than pledges that may result in a change
of control currently required to be
disclosed.230 The proposals also would
specifically require disclosure of
beneficial ownership of directors’
qualifying shares, which is currently not
required, because the beneficial
ownership disclosure should include a
complete tally of the securities
beneficially owned by directors.
Request for Comment
• Should any specific categories of
loans, such as margin loans, be treated
differently under the proposal to
disclose management pledges of
beneficially owned securities? If so,
please explain why.
• Should directors’ qualifying shares
continue to be excluded? If so, explain
why that information is not material.
V. Certain Relationships and Related
Transactions Disclosure
We believe that, in addition to
disclosure regarding executive
compensation, a materially complete
227 Item 403(b) of Regulation S–K and Item 403(b)
of Regulation S–B are proposed to be revised in the
same manner.
228 See, e.g., Marianne M. Jennings, The
Disconnect Between and Among Legal Ethics,
Business Ethics, Law, and Virtue: Learning Not to
Make Ethics So Complex, 1 U. St. Thomas L.J. 995,
1010 (Spring 2004) (arguing that the extension of
loans to the CEO of WorldCom, which were
collateralized by WorldCom shares owned by the
CEO, contributed to WorldCom’s financial demise).
229 This proposal is similar to a proposal the
Commission made in 2002. See Form 8–K
Disclosure of Certain Management Transactions,
Release No. 33–8090 (Apr. 12, 2002) [67 FR 19914].
230 Current Item 403(c) of Regulation S–K. See
also Items 6 and 7(3) of Schedule 13D [17 CFR
240.13d–101].
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picture of financial relationships with a
company involves disclosure regarding
related party transactions. Therefore, we
are also proposing significant revisions
to Item 404 of Regulation S–K ‘‘Certain
Relationships and Related
Transactions.’’ In 1982, various
provisions that had been adopted in a
piecemeal fashion and had been subject
to frequent amendment were
consolidated into Item 404 of Regulation
S–K.231 Today we propose to amend
Item 404 of Regulation S–K and S–B to
streamline and modernize this
disclosure requirement, while making it
more principles-based. Although the
proposals would significantly modify
this disclosure requirement, its
purpose—to elicit disclosure regarding
transactions and relationships,
including indebtedness, involving the
company and related persons and the
independence of directors and
nominees for director and the interests
of management—would remain
unchanged.
As discussed in greater detail below,
the proposal has four parts: 232
• Item 404(a) would contain a general
disclosure requirement for related
person transactions, including those
involving indebtedness.233
• Item 404(b) would require
disclosure regarding the company’s
policies and procedures for the review,
approval or ratification of related person
transactions.
• Item 404(c) would require
disclosure regarding promoters of a
company.234
• New Item 407 would consolidate
current corporate governance disclosure
requirements.235 Proposed Item 407(a)
would require disclosure regarding the
independence of directors, including
whether each director and nominee for
director of the registrant is independent,
as well as a description of any
relationships not disclosed under
paragraph (a) of Item 404 that were
231 See the 1982 Release. For a discussion of these
provisions, see also Disclosure of Certain
Relationships and Transactions Involving
Management, Release No. 33–6416 (July 9, 1982)
[47 FR 31394], at Section II.
232 The discussion that follows focuses on
changes to Regulation S–K, with Section V.E.1.
explaining the modifications proposed for
Regulation S–B. References throughout the
following discussion are to current or proposed
Items of Regulation S–K, unless otherwise
indicated.
233 As previously noted, related party transactions
are currently disclosed under Item 404(a).
Indebtedness is currently disclosed under Item
404(c).
234 Disclosure requiring promoters is currently
required under Item 404(d).
235 These matters are currently required pursuant
to various provisions, including Item 7 of Schedule
14A and Items 306, 401(h), (i) and (j), 402(j) and
404(b).
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considered when determining whether
each director and nominee for director
is independent.
A. Transactions With Related Persons
We are proposing revisions to Item
404 to make the certain relationships
and related transactions disclosure
requirements clearer and easier to
follow. The proposals would retain the
principles for disclosure of related
person transactions that are specified in
current Item 404(a), but would no longer
include all of the instructions that serve
to delineate what transactions are
reportable or excludable from disclosure
based on bright lines that can depart
from a more appropriate materiality
analysis. Instead, proposed Item 404(a)
would consist of a general statement of
the principle for disclosure, followed by
specific disclosure requirements and
instructions. The instructions would
explain the related persons covered by
the Item, the scope of transactions
covered by the Item, the method for
computation of the amounts involved in
the relationship or transaction, the
interaction with Item 402, special
requirements for indebtedness with
banks, and the materiality of certain
ownership interests.
The proposed Item would extend to
disclosure of indebtedness. Currently,
Item 404(a) requires disclosure
regarding transactions involving the
company and certain related persons,236
and Item 404(c) requires disclosure
regarding indebtedness.237 We propose
to consolidate these two provisions in
order to eliminate confusion regarding
the circumstances in which each item
applies and streamline duplicative
portions of current paragraphs (a) and
(c) of Item 404.
1. Broad Principle for Disclosure
Proposed Item 404(a) would articulate
a broad principle for disclosure; it
236 The related persons specified in current Item
404(a) are: (1) Any director or executive officer of
the company; (2) any nominee for election as a
director; (3) any security holder who is known to
the company to own of record or beneficially more
than five percent of any class of the company’s
voting securities; and (4) any member of the
immediate family of any of the foregoing persons.
237 The related persons specified in current Item
404(c) are: (1) Any director or executive officer of
the company; (2) any nominee for election as a
director; (3) any member of the immediate family
of any of the persons specified in (1) or (2) above;
(4) any corporation or organization (other than the
company or a majority-owned subsidiary of the
company) of which any of the persons in (1) or (2)
above is an executive officer or partner or is,
directly or indirectly, the beneficial owner of ten
percent or more of any class of equity securities;
and (5) any trust or other estate in which any of the
persons in (1) or (2) above has a substantial
beneficial interest or as to which such person serves
as a trustee or in a similar capacity.
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would state that a company must
provide disclosure regarding:
• Any transaction since the beginning
of the company’s last fiscal year, or any
currently proposed transaction.
• In which the company was or is to
be a participant;
• In which the amount involved
exceeds $120,000; and
• In which any related person had, or
will have, a direct or indirect material
interest.
We propose to eliminate current
Instruction 1 to Item 404(a), which is
repetitive of the general materiality
standard applicable to the item. By
proposing to delete this instruction we
do not intend to change the materiality
standard applicable to Item 404(a). The
‘‘materiality’’ standard for disclosure
currently embodied in Item 404(a)
would be retained; a company would
disclose based on whether the related
person had, or will have, a direct or
indirect material interest in the
transaction. The materiality of any
interest would continue to be
determined on the basis of the
significance of the information to
investors in light of all the
circumstances and the significance of
the interest to the person having the
interest.238 The relationship of the
related persons to the transaction, and
with each other, and the amount
involved in the transaction would be
among the factors to be considered in
determining the materiality of the
information to investors.
We propose to eliminate current
Instruction 7 to Item 404(a), which
establishes certain presumptions
regarding materiality and may operate to
exclude some transactions from
disclosure that might otherwise require
disclosure under the principles
enunciated by the Item. We also propose
to eliminate current Instruction 9 to
Item 404(a), which indicates that the
$60,000 threshold is not a bright line
materiality standard. We propose to
eliminate current Instruction 9 to Item
404(a) because it is repetitive of the
general materiality standard applicable
to the Item.239 We believe that
application of the materiality principles
under the Item would be more
consistent with a principles-based
approach and would lead to more
238 See Basic v. Levinson and TSC Industries v.
Northway.
239 It is possible that some registrants have been
operating under a misconception. The current
$60,000 threshold is not, and the proposed
$120,000 threshold would not be, a bright line
materiality standard. The rule calls for, and would
continue to call for, a materiality analysis of
transactions above the threshold in order to
determine if the related person has a direct or
indirect material interest.
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appropriate disclosure outcomes than
application of the instructions that we
propose to eliminate.
In addition, the proposals would:
• Call for disclosure if a company is
a ‘‘participant’’ in a transaction, rather
than if it is ‘‘a party’’ to the transaction,
as ‘‘participant’’ more accurately
connotes the company’s involvement;
• Modify the $60,000 threshold for
disclosure to $120,000 to adjust for
inflation;
• Include a defined term for
‘‘transaction’’ to provide that it includes
a series of similar transactions and to
make clear its broad scope; and
• Include a single defined term for
‘‘related persons.’’240
As is currently the case, disclosure
would be required for three years in
registration statements filed pursuant to
the Securities Act or the Exchange
Act.241
Finally, the rule proposals would
include a technical modification.
Currently, Item 404(a) states that
disclosure must be provided regarding
situations involving ‘‘the registrant or
any of its subsidiaries.’’ Because
companies must include subsidiaries in
making materiality determinations in all
circumstances, the reference to
‘‘subsidiaries’’ is superfluous, and we
propose to eliminate it. This proposal
would not change the scope of
disclosure required under the Item.242
Request for Comment
• Should we recast Item 404(a) as a
more principles-based disclosure
requirement as proposed? Why or why
not?
• In recasting Item 404(a) as a more
principles-based disclosure
requirement, should we eliminate all of
the current instructions, not only the
ones we propose eliminating? Are there
any concepts in the instructions to Item
404(a) that we propose to eliminate that
should be retained? As a result of
eliminating the instructions to Item
404(a), would there be any categories of
transactions which would have an
unclear disclosure status? Although the
analysis required for any particular
transaction would be fact-specific,
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240 The
‘‘related persons’’ covered by the rules
proposal are discussed below in Section V.A.1.b.
241 However, if the disclosure were being
incorporated by reference into a registration
statement on Form S–4, the additional two years of
disclosure would not be required. Proposed
Instruction 1 to Item 404.
242 For the same reason, we are eliminating the
references to ‘‘subsidiaries’’ in the ‘‘compensation
committee interlocks and insider participation in
compensation decisions’’ disclosure requirement in
current Item 402(j). This proposal would not change
the scope of disclosure required under the rule. See
proposed Item 407(e)(4).
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should we provide further guidance or
examples regarding the disclosure status
of particular types of direct or indirect
interests?
• Is it appropriate to adjust the
threshold for disclosure to $120,000?
Should there be no threshold? Should
the threshold also operate on a sliding
scale (for example, the lower of
$120,000 or 1% of the average of total
assets for the last three completed fiscal
years 243 or the lower of $120,000 or a
percentage of annual corporate
expenses) to capture smaller
transactions for smaller companies?
Explain whether a higher or lower
threshold, or no threshold, would result
in more effective disclosure.
• In Item 404(a), should we require a
company to be ‘‘involved’’ rather than to
be ‘‘a participant’’ in transactions
subject to disclosure?
a. Indebtedness
Section 402 of the Sarbanes-Oxley Act
prohibits most personal loans by an
issuer to its officers and directors.244
This development raises the issue of
whether disclosure of indebtedness of
the sort required under our current rules
should be maintained. We believe that
the approach to disclosure of
indebtedness involving related persons
that we propose today would be
appropriate because of the scope of the
direct and indirect interests covered by
our disclosure requirements, because
related persons include persons not
covered by the prohibitions, and
because there are certain exceptions to
the prohibitions. We propose, however,
to eliminate the current distinction
between indebtedness and other types
of related person transactions.
As a result of integrating paragraph (c)
of Item 404 into paragraph (a) of Item
404, the proposals would change some
situations in which indebtedness
disclosure is required. First, disclosure
of indebtedness transactions would be
required with regard to all related
persons covered by the related person
transaction disclosure requirement,
including significant shareholders.245
Second, the rule proposals would
243 This is the standard proposed for Item 404 of
Regulation S–B, which is discussed in Section
V.E.1. below.
244 Codified in Section 13(k) of the Exchange Act
[15 U.S.C. 78m(k)].
245 The related person transaction disclosure
requirement in current Item 404(a) covers
significant shareholders, while the indebtedness
disclosure requirement in current Item 404(c) does
not. The significant shareholders covered would
continue to be any security holder who is known
to the registrant to own of record or beneficially
more than five percent of any class of the
registrant’s voting securities. Proposed Instruction
1.b. to Item 404(a).
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require disclosure of all material
indirect interests in indebtedness
transactions of related persons,
including significant shareholders and
immediate family members.246
Disclosure of material indirect interests
of these related persons in transactions
involving the company currently is, and
would continue to be, required by Item
404(a). Currently, Item 404(c) requires
disclosure of specific indirect interests
of directors, nominees for director, and
executive officers of the registrant in
indebtedness through corporations,
organizations, trusts, and estates.247 We
believe that disclosure requirements for
indebtedness and for other related
person transactions should be
congruent. In particular, we believe that
loans by companies other than financial
institutions should be treated like any
other related person transactions, and,
as discussed below, we propose to
address certain ordinary course loans by
financial institutions in an instruction
to Item 404(a).
Request for Comment
• Is our proposal appropriate in light
of the prohibition on personal loans to
officers and directors in the SarbanesOxley Act?
• Should we combine the related
person and indebtedness disclosure
requirements in paragraphs (a) and (c) of
Item 404? As a result of combining these
disclosure requirements, would there be
categories of indebtedness transactions
for which disclosure would be required
that should not be required or for which
disclosure would not be required that
should be disclosed?
• Should the disclosure requirements
for indebtedness be extended to
significant shareholders?
b. Definitions
We propose to define the terms
‘‘transaction,’’ ‘‘related person’’ and
‘‘amount involved’’ to streamline Item
404(a) and clarify the broad scope of
financial transactions and relationships
covered by the rule.
246 As a result of integrating pragraph (c) of Item
404 into paragraph (a) of Item 404, the rule
proposals would set a $120,000 threshold and
require disclosure only if there is a direct or
indirect material interest in such an indebtedness
transaction, while Item 404(c) currently generally
requires disclosure of all indebtedness exceeding
$60,000.
247 Disclosure of these interests currently is
reuqired by subparagraphs (c)(4) and (c)(5) of Item
404. Under the rule proposals, these subparagraphs
would be eliminated. See note 237 for a full
description fo the related parties specified in these
subparagraphs.
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The term ‘‘transaction’’ would have a
broad scope in proposed Item 404(a).248
As proposed, this term is not to be
interpreted narrowly, but rather would
broadly include, but not be limited to,
any financial transaction, arrangement
or relationship or any series of similar
transactions, arrangements or
relationships. The proposals also would
specifically note that the term
‘‘transactions’’ is defined to include
indebtedness and guarantees of
indebtedness.
The proposed definition of ‘‘related
person’’ would identify the persons
covered, and clarify the time periods
during which they would be covered.
As proposed, the term ‘‘related
person’’ 249 would mean any person
who was in any of the following
categories at any time during the
specified period for which disclosure
under paragraph (a) of Item 404 would
be required:
• Any director or executive officer of
the registrant and his immediate family
members; and
• If disclosure were provided in a
proxy or information statement
involving the election of directors, any
nominee for director and the immediate
family members of any nominee for
director.
In addition, a security holder known to
the registrant to own of record or
beneficially more than five percent of
any class of the company’s voting
securities or any immediate family
member of any such person, when a
transaction in which such security
holder or family member had a direct or
indirect material interest occurred or
existed would also be a related person.
This is the same list of persons
covered by current Item 404(a). This
proposed definition of ‘‘related person’’
would result in requiring disclosure for
all transactions involving the company
and a person (other than a significant
shareholder or family member of such
shareholder) that occurred during the
last fiscal year, if the person was a
‘‘related person’’ during any part of that
year.250 A person who had such a
position or relationship giving rise to
the person being a ‘‘related person’’
during only part of the last fiscal year
may have had a material interest in a
248 The definition of ‘‘transaction’’ is in proposed
Instruction 2 to Item 404(a).
249 The definition of ‘‘related person’’ is in
proposed Instruction 1 to Item 404(a).
250 The principle for disclosure would only apply
to nominees for director if disclosure were being
provided in a proxy or information statement
involving the election of directors. Also, ongoing
disclosure would not be required regarding
nominees for director who were not elected (unless
a nominee was nominated again for director).
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transaction with the registrant during
that year. Although current Item 404(a)
does not specifically indicate whether
disclosure is required for the transaction
in this situation, the history of Item 404
suggests that disclosure would be
required if the requisite relationship
existed at the time of the transaction,
even if the person was no longer a
related person at the end of the year.251
We believe that, because of the potential
for abuse and the close proximity in
time between the transaction and the
person’s status as a ‘‘related person,’’ it
is appropriate to require disclosure for
transactions in which the person had a
material interest occurring at any time
during the fiscal year. For example, it is
possible that a material interest of a
person in a transaction during this
proximity in time could influence the
person’s performance of his or her
duties.
We believe that transactions with
persons who have been or who will
become significant shareholders (or
their family members), but are not at the
time of the transaction, raise different
considerations and are harder to track,
and thus we propose to exclude them.
Disclosure would be required, however,
regarding a transaction that begins
before a significant shareholder becomes
a significant shareholder, and continues
(for example, through the on-going
receipt of payments) on or after the
person becomes a significant
shareholder.
Under the rule proposals, the term
‘‘immediate family member’’ of a related
person would mean any child,
stepchild, parent, stepparent, spouse,
sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-inlaw, or sister-in-law, and any person
(other than a tenant or employee)
sharing the household of any director,
nominee for director, executive officer,
or significant shareholder of the
registrant.252 The proposed definition
would differ from the current definition
in that it includes stepchildren,
251 This position, which had been included in the
proxy rule provisions that were the precursor to
Item 404, was deleted from those provisions in 1967
as duplicative of a note that applied to all of the
disclosure required in Schedule 14A (including the
related party disclosure requirement in Schedule
14A). Adoption of Amendments to Proxy Rules and
Information Rules, Release No. 34–8206 (Dec. 14,
1967) [32 FR 20960], at ‘‘Schedule 14A—Item 7(f).’’
Note C to Schedule 14A currently provides that
‘‘information need not be included for any portion
of the period during which such person did not
hold any such position or relationship, provided a
statement to that effect is made.’’ The rule proposals
would amend Note C to Schedule 14A so that it
would no longer apply to disclosure of related
person transactions.
252 These definitions would replace current
instructions to paragraphs (a) and (c) of Item 404.
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stepparents, and any person (other than
a tenant or employee) sharing the
household of a related person.
The proposed definition of ‘‘amount
involved’’ would incorporate two
concepts included in current Item 404
regarding how to determine the
‘‘amount involved’’ in transactions, and
to clarify that the amounts reported
must be in dollars even if the amount
was set or expensed in a different
currency.253 Under the proposals, the
term ‘‘amount involved’’ would mean
the dollar value of the transaction, or
series of similar transactions, and would
include:
• In the case of any lease or other
transaction providing for periodic
payments or installments, the aggregate
amount of all periodic payments or
installments due on or after the
beginning of the company’s last fiscal
year, including any required or optional
payments due during or at the
conclusion of the lease; 254 and
• In the case of indebtedness, the
largest aggregate principal amount of all
indebtedness outstanding at any time
since the beginning of the company’s
last fiscal year and all amounts of
interest payable on it during the last
fiscal year.255
Request for Comment
• Does the definition of ‘‘transaction’’
make clear its broad scope? Are there
any additional categories that it should
specifically identify? Alternatively, is it
overly inclusive? If so, explain how.
• Should the same categories of
people be covered by the disclosure
requirements currently in paragraphs (a)
and (c) of Item 404? Specifically, are
there any persons who would be
defined as ‘‘related persons’’ for whom
indebtedness disclosure should not be
required or are there any additional
persons who should be covered?
• The proposed changes to Item 404
would require disclosure of indirect
interests in indebtedness of related
persons. Should they?
• Should disclosure be required
regarding portions of a period during
which a person did not have the
relationship giving rise to the disclosure
requirement? Is it appropriate, as we
propose, to exclude significant
shareholders and their immediate
family members from this approach?
• Should we expand the definition of
‘‘immediate family member’’ as
proposed? Specifically, are there any
253 The definition of ‘‘amount involved’’ is in
proposed Instruction 3 to Item 404(a).
254 This proposal is based on current Instruction
3 to Item 404(a).
255 This proposal is based on and clarifies current
Item 404(c).
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categories of people that should be
added to, or removed from, the
proposed definition?
• In 2002 we issued a release
regarding MD&A disclosure. At that
time, we noted the possible need for
related party disclosure in
circumstances additional to those
specified in Item 404.256 Are there any
circumstances that fall within the
MD&A requirements that should also be
covered by Item 404 where disclosure
currently is not required, or would not
be required under the rule proposals?
• Is there any reason to change the
current meaning of amount involved in
transactions involving leases, which we
propose to retain?
2. Disclosure Requirements
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Proposed subparagraphs of Item
404(a) would provide the disclosure
requirements for related person
transactions. The company would be
required to describe the transaction,
including:
• The person’s relationship to the
company;
• The person’s interest in the
transaction with the company,
including the related person’s position
or relationship with, or ownership in, a
firm, corporation, or other entity that is
a party to or has an interest in the
transaction; and
• The dollar value of the amount
involved in the transaction and of the
related person’s interest in the
transaction.257
256 The release stated that:
Registrants should * * * consider the need for
[MD&A] disclosure about parties that fall outside
the definition of ‘‘related parties,’’ but with whom
the registrant or its related parties have a
relationship that enables the parties to negotiate
terms of material transactions that may not be
available from other, more clearly independent,
parties on an arm’s-length basis. For example, an
entity may be established and operated by
individuals that were former senior management of,
or have some other current or former relationship
with, a registrant. The purpose of the entity may be
to own assets used by the registrant or provide
financing or services to the registrant. Although
former management or persons with other
relationships may not meet the definition of a
related party pursuant to FAS 57, the former
management positions may result in negotiation of
terms that are more or less favorable than those
available on an arm’s-length basis from clearly
independent third parties that are material to the
registrant’s financial position or results of
operations. In some cases, investors may be unable
to understand the registrant’s reported results of
operations without a clear explanation of these
arrangements and relationships.
Commission Statement about Management’s
Discussion and Analysis of Financial Condition and
Results of Operations, Release No. 33–8056 (Jan. 22,
2002) [67 FR 3746], at Section II.C.
257 As is the case today, the dollar value would
be computed without regard to the amount of the
profit or loss involved in the transaction. Because
of the manner in which the value of the amount
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Registrants would also be required to
disclose any other information regarding
the transaction or the related person in
the context of the transaction that is
material to investors in light of the
circumstances of the particular
transaction.
Consistent with the principles-based
approach that we propose to apply to
related person transaction disclosure,
we have, as noted above, eliminated
many of the instructions that provide
bright line tests that may be inconsistent
with general materiality standards.
Similarly, we propose to eliminate a
current instruction that, in the case of a
related person transaction involving a
purchase of assets by the company or
sale of assets to the company, calls for
specific disclosure of the cost of the
assets if acquired within two years of
the transaction. We would note,
however, that if such information was
material under the proposed standards
of Item 404(a), because, for example, the
recent purchase price to the related
person was materially less than the sale
price to the company, or the sale price
to the related person was materially
more than the recent purchase price to
the company, disclosure of such prior
purchase price could be required.258
Currently, disclosure must be
provided regarding amounts possibly
owed to the company under Section
16(b) of the Exchange Act.259 The
purpose of related person transaction
disclosure differs from the purpose of
Section 16(b). Accordingly, the rule
proposals eliminate this Section 16(b)related disclosure requirement.
Request for Comment
• Should Item 404 require specific
disclosure of the person determining the
registrant’s purchase or sale price for
registrant purchases or sales of assets
not in the ordinary course of business?
• Should Item 404 require disclosure
of Section 16(b)-related indebtedness?
Why or why not?
• Consistent with our principlesbased approach, should we specify any
other elements of the transaction for
disclosure?
involved is calculated for indebtedness, as
discussed above, disclosure with respect to
indebtedness would include the largest aggregate
amount of principal outstanding during the period
for which disclosure is provided, as well as the
amount of principal and interest paid during the
period for which disclosure is provided, the
aggregate amount of principal outstanding as of the
latest practicable date, and the rate or amount of
interest payable on the indebtedness.
258 Section 10(b) of the Exchange Act [15 U.S.C.
78j(b)], Rules 10b–5 [17 CFR 249,19b–5] and 12b-20
[17 CFR 240.12b–20] under the Exchange Act and
Section 17 of the Securities Act [15 U.S.C. 77q].
259 Current Instruction 4 to Item 404(c).
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3. Exceptions
The proposed rules would include
categories of transactions that do not fall
within the principle and therefore are
subject to disclosure exceptions that we
believe are consistent with our
principles-based approach.260 The first
category of transactions involves
compensation. Disclosure of
compensation to an executive officer
would not be required if:
• The compensation is reported
pursuant to Item 402 of Regulation S–
K; or
• The executive officer is not an
immediate family member of a related
person and such compensation would
have been reported under Item 402 as
compensation earned for services to the
company if the executive officer was a
named executive officer, and such
compensation had been approved as
such by the compensation committee of
the board of directors (or group of
independent directors performing a
similar function) of the company.
Disclosure of compensation to a
director (or nominee for director) would
not be required if:
• The compensation is reported
pursuant to proposed Item 402(l).261
Since the disclosure either would be
reported under Item 402, or would not
be required under Item 402, we do not
believe the transactions fall within our
proposed principle or will have already
been disclosed. We believe the
transactions involving compensation
that do not fall within these exceptions
would be within the scope of the
proposed Item 404(a) principle for
disclosure. These exceptions would
clarify the limited situations in which
disclosure of compensation to related
persons is not required under Item
404.262
The second category of transactions
involves three types of situations we
believe do not raise the potential issues
underlying our principle for disclosure.
First, in the case of transactions
involving indebtedness, the following
items of indebtedness would be
excluded from the calculation of the
amount of indebtedness and need not be
disclosed because they do not have the
potential to impact the parties as the
transactions for which disclosure is
required: amounts due from the related
person for purchases of goods and
services subject to usual trade terms, for
260 Proposed Instructions 4, 5, 6, 7 and 8 to Item
404(a).
261 Proposed Instructions 5 and 6 to Item 404(a),
which would replace current Instruction 1 to Item
404.
262 In particular, current Instruction 1 to Item 404
covers the scope of Items 402 and 404. We propose
to eliminate this instruction.
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ordinary business travel and expense
payments and for other transactions in
the ordinary course of business.263
Second, also in the case of a
transaction involving indebtedness, if
the lender is a bank, savings and loan
association, or broker-dealer extending
credit under Federal Reserve Regulation
T 264 and the loans are not disclosed as
nonaccrual, past due, restructured or
potential problems 265 disclosure under
proposed paragraph (a) of Item 404 may
consist of a statement, if correct, that the
loans to such persons satisfied the
following conditions:
• They were made in the ordinary
course of business;
• They were made on substantially
the same terms, including interest rates
and collateral, as those prevailing at the
time for comparable loans with persons
not related to the bank; and
• They did not involve more than the
normal risk of collectibility or present
other unfavorable features.266
This proposed exception is based on
a current instruction to Item 404(c),267
and is modified to be more consistent
with the prohibition of the SarbanesOxley Act on personal loans to officers
and directors.268
Finally, we propose an instruction
that indicates that a person who has a
position or relationship with a firm,
corporation, or other entity that engages
in a transaction with the company shall
not be deemed to have an indirect
‘‘material’’ interest within the meaning
of paragraph (a) of Item 404 if:
• The interest arises only: (i) From
the person’s position as a director of
another corporation or organization
which is a party to the transaction; or
(ii) from the direct or indirect
ownership by such person and all other
related persons, in the aggregate, of less
than a ten percent equity interest in
another person (other than a
partnership) which is a party to the
transaction; or (iii) from both such
position and ownership; or
• The interest arises only from the
person’s position as a limited partner in
a partnership in which the person and
all other related persons, have an
263 This proposal is based on current Instruction
2 to Item 404(c).
264 12 CFR Part 220.
265 See Item III.C.1. and 2. of Industry Guide 3,
Statistical Disclosure by Bank Holding Companies
[17 CFR 229.802(c)].
266 Proposed Instruction 7 to Item 404(a).
267 Current Instruction 3 to Item 404(c), which
would be eliminated.
268 Specifically, the language of current
Instruction 3 to paragraph (c) of Item 404 would be
modified to replace the reference ‘‘comparable
transactions with other persons’’ with the phase
‘‘comparable loans with persons not related to the
lender.’’
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interest of less than ten percent, and the
person is not a general partner of and
does not have another position in the
partnership.269
Request for Comment
• Does proposed Item 404(a) simplify
and clarify the requirements currently
contained in paragraphs (a) and (c) of
Item 404?
• Would the proposed rule clarify the
situations in which compensation
would be reportable under Item 404?
Are there any categories of
compensation for which it would be
unclear whether disclosure would be
required under proposed Item 404?
• We propose to exclude from the
‘‘amount involved’’ disclosure
requirements indebtedness due for
purchases subject to usual trade terms,
ordinary business travel and expense
payments, and ordinary course business
transactions as is currently the case. Is
this exclusion appropriate? Why or why
not?
• Do the current instructions that we
propose to modify or eliminate provide
necessary guidance for determining if
disclosure is necessary? Should any of
these current instructions be retained?
Should other instructions be added to
make the application of the principle for
disclosure clearer?
• Does proposed Instruction 8 to Item
404(a), which indicates that a person
having the specified positions or
relationships with a person that engages
in a transaction with the company shall
not be deemed to have an indirect
material interest in the transaction,
provide sufficient guidance for
determining whether disclosure is
necessary in the circumstances
identified in the instruction? Should the
potential exclusions contemplated in
the current instructions to Item 404(a),
including current Instruction 6
(excluding remuneration transactions
for services when the person’s interest
arises solely from a ten percent equity
ownership interest) and current
Instruction 8.C. (excluding transactions
where the interest arises from an equity
or creditor interest in another person
269 Proposed Instruction 8 to Item 404(a). This
proposal is based on parts A and B of current
Instruction 8 to Item 404(a). This proposal would
omit the portion of the current instruction
(Instruction 8.C.) regarding interests arising solely
from holding an equity or a creditor interest in a
person other than the company that is a party to the
transaction, when the transaction is not material to
the other person. This portion of the current
instruction may result in inappropriate nondisclosure of transactions without regard to whether
they are material to the company. In addition, we
propose to eliminate current Instruction 6 to Item
404(a) that covers a subset of transactions covered
by this proposed instruction, and therefore is
duplicative.
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and the transaction is not material to the
other person) be retained or expanded?
B. Procedures for Approval of Related
Person Transactions
We propose adopting a new
requirement for disclosure of the
policies and procedures established by
the company and its board of directors
regarding related person transactions.
State corporate law and increasingly
robust corporate governance practices
support or provide for such procedures
in connection with transactions
involving conflicts of interest.270 We
believe that this type of information is
material to investors, and our rule
proposals would therefore require
disclosure of policies and procedures
regarding related person transactions
under new paragraph (b) of Item 404.
Specifically, the proposal would
require a description of the company’s
policies and procedures for the review,
approval or ratification of transactions
with related persons that would be
reportable under paragraph (a) of Item
404. The description would include the
material features of these policies and
procedures that are necessary to
understand them. While the material
features of such policies and procedures
would vary depending on the particular
circumstances, examples of such
features may include, in given cases,
among other things:
• The types of transactions that are
covered by such policies and
procedures, and the standards to be
applied pursuant to such policies and
procedures;
• The persons or groups of persons on
the board of directors or otherwise who
are responsible for applying such
policies and procedures; and
• Whether such policies and
procedures are in writing and, if not,
how such policies and procedures are
evidenced.
The proposal would also require
identification of any transactions
required to be reported under paragraph
(a) of Item 404 where the company’s
policies and procedures did not require
review, approval or ratification or where
such policies and procedures were not
followed.
Request for Comment
• Should we require disclosure
regarding the review, approval or
ratification of related person
transactions? Should the rule include
the proposed requirements? Are there
other types of information that are
270 Del. Code Ann. tit. 8, § 144 (2004). See also
NYSE, Inc. Listed Company Manual Section 307.00
and NASD Manual, Marketplace Rules 4350(h) and
4360(i).
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material that should be included in the
description of the approval process?
• Should we require disclosure of
transactions required to be reported
under Item 404(a) where a company’s
policies and procedures did not require
review or were not followed?
C. Promoters
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The proposals would require a
company to provide disclosure
regarding the identity of promoters and
its transactions with those promoters if
the company had a promoter at any time
during the last five fiscal years. The
proposed disclosure would be required
in Securities Act registration statements
on Form S–1 (generally, the registration
statement form for initial public
offerings, offerings by unseasoned
issuers or those with less than $75
million public float and offerings by
issuers otherwise ineligible to use Form
S–3 or S–4) or on Form SB–2 (a
registration statement form that small
business issuers may use) and Exchange
Act Form 10 (used to register securities
initially under the Exchange Act) or
Form 10–SB (a registration form that
small business issuers may use). The
proposed disclosure would include:
• The names of the promoters;
• The nature and amount of anything
of value received by each promoter from
the company and the nature and amount
of any consideration received by the
company; and
• Additional information regarding
any assets acquired by the company
from a promoter.
The proposed disclosure requirements
are consistent with those currently
required regarding promoters. However,
this disclosure is not currently required
if the company has been organized more
than five years ago, even if the company
otherwise had a promoter within the
last five years. Our staff’s experience in
reviewing registration statements,
especially of smaller companies,
suggests that the more appropriate fiveyear test would relate to the period of
time during which the company had a
promoter for which the disclosure
should be provided, as our proposal
provides, rather than the date of
organization of the company.271 We also
are proposing to require the same
disclosure that is required for promoters
for any person who acquired control, or
271 The proposed rules would similarly revise the
disclosure requirement referencing promoters in
Item 401(g)(1) of Regulation S–K. In addition, our
proposal would add Form SB–2 to the list of
registration statement forms in Item 404 for which
promoter disclosure would be required. While this
revision would update the registration statement
forms listed in Item 404, it would not change the
promoter disclosure requirement of Form SB–2.
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is part of a group that acquired control,
of an issuer that is a shell company.272
Request for Comment
• Does the proposed requirement
cover the circumstances where promoter
disclosure would be material to
investors? If not, what other
circumstances should be covered?
• Does the proposed requirement
cover circumstances where the required
disclosure would not be material to
investors? If so, in what circumstance?
D. Corporate Governance Disclosure
We propose to consolidate our
disclosure requirements regarding
director independence and related
corporate governance disclosure
requirements under a single disclosure
item and to update such disclosure
requirements regarding director
independence to reflect our current
requirements and current listing
standards.273
Our current requirements provide for
disclosure of business relationships
between a director or nominee for
director and the company that may bear
on the ability of directors and nominees
for director to exercise independent
judgment in the performance of their
duties.274 In addition, as directed by the
Sarbanes-Oxley Act of 2002, we adopted
a rule requiring national securities
exchanges to adopt listing standards
requiring independent audit committees
meeting the standards of our rule.275
Further, in 2003 and 2004, we approved
272 Proposed Item 404(c)(2). The term ‘‘group’’
would have the same meaning as in Exchange Act
Rule 13d–5(b)(1) [17 CFR 240.13d–5(b)(1)], that is,
any two or more persons that agree to act together
for the purpose of acquiring, holding, voting, or
disposing of equity securities of an issuer.
273 Proposed Item 407 of Regulations S–K and S–
B. As proposed, Item 407 would consolidate
corporate governance disclosure requirements
located in several places under our rules and the
principal markets’ listing standards, including in
particular our requirements under current Items
306, 401(h), (i) and (j), 402(j) and 404(b) of
Regulation S–K and Item 7 of Schedule 14A under
the Exchange Act. We are not proposing any
changes to the substance of Item 306, Item 401(h),
(i) or (j), or Item 402(j) as part of this consolidation.
However, the proposed rules would reorder some
provisions in Item 306 and reflect the relevant
Public Company Accounting Oversight Board rules.
See PCAOB Rulemaking: Public Company
Accounting Oversight Board; Order Approving
Proposed Technical Amendments to Interim
Standards Rules, Release No. 34–49624 (Apr. 28,
2004) [69 FR 24199]; and Order Regarding Section
101(d) of the Sarbanes-Oxley Act of 2002, Release
No. 33–8223 (Apr. 25, 2003) [68 FR 2336].
274 Current Item 404(b).
275 Section 10A(m) of the Exchange Act [15 U.S.C.
78j–1(m)], as added by Section 301of the SarbanesOxley Act of 2002 (15 U.S.C. 7201 et seq.);
Exchange Act Rule 10A–3 [17 CFR 240.10A–3]; and
Standards Relating to Listed Company Audit
Committees, Release No. 33–8220 (Apr. 9, 2003) [68
FR 18788].
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amendments to additional listing
standards, including those of the New
York Stock Exchange and Nasdaq,276
that imposed specific additional
independence standards for boards of
directors, and the compensation and
nominating committees or persons
performing similar functions. Currently,
each listed company determines
whether its directors and committee
members are independent based on
definitions that it adopts which, at a
minimum, are required to comply with
the listing standards applicable to the
company.
The proposals would include a
disclosure requirement identifying the
276 NASD and NYSE Listing Standards Release.
The other exchanges have also adopted corporate
governance listing standards. See Order Granting
Approval of Proposed Rule Change by the American
Stock Exchange LLC and Notice of Filing and Order
Granting Accelerated Approval of Amendment No.
2 Relating to Enhanced Corporate Governance
Requirements Applicable to Listed Companies,
Release No. 34–48863 (Dec. 1, 2003) [68 FR 68432];
Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto by the
Philadelphia Stock Exchange, Inc. Relating to
Corporate Governance, Release No. 34–49881 (June
17, 2004) [69 FR 35408]; Order Approving Proposed
Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendment Nos.
2 and 3 to the Proposed Rule Change by the Chicago
Stock Exchange, Inc. Relating to Governance of
Issuers on the Exchange, Release No. 34–49911
(June 24, 2004) [69 FR 39989]; Notice of Filing and
Order Granting Accelerated Approval of Proposed
Rule Change by the Boston Stock Exchange, Inc. to
Amend Chapter XXVII, Section 10 of the Rules of
the Board of Governors by Adding Requirements
Concerning Corporate Governance Standards of
Exchange-Listed Companies, Release No. 34–49955
(July 1, 2004) [69 FR 41555]; Notice of Filing and
Order Granting Accelerated Approval of Proposed
Rule Change and Amendment Nos. 1 and 2 Thereto
by the Chicago Board Options Exchange,
Incorporated, Relating to Enhanced Corporate
Governance Requirements for Listed Companies,
Release No. 34–49995 (July 9, 2004) [69 FR 42476];
Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto by National
Stock Exchange Relating to Corporate Governance,
Release No. 34–49998 (July 9, 2004) [69 FR 42788];
and Notice of Filing and Immediate Effectiveness of
Proposed Rule Change by the Pacific Exchange, Inc.
to Amend the Corporate Governance Requirements
for PCX Listed Companies, Release No. 34–50677
(Nov. 16, 2004) [69 FR 68205].
The Commission has previously received a
rulemaking petition submitted by the AFL/CIO,
which requested the Commission to amend Items
401 and 404 of Regulation S–K to require disclosure
about transactions with non-profit organizations
(letter dated Dec. 12, 2001 from Richard Trumka,
Secretary-Treasurer, AFL/CIO, File No. 4–499,
available at www.sec.gov/rules/petitions/petn4–
499.pdf) and a rulemaking petition submitted by the
Council of Institutional Investors, which requested
amendments to Item 401 of Regulation S–K to
require disclosure of certain transactions between
directors, executive officers and nominees (letter
dated Oct. 1, 1997, as amended Oct. 19, 1998, from
Sarah A.B. Teslik, Executive Director, Council of
Institutional Investors, File No. 4–404). We believe
these requests have in large part been addressed by
revised listing standards instituted by the
exchanges, so that we are not now proposing
additional action under these petitions.
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independent directors of the company
(and, in the case of disclosure in proxy
or information statements, nominees for
director) under the definition for
determining board independence
applicable to it. The proposals would
also require disclosure of any members
of the compensation, nominating and
audit committee that the company had
not identified as independent under the
definition of independence for that
board committee applicable to it.
More specifically, if the company is
an issuer 277 with securities listed, or for
which it has applied for listing, on a
national securities exchange 278 or in an
automated inter-dealer quotation system
of a national securities association 279
which has requirements that a majority
of the board of directors be
independent, the proposal would
require disclosure of those directors and
director nominees that the company
identifies as independent (and
committee members not identified as
independent), using a definition for
independence for directors (and for
committee members) that is in
compliance with the applicable listing
standards. If the company is not a listed
issuer, the proposals would require
disclosure of those directors and
director nominees that the company
identifies as independent (and
committee members not identified as
independent) using the definition for
independence for directors (and for
committee members) of a national
securities exchange or a national
securities association, specified by the
company. The company would be
required to apply the same definition
consistently to all directors and also to
use the independence standards of the
same national securities exchange or
national securities association for
purposes of determining the
independence of members of the
compensation, nominating and audit
committees.280
277 Under the rule proposals, ‘‘listed issuer’’
would have the same meaning as in Exchange Act
Rule 10A–3.
278 Under the rule proposals ‘‘national securities
exchange’’ means a national securities exchange
registered pursuant to Section 6(a) of Exchange Act
[15 U.S.C. 78f(a)].
279 Under the rule proposals ‘‘automated interdealer quotation system of a national securities
association’’ means an automated inter-dealer
quotation system of a national securities association
registered pursuant to Section 15A(a) of the
Exchange Act [15 U.S.C. 78o–3(a)].
280 Similar disclosure is currently required
pursuant to Item 7(d)(2)(ii)(C) and Item 7(d)(3)(iv)
of Schedule 14A. As part of our consolidation of
these provisions into proposed Item 407, we
propose to revise these provisions to reflect the
general approach discussed above with regard to
disclosure of director independence for board and
committee purposes.
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The proposals would require an issuer
that has adopted definitions of
independence for directors and
committee members to disclose whether
those definitions are posted on the
company’s Web site, or include the
definitions as an appendix to the
company’s proxy materials at least once
every three years or if the policies have
been materially amended since the
beginning of the company’s last fiscal
year.281 Further, if the policies are not
on the company’s Web site, or included
as an appendix to the company’s proxy
statement, the company would have to
disclose in which of the prior fiscal
years the policies were included in the
company’s proxy statement.
In addition, the proposals would
require, for each director or director
nominee identified as independent, a
description of any transactions,
relationships or arrangements not
disclosed pursuant to paragraph (a) of
Item 404 that were considered by the
board of directors of the company in
determining that the applicable
independence standards were met.
This independence disclosure would
be required for any person who served
as a director of the company during any
part of the year for which disclosure
must be provided,282 even if the person
no longer serves as director at the time
of filing the registration statement or
report or, if the information is in a proxy
statement, if the director’s term of office
as a director will not continue after the
meeting. In this regard, we believe that
the independence status of a director is
material while the person is serving as
director, and not just as a matter of
reelection.283
The proposals also would revise the
current disclosure required regarding
the audit committee and nominating
committee 284 to eliminate duplicative
committee member independence
disclosure and to update the required
audit committee charter disclosure
requirement for consistency with the
more recently adopted nominating
committee charter disclosure
281 Proposed
Item 407(a)(2).
disclosure would not be required for
persons no longer serving as a director in
registration statements under the Securities Act or
the Exchange Act filed at a time when the company
is not subject to the reporting requirements of
Exchange Act Sections 13(a) or 15(d). Disclosure
would not be required of anyone who was a director
only during the time period before the company
made its initial public offering if he was no longer
a director at the time of the offering. Proposed
Instruction to Item 407(a).
283 For this reason, we do not propose to
incorporate the concept in current Instruction 4 to
Item 404(b) into proposed Item 407(a).
284 Current Item 7 of Schedule 14A.
282 However,
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requirements.285 As a result, the audit
committee charter would no longer be
required to be delivered to security
holders if it is posted on the company’s
Web site.286 We also propose moving
the disclosure required by Section 407
of the Sarbanes-Oxley Act regarding
audit committee financial experts to
Item 407, although we are not proposing
any substantive changes to that
requirement.
In addition to the disclosures
currently required regarding audit and
nominating committees of the board of
directors, we propose requiring similar
disclosure regarding compensation
committees.287 The company would
also be required to describe its processes
and procedures for the consideration
and determination of executive and
director compensation including:
• The scope of authority of the
compensation committee (or persons
performing the equivalent functions);
• The extent to which the
compensation committee (or persons
performing the equivalent functions)
may delegate any authority to other
persons, specifying what authority may
be so delegated and to whom;
• Whether the compensation
committee’s authority is set forth in a
charter or other document, and if so, the
company’s Web site address at which a
current copy is available if it is so
posted, and if not so posted, attaching
the charter to the proxy statement once
every three years;
• Any role of executive officers in
determining or recommending the
amount or form of executive and
director compensation; and
• Any role of compensation
consultants in determining or
recommending the amount or form of
executive and director compensation,
identifying such consultants, stating
whether such consultants are engaged
directly by the compensation committee
(or persons performing the equivalent
functions) or any other person,
describing the nature and scope of their
assignment, the material elements of the
instructions or directions given to the
consultants with respect to the
performance of their duties under the
engagement and identifying any
executive officer within the company
the consultants contacted in carrying
out their assignment.
285 However, we are not proposing to revise the
provision that the audit committee report is
furnished and not filed.
286 Proposed Item 407(d)(1) and Instruction 2 to
Item 407.
287 Current Item 7(d) of Schedule 14A. These new
proposed requirements also would be in proposed
Item 407(e).
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In addition, as noted above,
disclosure would be required regarding
each member of the compensation
committee that the registrant has
identified as not independent.
Further, the rule proposals would
consolidate into this compensation
committee disclosure requirement the
disclosure currently required in Item
402 regarding compensation committee
interlocks and insider participation in
compensation decisions.288
Finally, for registrants other than
registered investment companies, the
rule proposals would eliminate an
existing proxy disclosure requirement
regarding directors that have resigned or
declined to stand for re-election 289
which is no longer necessary since it
has been superseded by a disclosure
requirement in Form 8–K.290 For
registered investment companies, which
do not file Form 8–K, the requirement
would be moved to Item 22(b) of
Schedule 14A.291 Also, the rule
proposals would combine various proxy
disclosure requirements regarding board
meetings and committees into one
location.292 In addition, we propose two
instructions to Item 407 to combine
repetitive provisions, one relating to
independence disclosure, and the other
relating to board committee charters.293
Request for Comment
• Should the disclosure requirements
proposed to be consolidated in Item 407
continue to remain separate? If so, why?
Is the proposed location of this
consolidated disclosure appropriate,
including the proposed options for
disclosing adopted independence
definitions?
• Are there independence standards
that would be preferable to the ones
referenced in proposed new Item 407?
• Should companies that are not
listed on a national securities exchange
or on an inter-dealer quotation system of
a national securities association be able
to reference their own standards of
independence that they have adopted,
or should those companies be required
to refer to established listing standards
as proposed?
• Should we require as proposed a
description of transactions considered
(other than those that would be reported
288 Current
Item 402(j).
7(g) of Schedule 14A.
290 Item 5.02(a) of Form 8–K.
291 Proposed Item 22(b)(17) of Schedule 14A.
292 Current paragraphs (d)(1), (f), and (h)(3) of
Item 7 of Schedule 14A would be included in
proposed Item 407(b).
293 Proposed Instructions 1 and 2 to Item 407.
Proposed Instruction 2 also includes a requirement
that the charter be provided if it is materially
amended.
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under proposed Item 404(a)) when
determining if the independence
standards were met?
• Is there any reason why we should
not eliminate the requirement that
companies provide disclosure in their
proxy statements regarding directors
who have resigned or declined to stand
for re-election? 294
• Are there circumstances in which
disclosure should not be required under
proposed Item 407(a)? Should
disclosure not be required for a director
who is no longer a director at the time
of filing any registration statement or
report? Should disclosure not be
required if information is being
presented in a proxy or information
statement for a director whose term of
officer as a director will not continue
after the meeting to which the statement
relates?
• Given that registered investment
companies do not file Form 8–K, should
we continue to require registered
investment companies to make proxy
statement disclosures pursuant to
current Item 7(g) of Schedule 14A
regarding directors who have resigned
or declined to stand for re-election?
• Should we also move the disclosure
required by Rule 10A–3(d) (under
which companies must disclose
whether they have relied on an
exemption from the audit committee
independence requirements of Rule
10A–3) to proposed Item 407?
• Should the audit committee charter
disclosure requirement be changed to be
consistent with the nominating
committee charter disclosure
requirements? Should the compensation
committee charter disclosure
requirement be the same? Should there
be any changes to the proposed
compensation committee disclosure
requirements?
• Are there any disclosure
requirements regarding compensation
consultants that we should add to or
delete or change from the proposal?
E. Treatment of Specific Types of
Issuers
1. Small Business Issuers
Proposed Item 404 of Regulation S–B
is substantially similar to proposed Item
404 of Regulation S–K, except for the
following two matters:
• Paragraph (b) relating to policies
and procedures for reviewing related
party transactions is proposed not to be
included in Regulation S–B, and
• Regulation S–B would provide for a
disclosure threshold of the lesser of
$120,000 or one percent of the average
294 Item
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of the small business issuer’s total assets
for the last three completed fiscal years,
to require disclosure for small business
issuers that may have material related
person transactions even though smaller
than the absolute dollar amount of
$120,000.
Both proposed items would consist of
disclosure requirements regarding
related person transactions and
promoters. These provisions of Item 404
of Regulation S–B would be
substantially identical to those of Item
404 of Regulation S–K, except for
certain changes conforming proposed
Item 404 of Regulation S–B to current
Item 404 of Regulation S–B. These
changes consist of the following:
• Throughout proposed Item 404 of
Regulation S–B using the two year time
period for disclosure in current Item 404
of Regulation S–B;
• Retaining in proposed Item 404 of
Regulation S–B an instruction in current
Item 404 of Regulation S–B regarding
underwriting discounts and
commissions; 295 and
• Not including an instruction in
proposed Item 404 of Regulation S–B
regarding the treatment of foreign
private issuers that is included in
proposed Item 404 of Regulation S–K.296
In addition, proposed Item 404 of
Regulation S–B would retain a
paragraph from current Item 404 of
Regulation S–B requiring disclosure of a
list of all parents of the small business
issuer showing the basis of control and
as to each parent, the percentage of
voting securities owned or other basis of
control by its immediate parent, if any.
One conforming change that we are
not making, however, concerns the
calculation of a related person’s interest
in a given transaction. Current Item
404(a) of Regulation S–B differs from
current Item 404(a) of S–K with respect
to, among other things, the calculation
of the dollar value of a person’s interest
in a related transaction. Current
Instruction 4 to Item 404(a) of
Regulation S–K specifically provides
that the amount of such interest shall be
computed without regard to the amount
of profit or loss involved in the
transaction. In contrast, current Item
404(a) of Regulation S–B contains no
such instruction. We propose that the
method of calculation of a related
person’s interest in a transaction will be
the same for both Regulation S–B and
Regulation S–K. We believe that
differences, if any, between the types of
295 This instruction, which is current Instruction
2 to Item 404 of Regulation S–B, is proposed
Instruction 9 to Item 404 of Regulation S–B.
296 This instruction, which is current Instruction
3 to Item 404 of Regulation S–K, is not included in
current Item 404 of Regulation S–B.
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transactions that small business issuers
may engage in with related persons as
compared to transactions of larger
issuers would not warrant a different
approach for calculating a related
person’s interest in a transaction.
Proposed Item 407 of Regulation S–K
is substantially identical to proposed
Item 407 of Regulation S–B,297 except
that it would it would not require
disclosure regarding compensation
committee interlocks and insider
participation in compensation
decisions, since Regulation S–B
currently does not require disclosure of
this information.298
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Request for Comment
• Should small business issuers be
categorically exempted from any
additional aspect of the proposed Item
404 or Item 407 disclosure
requirements? If so, which requirements
and why? Should any of the proposed
exclusions not be excluded? If so, why?
• Currently Item 404(a) of Regulation
S–K states that companies are not to
consider the amount of profit or loss
when computing the amount involved
in a transaction, but Item 404 of
Regulation S–B does not include this
statement. We propose to provide the
same instruction in both Regulation S–
K and Regulation S–B. Should Item
404(a) of Regulation S–B continue to
omit this instruction? Why or why not?
• Currently Item 404(a) of Regulation
S–K specifically provides for using the
value of the aggregate amount of all
periodic payments or installments when
computing the amount involved in a
transaction, but Item 404 of Regulation
S–B does not. Should Item 404(a) of
Regulation S–B, as does proposed
Instruction 3 to Item 404(a) of
Regulation S–B, provide for this?
• Is the definition of ‘‘related person’’
in Item 404 of Regulation S–B
sufficiently broad? Should this
definition be expanded to include
consultants and advisors?
• Should we use a different
alternative threshold for disclosure in
proposed Item 404(a) of Regulation S–B?
For example the lesser of $120,000 or a
percentage of annual corporate
expenses?
2. Foreign Private Issuers
Currently a foreign private issuer will
be deemed to comply with Item 404 of
Regulation S–K if it provides the
information required by Item 7.B. of
297 Current paragraphs (e), (f), and (g) of Item 401
of Regulation S–B would become paragraphs (d)(5),
(d)(4) and (c)(3), respectively, of Item 407 of
Regulation S–B.
298 This disclosure is currently required under
Item 402(j) of Regulation S–K.
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Form 20–F. The proposals would retain
this approach, but would require that if
more detailed information is required to
be disclosed by the issuer’s home
jurisdiction or a market in which its
securities are listed or traded, that same
information must also be disclosed
pursuant to Item 404.
Request for Comment
• Is there any reason to discontinue
this treatment of foreign private issuers?
Should a foreign private issuer that is
required to comply with Item 404 (for
example, by filing an annual report on
Form 10–K) be required to provide all
of the information required under Item
404 instead of the information required
under Form 20–F?
3. Registered Investment Companies
We propose to revise Items 7 and
22(b) of Schedule 14A to reflect the
reorganization that we have proposed
with respect to operating companies.
Under the proposals, information that is
currently required to be provided by
registered investment companies under
Item 7 would instead be required by
Item 22(b).299 The requirements of Item
7 that are currently applicable to
registered investment companies
regarding the nominating and audit
committees, board meetings, the
nominating process, and shareholder
communications generally would be
included in Item 22(b) by crossreferences to the appropriate paragraphs
of proposed Item 407 of Regulation S–
K.300 The substance of these
requirements would not be altered. In
addition, the proposed revisions to Item
22(b) would directly incorporate
disclosures relating to the independence
299 Proposed amendments to Item 7(e) of
Schedule 14A. Business development companies
would furnish the information required by Item 7
of Schedule 14A, in addition to the information
required by Items 8 and 22(b) of Schedule 14A. See
proposed amendments to Items 7, 8, and 22(b) of
Schedule 14A.
300 Proposed Items 22(b)(15)(i) and (ii)(A) and
22(b)(16)(i) of Schedule 14A. Proposed Item
22(b)(15)(i) would require the information required
by Items 407(b)(1) and (2) and (f), corresponding to
the information that registered investment
companies are required to provide pursuant to
current Items 7(f) and 7(h). Proposed Item
22(b)(15)(ii)(A) would require the information
required by proposed Items 407(c)(1) and (2),
corresponding to the information that registered
investment companies are required to provide
pursuant to current Items 7(d)(2)(i) and 7(d)(2)(ii)
(other than the nominating committee
independence disclosures required by current Item
7(d)(2)(ii)(C)). Proposed Item 22(b)(16)(i) would
require closed-end investment companies to
provide the information required by proposed Items
407(d)(1) through (3), corresponding to the
information that closed-end investment companies
are required to provide pursuant to current Item
7(d)(3) (other than the audit committee
independence disclosures required by Items
7(d)(3)(iv)(A)(1) and (B)).
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of members of nominating and audit
committees that are similar to those
contained in proposed Item 407(a) of
Regulation S–K and currently contained
in Item 7.301
We are also proposing to raise from
$60,000 to $120,000 the threshold for
disclosure of certain interests,
transactions, and relationships of each
director or nominee for election as
director who is not or would not be an
‘‘interested person’’ of an investment
company within the meaning of Section
2(a)(19) of the Investment Company
Act.302 This disclosure is required in
investment company proxy and
information statements and registration
statements. The increase in the
disclosure threshold would correspond
to the proposal to increase the
disclosure threshold for Item 404 from
$60,000 to $120,000.
Request for Comment
• Should we reorganize in the
manner proposed the disclosures that
registered investment companies are
currently required to make under Item
7 of Schedule 14A? If not, how should
these disclosures be organized? Should
any substantive changes be made to the
proposed disclosures?
• Is it appropriate to adjust to
$120,000 the threshold for disclosure of
certain interests, transactions, and
relationships of each director or
nominee for election as director who is
not or would not be an ‘‘interested
person’’ of an investment company?
Should there be no threshold? Should
the threshold also operate on a sliding
scale (for example, the lower of
$120,000 or 1% of total or net assets for
the last three completed fiscal years or
the lower of $120,000 or a percentage of
annual expenses) to capture smaller
transactions for smaller companies?
Explain whether a higher or lower
threshold, or no threshold, would result
in more effective disclosure.
F. Conforming Amendments
The changes we propose to Item 404
necessitate conforming amendments to
301 Proposed Items 22(b)(15)(ii)(B) and (16)(ii) of
Schedule 14A. Proposed Item 22(b)(15)(ii)(B)
requires disclosure about the independence of
nominating committee members that is similar to
those required by current Item 7(d)(2)(ii)(C) and
proposed Item 22(b)(16)(ii) requires disclosure
about the independence of audit committee
members that is similar to those required by current
Items 7(d)(3)(iv)(A)(1) and (B).
302 Proposed amendments to Items 22(b)(7),
22(b)(8), and 22(b)(9) of Schedule 14A; proposed
amendments to Items 12(b)(6), 12(b)(7), and 12(b)(8)
of Form N–1A; proposed amendments to Items 18.9,
18.10, and 18.11 of Form N–2; proposed
amendments to Items 20(h), 20(i), and 20(j) of Form
N–3.
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other rules that refer specifically to Item
404.
1. Regulation Blackout Trading
Restriction
We are proposing conforming changes
to Regulation Blackout Trading
Restriction,303 also known as Regulation
BTR, which we adopted to clarify the
scope and operation of Section
306(a) 304 of the Sarbanes-Oxley Act of
2002 and to prevent evasion of the
statutory trading restriction.305 Rule 100
of Regulation BTR defines terms used in
Section 306(a) and Regulation BTR,
including the term ‘‘acquired in
connection with service or employment
as a director or executive officer.’’ 306
Under this definition, one of the
specified methods by which a director
or executive officer directly or indirectly
acquires equity securities in connection
with such service is an acquisition ‘‘at
a time when he or she was a director or
executive officer, as a result of any
transaction or business relationship
described in paragraph (a) or (b) of Item
404 of Regulation S–K.’’ 307 To conform
this provision of Regulation BTR to the
proposed Item 404 amendments, we
propose to amend Rule 100(a)(2) so that
it references only transactions described
in paragraph (a) of Item 404.
2. Rule 16b–3 Non-Employee Director
Definition
We also are proposing conforming
amendments to the definition of NonEmployee Director in Exchange Act
Rule 16b–3. Section 16(b) provides an
issuer (or shareholders suing on its
behalf) the right to recover from an
officer, director, or ten percent
shareholder profits realized from a
purchase and sale of issuer equity
securities within a period of less than
six months. However, Rule 16b–3
303 17
CFR 245.100–104.
U.S.C. 7244(a), entitled ‘‘Prohibition of
Insider Trading During Pension Fund Blackout
Periods.’’
305 Insider Trades During Pension Fund Blackout
Periods, Release No. 34–47225 (Jan. 22, 2003) [68
FR 4337]. Section 306(a) makes it unlawful for any
director or executive officer of an issuer of any
equity security (other than an exempted security),
directly or indirectly, to purchase, sell, or otherwise
acquire or transfer any equity security of the issuer
(other than an exempted security) during any
pension plan blackout period with respect to such
equity security, if the director or executive officer
acquired the equity security in connection with his
or her service or employment as a director or
executive officer. This provision equalizes the
treatment of corporate executives and rank-and-file
employees with respect to their ability to engage in
transactions involving issuer equity securities
during a pension plan blackout period if the
securities were acquired in connection with their
service to, or employment with, the issuer.
306 This term is defined in Rule 100(a) of
Regulation BTR.
307 Rule 100(a)(2) of Regulation BTR.
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exempts transactions between issuers of
securities and their officers and
directors if specified conditions are met.
In particular, acquisitions from and
dispositions to the issuer are exempt if
the transaction is approved in advance
by the issuer’s board of directors, or
board committee composed solely of
two or more Non-Employee Directors.308
The definition of ‘‘Non-Employee
Director,’’ among other things, limits
these directors to those who:
• Do not directly or indirectly receive
compensation from the issuer, its parent
or subsidiary for consulting or other
non-director services, except for an
amount that does not exceed the Item
404(a) dollar disclosure threshold;
• Do not possess an interest in any
other transaction for which Item 404(a)
disclosure would be required; and
• Are not engaged in a business
relationship required to be disclosed
under Item 404(b).
As described above, the Item 404
proposals would substantially revise or
rescind the Item 404 provisions on
which the Non-Employee Director
definition is based. To minimize
potential disruptions and because no
problems have been brought to our
attention regarding any aspect of the
current definition, the proposed
conforming amendment would continue
to permit consulting and similar
arrangements subject to limits measured
by reference to the proposed Item 404(a)
disclosure requirements.309 The
amendment would delete the provision
referring to business relationships
subject to disclosure under Item 404(b),
without otherwise revising the text of
the rule.310 Because the disclosure
threshold of Item 404(a) would be raised
from $60,000 to $120,000, however, the
effect in some cases may be to permit
previously ineligible directors to be
Non-Employee Directors.311 In other
cases, where proposed Item 404(a) may
require disclosure of business
relationships not subject to disclosure
308 Exchange
Act Rules 16b–3(d)(1) and 16b–3(e).
it appears appropriate that the
standards for an exemption from Section 16(b)
liability be readily determinable by reference to the
exemptive rule, and not variable depending upon
where the issuer’s securities are listed, we do not
propose to base the amended definition on the
listing standards for director independence
applicable to the issuer.
310 Exchange Act Rule 16b–3(b)(3)(ii), which
defines a Non-Employee Director of a closed-end
investment company as ‘‘a director who is not an
‘‘interested person’’ of the issuer, as that term is
defined in Section 2(a)(19) of the Investment
Company Act of 1940,’’ would not be revised.
311 As under the current rule, each test referring
to Item 404 will be measured by reference to the
Regulation S–K Item, even if the disclosure
requirements applicable to the company are
governed by Regulation S–B.
309 Because
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under current Item 404(b), some current
Non-Employee Directors may become
ineligible.
Request for Comment
• Should the Rule 16b–3 NonEmployee Director definition continue
to permit consulting or similar
arrangements with the issuer, as
proposed?
• Is the proposed Item 404(a)
disclosure threshold an appropriate
limit for permitting consulting or
similar arrangements? Instead, should
the dollar limit be lower, such as the
current $60,000 threshold? Explain the
basis for recommending a different
dollar limit.
• For business relationships for
which disclosure is not required by
current Item 404(b), but would be under
proposed Item 404(a), should there be a
different test? Are there any particular
transactions or relationships that would
become disclosable under proposed
Item 404(a) that should not render a
director ineligible to be a Non-Employee
Director? If so, explain why.
• Would continued use of Item 404 as
a measure for defining Non-Employee
Directors place an undue burden on
companies in forming their NonEmployee Director committees? Would
reference to another disclosure
requirement or standard be better?
3. Other Conforming Amendments
The changes we propose to Item 404,
along with the consolidation of
provisions into Item 407, necessitate
conforming amendments to various
forms and schedules under the
Securities Act and the Exchange Act.
The rule proposals would amend:
• Forms that require disclosure of the
information required by Item 404 to
instead require disclosure of the
information required by proposed Items
404 and 407(a); 312
• Some forms that require disclosure
of the information required by Item
404(a) or by Items 404(a) and (c), to
instead require disclosure of the
information required by proposed Items
404(a) and (b), or proposed Item 404(a),
as appropriate; 313
312 See proposed amendments to Item 15 of Form
SB–2, Item 11(n) of Form S–1, Item 18(a)(7)(iii) and
Item 19(a)(7)(iii) of Form S–4, Item 23 of Form S–
11, Item 7 of Form 10, Item 13 of Form 10–K, Item
7 of Form 10–SB, and Item 12 of Form 10–KSB. The
proposed amendments to Forms SB–2, 10–SB and
10–KSB would require disclosure of the
information required by proposed Items 404 and
407(a) of Regulation S–B.
313 See proposed amendments to Item 7(b) of
Schedule 14A, which refers to proposed Items
404(a) and (b), and Item 22(b)(11) and the
Instruction to Item 22(b)(11) of Schedule 14A, and
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• A form that cross-references an
instruction in Item 404 which we
propose to eliminate to instead include
the text of this instruction; 314
• Item 7 of Schedule 14A to require
disclosure of the information required
by proposed Item 407(a) rather than
current Item 404(b), and to eliminate
current paragraphs (d)–(h) which are
duplicative of proposed Item 407 and
replace them with a requirement to
disclose information specified by
corresponding paragraphs of Item 407;
• Forms that require disclosure of the
information required by Item 402 to
instead require disclosure of the
information required by proposed Item
402 and Item 407(e)(4); 315
• Some forms that require disclosure
of the information required by Item 401
to instead require disclosure of the
information required by Item 401 and
paragraphs (c)(3), (d)(4) and/or (d)(5) of
proposed Item 407, as appropriate; 316
• Forms that require disclosure of the
information required by Item 401(j), to
instead require disclosure of the
information required by proposed Item
407(c)(3); 317 and
• Item 10 of Form N–CSR to include
a cross reference to proposed Item
407(c)(2)(iv) of Regulation S–K and
proposed Item 22(b)(15) of Schedule
14A, in lieu of the current reference to
Item 7(d)(2)(ii)(G) of Schedule 14A.
In addition, conforming amendments
would be made to a provision in
Regulation AB, which currently requires
Item 5.02(c)(2) of Form 8–K, which refer to
proposed Item 404(a). The proposed amendments to
Form 8–K that reference paragraphs (a) and (b) of
Item 404 of Regulation S–B would require
disclosure of the information required by proposed
Item 404(a) of Regulation S–B.
314 See proposed amendments to Item 23 of Form
S–11.
315 See proposed amendments to Item 8 of
Schedule 14A, Item 11(l) of Form S–1, General
Instruction I.B.4.(c) to Form S–3, Items 18(a)(7)(ii)
and 19(a)(7)(ii) of Form S–4, Item 22 of Form S–11,
Item 6 of Form 10 and Item 11 of Form 10–K.
316 See proposed amendments to General
Instruction I.B.4.(c) of Form S–3, and Item 10 of
Form 10–K, which refer to Item 401 and paragraphs
(c)(3), (d)(4) and (d)(5) of proposed Item 407, and
Item 7(b) of Schedule 14A, which refers to Item 401
and paragraphs (d)(4) and (d)(5) of proposed Item
407.
The proposed amendments to Forms SB–2, 10–
SB and 10–KSB would require disclosure of the
information required by proposed Items 401 and
407(c)(3), (d)(4) and (d)(5) of Regulation S–B. We
are not proposing any changes to the reference to
Item 401 in Note G to Form 10–K, however, because
the portion of Item 401 applicable in Note G
(certain disclosure regarding executive officers)
does not include the part of Item 401 that we
propose to combine into proposed Item 407.
317 See proposed amendments to Item 5 in Part II
of Form 10–Q, and Item 5 in Part II of Form 10–
QSB. The proposed amendments to Item 5 in Part
II of Form 10–QSB would require disclosure of the
information required by proposed Item 407(c)(3) of
Regulation S–B.
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disclosure of the information required
by Items 401, 402 and 404, so that
instead it would require disclosure of
the information required by proposed
Items 401, 402, 404 and paragraphs (a),
(c)(3), (d)(4), (d)(5) and (e)(4) of Item
407.318
VI. Plain English Disclosure
We are proposing that most of the
disclosure required by proposed Items
402, 403, 404 and 407 be provided in
plain English. We propose that this
plain English requirement apply when
information responding to these items is
included (whether directly or through
incorporation by reference) in reports
required to be filed under Exchange Act
Sections 13(a) or 15(d).
In 1998, we adopted rule changes
requiring issuers to write the cover page,
summary and risk factors section of
prospectuses in plain English and apply
plain English principles to other
portions of the prospectus.319 These
rules transformed the landscape of
public offering disclosure and made
prospectuses more accessible to
investors. We believe that plain English
principles should apply to the
disclosure requirements that we propose
to revise, so disclosure provided in
response to those requirements is easier
to read and understand. Clearer, more
concise presentation of executive and
director compensation, related person
transactions, beneficial ownership and
corporate governance matters can
facilitate more informed investing and
voting decisions in the face of complex
information about these important areas.
We propose to add Exchange Act
Rules 13a–20 and 15d–20 to require that
companies prepare their executive and
director compensation, related person
transactions, beneficial ownership and
corporate governance disclosures
included in Exchange Act reports using
plain English principles, including the
following standards:
• Present information in clear,
concise sections, paragraphs and
sentences;
• Use short sentences;
• Use definite, concrete, everyday
words;
• Use the active voice;
• Avoid multiple negatives;
318 See proposed amendments to Item 1107(e) of
Regulation AB.
319 Plain English Disclosure, Release No. 33–7497
(Jan. 28, 1998) [63 FR 6369] (adopting revisions to
Securities Act Rule 421 [17 CFR 230.421]). We have
also required that risk factor disclosure included in
annual reports and Summary Term Sheets in
business combination filings be in plain English.
See General Instruction 1A. to Form 10–K and Item
1001 of Regulation M–A 17 CFR 229.1001],
respectively.
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• Use descriptive headings and
subheadings;
• Use a tabular presentation or bullet
lists for complex material, wherever
possible;
• Avoid legal jargon and highly
technical business and other
terminology;
• Avoid frequent reliance on
glossaries or defined terms as the
primary means of explaining
information, defining terms in the
glossary or other section of the
document only if the meaning is unclear
from the context and using a glossary
only if it facilitates understanding of the
disclosure; and
• In designing the presentation of the
information, include pictures, logos,
charts, graphs, schedules, tables or other
design elements so long as the design is
not misleading and the required
information is clear, understandable,
consistent with applicable disclosure
requirements and any other included
information, drawn to scale and not
misleading.
The proposed rule would also provide
additional guidance on drafting the
disclosure that would comply with
plain English principles, including
guidance as to the following practices
that registrants should avoid:
• Legalistic or overly complex
presentations that make the substance of
the disclosure difficult to understand;
• Vague ‘‘boilerplate’’ explanations
that are imprecise and readily subject to
different interpretations;
• Complex information copied
directly from legal documents without
any clear and concise explanation of the
provision(s); and
• Disclosure repeated in different
sections of the document that increases
the size of the document but does not
enhance the quality of the information.
Under the proposed rules, if the
executive compensation, beneficial
ownership, related person transaction or
corporate governance matters disclosure
were incorporated by reference into an
Exchange Act report from a company’s
proxy or information statement, the
disclosure would be required to be in
plain English in the proxy or
information statement.320 The plain
English rules are proposed as part of the
disclosure rules applicable to filings
required under Sections 13(a) and 15(d)
of the Exchange Act. We believe that
these plain English requirements are
320 See, e.g., General Instruction G(3) to Form 10–
K and General Instruction E.3. to Form 10–KSB
(specifying information that may be incorporated by
reference from a proxy or information statement in
an annual report on Form 10–K or 10–KSB).
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best administered by the Commission
under these rules.
Request for Comment
• Will the plain English requirements
discussed above be sufficient to
discourage boilerplate and promote
clear, more user-friendly Exchange Act
reports and proxy or information
statements? If not, how should we revise
the requirements?
• Are there differences between proxy
statements and Exchange Act reports
which would require different
requirements in order to accomplish the
objectives of plain English? If so, what
are the different requirements and how
should the different requirements be
addressed?
• In addition to the proposal, should
we require that information provided
under proposed Items 402, 403, 404 and
407 in other filings, such as Form S–1,
be written in plain English?
• Since only portions of the
disclosure under proposed Item 407
would be required to be included in
Exchange Act reports, should we
specifically require that all Item 407
disclosure be in plain English? If so,
how should we impose this
requirement?
• Should we require that all or
portions of proxy or information
statements be in plain English? If so,
should a plain English requirement
apply to disclosure provided by anyone
who solicits a proxy with a proxy
statement, or should it be limited to just
companies making a solicitation of their
shareholders? Should shareholder
proposals under Exchange Act Rule
14a–8 321 or financial statements and
related disclosures under Item 13 of
Schedule 14A be excluded from any
plain English requirements applicable to
proxy statements? Would a plain
English requirement under the proxy
rules have the potential to increase
disputes, including possible litigation,
that could inappropriately delay or
frustrate the conduct of solicitations and
shareholder meetings or otherwise
interfere with the proper operation of
the proxy rules?
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VII. Transition
We propose that, following their
adoption, the proposed new rules and
amendments would become effective
following publication of the adopting
release in the Federal Register as
follows:
• For Forms 10–K and 10–KSB, for
fiscal years ending 60 days or more after
publication;
321 17
CFR 240.14a–8.
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• For Forms 8–K, for triggering events
that occur 60 days or more after
publication;
• For Securities Act and Investment
Company Act registration statements
(including post-effective amendments)
and Exchange Act registration
statements that become effective 120
days or more after publication; and
• For proxy statements that are filed
90 days or more after publication.322
We do not propose to require
companies to ‘‘restate’’ compensation or
related person transaction disclosure for
fiscal years for which they previously
were required to apply the current rules.
Instead, the proposed Summary
Compensation Table and disclosure
required by proposed Item 404(a) would
be required only for the most recent
fiscal year.323 This would result in
phased-in implementation of the
proposed Summary Compensation
Table amendments and proposed Item
404(a) disclosure over a three-year
period for Regulation S–K companies,
and a two-year period for Regulation S–
B companies.
Request for Comment
• Is the proposed effectiveness
schedule workable?
• Is the proposed phased-in transition
provision for the amended Summary
Compensation Table and proposed
related person transaction disclosure
necessary? Could companies revise the
previous years’ required disclosure to
conform to the amended requirements
without incurring undue costs or
burdens?
• Are any special transition
provisions necessary for any other
aspects of the proposed amendments? If
so, explain what would be needed and
why.
General Request for Comments
We request and encourage any
interested person to submit comments
on any aspect of our proposals and any
other matters that might have an impact
322 The proposed amendments to the crossreferences in Item 10 of Form N–CSR would appear
in the Form concurrent with the effective date of
the amendments to our proxy rules, and would be
effective for a particular registrant’s Forms N–CSR
that are filed after the filing of any proxy statement
that includes a response to proposed Item
407(c)(2)(iv) of Regulation S–K (as required by
proposed Item 22(b)(15) of Schedule 14A). The
substance of the information required by the Item
would not be changed.
323 The other proposed executive and director
compensation disclosure requirements which relate
to the last completed fiscal year would not be
affected by this proposed transition approach. The
Summary Compensation Table would be treated
differently because, as proposed, it would require
disclosure of compensation to the named executive
officers for the last three fiscal years.
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on the amendments. We request
comment from companies and all users
of the executive compensation, related
party and corporate governance
information required by Commission
rules that may be affected by the
proposals. With respect to any
comments, we note that they are of
greatest assistance to our rulemaking
initiative if accompanied by supporting
data and analysis of the issues
addressed in those comments and by
alternatives to our proposals where
appropriate.
VIII. Paperwork Reduction Act
A. Background
The proposed rules and amendments
contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act of 1995.324
We are submitting these to the Office of
Management and Budget for review and
approval in accordance with the
Paperwork Reduction Act.325 The titles
for this information are: 326
(1) ‘‘Regulation S–B’’ (OMB Control
No. 3235–0417);
(2) ‘‘Regulation S–K’’ (OMB Control
No. 3235–0071);
(3) ‘‘Form SB–2’’ (OMB Control No.
3235–0418);
(4) ‘‘Form S–1’’ (OMB Control No.
3235–0065);
(5) ‘‘Form S–4’’ (OMB Control
Number 3235–0324);
(6) ‘‘Form S–11’’ (OMB Control
Number 3235–0067);
(7) ‘‘Regulation 14A and Schedule
14A’’ (OMB Control Number 3235–
0059);
(8) ‘‘Regulation 14C and Schedule
14C’’ (OMB Control Number 3235–
0057);
(9) ‘‘Form 10’’ (OMB Control No.
3235–0064);
(10) ‘‘Form 10–SB’’ (OMB Control No.
3235–0419);
(11) ‘‘Form 10–K’’ (OMB Control No.
3235–0063);
(12) ‘‘Form 10–KSB’’ (OMB Control
No. 3235–0420);
(13) ‘‘Form 8–K’’ (OMB Control No.
3235–0060); and
(14) ‘‘Form N–2’’ (OMB Control No.
3235–0026).
We adopted all of the existing
regulations and forms pursuant to the
324 44
U.S.C. 3501 et seq.
U.S.C. 3507(d) and 5 CFR 1320.11.
326 The paperwork burden from Regulations S–K
and S–B is imposed through the forms that are
subject to the requirements in those Regulations
and is reflected in the analysis of those forms. To
avoid a Paperwork Reduction Act inventory
reflecting duplicative burdens, for administrative
convenience we estimate the burdens imposed by
each of Regulations S–K and S–B to be a total of
one hour.
325 44
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Securities Act and the Exchange Act. In
addition, we adopted Form N–2
pursuant to the Investment Company
Act. These regulations and forms set
forth the disclosure requirements for
annual 327 and current reports,
registration statements, proxy
statements and information statements
that are prepared by issuers to provide
investors with the information they
need to make informed investment
decisions in registered offerings and in
secondary market transactions, as well
as informed voting decisions in the case
of proxy statements.
Our proposed amendments to existing
forms and regulations are intended to:
• Provide investors with a clearer and
more complete picture of compensation
awarded to, earned by or paid to
principal executive officers, principal
financial officers, the highest paid
executive officers other than the
principal executive officer and principal
financial officer and directors;
• Provide investors with better
information about key financial
relationships among companies and
their executive officers, directors,
significant shareholders and their
respective immediate family members;
• Include more complete information
about independence regarding members
of the board of directors and board
committees;
• Reorganize and modify the type of
executive and director compensation
information that must be disclosed in
current reports; and
• Require most of the disclosure
required under these proposals to be
provided in plain English.
The hours and costs associated with
preparing disclosure, filing forms, and
retaining records constitute reporting
and cost burdens imposed by the
collection of information. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid control
number.
The information collection
requirements related to annual and
current reports, registration statements,
proxy statements and information
statements would be mandatory.
However, the information collection
requirements relating exclusively to
proxy and information statements
would only apply to issuers subject to
the proxy rules. There would be no
mandatory retention period for the
information disclosed, and the
information disclosed would be made
327 The pertinent annual reports are those on
Form 10–K or 10–KSB.
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publicly available on the EDGAR filing
system.
B. Summary of Information Collections
The proposals would increase existing
disclosure burdens for annual reports on
Form 10–K 328 and registration
statements on Forms 10, S–1, S–4 and
S–11 by requiring:
• An expanded and reorganized
Summary Compensation Table, which
would require expanded disclosure of a
‘‘total compensation’’ amount, and
information necessary for computing the
total amount of compensation, such as
the grant date fair value of stock-based
and option-based awards computed in
accordance with FAS 123R, and the
aggregate increase in actuarial value of
defined benefit and actuarial pension
plans;
• Disclosure at lower thresholds of
information regarding perquisites and
other personal benefits;
• A more focused presentation of
compensation plan awards in a Grants
of Performance-Based Awards Table and
a Grants of All Other Equity Awards
Table, which would build upon existing
tabular disclosures regarding long term
incentive plans and awards of option
and stock appreciation rights to
supplement the information proposed to
be included in the Summary
Compensation Table;
• Expanded disclosure regarding
holdings and exercises by named
executive officers of outstanding
previously awarded stock, options and
similar instruments which would
include the grant date of the award, the
vesting date of restricted stock and
similar instruments and amounts (both
number of shares and value) realized
upon vesting and the previously
reported grant date fair value of awards
exercised or vested;
• Improved narrative disclosure
accompanying data presented in the
executive compensation tables and a
new Compensation Discussion and
Analysis section to explain material
328 The proposed disclosure requirements
regarding executive and director compensation,
beneficial ownership, related person transactions
and parts of the proposed corporate governance
disclosure requirements are in Form 10–K,
Schedule 14A and Schedule 14C. Form 10–K
permits the incorporation by reference of
information in Schedules 14A or 14C to satisfy the
disclosure requirements of Form 10–K. The analysis
that follows assumes that companies would either
provide the proposed disclosure in a Form 10–K
only, if the company is not subject to the proxy
rules, or would incorporate the required disclosure
into the Form 10–K by reference to the proxy or
information statement if the company is subject to
the proxy rules. This approach takes into account
the burden from the proposed disclosure
requirements that are included in both the Form
10–K and in Schedule 14A or 14C.
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elements of compensation of named
executive officers;
• Disclosure regarding up to three
employees who were not executive
officers and whose total compensation
for the last completed fiscal year was
greater than that of any of the named
executive officers;
• New tables and narrative disclosure
regarding retirement plans and
nonqualified defined contribution and
other deferred compensation plans;
• Expanded disclosure regarding
post-employment payments other than
pursuant to retirement and deferred
compensation plans;
• A new table and improved narrative
disclosure for director compensation to
replace current disclosure requirements;
• Disclosure regarding additional
related persons under the proposed
related person transaction disclosure
requirement;
• New disclosure regarding a
company’s policies and procedures for
the review, approval or ratification of
transactions with related persons;
• New and reorganized disclosure
regarding corporate governance matters
such as the independence of directors
and members of the nominating,
compensation and audit committees of
the board of directors; and
• Additional disclosure regarding
pledges of securities by officers and
directors and directors’ qualifying
shares.
At the same time, the proposals
would decrease existing disclosure
burdens for annual reports on Form 10–
K and registration statements on Form
10, S–1, S–4 and S–11 by:
• Eliminating requirements to
provide a Compensation Committee
Report and Performance Graph in proxy
materials and information statements,
which would substantially offset the
increased burdens regarding
Compensation Discussion and Analysis
that would be required to be included
or incorporated by reference in annual
reports or registration statements;
• Eliminating tabular presentation
regarding projected stock option values
under alternative stock appreciation
scenarios, which would substantially
offset the increased burdens regarding
equity holdings and exercises;
• Eliminating a generalized tabular
presentation regarding defined benefit
plans, which would offset in part the
increased burdens regarding defined
benefit plan disclosure;
• Increasing the dollar value
threshold for determining if related
person transaction disclosure is
required from $60,000 to $120,000; and
• Eliminating a current disclosure
requirement regarding specific director
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relationships that could affect
independence.
In addition, the proposals may
increase or decrease existing disclosure
burdens, or not affect them at all, for
annual reports on Form 10–K and
registration statements on Form 10, S–
1, S–4 and S–11, depending on a
company’s particular circumstances, by:
• Eliminating the requirement to
include in proxy or information
statements a compensation committee
report on the repricing of options and
stock appreciation rights and a table
reporting on the repricing of options
and stock appreciation rights over the
past ten years, in favor of a narrative
discussion of repricings, if any occurred
in the last fiscal year, which would be
required to be included or incorporated
by reference in annual reports and
registration statements; and
• Eliminating or reducing the scope
of instructions that provide bright line
tests for determining whether
transactions with related persons are
required to be disclosed in particular
circumstances.
Specifically with respect to proxy and
information statements, the proposals
would impose a new disclosure
requirement regarding the company’s
processes and procedures for the
consideration and determination of
executive and director compensation,
and disclosure regarding the availability
of the compensation committee’s charter
(if it has one), either as an appendix to
the proxy or information statement at
least once every three fiscal years or on
the company’s Web site. These
proposals would not require a
compensation committee to establish or
maintain a charter. The proposed
disclosure that would be required
regarding compensation committees is
similar to what is currently required for
audit committees and nominating
committees. The proposals would
decrease existing disclosure
requirements for proxy and information
statements by eliminating a current
disclosure requirement regarding the
resignation of directors, as well as
eliminating current requirements to
provide a Compensation Committee
Report, Performance Graph and a
compensation committee report on the
repricing of options and stock
appreciation rights. However, the extent
to which eliminating current
requirements to provide a
Compensation Committee Report,
Performance Graph and a compensation
committee report on the repricing of
options and stock appreciation rights
reduces burdens for proxy and
information statements would be offset
to a substantial extent, as discussed
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above, by the proposed Compensation
Discussion and Analysis and narrative
disclosure requirement regarding
repricings and other modifications, both
of which would be required to be
included or incorporated by reference in
annual reports and registration
statements. We estimate that, on
balance, the proposed changes that are
specific to proxy or information
statements would not result in
incremental burdens on proxy or
information statement collections of
information.
The proposals would increase existing
disclosure burdens for annual reports on
Form 10–KSB 329 and registration
statements on Forms 10–SB and SB–2
filed by small business issuers by
requiring:
• An expanded and reorganized
Summary Compensation Table, which
would require expanded disclosure of a
‘‘total compensation’’ amount, and
information necessary for computing the
total amount of compensation, such as
the grant date fair value of stock-based
and option-based awards computed in
accordance with FAS 123R and the
aggregate increase in actuarial value of
defined benefit and actuarial pension
plans;
• Disclosure at lower dollar
thresholds for information regarding
perquisites and other personal benefits;
• Expanded disclosure regarding
holdings of previously awarded stock,
options and similar instruments, which
would include the value of stock and
other similar incentive plan awards that
had not vested;
• A new table for director
compensation, to replace current
narrative disclosure requirements;
• A narrative description of
retirement plans;
• Disclosure regarding additional
related persons under the proposed
related person transaction disclosure
requirement;
• New and reorganized disclosure
regarding corporate governance matters
such as the independence of directors
and members of the nominating,
compensation and audit committees of
the board of directors; and
• Additional disclosure regarding
pledges of securities by officers and
directors, and director qualifying shares.
At the same time, the proposals
would decrease existing disclosure
burdens for annual reports on Form 10–
KSB and registration statements on
Form 10–SB and SB–2 filed by small
business issuers by:
329 The same analysis as discussed above with
regard to the relationship of Form 10–K to the
disclosure required in proxy or information
statements is also applied to Form 10–KSB.
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• Reducing by two the number of
named executive officers for the
purposes of executive compensation
disclosure, to include only the principal
executive officer and the two most
highly compensated executive officers
other than the principal executive
officer;
• Reducing the required information
in the Summary Compensation Table
from three years to two years of data;
• Eliminating tabular disclosure of
grants of options and stock appreciation
rights in the last fiscal year;
• Eliminating tabular disclosure
regarding exercises of options and stock
appreciation rights;
• Eliminating tabular disclosure
regarding long term incentive plan
awards in the last fiscal year; and
• Eliminating a current disclosure
requirement regarding specific director
relationships that could affect
independence.
In addition, the proposals may
increase or decrease, or not affect,
existing disclosure burdens for annual
reports on Form 10–KSB or registration
statements on Form 10–SB and SB–2
filed by small business issuers
depending on the small business
issuer’s particular circumstances, by:
• Eliminating the requirement to
include a compensation committee
report on the repricing of options and
stock appreciation rights, in favor of a
narrative discussion of repricings, if any
occurred in the last fiscal year;
• Changing the dollar value threshold
used for determining if related person
transaction disclosure is required from
$60,000 to the lesser of $120,000 or one
percent of the average of the small
business issuer’s total assets for the last
three completed fiscal years; and
• Eliminating or reducing the scope
of instructions that provide bright line
tests for determining whether
transactions with related persons are
required to be disclosed in particular
circumstances.
The proposals would decrease
existing disclosure burdens for Forms
N–1A, N–2, and N–3 by increasing to
$120,000 the current $60,000 threshold
in such forms for disclosure of certain
interests, transactions, and relationships
of disinterested directors, although as
discussed below we do not believe the
increase in the disclosure threshold will
significantly impact the hours of
company personnel time and cost of
outside professionals in responding to
these items. The proposals would
increase the existing disclosure burdens
for Form N–2 by requiring business
development companies to provide
additional disclosure regarding
compensation. However, the proposals
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would decrease the existing disclosure
burden by no longer requiring
compensation disclosure with respect to
certain affiliated persons and the
advisory board of business development
companies and by no longer requiring
business development companies to
disclose certain compensation from the
fund complex.
The proposals would decrease the
Form 8–K disclosure burdens, by
limiting both the existing requirement to
disclose a company’s entry into a
material definitive agreement outside of
the ordinary course of business or any
material amendment to such an
agreement and the requirement to
collect information regarding directors,
executive officers other than named
executive officers and officers covered
by Item 5.02 of Form 8–K. By focusing
the Form 8–K disclosure requirement on
more presumptively material
employment agreements, plans or
arrangements of a narrower group of
executive officers, the number of Form
8–Ks filed each year relating to
executive and director compensation
matters should be reduced.
We do not believe that our proposals
regarding exhibit filing requirements for
Form 20–F and our proposed treatment
for foreign private issuers under the
revised rules would impose any
incremental increase or decrease in the
disclosure burden for these issuers.
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C. Paperwork Reduction Act Burden
Estimates
For purposes of the Paperwork
Reduction Act, we estimate the annual
incremental increase in the paperwork
burden for companies to comply with
our proposed collection of information
requirements to be approximately
537,792 hours of in-house company
personnel time and to be approximately
$69,794,000 for the services of outside
professionals.330 These estimates
include the time and the cost of
preparing and reviewing disclosure,
filing documents and retaining records.
Our methodologies for deriving the
above estimates are discussed below.
Our estimates represent the average
burden for all issuers, both large and
small. As described below, we expect
that the burdens and costs could be
greater for larger issuers and lower for
smaller issuers. For Exchange Act
annual reports on Form 10–K or 10–
KSB,331 or current reports on Form 8–
330 For administative convenience, the
presentation of the totals related to the paperwork
burden hours have been rounded to the nearest
whole number and the cost totals have been
rounded to the nearest thousand.
331 We apply the same allocation of burden with
regard to proxy or information statements.
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K, we estimate that 75% of the burden
of preparation is carried by the company
internally and that 25% of the burden
is carried by outside professionals
retained by the issuer at an average cost
of $300 per hour.332 For Securities Act
registration statements on Forms SB–2,
S–1, S–4, S–11, or N–2 and Exchange
Act registration statements on Form 10
or 10–SB, we estimate that 25% of the
burden of preparation is carried by the
company internally and that 75% of the
burden is carried by outside
professionals retained by the issuer at
an average cost of $300 per hour.333 The
portion of the burden carried by outside
professionals is reflected as a cost, while
the portion of the burden carried by the
company internally is reflected in
hours.
1. Securities Act Registration
Statements, Exchange Act Registration
Statements and Exchange Act Annual
Reports
For the purposes of the Paperwork
Reduction Act, we estimate that, over a
three year period,334 the annual
incremental disclosure burden imposed
by the proposed revisions would
average 67 hours per Form 10–K; 35
hours per Form 10–KSB; 60 hours per
Form 10; 30 hours per Forms 10–SB and
SB–2; 60 hours per Forms S–1, S–4 and
S–11; and 1.675 hours per Form N–2. To
the extent that companies incorporate
information proposed to be required by
reference to proxy or information
statements, the proposed plain English
requirements would apply to disclosure
in those statements, however the
incremental burden of preparing plain
English disclosure is factored into the
burden estimates for Forms 10–K and
10–KSB. We estimate that the proposed
amendments to Item 22(b) of Schedule
14A and the proposal to increase to
$120,000 the current $60,000 threshold
in Forms N–1A, N–2, and N–3 for
disclosure of certain interests,
transactions, and relationships of
disinterested directors will not impose
332 In connection with other recent rulemakings,
we have had discussions with several private law
firms to estimate an hourly rate of $300 as the
average cost of outside professionals that assist
issuers in preparing disclosures and conducting
registered offerings.
333 As mentioned above, we do not believe that
the proposal to increase to $120,000 the current
$60,000 threshold in Forms N–1A, N–2, and N–3
for disclosure of certain interests, transactions, and
relationships of disinterested directors will
significantly impact the hours of company
personnel time and cost of outside professionals in
responding to these items.
334 We calculated an annual average over a three
year period because OMB approval of Paperwork
Reduction Act submissions covers a three year
period.
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an annual incremental disclosure
burden.
These estimates were based on the
following assumptions:
• On an ongoing basis, the hours of
company personnel time and outside
professional time required to prepare
the disclosure under proposed Item 402
of Regulation S–K (executive and
director compensation) would increase
in light of the expansion and
reorganization of the proposed
disclosure requirements relative to the
current disclosure requirements on
these topics, in particular the
requirements regarding Compensation
Discussion and Analysis.
• Companies filing annual reports on
Form 10–K that would be required to
include Item 402 of Regulation S–K, as
we propose to amend it, and proposed
Item 407(e)(4) of Regulation S–K
(regarding compensation committee
interlocks and insider participation),
would experience higher costs in
responding to these disclosure
requirements in the first year of
compliance with them, and, to a lesser
extent, in the second year, as systems
are implemented to obtain the relevant
data and compliance efforts with respect
to new or expanded disclosure
requirements, with lower incremental
costs expected in subsequent years.335
• On an ongoing basis, the hours of
company personnel time and outside
professional time required to prepare
the disclosure under proposed Item 404
(related person transactions), 407(a)
(director independence) and paragraphs
(e)(1) through (e)(3) of Item 407
(compensation committee functions) of
both Regulation S–K and Regulation S–
B would be approximately the same as
for compliance with the current related
party transaction disclosure and
disclosure about the board of directors
required by existing Item 404 of
Regulations S–K and S–B and Item 7 of
Schedule 14A.336 Other revisions
proposed to be made by moving
335 For Form 10–K, we estimate that it would take
issuers 120 additional hours to prepare the
proposed disclosure in year one, and 55 hours in
year two and 25 hours in year three and thereafter,
which results in an average of 67 hours over the
three year period. This estimate takes into account
that the burden would be incurred by either
including the proposed disclosure in the report
directly or incorporating by reference from a proxy
or information statement.
336 Similarly, on an ongoing basis, the hours of
company personnel time and outside professional
time required to prepare the disclosure required by
the proposed conforming revisions to Item 22(b)
relating to the independence of members of
nominating and audit committees of investment
companies would be approximately the same as for
compliance with the current requirements regarding
disclosure of the independence of nominating and
audit committee members of investment companies
required by existing Item 7 of Schedule 14A.
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disclosure requirements relating to
corporate governance to Item 407 of
Regulations S–K and S–B would not
change the substance of existing
disclosure and would therefore not
increase burdens, particularly for proxy
or information statements where much
of the disclosure is currently required.
• Companies filing registration
statements on Forms 10, S–1, S–4 and
S–11 that are not already filing periodic
reports pursuant to Exchange Act
Sections 13(a) or 15(d) would in many
cases not have been required to comply
with the proposed disclosure
requirements prior to filing such
registration statements, and would
therefore take an estimated 60 hours to
comply with the proposed changes in
the disclosure requirements. The
additional time required by these
registrants to obtain the relevant data
and to compile the required information
is offset to some extent by the fact that
only one year of compensation
information would generally be required
for presentation in the Summary
Compensation Table, as compared to
three years for issuers already subject to
Exchange Act reporting requirements.337
• Small business issuers filing annual
reports on Form 10–KSB would be
subject to lower incremental costs than
other issuers as a result of the proposals,
given the reduced disclosure required
by Item 402 of Regulation S–B relative
to Item 402 of Regulation S–K, as
described above. As with companies
filing annual reports on Form 10–K, we
expect that small business issuers
would experience higher costs in
responding to the proposed disclosure
requirements in the first year of
compliance with them, as systems are
implemented to obtain the relevant data
and compliance efforts with respect to
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337 Our estimates of the number of annual
responses to the collections of information are
based on the number of filings made in the period
from October 1, 2004 through September 30, 2005.
In order to factor in disclosure that may be
incorporated by reference from other filings, we
have estimated that 496 out of 619 registration
statements on Form S–4 would include the required
information contemplated by these rule proposals
through incorporation by reference to a Form 10–
K or Form 10–KSB.
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new or expanded disclosure
requirements are implemented, with
lower incremental costs in subsequent
years.338
• Small business issuers filing
registration statements on Forms 10–SB
and SB–2 that are not already filing
periodic reports pursuant to Exchange
Act Sections 13(a) or 15(d) would not
have been required to comply with the
proposed disclosure requirements prior
to filing such registration statements,
and would therefore take an estimated
30 additional hours to comply with the
proposed changes in the disclosure
requirements. The additional time
required by these registrants to obtain
the relevant data and to compile the
required information is offset to some
extent by the fact that only one year of
compensation information would
generally be required for presentation in
the Summary Compensation Table, as
compared to two years for small
business issuers already subject to
Exchange Act reporting requirements.
• Based on our experience with the
requirement we adopted in 1998 for
companies to write certain sections of
prospectuses in plain English, drafting
documents in plain English would
result in an initial increase in time and
cost burdens in the first year of
implementation, and to a lesser extent,
the second year, with those time or cost
burdens decreasing in the year
following implementation of the new
rules. The plain English rule proposals
would not affect the substance of the
required disclosure, and companies that
have filed registration statements under
the Securities Act are already familiar
with the requirements.
• We estimate that the proposals to
increase to $120,000 the current $60,000
threshold for disclosure of certain
interests, transactions, and relationships
338 For Form 10–KSB, we estimate that it would
take issuers 70 additional hours to prepare the
proposed disclosure in year one, and 25 additional
hours in year two and 10 additional hours in year
three and thereafter, which results in an average of
35 additional hours over the three year period. This
estimate assumes that the burden would be
incurred by either including the proposed
disclosure in the report directly or incorporating by
reference from a proxy or information statement.
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of disinterested directors in Forms N–
1A, N–2, and N–3 and in proxy and
information statements would neither
increase nor decrease the annual
paperwork burden, because these forms
are already required to disclose these
interests, transactions, and relationships
in amounts exceeding $60,000, and we
do not believe the increase in the
disclosure threshold will significantly
impact the hours of company personnel
time and cost of outside professionals in
responding to these items.
• Business development companies
filing Form N–2 would be required to
include Item 402 of Regulation S–K, as
we propose to amend it, and would
experience higher costs in responding to
these disclosure requirements in the
first year of complying with them, and,
to a lesser extent, in the second year, as
systems are implemented to obtain the
relevant data and compliance efforts
with respect to new or expanded
disclosure requirements are
implemented, with lower incremental
costs expected in subsequent years.339
Tables 1 and 2 below illustrate the
incremental annual compliance burden
in the collection of information in hours
and cost for Exchange Act periodic
reports for companies other than
registered investment companies,
Securities Act registration statements
and Exchange Act registration
statements.
339 For Form N–2, we estimate that it would take
business development companies 100 additional
hours to prepare the proposed disclosure in year
one, 50 hours in year two and 25 hours in year three
and thereafter, which results in an average of 58
hours for each business development company to
comply with the proposed compensation
disclosures that would be required on Form N–2.
We estimate an average annual incremental
disclosure burden of 1.675 hours per Form N–2,
based on 58 hours per Form N–2 filing by business
development companies times 27 filings on Form
N–2 by business development companies
(representing all Form N–2 and N–2/A filings by
business development companies during the year
ended December 31, 2005) (58 hours times 27 Form
N–2 filings (including amendments) = 1,566 hours),
divided by 935 total annual filings on Form N–2
(representing all Form N–2 and N–2/A filings
during the year ended December 31, 2005) (1,566
hours divided by 935 filings on Form N–2
(including amendments) = 1.675 hours per Form N–
2 (including amendments)).
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TABLE 1.—CALCULATION OF INCREMENTAL PAPERWORK REDUCTION ACT BURDEN ESTIMATES FOR EXCHANGE ACT
PERIODIC REPORTS
Annual
responses
Incremental
hours/form
Incremental
burden
75% Issuer
25% Professional
$300 Professional cost
(A)
Form
(B)
(C) = (A)*(B)
(D) = ( C)*0.75
(E) = (C)*0.25
(F) = (E)*$300
10–K 340 ....................................................
10–KSB ....................................................
8,602
3,504
67
35
576,334
122,640
432,250.5
91,980.0
144,083.5
30,660.0
$43,225,050
9,198,000
Total ..................................................
........................
........................
698,974
524,230.5
........................
52,423,050
TABLE 2.—CALCULATION OF INCREMENTAL PAPERWORK REDUCTION ACT BURDEN ESTIMATES FOR SECURITIES ACT
REGISTRATION STATEMENTS AND EXCHANGE ACT REGISTRATION STATEMENTS
Annual
responses
Incremental
hours/form
Incremental
burden
75% Issuer
75%
Professional
$300
Professional
cost
(A)
Form
(B)
(C) = (A)*(B)
(D) = (C)*0.25
(E) = (C)*0.75
(F) = (E)*$300
10 .............................................................
10–SB ......................................................
SB–2 ........................................................
S–1 ...........................................................
S–4 ...........................................................
S–11 .........................................................
N–2 ...........................................................
72
166
885
528
123
60
935
60
30
30
60
60
60
1.675
4,320
4,980
26,550
31,680
7,380
3,600
1,566
1,080.0
1,245.0
6,637.5
7,920.0
1,845.0
900.0
391.5
3,240.0
3,735.0
19,912.5
23,760.0
5,535.0
2,700.0
1,174.5
$972,000
1,120,500
5,973,750
7,128,000
1,660,500
810,000
352,350
Total ..................................................
........................
........................
80,076
20,019.0
........................
18,017,100
2. Exchange Act Current Reports
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For purposes of the Paperwork
Reduction Act, we estimate that the
proposals affecting the collection of
information requirements related to
current reports on Form 8–K would
reduce the annual paperwork burden by
approximately 6,458 hours of company
personnel time and by a cost of
approximately $645,750 for the services
of outside professionals. This estimate
reflects the reduction in the number of
filings that could result from our
proposals. These estimates were based
on the following assumptions:
• The number of annual responses for
Form 8–K is estimated to be 110,416.341
Based on a study of current reports on
Form 8–K filed in September 2005, we
estimate that approximately 22,083
current reports filed on Forms 8–K
340 The burden estimates for Form 10–K and 10–
KSB assume that the proposed requirements are
satisfied by either including information directly in
the annual reports or incorporating the information
by reference from the proxy statement or
information statement in Schedule 14A or Schedule
14C, respectively. As described above, we estimate
that the proposed changes to executive
compensation disclosure and corporate governance
matters that would be included only in proxy or
information statements (and thus not in Securities
Act registration statements or Exchange Act reports
or registration statement) would not, on balance,
impose an incremental burden.
341 This is based on the number of responses
made in the period from October 1, 2004 through
September 30, 2005.
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would be filed pursuant to Item 1.01 of
Form 8–K.
• Based on a review of Item 1.01
Form 8–K filings made in September
2005, we estimate that 6,625 of the
22,083 current reports on Form 8–K
filed under Item 1.01 would relate to
executive or director compensation
matters.
• Based on a review of Item 1.01
Form 8–K filings made in September
2005, we estimate that 1,722 fewer Form
8–Ks would be filed because of more
focused current reporting of executive
officer and director compensation
transactions under proposed Item
5.02(e) of Form 8–K.342
D. Request for Comment
We request comment in order to: (a)
Evaluate whether the collections of
information are necessary for the proper
performance of our functions, including
whether the information will have
practical utility; (b) evaluate the
accuracy of our estimate of the burden
of the collections of information; (c)
determine whether there are ways to
enhance the quality, utility, and clarity
342 For Form 8–K, the current burden estimate is
5 hours per filing. We estimate that 75% of the
burden of preparation is carried by the company
internally and that 25% of the burden is carried by
outside professionals retained by the issuer at an
average cost of $300 per hour. The computation of
the reduction in burden is thus based on 1,722
fewer Form 8–Ks filed with a per filing burden of
3.75 hours carried by the company and 1.25 hours
at a cost of $300 per hour (or $375 per filing).
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of the information to be collected; and
(d) evaluate whether there are ways to
minimize the burden of the collections
of information on those who respond,
including through the use of automated
collection techniques or other forms of
information technology.343
Any member of the public may direct
to us any comments concerning the
accuracy of these burden estimates and
any suggestions for reducing these
burdens. Persons who desire to submit
comments on the collection of
information requirements should direct
their comments to the OMB, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should send
a copy of the comments to Nancy M.
Morris, Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–9303, with
reference to File No. S7–03–06.
Requests for materials submitted to the
OMB by us with regard to this collection
of information should be in writing,
refer to File No. S7–03–06, and be
submitted to the Securities and
Exchange Commission, Office of Filings
and Information Services, Branch of
Records Management, 6432 General
Green Way, Alexandria, VA 22312.
Because the OMB is required to make a
decision concerning the collections of
343 Comments are requested pursuant to 44 U.S.C.
3506(c)(2)(B).
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information between 30 and 60 days
after publication, your comments are
best assured of having their full effect if
the OMB receives them within 30 days
of publication.
IX. Cost-Benefit Analysis
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A. Background
We are proposing revisions to our
rules governing disclosure of executive
and director compensation, related
person transactions, director
independence and other corporate
governance matters and security
ownership of officers and directors. The
proposed revisions to the executive and
director compensation disclosure rules
are intended to provide investors with
a clearer and more complete picture of
compensation to principal executive
officers, principal financial officers, the
highest paid executive officers and
directors. We also propose to revise our
rules relating to current reports on Form
8–K to require real-time disclosure of
only executive and director
compensation events that are
unquestionably or presumptively
material, thereby reducing the number
of filings for events relating to executive
officers other than named executive
officers and those officers specified in
Item 5.02. We also propose to revise our
closely related rules requiring
disclosure regarding the extent to which
executive officers, directors, significant
shareholders and other related persons
participate in financial transactions and
relationships with the issuer. We are
proposing to amend our beneficial
ownership disclosure requirement to
require disclosure regarding pledges of
securities by management and directors’
qualifying shares. Finally, we are
proposing that most of the disclosure
that would be required under the
proposed amendments be provided in
plain English, so that investors can more
easily understand this information
when it is required to be included in
Exchange Act reports or it is
incorporated by reference from proxy or
information statements.
B. Summary of Proposals
In light of the complexity of, and
variations in, compensation programs,
the sometimes inflexible and highly
formatted nature of current Item 402 of
Regulation S–K and S–B has resulted, in
some cases, in disclosure that does not
clearly inform investors as to all
elements of compensation. The
proposed changes to Item 402 would
apply a broader approach that would
eliminate some tables, simplify or
refocus other tables, reflect total current
compensation in the Summary
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Compensation Table, and reorganize the
compensation table to group together
compensation elements that have
similar functions so that the quantitative
disclosure is both more informative and
more easily understood. This improved
quantitative disclosure would be
complemented by enhanced narrative
disclosure clearly and comprehensively
describing the context in which
compensation is paid and received. In
particular, the narrative disclosure
requirements would provide
transparency regarding company
compensation policies and procedures,
and be sufficiently flexible to operate
effectively as new forms of
compensation continue to evolve.
Under the proposals, the scope and
presentation of information in Item 402
of Regulation S–B would differ in a
number of significant ways from Item
402 of Regulation S–K. Item 402 of
Regulation S–B would:
• Limit the named executive officers
for whom disclosure would be required
to a smaller group, consisting of the
principal executive officer and the two
other highest paid executive officers; 344
• Require a revised Summary
Compensation Table to disclose
compensation information for the small
business issuer’s two most recent fiscal
years, and to require that narrative
disclosure accompany the Summary
Compensation Table; 345
• Provide a higher threshold for
separate identification of categories of
‘‘All Other Compensation’’ in the
Summary Compensation Table;
• Require a new Outstanding Equity
Awards at Fiscal Year-End Table that
would include expanded disclosure
regarding holdings of previously
awarded stock, options and similar
instruments, which would include the
value of stock and other similar
incentive plan awards that had not
vested;
• Require additional narrative
disclosure addressing the material terms
of defined benefit and defined
contribution plans and other posttermination compensation
arrangements; and
344 Current Item 402(a)(2) of Regulation S–B
requires compensation disclosure for all individuals
serving as the small business issuer’s chief
executive officer and the small business issuer’s
four other highest paid officers other than the chief
executive officer.
345 Current Item 402(b)(1) of Regulation S–B
requires disclosure of compensation of the named
executive officers for each of the last three fiscal
years, and narrative disclosure is not currently
required to accompany the Summary Compensation
Table, however the proposed narrative disclosure
would address some elements of compensation
currently required in tables in current Item 402 of
Regulation S–B.
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• Require a new Director
Compensation Table.
Item 402 of Regulation S–B would not
include the following disclosures that
would be required by proposed Item 402
of Regulation S–K:
• Compensation Discussion and
Analysis;
• A third fiscal year of Summary
Compensation Table disclosure; and
• The supplementary Grants of
Performance-Based Awards Table and
Grants of All Other Equity Awards
Table, the Option Exercises and Stock
Vested Table, the Retirement Plan
Potential Annual Payments and Benefits
Table, and the Nonqualified Defined
Contribution and Other Deferred
Compensation Plans Table and the
separate Potential Payments Upon
Termination or Change-in-Control
narrative section, while providing a
general requirement to discuss the
material terms of retirement plans and
the material terms of contracts
providing for payment upon a
termination or change in control.
The application of Item 1.01 of Form
8–K to compensatory arrangements has
raised concerns that real-time disclosure
may be required for executive
compensation events that are not
unquestionably or presumptively
material, and that are more
appropriately disclosed, if at all, in the
company’s proxy statement for its
annual meeting of shareholders. The
proposed amendments to Items 1.01 and
5.02 of Form 8–K would focus real-time
disclosure on compensation
arrangements with executives and
directors that we believe are
unquestionably or presumptively
material, and eliminate the obligation to
file Form 8–K with respect to other
compensatory arrangements.
Current Item 404 of Regulation S–K
was adopted to consolidate various
provisions previously adopted in a
piecemeal fashion. The proposals would
revise Item 404 of Regulation S–K to
streamline and modernize it, while
making it more principles-based.
Indebtedness of related persons is
limited by the Sarbanes-Oxley Act, and
the disclosure requirement regarding
indebtedness of related persons would
be combined into the requirement
regarding other transactions with related
persons. This consolidated disclosure
requirement would apply to an
expanded group of related persons.
While the current principles for
disclosure would be retained, the
proposal would increase the $60,000
threshold for disclosure currently in
paragraphs (a) and (c) of Item 404 to
$120,000 and eliminate or reduce the
scope of certain instructions delineating
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what transactions are reportable or
excludable. Existing disclosure
requirements in Item 404 regarding
transactions with promoters would
slightly expanded to apply when a
company had a promoter over the past
five years, as well as to require
analogous disclosure regarding
transactions with control persons of a
shell company. With respect to
registered investment companies and
business development companies,
proposed amendments to Items 22(b)(7),
22(b)(8), and 22(b)(9) of Schedule 14A
and to Forms N–1A, N–2, and N–3
would similarly increase to $120,000
the current $60,000 threshold for
disclosure of certain interests,
transactions, and relationships of each
director (and, in the case of Items
22(b)(7), 22(b)(8), and 22(b)(9) of
Schedule 14A, each nominee for
election as director) who is not or would
not be an ‘‘interested person’’ of the
fund within the meaning of Section
2(a)(19) of the Investment Company Act
(and their immediate family members).
In addition, Form N–2 would require
business development companies to
include the compensation disclosure
required by Item 402 of Regulation S–
K, as we propose to amend it.
The proposals also would replace the
disclosure requirement for certain
business relationships currently in Item
404(b) of Regulation S–K, which focuses
on relationships relevant to director
independence, with requirements for
director independence disclosure
discussed below. Under the proposals,
the disclosure currently required by the
certain business relationship disclosure
requirement may be required by the
consolidated disclosure requirement
regarding transactions and relationships
with related persons in Item 404(a) of
Regulation S–K. Proposed Item 404(b) of
Regulation S–K would require
disclosure regarding the company’s
policies for the review, approval or
ratification of transactions with related
persons.
We propose similar amendments to
Item 404 of Regulation S–B, which
would result in a more detailed related
person transaction disclosure
requirement than currently exists in
Item 404 of Regulation S–B. However,
unlike Item 404 of Regulation S–K, Item
404 of Regulation S–B would not
require disclosure regarding the
company’s policies for the review,
approval or ratification of transactions
with related persons. We propose to
retain the requirement that transactions
occurring within the last two years must
be disclosed under Item 404 of
Regulation S–B, whereas Item 404 of
Regulation S–K requires disclosure for
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the last fiscal year, unless the
information is included in a Securities
Act or Exchange Act registration
statement, where information as to the
last three fiscal years is required.
We propose to adopt a new disclosure
requirement in Item 407 of Regulations
S–K and S–B that would consolidate
disclosures required in several places
throughout our rules addressing director
independence, board committee
functions and other related corporate
governance matters. This proposed Item,
which would require new disclosure
regarding independence of members of
the board of directors and board
committees, is intended to enhance
disclosures regarding independence
required by corporate governance listing
standards of the national securities
exchanges and the inter-dealer
quotation systems of a national
securities association.346
To the extent that shares beneficially
owned by named executive officers,
directors and director nominees are
used as collateral for loans, these shares
are subject to risks or contingencies that
do not apply to other shares beneficially
owned by these persons. These
circumstances have the potential to
influence management’s performance
and decisions. As a result, we believe
that the existence of these securities
pledges could be material to
shareholders and should be disclosed.
We therefore propose to amend Item 403
of Regulation S–K and Regulation S–B
to require this disclosure as well as
disclosure regarding directors’
beneficial ownership of qualifying
shares.
We propose to require that most of the
information that is required by these
amendments be provided in plain
English in Exchange Act reports or in
proxy or information statements
incorporated by reference into those
reports. The plain English requirements
would make these documents easier to
understand.
The proposed changes to Item 402 of
Regulation S–K, Items 402 and 404 of
Regulation S–B, and Form 8–K would
affect all companies reporting under
Sections 13(a) and 15(d) of the Exchange
Act, other than registered investment
companies. The proposed changes to
Item 404 of Regulation S–K would affect
all companies reporting under Sections
13(a) and 15(d) of the Exchange Act,
other than registered investment
companies, and all companies,
including registered investment
346 We also propose conforming revisions to Item
22(b) relating to the independence of members of
nominating and audit committees of investment
companies.
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companies, filing proxy or information
statements with respect to the election
of directors. The proposed changes to
Items 402 and 404 of Regulation S–K
and Regulation S–B would also affect
additional companies filing Securities
Act and Exchange Act registration
statements. The proposed changes to
Item 22(b) of Schedule 14A will affect
business development companies and
registered investment companies filing
proxy statements with respect to the
election of directors. The proposed
changes to Form N–1A will affect openend investment companies registering
with the Commission on Form N–1A.
The proposed changes to Form N–2 will
affect closed-end investment companies
(including business development
companies) registering with the
Commission on Form N–2. The
proposed changes to Form N–3 will
affect separate accounts, organized as
management investment companies and
offering variable annuities, registering
with the Commission on Form N–3.
C. Benefits
As discussed, the overall goal of the
executive and director compensation
proposals would be to provide investors
with clearer, better organized and more
complete disclosure regarding the mix,
size and incentive components of
executive and director compensation.
This goal would be accomplished by
eliminating some tables and other
disclosures that we believe may no
longer be useful to investors, revising
other tables so that they are more
informative, and requiring new tabular
and new quantitative estimate
disclosure for retirement plans and
similar benefits and director
compensation. The proposals would
require enhanced narrative disclosure,
in the form of a Compensation
Discussion and Analysis section and
narrative disclosure accompanying the
tables, to explain the significant factors
underlying the compensation decisions
reflected in the tabular data. The
proposals also would require companies
to report the total amount of
compensation for named executive
officers and directors, and provide
important context to the disclosure of
total compensation.
Improved disclosure under the
proposals of certain forms of
compensation, such as stock-, optionand incentive plan-based compensation,
as well as retirement and other postemployment compensation, combined
with the ability of investors to track the
elements of executive and director
compensation and the relative weights
of those elements over time (and the
reasons why companies allocate
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compensation in the manner that they
do), would enable investors to make
comparisons both within and across
companies. A presentation facilitating
the comparability and different
elements of compensation in different
companies should make it easier for
investors to analyze both the manner of
compensation across companies and the
quality of disclosure of compensation
across companies. Disclosure of total
compensation would benefit investors
by reducing the need to make individual
computations in order to assess the size
of current compensation. Further,
improved executive and director
compensation disclosure would
enhance investors’ understanding of this
use of corporate resources and the
actions of boards of directors and
compensation committees in making
decisions in this area.347 Particularly
with respect to the proxy statement for
the annual meeting at which directors
are elected, this improved disclosure
would provide better information to
shareholders for purposes of evaluating
the actions of the board of directors in
fulfilling its responsibilities to the
company and its shareholders.
We believe that the extent to which
increased transparency and
completeness in executive and director
compensation disclosure would result
in broader benefits depends at least in
part on the extent to which current
executive and director compensation
practices are aligned with the interests
of investors as reflected in their
investment and voting decisions. Any
changes to a company that might occur,
including changes in corporate
governance, changes in control, changes
in the employment of particular
executives or other changes could
depend to some extent on the degree to
which improved transparency in
executive and director compensation
would affect investors’ decision-making
with respect to that company.
Improved transparency in executive
and director compensation under these
proposals could have other benefits in
terms of the allocative efficiency of
affected corporations with regard to the
use of resources for executive
compensation relative to other corporate
needs, as well as improvements in
efficiency of managerial labor markets.
Benefits such as these depend on the
extent to which the proposals, including
requirements to disclose a total amount
of compensation and more detail
regarding compensation policies, could
347 For a discussion of the debate concerning
board of directors and managerial decision-making
in the area of executive compensation, see, e.g.,
Steven M. Bainbridge, Executive Compensation:
Who Decides?, 83 Tex. L. Rev. 1615 (2005).
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alter existing policies or practices in
these areas. We emphasize that we are
not seeking to foster any given
directional or other impacts. Our
objective is to increase transparency to
enable decision-makers to make more
informed decisions, which could result
in different policies or practices or
increase investor confidence in existing
policies or practices.
The proposed amendments to Form
8–K would facilitate shareholder and
investor access to real-time disclosure of
public companies significant personnel
and compensation decisions by focusing
this disclosure only on what we believe
are the most important compensatory
arrangements with executive officers
and directors. This information would
be filed pursuant to Item 5.02(e) of Form
8–K. To find this information,
shareholders and investors no longer
would need to examine multiple Item
1.01 disclosures relating to other
actions. Companies would also be
relieved of obligations to quickly report
arguably less important compensation
information on Form 8–K.
The proposed amendments to Item
404 would provide investors with more
complete disclosure of related person
transactions and director independence,
and new disclosure regarding a
company’s policies and procedures for
the review, approval or ratification of
relationships with related persons.
These proposals would enhance
investors understanding of how
corporate resources are used in related
person transactions, and provide
improved information to shareholders
for purposes of better evaluating the
actions of the board of directors and
executive officers in fulfilling their
responsibilities to the company and its
shareholders.
In addition, by combining similar
provisions of current Item 404 into a
single combined disclosure
requirement, the proposals would
reduce confusion regarding the
disclosure required when more than one
of the item’s current provisions applies
to a relationship. Improved corporate
governance disclosure in proposed Item
407 would provide investors with better
organized and more complete
information regarding the independence
of members of the board of directors. In
addition, companies would benefit from
having one disclosure item to satisfy in
making required corporate governance
disclosures. The proposed amendments
to Item 403 of Regulation S–K and
Regulation S–B would provide investors
with disclosure of pledges of the
securities beneficially owned by
management and directors and full
disclosure of beneficial ownership by
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directors, including directors’ qualifying
shares.
Proposed changes to Items 22(b)(7),
22(b)(8) and 22(b)(9) of Schedule 14A
and to Forms N–1A, N–2, and N–3
would decrease the disclosure burden
imposed on registered investment
companies by increasing the threshold
for disclosure of certain interests,
transactions, and relationships of each
director (and, in the case of Items
22(b)(7), 22(b)(8), and 22(b)(9) of
Schedule 14A, each nominee for
election as director) who is not or would
not be an ‘‘interested person’’ of the
fund within the meaning of Section
2(a)(19) of the Investment Company Act
(and their immediate family members).
Finally, presentation in plain English
would facilitate investor understanding
of most of the matters contemplated by
our proposals.
The benefits of clearer, more useful
disclosure are difficult to quantify.
D. Costs
In our view, the proposed revisions to
the executive officer and director
compensation disclosure requirements
would increase the costs of complying
with the Commission’s rules. The
proposed revisions to the related person
transaction, director independence and
corporate governance disclosure
requirements would generally not
increase costs. We further believe that
the costs related to preparing required
disclosure in plain English would be
short-term costs arising mainly in the
first two years of implementation.348
Increased costs under the proposals
would largely impact companies
required to comply with the proposals;
any net increase in costs would
ultimately be borne by shareholders of
those companies. If our assumptions
regarding these costs and current
practices are not correct or complete,
then costs may prove to be higher.
We believe that compliance with
these proposals would, on balance, be
more costly for companies than
compliance with the existing disclosure
requirements, with the highest
incremental annual costs occurring
principally in the first two years as
companies and their advisors would
determine how best to compile and
report information in response to new or
expanded disclosure requirements.
The improved quantitative and
textual disclosure regarding executive
and director compensation that we are
proposing would incrementally increase
348 The proposed plain English requirements
would require both the rewriting of existing
disclosures in plain English, as well as drafting new
disclosures in plain English, such as Compensation
Discussion and Analysis.
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costs for companies in several ways as
a result of the new or expanded
requirements. First, we propose that
companies provide a Compensation
Discussion and Analysis involving a
discussion and analysis of material
factors underlying compensation
decisions reflected in the tabular
presentations.349 Second, we propose to
require narrative disclosure to
accompany tabular presentations so that
the data included in the tables may be
understood in context. Third, we
propose to expand disclosure regarding
compensation-related equity-based and
other plan-based holdings, as well as
retirement and similar plans. Finally,
we propose a director compensation
table that would require more detailed
information regarding director
compensation than is specified in the
current narrative disclosure
requirement.350 Each of these proposed
revisions would seek to elicit more
complete and clearer information than
is currently required under existing
rules.
While the Summary Compensation
Table as proposed to be revised would
require reporting of the grant date fair
value of stock-based and option-based
awards under the proposals, we do not
believe that this change would increase
costs for companies, because the
computation of the grant date fair values
of stock, options and similar
instruments already is required for
financial statement purposes as a result
of the implementation of FAS 123R.
349 The Compensation Discussion and Analysis,
unlike the current Compensation Committee Report
and the Performance Graph, but like all of the rest
of the current compensation disclosure, would be
considered filed and as such would be part of the
documents for which certifications apply. The
release adopting our certification requirements
discussed the costs and benefits of the requirements
as follows:
The new certification requirement may lead to
some additional costs for issuers. The new rules
require an issuer’s principal executive and financial
officers to review the issuer’s periodic reports and
to make the required certification. To the extent that
corporate officers would need to spend additional
time thinking critically about the overall context of
their company’s disclosure, issuers would incur
costs (although investors would benefit from
improved disclosure). The certification requirement
creates a new legal obligation for an issuer’s
principal executive and financial officers, but does
not change the standard of legal liability * * *
[T]he new rules are likely to provide significant
benefits by ensuring that information about an
issuer’s business and financial condition is
adequately reviewed by the issuer’s principal
executive and financial officers * * * Conversely,
the new rule are likely to provide significant
benefits by ensuring that information about an
issuer’s business and financial condition is
adequately reviewed by the issuer’s principal
executive and financial officers.
Certification Release, at Section VII.
350 See current Item 402(f) of Regulation S–B and
Item 402(g) of Regulation S–K.
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Companies may incur additional costs,
however, in determining incremental
changes in the actuarial value of
retirement benefits for the purposes of
reporting such compensation in the
Summary Compensation Table. Costs
may also arise from the reporting of
other compensation in the All Other
Compensation Column of the Summary
Compensation Table. We do not believe
that the addition of a ‘‘Total’’ column to
the Summary Compensation Table in
and of itself would increase costs,
because existing disclosure
requirements already mandate the
disclosure of all compensation, and the
mechanical process of adding up
disclosure amounts would not be
significant. Additional costs may be
incurred in preparing and presenting
required disclosures regarding up to
three highly paid non-executive
employees, retirement benefits, deferred
compensation and post-termination or
change in control payments to the
extent that information regarding these
matters is not currently collected in a
way that would facilitate disclosure
under the proposals. In addition,
because named executive officers would
be based on total compensation rather
than salary and bonus, some companies
may need to track more employees to
determine which are the most highly
compensated.
Under the proposals regarding Form
8–K, disclosure regarding executive and
director arrangements and other plans
that would no longer be required to be
reported within four days under Item
1.01 of Form 8–K would be required to
be disclosed by way of the exhibit filing
requirements on at least a quarterly
basis. To the extent that a reduction in
timeliness of this information would
reduce its value to investors, the
proposals may impose costs on
investors.
We believe that there would not be a
significant increase in the cost of
complying with the related person
transaction disclosure requirement. The
proposals may increase the cost of
complying with this disclosure
requirement by eliminating or reducing
the scope of certain instructions and by
expanding the group of related persons
covered to include additional
‘‘immediate family members’’ and also,
in the case of indebtedness transactions,
significant shareholders.351 Similarly,
with respect to registered investment
companies and business development
351 Significant shareholders are those identified
under proposed Instruction 1.b.(i) to Item 404 of
Regulation S–K, that is, any security holder who is
known to the registrant to own of record or
beneficially more than five percent of any class of
the registrant’s voting securities.
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companies, proposed amendments to
Items 22(b)(7), 22(b)(8), and 22(b)(9) of
Schedule 14A and to Forms N–1A, N–
2, and N–3 would increase to $120,000
the current $60,000 threshold for
disclosure of certain interests,
transactions, and relationships of each
director (and, in the case of Items
22(b)(7), 22(b)(8), and 22(b)(9) of
Schedule 14A, each nominee for
election as director) who is not or would
not be an ‘‘interested person’’ of the
fund within the meaning of Section
2(a)(19) of the Investment Company Act
(and their immediate family members).
Since these forms already require such
disclosure using the $60,000 threshold,
we do not believe the proposals would
impose additional costs.
Proposed Item 404(b) of Regulation S–
K would introduce new costs by
imposing new disclosure requirements
on companies regarding their policies
for review, approval or ratification of
related person transactions. In order to
comply with their policies for the
review, approval or ratification of
related person transactions or the
determination of executive and director
compensation we understand that
companies would incur costs of
collecting the type of information that
would be required to be disclosed.
These costs would be higher to the
extent companies do not already collect
this information either pursuant to their
corporate governance policies or
through directors and officers’
questionnaires. The proposed rules
would not require companies to create
new policies for review, approval or
ratification of relationships with related
persons or the determination of
executive and director compensation;
however, to the extent that companies
do create new policies that require the
collection of different or additional
information, they may incur
incremental costs.
The proposed disclosures regarding
director independence are similar to
existing disclosure requirements under
the proxy rules regarding the
independence of directors who are
members of the company’s audit and
nominating committees. Thus, for
companies that are subject to the proxy
rules, the task of complying with the
proposed disclosure requirement
regarding director independence could
be performed by the same person or
group of persons responsible for
compliance under the current rules.
Because the current rules already
require companies subject to the proxy
rules to collect and disclose information
about the independence of directors
who serve on the audit and nominating
committees, this proposed disclosure
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should not impose significant new costs
for the collection of information by
companies that are subject to the proxy
rules. The new disclosure requirement
regarding director and committee
member independence may require
disclosure of additional relationships
with related persons. Additional costs
may be incurred in seeking this
information. However, such costs are
limited by the extent to which
companies already identify and track
the relationships that may be required to
be disclosed for the purposes of
complying with existing disclosure
requirements or corporate governance
listing standards.
We believe that, overall, the costs
noted above that are associated with the
proposed disclosure requirements for
related person transactions and director
independence will be offset by cost
decreases associated with narrowing the
scope of other disclosure requirements
under the proposal. In this regard, we
believe that companies will generally be
required to provide an amount of
information that is comparable to what
is currently required by our rules, but
under the proposals the information
regarding these matters would be
presented in a manner that recognizes
recent changes such as the imposition of
corporate governance listing standards
at the major markets.
Our plain English proposal would
require that companies use a clear
writing style to present the information
about executive and director
compensation, related person
transactions, beneficial ownership and
some corporate governance matters that
would be required to be disclosed in
Exchange Act reports such as annual
reports on Forms 10–K or 10–KSB. We
believe the proposed rules, if adopted,
would result in a short-term increase in
costs for companies as they rewrite the
information required to be included in
annual reports or incorporated by
reference from proxy or information
statements, but few additional costs
after the first year or two of
implementation, as companies become
familiar with the organizational,
language, and document structure
changes necessary to comply with these
proposals. Additional costs, if any,
should be one-time or otherwise shortterm.
We believe that there would be little,
if any, increase in the cost of complying
with the beneficial ownership rule
proposals. A company would be
required to disclose named executive
officer, director and director nominee
pledges of securities, and directors’’ full
beneficial ownership of equity
securities, including directors qualifying
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shares. The company could inquire as to
this information in questionnaires it
already circulates to the company’s
officers and directors.
For purposes of the Paperwork
Reduction Act, we have estimated the
annual incremental increase in the
paperwork burden for companies to
comply with our proposed collection of
information requirements to be
approximately 537,792 hours of inhouse company personnel time and to
be approximately $69,794,000 for the
services of outside professionals. These
costs are based on our estimates that the
annual incremental disclosure burden
imposed by the revisions that we
propose today would average 67 hours
per Form 10–K; 35 hours per Form 10–
KSB; 60 hours per Form 10; 30 hours
per Forms 10–SB and SB–2; 60 hours
per Forms S–1, S–4 and S–11; and 1.675
hours per Form N–2. We estimate that
the proposed amendments to Item 22(b)
of Schedule 14A and the proposal to
increase to $120,000 the current $60,000
threshold for disclosure of certain
interests, transactions, and relationships
of each director in Forms N–1A, N–2,
and N–3 will not impose an annual
incremental disclosure burden. These
estimated costs include an estimated
reduction in costs attributable to current
reports on Form 8–K of approximately
6,458 hours of company personnel time
and by a cost of approximately $645,750
for the services of outside professionals,
based on an estimate that 1,722 fewer
Form 8–Ks would be filed because of
more focused current reporting of
compensation transactions. Based on
these estimates for the purposes of the
Paperwork Reduction Act and assuming
that the cost of in-house company
personnel time is $175, the total
estimated incremental costs of the
proposals would be approximately
$163,908,000. We have not quantified
other costs which might arise as a result
of implementation of the rules,
especially to the extent that such costs
could arise as a result of changes in
policies, practices or other behavior
attributable to the proposed disclosure
requirements. These costs could be
more than those estimated for the
purposes of the Paperwork Reduction
Act.
E. Request for Comment
• We solicit quantitative data to assist
our assessment of the benefits and costs
of increased disclosure resulting from:
(1) Requiring narrative disclosure
regarding executive and director
compensation in the form of
Compensation Discussion and Analysis
and narrative disclosures accompanying
the tabular presentations, and
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eliminating the Compensation
Committee Report and Performance
Graph; (2) expanding disclosure, in a
tabular format, of director
compensation; and (3) requiring the
more focused and in some cases
expanded tabular presentation of
executive compensation. We also solicit
such data regarding the benefits and
costs of any other aspects of the
executive compensation disclosure
proposals.
• We solicit quantitative data to assist
our assessment of the benefits and costs
of revising the requirements for current
reporting of executive and director
compensation arrangements on Form 8–
K to focus on those arrangements which
are unquestionably material.
• We solicit quantitative data to assist
our assessment of the benefits and costs
of increased disclosure resulting from:
(1) Expanding the group of related
persons covered by current Item 404(a)
to include additional ‘‘immediate family
members’’; (2) expanding the required
relationship disclosure to include
significant shareholders as related
persons who may have reportable
indebtedness relationships; and (3)
requiring disclosure of a registrant’s
policies for approval of relationships
involving related persons and the
independence of directors. We also
solicit such data regarding the benefits
and costs of any other aspects of the
related person transactions disclosure
requirements.
• Do companies currently have
policies and procedures regarding the
review, approval, authorization or
ratification of relationships with related
persons? If not, what cost would a
company incur to institute such
policies?
• Are there any public companies
that currently provide information to
the public regarding their policies and
procedures related to the review,
approval, authorization or ratification of
relationships with related persons? If so,
is there any information available as to
whether investors find this information
to be useful?
• We solicit quantitative data to assist
our assessment of the benefits and costs
associated with increased disclosure
and the proposed application of plain
English principles to the disclosure
resulting from most of the proposed
requirements.
• What are the direct and indirect
costs associated with the proposals?
• What are the costs in the first year
of compliance versus subsequent years?
• We solicit comments on the degree
to which companies already collect the
information that the proposed rules
would require to be disclosed.
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Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 / Proposed Rules
X. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition and Capital
Formation
Exchange Act Section 23(a)(2) 352
requires us, when adopting rules under
the Exchange Act, to consider the
impact that any new rule would have on
competition. In addition, Section
23(a)(2) prohibits us from adopting any
rule that would impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
Furthermore, Securities Act Section
2(b),353 Exchange Act Section 3(f) 354
and Investment Company Act Section
2(c) 355 require us, when engaging in
rulemaking where we are required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action will promote efficiency,
competition, and capital formation.
The proposed amendments to
Regulations S–K and S–B, to Items 8
and 22(b) of Schedule 14A, and to
Forms N–1A, N–2, and N–3 are
intended to improve the completeness
and clarity of executive compensation
and related person transaction
disclosure available to investors and the
financial markets. These proposals
would enhance investors’
understanding of how corporate
resources are used, and enable
shareholders to better evaluate the
actions of the board of directors and
executive officers in fulfilling their
responsibilities.
The proposed amendments to Form
8–K are intended to facilitate the ability
of investors and shareholders to access
real-time disclosure of public
companies’ employee compensation
events that are unquestionably or
presumptively material by requiring this
disclosure only for the compensatory
agreements with specified executive
officers. To find this information,
shareholders and investors no longer
would need to examine multiple Form
8–K disclosures relating to other
executive officers or other material nonordinary course definitive agreements.
The proposals to expand and
consolidate into one item the director
independence and related corporate
governance disclosure requirements in
proposed Item 407 of Regulation S–K
would improve shareholders’ and
investors’ understanding of the
composition and functions of the board
352 15
U.S.C. 78w(a)(2).
U.S.C. 77b(b).
354 15 U.S.C. 78c(f).
355 15 U.S.C. 80a–2(c).
353 15
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of directors and board committees.
Proposed amendments to beneficial
ownership reporting requiring
disclosure of pledged securities and
director qualifying shares are intended
to improve the disclosure regarding
security holdings of directors and
executive officers.
The proposal to require most of the
information required in these proposals
to be written in plain English is
intended to make Exchange Act reports
and proxy or information statements
incorporated by reference in those
reports easier to understand.
Thus, the proposed rules would
enhance existing reporting requirements
by providing more effective material
disclosure to investors in a timely
manner. We anticipate that these
proposals would improve investors’’
ability to make informed investment
and voting decisions and, therefore lead
to increased efficiency and
competitiveness of the U.S. capital
markets.
Because only companies subject to the
reporting requirements of Sections 13
and 15 of the Exchange Act, and
companies filing registration statements
under the Securities Act, would be
required to make the proposed
disclosures required by Items 402, 404
and 407, competitors not in those
categories could gain an informational
advantage. However, with respect to
executive compensation, as under
current Item 402, registrants would not
be required to disclose target levels with
respect to specific quantitative or
qualitative performance-related factors,
or any factors or criteria involving
confidential commercial or business
information, the disclosure of which
would have an adverse effect on the
company. Notwithstanding this
exception for competitively sensitive
information, competitors could
potentially gain additional insight into
the executive compensation policies of
companies through disclosure required
in Compensation Discussion and
Analysis and in other portions of the
required disclosure. Further, the
availability of more broad-based
compensation disclosure may provide
additional information to be used by
competitors in recruiting executive
talent.
We request comment on whether the
proposals, if adopted, would promote
efficiency, competition, and capital
formation or have an impact or burden
on competition. Commenters are
requested to provide empirical data and
other factual support for their views, if
possible.
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XI. Initial Regulatory Flexibility Act
Analysis
This Initial Regulatory Flexibility Act
Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates
to proposed revisions to the rules and
forms under the Securities Act and
Exchange Act that seek to improve the
clarity and completeness of companies’
disclosure of the compensation earned
by the principal executive officer,
principal financial officer,356 other
highly paid executive officers and all
members of the board of directors, and
of related person transactions. These
proposed revisions include revising the
executive and director compensation
disclosure requirements, modifying our
rules so that only elements of
compensation that are unquestionably
or presumptively material to investors
must be disclosed in current reports of
Form 8–K, streamlining and
modernizing disclosure requirements
regarding related person transactions,
adding disclosure regarding pledges of
securities beneficially owned by
executive officers and directors and
regarding directors’ qualifying shares,
consolidating corporate governance
disclosure requirements and expanding
disclosure regarding the independence
of the board of directors, as well as
requiring that all disclosure required by
the proposed items to be provided in
plain English.
A. Reasons for the Proposed Action
Since the enactment of the Securities
Act and the Exchange Act, the
Commission has on a number of
occasions explored the best methods for
communicating clear, concise and
meaningful material information about
executive and director compensation
and relationships with the issuer. With
regard to compensation, at different
times, the Commission has adopted
rules mandating narrative, tabular, and
combinations of narrative and tabular
disclosure as the best method for
presenting compensation disclosure in a
manner that is concise and useful to
investors. From time to time, the
Commission has reconsidered executive
and director compensation information
requirements in light of changing trends
in executive compensation, or due to
concerns about the usefulness of
disclosure elicited under then
applicable rules. Most recently, in 1992,
the Commission proposed and adopted
amendments to the disclosure rules that
moved away from the mostly narrative
disclosure approach adopted in 1983 to
356 The principal financial officer is not specified
as a named executive officer in Item 402 of
Regulation S–B.
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formatted tables which sought to
capture the various elements of
compensation and promote
comparability from year to year and
from company to company.
While this tabular approach remains a
sound basis for disclosure, its
sometimes inflexible and formatted
nature has, especially in light of the
complexity of and variations in
compensation programs, resulted in
some cases in disclosure that does not
clearly inform investors as to all
elements of compensation,
notwithstanding the express
requirement to do so in the rules.
Accordingly, the proposals under
current consideration seek a broaderbased approach to eliciting executive
compensation disclosure while
retaining comparability.
Form 8–K requires disclosure of the
entry into, amendment of and
termination of material definitive
agreements entered into outside the
ordinary course of business. Under our
current definitions in Regulation S–K,
many agreements regarding executive
compensation are deemed to be material
agreements entered into outside the
ordinary course, and when for purposes
of consistency we adopted those
definitions for use in the expanded
Form 8–K requirements, we
incorporated all of these executive
compensation agreements into the
current Form 8–K disclosure
requirements. Therefore, many
agreements regarding executive
compensation are required to be
disclosed within four business days of
the applicable triggering event. Because
it was not our intent in adopting the
expanded Form 8–K requirements to
make all elements of compensation for
all executive officers potential items of
real-time disclosure, but only to capture
in this area, as in others, events that are
unquestionably or presumptively
material to investors, we believe it is
appropriate to modify our rules so that
only those events must be disclosed on
Form 8–K.
We believe that disclosure of
executive and director compensation is
closely related to disclosure regarding
financial transactions and relationships
involving companies and their directors,
executive officers, significant
shareholders and respective immediate
family members. These disclosure
requirements have historically been
interconnected, given that relationships
among these persons and the company
can include transactions that involve
compensation or analogous features.
Such disclosure also represents material
information in evaluating the overall
relationship with a company’s executive
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officers and directors. Further, this
disclosure provides material
information regarding the independence
of directors. The current related party
transaction disclosure requirements
were adopted piecemeal over the years
and were combined in one disclosure
requirement beginning in 1982. In light
of the many developments, including
the increasing focus on corporate
governance and director independence,
we believe it is necessary to revise the
rule. We propose to replace the current
requirement for disclosure about
relationships that can affect director
independence with a narrative
explanation of the independence status
of directors under a company’s
independence policies for the majority
of the board and for the nominating,
audit and compensation committees.
We also propose to consolidate this and
other requirements regarding director
independence, board committees and
other corporate governance matters in a
new disclosure Item. In addition, we are
also proposing corresponding changes
to items in our registration forms and
proxy and information statements filed
by registered investment companies and
business development companies that
impose requirements to disclose certain
interests, transactions, and relationships
of each director or nominee for election
as director who is not or would not be
an ‘‘interested person’’ of the fund
within the meaning of Section 2(a)(19)
of the Investment Company Act (and
their immediate family members).
To the extent that shares beneficially
owned by named executive officers,
directors and director nominees are
pledged, these shares are subject to risks
and contingencies that do not apply to
other shares beneficially owned by these
persons. These circumstances have the
potential to influence management’s
performance and decisions, and for this
reason, it appears that the existence of
these securities pledges could be
material to shareholders and should be
disclosed under proposed revisions to
Item 403 of Regulations S–K and S–B.
An exclusion from the beneficial
ownership disclosure requirement for
directors’’ qualifying shares is also
proposed to be removed.
In order for most of these amended
requirements to result in disclosure that
is clear, concise and understandable for
investors when responsive disclosure is
included in Exchange Act reports or
incorporated by reference from proxy or
information statements, we propose to
add Exchange Act rules to require that
the disclosure regarding executive and
director compensation, beneficial
ownership, related person transactions
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and most corporate governance matters
be provided in plain English.
B. Objectives
The overall goal of the rule proposals
is to provide investors with a clearer
and more complete picture of executive
and director compensation, related
person transactions and corporate
governance matters. We believe that the
proposals would:
• Confirm our current requirement
that all elements of compensation must
be disclosed;
• Retain the comparability of
executive and director compensation
while also providing material
qualitative information about the
context in which compensation is
granted, awarded and earned;
• Reorganize and modify the type of
compensation information that must be
disclosed in current reports;
• Streamline and modernize the
related person transaction disclosure
requirements, while making them more
principles-based;
• Update the disclosure requirements
regarding director independence to
reflect current listing standards and
consolidate all such disclosure under a
single disclosure item so that it is easier
to locate; and
• Facilitate more informed voting
decisions in the face of complex
information about directors, executive
officers and corporate governance, by
requiring that most of the information
required by these proposals be written
in plain English.
C. Legal Basis
We are proposing the amendments
pursuant to Sections 3(b), 6, 7, 10 and
19(a) of the Securities Act; Sections
10(b), 12, 13, 14(a), 15(d), and 23(a) of
the Exchange Act; Sections 8, 20(a),
24(a), 30, and 38 of the Investment
Company Act; and Section 3(a) of the
Sarbanes-Oxley Act of 2002.
D. Small Entities Subject to the
Proposed Amendments
The proposals would affect small
entities, the securities of which are
registered under Section 12 of the
Exchange Act or that are required to file
reports under Section 15(d) of the
Exchange Act. The proposals also would
affect small entities that file, or have
filed, a registration statement that has
not yet become effective under the
Securities Act and that has not been
withdrawn. Securities Act Rule 157 357
and Exchange Act Rule 0–10(a) 358
357 17
358 17
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CFR 240.0–10(a).
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define an issuer to be a ‘‘small business’’
or ‘‘small organization’’ for purposes of
the Regulatory Flexibility Act if it had
total assets of $5 million or less on the
last day of its most recent fiscal year.
We believe that the proposals would
affect small entities that are operating
companies. We estimate that there are
approximately 2,500 issuers, other than
investment companies, that may be
considered small entities. An
investment company is considered to be
a ‘‘small business’’ if it, together with
other investment companies in the same
group of related investment companies,
has net assets of $50 million or less as
of the end of its most recent fiscal
year.359 We believe that the proposals
would affect small entities that are
investment companies. We estimate that
there are approximately 240 investment
companies that may be considered small
entities.
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E. Reporting, Recordkeeping and Other
Compliance Requirements
The proposed amendments to Item
402 of Regulation S–K would expand
some existing disclosure requirements,
and consolidate or eliminate others. The
proposed amendments to Item 402 of
Regulation S–B would require less
extensive disclosure for small business
issuers than would be required for
companies complying with Item 402 of
Regulation S–K. Under the proposals,
the scope and presentation of
information in Item 402 of Regulation
S–B would differ in a number of
significant ways from Item 402 of
Regulation S–K. Item 402 of Regulation
S–B would:
• Limit the named executive officers
for whom disclosure would be required
to a smaller group, consisting of the
principal executive officer and the two
other highest paid executive officers;
• Require that the Summary
Compensation Table disclose the two
most recent fiscal years and that
narrative disclosure accompany the
Summary Compensation Table;
• Provide a higher threshold for
separate identification of categories of
‘‘All Other Compensation’’ in the
Summary Compensation Table;
• Require the Outstanding Equity
Awards at Fiscal Year-End Table;
• Require additional narrative
disclosure addressing the material terms
of defined benefit and defined
contribution plans and other posttermination compensation
arrangements; and
• Require the Director Compensation
Table.
359 17
360 Proposed Item 404(a) of Regulation S–K only
includes $120,000 as the threshold.
CFR 270.0–10(a).
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Item 402 of Regulation S–B would not
include the following disclosures that
would be required by proposed Item 402
of Regulation S–K:
• Compensation Discussion and
Analysis;
• Information regarding two
additional executives;
• The third fiscal year of Summary
Compensation Table disclosure; and
• The supplementary Grants of
Performance-Based Awards Table and
Grants of All Other Equity Awards
Table, the Option Exercises and Stock
Vested Table, the Retirement Plan
Potential Annual Payments and Benefits
Table, and the Nonqualified Defined
Contribution and Other Deferred
Compensation Plans Table and the
separate Potential Payments Upon
Termination or Change-in-Control
narrative section, while providing a
general requirement to discuss the
material terms of retirement plans and
the material terms of contracts
providing for payment upon a
termination or change in control.
As a result, the proposed amendments
to Item 402 of Regulation S–B would not
result in the same level of incremental
increase in costs or burdens as would
the requirements of proposed
amendments to Item 402 of Regulation
S–K.
The proposed amendments to Item
404 of Regulation S–K and S–B would
decrease the existing related person
transaction disclosure requirement that
companies, including small entities,
must comply with in some respects and
expand it in other respects. The
proposed amendments to Item 404 of
Regulation S–B would potentially
decrease the scope of the related person
transaction disclosure requirement by
changing the $60,000 threshold for
disclosure of related person transactions
to the lesser of $120,000 or one percent
of the average of the small business
issuers’ total assets for the last three
completed fiscal years.360 At the same
time, the proposed amendments to Item
404 of Regulation S–B would increase
the scope of the related person
transaction disclosure requirement by
expanding the group of related persons
covered to include additional
‘‘immediate family members,’’ and in
the case of indebtedness relationships,
significant shareholders. In addition, the
proposals may decrease or increase the
scope of the related person transaction
disclosure requirement by eliminating
or reducing the scope of instructions
that provide bright line tests for whether
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related person transaction disclosure is
required.
Unlike the proposed amendments to
Item 404 of Regulation S–K, the
proposed amendments to Item 404 of
Regulations S–B would not impose an
additional disclosure requirement for
small business issuers, including small
entities, regarding their policies and
procedures for the review, approval or
ratification of relationships with related
persons. The proposed amendments to
Item 404 of Regulation S–B and
proposed Item 407 of Regulation S–B
would require, depending upon the
particular circumstances of a company,
more or less disclosure by changing the
disclosure requirement regarding
director independence.361
Similar to proposed Item 404(a) of
Regulation S–K, proposed amendments
to Items 22(b)(7), 22(b)(8), and 22(b)(9)
of Schedule 14A and to Forms N–1A,
N–2, and N–3 would decrease the scope
of the requirement imposed on
registered investment companies and
business development companies to
disclose certain interests, transactions,
and relationships of each director (and,
in the case of Items 22(b)(7), 22(b)(8),
and 22(b)(9) of Schedule 14A, each
nominee for election as director) who is
not or would not be an ‘‘interested
person’’ of the fund within the meaning
of Section 2(a)(19) of the Investment
Company Act (and their immediate
family members) by increasing to
$120,000 the current $60,000 threshold
for disclosure of such interests,
transactions, and relationships.
The proposed amendments to Item
403 of Regulation S–K and S–B would
require footnote disclosure to the
beneficial ownership table of the
number of shares pledged by named
executive officers, directors and director
nominees and disclosure of directors’’
qualifying shares. This would impose an
additional disclosure requirement on
companies, including small entities.
The proposed plain English rules
applicable to Exchange Act reports and
proxy or information statements
incorporated by reference into Exchange
Act reports would not affect the
substance of disclosures that companies
must make. The proposed plain English
rules would also not impose any new
recordkeeping requirements or require
reporting of additional information.
Other proposed changes to our rules
would decrease the scope of the
disclosure requirements for Form 8–K,
361 As is the case currently, proposed Item 407 of
Regulation S–B would not require compensation
committee interlocks disclosure as would proposed
Item 407 of Regulation S–K. This retains a current
difference between Item 402 of Regulation S–B and
Item 402 of Regulation S–K.
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and thereby result in a reduction in the
number of current reports on Form 8–
K filed each year.
Overall, the proposals are expected to
result in increased costs to all subject
companies, large or small, as follows:
• Incremental increase in costs is
expected with proposed changes to
executive and director compensation
disclosure requirements;
• No incremental increase in costs is
expected from the amendments to the
related person transaction rules and
corporate governance disclosures; and
• Decreased costs are expected as a
result of the proposed revisions to Form
8–K. Because the current proxy rules
require a subject registrant to collect and
disclose information about the
independence of its directors who serve
on the audit or nominating committee of
its board, the proposed disclosure
should not impose on companies
subject to the proxy rules significant
new costs for the collection of
information regarding the independence
of directors. Thus, the task of complying
with the proposed expanded director
independence disclosure in Item 407 of
Regulation S–K or S–B could be
performed by the same person or group
of persons responsible for compliance
under the current rules at a minimal
incremental cost.
Our plain English proposal would
require that companies use a clear
writing style to present the information
about executive and director
compensation, related person
transactions, beneficial ownership and
some corporate governance matters that
would be required to be disclosed in
Exchange Act reports such as annual
reports on Forms 10–K or 10–KSB. We
believe the proposed rules, if adopted,
would result in a short-term increase in
costs for companies as they rewrite the
information required to be included in
annual reports or incorporated by
reference from proxy or information
statements, but few additional costs
after the first year or two of
implementation, as companies become
familiar with the organizational,
language, and document structure
changes necessary to comply with these
proposals. Additional costs, if any,
should be one-time or otherwise shortterm.
For purposes of the Paperwork
Reduction Act, we estimate that with
respect to Form 10–KSB, it would take
issuers 70 additional hours to prepare
the proposed disclosure in year one, 25
additional hours in year two, and 10
additional hours in year three and
thereafter, which results in an average of
35 additional hours over the three year
period. The same estimates would apply
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to preparation of information in the
proxy or information statement that is
then incorporated by reference into the
Form 10–KSB. With regard to persons
other than small business issuers who
would file a Form 10–K, we estimate for
purposes of the Paperwork Reduction
Act that it would take issuers 120
additional hours to prepare the
proposed disclosure in year one, and 55
hours in year two, and 25 hours in year
three and thereafter, which results in an
average of 67 hours over the three year
period. If we assume that a small entity
complies with the disclosure provisions
of Regulation S–B rather than
Regulation S–K and 75% of the burden
would be performed by the company
internally at a cost of $175 per hour and
25% of the burden would be carried by
outside professionals retained by the
company at a cost of $300 per hour, the
average annual cost to comply with the
proposed disclosure requirements in
periodic reports and/or proxy or
information statements would be
approximately $7,219. The extent to
which an additional average compliance
cost of approximately $7,219 per small
entity over a three year period would
constitute a significant economic impact
for small entities would depend on the
relative revenues, costs and allocation of
resources toward compliance with the
Commission’s rules for small entities
both individually and as a group.
For purposes of the Paperwork
Reduction Act, we estimate that with
respect to Form N–2, it would take
business development companies 100
additional hours to prepare the
proposed disclosure in year one, 50
hours in year two and 25 hours in year
three and thereafter, which results in an
average of 58 hours for each business
development company to comply with
the proposed compensation disclosures
that would be required on Form N–2. If
we assume that 25% of the burden
would be borne internally at a cost of
$175 per hour and 75% of the burden
would be carried by outside
professionals retained by the company
at a cost of $300 per hour, the average
annual cost for business development
companies to comply with the proposed
disclosure requirements on Form N–2
would be approximately $15,588. The
extent to which an additional average
compliance cost of approximately
$15,588 per small entity over a three
year period would constitute a
significant economic impact for small
entities would depend on the relative
assets, income, operating expenses and
the allocation of resources toward
compliance with the Commission’s
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rules for small entities both individually
and as a group.
We encourage written comments
regarding this analysis. We solicit
comments as to whether the proposed
amendments could have an effect that
we have not considered. We request that
commenters describe the nature of any
impact on small entities and provide
empirical data to support the extent of
the impact.
F. Duplicative, Overlapping or
Conflicting Federal Rules
We believe that there are no federal
rules that conflict with or completely
duplicate the proposed rules.
G. Significant Alternatives
The Regulatory Flexibility Act directs
us to consider significant alternatives
that would accomplish the stated
objectives, while minimizing any
significant adverse impact on small
entities. In connection with the
proposals, we considered the following
alternatives:
1. Establishing different compliance
or reporting requirements which take
into account the resources available to
smaller entities;
2. The clarification, consolidation or
simplification of disclosure for small
entities;
3. Use of performance standards
rather than design standards; and
4. Exempting smaller entities from
coverage of the disclosure requirements,
or any part thereof.
With regard to Alternative 1, we have
proposed some different compliance or
reporting requirements for small entities
and solicited comments on others. We
nevertheless believe improving the
clarity and completeness of disclosure
regarding executive and director
compensation and related person
transactions requires a high degree of
comparability between all issuers.
Regarding Alternative 2, the
amendments would clarify, consolidate
and simplify the requirements for all
public companies, and some especially
for small entities. Regarding Alternative
3, we believe that design rather than
performance standards are appropriate,
because design standards for small
entities would be necessary to promote
the goal of relatively uniform
presentation of comparable information
for the benefit of investors. Finally,
although we propose to exempt some
information required of larger issuers, a
wholesale exemption for small entities
would not be appropriate because the
proposals are designed to make uniform
the application of the disclosure and
other requirements that would be
amended.
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We note that small business
issuers,362 which is a broader category
of issuers than small entities, in certain
circumstances may provide the
executive compensation and
relationships with related persons and
promoters disclosure specified,
respectively, in Items 402 and 404 of
Regulation S–B, rather than the
corresponding disclosure specified in
Items 402 and 404 of Regulation S–K.
We have proposed disclosure
amendments that would require clear
and straightforward disclosure of
executive compensation, and
relationships with related persons and
promoters, respectively. We have
proposed what we believe to be
appropriate revisions to the small
business issuer reporting requirements
under Regulation S–B, given that small
business issuer compensation structures
are likely to be less complex than those
of registrants that are not small business
issuers. Separate disclosure
requirements for small entities that
would differ from the proposed
reporting requirements of Regulation S–
B would not yield the disclosure we
believe to be necessary to achieve our
disclosure objectives. In particular, we
believe the changes that are reflected in
the proposed amendments to Regulation
S–B would balance the informational
needs of investors in smaller companies
with the burdens imposed on such
companies by the disclosure
requirements.
We have used design rather than
performance standards in connection
with the proposals for two reasons.
First, based on our past experience, we
believe the proposed disclosure would
be more useful to investors if there were
specific informational requirements.
The proposed mandated disclosures are
intended to result in more focused and
comprehensive disclosure. Second, the
specific disclosure requirements in the
proposals would promote more
consistent disclosure among public
companies because they would provide
greater certainty as to the scope of
required disclosure. In addition, specific
disclosure requirements would improve
the Commission’s ability to enforce the
proposed rules. Therefore, amending the
disclosure requirements of Items 402
and 404 of Regulations S–K and
Regulation S–B and Exchange Act Form
8–K, and adopting Item 407 of
Regulation S–K and S–B, appears to be
362 Item 10 of Regulation S–B (17 CFR 228.10)
defines a small business issuer as a registrant that
has revenues of less than $25 million, is a U.S. or
Canadian issuer, is not an investment company, and
has a public float of less than $25 million. Also, if
it is a majority owned subsidiary, the parent
corporation also must be a small business issuer.
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the most effective method of eliciting
the disclosure.
List of Subjects
H. Solicitation of Comment
Reporting and recordkeeping
requirements, Securities, Small
businesses.
We encourage the submission of
comments with respect to any aspect of
this Initial Regulatory Flexibility
Analysis. In particular, we request
comments regarding: (i) The number of
small entity issuers that may be affected
by the proposed revisions; (ii) the
existence or nature of the potential
impact of the proposed revisions on
small entity issuers discussed in the
analysis; and (iii) how to quantify the
impact of the proposed revisions.
Commenters are asked to describe the
nature of any impact and provide
empirical data supporting the extent of
the impact. Such comments will be
considered in the preparation of the
Final Regulatory Flexibility Analysis, if
the proposed revisions are adopted, and
will be placed in the same public file as
comments on the proposed
amendments.
XII. Small Business Regulatory
Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996,363 a rule is ‘‘major’’ if it has
resulted, or is likely to result in:
• An annual effect on the U.S.
economy of $100 million or more;
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment or innovation.
We request comment on whether our
proposals would be a ‘‘major rule’’ for
purposes of the Small Business
Regulatory Enforcement Fairness Act.
We solicit comment and empirical data
on: (a) the potential effect on the U.S.
economy on an annual basis; (b) any
potential increase in costs or prices for
consumers or individual industries; and
(c) any potential effect on competition,
investment or innovation.
XIII. Statutory Authority and Text of
the Proposed Amendments
We are proposing new rules and
amendments pursuant to Sections 3(b),
6, 7, 10, and 19(a) of the Securities Act,
as amended, Sections 10(b), 12, 13, 14,
15(d) and 23(a) of the Exchange Act, as
amended, and Sections 8, 20(a), 24(a),
30 and 38 of the Investment Company
Act of 1940, as amended.
363 Pub.
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L. 104–121, Title II, 110 Stat. 857 (1996).
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17 CFR Part 228
17 CFR Parts 229, 239, 240, 245 and 249
Reporting and recordkeeping
requirements, Securities.
17 CFR Part 274
Investment companies, Reporting and
recordkeeping requirements, Securities.
For the reasons set forth above, we
propose to amend Title 17, Chapter II of
the Code of Federal Regulations as
follows:
PART 228—INTEGRATED
DISCLOSURE SYSTEM FOR SMALL
BUSINESS ISSUERS
1. The authority citation for part 228
continues to read in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll,
78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b–
11, and 7201 et seq.; and 18 U.S.C. 1350.
*
*
*
*
*
2. Amend § 228.201 by revising
Instruction 2 to paragraph (d) to read as
follows:
§ 228.201 (Item 201) Market for Common
Equity and Related Stockholder Matters.
*
*
*
*
*
Instructions to paragraph (d). 1. * * *
2. For purposes of this paragraph, an
‘‘individual compensation arrangement’’
includes, but is not limited to, the following:
A written compensation contract within the
meaning of ‘‘employee benefit plan’’ under
§ 230.405 of this chapter and a plan (whether
or not set forth in any formal document)
applicable to one person as provided under
Item 402(a)(5)(ii) of Regulation S–B
(§ 228.402(a)(5)(ii)).
*
*
§ 228.306
*
*
*
[Removed and Reserved]
3. Remove and reserve § 228.306.
§ 228.401
[Amended]
4. Amend § 228.401 by removing
paragraphs (e), (f) and (g).
5. Revise § 228.402 to read as follows:
§ 228.402 (Item 402) Executive
compensation.
(a) General. (1) All compensation
covered. This Item requires clear,
concise and understandable disclosure
of all plan and non-plan compensation
awarded to, earned by, or paid to the
named executive officers designated
under paragraph (a)(2) of this Item, and
directors covered by paragraph (f) of this
Item, by any person for all services
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rendered in all capacities to the small
business issuer and its subsidiaries,
unless otherwise specifically excluded
from disclosure in this Item. All such
compensation shall be reported
pursuant to this Item, even if also called
for by another requirement, including
transactions between the small business
issuer and a third party where a purpose
of the transaction is to furnish
compensation to any such named
executive officer or director. No amount
reported as compensation for one fiscal
year need be reported in the same
manner as compensation for a
subsequent fiscal year; amounts
reported as compensation for one fiscal
year may be required to be reported in
a different manner pursuant to this Item.
(2) Persons covered. Disclosure shall
be provided pursuant to this Item for
each of the following (the ‘‘named
executive officers’’):
(i) All individuals serving as the small
business issuer’s principal executive
officer or acting in a similar capacity
during the last completed fiscal year
(‘‘PEO’’), regardless of compensation
level;
(ii) The small business issuer’s two
most highly compensated executive
officers other than the PEO who were
serving as executive officers at the end
of the last completed fiscal year; and
(iii) Up to two additional individuals
for whom disclosure would have been
provided pursuant to paragraph (a)(2)(ii)
of this Item but for the fact that the
individual was not serving as an
executive officer of the small business
issuer at the end of the last completed
fiscal year.
Instructions to Item 402(a)(2). 1.
Determination of most highly compensated
executive officers. The determination as to
which executive officers are most highly
compensated shall be made by reference to
total compensation for the last completed
fiscal year (as required to be disclosed
pursuant to paragraph (b)(2)(iii) of this Item),
provided, however, that no disclosure need
be provided for any executive officer, other
than the PEO, whose total compensation does
not exceed $100,000.
2. Inclusion of executive officer of
subsidiary. It may be appropriate for a small
business issuer to include as named
executive officers one or more executive
officers of subsidiaries in the disclosure
required by this Item. See Rule 3b-7 under
the Exchange Act (17 CFR 240.3b-7).
3. Exclusion of executive officer due to
overseas compensation. It may be
appropriate in limited circumstances for a
small business issuer not to include in the
disclosure required by this Item an
individual, other than its PEO, who is one of
the small business issuer’s most highly
compensated executive officers due to the
payment of amounts of cash compensation
relating to overseas assignments attributed
predominantly to such assignments.
(3) Information for full fiscal year. If
the PEO served in that capacity during
any part of a fiscal year with respect to
which information is required,
information should be provided as to all
of his or her compensation for the full
fiscal year. If a named executive officer
(other than the PEO) served as an
executive officer of the small business
issuer (whether or not in the same
position) during any part of the fiscal
year with respect to which information
is required, information shall be
provided as to all compensation of that
individual for the full fiscal year.
(4) Omission of table or column. A
table or column may be omitted, if there
has been no compensation awarded to,
earned by, or paid to any of the named
executive officers required to be
reported in that table or column in any
fiscal year covered by that table.
(5) Definitions. For purposes of this
Item:
(i) The term stock appreciation rights
(‘‘SARs’’) refers to SARs payable in cash
or stock, including SARs payable in
cash or stock at the election of the small
6599
business issuer or a named executive
officer.
(ii) The term plan includes, but is not
limited to, the following: Any plan,
contract, authorization or arrangement,
whether or not set forth in any formal
document, pursuant to which cash,
securities, similar instruments or any
other property may be received. A plan
may be applicable to one person. Small
business issuers may omit information
regarding group life, health,
hospitalization, or medical
reimbursement plans that do not
discriminate in scope, terms or
operation, in favor of executive officers
or directors of the small business issuer
and that are available generally to all
salaried employees.
(iii) The term incentive plan means
any plan providing compensation
intended to serve as incentive for
performance to occur over a specified
period, whether such performance is
measured by reference to financial
performance of the small business issuer
or an affiliate, the small business
issuer’s stock price, or any other
measure. A non-stock incentive plan is
an incentive plan or portion of an
incentive plan where the relevant
performance measure is not based on
the price of the small business issuer’s
equity securities or the award does not
permit settlement by issuance of the
small business issuer’s equity securities.
The term incentive plan award means
an award provided under an incentive
plan.
(b) Summary compensation table. (1)
General. Provide the information
specified in paragraph (b)(2) of this
Item, concerning the compensation of
the named executive officers for each of
the small business issuer’s last two
completed fiscal years, in a Summary
Compensation Table in the tabular
format specified below.
SUMMARY COMPENSATION TABLE
Name and principal position
Year
Total
($)
(a)
(b)
Bonus
($)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(d)
(e)
(f)
(g)
(h)
(i)
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(c)
PEO ......................................
A ...........................................
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Salary
($)
B ...........................................
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(2) The Table shall include:
(i) The name and principal position of
the named executive officer (column
(a));
(ii) The fiscal year covered (column
(b));
(iii) The dollar value of total
compensation for the covered fiscal year
(column (c)). With respect to each
named executive officer, disclose the
sum of all amounts reported in columns
(d) through (i);
(iv) The dollar value of base salary
(cash and non-cash) earned by the
named executive officer during the
fiscal year covered (column (d));
(v) The dollar value of bonus (cash
and non-cash) earned by the named
executive officer during the fiscal year
covered (column (e));
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Instructions to Item 402(b)(2)(iv) and (v). 1.
If the amount of salary or bonus earned in a
given fiscal year is not calculable through the
latest practicable date, a footnote shall be
included disclosing that the amount of salary
or bonus is not calculable through the latest
practicable date and providing the date that
the amount of salary or bonus is expected to
be determined, and such amount must be
disclosed in a filing under Item 5.02(e) of
Form 8–K (17 CFR 249.308).
2. Small business issuers need not include
in the salary column (column (d)) or bonus
column (column (e)) any amount of salary or
bonus forgone at the election of a named
executive officer pursuant to a small business
issuer’s program under which stock, stockbased or other forms of non-cash
compensation may be received by a named
executive officer instead of a portion of
annual compensation earned in a covered
fiscal year. However, the receipt of any such
form of non-cash compensation instead of
salary or bonus earned for a covered fiscal
year must be disclosed in the appropriate
column of the Table corresponding to that
fiscal year (e.g., stock awards (column (f));
option awards (column (g)); all other
compensation (column (i))); or if made
pursuant to a non-stock incentive plan and
therefore not reportable at grant in the
Summary Compensation Table, a footnote
must be added to the salary or bonus column
so disclosing and referring to the Narrative
Disclosure to the Summary Compensation
Table (required by paragraph (c) of this Item)
where the material terms of the award are
reported.
(vi) For awards of stock, including
restricted stock, restricted stock units,
phantom stock, phantom stock units,
common stock equivalent units and
other similar instruments that do not
have option-like features, the aggregate
grant date fair value computed in
accordance with Financial Accounting
Standards Board Statement of Financial
Accounting Standards No. 123 (revised
2004), Share-Based Payment (‘‘FAS
123R’’), as modified or supplemented,
applying the same valuation model and
assumptions as the small business
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issuer applies for financial statement
reporting purposes, and all earnings on
any outstanding awards (column (f));
(vii) For awards of stock options, with
or without tandem SARs, freestanding
SARs and other similar instruments
with option-like features (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R applying the same valuation
model and assumptions as the small
business issuer applies for financial
statement reporting purposes, and all
earnings on any outstanding awards
(column (g));
Instructions to Item 402(b)(2)(vi) and (vii).
1. For awards reported in columns (f) and (g),
include a footnote disclosing all assumptions
made in the valuation, by reference to a
discussion of those assumptions in the small
business issuer’s financial statements,
footnotes to the financial statements, or
discussion in the Management’s Discussion
and Analysis. The sections so referenced are
deemed part of the disclosure provided
pursuant to this Item 402.
2. If at any time during the last completed
fiscal year, the small business issuer has
adjusted or amended the exercise price of
stock options or SARs previously awarded to
a named executive officer, whether through
amendment, cancellation or replacement
grants, or any other means (‘‘repriced’’), or
otherwise has materially modified such
awards, the small business issuer shall
include, as awards required to be reported in
column (g), the total fair value of options or
SARs as so repriced or modified, measured
as of the repricing or modification date.
3. All earnings on outstanding awards must
be identified and quantified in a footnote to
column (f) or (g), as applicable, whether the
earnings were paid during the fiscal year,
payable during the period but deferred, or
payable by their terms at a later date.
(viii) The dollar value of all earnings
for services performed during the fiscal
year pursuant to non-stock based
incentive plans as defined in paragraph
(a)(5)(iii) of this Item, and all earnings
on any outstanding non-stock incentive
plan awards (column (h));
Instructions to Item 402(b)(2)(viii). 1. If the
relevant performance measure is satisfied
during the fiscal year (including for a single
year in a plan with a multi-year performance
measure), the earnings are reportable for that
fiscal year, even if not payable until a later
date, and are not reportable again in the fiscal
year when amounts are paid to the named
executive officer.
2. All earnings on non-stock incentive plan
compensation must be identified and
quantified in a footnote to column (h),
whether the earnings were paid during the
fiscal year, payable during the period but
deferred at the election of the named
executive officer, or payable by their terms at
a later date.
(ix) All other compensation for the
covered fiscal year that the small
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business issuer could not properly
report in any other column of the
Summary Compensation Table (column
(i)). Each compensation item that is not
properly reportable in columns (d)–(h)
must be reported in this column. Such
compensation must include, but is not
limited to:
(A) Perquisites and other personal
benefits, or property, unless the
aggregate amount of such compensation
is less than $10,000;
(B) All earnings on compensation that
is deferred on a basis that is not taxqualified, including such earnings on
non-qualified defined contribution
plans;
(C) All ‘‘gross-ups’’ or other amounts
reimbursed during the fiscal year for the
payment of taxes;
(D) For any security of the small
business issuer or its subsidiaries
purchased from the small business
issuer or its subsidiaries (through
deferral of salary or bonus, or otherwise)
at a discount from the market price of
such security at the date of purchase,
unless that discount is available
generally, either to all security holders
or to all salaried employees of the small
business issuer, the compensation cost
computed in accordance with FAS 123R
applying the same valuation model and
assumptions as the small business
issuer applies for financial statement
reporting purposes;
(E) The amount paid or accrued to any
named executive officer pursuant to a
plan or arrangement in connection with:
(1) Any termination, including
without limitation through retirement,
resignation, severance or constructive
termination (including a change in
responsibilities) of such executive
officer’s employment with the small
business issuer and its subsidiaries; or
(2) A change in control of the small
business issuer;
(F) Small business issuer
contributions or other allocations to
vested and unvested defined
contribution plans;
(G) The aggregate increase in actuarial
value to the named executive officer of
all defined benefit and actuarial pension
plans (including supplemental plans)
accrued during the small business
issuer’s covered fiscal year; and
(H) The dollar value of any insurance
premiums paid by, or on behalf of, the
small business issuer during the covered
fiscal year with respect to life insurance
for the benefit of a named executive
officer.
Instructions to Item 402(b)(2)(ix). 1.
Incentive plan awards and earnings and
earnings on restricted stock, options, SARs
and similar awards are required to be
reported elsewhere as provided herein. These
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amounts and amounts received on exercise of
options and SARs are not reportable as All
Other Compensation in column (i).
2. Benefits paid pursuant to defined benefit
and actuarial plans are reportable as All
Other Compensation in column (i) if paid to
the named executive officer during the
period covered by the Table. Otherwise
information concerning these plans is
reportable pursuant to paragraph (e)(1) of this
Item.
3. Reimbursements of taxes owed with
respect to perquisites or other personal
benefits must be included in the columns as
tax reimbursements (paragraph (b)(2)(ix)(C)
of this Item) even if the associated perquisites
or other personal benefits are not required to
be included because the aggregate amount of
such compensation is less than $10,000.
4. Perquisites and other personal benefits
shall be valued on the basis of the aggregate
incremental cost to the small business issuer
and its subsidiaries.
5. Regarding paragraph (b)(2)(ix)(B) of this
Item, if the applicable interest rates vary
depending upon conditions such as a
minimum period of continued service, the
reported amount should be calculated
assuming satisfaction of all conditions to
receiving interest at the highest rate. Footnote
disclosure may be provided disclosing the
portion of any earnings that the registrant
considers to be paid at an above-market rate,
provided that the footnote explains the small
business issuer’s criteria for determining the
portion considered to be above-market.
6. The disclosure required pursuant to
paragraph (b)(2)(ix)(G) of this Item applies to
each plan that provides for the payment of
retirement benefits, or benefits that will be
paid primarily following retirement,
including but not limited to tax-qualified
defined benefit plans and supplemental
employee retirement plans, but excluding
tax-qualified defined contribution plans and
nonqualified defined contribution plans.
Instructions to Item 402(b). 1. Information
with respect to the fiscal year prior to the last
completed fiscal year will not be required if
the small business issuer was not a reporting
company pursuant to Section 13(a) or 15(d)
of the Exchange Act (15 U.S.C. 78m(a),
78o(d)) at any time during that year, except
that the small business issuer will be
required to provide information for such year
if that information previously was required to
be provided in response to a Commission
filing requirement.
2. All compensation values reported in the
Summary Compensation Table must be
reported in dollars. Where compensation was
paid to or received by a named executive
officer in a different currency, a footnote
must be provided to identify that currency
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and describe the rate and methodology used
to convert the payment amounts to dollars.
3. If a named executive officer is also a
director who receives compensation for his
or her services as a director, reflect that
compensation in the Summary Compensation
Table and provide a footnote identifying and
itemizing such compensation and amounts.
Use the categories in the Director
Compensation Table required pursuant to
paragraph (f) of this Item.
4. Amounts deferred at the election of a
named executive officer or at the direction of
the small business issuer, whether pursuant
to a plan established under Section 401(k) of
the Internal Revenue Code (26 U.S.C. 401(k)),
or otherwise, shall be included in the
appropriate column for the fiscal year in
which earned. The amount so deferred must
be disclosed in a footnote to the applicable
column.
(c) Narrative disclosure to summary
compensation table. (1) Provide a
narrative description of any material
factors necessary to an understanding of
the information disclosed in the Table
required by paragraph (b) of this Item.
Examples of such factors may include,
in given cases, among other things:
(i) The material terms of each named
executive officer’s employment
agreement or arrangement, whether
written or unwritten.
(ii) If at any time during the last fiscal
year, any outstanding option, SAR or
other equity-based award was repriced
or otherwise materially modified (such
as by extension of exercise periods, the
change of vesting or forfeiture
conditions, the change or elimination of
applicable performance criteria, or the
change of the bases upon which returns
are determined), a description of each
such repricing or other material
modification.
(iii) The waiver or modification of any
specified performance target, goal or
condition to payout with respect to any
amount included in non-stock incentive
plan compensation or payouts reported
in column (h) to the Summary
Compensation Table required by
paragraph (b) of this Item, stating
whether the waiver or modification
applied to one or more specified named
executive officers or to all compensation
subject to the target, goal or condition.
(iv) The material terms of each grant,
including but not limited to date of
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6601
exercisability, any conditions to
exercisability, any tandem feature, any
reload feature, any tax-reimbursement
feature, and any provision that could
cause the exercise price to be lowered.
(v) The material terms of any nonoption and non-SAR award made to a
named executive officer during the last
completed fiscal year, including a
general description of the formula or
criteria to be applied in determining the
amounts payable and vesting schedule.
(vi) The assumptions underlying any
determination of an increase in the
actuarial value of defined benefit and
actuarial plans and the method of
calculating earnings on deferred
compensation plans including defined
contribution plans.
(vii) An identification to the extent
material of any item included under All
Other Compensation (column (i)) in the
Summary Compensation Table.
Identification of an item shall not be
considered material if it does not exceed
the greater of $25,000 or 10% of all
items included in the specified category
in question set forth in paragraphs
(b)(2)(ix) of this Item. All items of
compensation are required to be
included in the Summary Compensation
Table without regard to whether such
items are required to be identified.
(2) For up to three employees who
were not executive officers during the
last completed fiscal year and whose
total compensation for the last
completed fiscal year was greater than
that of any named executive officers,
disclose each of such employee’s total
compensation for that year and describe
their job positions.
(d) Outstanding equity awards at
fiscal year-end table. (1) Provide the
information specified in paragraph
(d)(2) of this Item, concerning the
number and value of unexercised
options, SARs and similar instruments
and nonvested stock (including
restricted stock, restricted stock units or
other similar instruments) and incentive
plan awards for each named executive
officer outstanding as of the end of the
small business issuer’s last completed
fiscal year on an aggregated basis in the
following tabular format:
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Number of
securities underlying
unexercised
options
(#)
exercisable/
unexercisable
In-the-money
amount of
unexercised
option
(#)
exercisable/
unexercisable
Number of
shares or
units of
stock held
that have
not vested
(#)
Market
value of
shares or
units of
stock held
that have
not vested
($)
Incentive
plans: number of nonvested
shares,
units or
other rights
held
(#)
Incentive
plans: market or payout value of
nonvested
shares,
units or
other rights
held
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
PEO .............................................................................
A ..................................................................................
B ..................................................................................
(2) The Table shall include:
(i) The name of the executive officer
(column (a));
(ii) The total number of securities
underlying unexercised options, SARs
and similar instruments with optionlike features held at the end of the last
completed fiscal year, including awards
that have been transferred, separately
identifying the exercisable and
unexercisable options, SARs and similar
instruments (column (b));
(iii) The aggregate in-the-money
amount of unexercised options, SARs
and similar instruments with optionlike features held at the end of the fiscal
year, including awards that have been
transferred, separately identifying the
exercisable and unexercisable options,
SARs and similar instruments (column
(c));
(iv) The total number of nonvested
shares of stock (including restricted
stock, restricted stock units or similar
instruments that do not have option-like
features) held at the end of the fiscal
year (column (d));
(v) The aggregate market value of
nonvested shares of stock (including
restricted stock, restricted stock units or
similar instruments that do not have
option-like features) held at the end of
the fiscal year (column (e));
(vi) The total number of nonvested
shares, units or other rights awarded
under any incentive plan, and, if
applicable the number of shares
underlying any such unit or right, held
at the end of the fiscal year (column (f));
and
(vii) The aggregate market or payout
value of nonvested shares, units or other
rights awarded under any incentive plan
held at the end of the fiscal year
(column (g)).
Instructions to Item 402(d)(2). 1. In the title
of the table, specify the applicable fiscal year
of the small business issuer.
2. Options, SARs or similar instruments are
in-the-money if the market price of the
underlying securities exceeds the exercise or
base price of the option, SAR or similar
instrument. Compute the amounts in column
(c) by determining the difference between the
market price at fiscal year-end of the
securities underlying the options, SARs or
similar instruments and the exercise or base
price of the options, SARs or similar
instruments.
3. The expiration dates of options, SARs
and similar instruments held at fiscal yearend, separately identifying the exercisable
and unexercisable options, SARs and similar
instruments must be disclosed by footnote to
column (b). If the expiration date of an
option, SAR or similar instrument held at
fiscal year-end subsequently has occurred,
state whether it was exercised or expired
unexercised. The vesting dates of restricted
stock shares and similar instruments and
incentive plan awards held at fiscal-year end
must be disclosed by footnotes to columns
(d) and (f), respectively.
4. Compute the market values of stock
(including restricted stock, restricted stock
units or similar instruments) holdings
reported in column (e) and equity-based
incentive plan awards reported in column (g)
by multiplying the closing market price of
the small business issuer’s stock at the end
of the last completed fiscal year by the
number of restricted stock or incentive plan
award holdings, respectively.
(e) Additional narrative disclosure.
Provide a narrative description of the
following to the extent material:
(1) The material terms of each plan
that provides for the payment of
retirement benefits, or benefits that will
be paid primarily following retirement,
including but not limited to taxqualified defined benefit plans,
supplemental employee retirement
plans, tax-qualified defined contribution
plans and nonqualified defined
contribution plans.
(2) The material terms of each
contract, agreement, plan or
arrangement, whether written or
unwritten, that provides for payment(s)
to a named executive officer at,
following, or in connection with the
resignation, retirement or other
termination of a named executive
officer, or a change in control of the
small business issuer or a change in the
named executive officer’s
responsibilities following a change in
control, with respect to each named
executive officer.
(f) Compensation of directors. (1)
Provide the information specified in
paragraph (f)(2) of this Item, concerning
the compensation of the directors for the
small business issuer’s last completed
fiscal year, in the following tabular
format:
DIRECTOR COMPENSATION
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Name
Total
($)
Fees
earned or
paid in cash
($)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
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A .......................................................................................
B .......................................................................................
C .......................................................................................
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6603
DIRECTOR COMPENSATION—Continued
Name
Total
($)
Fees
earned or
paid in cash
($)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
D .......................................................................................
E .......................................................................................
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(2) The Table shall include:
(i) The name of each director, unless
such director is also a named executive
officer under Item 402(a) and his or her
compensation for service as a director is
fully reflected in the Summary
Compensation Table pursuant to Item
402(b) and otherwise as required
pursuant to Items 402(c) and (e)
(column (a));
(ii) The dollar value of total
compensation for the covered fiscal year
(column (b)). With respect to each
director, disclose the sum of all amounts
reported in columns (c) through (g);
(iii) The aggregate dollar amount of all
fees earned or paid in cash for services
as a director, including annual retainer
fees, committee and/or chairmanship
fees, and meeting fees (column (c));
(iv) For awards of stock, including
restricted stock, restricted stock units,
phantom stock, phantom stock units,
common stock equivalent units or other
similar instruments that do not have
option-like features, the aggregate grant
date fair value computed in accordance
with FAS 123R, applying the same
valuation model and assumptions as the
small business issuer applies for
financial statement reporting purposes,
and all earnings on any outstanding
awards (column (d));
(v) For awards of stock options, with
or without tandem SARs, freestanding
SARs and other similar instruments
with option-like features (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R applying the same valuation
model and assumptions as the small
business issuer applies for financial
statement reporting purposes, and all
earnings on any outstanding awards
(column (e));
Instruction to Item 402(f)(2)(iv) and (v).
Disclose, for each director, by footnote to the
appropriate column, the outstanding equity
awards at fiscal year end as would be
required if the tabular presentation for named
executive officers specified in paragraph (d)
of this Item were required for directors.
(vi) The dollar value of all earnings
for services performed during the fiscal
year pursuant to non-stock-based
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incentive plans as defined in paragraph
(a)(5)(iii) of this Item, and all earnings
on any outstanding awards (column (f));
and
(vii) All other compensation for the
covered fiscal year that the small
business issuer could not properly
report in any other column of the
Director Compensation Table (column
(g)). Each compensation item for the last
completed fiscal year that is not
properly reportable in columns (c)–(f)
must be reported in this column and
must be identified and quantified in a
footnote if it is deemed material in
accordance with paragraph (c)(6) of this
Item. Such compensation must include,
but is not limited to:
(A) All perquisites and other personal
benefits, or property, unless the
aggregate amount of such compensation
is less than $10,000;
(B) All earnings on compensation that
is deferred on a basis that is not taxqualified;
(C) All amounts reimbursed during
the fiscal year for the payment of taxes;
(D) For any security of the small
business issuer or its subsidiaries
purchased from the small business
issuer or its subsidiaries (through
deferral of salary or bonus, or otherwise)
at a discount from the market price of
such security at the date of purchase,
unless that discount is available
generally, either to all security holders
or to all salaried employees of the small
business issuer, the compensation cost
computed in accordance with FAS 123R
applying the same valuation model and
assumptions as the small business
issuer applies for financial statement
reporting purposes;
(E) The amount paid or accrued to any
director pursuant to a plan or
arrangement in connection with:
(1) The resignation, retirement or any
other termination of such director; or
(2) A change in control of the small
business issuer;
(F) The aggregate increase in actuarial
value to the director of all defined
benefit and actuarial pension plans
(including supplemental plans) accrued
during the small business issuer’s
covered fiscal year;
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(G) Small business issuer
contributions or other allocations to
vested and unvested defined
contribution plans;
(H) Consulting fees earned from, or
paid or payable by the small business
issuer and/or its subsidiaries (including
joint ventures);
(I) The annual costs of payments and
promises of payments pursuant to
director legacy programs and similar
charitable award programs; and
(J) The dollar value of any insurance
premiums paid by, or on behalf of, the
small business issuer during the covered
fiscal year with respect to life insurance
for the benefit of a director.
Instruction to Item 402(f)(2)(vii). Programs
in which small business issuers agree to
make donations to one or more charitable
institutions in a director’s name, payable by
the small business issuer currently or upon
a designated event, such as the retirement or
death of the director, are charitable awards
programs or director legacy programs for
purposes of the disclosure required by
paragraph (f)(2)(vii)(I) of this Item. Provide
footnote disclosure of the total dollar amount
and other material terms of each such
program for which tabular disclosure is
provided.
Instruction to Item 402(f)(2). Two or more
directors may be grouped in a single row in
the table if all of their elements of
compensation are identical. The names of the
directors for whom disclosure is presented
on a group basis should be clear from the
table.
(3) Narrative to director compensation
table. Provide a narrative description of
any factors necessary to an
understanding of the director
compensation disclosed in this Table.
While material factors will vary
depending upon the facts, examples of
such factors may include, in given
cases, among other things:
(i) A description of standard
compensation arrangements (such as
fees for retainer, committee service,
service as chairman of the board or a
committee, and meeting attendance);
and
(ii) Whether any director has a
different compensation arrangement,
identifying that director and describing
the terms of that arrangement.
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Instruction to Item 402(f). In addition to
the Instruction to paragraph (f)(2)(vii) of this
Item, the following apply equally to
paragraph (f) of this Item: Instructions 2 and
3 to paragraph (b) of this Item; the
Instructions to paragraphs (b)(2)(iv) and (v) of
this Item; the Instructions to paragraphs
(b)(2)(vi) and (vii) of this Item; the
Instructions to paragraph (b)(2)(viii) of this
Item; the Instructions to paragraph (b)(2)(ix)
of this Item; and paragraph (c)(6) of this Item.
These Instructions apply to the columns in
the Director Compensation Table that are
analogous to the columns in the Summary
Compensation Table to which they refer and
to disclosures under paragraph (f) of this Item
that correspond to analogous disclosures
provided for in paragraph (b) of this Item to
which they refer.
(1) Title of class
*
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§ 228.404 (Item 404) Transactions with
related persons and promoters.
(a) Transactions with related persons.
Describe any transaction during the last
two years, or any currently proposed
transaction, in which the small business
issuer was, or is to be, a participant and
the amount involved exceeds the lesser
of $120,000 or one percent of the
average of the small business issuer’s
total assets for the last three completed
fiscal years and in which any related
person had, or will have, a direct or
indirect material interest. Disclose the
following information regarding the
transaction:
(1) The name of the related person
and the basis on which the person is a
related person.
(2) The related person’s interest in the
transaction with the small business
issuer, including the related person’s
position(s) or relationship(s) with, or
ownership in, a firm, corporation, or
other entity that is a party to, or has an
interest in, the transaction.
(3) The approximate dollar value of
the amount involved in each transaction
and of the amount of the related
person’s interest in each transaction
each of which shall be computed
without regard to the amount of profit
or loss.
(4) In the case of indebtedness,
disclosure of the amount involved in the
transaction shall include the largest
aggregate amount of principal
outstanding during the last two years,
the amount thereof outstanding as of the
latest practicable date, the amount of
principal paid during the periods for
which disclosure is provided, the
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§ 228.403 (Item 403) Security Ownership of
Certain Beneficial Owners and
Management.
*
*
*
*
*
(b) Security ownership of
management. Furnish the following
information, as of the most recent
practicable date, in substantially the
tabular form indicated, as to each class
of equity securities of the small business
issuer or any of its parents or
subsidiaries, including directors’
qualifying shares, beneficially owned by
all directors and nominees, naming
(2) Name of beneficial owner
*
*
*
*
7. Revise § 228.404 to read as follows:
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6. Amend § 228.403 by revising
paragraph (b) to read as follows:
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(3) Amount of shares and nature
of beneficial ownership
amount of interest paid during the
period for which disclosure is provided,
and the rate or amount of interest
payable on the indebtedness.
(5) Any other information regarding
the transaction or the related person in
the context of the transaction that is
material to investors in light of the
circumstances of the particular
transaction.
Instructions to Item 404(a). 1. For the
purposes of paragraph (a) of this Item, the
term related person means:
a. Any person who was in any of the
following categories at any time during the
specified period for which disclosure under
paragraph (a) of this Item is required:
i. Any director or executive officer of the
small business issuer;
ii. Any nominee for director, when the
information called for by paragraph (a) of this
Item is being presented in a proxy or
information statement relating to the election
of that nominee for director; or
iii. Any immediate family member of any
of the foregoing persons, which means any
child, stepchild, parent, stepparent, spouse,
sibling, mother-in-law, father-in-law, son-inlaw, daughter-in-law, brother-in-law, or
sister-in-law, and any person (other than a
tenant or employee) sharing the household of
a related person identified in paragraph 1.a.i.
or 1.a.ii. of this instruction; and
b. Any person who was in any of the
following categories when a transaction in
which such person had a direct or indirect
material interest occurred or existed:
i. A security holder covered by Item 403(a)
(§ 228.403(a)); or
ii. Any immediate family member of any
such security holder, which means any child,
stepchild, parent, stepparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-inlaw, of such security holder and any person
(other than a tenant or employee) sharing the
household of such security holder.
2. For purposes of paragraph (a) of this
Item, a transaction includes, but is not
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them, each of the named executive
officers as defined in Item 402(a)(2)
(§ 228.402(a)(2)), and directors and
executive officers of the small business
issuer as a group, without naming them.
Show in column (3) the total number of
shares beneficially owned and in
column (4) the percent of the class so
owned. Of the number of shares shown
in column (3), indicate, by footnote the
amount of shares that are pledged as
security and the amount of shares with
respect to which such persons have the
right to acquire beneficial ownership as
specified in § 240.13d–3(d)(1) of this
chapter.
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(4) Percent of class
limited to, any financial transaction,
arrangement or relationship (including any
indebtedness or guarantee of indebtedness)
or any series of similar transactions,
arrangements or relationships.
3. The amount involved in the transaction
shall be computed by determining the dollar
value of the amount involved in the
transaction in question, which shall include:
a. In the case of any lease or other
transaction providing for periodic payments
or installments, the aggregate amount of all
periodic payments or installments due on or
after the beginning of the small business
issuer’s last fiscal year, including any
required or optional payments due during or
at the conclusion of the lease.
b. In the case of indebtedness, the largest
aggregate amount of all indebtedness
outstanding at any time since the beginning
of the small business issuer’s last fiscal year
and all amounts of interest payable on it
during the last fiscal year.
4. In the case of transactions involving
indebtedness, the following items of
indebtedness may be excluded from the
calculation of the amount of indebtedness
and need not be disclosed: amounts due from
the related person for purchases of goods and
services subject to usual trade terms, for
ordinary business travel and expense
payments and for other transactions in the
ordinary course of business.
5. Disclosure of an employment
relationship or transaction involving an
executive officer and any related
compensation solely resulting from that
employment relationship or transaction need
not be provided pursuant to paragraph (a) of
this Item if:
a. The compensation arising from the
relationship or transaction is reported
pursuant to Item 402 (§ 228.402); or
b. The executive officer is not an
immediate family member of a related person
(as specified in Instruction 1. to paragraph (a)
of this Item) and such compensation would
have been reported under Item 402
(§ 228.402) as compensation earned for
services to the small business issuer if the
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executive officer was a named executive
officer as that term is defined in Item
402(a)(2) (§ 228.402(a)(2)), and such
compensation had been approved as such by
the compensation committee of the board of
directors (or group of independent directors
performing a similar function) of the small
business issuer.
6. Disclosure of compensation to a director
need not be provided pursuant to paragraph
(a) of this Item if the compensation is
reportable pursuant to Item 402(f)
(§ 228.402(f)).
7. In the case of a transaction involving
indebtedness, if the lender is a bank, savings
and loan association, or broker-dealer
extending credit under Federal Reserve
Regulation T (12 CFR part 220) and the loans
are not disclosed as nonaccrual, past due,
restructured or potential problems (see Item
III.C.1. and 2. of Industry Guide 3, Statistical
Disclosure by Bank Holding Companies (17
CFR 229.802(c))), disclosure under paragraph
(a) of this Item may consist of a statement,
if such is the case, that the loans to such
persons:
a. Were made in the ordinary course of
business;
b. Were made on substantially the same
terms, including interest rates and collateral,
as those prevailing at the time for comparable
loans with persons not related to the lender;
and
c. Did not involve more than the normal
risk of collectibility or present other
unfavorable features.
8. A person who has a position or
relationship with a firm, corporation, or other
entity that engages in a transaction with the
small business issuer shall not be deemed to
have an indirect ‘‘material’’ interest within
the meaning of paragraph (a) of this Item
where:
a. The interest arises only:
i. From such person’s position as a director
of another corporation or organization which
is a party to the transaction; or
ii. From the direct or indirect ownership by
such person and all other persons specified
in Instruction 1 to paragraph (a) of this Item,
in the aggregate, of less than a ten percent
equity interest in another person (other than
a partnership) which is a party to the
transaction; or
iii. From both such position and
ownership; or
b. The interest arises only from such
person’s position as a limited partner in a
partnership in which the person and all other
persons specified in Instruction 1 to
paragraph (a) of this Item, have an interest of
less than ten percent, and the person is not
a general partner of and does not hold
another position in the partnership.
9. Include information for any material
underwriting discounts and commissions
upon the sale of securities by the small
business issuer where any of the specified
persons was or is to be a principal
underwriter or is a controlling person or
member of a firm that was or is to be a
principal underwriter.
(b) Parents. List all parents of the
small business issuer showing the basis
of control and as to each parent, the
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percentage of voting securities owned or
other basis of control by its immediate
parent, if any.
(c) Promoters. (1) Small business
issuers that had a promoter at any time
during the past five fiscal years shall:
(i) State the names of the promoter(s),
the nature and amount of anything of
value (including money, property,
contracts, options or rights of any kind)
received or to be received by each
promoter, directly or indirectly, from
the small business issuer and the nature
and amount of any assets, services or
other consideration therefor received or
to be received by the small business
issuer; and
(ii) As to any assets acquired or to be
acquired by the small business issuer
from a promoter, state the amount at
which the assets were acquired or are to
be acquired and the principle followed
or to be followed in determining such
amount, and identify the persons
making the determination and their
relationship, if any, with the small
business issuer or any promoter. If the
assets were acquired by the promoter
within two years prior to their transfer
to the small business issuer, also state
the cost thereof to the promoter.
(2) Small business issuers shall
provide the disclosure required by
paragraphs (c)(1)(i) and (c)(1)(ii) of this
Item as to any person who acquired
control of a small business issuer that is
a shell company, or any person that is
part of a group, consisting of two or
more persons that agree to act together
for the purpose of acquiring, holding,
voting or disposing of equity securities
of a small business issuer, that acquired
control of a small business issuer that is
a shell company.
8. Add § 228.407 to read as follows:
§ 228.407 (Item 407) Corporate
governance.
(a) Director independence. Identify
each director and, when the disclosure
called for by this paragraph is being
presented in a proxy or information
statement relating to the election of
directors, each nominee for director,
that is independent under the
independence standards applicable to
the small business issuer under
paragraph (a)(1) of this Item. In
addition, if such independence
standards contain independence
requirements for committees of the
board of directors, identify each director
that is a member of the compensation,
nominating or audit committee that is
not independent under such committee
independence standards. If the small
business issuer does not have a
separately designated audit, nominating
or compensation committee or
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committee performing similar functions,
the small business issuer must provide
the disclosure of directors that are not
independent with respect to all
members of the board of directors
applying such committee independence
standards.
(1) In determining whether or not the
director or nominee for director is
independent for the purposes of
paragraph (a) of this Item, the small
business issuer shall use the applicable
definition of independence, as follows:
(i) If the small business issuer is a
listed issuer whose securities are listed
on a national securities exchange or in
an inter-dealer quotation system which
has requirements that a majority of the
board of directors be independent, the
small business issuer’s definition of
independence that it uses for
determining if a majority of the board of
directors is independent in compliance
with the listing standards applicable to
the small business issuer. When
determining whether the members of a
committee of the board of directors are
independent, the small business issuer’s
definition of independence that it uses
for determining if the members of that
specific committee are independent in
compliance with the independence
standards applicable for the members of
the specific committee in the listing
standards of the national securities
exchange or inter-dealer quotation
system that the small business issuer
uses for determining if a majority of the
board of directors are independent. If
the small business issuer does not have
independence standards for a
committee, the independence standards
for that specific committee in the listing
standards of the national securities
exchange or inter-dealer quotation
system that the small business issuer
uses for determining if a majority of the
board of directors are independent.
(ii) If the small business issuer is not
a listed issuer, a definition of
independence of a national securities
exchange or of a national securities
association which has requirements that
a majority of the board of directors be
independent, and state which definition
is used. Whatever such definition the
small business issuer chooses, it must
use the same definition with respect to
all directors and nominees for director.
When determining whether the
members of a specific committee of the
board of directors are independent, if
the national securities exchange or
national securities association whose
standards are used has independence
standards for the member of a specific
committee, use those committee specific
standards.
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(iii) If the information called for by
paragraph (a) of this item is being
presented in a registration statement on
Form S–1 (§ 239.11 of this chapter) or
Form SB–2 (§ 239.10 of this chapter)
under the Securities Act or on a Form
10 or Form 10–SB (§ 249.210 or
§ 249.210b of this chapter) under the
Exchange Act where the small business
issuer has applied for listing with a
national securities exchange or in an
inter-dealer quotation system which has
requirements that a majority of the
board of directors be independent, the
definition of independence that the
small business issuer uses for
determining if a majority of the board of
directors is independent, and the
definition of independence that the
small business issuer uses for
determining if members of the specific
committee of the board of directors are
independent, that is in compliance with
the independence listing standards of
the national securities exchange or
inter-dealer quotation system on which
it has applied for listing, or if the small
business issuer has not adopted such
definitions, the independence standards
for determining if the majority of the
board of directors is independent and if
members of the committee of the board
of directors are independent of that
national securities exchange or interdealer quotation system.
(2) If the small business issuer uses its
own definitions for determining
whether its directors and nominees for
director, and members of specific
committees of the board of directors, are
independent, disclose whether these
definitions are available to security
holders on the small business issuer’s
Web site. If so, provide the small
business issuer’s Web site address. If
not, include a copy of these policies in
an appendix to the small business
issuer’s proxy statement that is provided
to security holders at least once every
three fiscal years or if the policies have
been materially amended since the
beginning of the small business issuer’s
last fiscal year. If a current copy of the
policies is not available to security
holders on the small business issuer’s
Web site, and is not included as an
appendix to the small business issuer’s
proxy statement, identify the most
recent fiscal years in which the policies
were so included in satisfaction of this
requirement.
(3) For each director and nominee for
director that is identified as
independent, describe any transactions,
relationships or arrangements not
disclosed pursuant to Item 404(a)
(§ 228.404(a)) that were considered by
the board of directors under the
applicable independence definitions in
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determining that the director is
independent.
Instruction to Item 407(a). No information
called for by paragraph (a) of this Item need
be given in a registration statement filed at
a time when the small business issuer is not
subject to the reporting requirements of
sections 13(a) or 15(d) of the Exchange Act
(15 U.S.C. 78m(a), or 78o(d)) respecting any
director who is no longer a director at the
time of effectiveness of the registration
statement.
(b) Board meetings and committees.
(1) State the total number of meetings of
the board of directors (including
regularly scheduled and special
meetings) which were held during the
last full fiscal year. Name each
incumbent director who during the last
full fiscal year attended fewer than 75
percent of the aggregate of:
(i) The total number of meetings of the
board of directors (held during the
period for which he has been a director);
and
(ii) The total number of meetings held
by all committees of the board on which
he served (during the periods that he
served).
(2) Describe the small business
issuer’s policy, if any, with regard to
board members’ attendance at annual
meetings of security holders and state
the number of board members who
attended the prior year’s annual
meeting.
Instruction to Item 407(b)(2). In lieu of
providing the information required by
paragraph (b)(2) of this Item in the proxy
statement, the small business issuer may
instead provide the small business issuer’s
Web site address where such information
appears.
(3) State whether or not the small
business issuer has standing audit,
nominating and compensation
committees of the board of directors, or
committees performing similar
functions. If the small business issuer
has such committees, however
designated, identify each committee
member, state the number of committee
meetings held by each such committee
during the last fiscal year and describe
briefly the functions performed by each
such committee. Such disclosure need
not be provided to the extent it is
duplicative of disclosure provided in
accordance with paragraph (d)(4) of this
Item.
(c) Nominating committee. (1) If the
small business issuer does not have a
standing nominating committee or
committee performing similar functions,
state the basis for the view of the board
of directors that it is appropriate for the
small business issuer not to have such
a committee and identify each director
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who participates in the consideration of
director nominees.
(2) Provide the following information
regarding the small business issuer’s
director nomination process:
(i) State whether or not the
nominating committee has a charter. If
the nominating committee has a charter,
provide the disclosure required by
Instruction 2 to this Item regarding the
nominating committee charter;
(ii) If the nominating committee has a
policy with regard to the consideration
of any director candidates
recommended by security holders,
provide a description of the material
elements of that policy, which shall
include, but need not be limited to, a
statement as to whether the committee
will consider director candidates
recommended by security holders;
(iii) If the nominating committee does
not have a policy with regard to the
consideration of any director candidates
recommended by security holders, state
that fact and state the basis for the view
of the board of directors that it is
appropriate for the small business issuer
not to have such a policy;
(iv) If the nominating committee will
consider candidates recommended by
security holders, describe the
procedures to be followed by security
holders in submitting such
recommendations;
(v) Describe any specific minimum
qualifications that the nominating
committee believes must be met by a
nominating committee-recommended
nominee for a position on the small
business issuer’s board of directors, and
describe any specific qualities or skills
that the nominating committee believes
are necessary for one or more of the
small business issuer’s directors to
possess;
(vi) Describe the nominating
committee’s process for identifying and
evaluating nominees for director,
including nominees recommended by
security holders, and any differences in
the manner in which the nominating
committee evaluates nominees for
director based on whether the nominee
is recommended by a security holder;
(vii) With regard to each nominee
approved by the nominating committee
for inclusion on the small business
issuer’s proxy card (other than
nominees who are executive officers or
who are directors standing for reelection), state which one or more of the
following categories of persons or
entities recommended that nominee:
security holder, non-management
director, chief executive officer, other
executive officer, third-party search
firm, or other specified source;
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(viii) If the small business issuer pays
a fee to any third party or parties to
identify or evaluate or assist in
identifying or evaluating potential
nominees, disclose the function
performed by each such third party; and
(ix) If the small business issuer’s
nominating committee received, by a
date not later than the 120th calendar
day before the date of the small business
issuer’s proxy statement released to
security holders in connection with the
previous year’s annual meeting, a
recommended nominee from a security
holder that beneficially owned more
than 5% of the small business issuer’s
voting common stock for at least one
year as of the date the recommendation
was made, or from a group of security
holders that beneficially owned, in the
aggregate, more than 5% of the small
business issuer’s voting common stock,
with each of the securities used to
calculate that ownership held for at
least one year as of the date the
recommendation was made, identify the
candidate and the security holder or
security holder group that
recommended the candidate and
disclose whether the nominating
committee chose to nominate the
candidate, provided, however, that no
such identification or disclosure is
required without the written consent of
both the security holder or security
holder group and the candidate to be so
identified.
a. A written statement from the ‘‘record’’
holder of the securities (usually a broker or
bank) verifying that, at the time the security
holder made the recommendation, he or she
had held the required securities for at least
one year; or
b. If the security holder has filed a
Schedule 13D (§ 240.13d–101 of this
chapter), Schedule 13G (§ 240.13d–102 of
this chapter), Form 3 (§ 249.103 of this
chapter), Form 4 (§ 249.104 of this chapter),
and/or Form 5 (§ 249.105 of this chapter), or
amendments to those documents or updated
forms, reflecting ownership of the securities
as of or before the date of the
recommendation, a copy of the schedule and/
or form, and any subsequent amendments
reporting a change in ownership level, as
well as a written statement that the security
holder continuously held the securities for
the one-year period as of the date of the
recommendation.
4. For purposes of the small business
issuer’s obligation to provide the disclosure
specified in paragraph (c)(2)(ix) of this Item,
the security holder or group must have
provided to the small business issuer, at the
time of the recommendation, the written
consent of all parties to be identified and,
where the security holder or group members
are not registered holders, proof that the
security holder or group satisfied the
required ownership percentage and holding
period as of the date of the recommendation.
Instruction to Item 407(c)(2). For purposes
of paragraph (c)(2) of this Item, the term
‘‘nominating committee’’ refers not only to
nominating committees and committees
performing similar functions, but also to
groups of directors fulfilling the role of a
nominating committee, including the entire
board of directors.
Instructions to Item 407(c)(2)(ix). 1. For
purposes of paragraph (c)(2)(ix) of this Item,
the percentage of securities held by a
nominating security holder may be
determined using information set forth in the
small business issuer’s most recent quarterly
or annual report, and any current report
subsequent thereto, filed with the
Commission pursuant to the Exchange Act,
unless the party relying on such report
knows or has reason to believe that the
information contained therein is inaccurate.
2. For purposes of the small business
issuer’s obligation to provide the disclosure
specified in paragraph (c)(2)(ix) of this Item,
where the date of the annual meeting has
been changed by more than 30 days from the
date of the previous year’s meeting, the
obligation under that Item will arise where
the small business issuer receives the
security holder recommendation a reasonable
time before the small business issuer begins
to print and mail its proxy materials.
3. For purposes of paragraph (c)(2)(ix) of
this Item, the percentage of securities held by
a recommending security holder, as well as
the holding period of those securities, may be
determined by the small business issuer if
the security holder is the registered holder of
the securities. If the security holder is not the
registered owner of the securities, he or she
can submit one of the following to the small
business issuer to evidence the required
ownership percentage and holding period:
(3) Describe any material changes to
the procedures by which security
holders may recommend nominees to
the small business issuer’s board of
directors, where those changes were
implemented after the small business
issuer last provided disclosure in
response to the requirements of
paragraph (c)(2)(iv) of this Item, or
paragraph (c)(3) of this Item.
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Instructions to Item 407(c)(3). 1. The
disclosure required in paragraph (c)(3) of this
Item need only be provided in a small
business issuer’s quarterly or annual reports.
2. For purposes of paragraph (c)(3) of this
Item, adoption of procedures by which
security holders may recommend nominees
to the small business issuer’s board of
directors, where the small business issuer’s
most recent disclosure in response to the
requirements of paragraph (c)(2)(iv) of this
Item, or paragraph (c)(3) of this Item,
indicated that the small business issuer did
not have in place such procedures, will
constitute a material change.
(d) Audit committee. (1) State whether
or not the audit committee has a charter.
If the audit committee has a charter,
provide the disclosure required by
Instruction 2 to this Item regarding the
audit committee charter.
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(2) If a listed issuer’s board of
directors determines, in accordance
with the listing standards applicable to
the issuer, to appoint a director to the
audit committee who is not
independent (apart from the
requirements in § 240.10A–3 of this
chapter), including as a result of
exceptional or limited or similar
circumstances, disclose the nature of the
relationship that makes that individual
not independent and the reasons for the
board of directors’ determination.
(3)(i) The audit committee must state
whether:
(A) The audit committee has reviewed
and discussed the audited financial
statements with management;
(B) The audit committee has
discussed with the independent
auditors the matters required to be
discussed by the statement on Auditing
Standards No. 61, as amended (AICPA,
Professional Standards, Vol. 1, AU
section 380), as adopted by the Public
Company Accounting Oversight Board
in Rule 3200T;
(C) The audit committee has received
the written disclosures and the letter
from the independent accountants
required by Independence Standards
Board Standard No. 1 (Independence
Standards Board Standard No. 1,
Independence Discussions with Audit
Committees), as adopted by the Public
Company Accounting Oversight Board
in Rule 3600T, and has discussed with
the independent accountant the
independent accountant’s
independence; and
(D) Based on the review and
discussions referred to in paragraphs
(d)(3)(i)(A) through (d)(3)(i)(C) of this
Item, the audit committee recommended
to the board of directors that the audited
financial statements be included in the
small business issuer’s Annual Report
on Form 10–K (17 CFR 249.310) for the
last fiscal year for filing with the
Commission.
(ii) The name of each member of the
company’s audit committee (or, in the
absence of an audit committee, the
board committee performing equivalent
functions or the entire board of
directors) must appear below the
disclosure required by paragraph
(d)(3)(i) of this Item.
(4)(i) If you meet the following
requirements, provide the disclosure in
paragraph (d)(4)(ii) of this Item:
(A) You are a listed issuer, as defined
in § 240.10A–3 of this chapter;
(B) You are filing either an annual
report on Form 10–K or 10–KSB (17
CFR 249.310 or 17 CFR 249.310b), or a
proxy statement or information
statement pursuant to the Exchange Act
(15 U.S.C. 78a et seq.) if action is to be
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taken with respect to the election of
directors; and
(C) You are neither:
(1) A subsidiary of another listed
issuer that is relying on the exemption
in § 240.10A–3(c)(2) of this chapter; nor
(2) Relying on any of the exemptions
in § 240.10A–3(c)(4) through (c)(7) of
this chapter.
(ii)(A) State whether or not the small
business issuer has a separatelydesignated standing audit committee
established in accordance with section
3(a)(58)(A) of the Exchange Act (15
U.S.C. 78c(a)(58)(A)), or a committee
performing similar functions. If the
small business issuer has such a
committee, however designated,
identify each committee member. If the
entire board of directors is acting as the
small business issuer’s audit committee
as specified in section 3(a)(58)(B) of the
Exchange Act (15 U.S.C. 78c(a)(58)(B)),
so state.
(B) If applicable, provide the
disclosure required by § 240.10A–3(d) of
this chapter regarding an exemption
from the listing standards for audit
committees.
(5) Audit committee financial expert.
(i)(A) Disclose that the small business
issuer’s board of directors has
determined that the small business
issuer either:
(1) Has at least one audit committee
financial expert serving on its audit
committee; or
(2) Does not have an audit committee
financial expert serving on its audit
committee.
(B) If the small business issuer
provides the disclosure required by
paragraph (d)(5)(i)(A)(1) of this Item, it
must disclose the name of the audit
committee financial expert and whether
that person is independent, as
independence for audit committee
members is defined in the listing
standards applicable to the listed issuer.
(C) If the small business issuer
provides the disclosure required by
paragraph (d)(5)(i)(A)(2) of this Item, it
must explain why it does not have an
audit committee financial expert.
Instruction to Item 407(d)(5)(i). If the small
business issuer’s board of directors has
determined that the small business issuer has
more than one audit committee financial
expert serving on its audit committee, the
small business issuer may, but is not required
to, disclose the names of those additional
persons. A small business issuer choosing to
identify such persons must indicate whether
they are independent pursuant to paragraph
(d)(5)(i)(B) of this Item.
(ii) For purposes of this Item, an audit
committee financial expert means a
person who has the following attributes:
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(A) An understanding of generally
accepted accounting principles and
financial statements;
(B) The ability to assess the general
application of such principles in
connection with the accounting for
estimates, accruals and reserves;
(C) Experience preparing, auditing,
analyzing or evaluating financial
statements that present a breadth and
level of complexity of accounting issues
that are generally comparable to the
breadth and complexity of issues that
can reasonably be expected to be raised
by the small business issuer’s financial
statements, or experience actively
supervising one or more persons
engaged in such activities;
(D) An understanding of internal
control over financial reporting; and
(E) An understanding of audit
committee functions.
(iii) A person shall have acquired
such attributes through:
(A) Education and experience as a
principal financial officer, principal
accounting officer, controller, public
accountant or auditor or experience in
one or more positions that involve the
performance of similar functions;
(B) Experience actively supervising a
principal financial officer, principal
accounting officer, controller, public
accountant, auditor or person
performing similar functions;
(C) Experience overseeing or assessing
the performance of companies or public
accountants with respect to the
preparation, auditing or evaluation of
financial statements; or
(D) Other relevant experience.
(iv) Safe harbor.
(A) A person who is determined to be
an audit committee financial expert will
not be deemed an expert for any
purpose, including without limitation
for purposes of section 11 of the
Securities Act (15 U.S.C. 77k), as a
result of being designated or identified
as an audit committee financial expert
pursuant to this Item 407.
(B) The designation or identification
of a person as an audit committee
financial expert pursuant to this Item
does not impose on such person any
duties, obligations or liability that are
greater than the duties, obligations and
liability imposed on such person as a
member of the audit committee and
board of directors in the absence of such
designation or identification.
(C) The designation or identification
of a person as an audit committee
financial expert pursuant to this Item
does not affect the duties, obligations or
liability of any other member of the
audit committee or board of directors.
Instructions to Item 407(d)(5). 1. The
disclosure under paragraph (d)(5) of this Item
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is required only in a small business issuer’s
annual report. The small business issuer
need not provide the disclosure required by
paragraph (d)(5) of this Item in a proxy or
information statement unless that small
business issuer is electing to incorporate this
information by reference from the proxy or
information statement into its annual report
pursuant to General Instruction E(3) to Form
10–KSB (17 CFR 249.310b).
2. If a person qualifies as an audit
committee financial expert by means of
having held a position described in
paragraph (d)(5)(iii)(D) of this Item, the small
business issuer shall provide a brief listing of
that person’s relevant experience. Such
disclosure may be made by reference to
disclosures required under Item 401(a)(4)
(§ 228.401(a)(4)).
3. In the case of a foreign private issuer
with a two-tier board of directors, for
purposes of paragraph (d)(5) of this Item, the
term board of directors means the
supervisory or non-management board. Also,
in the case of a foreign private issuer, the
term generally accepted accounting
principles in paragraph (d)(5)(ii)(A) of this
Item means the body of generally accepted
accounting principles used by that issuer in
its primary financial statements filed with
the Commission.
4. Following the effective date of the first
registration statement filed under the
Securities Act (15 U.S.C. 77a et seq.) or
Exchange Act (15 U.S.C. 78a et seq.) by a
small business issuer, the small business
issuer or successor issuer need not make the
disclosures required by this Item in its first
annual report filed pursuant to section 13(a)
or 15(d) (15 U.S.C. 78m(a) or 78o(d)) of the
Exchange Act after effectiveness.
Instructions to Item 407(d). 1. The
information required by paragraphs (d)(1)–(3)
of this Item shall not be deemed to be
‘‘soliciting material,’’ or to be ‘‘filed’’ with
the Commission or subject to Regulation 14A
or 14C (17 CFR 240.14a–1 through 240.14b–
2 or 240.14c–1 through 240.14c–101), other
than as provided in this Item, or to the
liabilities of section 18 of the Exchange Act
(15 U.S.C. 78r), except to the extent that the
small business issuer specifically requests
that the information be treated as soliciting
material or specifically incorporates it by
reference into a document filed under the
Securities Act or the Exchange Act. Such
information will not be deemed to be
incorporated by reference into any filing
under the Securities Act or the Exchange Act,
except to the extent that the small business
issuer specifically incorporates it by
reference.
2. The disclosure required by paragraphs
(d)(1)–(3) of this Item need only be provided
one time during any fiscal year.
3. The disclosure required by paragraph
(d)(3) of this Item need not be provided in
any filings other than a small business
issuer’s proxy or information statement
relating to an annual meeting of security
holders at which directors are to be elected
(or special meeting or written consents in
lieu of such meeting).
(e) Compensation committee. (1) If the
small business issuer does not have a
standing compensation committee or
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committee performing similar functions,
state the basis for the view of the board
of directors that it is appropriate for the
small business issuer not to have such
a committee and identify each director
who participates in the consideration of
executive officer and director
compensation.
(2) State whether or not the
compensation committee has a charter.
If the compensation committee has a
charter, provide the disclosure required
by Instruction 2 to this Item regarding
the compensation committee charter.
(3) Provide a narrative description of
the small business issuer’s processes
and procedures for the consideration
and determination of executive and
director compensation, including:
(i)(A) The scope of authority of each
of the compensation committee (or
persons performing the equivalent
functions); and
(B) The extent to which the
compensation committee (or persons
performing the equivalent functions)
may delegate any authority described in
paragraph (e)(3)(i)(A) of this Item to
other persons, specifying what authority
may be so delegated and to whom;
(ii) Any role of executive officers in
determining or recommending the
amount or form of executive and
director compensation; and
(iii) Any role of compensation
consultants in determining or
recommending the amount or form of
executive and director compensation,
identifying such consultants, stating
whether such consultants are engaged
directly by the compensation committee
(or persons performing the equivalent
functions) or any other person,
describing the nature and scope of their
assignment, the material elements of the
instructions or directions given to the
consultants with respect to the
performance of their duties under the
engagement and identifying the
executive officer within the small
business issuer the consultants
contacted in carrying out their
assignment.
(f) Shareholder communications and
annual meeting attendance. (1) State
whether or not the small business
issuer’s board of directors provides a
process for security holders to send
communications to the board of
directors and, if the small business
issuer does not have such a process for
security holders to send
communications to the board of
directors, state the basis for the view of
the board of directors that it is
appropriate for the small business issuer
not to have such a process.
(2) If the small business issuer has a
process for security holders to send
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communications to the board of
directors:
(i) Describe the manner in which
security holders can send
communications to the board and, if
applicable, to specified individual
directors; and
(ii) If all security holder
communications are not sent directly to
board members, describe the small
business issuer’s process for
determining which communications
will be relayed to board members.
the charter in an appendix to the small
business issuer’s proxy statement that is
provided to security holders at least once
every three fiscal years, or if the charter has
been materially amended since the beginning
of the small business issuer’s last fiscal year.
If a current copy of the charter is not
available to security holders on the small
business issuer’s Web site, and is not
included as an appendix to the small
business issuer’s proxy statement, identify in
which of the prior fiscal years the charter was
so included in satisfaction of this
requirement.
Instructions to Item 407(f). 1. In lieu of
providing the information required by
paragraph (f)(2) of this Item in the proxy
statement, the small business issuer may
instead provide the small business issuer’s
Web site address where such information
appears.
2. For purposes of the disclosure required
by paragraph (f)(2)(ii) of this Item, a small
business issuer’s process for collecting and
organizing security holder communications,
as well as similar or related activities, need
not be disclosed provided that the small
business issuer’s process is approved by a
majority of the independent directors.
3. For purposes of this paragraph,
communications from an officer or director of
the small business issuer will not be viewed
as ‘‘security holder communications.’’
Communications from an employee or agent
of the small business issuer will be viewed
as ‘‘security holder communications’’ for
purposes of this paragraph only if those
communications are made solely in such
employee’s or agent’s capacity as a security
holder.
4. For purposes of this paragraph, security
holder proposals submitted pursuant to
§ 240.14a–8 of this chapter, and
communications made in connection with
such proposals, will not be viewed as
‘‘security holder communications.’’
Instructions to Item 407. 1. For purposes of
this Item:
a. Listed issuer means a listed issuer as
defined in § 240.10A–3 of this chapter;
b. National securities exchange means a
national securities exchange registered
pursuant to section 6(a) of the Exchange Act
(15 U.S.C. 78f(a));
c. Inter-dealer quotation system means an
automated inter-dealer quotation system of a
national securities association registered
pursuant to section 15A(a) of the Exchange
Act (15 U.S.C. 78o–3(a)); and
d. National securities association means a
national securities association registered
pursuant to section 15A(a) of the Exchange
Act (15 U.S.C. 78o–3(a)) that has been
approved by the Commission (as that
definition may be modified or
supplemented).
2. With respect to paragraphs (c)(2)(i),
(d)(1) and (e)(2) of this Item, disclose whether
a current copy of the applicable committee
charter is available to security holders on the
small business issuer’s Web site, and if so,
provide the small business issuer’s Web site
address. If a current copy of the charter is not
available to security holders on the small
business issuer’s Web site, include a copy of
PART 229—STANDARD
INSTRUCTIONS FOR FILING FORMS
UNDER SECURITIES ACT OF 1933,
SECURITIES EXCHANGE ACT OF 1934
AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—
REGULATION S–K
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9. The authority citation for part 229
continues to read in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
78o, 78u–5, 78w, 78ll, 78mm, 79e, 79j, 79n,
79t, 80a–8, 80a–9, 80a–20, 80a–29, 80a–30,
80a–31(c), 80a–37, 80a–38(a), 80a–39, 80b–
11, and 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
10. Amend § 229.201 by revising
Instruction 2 to paragraph (d) to read as
follows:
§ 229.201 (Item 201) Market price of and
dividends on the registrant’s common
equity and related stockholder matters.
*
*
*
*
*
Instructions to paragraph (d). 1. * * *
2. For purposes of this paragraph, an
‘‘individual compensation arrangement’’
includes, but is not limited to, the following:
a written compensation contract within the
meaning of ‘‘employee benefit plan’’ under
§ 230.405 of this chapter and a plan (whether
or not set forth in any formal document)
applicable to one person as provided under
Item 402(a)(6)(ii) of Regulation S–K
(§ 229.402(a)(6)(ii)).
*
*
§ 229.306
*
*
*
[Removed and reserved]
11. Remove and reserve § 229.306.
12. Amend § 229.401 by removing
paragraphs (h), (i) and (j) and by
revising paragraph (g)(1) to read as
follows:
§ 229.401 (Item 401) Directors, executive
officers, promoters and control persons.
*
*
*
*
*
(g) Promoters and control persons. (1)
Registrants, which have not been subject
to the reporting requirements of section
13(a) or 15(d) of the Exchange Act (15
U.S.C. 78m(a), 78o(d)) for the twelve
months immediately prior to the filing
of the registration statement, report, or
statement to which this Item is
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applicable, and which had a promoter at
any time during the past five fiscal
years, shall describe with respect to any
promoter, any of the events enumerated
in paragraphs (f)(1) through (f)(6) of this
Item that occurred during the past five
years and that are material to a voting
or investment decision.
*
*
*
*
*
13. Revise § 229.402 to read as
follows:
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§ 229.402 (Item 402) Executive
compensation.
(a) General. (1) Treatment of foreign
private issuers. A foreign private issuer
will be deemed to comply with this Item
if it provides the information required
by Items 6.B and 6.E.2 of Form 20–F (17
CFR 249.220f), with more detailed
information provided if otherwise made
publicly available or required to be
disclosed by the issuer’s home
jurisdiction or a market in which its
securities are listed or traded.
(2) All compensation covered. This
Item requires clear, concise and
understandable disclosure of all plan
and non-plan compensation awarded to,
earned by, or paid to the named
executive officers designated under
paragraph (a)(3) of this Item, and
directors covered by paragraph (l) of this
Item, by any person for all services
rendered in all capacities to the
registrant and its subsidiaries, unless
otherwise specifically excluded from
disclosure in this Item. All such
compensation shall be reported
pursuant to this Item, even if also called
for by another requirement, including
transactions between the registrant and
a third party where a purpose of the
transaction is to furnish compensation
to any such named executive officer or
director. No amount reported as
compensation for one fiscal year need
be reported in the same manner as
compensation for a subsequent fiscal
year; amounts reported as compensation
for one fiscal year may be required to be
reported in a different manner pursuant
to this Item.
(3) Persons covered. Disclosure shall
be provided pursuant to this Item for
each of the following (the ‘‘named
executive officers’’):
(i) All individuals serving as the
registrant’s principal executive officer or
acting in a similar capacity during the
last completed fiscal year (‘‘PEO’’),
regardless of compensation level;
(ii) All individuals serving as the
registrant’s principal financial officer or
acting in a similar capacity during the
last completed fiscal year (‘‘PFO’’),
regardless of compensation level;
(iii) The registrant’s three most highly
compensated executive officers other
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than the PEO and PFO who were
serving as executive officers at the end
of the last completed fiscal year; and
(iv) Up to two additional individuals
for whom disclosure would have been
provided pursuant to paragraph
(a)(3)(iii) of this Item but for the fact that
the individual was not serving as an
executive officer of the registrant at the
end of the last completed fiscal year.
Instructions to Item 402(a)(3). 1.
Determination of most highly compensated
executive officers. The determination as to
which executive officers are most highly
compensated shall be made by reference to
total compensation for the last completed
fiscal year (as required to be disclosed
pursuant to paragraph (c)(2)(iii) of this Item),
provided, however, that no disclosure need
be provided for any executive officer, other
than the PEO and PFO, whose total
compensation does not exceed $100,000.
2. Inclusion of executive officer of
subsidiary. It may be appropriate for a
registrant to include as named executive
officers one or more executive officers of
subsidiaries in the disclosure required by this
Item. See Rule 3b–7 under the Exchange Act
(17 CFR 240.3b–7).
3. Exclusion of executive officer due to
overseas compensation. It may be
appropriate in limited circumstances for a
registrant not to include in the disclosure
required by this Item an individual, other
than its PEO or PFO, who is one of the
registrant’s most highly compensated
executive officers due to the payment of
amounts of cash compensation relating to
overseas assignments attributed
predominantly to such assignments.
(4) Information for full fiscal year. If
the PEO or PFO served in that capacity
during any part of a fiscal year with
respect to which information is
required, information should be
provided as to all of his or her
compensation for the full fiscal year. If
a named executive officer (other than
the PEO or PFO) served as an executive
officer of the registrant (whether or not
in the same position) during any part of
the fiscal year with respect to which
information is required, information
shall be provided as to all compensation
of that individual for the full fiscal year.
(5) Omission of table or column. A
table or column may be omitted, if there
has been no compensation awarded to,
earned by, or paid to any of the named
executive officers required to be
reported in that table or column in any
fiscal year covered by that table.
(6) Definitions. For purposes of this
Item:
(i) The term stock appreciation rights
(‘‘SARs’’) refers to SARs payable in cash
or stock, including SARs payable in
cash or stock at the election of the
registrant or a named executive officer.
(ii) The term plan includes, but is not
limited to, the following: Any plan,
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contract, authorization or arrangement,
whether or not set forth in any formal
documents, pursuant to which cash,
securities, similar instruments, or any
other property may be received. A plan
may be applicable to one person.
Registrants may omit information
regarding group life, health,
hospitalization, or medical
reimbursement plans that do not
discriminate in scope, terms or
operation, in favor of executive officers
or directors of the registrant and that are
available generally to all salaried
employees.
(iii) The term incentive plan means
any plan providing compensation
intended to serve as incentive for
performance to occur over a specified
period, whether such performance is
measured by reference to financial
performance of the registrant or an
affiliate, the registrant’s stock price, or
any other performance measure. A nonstock incentive plan is an incentive plan
or portion of an incentive plan where
the relevant performance measure is not
based on the price of the registrant’s
equity securities or the award does not
permit settlement by issuance of
registrant equity securities. The term
incentive plan award means an award
provided under an incentive plan.
(b) Compensation discussion and
analysis. (1) Discuss the compensation
awarded to, earned by, or paid to the
named executive officers. The
discussion shall explain all elements of
the registrant’s compensation of the
named executive officers. The
discussion shall describe the following:
(i) The objectives of the registrant’s
compensation programs;
(ii) What the compensation program is
designed to reward and not reward;
(iii) Each element of compensation;
(iv) Why the registrant chooses to pay
each element;
(v) How the registrant determines the
amount (and, where applicable, the
formula) for each element to pay; and
(vi) How each compensation element
and the registrant’s decisions regarding
that element fit into the registrant’s
overall compensation objectives and
affect decisions regarding other
elements.
(2) While the material information to
be disclosed under Compensation
Discussion and Analysis will vary
depending upon the facts and
circumstances, examples of such
information may include, in a given
case, among other things, the following:
(i) The policies for allocating between
long-term and currently paid out
compensation;
(ii) The policies for allocating
between cash and non-cash
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compensation, and among different
forms of non-cash compensation;
(iii) For long-term compensation, the
basis for allocating compensation to
each different form of award (such as
relationship of the award to the
achievement of the registrant’s longterm goals, management’s exposure to
downside equity performance risk,
correlation between cost to registrant
and expected benefits to the registrant);
(iv) For equity-based compensation,
how the determination is made as to
when awards are granted;
(v) What specific items of corporate
performance are taken into account in
setting compensation policies and
making compensation decisions;
(vi) How specific forms of
compensation are structured to reflect
the named executive officer’s individual
performance and/or individual
contribution to these items of the
registrant’s performance, describing the
elements of individual performance
and/or contribution that are taken into
account;
(vii) How specific forms of
compensation are structured to reflect
these items of the registrant’s
performance, including whether
discretion can be exercised (either to
award compensation absent attainment
of the relevant performance goal(s) or to
reduce or increase the size of an award);
(viii) The factors considered in
decisions to increase or decrease
compensation materially;
(ix) How compensation or amounts
realizable from prior compensation (e.g.,
gains from prior option or stock awards)
are considered in setting other elements
of compensation (e.g., how gains from
prior option or stock awards are
considered in setting retirement
benefits);
(x) The impact of the accounting and
tax treatments of the particular form of
compensation;
(xi) The registrant’s equity or other
security ownership requirements or
guidelines (specifying applicable
amounts and forms of ownership), and
any registrant policies regarding
hedging the economic risk of such
ownership;
(xii) Whether the registrant engaged in
any benchmarking of total
compensation, or any material element
of compensation, identifying the
benchmark and, if applicable, its
components (including component
companies); and
(xiii) The role of executive officers in
determining executive compensation.
Instructions to Item 402(b). 1. The purpose
of the Compensation Discussion and
6611
Analysis is to provide to investors material
information that is necessary to an
understanding of the registrant’s
compensation policies and decisions
regarding the named executive officers.
2. The Compensation Discussion and
Analysis should be of the information
contained in the tables and otherwise
disclosed pursuant to this Item.
3. The Compensation Discussion and
Analysis should focus on the material
principles underlying the registrant’s
executive compensation policies and
decisions and the most important factors
relevant to analysis of those policies and
decisions, and shall not use boilerplate
language or repeat the more detailed
information set forth in the tables and
narrative disclosures that follow.
4. Registrants are not required to disclose
target levels with respect to specific
quantitative or qualitative performancerelated factors considered by the
compensation committee or the board of
directors, or any factors or criteria involving
confidential commercial or business
information, the disclosure of which would
have an adverse effect on the registrant.
(c) Summary compensation table. (1)
General. Provide the information
specified in paragraph (c)(2) of this
Item, concerning the compensation of
the named executive officers for each of
the registrant’s last three completed
fiscal years, in a Summary
Compensation Table in the tabular
format specified below.
SUMMARY COMPENSATION TABLE
(a)
PEO ..................................
PFO ..................................
A .......................................
B .......................................
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C .......................................
Year
Total
($)
Salary
($)
Bonus
($)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(b)
Name and principal
position
(c)
(d)
(e)
(f)
(g)
(h)
(i)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2) The Table shall include:
(i) The name and principal position of
the named executive officer (column
(a));
(ii) The fiscal year covered (column
(b));
(iii) The dollar value of total
compensation for the covered fiscal year
(column (c)). With respect to each
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named executive officer, disclose the
sum of all amounts reported in columns
(d) through (i);
(iv) The dollar value of base salary
(cash and non-cash) earned by the
named executive officer during the
fiscal year covered (column (d));
(v) The dollar value of bonus (cash
and non-cash) earned by the named
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executive officer during the fiscal year
covered (column (e));
Instructions to Item 402(c)(2)(iv) and (v). 1.
If the amount of salary or bonus earned in a
given fiscal year is not calculable through the
latest practicable date, a footnote shall be
included disclosing that the amount of salary
or bonus is not calculable through the latest
practicable date and providing the date that
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the amount of salary or bonus is expected to
be determined, and such amount must be
disclosed in a filing under Item 5.02(e) of
Form 8–K (17 CFR 249.308).
2. Registrants need not include in the
salary column (column (d)) or bonus column
(column (e)) any amount of salary or bonus
forgone at the election of a named executive
officer pursuant to a registrant’s program
under which stock, stock-based or other
forms of non-cash compensation may be
received by a named executive officer instead
of a portion of annual compensation earned
in a covered fiscal year. However, the receipt
of any such form of non-cash compensation
instead of salary or bonus earned for a
covered fiscal year must be disclosed in the
appropriate column of the Summary
Compensation Table corresponding to that
fiscal year (e.g., stock awards (column (f));
option awards (column (g)); all other
compensation (column (i)); or if made
pursuant to a non-stock incentive plan and
therefore not reportable at grant in the
Summary Compensation Table, a footnote
must be added to the salary or bonus column
so disclosing and referring to the Grants of
Performance-Based Awards Table (required
by paragraph (d) of this Item) where the
award is reported.
wwhite on PROD1PC61 with PROPOSALS2
(vi) For awards of stock, including
restricted stock, restricted stock units,
phantom stock, phantom stock units,
common stock equivalent units and
other similar instruments that do not
have option-like features, the aggregate
grant date fair value computed in
accordance with Financial Accounting
Standards Board Statement of Financial
Accounting Standards No. 123 (revised
2004), Share-Based Payment (‘‘FAS
123R’’), as modified or supplemented,
applying the same valuation model and
assumptions as the registrant applies for
financial statement reporting purposes,
and all earnings on any outstanding
awards (column (f));
(vii) For awards of stock options, with
or without tandem SARs, freestanding
SARs and other similar instruments
with option-like features (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R applying the same valuation
model and assumptions as the registrant
applies for financial statement reporting
purposes, and all earnings on any
outstanding awards (column (g));
Instructions to Item 402(c)(2)(vi) and (vii).
1. For awards reported in columns (f) and (g),
include a footnote disclosing all assumptions
made in the valuation, by reference to a
discussion of those assumptions in the
registrant’s financial statements, footnotes to
the financial statements, or discussion in the
Management’s Discussion and Analysis. The
sections so referenced are deemed part of the
disclosure provided pursuant to this Item.
2. If at any time during the last completed
fiscal year, the registrant has adjusted or
amended the exercise price of stock options
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or SARs previously awarded to a named
executive officer, whether through
amendment, cancellation or replacement
grants, or any other means (‘‘repriced’’), or
otherwise has materially modified such
awards, the registrant shall include, as
awards required to be reported in column (g),
the total fair value of options or SARs as so
repriced or modified, measured as of the
repricing or modification date.
3. All earnings on outstanding awards must
be identified and quantified in a footnote to
column (f) or (g), as applicable, whether the
earnings were paid during the fiscal year,
payable during the period but deferred, or
payable by their terms at a later date.
(viii) The dollar value of all earnings
for services performed during the fiscal
year pursuant to awards under nonstock incentive plans as defined in
paragraph (a)(6)(iii) of this Item, and all
earnings on any outstanding awards
(column (h)); and
Instructions to Item 402(c)(2)(viii). 1. If the
relevant performance measure is satisfied
during the fiscal year (including for a single
year in a plan with a multi-year performance
measure), the earnings are reportable for that
fiscal year, even if not payable until a later
date, and are not reportable again in the fiscal
year when amounts are paid to the named
executive officer.
2. All earnings on non-stock incentive plan
compensation must be identified and
quantified in a footnote to column (h),
whether the earnings were paid during the
fiscal year, payable during the period but
deferred at the election of the named
executive officer, or payable by their terms at
a later date.
(ix) All other compensation for the
covered fiscal year that the registrant
could not properly report in any other
column of the Summary Compensation
Table (column (i)). Each compensation
item that is not properly reportable in
columns (d)–(h) must be reported in this
column and must be identified and
quantified in a footnote if the amount of
the item exceeds $10,000 (or in the case
of any perquisite or personal benefit,
must be identified unless the aggregate
value of perquisites and personal
benefits is less than $10,000, and must
be quantified if it is valued at the greater
of $25,000 or 10% of total perquisites
and other personal benefits as specified
in Instruction 3 to this paragraph). Such
compensation must include, but is not
limited to:
(A) Perquisites and other personal
benefits, or property, unless the
aggregate amount of such compensation
is less than $10,000;
(B) All earnings on compensation that
is deferred on a basis that is not taxqualified, including such earnings on
non-qualified defined contribution
plans;
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(C) All ‘‘gross-ups’’ or other amounts
reimbursed during the fiscal year for the
payment of taxes;
(D) For any security of the registrant
or its subsidiaries purchased from the
registrant or its subsidiaries (through
deferral of salary or bonus, or otherwise)
at a discount from the market price of
such security at the date of purchase,
unless that discount is available
generally, either to all security holders
or to all salaried employees of the
registrant, the compensation cost
computed in accordance with FAS 123R
applying the same valuation model and
assumptions as the registrant applies for
financial statement reporting purposes;
(E) The amount paid or accrued to any
named executive officer pursuant to a
plan or arrangement in connection with:
(1) Any termination, including
without limitation through retirement,
resignation, severance or constructive
termination (including a change in
responsibilities) of such executive
officer’s employment with the registrant
and its subsidiaries; or
(2) A change in control of the
registrant;
(F) Registrant contributions or other
allocations to vested and unvested
defined contribution plans;
(G) The aggregate increase in actuarial
value to the named executive officer of
all defined benefit and actuarial pension
plans (including supplemental plans)
accrued during the registrant’s covered
fiscal year; and
(H) The dollar value of any insurance
premiums paid by, or on behalf of, the
registrant during the covered fiscal year
with respect to life insurance for the
benefit of a named executive officer.
Instructions to Item 402(c)(2)(ix). 1.
Incentive plan awards and earnings; earnings
on restricted stock, options, SARs and similar
awards; and amounts received on exercise of
options and SARs are required to be reported
elsewhere as provided in this Item and are
not reportable as All Other Compensation in
column (i).
2. Benefits paid pursuant to defined benefit
and actuarial plans are reportable as All
Other Compensation in column (i) if paid to
the named executive officer during the
period covered by the Table. Otherwise
information concerning these plans is
reportable pursuant to paragraph (i) of this
Item.
3. Each perquisite or personal benefit must
be identified by type unless the aggregate
value of perquisites and personal benefits is
less than $10,000 and each perquisite or
personal benefit that exceeds the greater of
$25,000 or 10% of the total amount of
perquisites and personal benefits must be
quantified for a named executive officer
pursuant to paragraph (c)(2)(ix)(A) of this
Item, and each item reported for a named
executive officer pursuant to paragraph
(c)(2)(ix) of this Item that exceeds $10,000
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must be identified by type and amount in a
footnote to column (i). All items of
compensation are required to be included in
the Summary Compensation Table without
regard to whether such items are required to
be so identified. Reimbursements of taxes
owed with respect to perquisites or other
personal benefits are subject to inclusion in
column (i) and to separate quantification and
identification as tax reimbursements
(paragraph (c)(2)(ix)(C) of this Item) even if
the associated perquisites or other personal
benefits are not required to be separately
quantified or the perquisite or other personal
benefit is not required to be included because
the aggregate amount of such compensation
is less than $10,000.
4. Perquisites and other personal benefits
shall be valued on the basis of the aggregate
incremental cost to the registrant and its
subsidiaries.
5. Regarding paragraph (c)(2)(ix)(B) of this
Item, if the applicable interest rates vary
depending upon conditions such as a
minimum period of continued service, the
reported amount should be calculated
assuming satisfaction of all conditions to
receiving interest at the highest rate. Footnote
disclosure may be provided disclosing the
portion of any earnings that the registrant
considers to be paid at an above-market rate,
provided that the footnote explains the
registrant’s criteria for determining the
portion considered to be above market.
6. The disclosure required pursuant to
paragraph (c)(2)(ix)(G) of this Item applies to
each plan that provides for the payment of
retirement benefits, or benefits that will be
paid primarily following retirement,
including but not limited to tax-qualified
defined benefit plans and supplemental
employee retirement plans, but excluding
tax-qualified defined contribution plans and
nonqualified defined contribution plans.
Instructions to Item 402(c). 1. Information
with respect to fiscal years prior to the last
completed fiscal year will not be required if
the registrant was not a reporting company
pursuant to section 13(a) or 15(d) of the
Exchange Act (15 U.S.C. 78m(a), 78o(d)) at
any time during that year, except that the
registrant will be required to provide
information for any such year if that
information previously was required to be
provided in response to a Commission filing
requirement.
2. All compensation values reported in the
Summary Compensation Table must be
reported in dollars. Where compensation was
paid to or received by a named executive
officer in a different currency, a footnote
must be provided to identify that currency
and describe the rate and methodology used
to convert the payment amounts to dollars.
3. If a named executive officer is also a
director who receives compensation for his
or her services as a director, reflect that
compensation in the Summary Compensation
Table and provide a footnote identifying and
itemizing such compensation and amounts.
Use the categories in the Director
Compensation Table required pursuant to
paragraph (l) of this Item.
4. Amounts deferred at the election of a
named executive officer or at the direction of
the registrant, whether pursuant to a plan
established under section 401(k) of the
Internal Revenue Code (26 U.S.C. 401(k)), or
otherwise, shall be included in the
appropriate column for the fiscal year in
which earned. The amount so deferred must
be disclosed in a footnote to the applicable
column.
(d) Grants of performance-based
awards table. (1) Provide the
information specified in paragraph
(d)(2) of this Item, concerning each grant
of an award made to a named executive
officer in the last completed fiscal year
under any performance-based plan
(including a performance-based portion
of any plan), including awards that
subsequently have been transferred, in
the following tabular format:
GRANTS OF PERFORMANCE-BASED AWARDS
Name
Performance-based
stock and
stock-based
incentive
plans: number of
shares,
units or
other rights
(#)
Performance-based
options:
number of
securities
underlying
options
(#)
Non-stock
incentive
plan
awards:
number of
units or
other rights
(#)
Dollar
amount of
consideration paid
for award, if
any
($)
Grant date
for stock or
option
awards
Performance or
other period
until vesting
or payout
and option
expiration
date
Estimated future payouts
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Threshold
($)
or
(#)
Target
($)
or
(#)
Maximum
($)
or
(#)
(h)
(i)
(j)
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PEO ..........
PFO ..........
A ...............
B ...............
C ...............
(2) The Table shall include:
(i) The name of the named executive
officer (column (a));
(ii) The number of shares of
performance-based stock, including
restricted stock, restricted stock units,
phantom stock, phantom stock units,
common stock equivalent units or
similar instruments that do not have
option-like features granted under an
award, and the number of shares, units
or other rights granted under an award
under any stock-based incentive plan
(and if applicable, the number of shares
underlying any such unit or right)
(column (b));
(iii) The number of performancebased options, SARs, and similar
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instruments with option-like features
(column (c)) granted under an award
under any such plan;
(iv) The number of units or other
rights granted under an award under
any non-stock incentive plan (column
(d));
(v) The dollar amount of
consideration, if any, paid by the
executive officer for the award (column
(e));
(vi) The grant date for stock, option or
similar awards reported in columns (b)
and (c) (column (f));
(vii) The performance or other time
period until earning, payout or
maturation of the award, and the
option/SAR expiration date (column
(g)); and
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(viii) The dollar value of the estimated
future payout or the number of shares to
be awarded in the future as the payout
on satisfaction of the conditions in
question, or the applicable range of
estimated payouts denominated in
dollars or number of shares under the
award (threshold, target and maximum
amount) (columns (h) through (j)).
Instructions to Item 402(d). 1. Separate
disclosure shall be provided in the Table for
each grant of an award made to a named
executive officer, accompanied by the
information specified in Instruction 2 to this
paragraph. If grants of awards were made to
a named executive officer during the fiscal
year under more than one plan, identify the
particular plan under which each such grant
was made.
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2. For column (h), threshold refers to the
minimum amount payable for a certain level
of performance under the plan. For column
(i), target refers to the amount payable if the
specified performance target(s) are reached.
For column (j), maximum refers to the
maximum payout possible under the plan. If
the award provides only for a single
estimated payout, that amount should be
reported as the target in column (i). In
column (i), registrants must provide a
representative amount based on the previous
fiscal year’s performance if the target amount
is not determinable.
3. A tandem grant of two instruments, only
one of which is performance-based, such as
an option granted in tandem with a
performance share, need be reported only in
the table applicable to the other instrument.
For example, an option granted in tandem
with a performance share would be reported
only as an option grant, with the tandem
feature noted.
4. Options, SARs and similar option-like
instruments granted in connection with a
repricing transaction shall be reported in this
table. See Instruction 2 to paragraphs
(c)(2)(vi) and (vii) of this item.
(e) Grants of all other equity awards
table. (1) Provide the information
specified in paragraph (e)(2) of this
Item, concerning each grant of an
equity-based award that is not
performance-based (including awards
that subsequently have been transferred)
made during the last completed fiscal
year to each of the named executive
officers in the following tabular format:
GRANTS OF ALL OTHER EQUITY AWARDS
Name
Number of
securities
underlying
options
granted
(#)
Exercise or
base price
($/Sh)
(a)
(b)
Expiration
date
Number of
shares of
stock or
units granted
(#)
Vesting date
Grant date
(c)
(d)
(e)
(f)
(g)
PEO ..................................................................................
PFO ..................................................................................
A .......................................................................................
B .......................................................................................
C .......................................................................................
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(2) The Table shall include, with
respect to each grant:
(i) The name of the executive officer
(column (a));
(ii) The number of securities
underlying options, SARs and similar
option-like instruments granted that are
not performance-based (column (b));
(iii) The per-share exercise or base
price of the options, SARs and similar
option-like instruments granted (column
(c)). If such exercise or base price is less
than the market price of the underlying
security on the date of the grant, a
separate, adjoining column shall be
added showing market price on the date
of the grant;
(iv) The expiration date of the
options, SARs and similar option-like
instruments (column (d));
(v) The number of shares of stock,
including restricted stock, units and
similar instruments that are not optionlike, granted that are not performancebased (column (e));
(vi) The vesting date of the restricted
shares, units and similar instruments
(column (f)); and
(vii) The grant date of any options,
stock or similar instruments reported in
columns (b) and (e) (column (g)).
Instructions to Item 402(e). 1. The awards
reportable in this Table are share-based
awards that are not subject to a performance
condition or a market condition, as those
terms are defined in FAS 123R.
2. If more than one award was made to a
named executive officer during the last
completed fiscal year, a separate line should
be used to disclose each such award.
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However, multiple option grants during a
single fiscal year may be aggregated where
each grant was made at the same exercise
and/or base price and has the same
expiration date. A single grant consisting of
options, SARs and/or similar option-like
instruments shall be reported as separate
grants with respect to each tranche with a
different exercise and/or base price or
expiration date.
3. Options, SARs and similar option-like
instruments granted in connection with a
repricing transaction shall be reported in this
Table. See Instruction 2 to paragraphs
(c)(2)(vi) and (vii) of this Item.
4. Any material term of the grant or award,
including but not limited to the date of
exercisability, the number and nature of any
tandem instruments, a reload feature, or a
tax-reimbursement feature, must be described
in a footnote.
5. If any provision of a grant or award
(other than an antidilution provision) could
cause the exercise price to be lowered,
registrants must disclose that provision and
its potential consequences either by a
footnote or accompanying textual narrative.
6. In determining if the exercise or base
price of the options, SARs and similar
option-like instruments is less than the
market price of the underlying security on
the date of the grant, the registrant may use
either the closing price per share of the
security on an established public trading
market on the date of the grant, or if no such
market exists, any other formula prescribed
for the security.
(f) Narrative disclosure to summary
compensation table and subsidiary
tables. (1) Provide a narrative
description of any material factors
necessary to an understanding of the
information disclosed in the tables
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required by paragraphs (c), (d) and (e) of
this Item. Examples of such factors may
include, in given cases, among other
things:
(i) The material terms of each named
executive officer’s employment
agreement or arrangement, whether
written or unwritten.
(ii) If at any time during the last fiscal
year, any outstanding option, SAR or
other equity-based award was repriced
or otherwise materially modified (such
as by extension of exercise periods, the
change of vesting or forfeiture
conditions, the change or elimination of
applicable performance criteria, or the
change of the bases upon which returns
are determined), a description of each
such repricing or other material
modification.
(iii) The material terms of any award
reported in response to paragraph (d) of
this Item, including a general
description of the formula or criteria to
be applied in determining the amounts
payable, and the vesting schedule. For
example, state where applicable that
dividends will be paid on stock
(including restricted stock, restricted
stock units or other similar
instruments), and if so, the applicable
dividend rate and whether that rate is
preferential. Describe the performancebased conditions, and any other
material conditions, that are applicable
to the award. Registrants are not
required to disclose any factor, criteria
or performance-related or other
condition to payout or maturation of a
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particular award that involves
confidential commercial or business
information, disclosure of which would
adversely affect the registrant’s
competitive position. For purposes of
the Table required by paragraph (d) of
this Item and the narrative disclosure
required by paragraph (f) of this Item,
performance-based conditions include
both performance conditions and
market conditions, as those terms are
defined in FAS 123R.
(iv) The waiver or modification of any
specified performance target, goal or
condition to payout with respect to any
amount included in non-stock incentive
plan compensation reported in column
(h) to the Summary Compensation Table
required by paragraph (c) of this Item,
stating whether the waiver or
modification applied to one or more
specified named executive officers or to
all compensation subject to the target,
goal or condition.
(v) The assumptions underlying any
determination of an increase in the
actuarial value of defined benefit and
actuarial plans and the method of
calculating earnings on deferred
compensation plans including defined
contribution plans.
Instruction to Item 402(f)(1). 1. Include a
discussion of provisions regarding posttermination compensation only to the extent
disclosure of such compensation is required
in the Summary Compensation Table
pursuant to paragraph (c)(2)(ix)(E) of this
Item; otherwise disclose these provisions
pursuant to paragraph (k) of this Item.
2. The disclosure required by paragraph
(f)(2) of this Item would not apply to any
repricing that occurs through a pre-existing
formula or mechanism in the plan or award
that results in the periodic adjustment of the
option or SAR exercise or base price, an
antidilution provision in a plan or award, or
a recapitalization or similar transaction
equally affecting all holders of the class of
securities underlying the options or SARs.
6615
(2) For up to three employees who
were not executive officers during the
last completed fiscal year and whose
total compensation for the last
completed fiscal year was greater than
that of any of the named executive
officers, disclose each of such
employee’s total compensation for that
year and describe their job positions.
(g) Outstanding equity awards at
fiscal year-end table. (1) Provide the
information specified in paragraph (g)(2)
of this Item, concerning the number and
value of unexercised options, SARs and
similar instruments; nonvested stock
(including restricted stock, restricted
stock units or other similar
instruments); and incentive plan awards
for each named executive officer
outstanding as of the end of the
registrant’s last completed fiscal year on
an aggregated basis in the following
tabular format:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Number of
securities underlying
unexercised
options
(#)
exercisable/
unexercisable
In-the-money
amount of
unexercised
options
($)
exercisable/
unexercisable
Number of
shares or
units of
stock held
that have
not vested
(#)
Market
value of
nonvested
shares or
units of
stock held
that have
not vested
($)
Incentive
plans: number of nonvested
shares,
units or
other rights
held
(#)
Incentive
plans: market or payout value of
nonvested
shares,
units or
other rights
held
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
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PEO .............................................................................
PFO .............................................................................
A ..................................................................................
B ..................................................................................
C ..................................................................................
(2) The Table shall include:
(i) The name of the named executive
officer (column (a));
(ii) The total number of securities
underlying unexercised options, SARs
and similar instruments with optionlike features held at the end of the last
completed fiscal year, including awards
that have been transferred, separately
identifying the exercisable and
unexercisable options, SARs and similar
instruments (column (b));
(iii) The aggregate in-the-money
amount of unexercised options, SARs
and similar instruments with optionlike features held at the end of the fiscal
year, including awards that have been
transferred, separately identifying the
exercisable and unexercisable options,
SARs and similar instruments (column
(c));
(iv) The total number of nonvested
shares of stock (including restricted
stock, restricted stock units or similar
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instruments that do not have option-like
features) held at the end of the fiscal
year (column (d));
(v) The aggregate market value of
nonvested shares of stock (including
restricted stock, restricted stock units or
similar instruments that do not have
option-like features) held at the end of
the fiscal year (column (e));
(vi) The total number of nonvested
shares, units or other rights awarded
under any incentive plan, and, if
applicable the number of shares
underlying any such unit or right, held
at the end of the fiscal year (column (f));
and
(vii) The aggregate market or payout
value of nonvested shares, units or other
rights awarded under any incentive plan
held at the end of the fiscal year
(column (g)).
securities exceeds the exercise or base price
of the option, SAR or similar instrument.
Compute the amounts in column (c) by
determining the difference between the
market price at fiscal year-end of the
securities underlying the options, SARs or
similar instruments and the exercise or base
price of the options, SARs or similar
instruments.
2. The expiration dates of options, SARs
and similar instruments held at fiscal yearend, separately identifying the exercisable
and unexercisable options, SARs and similar
instruments must be disclosed by footnote to
column (b). If the expiration date of an
option, SAR or similar instrument held at
fiscal year-end subsequently has occurred,
state whether it was exercised or expired
unexercised. The vesting dates of restricted
stock shares and similar instruments and
incentive plan awards held at fiscal-year end
must be disclosed by footnotes to columns
(d) and (f), respectively.
Instructions to Item 402(g)(2). 1. Options,
SARs or similar instruments are in-themoney if the market price of the underlying
3. Compute the market values of stock
(including restricted stock, restricted
stock units or similar instruments)
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holdings reported in column (e) and
equity-based incentive plan awards
reported in column (g) by multiplying
the closing market price of the
registrant’s stock at the end of the last
completed fiscal year by the number of
restricted stock or incentive plan award
holdings, respectively.
(h) Option exercises and stock vested
table. (1) Provide the information
specified in paragraph (h)(2) of this
Item, concerning each exercise of stock
options, SARs and similar instruments,
and each vesting of stock, including
restricted stock, restricted stock units
and similar instruments, during the last
completed fiscal year for each of the
named executive officers on an
aggregated basis in the following tabular
format:
OPTION EXERCISES AND STOCK VESTED
Name of executive officer
Number of
shares acquired on
exercise or
vesting
(#)
Value realized upon
exercise or
vesting
($)
Grant date
fair value
previously
reported in
summary
compensation table
($)
(a)
(b)
(c)
(d)
PEO—Options .........................................................................................................................................
Stock ........................................................................................................................................................
PFO—Options ..........................................................................................................................................
Stock ........................................................................................................................................................
A—Options ...............................................................................................................................................
Stock ........................................................................................................................................................
B—Options ...............................................................................................................................................
Stock ........................................................................................................................................................
C—Options ..............................................................................................................................................
Stock ........................................................................................................................................................
(2) The Table shall include:
(i) The name of the executive officer
(column (a));
(ii) The number of securities for
which the options, SARs and similar
instruments were exercised, and the
number of shares of stock, including
restricted stock, restricted stock units
and similar instruments that vested
(column (b));
(iii) The aggregate dollar value
realized upon exercise and vesting
(column (c)); and
(iv) The grant date fair value
previously reported in the Summary
Compensation Table for the same
options, SARs, and similar instruments,
and the same shares of stock, including
restricted stock, restricted stock units or
similar instruments (column (d)).
Instructions to Item 402(h)(2). 1. Report in
column (c), line 1, the aggregate dollar
amount realized by the named executive
officer upon exercise of the options, SARs
and similar instruments. Compute the dollar
amount realized upon exercise by
determining the difference between the
market price of the underlying securities at
exercise and the exercise or base price of the
options, SARs or similar instruments. Do not
include the value of any related payment or
other consideration provided (or to be
provided) by the registrant to or on behalf of
a named executive officer, whether in
payment of the exercise price or related
taxes. (Any such payment or other
consideration provided by the registration is
required to be disclosed in accordance with
paragraph (c)(2)(ix) of this item.) Report in
column (c), line 2, the aggregate dollar
amount realized by the named executive
officer upon the vesting of stock, including
restricted stock, restricted stock units and
similar instruments. Compute the aggregate
dollar amount realized upon vesting by
multiplying the number of shares of stock or
units by the market value of the underlying
shares on the vesting date.
2. Report in column (d), line 1, the
aggregate grant date fair value previously
reported in the registrant’s Summary
Compensation Table for the fiscal year of the
grant for the options, SARs and similar
instruments that were exercised by the
named executive officer during the last
completed fiscal year. Report in column (d),
line 2, the aggregate grant date fair value
previously reported in the registrant’s
Summary Compensation Table for the fiscal
year of the grant for the shares of stock or
units, including restricted stock, restricted
stock units and similar instruments held by
the named executive officer that vested
during the last completed fiscal year. If the
named executive officer was not previously
a named executive officer during the fiscal
year of the grant, report in column (d) the
grant date fair value of the award valued in
accordance with FAS 123R.
(i) Retirement plan potential annual
payments and benefits. (1) Provide the
information specified in paragraph (i)(2)
of this Item with respect to each plan
that provides for payments or other
benefits at, following, or in connection
with retirement, in the following tabular
format:
RETIREMENT PLAN POTENTIAL ANNUAL PAYMENTS AND BENEFITS
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Name
Plan name
Number of years
credited service
(#)
Normal retirement
age
(#)
Estimated normal
retirement annual
benefit
($)
Early retirement age
(#)
Estimated early
retirement annual
benefit
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
PEO
PFO
A ......
B ......
C ......
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(2) The Table shall include:
(i) The name of the executive officer
(column (a));
(ii) The name of the plan (column (b));
(iii) The number of years of service
credited to the named executive officer
under the plan (column (c));
(iv) The normal retirement age under
the plan (column (d));
(v) The estimated dollar amount of
annual payments and benefits that the
named executive officer would be
entitled to receive upon attaining
normal retirement age, or, if the named
executive officer currently is eligible to
retire, the dollar amount of annual
payments and benefits that the named
executive officer would be entitled to
receive, if he or she had retired at the
end of the registrant’s last completed
fiscal year (column (e));
(vi) The early retirement age, if
applicable, under the plan (column (f));
and
(vii) The estimated dollar amount of
annual payments and benefits that the
named executive officer would be
entitled to receive upon attaining early
retirement age, or, if the named
executive officer currently is eligible for
early retirement under the plan, the
dollar amount of annual payments and
benefits that the named executive officer
would be entitled to receive if he or she
had so retired at the end of the
registrant’s last completed fiscal year
(column (g)).
Instructions to Item 402(i)(2). 1. The
disclosure required pursuant to this Table
applies to each plan that provides for
specified retirement payments and benefits,
or payments and benefits that will be
provided primarily following retirement,
including but not limited to tax-qualified
defined benefit plans and supplemental
employee retirement plans, but excluding
tax-qualified defined contribution plans and
nonqualified defined contribution plans.
Provide a separate row for each such plan in
which the named executive officer
participates.
2. If a named executive officer’s number of
years of credited service with respect to any
plan is different from the named executive
officer’s number of actual years of service
with the registrant, provide footnote
disclosure quantifying the difference and any
resulting benefit augmentation.
3. Normal retirement age means normal
retirement age as defined in the plan, or if
not so defined, the earliest time at which a
participant may retire under the plan without
any benefit reduction due to age. Early
retirement age means early retirement age as
defined in the plan, or otherwise available to
the executive.
4. Quantification of payments and benefits
should reflect the form of benefit currently
elected by the executive, such as joint and
survivor annuity or single life annuity,
specifying that form in a footnote. Where the
named executive officer is not yet eligible to
retire, the dollar amount of annual payments
and benefits that the named executive officer
would be entitled to receive upon becoming
eligible shall be computed assuming that the
named executive officer will continue to earn
the same amount of compensation as
reported for the registrant’s last fiscal year.
(3) Provide a succinct narrative
description of any material factors
necessary to an understanding of each
plan covered by the tabular disclosure
required by this paragraph. While
material factors will vary depending
6617
upon the facts, examples of such factors
may include, in given cases, among
other things:
(i) The material terms and conditions
of payments and benefits available
under the plan, including the plan’s
normal retirement payment and benefit
formula and eligibility standards, and (if
applicable) early retirement payment
and benefit formula and eligibility
standards. If the plan permits a lump
sum distribution at the election of the
executive or the registrant, quantify the
amount of such distribution that would
be available on such election as of the
end of the registrant’s last fiscal year,
and disclose the valuation method and
all material assumptions applied in
quantifying such amount;
(ii) The specific elements of
compensation (e.g., salary, bonus, etc.)
included in applying the payment and
benefit formula, identifying each such
element;
(iii) With respect to named executive
officers’’ participation in multiple plans,
the reasons for each plan; and
(iv) Registrant policies with regard to
such matters as granting extra years of
credited service.
(j) Nonqualified defined contribution
and other deferred compensation plans.
(1) Provide the information specified in
paragraph (j)(2) of this Item with respect
to each defined contribution or other
plan that provides for the deferral of
compensation on a basis that is not taxqualified in the following tabular
format:
NONQUALIFIED DEFINED CONTRIBUTION AND OTHER DEFERRED COMPENSATION PLANS
Name
Executive
contributions in
last FY
($)
Registrant
contributions in last
FY
($)
Aggregate
earnings in
last FY
($)
Aggregate
withdrawals/
distributions
($)
Aggregate
balance at
last FYE
($)
(a)
(b)
(c)
(d)
(e)
(f)
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PEO .............................................................................................................
PFO ..............................................................................................................
A ...................................................................................................................
B ...................................................................................................................
C ..................................................................................................................
(2) The Table shall include:
(i) The name of the executive officer
(column (a));
(ii) The dollar amount of aggregate
executive contributions during the
registrant’s last fiscal year (column (b));
(iii) The dollar amount of aggregate
registrant contributions during the
registrant’s last fiscal year (column (c));
(iv) The dollar amount of aggregate
interest or other earnings accrued
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during the registrant’s last fiscal year
(column (d));
(v) The aggregate dollar amount of all
withdrawals by and distributions to the
executive during the registrant’s last
fiscal year (column (e)); and
(vi) The dollar amount of total balance
of the executive’s account as of the end
of the registrant’s last fiscal year
(column (f)).
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Instruction to Item 402(j)(2). Provide a
footnote quantifying the extent to which
amounts reported in the contributions and
earnings columns are reported as
compensation in the last completed fiscal
year in the registrant’s Summary
Compensation Table and amounts reported
in the aggregate balance at last fiscal year end
(column (f)) previously were reported as
compensation to the named executive officer
in the registrant’s Summary Compensation
Table for previous years.
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(3) Provide a succinct narrative
description of any material factors
necessary to an understanding of each
plan covered by tabular disclosure
required by this paragraph. While
material factors will vary depending
upon the facts, examples of such factors
may include, in given cases, among
other things:
(i) The type(s) of compensation
permitted to be deferred, and any
limitations (by percentage of
compensation or otherwise) on the
extent to which deferral is permitted;
(ii) The measures for calculating
interest or other plan earnings
(including whether such measure(s) are
selected by the executive or the
registrant and the frequency and manner
in which selections may be changed),
quantifying interest rates and other
earnings measures applicable during the
registrant’s last fiscal year; and
(iii) Material terms with respect to
payouts, withdrawals and other
distributions.
(k) Potential payments upon
termination or change-in-control.
Regarding each contract, agreement,
plan or arrangement, whether written or
unwritten, that provides for payment(s)
to a named executive officer at,
following, or in connection with any
termination, including without
limitation resignation, severance,
retirement or a constructive termination
of a named executive officer, or a
change in control of the registrant or a
change in the named executive officer’s
responsibilities, with respect to each
named executive officer:
(1) Describe and explain the specific
circumstances that would trigger
payment(s) or the provision of other
benefits, including perquisites;
(2) Describe and quantify the
estimated annual payments and benefits
that would be provided in each covered
circumstance, whether they would or
could be lump sum, or annual,
disclosing the duration, and by whom
they would be provided;
(3) Describe and explain the specific
factors used to determine the
appropriate payment and benefit levels
under the various circumstances that
trigger payments or provision of
benefits;
(4) Describe and explain any material
conditions or obligations applicable to
the receipt of payments or benefits,
including but not limited to noncompete, non-solicitation, nondisparagement or confidentiality
agreements, including the duration of
such agreements and provisions
regarding waiver of breach of such
agreements; and
(5) Describe any other material factors
regarding each such contract,
agreement, plan or arrangement.
Instruction to Item 402(k). The registrant
must provide quantitative disclosure under
these requirements even where uncertainties
exist as to amounts in given circumstances
payable under these plans and arrangements.
In the event that uncertainties exist as to the
provision of payments and benefits or the
amounts involved, the registrant is required
to make reasonable estimates and disclose
material assumptions underlying such
estimates in its disclosure. In such event the
disclosure would require forward-looking
information as appropriate. Perquisites and
other personal benefits or property may be
excluded only if the aggregate amount of
such compensation will be less than $10,000.
Individual perquisites and personal benefits
shall be identified and quantified as required
by Instruction 3 to paragraph (c)(2)(ix) of this
Item.
(l) Compensation of directors. (1)
Provide the information specified in
paragraph (l)(2) of this Item, concerning
the compensation of the directors for the
registrant’s last completed fiscal year, in
the following tabular format:
DIRECTOR COMPENSATION
Name
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Fees
earned or
paid in cash
($)
Stock
awards
($)
Option
awards
($)
Non-stock
incentive
plan compensation
($)
All other
compensation
($)
(a)
A
B
C
D
E
Total
($)
(b)
(c)
(d)
(e)
(f)
(g)
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
(2) The Table shall include:
(i) The name of each director unless
such director is also a named executive
officer under paragraph (a) of this Item
and his or her compensation for service
as a director is fully reflected in the
Summary Compensation Table pursuant
to paragraph (c) of this Item and
otherwise as required pursuant to
paragraphs 402(d)–(k) (column (a)) of
this Item;
(ii) The dollar value of total
compensation for the covered fiscal year
(column (b)). With respect to each
director, disclose the sum of all amounts
reported in columns (c) through (g);
(iii) The aggregate dollar amount of all
fees earned or paid in cash for services
as a director, including annual retainer
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fees, committee and/or chairmanship
fees, and meeting fees (column (c));
(iv) For awards of stock, including
restricted stock, restricted stock units,
phantom stock, phantom stock units,
common stock equivalent units or other
similar instruments that do not have
option-like features, the aggregate grant
date fair value computed in accordance
with FAS 123R, applying the same
valuation model and assumptions as the
registrant applies for financial statement
reporting purposes, and all earnings on
any outstanding awards (column (d));
(v) For awards of stock options, with
or without tandem SARs, freestanding
SARs and other similar instruments
with option-like features (including
awards that subsequently have been
transferred), the aggregate grant date fair
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value computed in accordance with
FAS 123R applying the same valuation
model and assumptions as the registrant
applies for financial statement reporting
purposes, and all earnings on any
outstanding awards (column (e));
Instruction to Item 402(l)(2)(iv) and (v).
Disclose, for each director, by footnote to the
appropriate column, the outstanding equity
awards at fiscal year end as would be
required if the tabular presentation for named
executive officers specified in paragraph (g)
of this Item were required for directors.
(vi) The dollar value of all earnings
for services performed during the fiscal
year pursuant to non-stock incentive
plans as defined in paragraph (a)(6)(iii)
of this Item, and all earnings on any
outstanding awards (column (f)); and
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(vii) All other compensation for the
covered fiscal year that the registrant
could not properly report in any other
column of the Director Compensation
Table (column (g)). Each compensation
item for the last completed fiscal year
that is not properly reportable in
columns (c)–(f) must be reported in this
column and must be identified and
quantified in a footnote if the amount of
the item exceeds $10,000 (or in the case
of any perquisites or personal benefits,
must be itemized unless the aggregate
value of perquisites and personal
benefits is less than $10,000, and must
be quantified if it is valued at the greater
of $25,000 or 10% of total perquisites
and personal benefits of the director).
Such compensation must include, but is
not limited to:
(A) All perquisites and other personal
benefits, or property, unless the
aggregate amount of such compensation
is less than $10,000;
(B) All earnings on compensation that
is deferred on a basis that is not taxqualified;
(C) All amounts reimbursed during
the fiscal year for the payment of taxes;
(D) For any security of the registrant
or its subsidiaries purchased from the
registrant or its subsidiaries (through
deferral of salary or bonus, or otherwise)
at a discount from the market price of
such security at the date of purchase,
unless that discount is available
generally, either to all security holders
or to all salaried employees of the
registrant, the compensation cost
computed in accordance with FAS 123R
applying the same valuation model and
assumptions as the registrant applies for
financial statement reporting purposes;
(E) The amount paid or accrued to any
director pursuant to a plan or
arrangement in connection with:
(1) The resignation, retirement or any
other termination of such director; or
(2) A change in control of the
registrant;
(F) The aggregate increase in actuarial
value to the director of all defined
benefit and actuarial pension plans
(including supplemental plans) accrued
(1) Title of class
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*
*
*
*
15. Revise § 229.404 to read as
follows:
§ 229.404 (Item 404) Transactions with
related persons and promoters.
(a) Transactions with related persons.
Describe any transaction, since the
19:58 Feb 07, 2006
Instruction to Item 402(l)(2)(vii). Programs
in which registrants agree to make donations
to one or more charitable institutions in a
director’s name, payable by the registrant
currently or upon a designated event, such as
the retirement or death of the director, are
charitable awards programs or director legacy
programs for purposes of the disclosure
required by paragraph (l)(2)(vii)(I) of this
Item. Provide footnote disclosure of the total
dollar amount and other material terms of
each such program for which tabular
disclosure is provided.
Instruction to Item 402(l)(2). Two or more
directors may be grouped in a single row in
the table if all of their elements of
compensation are identical. The names of the
directors for whom disclosure is presented
on a group basis should be clear from the
Table.
(3) Narrative to director compensation
table. Provide a narrative description of
any factors necessary to an
understanding of the director
compensation disclosed in this Table.
While material factors will vary
depending upon the facts, examples of
such factors may include, in given
cases, among other things:
(i) A description of standard
compensation arrangements (such as
fees for retainer, committee service,
service as chairman of the board or a
committee, and meeting attendance);
and
(ii) Whether any director has a
different compensation arrangement,
(2) Name of beneficial owner
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during the registrant’s covered fiscal
year;
(G) Registrant contributions or other
allocations to vested and unvested
defined contribution plans;
(H) Consulting fees earned from, or
paid or payable by the registrant and/or
its subsidiaries (including joint
ventures);
(I) The annual costs of payments and
promises of payments pursuant to
director legacy programs and similar
charitable award programs; and
(J) The dollar value of any insurance
premiums paid by, or on behalf of, the
registrant during the covered fiscal year
with respect to life insurance for the
benefit of a director.
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identifying that director and describing
the terms of that arrangement.
Instruction to Item 402(l). In addition to the
Instruction to paragraph (l)(2)(vii) of this
Item, the following apply equally to
paragraph (l) of this Item: Instructions 2 and
3 to paragraph (c) of this Item; Instructions
to paragraphs (c)(2)(iv) and (v) of this Item;
Instructions to paragraphs (c)(2)(vi) and (vii)
of this Item; Instructions to paragraph
(c)(2)(viii) of this Item and Instructions to
paragraph (c)(2)(ix). These Instructions apply
to the columns in the Director Compensation
Table that are analogous to the columns in
the Summary Compensation Table to which
they refer and to disclosures under paragraph
(l) of this Item that correspond to analogous
disclosures provided for in paragraph (c) of
this Item to which they refer.
Instruction to Item 402. Specify the
applicable fiscal year in the title to each table
required under this Item which calls for
disclosure as of or for a completed fiscal year.
14. Amend § 229.403 by revising
paragraph (b) to read as follows:
§ 229.403 (Item 403) Security ownership of
certain beneficial owners and management.
(a) * * *
(b) Security ownership of
management. Furnish the following
information, as of the most recent
practicable date, in substantially the
tabular form indicated, as to each class
of equity securities of the registrant or
any of its parents or subsidiaries,
including directors’ qualifying shares,
beneficially owned by all directors and
nominees, naming them, each of the
named executive officers as defined in
Item 402(a)(3) (§ 229.402(a)(3)), and
directors and executive officers of the
registrant as a group, without naming
them. Show in column (3) the total
number of shares beneficially owned
and in column (4) the percent of class
so owned. Of the number of shares
shown in column (3), indicate, by
footnote, the amount of shares that are
pledged as security and the amount of
shares with respect to which such
persons have the right to acquire
beneficial ownership as specified in
§ 240.13d–3(d)(1) of this chapter.
(3) Amount and nature of
beneficial ownership
beginning of the registrant’s last fiscal
year, or any currently proposed
transaction, in which the registrant was
or is to be a participant and the amount
involved exceeds $120,000, and in
which any related person had, or will
have, a direct or indirect material
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6619
(4) Percent of class
interest. Disclose the following
information regarding the transaction
(1) The name of the related person
and the basis on which the person is a
related person.
(2) The related person’s interest in the
transaction with the registrant,
including the related person’s
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position(s) or relationship(s) with, or
ownership in, a firm, corporation, or
other entity that is a party to, or has an
interest in, the transaction.
(3) The approximate dollar value of
the amount involved in each transaction
and of the amount of the related
person’s interest in each transaction,
each of which shall be computed
without regard to the amount of profit
or loss.
(4) In the case of indebtedness,
disclosure of the amount involved in the
transaction shall include the largest
aggregate amount of principal
outstanding during the period for which
disclosure is provided, the amount
thereof outstanding as of the latest
practicable date, the amount of
principal paid during the periods for
which disclosure is provided, the
amount of interest paid during the
period for which disclosure is provided,
and the rate or amount of interest
payable on the indebtedness.
(5) Any other information regarding
the transaction or the related person in
the context of the transaction that is
material to investors in light of the
circumstances of the particular
transaction.
Instructions to Item 404(a). 1. For the
purposes of paragraph (a) of this Item, the
term related person means:
a. Any person who was in any of the
following categories at any time during the
specified period for which disclosure under
paragraph (a) of this Item is required:
i. Any director or executive officer of the
registrant,
ii. Any nominee for director, when the
information called for by paragraph (a) of this
Item is being presented in a proxy or
information statement relating to the election
of that nominee for director; or
iii. Any immediate family member of any
of the foregoing persons, which means any
child, stepchild, parent, stepparent, spouse,
sibling, mother-in-law, father-in-law, son-inlaw, daughter-in-law, brother-in-law, or
sister-in-law, and any person (other than a
tenant or employee) sharing the household of
a related person identified in paragraph 1.a.i
or 1.a.ii. of this instruction; and
b. Any person who was in any of the
following categories when a transaction in
which such person had a direct or indirect
material interest occurred or existed:
i. A security holder covered by Item 403(a)
(§ 229.403(a)); or
ii. Any immediate family member of any
such security holder, which means any child,
stepchild, parent, stepparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-inlaw, of such security holder and any person
(other than a tenant or employee) sharing the
household of such security holder.
2. For purposes of paragraph (a) of this
Item, a transaction includes, but is not
limited to, any financial transaction,
arrangement or relationship (including any
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indebtedness or guarantee of indebtedness)
or any series of similar transactions,
arrangements or relationships.
3. The amount involved in the transaction
shall be computed by determining the dollar
value of the amount involved in the
transaction in question, which shall include:
a. In the case of any lease or other
transaction providing for periodic payments
or installments, the aggregate amount of all
periodic payments or installments due on or
after the beginning of the registrant’s last
fiscal year, including any required or
optional payments due during or at the
conclusion of the lease.
b. In the case of indebtedness, the largest
aggregate amount of all indebtedness
outstanding at any time since the beginning
of the registrant’s last fiscal year and all
amounts of interest payable on it during the
last fiscal year.
4. In the case of transactions involving
indebtedness, the following items of
indebtedness may be excluded from the
calculation of the amount of indebtedness
and need not be disclosed: amounts due from
the related person for purchases of goods and
services subject to usual trade terms, for
ordinary business travel and expense
payments and for other transactions in the
ordinary course of business.
5. Disclosure of an employment
relationship or transaction involving an
executive officer and any related
compensation solely resulting from that
employment relationship or transaction, need
not be provided pursuant to paragraph (a) of
this Item if:
a. The compensation arising from the
relationship or transaction is reported
pursuant to Item 402 (§ 229.402); or
b. The executive officer is not an
immediate family member of a related person
(as specified in Instruction 1. to paragraph (a)
of this Item) and such compensation would
have been reported under Item 402
(§ 229.402) as compensation earned for
services to the registrant if the executive
officer was a named executive officer as that
term is defined in Item 402(a)(3)
(§ 229.402(a)(3)), and such compensation had
been approved as such by the compensation
committee of the board of directors (or group
of independent directors performing a similar
function) of the registrant.
6. Disclosure of compensation to a director
need not be provided pursuant to paragraph
(a) of this Item if the compensation is
reported pursuant to Item 402(l)
(§ 229.402(l)).
7. In the case of a transaction involving
indebtedness, if the lender is a bank, savings
and loan association, or broker-dealer
extending credit under Federal Reserve
Regulation T (12 CFR part 220) and the loans
are not disclosed as nonaccrual, past due,
restructured or potential problems (see Item
III.C.1. and 2. of Industry Guide 3, Statistical
Disclosure by Bank Holding Companies (17
CFR 229.802(c))), disclosure under paragraph
(a) of this Item may consist of a statement,
if such is the case, that the loans to such
persons:
a. Were made in the ordinary course of
business;
b. Were made on substantially the same
terms, including interest rates and collateral,
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as those prevailing at the time for comparable
loans with persons not related to the lender;
and
c. Did not involve more than the normal
risk of collectibility or present other
unfavorable features.
8. A person who has a position or
relationship with a firm, corporation, or other
entity that engages in a transaction with the
registrant shall not be deemed to have an
indirect ‘‘material’’ interest within the
meaning of paragraph (a) of this Item where:
a. The interest arises only:
i. From such person’s position as a director
of another corporation or organization which
is a party to the transaction; or
ii. From the direct or indirect ownership by
such person and all other persons specified
in Instruction 1 to paragraph (a) of this Item,
in the aggregate, of less than a ten percent
equity interest in another person (other than
a partnership) which is a party to the
transaction; or
iii. From both such position and
ownership; or
b. The interest arises only from such
person’s position as a limited partner in a
partnership in which the person and all other
persons specified in Instruction 1 to
paragraph (a) of this Item, have an interest of
less than ten percent, and the person is not
a general partner of and does not hold
another position in the partnership.
(b) Review, approval or ratification of
transactions with related persons. (1)
Describe the registrant’s policies and
procedures for the review, approval, or
ratification of any transaction required
to be reported under paragraph (a) of
this Item. While the material features of
such policies and procedures will vary
depending on the particular
circumstances, examples of such
features may include, in given cases,
among other things:
(i) The types of transactions that are
covered by such policies and
procedures.
(ii) The standards to be applied
pursuant to such policies and
procedures.
(iii) The persons or groups of persons
on the board of directors or otherwise
who are responsible for applying such
policies and procedures.
(iv) A statement of whether such
policies and procedures are in writing
and, if not, how such policies and
procedures are evidenced.
(2) Identify any transaction required
to be reported under paragraph (a) of
this Item since the beginning of the
registrant’s last fiscal year where such
policies and procedures did not require
review, approval or ratification or where
such policies and procedures were not
followed.
(c) Promoters. (1) Registrants that are
filing a registration statement on Form
S–1 or Form SB–2 under the Securities
Act (§ 239.11 or § 239.10 of this chapter)
or on Form 10 or Form 10–SB under the
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Exchange Act (§ 249.210 or § 249.210b
of this chapter) and that had a promoter
at any time during the past five fiscal
years shall:
(i) State the names of the promoter(s),
the nature and amount of anything of
value (including money, property,
contracts, options or rights or any kind)
received or to be received by each
promoter, directly or indirectly, from
the registrant and the nature and
amount of any assets, services or other
consideration therefore received or to be
received by the registrant; and
(ii) As to any assets acquired or to be
acquired by the registrant from a
promoter, state the amount at which the
assets were acquired or are to be
acquired and the principle followed or
to be followed in determining such
amount, and identify the persons
making the determination and their
relationship, if any, with the registrant
or any promoter. If the assets were
acquired by the promoter within two
years prior to their transfer to the
registrant, also state the cost thereof to
the promoter.
(2) Registrants shall provide the
disclosure required by paragraphs
(c)(1)(i) and (c)(1)(ii) of this Item as to
any person who acquired control of an
issuer that is a shell company, or any
person that is part of a group, consisting
of two or more persons that agree to act
together for the purpose of acquiring,
holding, voting or disposing of equity
securities of an issuer, that acquired
control of an issuer that is a shell
company.
Instructions to Item 404. 1. If the
information called for by this Item is being
presented in a registration statement filed
pursuant to the Securities Act or the
Exchange Act, information shall be given for
the periods specified in the Item and, in
addition, for the two fiscal years preceding
the registrant’s last fiscal year, unless the
information is being incorporated by
reference into a registration statement on
Form S–4 (17 CFR 239.25), in which case,
information shall be given for the periods
specified in the Item.
2. A foreign private issuer will be deemed
to comply with this Item if it provides the
information required by Item 7.B. of Form
20–F (17 CFR 249.220f) with more detailed
information provided if otherwise made
publicly available or required to be disclosed
by the issuer’s home jurisdiction or a market
in which its securities are listed or traded.
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16. Add § 229.407 to read as follows:
§ 229.407 (Item 407) Corporate
governance.
(a) Director independence. Identify
each director and, when the disclosure
called for by this paragraph is being
presented in a proxy or information
statement relating to the election of
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directors, each nominee for director,
that is independent under the
independence standards applicable to
the registrant under paragraph (a)(1) of
this Item. In addition, if such
independence standards contain
independence requirements for
committees of the board of directors,
identify each director that is a member
of the compensation, nominating or
audit committee that is not independent
under such committee independence
standards. If the registrant does not have
a separately designated audit,
nominating or compensation committee
or committee performing similar
functions, the registrant must provide
the disclosure of directors that are not
independent with respect to all
members of the board of directors
applying such committee independence
standards.
(1) In determining whether or not the
director or nominee for director is
independent for the purposes of
paragraph (a) of this Item, the registrant
shall use the applicable definition of
independence, as follows:
(i) If the registrant is a listed issuer
whose securities are listed on a national
securities exchange or in an inter-dealer
quotation system which has
requirements that a majority of the
board of directors be independent, the
registrant’s definition of independence
that it uses for determining if a majority
of the board of directors is independent
in compliance with the listing standards
applicable to the registrant. When
determining whether the members of a
committee of the board of directors are
independent, the registrant’s definition
of independence that it uses for
determining if the members of that
specific committee are independent in
compliance with the independence
standards applicable for the members of
the specific committee in the listing
standards of the national securities
exchange or inter-dealer quotation
system that the registrant uses for
determining if a majority of the board of
directors are independent. If the
registrant does not have independence
standards for a committee, the
independence standards for that specific
committee in the listing standards of the
national securities exchange or interdealer quotation system that the
registrant uses for determining if a
majority of the board of directors are
independent.
(ii) If the registrant is not a listed
issuer, a definition of independence of
a national securities exchange or of a
national securities association which
has requirements that a majority of the
board of directors be independent, and
state which definition is used. Whatever
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such definition the registrant chooses, it
must use the same definition with
respect to all directors and nominees for
director. When determining whether the
members of a specific committee of the
board of directors are independent, if
the national securities exchange or
national securities association whose
standards are used has independence
standards for the member of a specific
committee, use those committee specific
standards.
(iii) If the information called for by
paragraph (a) of this Item is being
presented in a registration statement on
Form S–1 (§ 239.11 of this chapter) or
Form SB–2 (§ 239.10 of this chapter)
under the Securities Act or on a Form
10 or Form 10–SB (§ 249.210 or
§ 249.210b of this chapter) under the
Exchange Act where the registrant has
applied for listing with a national
securities exchange or in an inter-dealer
quotation system which has
requirements that a majority of the
board of directors be independent, the
definition of independence that the
registrant uses for determining if a
majority of the board of directors is
independent, and the definition of
independence that the registrant uses
for determining if members of the
specific committee of the board of
directors are independent, that is in
compliance with the independence
listing standards of the national
securities exchange or inter-dealer
quotation system on which it has
applied for listing, or if the registrant
has not adopted such definitions, the
independence standards for determining
if the majority of the board of directors
is independent and if members of the
committee of the board of directors are
independent of that national securities
exchange or inter-dealer quotation
system.
(2) If the registrant uses its own
definitions for determining whether its
directors and nominees for director, and
members of specific committees of the
board of directors, are independent,
disclose whether these definitions are
available to security holders on the
registrant’s Web site. If so, provide the
registrant’s Web site address. If not,
include a copy of these policies in an
appendix to the registrant’s proxy
statement that is provided to security
holders at least once every three fiscal
years or if the policies have been
materially amended since the beginning
of the registrant’s last fiscal year. If a
current copy of the policies is not
available to security holders on the
registrant’s Web site, and is not
included as an appendix to the
registrant’s proxy statement, identify the
most recent fiscal years in which the
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policies were so included in satisfaction
of this requirement.
(3) For each director and nominee for
director that is identified as
independent, describe any transactions,
relationships or arrangements not
disclosed pursuant to Item 404(a)
(§ 229.404(a)), or for investment
companies, Item 22(b) of Schedule 14
(§ 240.14a–101 of this chapter), that
were considered by the board of
directors under the applicable
independence definitions in
determining that the director is
independent.
Instruction to Item 407(a). No information
called for by paragraph (a) of this Item need
be given in a registration statement filed at
a time when the registrant is not subject to
the reporting requirements of sections 13(a)
or 15(d) of the Exchange Act (15 U.S.C.
78m(a), 78o(d)) respecting any director who
is no longer a director at the time of
effectiveness of the registration statement.
(b) Board meetings and committees.
(1) State the total number of meetings of
the board of directors (including
regularly scheduled and special
meetings) which were held during the
last full fiscal year. Name each
incumbent director who during the last
full fiscal year attended fewer than 75
percent of the aggregate of:
(i) The total number of meetings of the
board of directors (held during the
period for which he has been a director);
and
(ii) The total number of meetings held
by all committees of the board on which
he served (during the periods that he
served).
(2) Describe the registrant’s policy, if
any, with regard to board members’
attendance at annual meetings of
security holders and state the number of
board members who attended the prior
year’s annual meeting.
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Instruction to Item 407(b)(2). In lieu of
providing the information required by
paragraph (b)(2) of this Item in the proxy
statement, the registrant may instead provide
the registrant’s Web site address where such
information appears.
(3) State whether or not the registrant
has standing audit, nominating and
compensation committees of the board
of directors, or committees performing
similar functions. If the registrant has
such committees, however designated,
identify each committee member, state
the number of committee meetings held
by each such committee during the last
fiscal year and describe briefly the
functions performed by each such
committee. Such disclosure need not be
provided to the extent it is duplicative
of disclosure provided in accordance
with paragraph (d)(4) of this Item.
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(c) Nominating committee. (1) If the
registrant does not have a standing
nominating committee or committee
performing similar functions, state the
basis for the view of the board of
directors that it is appropriate for the
registrant not to have such a committee
and identify each director who
participates in the consideration of
director nominees.
(2) Provide the following information
regarding the registrant’s director
nomination process:
(i) State whether or not the
nominating committee has a charter. If
the nominating committee has a charter,
provide the disclosure required by
Instruction 2 to this Item regarding the
nominating committee charter;
(ii) If the nominating committee has a
policy with regard to the consideration
of any director candidates
recommended by security holders,
provide a description of the material
elements of that policy, which shall
include, but need not be limited to, a
statement as to whether the committee
will consider director candidates
recommended by security holders;
(iii) If the nominating committee does
not have a policy with regard to the
consideration of any director candidates
recommended by security holders, state
that fact and state the basis for the view
of the board of directors that it is
appropriate for the registrant not to have
such a policy;
(iv) If the nominating committee will
consider candidates recommended by
security holders, describe the
procedures to be followed by security
holders in submitting such
recommendations;
(v) Describe any specific minimum
qualifications that the nominating
committee believes must be met by a
nominating committee-recommended
nominee for a position on the
registrant’s board of directors, and
describe any specific qualities or skills
that the nominating committee believes
are necessary for one or more of the
registrant’s directors to possess;
(vi) Describe the nominating
committee’s process for identifying and
evaluating nominees for director,
including nominees recommended by
security holders, and any differences in
the manner in which the nominating
committee evaluates nominees for
director based on whether the nominee
is recommended by a security holder;
(vii) With regard to each nominee
approved by the nominating committee
for inclusion on the registrant’s proxy
card (other than nominees who are
executive officers or who are directors
standing for re-election), state which
one or more of the following categories
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of persons or entities recommended that
nominee: security holder, nonmanagement director, chief executive
officer, other executive officer, thirdparty search firm, or other specified
source. With regard to each such
nominee approved by a nominating
committee of an investment company,
state which one or more of the following
additional categories of persons or
entities recommended that nominee:
security holder, director, chief executive
officer, other executive officer, or
employee of the investment company’s
investment adviser, principal
underwriter, or any affiliated person of
the investment adviser or principal
underwriter;
(viii) If the registrant pays a fee to any
third party or parties to identify or
evaluate or assist in identifying or
evaluating potential nominees, disclose
the function performed by each such
third party; and
(ix) If the registrant’s nominating
committee received, by a date not later
than the 120th calendar day before the
date of the registrant’s proxy statement
released to security holders in
connection with the previous year’s
annual meeting, a recommended
nominee from a security holder that
beneficially owned more than 5% of the
registrant’s voting common stock for at
least one year as of the date the
recommendation was made, or from a
group of security holders that
beneficially owned, in the aggregate,
more than 5% of the registrant’s voting
common stock, with each of the
securities used to calculate that
ownership held for at least one year as
of the date the recommendation was
made, identify the candidate and the
security holder or security holder group
that recommended the candidate and
disclose whether the nominating
committee chose to nominate the
candidate, provided, however, that no
such identification or disclosure is
required without the written consent of
both the security holder or security
holder group and the candidate to be so
identified.
Instructions to Item 407(c)(2)(ix). 1. For
purposes of paragraph (c)(2)(ix) of this Item,
the percentage of securities held by a
nominating security holder may be
determined using information set forth in the
registrant’s most recent quarterly or annual
report, and any current report subsequent
thereto, filed with the Commission pursuant
to the Exchange Act (or, in the case of a
registrant that is an investment company
registered under the Investment Company
Act of 1940, the registrant’s most recent
report on Form N–CSR (§§ 249.331 and
274.128 of this chapter)), unless the party
relying on such report knows or has reason
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to believe that the information contained
therein is inaccurate.
2. For purposes of the registrant’s
obligation to provide the disclosure specified
in paragraph (c)(2)(ix) of this Item, where the
date of the annual meeting has been changed
by more than 30 days from the date of the
previous year’s meeting, the obligation under
that Item will arise where the registrant
receives the security holder recommendation
a reasonable time before the registrant begins
to print and mail its proxy materials.
3. For purposes of paragraph (c)(2)(ix) of
this Item, the percentage of securities held by
a recommending security holder, as well as
the holding period of those securities, may be
determined by the registrant if the security
holder is the registered holder of the
securities. If the security holder is not the
registered owner of the securities, he or she
can submit one of the following to the
registrant to evidence the required ownership
percentage and holding period:
a. A written statement from the ‘‘record’’
holder of the securities (usually a broker or
bank) verifying that, at the time the security
holder made the recommendation, he or she
had held the required securities for at least
one year; or
b. If the security holder has filed a
Schedule 13D (§ 240.13d–101 of this
chapter), Schedule 13G (§ 240.13d–102 of
this chapter), Form 3 (§ 249.103 of this
chapter), Form 4 (§ 249.104 of this chapter),
and/or Form 5 (§ 249.105 of this chapter), or
amendments to those documents or updated
forms, reflecting ownership of the securities
as of or before the date of the
recommendation, a copy of the schedule and/
or form, and any subsequent amendments
reporting a change in ownership level, as
well as a written statement that the security
holder continuously held the securities for
the one-year period as of the date of the
recommendation.
4. For purposes of the registrant’s
obligation to provide the disclosure specified
in paragraph (c)(2)(ix) of this Item, the
security holder or group must have provided
to the registrant, at the time of the
recommendation, the written consent of all
parties to be identified and, where the
security holder or group members are not
registered holders, proof that the security
holder or group satisfied the required
ownership percentage and holding period as
of the date of the recommendation.
Instruction to Item 407(c)(2). For purposes
of paragraph (c)(2) of this Item, the term
nominating committee refers not only to
nominating committees and committees
performing similar functions, but also to
groups of directors fulfilling the role of a
nominating committee, including the entire
board of directors.
(3) Describe any material changes to
the procedures by which security
holders may recommend nominees to
the registrant’s board of directors, where
those changes were implemented after
the registrant last provided disclosure in
response to the requirements of
paragraph (c)(2)(iv) of this Item, or
paragraph (c)(3) of this Item.
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Instructions to Item 407(c)(3). 1. The
disclosure required in paragraph (c)(3) of this
Item need only be provided in a registrant’s
quarterly or annual reports.
2. For purposes of paragraph (c)(3) of this
Item, adoption of procedures by which
security holders may recommend nominees
to the registrant’s board of directors, where
the registrant’s most recent disclosure in
response to the requirements of paragraph
(c)(2)(iv) of this Item, or paragraph (c)(3) of
this Item, indicated that the registrant did not
have in place such procedures, will
constitute a material change.
(d) Audit committee. (1) State whether
or not the audit committee has a charter.
If the audit committee has a charter,
provide the disclosure required by
Instruction 2 to this Item regarding the
audit committee charter.
(2) If a listed issuer’s board of
directors determines, in accordance
with the listing standards applicable to
the issuer, to appoint a director to the
audit committee who is not
independent (apart from the
requirements in § 240.10A–3 of this
chapter), including as a result of
exceptional or limited or similar
circumstances, disclose the nature of the
relationship that makes that individual
not independent and the reasons for the
board of directors’ determination.
(3)(i) The audit committee must state
whether:
(A) The audit committee has reviewed
and discussed the audited financial
statements with management;
(B) The audit committee has
discussed with the independent
auditors the matters required to be
discussed by the statement on Auditing
Standards No. 61, as amended (AICPA,
Professional Standards, Vol. 1. AU
section 380), as adopted by the Public
Company Accounting Oversight Board
in Rule 3200T;
(C) The audit committee has received
the written disclosures and the letter
from the independent accountants
required by Independence Standards
Board Standard No. 1 (Independence
Standards Board Standard No. 1,
Independence Discussions with Audit
Committees), as adopted by the Public
Company Accounting Oversight Board
in Rule 3600T, and has discussed with
the independent accountant the
independent accountant’s
independence; and
(D) Based on the review and
discussions referred to in paragraphs
(d)(3)(i)(A) through (d)(3)(i)(C) of this
Item, the audit committee recommended
to the board of directors that the audited
financial statements be included in the
company’s Annual Report on Form 10–
K (17 CFR 249.310) (or, for closed-end
investment companies registered under
the Investment Company Act of 1940
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(15 U.S.C. 80a–1 et seq.), the annual
report to shareholders required by
section 30(e) of the Investment
Company Act of 1940 (15 U.S.C. 80a–
29(e)) and Rule 30d–1 (17 CFR 270.30d–
1) thereunder) for the last fiscal year for
filing with the Commission.
(ii) The name of each member of the
company’s audit committee (or, in the
absence of an audit committee, the
board committee performing equivalent
functions or the entire board of
directors) must appear below the
disclosure required by paragraph
(d)(3)(i) of this Item.
(4)(i) If you meet the following
requirements, provide the disclosure in
paragraph (d)(4)(ii) of this Item:
(A) You are a listed issuer, as defined
in § 240.10A–3 of this chapter;
(B) You are filing either an annual
report on Form 10–K or 10–KSB (17
CFR 249.310 or 17 CFR 249.310b), or a
proxy statement or information
statement pursuant to the Exchange Act
(15 U.S.C. 78a et seq.) if action is to be
taken with respect to the election of
directors; and
(C) You are neither:
(1) A subsidiary of another listed
issuer that is relying on the exemption
in § 240.10A–3(c)(2) of this chapter; nor
(2) Relying on any of the exemptions
in § 240.10A–3(c)(4) through (c)(7) of
this chapter.
(ii)(A) State whether or not the
registrant has a separately-designated
standing audit committee established in
accordance with section 3(a)(58)(A) of
the Exchange Act (15 U.S.C.
78c(a)(58)(A)), or a committee
performing similar functions. If the
registrant has such a committee,
however designated, identify each
committee member. If the entire board
of directors is acting as the registrant’s
audit committee as specified in section
3(a)(58)(B) of the Exchange Act (15
U.S.C. 78c(a)(58)(B)), so state.
(B) If applicable, provide the
disclosure required by § 240.10A–3(d) of
this chapter regarding an exemption
from the listing standards for audit
committees.
(5) Audit committee financial expert.
(i)(A) Disclose that the registrant’s board
of directors has determined that the
registrant either:
(1) Has at least one audit committee
financial expert serving on its audit
committee; or
(2) Does not have an audit committee
financial expert serving on its audit
committee.
(B) If the registrant provides the
disclosure required by paragraph
(d)(5)(i)(A)(1) of this Item, it must
disclose the name of the audit
committee financial expert and whether
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that person is independent, as
independence for audit committee
members is defined in the listing
standards applicable to the listed issuer.
(C) If the registrant provides the
disclosure required by paragraph
(d)(5)(i)(A)(2) of this Item, it must
explain why it does not have an audit
committee financial expert.
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Instruction to Item 407(d)(5)(i). If the
registrant’s board of directors has determined
that the registrant has more than one audit
committee financial expert serving on its
audit committee, the registrant may, but is
not required to, disclose the names of those
additional persons. A registrant choosing to
identify such persons must indicate whether
they are independent pursuant to paragraph
(d)(5)(i)(B) of this Item.
(ii) For purposes of this Item, an audit
committee financial expert means a
person who has the following attributes:
(A) An understanding of generally
accepted accounting principles and
financial statements;
(B) The ability to assess the general
application of such principles in
connection with the accounting for
estimates, accruals and reserves;
(C) Experience preparing, auditing,
analyzing or evaluating financial
statements that present a breadth and
level of complexity of accounting issues
that are generally comparable to the
breadth and complexity of issues that
can reasonably be expected to be raised
by the registrant’s financial statements,
or experience actively supervising one
or more persons engaged in such
activities;
(D) An understanding of internal
control over financial reporting; and
(E) An understanding of audit
committee functions.
(iii) A person shall have acquired
such attributes through:
(A) Education and experience as a
principal financial officer, principal
accounting officer, controller, public
accountant or auditor or experience in
one or more positions that involve the
performance of similar functions;
(B) Experience actively supervising a
principal financial officer, principal
accounting officer, controller, public
accountant, auditor or person
performing similar functions;
(C) Experience overseeing or assessing
the performance of companies or public
accountants with respect to the
preparation, auditing or evaluation of
financial statements; or
(D) Other relevant experience.
(iv) Safe harbor. (A) A person who is
determined to be an audit committee
financial expert will not be deemed an
expert for any purpose, including
without limitation for purposes of
section 11 of the Securities Act (15
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U.S.C. 77k), as a result of being
designated or identified as an audit
committee financial expert pursuant to
this Item 407.
(B) The designation or identification
of a person as an audit committee
financial expert pursuant to this Item
407 does not impose on such person any
duties, obligations or liability that are
greater than the duties, obligations and
liability imposed on such person as a
member of the audit committee and
board of directors in the absence of such
designation or identification.
(C) The designation or identification
of a person as an audit committee
financial expert pursuant to this Item
does not affect the duties, obligations or
liability of any other member of the
audit committee or board of directors.
Instructions to Item 407(d)(5). 1. The
disclosure under paragraph (d)(5) of this Item
is required only in a registrant’s annual
report. The registrant need not provide the
disclosure required by paragraph (d)(5) of
this Item in a proxy or information statement
unless that registrant is electing to
incorporate this information by reference
from the proxy or information statement into
its annual report pursuant to General
Instruction G(3) to Form 10–K (17 CFR
249.310).
2. If a person qualifies as an audit
committee financial expert by means of
having held a position described in
paragraph (d)(5)(iii)(D) of this Item, the
registrant shall provide a brief listing of that
person’s relevant experience. Such disclosure
may be made by reference to disclosures
required under Item 401(e) (§ 229.401(e)).
3. In the case of a foreign private issuer
with a two-tier board of directors, for
purposes of paragraph (d)(5) of this Item, the
term board of directors means the
supervisory or non-management board. In the
case of a foreign private issuer meeting the
requirements of § 240.10A–3(c)(3) of this
chapter, for purposes of paragraph (d)(5) of
this Item, the term board of directors means
the issuer’s board of auditors (or similar
body) or statutory auditors, as applicable.
Also, in the case of a foreign private issuer,
the term generally accepted accounting
principles in paragraph (d)(5)(ii)(A) of this
Item means the body of generally accepted
accounting principles used by that issuer in
its primary financial statements filed with
the Commission.
4. A registrant that is an Asset-Backed
Issuer (as defined in § 229.1101) is not
required to disclose the information required
by paragraph (d)(5) of this Item.
Instructions to Item 407(d). 1. The
information required by paragraphs (d)(1)–(3)
of this Item shall not be deemed to be
‘‘soliciting material,’’ or to be ‘‘filed’’ with
the Commission or subject to Regulation 14A
or 14C (17 CFR 240.14a–1 through 240.14b–
2 or 240.14c–1through 240.14c–101), other
than as provided in this Item, or to the
liabilities of section 18 of the Exchange Act
(15 U.S.C. 78r), except to the extent that the
registrant specifically requests that the
information be treated as soliciting material
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or specifically incorporates it by reference
into a document filed under the Securities
Act or the Exchange Act. Such information
will not be deemed to be incorporated by
reference into any filing under the Securities
Act or the Exchange Act, except to the extent
that the registrant specifically incorporates it
by reference.
2. The disclosure required by paragraphs
(d)(1)–(3) of this Item need only be provided
one time during any fiscal year.
3. The disclosure required by paragraph
(d)(3) of this Item need not be provided in
any filings other than a registrant’s proxy or
information statement relating to an annual
meeting of security holders at which
directors are to be elected (or special meeting
or written consents in lieu of such meeting).
(e) Compensation committee. (1) If the
registrant does not have a standing
compensation committee or committee
performing similar functions, state the
basis for the view of the board of
directors that it is appropriate for the
registrant not to have such a committee
and identify each director who
participates in the consideration of
executive officer and director
compensation.
(2) State whether or not the
compensation committee has a charter.
If the compensation committee has a
charter, provide the disclosure required
by Instruction 2 to this Item regarding
the compensation committee charter.
(3) Provide a narrative description of
the registrant’s processes and
procedures for the consideration and
determination of executive and director
compensation, including:
(i)(A) The scope of authority of each
of the compensation committee (or
persons performing the equivalent
functions); and
(B) The extent to which the
compensation committee (or persons
performing the equivalent functions)
may delegate any authority described in
paragraph (e)(3)(i)(A) of this Item to
other persons, specifying what authority
may be so delegated and to whom;
(ii) Any role of executive officers in
determining or recommending the
amount or form of executive and
director compensation; and
(iii) Any role of compensation
consultants in determining or
recommending the amount or form of
executive and director compensation,
identifying such consultants, stating
whether such consultants are engaged
directly by the compensation committee
(or persons performing the equivalent
functions) or any other person,
describing the nature and scope of their
assignment, the material elements of the
instructions or directions given to the
consultants with respect to the
performance of their duties under the
engagement and identifying any
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executive officer within the registrant
the consultants contacted in carrying
out their assignment.
(4) Under the caption ‘‘Compensation
Committee Interlocks and Insider
Participation’’:
(i) The registrant shall identify each
person who served as a member of the
compensation committee of the
registrant’s board of directors (or board
committee performing equivalent
functions) during the last completed
fiscal year, indicating each committee
member who:
(A) Was, during the fiscal year, an
officer or employee of the registrant;
(B) Was formerly an officer of the
registrant; or
(C) Had any relationship requiring
disclosure by the registrant under any
paragraph of Item 404 (§ 229.404). In
this event, the disclosure required by
Item 404 (§ 229.404) shall accompany
such identification.
(ii) If the registrant has no
compensation committee (or other board
committee performing equivalent
functions), the registrant shall identify
each officer and employee of the
registrant, and any former officer of the
registrant, who, during the last
completed fiscal year, participated in
deliberations of the registrant’s board of
directors concerning executive officer
compensation.
(iii) The registrant shall describe any
of the following relationships that
existed during the last completed fiscal
year:
(A) An executive officer of the
registrant served as a member of the
compensation committee (or other board
committee performing equivalent
functions or, in the absence of any such
committee, the entire board of directors)
of another entity, one of whose
executive officers served on the
compensation committee (or other board
committee performing equivalent
functions or, in the absence of any such
committee, the entire board of directors)
of the registrant;
(B) An executive officer of the
registrant served as a director of another
entity, one of whose executive officers
served on the compensation committee
(or other board committee performing
equivalent functions or, in the absence
of any such committee, the entire board
of directors) of the registrant; and
(C) An executive officer of the
registrant served as a member of the
compensation committee (or other board
committee performing equivalent
functions or, in the absence of any such
committee, the entire board of directors)
of another entity, one of whose
executive officers served a director of
the registrant.
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(iv) Disclosure required under
paragraph (e)(4)(iii) of this Item
regarding a compensation committee
member or other director of the
registrant who also served as an
executive officer of another entity shall
be accompanied by the disclosure called
for by Item 404 with respect to that
person.
Instruction to Item 407(e)(4). For purposes
of paragraph (e)(4) of this Item, the term
entity shall not include an entity exempt
from tax under section 501(c)(3) of the
Internal Revenue Code (26 U.S.C. 501(c)(3)).
(f) Shareholder communications and
annual meeting attendance. (1) State
whether or not the registrant’s board of
directors provides a process for security
holders to send communications to the
board of directors and, if the registrant
does not have such a process for
security holders to send
communications to the board of
directors, state the basis for the view of
the board of directors that it is
appropriate for the registrant not to have
such a process.
(2) If the registrant has a process for
security holders to send
communications to the board of
directors:
(i) Describe the manner in which
security holders can send
communications to the board and, if
applicable, to specified individual
directors; and
(ii) If all security holder
communications are not sent directly to
board members, describe the registrant’s
process for determining which
communications will be relayed to
board members.
Instructions to Item 407(f). 1. In lieu of
providing the information required by
paragraph (f)(2) of this Item in the proxy
statement, the registrant may instead provide
the registrant’s Web site address where such
information appears.
2. For purposes of the disclosure required
by paragraph (f)(2)(ii) of this Item, a
registrant’s process for collecting and
organizing security holder communications,
as well as similar or related activities, need
not be disclosed provided that the registrant’s
process is approved by a majority of the
independent directors or, in the case of a
registrant that is an investment company, a
majority of the directors who are not
‘‘interested persons’’ of the investment
company as defined in section 2(a)(19) of the
Investment Company Act of 1940 (15 U.S.C.
80a–2(a)(19)).
3. For purposes of this paragraph,
communications from an officer or director of
the registrant will not be viewed as ‘‘security
holder communications.’’ Communications
from an employee or agent of the registrant
will be viewed as ‘‘security holder
communications’’ for purposes of this
paragraph only if those communications are
made solely in such employee’s or agent’s
capacity as a security holder.
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6625
4. For purposes of this paragraph, security
holder proposals submitted pursuant to
§ 240.14a–8 of this chapter, and
communications made in connection with
such proposals, will not be viewed as
‘‘security holder communications.’’
Instructions to Item 407. 1. For purposes of
this Item:
a. Listed issuer means a listed issuer as
defined in § 240.10A–3 of this chapter;
b. National securities exchange means a
national securities exchange registered
pursuant to section 6(a) of the Exchange Act
(15 U.S.C. 78f(a));
c. Inter-dealer quotation system means an
automated inter-dealer quotation system of a
national securities association registered
pursuant to section 15A(a) of the Exchange
Act (15 U.S.C. 78o–3(a)); and
d. National securities association means a
national securities association registered
pursuant to section 15A(a) of the Exchange
Act (15 U.S.C. 78o–3(a)) that has been
approved by the Commission (as that
definition may be modified or
supplemented).
2. With respect to paragraphs (c)(2)(i),
(d)(1) and (e)(2) of this Item, disclose whether
a current copy of the applicable committee
charter is available to security holders on the
registrant’s Web site, and if so, provide the
registrant’s Web site address. If a current
copy of the charter is not available to security
holders on the registrant’s Web site, include
a copy of the charter in an appendix to the
registrant’s proxy statement that is provided
to security holders at least once every three
fiscal years, or if the charter has been
materially amended since the beginning of
the registrant’s last fiscal year. If a current
copy of the charter is not available to security
holders on the registrant’s Web site, and is
not included as an appendix to the
registrant’s proxy statement, identify in
which of the prior fiscal years the charter was
so included in satisfaction of this
requirement.
17. Amend § 229.601 to revise
paragraph (b)(10)(iii)(C)(5) to read as
follows:
§ 229.601
(Item 601) Exhibits.
*
*
*
*
*
(b) * * *
(10) * * *
(iii) * * *
(C) * * *
(5) Any compensatory plan, contract
or arrangement if the registrant is a
foreign private issuer that furnishes
compensatory information under Item
402(a)(1) (§ 229.402(a)(1)) and the public
filing of the plan, contract or
arrangement, or portion thereof, is not
required in the registrant’s home
country and is not otherwise publicly
disclosed by the registrant.
*
*
*
*
*
18. Amend § 229.1107 by revising
paragraph (e) to read as follows:
§ 229.1107
(Item 1107) Issuing Entities.
*
*
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(e) If the issuing entity has executive
officers, a board of directors or persons
performing similar functions, provide
the information required by Items 401,
402, 403 404 and 407(a), (c)(3), (d)(4),
(d)(5) and (e)(4) of Regulation S–K
(§§ 229.401, 229.402, 229.403, 229.404
and 229.407(a), (c)(3), (d)(4), (d)(5) and
(e)(4)) for the issuing entity.
*
*
*
*
*
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
19. The authority citation for part 239
continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n,
78o(d), 78u–5, 78w(a), 78ll(d), 77mm, 79e,
79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a–
2(a), 80a–3, 80a–8, 80a–9, 80a–10, 80a–13,
80a–24, 80a–26, 80a–29, 80a–30, and 80a–37,
unless otherwise noted.
*
*
*
*
*
20. Amend Form SB–2 (referenced in
§ 239.10) by revising Item 15 to read as
follows:
Note: The text of Form SB–2 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form SB–2 Registration Statement
Under the Securities Act of 1933
*
*
*
*
*
Item 15. Organization Within Last
Five Years.
Furnish the information required by
Item 404 of Regulation S–B and Item
407(a) of Regulation S–B.
*
*
*
*
*
21. Amend Form S–1 (referenced in
§ 239.11) by revising Item 11,
paragraphs (l) and (n) to read as follows:
Note: The text of Form S–1 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form S–1 Registration Statement
Under the Securites Act of 1933
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*
*
*
*
*
Item 11. Information with Respect to
the Registrant.
*
*
*
*
*
(l) Information required by Item 402
of Regulation S–K (§ 229.402 of this
chapter), executive compensation, and
information required by paragraph (e)(4)
of Item 407 of Regulation S–K (§ 229.407
of this chapter), corporate governance;
*
*
*
*
*
(n) Information required by Item 404
of Regulation S–K (§ 229.404 of this
chapter), transactions with related
persons and promoters, and Item 407(a)
of Regulation S–K (§ 229.407(a) of this
chapter), corporate governance.
*
*
*
*
*
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22. Amend Form S–3 (referenced
§ 239.13) by revising General Instruction
I.A.3.(b) and the introductory text of
General Instruction I.B.4.(c) to read as
follows:
Note: The text of Form S–3 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form S–3 Registration Statement
Under the Securities Act of 1933
*
*
*
*
*
General Instructions
I. Eligibility Requirements for Use of
Form S–3 * * *
A. Registrant Requirements. * * *
3. * * *
(b) has filed in a timely manner all
reports required to be filed during the
twelve calendar months and any portion
of a month immediately preceding the
filing of the registration statement, other
than a report that is required solely
pursuant to Items 1.01, 1.02, 2.03, 2.04,
2.05, 2.06, 4.02(a) or 5.02(e) of Form 8–
K (§ 249.308 of this chapter). If the
registrant has used (during the twelve
calendar months and any portion of a
month immediately preceding the filing
of the registration statement) Rule 12b–
25(b) (§ 240.12b–25(b) of this chapter)
under the Exchange Act with respect to
a report or a portion of a report, that
report or portion thereof has actually
been filed within the time period
prescribed by that rule.
*
*
*
*
*
B. Transaction Requirements. * * *
4. * * *
(c) The issuer also must have
provided, within the twelve calendar
months immediately before the Form S–
3 registration statement is filed, the
information required by Items 401, 402,
403 and 407(c)(3), (d)(4), (d)(5) and
(e)(4) of Regulation S–K (§ 229.401–
§ 229.403 and § 229.407(c)(3),(d)(4),
(d)(5) and (e)(4) of this chapter) to:
*
*
*
*
*
23. Amend Form S–4 (referenced in
§ 239.25) by revising Items 18(a)(7)(ii)
and (iii) and 19(a)(7)(ii) and (iii) to read
as follows:
Note: The text of Form S–4 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form S–4 Registration Statement
Under the Securities Act of 1933
*
*
*
*
*
Item 18. Information if Proxies,
Consents or Authorizations are to be
Solicited.
(a) * * *
(7) * * *
(ii) Item 402 of Regulation S–K
(§ 229.402 of this chapter), executive
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compensation, and paragraph (e)(4) of
Item 407 of Regulation S–K (§ 229.407 of
this chapter), corporate governance;
(iii) Item 404 of Regulation S–K
(§ 229.404 of this chapter), transactions
with related persons and promoters, and
Item 407(a) of Regulation S–K
(§ 229.407(a) of this chapter), corporate
governance.
*
*
*
*
*
Item 19. Information if Proxies,
Consents or Authorizations are not to be
Solicited or in an Exchange Offer.
(a) * * *
(7) * * *
(ii) Item 402 of Regulation S–K
(§ 229.402 of this chapter), executive
compensation, and paragraph (e)(4) of
Item 407 of Regulation S–K (§ 229.407 of
this chapter), corporate governance;
(iii) Item 404 of Regulation S–K
(§ 229.404), transactions with related
persons and promoters, and Item 407(a)
of Regulation S–K (§ 229.407(a)),
corporate governance.
*
*
*
*
*
24. Amend Form S–11 (referenced in
§ 239.18) by revising Items 22 and 23 to
read as follows:
Note: The text of Form S–11 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form S–11 For Registration Under the
Securities Act of 1933 of Securities of
Certain Real Estate Companies
*
*
*
*
*
Item 22. Executive Compensation.
Furnish the information required by
Item 402 of Regulation S–K (§ 229.402 of
this chapter), and the information
required by paragraph (e)(4) of Item 407
of Regulation S–K (§ 229.407 of this
chapter).
Item 23. Certain Relationships and
Related Transactions.
Furnish the information required by
Items 404 and 407(a) of Regulation S–
K (§§ 229.404 and 229.407(a) of this
chapter). If a transaction involves the
purchase or sale of assets by or to the
registrant, otherwise than in the
ordinary course of business, state the
cost of the assets to the purchaser and,
if acquired by the seller within two
years prior to the transaction, the cost
thereof to the seller. Furthermore, if the
assets have been acquired by the seller
within five years prior to the
transaction, disclose the aggregate
depreciation claimed by the seller for
federal income tax purposes. Indicate
the principle followed in determining
the registrant’s purchase or sale price
and the name of the person making such
determination.
*
*
*
*
*
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PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
25. The authority citation for part 240
continues to read in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q,
79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3,
80b–4, 80b–11, and 7201 et seq.; and 18
U.S.C. 1350, unless otherwise noted.
*
*
*
*
*
26. Amend § 240.13a–11 by revising
paragraph (c) to read as follows:
§ 240.13a–11 Current reports on Form 8–K
(§ 249.308 of this chapter).
*
*
*
*
*
(c) No failure to file a report on Form
8–K that is required solely pursuant to
Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06,
4.02(a), 5.02(e) or 6.03 of Form 8–K
shall be deemed to be a violation of 15
U.S.C. 78j(b) and § 240.10b–5.
27. Add § 240.13a–20 to read as
follows:
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§ 240.13a–20 Plain English presentation of
specified information.
(a) Any information included or
incorporated by reference in a report
filed under section 13(a) of the Act (15
U.S.C. 78m(a)) that is required to be
disclosed pursuant to Item 402, 403, 404
or 407 of Regulation S–B (§§ 228.402,
228.403, 228.404 or 228.407 of this
chapter) or Item 402, 403, 404 or 407 of
Regulation S–K (§§ 229.402, 229.403,
229.404 or 229.407 of this chapter) must
be presented in a clear, concise and
understandable manner. You must
prepare the disclosure using the
following standards:
(1) Present information in clear,
concise sections, paragraphs and
sentences;
(2) Use short sentences;
(3) Use definite, concrete, everyday
words;
(4) Use the active voice;
(5) Avoid multiple negatives;
(6) Use descriptive headings and
subheadings;
(7) Use a tabular presentation or bullet
lists for complex material, wherever
possible;
(8) Avoid legal jargon and highly
technical business and other
terminology;
(9) Avoid frequent reliance on
glossaries or defined terms as the
primary means of explaining
information. Define terms in a glossary
or other section of the document only if
the meaning is unclear from the context.
Use a glossary only if it facilitates
understanding of the disclosure; and
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(10) In designing the presentation of
the information you may include
pictures, logos, charts, graphs and other
design elements so long as the design is
not misleading and the required
information is clear. You are encouraged
to use tables, schedules, charts and
graphic illustrations that present
relevant data in an understandable
manner, so long as such presentations
are consistent with applicable
disclosure requirements and consistent
with other information in the document.
You must draw graphs and charts to
scale. Any information you provide
must not be misleading.
(b) [Reserved].
Note to § 240.13a–20. In drafting the
disclosure to comply with this section, you
should avoid the following:
1. Legalistic or overly complex
presentations that make the substance of the
disclosure difficult to understand;
2. Vague ‘‘boilerplate’’ explanations that
are imprecise and readily subject to different
interpretations;
3. Complex information copied directly
from legal documents without any clear and
concise explanation of the provision(s); and
4. Disclosure repeated in different sections
of the document that increases the size of the
document but does not enhance the quality
of the information.
28. Amend § 240.14a–6 to revise
paragraph (a)(4) to read as follows:
§ 240.14a–6
Filing requirements.
(a) * * *
(4) The approval or ratification of a
plan as defined in paragraph (a)(6)(ii) of
Item 402 of Regulation S–K
(§ 229.402(a)(6)(ii) of this chapter) or
amendments to such a plan;
*
*
*
*
*
29. Amend § 240.14a–101 by:
a. Removing paragraphs (f), (g), and
(h) of Item 7 and paragraph (b)(13)(iii)
of Item 22;
b. Revising ‘‘$60,000’’ to read
‘‘$120,000’’ in the introductory text of
Items 22(b)(7), (b)(8), and (b)(9);
Instruction 2 to Item 22(b)(7); and
Instruction 6 to Item 22(b)(9);
c. Revising Note C, Item 7(b), (c), (d),
and (e), the introductory text of Item 8,
the undesignated paragraph following
Item 8(d), Item 10(b)(1)(ii), the
Instruction to Item 10(b)(1)(ii), the
introductory text of Item 22(b), Item
22(b)(11), the Instruction to paragraph
(b)(11) of Item 22, and the introductory
text of Item 22(b)(13); and
d. Adding Items 22(b)(15), (b)(16), and
(b)(17).
The revisions and additions read as
follows:
§ 240.14a–101 Schedule 14A. Information
required in proxy statement.
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Notes.
*
*
*
*
*
C. Except as otherwise specifically
provided, where any item calls for
information for a specified period with
regard to directors, executive officers, officers
or other persons holding specified positions
or relationships, the information shall be
given with regard to any person who held
any of the specified positions or relationship
at any time during the period. Information,
other than information required by Item 404
of Regulation S–B or Item 404 of Regulation
S–K, need not be included for any portion of
the period during which such person did not
hold any such position or relationship,
provided a statement to that effect is made.
*
*
*
*
*
Item 7. Directors and executive officers.
* * *
*
*
*
*
*
(b) The information required by Items 401,
404(a) and (b), 405 and 407(d)(4) and (d)(5)
of Regulation S–K (§ 229.401, § 229.404,
§ 229.405 and § 229.407 of this chapter).
(c) The information required by Item 407(a)
of Regulation S–K (§ 229.407 of this chapter).
(d) The information required by Item
407(b), (c)(1), (c)(2), (d)(1), (d)(2), (d)(3),
(e)(1), (e)(2), (e)(3) and (f) of Regulation S–K
(§ 229.407 of this chapter).
(e) In lieu of the information required by
this Item 7, investment companies registered
under the Investment Company Act of 1940
(15 U.S.C. 80a) must furnish the information
required by Item 22(b) of this Schedule 14A.
*
*
*
*
*
Item 8. Compensation of directors and
executive officers. Furnish the information
required by Item 402 of Regulation S–K
(§ 229.402 of this chapter) and paragraph
(e)(4) of Item 407 of Regulation S–K
(§ 229.407 of this chapter) if action is to be
taken with regard to:
*
*
*
*
*
(d) * * *
However, if the solicitation is made on
behalf of persons other than the registrant,
the information required need be furnished
only as to nominees of the persons making
the solicitation and associates of such
nominees. In the case of investment
companies registered under the Investment
Company Act of 1940 (15 U.S.C. 80a), furnish
the information required by Item 22(b)(13) of
this Schedule.
*
*
*
*
*
Item 10. Compensation plans. * * *
(b)(1) Additional information regarding
specified plans subject to security holder
action. * * *
(ii) The estimated annual payment to be
made with respect to current services. In the
case of a pension or retirement plan,
information called for by paragraph (a)(2) of
this Item may be furnished in the format
specified by paragraph (i)(2) of Item 402 of
Regulation S–K (§ 229.402(i)(2) of this
chapter).
Instruction to paragraph (b)(1)(ii). In the
case of investment companies registered
under the Investment Company Act of 1940
(15 U.S.C. 80a), refer to Instruction 4 in Item
22(b)(13)(i) of this Schedule in lieu of
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paragraph (i)(2) of Item 402 of Regulation S–
K (§ 229.402(i)(2) of this chapter).
*
*
*
*
*
Item 22. Information required in
investment company proxy statement.
(a) * * *
(b) Election of Directors. If action is to be
taken with respect to the election of directors
of a Fund, furnish the following information
in the proxy statement in addition to, in the
case of business development companies, the
information (and in the format) required by
Item 7 and Item 8 of this Schedule 14A.
*
*
*
*
*
(11) Provide in tabular form, to the extent
practicable, the information required by
Items 401(f) and (g), 404(a), and 405 of
Regulation S–K (§§ 229.401(f) and (g),
229.404(a), and 229.405 of this chapter).
Instruction to paragraph (b)(11).
Information provided under paragraph (b)(8)
of this Item 22 is deemed to satisfy the
requirements of Item 404(a) of Regulation S–
K for information about directors, nominees
for election as directors, and Immediate
Family Members of directors and nominees,
and need not be provided under this
paragraph (b)(11).
*
*
*
*
*
(13) In the case of a Fund that is an
investment company registered under the
Investment Company Act of 1940 (15 U.S.C.
80a), for all directors, and for each of the
three highest-paid Officers that have
aggregate compensation from the Fund for
the most recently completed fiscal year in
excess of $60,000 (‘‘Compensated Persons’’):
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*
*
*
*
*
(15)(i) Provide the information (and in the
format) required by Item 407(b)(1), (b)(2) and
(f) of Regulation S–K (§ 229.407(b)(1), (b)(2)
and (f) of this chapter); and
(ii) Provide the following regarding the
requirements for the director nomination
process:
(A) The information (and in the format)
required by Item 407(c)(1) and (c)(2) of
Regulation S–K (§ 229.407(c)(1) and (c)(2) of
this chapter); and
(B) If the Fund is a listed issuer (as defined
in § 240.10A–3 of this chapter) whose
securities are listed on a national securities
exchange registered pursuant to section 6(a)
of the Act (15 U.S.C. 78f(a)) or in an
automated inter-dealer quotation system of a
national securities association registered
pursuant to section 15A of the Act (15 U.S.C.
78o–3(a)) that has independence
requirements for nominating committee
members, identify each director that is a
member of the nominating committee that is
not independent under the independence
standards described in this paragraph. In
determining whether the nominating
committee members are independent, use the
Fund’s definition of independence that it
uses for determining if the members of the
nominating committee are independent in
compliance with the independence standards
applicable for the members of the nominating
committee in the listing standards applicable
to the Fund. If the Fund does not have
independence standards for the nominating
committee, use the independence standards
for the nominating committee in the listing
standards applicable to the Fund.
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(16) In the case of a Fund that is a closedend investment company:
(i) Provide the information (and in the
format) required by Item 407(d)(1), (d)(2) and
(d)(3) of Regulation S–K (§ 229.407(d)(1),
(d)(2) and (d)(3) of this chapter); and
(ii) Identify each director that is a member
of the Fund’s audit committee that is not
independent under the independence
standards described in this paragraph. If the
Fund does not have a separately designated
audit committee, or committee performing
similar functions, the Fund must provide the
disclosure with respect to all members of its
board of directors.
(A) If the Fund is a listed issuer (as defined
in § 240.10A–3 of this chapter) whose
securities are listed on a national securities
exchange registered pursuant to section 6(a)
of the Act (15 U.S.C. 78f(a)) or in an
automated inter-dealer quotation system of a
national securities association registered
pursuant to section 15A of the Act (15 U.S.C.
78o–3(a)) that has independence
requirements for audit committee members,
in determining whether the audit committee
members are independent, use the Fund’s
definition of independence that it uses for
determining if the members of the audit
committee are independent in compliance
with the independence standards applicable
for the members of the audit committee in
the listing standards applicable to the Fund.
If the Fund does not have independence
standards for the audit committee, use the
independence standards for the audit
committee in the listing standards applicable
to the Fund.
(B) If the Fund is not a listed issuer whose
securities are listed on a national securities
exchange registered pursuant to section 6(a)
of the Act (15 U.S.C. 78f(a)) or in an
automated inter-dealer quotation system of a
national securities association registered
pursuant to section 15A of the Act (15 U.S.C.
78o–3(a)), in determining whether the audit
committee members are independent, use a
definition of independence of a national
securities exchange registered pursuant to
section 6(a) of the Act (15 U.S.C. 78f(a)) or
an automated inter-dealer quotation system
of a national securities association registered
pursuant to section 15A of the Act (15 U.S.C.
78o–3(a)) which has requirements that a
majority of the board of directors be
independent and that has been approved by
the Commission, and state which definition
is used. Whatever such definition the Fund
chooses, it must use the same definition with
respect to all directors and nominees for
director. If the national securities exchange
or national securities association whose
standards are used has independence
standards for the members of the audit
committee, use those specific standards.
(17) In the case of a Fund that is an
investment company registered under the
Investment Company Act of 1940 (15 U.S.C.
80a), if a director has resigned or declined to
stand for re-election to the board of directors
since the date of the last annual meeting of
security holders because of a disagreement
with the registrant on any matter relating to
the registrant’s operations, policies or
practices, and if the director has furnished
the registrant with a letter describing such
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disagreement and requesting that the matter
be disclosed, the registrant shall state the
date of resignation or declination to stand for
re-election and summarize the director’s
description of the disagreement. If the
registrant believes that the description
provided by the director is incorrect or
incomplete, it may include a brief statement
presenting its view of the disagreement.
*
*
*
*
*
30. Amend § 240.15d–11 by revising
paragraph (c) to read as follows:
§ 240.15d–11 Current reports on Form 8–K
(§ 249.308 of this chapter).
*
*
*
*
*
(c) No failure to file a report on Form
8–K that is required solely pursuant to
Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06,
4.02(a), 5.02(e) or 6.03 of Form 8–K
shall be deemed to be a violation of 15
U.S.C. 78j(b) and § 240.10b–5.
31. Add § 240.15d–20 to read as
follows:
§ 240.15d–20 Plain English presentation of
specified information.
(a) Any information included or
incorporated by reference in a report
filed under section 15(d) of the Act (15
U.S.C. 78o(d)) that is required to be
disclosed pursuant to Items 402, 403,
404 or 407 of Regulation S–B
(§§ 228.402, 228.403, 228.404 or 228.407
of this chapter) or Items 402, 403, 404
or 407 of Regulation S–K (§§ 229.402,
229.403, 229.404 or 229.407 of this
chapter) must be presented in a clear,
concise and understandable manner.
You must prepare the disclosure using
the following standards:
(1) Present information in clear,
concise sections, paragraphs and
sentences;
(2) Use short sentences;
(3) Use definite, concrete, everyday
words;
(4) Use the active voice;
(5) Avoid multiple negatives;
(6) Use descriptive headings and
subheadings;
(7) Use a tabular presentation or bullet
lists for complex material, wherever
possible;
(8) Avoid legal jargon and highly
technical business and other
terminology;
(9) Avoid frequent reliance on
glossaries or defined terms as the
primary means of explaining
information. Define terms in a glossary
or other section of the document only if
the meaning is unclear from the context.
Use a glossary only if it facilitates
understanding of the disclosure; and
(10) In designing the presentation of
the information you may include
pictures, logos, charts, graphs and other
design elements so long as the design is
not misleading and the required
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information is clear. You are encouraged
to use tables, schedules, charts and
graphic illustrations that present
relevant data in an understandable
manner, so long as such presentations
are consistent with applicable
disclosure requirements and consistent
with other information in the document.
You must draw graphs and charts to
scale. Any information you provide
must not be misleading.
(b) [Reserved].
Note to § 240.15d–20. In drafting the
disclosure to comply with this section, you
should avoid the following:
1. Legalistic or overly complex
presentations that make the substance of the
disclosure difficult to understand;
2. Vague ‘‘boilerplate’’ explanations that
are imprecise and readily subject to different
interpretations;
3. Complex information copied directly
from legal documents without any clear and
concise explanation of the provision(s); and
4. Disclosure repeated in different sections
of the document that increases the size of the
document but does not enhance the quality
of the information.
§ 240.16b–3
[Amended]
32. Amend § 240.16b–3 by:
a. Adding ‘‘and’’ at the end of
paragraph (b)(3)(i)(B);
b. Removing ‘‘; and’’ at the end of
paragraph (b)(3)(i)(C) and in its place
adding a period; and
c. Removing paragraph (b)(3)(i)(D).
Authority: 15 U.S.C. 78w(a), unless
otherwise noted.
§ 245.100
*
*
*
*
*
*
*
Item 6. Executive Compensation.
Furnish the information required by
Item 402 of Regulation S–K (§ 229.402 of
this chapter) and paragraph (e)(4) of
Item 407 of Regulation S–K (§ 229.407 of
this chapter).
Item 7. Certain Relationships and
Related Transactions, and Director
Independence.
Furnish the information required by
Item 404 of Regulation S–K (§ 229.404 of
this chapter) and Item 407(a) of
Regulation S–K (§ 229.407(a) of this
chapter).
*
*
*
*
*
37. Amend Form 10–SB (referenced in
§ 249.210b), Information Required in
Registration Statement, by revising Item
7 to read as follows:
Note: The text of Form 10–SB does not,
and this amendment will not, appear in the
Code of Federal Regulations.
*
33. The authority citation for Part 245
continues to read in part as follows:
*
General Form for Registration of
Securities Pursuant to Section 12(b) or
(g) of the Securities Exchange Act of
1934
Form 10–SB General Form for
Registration of Securities of Small
Business Issuers
PART 245—REGULATION BLACKOUT
TRADING RESTRICTION
(REGULATION BTR—BLACKOUT
TRADING RESTRICTION)
*
Form 10
*
[Amended]
34. Amend § 245.100, paragraph
(a)(2), by revising the phrase ‘‘paragraph
(a) or (b) of Item 404’’ to read
‘‘paragraph (a) of Item 404’’.
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
*
*
*
Information Required in Registration
Statement
*
*
*
*
*
Item 7. Certain Relationships and
Related Transactions, and Director
Independence.
Furnish the information required by
Item 404 of Regulation S–B and Item
407(a) of Regulation S–B.
*
*
*
*
*
38. Amend Form 20–F (referenced in
§ 249.220f) by revising Instruction
4.(c)(v) to the Instructions as to Exhibits
to read as follows:
Note: The text of Form 20–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 20–F
35. The authority citation for part 249
continues to read in part as follows:
*
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
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*
*
*
*
*
*
*
36. Amend Form 10 (referenced in
§ 249.210) by revising Items 6 and 7 to
read as follows:
Note: The text of Form 10 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
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*
*
*
*
Instructions as to Exhibits
*
*
*
*
4.(a) * * *
(c) * * *
(v) Public filing of the management
contact or compensatory plan, contract
or arrangement, or portion thereof, is
not required in the company’s home
country and is not otherwise publicly
disclosed by the company.
*
*
*
*
*
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39. Form 8–K (referenced in
§ 249.308) is amended by:
a. Revising General Instruction D;
b. Revising the last sentence of
Instruction 1 to Item 1.01;
c. Revising the heading of Item 5.02;
d. Revising Item 5.02(b), the
introductory text of Item 5.02(c), Item
5.02(c)(2) and (c)(3);
e. Adding Item 5.02(d)(5) and (e); and
f. Adding Instruction 3 to Item 5.02.
The revisions and addition read as
follows:
Note: The text of Form 8–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 8–K Current Report Pursuant to
Section 13 or 15(d) of the Securities
Exchange Act of 1934
*
*
*
*
*
General Instructions
*
*
*
*
*
D. Preparation of Report.
This form is not to be used as a blank
form to be filled in, but only as a guide
in the preparation of the report on paper
meeting the requirements of Rule 12b–
12 (17 CFR 240.12b–12). The report
shall contain the number and caption of
the applicable item, but the text of such
item may be omitted, provided the
answers thereto are prepared in the
manner specified in Rule 12b–13 (17
CFR 240.12b–13). To the extent that
Item 1.01 and one or more other items
of the form are applicable, registrants
need not provide the number and
caption of Item 1.01 so long as the
substantive disclosure required by Item
1.01 is disclosed in the report and the
number and caption of the other
applicable item(s) are provided. All
items that are not required to be
answered in a particular report may be
omitted and no reference thereto need
be made in the report. All instructions
should also be omitted.
*
*
*
*
*
Item 1.01 Entry into a Material
Definitive Agreement.
*
*
*
*
*
Instructions. 1. * * * An agreement
involving the subject matter identified
in Item 601(b)(10)(iii)(A) or (B) need not
be disclosed under this item.
*
*
*
*
*
Item 5.02 Departure of Directors or
Certain Officers; Election of Directors;
Appointment of Certain Officers;
Compensatory Arrangements of Certain
Officers.
*
*
*
*
*
(b) If the registrant’s principal
executive officer, president, principal
financial officer, principal accounting
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officer, principal operating officer, or
any person performing similar
functions, or any named executive
officer for the registrant’s most recent
fiscal year (as defined by Item 402(a)(3)
of Regulation S-K (17 CFR
229.402(a)(3)), retires, resigns or is
terminated from that position, or if a
director retires, resigns, is removed, or
refuses to stand for re-election (except
in circumstances described in paragraph
(a) of this Item 5.02), disclose the fact
that the event has occurred and the date
of the event.
(c) If the registrant appoints a new
principal executive officer, president,
principal financial officer, principal
accounting officer, principal operating
officer, or person performing similar
functions, disclose the following
information with respect to the newly
appointed officer:
(1) * * *
(2) the information required by Items
401(b), (d), (e) and Item 404(a) of
Regulation S–K (17 CFR 229.401(b), (d),
(e) and 229.404(a)), or, in the case of a
small business issuer, Items 401(a)(4),
(a)(5), (c), and Items 404(a) of Regulation
S–B (17 CFR 228.401(a)(4), (a)(5), (c),
and 228.404(a), respectively); and
(3) a brief description of any material
plan, contract or arrangement (whether
or not written) to which a covered
officer is a party or in which he or she
participates that is entered into or a
material amendment in connection with
the triggering event or any grant or
award to any such covered person or
modification thereto, under any such
plan, contract or arrangement in
connection with any such event.
(d) * * *
(5) a brief description of any material
plan, contract or arrangement (whether
or not written) to which the director is
a party or in which he or she
participates that is entered into or
material amendment in connection with
the triggering event or any grant or
award to any such covered person or
modification thereto, under any such
plan, contract or arrangement in
connection with any such event.
(e) If the registrant enters into, adopts,
or otherwise commences a material
compensatory plan, contract or
arrangement (whether or not written), as
to which the registrant’s principal
executive officer, principal financial
officer, or a named executive officer (as
defined by Item 402(a)(3) of Regulation
S–K (17 CFR 229.402(a)(3)) for the
registrant’s most recent fiscal year
participates or is a party, or such
compensatory plan, contract or
arrangement is materially amended or
modified, or a material grant or award
under any such plan, contract or
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arrangement to any such person is made
or materially modified, then the
registrant shall provide a brief
description of the terms and conditions
of the plan, contract or arrangement and
the amounts payable to the officer
thereunder.
Instructions to paragraph (e). 1. Disclosure
under this Item 5.02(e) shall be required
whether or not the specified event is in
connection with events otherwise triggering
disclosure pursuant to this Item 5.02.
2. Grants or awards (or modifications
thereto) made pursuant to a plan, contract or
arrangement, that are materially consistent
with the original terms of such plan, contract
or arrangement, need not be disclosed under
this Item 5.02(e), provided the registrant has
previously disclosed such original terms and
the grant, award or modification is disclosed
when Item 402 of Regulation S–K (17 CFR
229.402) requires such disclosure.
3. If the salary and bonus of a named
executive officer cannot be calculated as of
the most recent practicable date and are
omitted from the Summary Compensation
Table as specified in Instruction 1 to Item
402(b)(2)(iv) and (v) of Regulation S–B or
Instruction 1 to Item 402(c)(2)(iv) and (v) of
Regulation S–K, disclose the appropriate
information under this Item 5.02(e) when
there is a payment, grant, award, decision or
other occurrence as a result of which such
amounts become calculable in whole or part.
Disclosure is required even where Instruction
2 would permit such information not to be
disclosed.
Instructions to Item 5.02.
*
*
*
*
*
3. The registrant need not provide
information with respect to plans, contracts,
and arrangements to the extent they do not
discriminate in scope, terms or operation, in
favor of executive officers or directors of the
registrant and that are available generally to
all salaried employees.
*
*
*
*
*
40. Amend Form 10–Q (referenced in
§ 249.308a) by revising Item 5(b) in Part
II to read as follows:
Note: The text of Form 10–Q does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 10–Q
*
*
*
*
*
Part II—Other Information
*
*
*
*
*
Item 5. Other Information.
(a) * * *
(b) Furnish the information required
by Item 407(c)(3) of Regulation S–K
(§ 229.407).
*
*
*
*
*
41. Amend Form 10–QSB (referenced
in § 249.308b) by revising Item 5(b) in
Part II to read as follows:
Note: The text of Form 10–QSB does not,
and this amendment will not, appear in the
Code of Federal Regulations.
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Form 10–QSB
*
*
*
*
*
Part II—Other Information
*
*
*
*
*
Item 5. Other Information.
(a) * * *
(b) Furnish the information required
by Item 407(c)(3) of Regulation S–B
(§ 228.407).
*
*
*
*
*
42. Amend Form 10–K (referenced in
§ 249.310) by revising Item 10 before the
instruction and Items 11 and 13 in Part
III to read as follows:
Note: The text of Form 10–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 10–K
*
*
*
*
*
Part III
*
*
*
*
*
Item 10. Directors, Executive Officers
and Corporate Governance.
Furnish the information required by
Items 401, 405, 406, and 407(c)(3), (d)(4)
and (d)(5) of Regulation S–K
(§§ 229.401, 229.405, 229.406, and
229.407(c)(3), (d)(4) and (d)(5) of this
chapter).
*
*
*
*
*
Item 11. Executive Compensation.
Furnish the information required by
Item 402 of Regulation S–K (§ 229.402 of
this chapter) and paragraph (e)(4) of
Item 407 of Regulation S–K (§ 229.407 of
this chapter).
*
*
*
*
*
Item 13. Certain Relationships and
Related Transactions, and Director
Independence.
Furnish the information required by
Item 404 of Regulation S–K (§ 229.404 of
this chapter) and Item 407(a) of
Regulation S–K (§ 229.407(a) of this
chapter).
*
*
*
*
*
43. Amend Form 10–KSB (referenced
in § 249.310b) by revising Item 9 before
the instruction and Item 12 in Part III to
read as follows:
Note: The text of Form 10–KSB does not,
and this amendment will not, appear in the
Code of Federal Regulations.
Form 10–KSB
*
*
*
*
*
Part III
Item 9. Directors, Executive Officers,
Promoters, Control Persons and
Corporate Governance; Compliance
With Section 16(a) of the Exchange Act.
Furnish the information required by
Items 401, 405, 406, and 407(c)(3), (d)(4)
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and (d)(5) of Regulation S–B
(§§ 228.401, 228.405, 228.406, and
228.407(c)(3), (d)(4) and (d)(5) of this
chapter).
*
*
*
*
*
Item 12. Certain Relationships and
Related Transactions, and Director
Independence.
Furnish the information required by
Item 404 of Regulation S–B (§ 228.404 of
this chapter) and Item 407(a) of
Regulation S–B (§ 228.407(a) of this
chapter).
*
*
*
*
*
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
PART 274—FORMS PRESCRIBED
UNDER THE INVESTMENT COMPANY
ACT OF 1940
44. The authority citation for Part 274
continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24,
80a–26, and 80a–29, unless otherwise noted.
*
*
*
*
*
45. Amend Form N–1A (referenced in
§§ 239.15A and 274.11A) by:
a. Revising ‘‘$60,000’’ to read
‘‘$120,000’’ in the introductory text of
Items 12(b)(6), (b)(7), and (b)(8);
Instruction 2 to Item 12(b)(6); and
Instruction 5 to Item 12(b)(8); and
b. Removing the word ‘‘relocation,’’ in
Instruction 2 to Item 15(b).
Note: The text of Form N–1A does not, and
this amendment will not, appear in the Code
of Federal Regulations.
wwhite on PROD1PC61 with PROPOSALS2
46. Amend Form N–2 (referenced in
§§ 239.14 and 274.11a–1) by:
a. Removing paragraph 14(c) of Item
18;
b. Redesignating paragraphs 15 and 16
of Item 18 as paragraphs 16 and 17,
respectively;
c. Adding new paragraph 15 of Item
18;
VerDate Aug<31>2005
19:58 Feb 07, 2006
Jkt 208001
d. Revising ‘‘$60,000’’ to read
‘‘$120,000’’ in the introductory text of
paragraphs 9, 10, and 11 of Item 18;
Instruction 2 to paragraph 9 of Item 18;
and Instruction 5 to paragraph 11 of
Item 18;
e. Revising the introductory text of
paragraph 14 of Item 18;
f. Removing ‘‘relocation,’’ from
Instruction 2 to paragraph 2 of Item 21;
and
g. Revising the cite ‘‘Item 18.16’’ to
read ‘‘Item 18.17’’ in Instruction 8.a. to
Item 24.
The addition and revision read as
follows:
Note: The text of Form N–2 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form N–2
*
*
*
*
*
Item 18. Management.
*
*
*
*
*
14. In the case of a Registrant that is
not a business development company,
provide the following for all directors of
the Registrant, all members of the
advisory board of the Registrant, and for
each of the three highest paid officers or
any affiliated person of the Registrant
with aggregate compensation from the
Registrant for the most recently
completed fiscal year in excess of
$60,000 (‘‘Compensated Persons’’).
*
*
*
*
*
15. In the case of a Registrant that is
a business development company,
provide the information required by
Item 402 of Regulation S–K (17 CFR
229.402).
*
*
*
*
*
47. Amend Form N–3 (referenced in
§§ 239.17a and 274.11b) by:
a. Revising ‘‘$60,000’’ to read
‘‘$120,000’’ in the introductory text of
paragraphs (h), (i), and (j) of Item 20;
Instruction 2 to paragraph (h) of Item 20;
and Instruction 5 to paragraph (j) of Item
20; and
PO 00000
Frm 00091
Fmt 4701
Sfmt 4702
6631
b. Removing the word ‘‘relocation,’’ in
Instruction 2 to Item 22(b).
Note: The text of Form N–3 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
48. Amend Form N–CSR (referenced
in §§ 249.331 and 274.128) by revising
Item 10 to read as follows:
Note: The text of Form N–CSR does not,
and this amendment will not, appear in the
Code of Federal Regulations.
Form N–CSR
*
*
*
*
*
Item 10. Submission of Matters to a
Vote of Security Holders.
Describe any material changes to the
procedures by which shareholders may
recommend nominees to the registrant’s
board of directors, where those changes
were implemented after the registrant
last provided disclosure in response to
the requirements of Item 407(c)(2)(iv) of
Regulation S–K (17 CFR 229.407) (as
required by Item 22(b)(15) of Schedule
14A (17 CFR 240.14a–101)), or this Item.
Instruction. For purposes of this Item,
adoption of procedures by which
shareholders may recommend nominees
to the registrant’s board of directors,
where the registrant’s most recent
disclosure in response to the
requirements of Item 407(c)(2)(iv) of
Regulation S–K (17 CFR 229.407) (as
required by Item 22(b)(15) of Schedule
14A (17 CFR 240.14a–101)), or this Item,
indicated that the registrant did not
have in place such procedures, will
constitute a material change.
*
*
*
*
*
Dated: January 27, 2006.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06–946 Filed 2–7–06; 8:45 am]
BILLING CODE 8010–01–P
E:\FR\FM\08FEP2.SGM
08FEP2
]]>Agencies
[Federal Register Volume 71, Number 26 (Wednesday, February 8, 2006)]
[Proposed Rules]
[Pages 6542-6631]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-946]
[[Page 6541]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 228, 229, 239, et al.
Executive Compensation and Related Party Disclosure; Proposed Rule
Federal Register / Vol. 71, No. 26 / Wednesday, February 8, 2006 /
Proposed Rules
[[Page 6542]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 239, 240, 245, 249 and 274
[Release Nos. 33-8655; 34-53185; IC-27218; File No. S7-03-06]
RIN 3235-AI80
Executive Compensation and Related Party Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing amendments
to the disclosure requirements for executive and director compensation,
related party transactions, director independence and other corporate
governance matters and security ownership of officers and directors.
These amendments would apply to disclosure in proxy and information
statements, periodic reports, current reports and other filings under
the Securities Exchange Act of 1934 and to registration statements
under the Exchange Act and the Securities Act of 1933. We also propose
to require that disclosure under the amended items generally be
provided in plain English. The proposed amendments are intended to make
proxy statements, reports and registration statements easier to
understand. They are also intended to provide investors with a clearer
and more complete picture of the compensation earned by a company's
principal executive officer, principal financial officer and highest
paid executive officers and members of its board of directors. In
addition, they are intended to provide better information about key
financial relationships among companies and their executive officers,
directors, significant shareholders and their respective immediate
family members.
DATES: Comments should be received on or before April 10, 2006.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-03-06 on the subject line; or
Use the Federal Rulemaking Portal (https://
www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number S7-03-06. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (https://www.sec.gov/rules/proposed/shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE, Washington, DC
20549. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Carloyn Sherman, or
Daniel Greenspan, at (202) 551-3500, in the Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549-3010 or, with respect to questions regarding
investment companies, Kieran Brown in the Division of Investment
Management, at (202) 551-6784.
SUPPLEMENTARY INFORMATION: We propose to amend: Items 201,\1\ 306,\2\
401,\3\ 402,\4\ 403 \5\ and 404 \6\ of Regulations S-K \7\ and S-B,\8\
Item 601 \9\ of Regulation S-K, Item 1107 \10\ of Regulation AB,\11\
and Rule 100 \12\ of Regulation BTR.\13\ We also propose to add new
Item 407 to Regulations S-K and S-B. In addition, we propose to amend
Rules 13a-11,\14\ 14a-6,\15\ 14c-5,\16\ 15d-11 \17\ and 16b-3 \18\
under the Securities Exchange Act of 1934.\19\ We propose to add Rules
13a-20 and 15d-20 under the Exchange Act. We further propose to amend
Schedule 14A \20\ under the Exchange Act, as well as Exchange Act Forms
8-K,\21\ 10,\22\ 10SB,\23\ 10-Q,\24\ 10-QSB,\25\ 10-K,\26\ 10-KSB \27\
and 20-F.\28\ Finally, we propose to amend Forms SB-2,\29\ S-1,\30\ S-
3,\31\ S-4 \32\ and S-11 \33\ under the Securities Act, Forms N-1A,\34\
N-2,\35\ and N-3 \36\ under the Securities Act and the Investment
Company Act of 1940,\37\ and Form N-CSR \38\ under the Investment
Company Act and the Exchange Act.
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\1\ 17 CFR 229.201 and 17 CFR 228.201.
\2\ 17 CFR 229.306 and 17 CFR 228.306.
\3\ 17 CFR 229.401 and 17 CFR 228.401.
\4\ 17 CFR 229.402 and 17 CFR 228.402.
\5\ 17 CFR 229.403 and 17 CFR 228.403.
\6\ 17 CFR 229.404 and 17 CFR 228.404.
\7\ 17 CFR 229.10 et seq.
\8\ 17 CFR 228.10 et seq.
\9\ 17 CFR 229.601.
\10\ 17 CFR 229.1107.
\11\ 17 CFR 229.1100 et seq.
\12\ 17 CFR 245.100.
\13\ 17 CFR 245.100 et seq.
\14\ 17 CFR 240.13a-11.
\15\ 17 CFR 240.14a-6.
\16\ 17 CFR 240.14c-5.
\17\ 17 CFR 240.15d-11.
\18\ 17 CFR 240.16b-3.
\19\ 15 U.S.C. 78a et seq.
\20\ 17 CFR 240.14a-101.
\21\ 17 CFR 249.308.
\22\ 17 CFR 249.210.
\23\ 17 CFR 249.210b.
\24\ 17 CFR 249.308a.
\25\ 17 CFR 249.308b.
\26\ 17 CFR 249.310.
\27\ 17 CFR 249.310b.
\28\ 17 CFR 249.220f.
\29\ 17 CFR 239.10.
\30\ 17 CFR 239.11.
\31\ 17 CFR 239.13.
\32\ 17 CFR 239.25.
\33\ 17 CFR 239.18.
\34\ 17 CFR 239.15A and 274.11A.
\35\ 17 CFR 239.14 and 274.11a-1.
\36\ 17 CFR 239.17a and 274.11b.
\37\ 15 U.S.C. 80a-1 et seq.
\38\ 17 CFR 249.331 and 274.128.
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Table of Contents
I. Background and Overview of the Proposals
II. Executive and Director Compensation Disclosure
A. Compensation Discussion and Analysis
1. Intent and Operation of the Proposed Compensation Discussion
and Analysis
2. Proposed Instructions to Compensation Discussion and Analysis
3. ``Filed'' Status of Compensation Discussion and Analysis
4. Proposed Elimination of the Performance Graph and the
Compensation Committee Report
B. Compensation Tables
1. Compensation to Named Executive Officers in the Last Three
Completed Fiscal Years--The Summary Compensation Table and Related
Disclosure
a. Total Compensation Column
b. Salary and Bonus Columns
c. Plan-Based Awards
i. Stock Awards and Option Awards Columns
ii. Non-Stock Incentive Plan Compensation Column
d. All Other Compensation Column
i. Earnings on Deferred Compensation
ii. Increase in Pension Value
iii. Perquisites and Other Personal Benefits
iv. Additional All Other Compensation Column Items
e. Captions and Table Layout
2. Supplemental Annual Compensation Tables
a. Grants of Performance-Based Awards Table
b. Grants of All Other Equity Awards Table
3. Narrative Disclosure to Summary Compensation Table and
Supplemental Tables
[[Page 6543]]
4. Exercises and Holdings of Previously Awarded Equity
a. Outstanding Equity Awards at Fiscal Year-End
b. Option Exercises and Stock Vesting
5. Post-Employment Compensation
a. Retirement Plan Potential Annual Payments and Benefits Table
b. Nonqualified Defined Contribution and Other Deferred
Compensation Plans Table
c. Other Potential Post-Employment Payments
6. Officers Covered
a. Named Executive Officers
b. Identification of Most Highly Compensated Officers; Dollar
Threshold for Disclosure
7. Interplay of Items 402 and 404
8. Other Proposed Changes
9. Compensation of Directors
C. Treatment of Specific Types of Issuers
1. Small Business Issuers
2. Foreign Private Issuers
3. Business Development Companies
D. Conforming Amendments
E. General Comment Requests on the Item 402 Proposals
III. Proposed Revisions to Form 8-K and the Periodic Report Exhibit
Requirements
A. Proposed Revisions to Items 1.01 and 5.02 of Form 8-K
B. Proposed Extension of Limited Safe Harbor under Section 10(b)
and Rule 10b-5 to Item 5.02(e) of Form 8-K and Exclusion of that
Item from Form S-3 Eligibility Requirements
C. General Instruction D to Form 8-K
D. Foreign Private Issuers
IV. Beneficial Ownership Disclosure
V. Certain Relationships and Related Transactions Disclosure
A. Transactions with Related Persons
1. Broad Principle for Disclosure
a. Indebtedness
b. Definitions
2. Disclosure Requirements
3. Exceptions
B. Procedures for Approval of Related Person Transactions
C. Promoters
D. Corporate Governance Disclosure
E. Treatment of Specific Types of Issuers
1. Small Business Issuers
2. Foreign Private Issuers
3. Registered Investment Companies
F. Conforming Amendments
1. Regulation Blackout Trading Restriction
2. Rule 16b-3 Non-Employee Director Definition
3. Other Conforming Amendments
VI. Plain English Disclosure
VII. Transition
VIII. Paperwork Reduction Act
A. Background
B. Summary of Information Collections
C. Paperwork Reduction Act Burden Estimates
1. Securities Act Registration Statements, Exchange Act
Registration Statements and Exchange Act Annual Reports
2. Exchange Act Current Reports
D. Request for Comment
IX. Cost-Benefit Analysis
A. Background
B. Summary of Proposals
C. Benefits
D. Costs
E. Request for Comment
X. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
XI. Initial Regulatory Flexibility Act Analysis
A. Reasons for the Proposed Action
B. Objectives
C. Legal Basis
D. Small Entities Subject to the Proposed Amendments
E. Reporting, Recordkeeping and Other Compliance Requirements
F. Duplicative, Overlapping or Conflicting Federal Rules
G. Significant Alternatives
H. Solicitation of Comment
XII. Small Business Regulatory Enforcement Fairness Act
XIII. Statutory Authority and Text of the Proposed Amendments
I. Background and Overview of the Proposals
We are proposing revisions to our rules governing disclosure of
executive compensation, director compensation, related party
transactions, director independence and other corporate governance
matters and current reporting regarding compensation arrangements. The
proposed revisions to the compensation disclosure rules are intended to
provide investors with a clearer and more complete picture of
compensation to principal executive officers, principal financial
officers, the other highest paid executive officers and directors.
Closely related to executive officer and director compensation is
the participation by executive officers, directors, significant
shareholders and other related persons in financial transactions and
relationships with the company. We are also proposing to revise our
disclosure rules regarding related party transactions and director
independence and board committee functions.
Finally, some compensation arrangements must be disclosed under our
recently revised rules relating to current reports on Form 8-K. We
propose to reorganize and more appropriately focus our requirements on
the type of compensation information that should be disclosed on a
real-time basis.
Since the enactment of the Securities Act and the Exchange Act,\39\
the Commission has on a number of occasions explored the best methods
for communicating clear, concise and meaningful information about
executive and director compensation and relationships with the
issuer.\40\ The Commission also has had to reconsider executive and
director compensation disclosure requirements in light of changing
trends in executive compensation. Most recently, in 1992, the
Commission adopted amendments to the disclosure rules that eschewed a
mostly narrative disclosure approach adopted in 1983 in favor of
formatted tables that captured all compensation, while categorizing the
various elements of compensation and promoting comparability from year
to year and from company to company.\41\
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\39\ Initially, disclosure requirements regarding executive and
director compensation were set forth in Schedule A to the Securities
Act and Section 12(b) of the Exchange Act, which list the type of
information to be included in Securities Act and Exchange Act
registration statements. Item 14 of Schedule A called for disclosure
of the ``remuneration, paid or estimated to be paid, by the issuer
or its predecessor, directly or indirectly, during the past year and
ensuing year to (a) the directors or persons performing similar
functions, and (b) its officers and other persons, naming them
wherever such remuneration exceeded $25,000 during any such year.''
Section 12(b) of the Exchange Act as enacted required disclosure of
``(D) the directors, officers, and underwriters, and each security
holder of record holding more than 10 per centum of any class of any
equity security of the issuer (other than an exempted security),
their remuneration and their interests in the securities of, and
their material contracts with, the issuers and any person directly
or indirectly controlling or controlled by, or under direct or
indirect common control with the issuer;'' and ``(E) remuneration to
others than directors and officers exceeding $20,000 per annum.''
\40\ In 1938, the Commission promulgated its first executive and
director compensation disclosure rules for proxy statements. Release
No. 34-1823 (Aug. 11, 1938). At different times thereafter, the
Commission has adopted rules mandating narrative, tabular, or
combinations of narrative and tabular disclosure as the best method
for presenting compensation disclosure in a manner that is clear and
useful to investors. See e.g., Release No. 34-3347 (Dec. 18, 1942)
[7 FR 10653] (introducing first tabular disclosure); Release No. 34-
4775 (Dec. 11, 1952) [17 FR 11431] (introducing separate table for
pensions and deferred remuneration); Uniform and Integrated
Reporting Requirements: Management Remuneration, Release No. 33-6003
(Dec. 4, 1978) [43 FR 58151] (expanding tabular disclosure to cover
all forms of compensation); and Disclosure of Executive
Compensation, Release No. 33-6486 (Sept. 23, 1983) [48 FR 44467]
(the ``1983 Release'') (limiting tabular disclosure to cash
remuneration).
\41\ Executive Compensation Disclosure, Release No. 33-6962
(Oct. 16, 1992) [57 FR 48125] (the ``1992 Release''); See also
Executive Compensation Disclosure; Securityholder Lists and Mailing
Requests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010], at
Section II.
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We believe this tabular approach remains a sound basis for
disclosure. However, especially in light of the complexity of and
variations in compensation programs, the very formatted nature of the
current rules results in too many cases in disclosure that does not
inform investors adequately as to all elements of compensation. In
those cases investors may lack material information that we believe
they should receive.
We are thus today proposing an approach that builds on the
strengths of
[[Page 6544]]
the current requirements rather than discarding them. However, today's
proposals do represent a thorough rethinking of our current rules that
would combine a broader-based tabular presentation with improved
narrative disclosure supplementing the tables. This proposed approach
would promote clarity and completeness of numerical information through
an improved tabular presentation, continue to provide the ability to
make comparisons using tables, and call for material qualitative
information regarding the manner and context in which compensation is
awarded and earned.
The proposals that we publish for comment today would require that
all elements of compensation must be disclosed. We also seek to
structure the revised requirements sufficiently broadly so that, if
they are adopted, they will continue to operate effectively as new
forms of compensation are developed in the future.
Under our proposals, compensation disclosure would begin with a
narrative providing a general overview. Much like the overview that we
have encouraged companies to provide with their Management's Discussion
and Analysis of Financial Condition and Results of Operations
(MD&A),\42\ the proposed Compensation Discussion and Analysis would
call for a discussion and analysis of the material factors underlying
compensation policies and decisions reflected in the data presented in
the tables. This overview would address in one place these factors with
respect to both the separate elements of executive compensation and
executive compensation as a whole.
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\42\ Item 303 of Regulation S-K [17 CFR 229.303]. See also
Commission Guidance Regarding Management's Discussion and Analysis
of Financial Condition and Results of Operations, Release No. 33-
8350 (Dec. 19, 2003) [68 FR 75055], at Section III.A.
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Following the Compensation Discussion and Analysis, we propose to
organize detailed disclosure of executive compensation into three broad
categories:
Compensation with respect to the last fiscal year (and the
two preceding fiscal years), as reflected in a revised Summary
Compensation Table that presents compensation paid currently or
deferred (including options, restricted stock and similar grants) and
compensation consisting of current earnings or awards that are part of
a plan, and as supplemented by two tables providing back-up information
for certain data in the Summary Compensation Table;
Holdings of equity-related interests that relate to
compensation or are potential sources of future gains, with a focus on
compensation-related equity interests that were awarded in prior years
(and disclosed as current compensation for those years) and are ``at
risk,'' as well as recent realization on these interests, such as
through vesting of restricted stock and similar instruments or the
exercise of options and similar instruments; and
Retirement and other post-employment benefits, including
retirement and defined contribution and other deferred compensation
plans, other retirement benefits and other post-employment benefits,
such as those payable in the event of a change in control.
We propose to require improved tabular disclosure for each of the
above three categories that would be supplemented by appropriate
narrative that provides material information necessary to an
understanding of the information presented in the individual
tables.\43\ We are also proposing a new disclosure requirement of the
total compensation and job description of up to an additional three
most highly compensated employees who are not executive officers or
directors but who earn more than the highest paid executive officers.
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\43\ As discussed in more detail below, this narrative
disclosure, together with the Compensation Discussion and Analysis
noted above, would replace the currently required Compensation
Committee Report and the Performance Graph. Unlike the current
requirements under which both the report and the graph, although
physically included in the proxy statement, need only be furnished
to the Commission, the proposed narrative disclosure, along with the
rest of the proposed executive officer and director compensation,
would be company disclosure filed with the Commission.
Current Item 402(a)(9) of Regulation S-K provides that the
Compensation Committee Report and Performance Graph ``shall not be
deemed to be ``soliciting material'' or to be ``filed'' with the
Commission or subject to Regulations 14A or 14C [17 CFR 240.14a-1 et
seq. or 240.14c-1 et seq.], other than as provided in this item, or
to the liabilities of section 18 of the Exchange Act [15 U.S.C.
78r], except to the extent that the registrant specifically requests
that such information be treated as soliciting material or
specifically incorporates it by reference into a filing under the
Securities Act or the Exchange Act.''
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Finally, we propose a director compensation table that is similar
to the proposed Summary Compensation Table.\44\
---------------------------------------------------------------------------
\44\ We made similar proposals, which we did not act on,
regarding director compensation in 1995. Streamlining and
Consolidation of Executive and Director Compensation Disclosure,
Release No. 33-7184 (Aug. 6, 1995) [60 FR 35633] (the ``1995
Release''), at Section I.B.
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We also propose to modify some of the recently expanded Form 8-K
requirements regarding compensation. Form 8-K requires disclosure on a
current basis of the entry into, amendment of, and termination of,
material definitive agreements entered into outside the ordinary course
of business within four business days of the triggering event. Under
our pre-existing definitions of material contracts, many agreements
regarding executive compensation are deemed to be material agreements
entered into outside the ordinary course, and when, for purposes of
consistency, we adopted those definitions for use in the expanded Form
8-K requirements, we incorporated all of these executive compensation
agreements into the current disclosure requirements. Therefore, many
agreements regarding executive compensation, including some not related
to named executive officers, are required to be disclosed within four
business days of the applicable triggering event. Consistent with our
intent in adopting the expanded Form 8-K to capture only events that
are unquestionably or presumptively material to investors, we believe
it is appropriate to modify the Form 8-K requirements.
We believe that executive and director compensation is closely
related to financial transactions and relationships involving companies
and their directors, executive officers and significant shareholders
and respective immediate family members. Disclosure requirements
regarding these matters historically have been interconnected, given
that relationships among these parties and the company can include
transactions that involve compensation or analogous features. Such
disclosure also represents material information in evaluating the
overall relationship with a company's executive officers and directors.
Further, this disclosure provides material information regarding the
independence of directors. The current related party transaction
disclosure requirements were adopted piecemeal over the years and were
combined into one disclosure requirement beginning in 1982.\45\ In
light of the many developments since then, including the increasing
focus on corporate governance and director independence, we believe it
is necessary to revise our requirements. Today's proposals include
amendments to update, clarify and slightly expand the related party
transaction disclosure requirements. The proposed amendments would fold
into the disclosure requirements for related party transactions the
currently separate
[[Page 6545]]
disclosure requirement regarding indebtedness of management and
directors.\46\ Further, we propose a requirement that calls for a
narrative explanation of the independence status of directors under a
company's director independence policies, consistent with recent
significant changes to the listing standards of the nation's principal
securities trading markets.\47\ We also propose to consolidate this and
other corporate governance disclosure requirements regarding director
independence and board committees into a single expanded disclosure
item.\48\
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\45\ Disclosure of Certain Relationships and Transactions
Involving Management, Release No. 33-6441 (Dec. 2, 1982) [47 FR
55661] (the ``1982 Release'').
\46\ Related party transactions are currently disclosed under
Items 404(a) of Regulations S-K and S-B. Indebtedness is currently
disclosed under Item 404(c) of Regulation S-K.
\47\ See, e.g., NASD and NYSE Rulemaking: Relating to Corporate
Governance, Release No. 34-48745 (Nov. 4, 2003) [68 FR 64154] (the
``NASD and NYSE Listing Standards Release''). This proposal would
replace our existing disclosure requirement about director
relationships that can affect independence.
\48\ Proposed Item 407 of Regulation S-K and Regulation S-B.
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In order to ensure that these amended requirements result in
disclosure that is clear, concise and understandable for investors, we
propose to add Rules 13a-20 and 15d-20 under the Exchange Act to
require that most of the disclosure provided in response to the amended
items be presented in plain English. This proposal would extend the
plain English requirements currently applicable to portions of
registration statements under the Securities Act to the disclosure
required under the amended items in Exchange Act reports and proxy or
information statements incorporated by reference into those reports.
Finally, we propose to amend our beneficial ownership disclosure
requirements to require disclosure of shares pledged by named executive
officers, directors and director nominees, as well as directors'
qualifying shares.
II. Executive and Director Compensation Disclosure
As discussed above, executive and director compensation disclosure
has been required since 1933, and the Commission has had disclosure
rules in this area since 1938. In 1992, the Commission proposed and
adopted substantially revised rules that embody our current
requirements.\49\ In doing so, the Commission moved away from narrative
disclosure and back to using tables that permit comparability from year
to year and from company to company. We believe that while the
reasoning behind this approach remains fundamentally sound, significant
changes are appropriate. Much of the concern with the current tables is
also their strength: they are highly formatted and rigid.\50\ Thus,
information not specifically called for in the tables is sometimes not
provided. For example, the highly formatted and specific approach has
led some to suggest that items that do not fit squarely within a
``box'' specified by the rules need not be disclosed.\51\ As another
example, because the tables do not call for a single figure for total
compensation, that information is generally not provided, although
there is considerable commentary indicating that a single total figure
is high on the list of information that some investors wish to have. To
preserve the strengths of the current approach and build on them, we
propose several steps:
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\49\ 1992 Release.
\50\ See, e.g., Council of Institutional Investors' Discussion
Paper on Executive Pay Disclosure, Executive Compensation
Disclosure: How It Works Now, How It Can Be Improved, at 11
(available at www.cii.org/site_files/pdfs/
CII%20pay%20primer%20edited.pdf).
\51\ For examples, see, e.g., The Corporate Counsel (Sept.-Oct.
2005) at 6-7; The Corporate Counsel (Sept.-Oct. 2004) at 7; but see
Alan L. Beller, Director, Division of Corporation Finance, U.S.
Securities and Exchange Commission, Remarks Before Conference of the
NASPP, The Corporate Counsel and the Corporate Executive (October
20, 2004) (indicating that the explicit language of the current
rules requires disclosure of such items), available at www.sec.gov/
news/speech/spch102004alb.htm.
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First, retaining the tabular approach to provide clarity
and comparability while improving the tabular disclosure requirements;
Second, confirming that all elements of compensation must
be included in the tables;
Third, providing a format for the Summary Compensation
Table that requires disclosure of a single figure for total
compensation; and
Finally, requiring narrative disclosure comprising both a
general discussion and analysis of compensation and specific material
information regarding tabular items where necessary to an understanding
of the tabular disclosure.\52\
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\52\ The discussion that follows focuses on changes to Item 402
of Regulation S-K, with Section II.C.1 explaining the different
modifications proposed for Item 402 of Regulation S-B. References
throughout the following discussion are to current or proposed Items
of Regulation S-K, unless otherwise indicated.
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A. Compensation Discussion and Analysis
We propose requiring a new Compensation Discussion and Analysis
section.\53\ This section would be an overview that would provide
narrative disclosure that puts into context the compensation disclosure
provided elsewhere.\54\ This overview would explain material elements
of the particular company's compensation for named executive officers
by answering the following questions:
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\53\ Proposed Item 402(b). In addition to the narrative
Compensation Discussion and Analysis, we are proposing revisions to
the rules so that, to the extent material, additional narrative
disclosure would be provided following certain tables to supplement
the disclosure in the table. See, e.g., Section II.B.3., discussing
the narrative disclosure to the Summary Compensation Table and
supplemental tables. We are also proposing disclosure of
compensation committee procedures and processes as well as
information regarding compensation committee interlocks and insider
participation in compensation decisions as part of proposed Item 407
of Regulation S-K. See Section V.D., below.
\54\ See Jeffrey N. Gordon, Executive Compensation: What's the
Problem, What's the Remedy? The Case for Compensation Discussion and
Analysis, 30 J. Corp. L. (forthcoming Spring 2006) (arguing that the
SEC should require proxy disclosure that includes a ``Compensation
Discussion and Analysis'' section that collects and summarizes all
the compensation elements for senior executives, providing a
``bottom line assessment'' of the different compensation elements
and an explanation as to why the board thinks such compensation is
warranted). Also available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=686464.
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What are the objectives of the company's compensation
programs?
What is the compensation program designed to reward and
not reward?
What is each element of compensation?
Why does the company choose to pay each element?
How does the company determine the amount (and, where
applicable, the formula) for each element?
How does each element and the company's decisions
regarding that element fit into the company's overall compensation
objectives and affect decisions regarding other elements?
1. Intent and Operation of the Proposed Compensation Discussion and
Analysis
The purpose of the Compensation Discussion and Analysis disclosure
would be to provide material information about the compensation
objectives and policies for named executive officers without resorting
to boilerplate disclosure. The Compensation Discussion and Analysis is
intended to put into perspective for investors the numbers and
narrative that follow it.
The proposed Compensation Discussion and Analysis requirement would
be principles-based, in that it identifies the disclosure concept and
provides several illustrative examples. The application of a particular
example must be tailored to the company. However, the scope of the
[[Page 6546]]
Compensation Discussion and Analysis is intended to be comprehensive,
so that it would call for discussion of post-termination as well as in-
service compensation arrangements.\55\ Boilerplate disclosure would not
comply with the proposed item. Examples of the issues that would
potentially be appropriate for the company to address in given cases in
the Compensation Discussion and Analysis include the following:
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\55\ Forward looking information in the Compensation Discussion
and Analysis would fall with the safe harbor for disclosure of such
information. See Securities Act Section 27A [15 U.S.C. 77z-2] and
Exchange Act Section 21E [15 U.S.C. 78u-5]).
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Policies for allocating between long-term and currently
paid out compensation;
Policies for allocating between cash and non-cash
compensation, and among different forms of non-cash compensation;
For long-term compensation, the basis for allocating
compensation to each different form of award;
For equity-based compensation, how the determination is
made as to when the award is granted;
What specific items of corporate performance are taken
into account in setting compensation policies and making compensation
decisions;
How specific elements of compensation are structured to
reflect these items of the company's performance and the executive's
individual performance;
The factors considered in decisions to increase or
decrease compensation materially;
How compensation or amounts realizable from prior
compensation (e.g., gains from prior option or stock awards) are
considered in setting other elements of compensation (e.g., how gains
from prior option or stock awards are considered in setting retirement
benefits);
The impact of accounting and tax treatments of a
particular form of compensation;
The company's equity or other security ownership
requirements or guidelines (specifying applicable amounts and forms of
ownership), and any company policies regarding hedging the economic
risk of such ownership;
Whether the company engaged in any benchmarking of total
compensation or any material element of compensation, identifying the
benchmark and, if applicable, its components (including component
companies); and
The role of executive officers in the compensation
process.
The Compensation Discussion and Analysis should be sufficiently
precise to identify material differences in compensation policies and
decisions for individual named executive officers where appropriate.
Where policies or decisions are materially similar, officers could be
grouped together. Where, however, the policy for an executive officer
is materially different, for example in the case of a principal
executive officer, his or her compensation would be discussed
separately.
2. Proposed Instructions to Compensation Discussion and Analysis
We are proposing instructions to make clear that the Compensation
Discussion and Analysis should focus on the material principles
underlying the company's executive compensation policies and decisions,
and the most important factors relevant to analysis of those policies
and decisions, without using boilerplate language or repeating the more
detailed information set forth in the tables and related narrative
disclosures that follow. We also propose to include an instruction to
make clear, as is currently the case, that companies are not required
to disclose target levels with respect to specific quantitative or
qualitative performance-related factors considered by the compensation
committee or the board of directors, or any factors or criteria
involving confidential commercial or business information, the
disclosure of which would have an adverse effect on the company,
similar to the instruction with respect to the Compensation Committee
Report today. In applying this instruction, we intend the standard for
companies to use when determining whether disclosure would have an
adverse effect on the company to be the same one that would apply when
companies request confidential treatment of confidential trade secrets
and commercial or financial information that otherwise is required to
be disclosed in registration statements, periodic reports and other
documents filed with us.\56\ Similarly, to the extent a performance
target has otherwise been disclosed publicly, disclosure under Item 402
would be required.
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\56\ See Securities Act Rule 406 [17 CFR 230.406] and Exchange
Act Rule 24b-2 [17 CFR 240.24b-2] (incorporating the criteria for
non-disclosure set forth in Exemption 4 of the Freedom of
Information Act [5 U.S.C. 552(b)(4)] and Exchange Act Rule 80(b)(4)
[17 CFR 200.80(b)(4)]). Today's proposed rules, like the current
rules, would not require a company to seek confidential treatment
under the procedures in Securities Act Rule 406 and Exchange Act
Rule 24b-2.
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3. ``Filed'' Status of Compensation Discussion and Analysis
The Compensation Discussion and Analysis will be considered a part
of the proxy statement and any other filing in which it is included.
Unlike the current Compensation Committee Report and Performance Graph,
which would be eliminated under our proposals, as discussed below, the
proposed Compensation Discussion and Analysis would be soliciting
material and would be filed with the Commission. Therefore, it would be
subject to Regulations 14A or 14C and to the liabilities of Section 18
of the Exchange Act.\57\ In addition, to the extent that the
Compensation Discussion and Analysis and any of the other disclosure
regarding executive officer and director compensation or other matters
is included or incorporated by reference into a periodic report, the
disclosure would be covered by the certifications that principal
executives officers and principal financial officers are required to
make under the Sarbanes-Oxley Act of 2002.\58\
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\57\ 15 U.S.C. 78r.
\58\ Exchange Act Rules 13a-14 [17 CFR 240.13a-14] and 15d-14
[17 CFR 240.15d-14]. See also Certification of Disclosure in
Companies' Quarterly and Annual Reports, Release No. 34-46427 (Aug.
29, 2002) [67 FR 57275], at note 35 (the ``Certification Release'')
(stating that ``the certification in the annual report on Form 10-K
or 10-KSB would be considered to cover the Part III information in a
registrant's proxy or information statement as and when filed'').
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In adopting the current rules in 1992, the Commission took into
account comments that the Compensation Committee Report should be
furnished rather than filed to allow for a more open and robust
discussion in the reports.\59\ Little that we see in current
Compensation Committee Reports suggests that this treatment has
resulted in such discussions, or at least the more transparent
disclosure that the comments suggested would result. Further, we
believe that it is appropriate for companies to take responsibility for
disclosure involving board matters as with other disclosure.
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\59\ 1992 Release, at Section II.H.
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4. Proposed Elimination of the Performance Graph and the Compensation
Committee Report
In light of the Compensation Discussion and Analysis proposal, we
propose to eliminate the Performance Graph and the Compensation
Committee Report that currently are required by our rules.\60\ The
graph and
[[Page 6547]]
the report were intended to be intertwined and their purpose was to
show the relationship, if any, between compensation and corporate
performance, as reflected by stock price. Unfortunately, the
Compensation Committee Report today often results in boilerplate
disclosure that is of little benefit to investors.\61\ Further, given
the widespread availability of stock performance information about
companies, industries and indexes through business-related Web sites or
similar sources, we believe that the requirement for the Performance
Graph is outdated, particularly since the disclosure in the
Compensation Discussion and Analysis regarding the elements of
corporate performance that a given company's policies might reach is
intended to allow broader discussion than just that of the relationship
of compensation to the performance of the company as reflected by stock
price.
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\60\ The Compensation Committee Report is currently required by
Item 402(k) and the Performance Graph is currently required by Item
402(l).
\61\ See Martin D. Mobley, Compensation Committee Reports Post-
Sarbanes-Oxley: Unimproved Disclosure for Executive Compensation
Policies and Practices, 2005 Colum. Bus. L. Rev. 111 (2005).
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Request for Comment
Does the proposed Compensation Discussion and Analysis
provide companies with the same flexibility as MD&A to provide a clear
picture to investors?
Are there any further changes that we can make to avoid
boilerplate disclosure about executive compensation?
Is there any significant impact by not having the report
over the names of the compensation committee of the board of directors?
If so, please explain in detail.
Would any significant impact result from treating the
Compensation Discussion and Analysis as filed and not furnished? A
commenter that prefers furnishing over filing should describe any
benefits that would be obtained by treating the material as furnished.
In particular, such a commenter should describe those benefits in the
context of the expected benefits of the Commission's decision in 1992
to treat the report of the Compensation Committee as furnished and
should address whether and why those benefits were achieved or not
achieved.
Are there any other specific items we should list in the
rule as possibly material information? Are there any items that are
listed that should not be?
Are there any items that we should explicitly mandate be
disclosed by every issuer?
Should performance targets continue to be excludable based
on the potential adverse competitive effect on the company of their
disclosure? Why or why not? If so, what should be the standard for
exclusion? Are there any other items that should be excludable based on
potential adverse competitive effect on the company of their
disclosure?
Should we retain the Performance Graph?
B. Compensation Tables
We believe that much about the tabular approach to eliciting
compensation disclosure is sound.\62\ We also believe, however, that
the tables should be reorganized and streamlined to provide a clearer
and more logical picture of total compensation and its elements for
named executive officers. We propose reorganizing the compensation
tables and their related narrative disclosure into three broad
categories:
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\62\ The tabular disclosure and related narrative disclosure
under proposed Item 402 would apply, as does existing Item 402, to
named executive officers. As discussed below in Section II.B.6.a.,
we are proposing certain changes to the definition of named
executive officer.
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1. Compensation with respect to the last fiscal year (and the two
preceding fiscal years), as reflected in a revised Summary Compensation
Table that presents compensation paid currently or deferred (including
options, restricted stock and similar grants) and compensation
consisting of current earnings or awards that are part of a plan, and
as supplemented by two tables providing back-up information for certain
data in the Summary Compensation Table; \63\
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\63\ The two tables that would supplement the Summary
Compensation Table would be the Grants of Performance-Based Awards
Table, discussed below in Section II.B.2.a., and the Grants of All
Other Equity Awards Table, discussed below in Section II.B.2.b. A
proposed narrative disclosure requirement accompanying these three
tables is discussed below in Section II.B.3.
---------------------------------------------------------------------------
2. Holdings of equity-based interests that relate to compensation
or are potential sources of future compensation, focusing on
compensation-related equity-based interests that were awarded in prior
years \64\ and are ``at risk,'' as well as recent realization on these
interests, such as through vesting of restricted stock or the exercise
of options and similar instruments; \65\ and
---------------------------------------------------------------------------
\64\ Under the proposals, these interests would be disclosed as
current compensation for those prior years.
\65\ Information regarding holdings of such equity-based
interests that relate to compensation would be disclosed in the
Outstanding Equity Awards at Fiscal Year-End Table, discussed below
in Section II.B.4.a. Information regarding realization on holdings
of equity-related interests would be required to be disclosed in the
Option Exercises and Stock Vested Table discussed below in Section
II.B.4.b.
---------------------------------------------------------------------------
3. Retirement and other post-employment compensation, including
retirement and deferred compensation plans, other retirement benefits
and other post-employment benefits, such as those payable in the event
of a change in control.\66\
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\66\ The proposed disclosure regarding retirement and post-
employment compensation would be required in the Retirement Plan
Potential Annual Payments and Benefits Table, discussed below in
Section II.B.5.a., the Nonqualified Defined Contribution and Other
Deferred Compensation Plans Table, discussed below in Section
II.B.5.b., and the narrative disclosure requirement for other
potential post-employment payments discussed below in Section
II.B.5.c.
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Reorganizing the tables along these themes should help investors
understand how compensation components relate to each other. At the
same time we would retain the ability for investors to use the tables
to compare compensation from year to year and from company to company.
We note that in more clearly organizing the compensation tables to
explain how the elements relate to each other, we may in some
situations be requiring disclosure of both amounts earned (or
potentially earned) and amounts subsequently paid out. This approach
raises the risk of ``double counting'' some elements of compensation.
However, we believe the risk inherent in such double disclosure is
outweighed by the clearer and more complete picture it would provide to
investors. We would encourage companies to use the narrative following
the tables (and where appropriate the Compensation Discussion and
Analysis) to explain how disclosures relate to each other in their
particular circumstances.
1. Compensation to Named Executive Officers in the Last Three Completed
Fiscal Years--The Summary Compensation Table and Related Disclosure
Under today's proposals, the Summary Compensation Table would
continue to serve as the principal disclosure vehicle regarding
executive compensation. This table, with the proposed revisions, would
show the named executive officers compensation for each of the last
three years, whether or not actually paid out. Consistent with current
requirements, the revised Summary Compensation Table would continue to
require disclosure of compensation for each of the company's last three
completed fiscal years.\67\
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\67\ Current Instruction to Item 402(b), permitting exclusion of
information for fiscal years prior to the last completed fiscal year
if the registrant was not a reporting company pursuant to Exchange
Act Sections 13(a) or 15(d) at any time during that year, unless the
registrant previously was required to provide information for any
such year in response to a Commission filing requirement, would be
retained and redesignated as proposed Instruction 1 to Item 402(c).
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[[Page 6548]]
However, the proposals would require disclosure of a figure
representing total compensation, as reflected in other columns of the
Summary Compensation Table, and would simplify the presentation from
that in the current table. As described in greater detail below, the
proposals also provide for two supplementary tables disclosing
additional information about grants of performance-based awards and all
other equity awards, respectively. Narrative disclosure would follow
the three tables, providing disclosure of material information
necessary to an understanding of the information disclosed in the
tables.
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\68\ ``PEO'' refers to principal executive officer. See Section
II.B.6.a. below for a description of the proposed named executive
officers for whom compensation disclosure would be required.
\69\ ``PFO'' refers to principal financial officer.
Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-stock
incentive All other
Name and principal position Year Total ($) Salary ($) Bonus ($) Stock Option plan compensation
awards ($) awards ($) compensation ($)
($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------------------------------------
PEO \68\........................................ --
--
--
PFO \69\........................................ --
--
--
A............................................... --
--
--
B............................................... --
--
--
C............................................... --
--
--
--------------------------------------------------------------------------------------------------------------------------------------------------------
Request for Comment
Should the Summary Compensation Table continue as it
currently does to require disclosure of compensation for each of the
company's last three fiscal years, or is only the last completed fiscal
year necessary in light of the availability of historical data on
compensation through the Commission's EDGAR system and other sources?
Should we require all of the proposed disclosures
discussed below in addition to those in the Summary Compensation Table,
or does the Summary Compensation Table itself provide an adequate
picture of compensation? Is there some other combination of the Summary
Compensation Table with other proposed disclosures that would fulfill
our objectives?
a. Total Compensation Column
We propose to modify the Summary Compensation Table to provide a
clearer picture of total compensation. We propose requiring that all
compensation be disclosed in dollars and that a total of all
compensation be provided.\70\ The new column disclosing total
compensation would appear as the first column providing compensation
information--column (c).\71\ This column would aggregate the total
dollar value of each form of compensation quantified in the columns
that would follow it (columns (d) through (i)). The proposed ``Total''
column would respond to concerns that investors, analysts and other
users of Item 402 disclosure cannot compute aggregate amounts of
compensation using current disclosure in a manner that is accurate or
is comparable across years or companies.
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\70\ Proposed Instruction 2 to Item 402(c) (requiring all
compensation values in the Summary Compensation Table to be reported
in dollars). Currently, some stock-based compensation is disclosed
in per share increments rather than in dollar amounts. The
instruction would further require, where compensation was paid or
received in a different currency, footnote disclosure identifying
that currency and describing the rate and methodology used for
conversion to dollars.
\71\ Columns (a) and (b) would, as is currently the case,
specify the executive officer and the year in question.
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Request for Comment
Should we include a requirement to disclose a total
compensation amount?
Will a total compensation number provide investors with
meaningful information about compensation? If not, why? Would
disclosure of a total compensation number result in any unintended
consequences? If so, how can they be mitigated?
Should total compensation be calculated in a different
manner from that proposed? For example, with respect to stock-based and
option-based awards, should exercise or vesting date valuations be used
instead?
Is the proposed new instruction which would direct that
all compensation values are to be reported in U.S. dollars necessary?
Are there particular circumstances we should address regarding
disclosure of compensation in foreign currencies?
b. Salary and Bonus Columns
The next columns we are proposing are the salary and bonus columns
(columns (d) and (e), respectively), which would be retained
substantially in their current form. However, we propose certain
changes that should give an investor a clearer picture of the total
amount earned, the amount deferred for the year, and the total amount
of deferred compensation that may be paid out at a later date.
Compensation that is earned, but for which payment will be
deferred, would be included in the salary, bonus or other
[[Page 6549]]
column, as appropriate.\72\ A new instruction, applicable to the entire
Summary Compensation Table, would provide that if receipt of any amount
of compensation is currently payable (which must be included in the
appropriate column) but has been deferred for any reason, the amount so
deferred must be disclosed in a footnote to the applicable column.\73\
As described below, the amount deferred would also generally be
reflected as a contribution in the deferred compensation
presentation.\74\ The new footnote disclosure of amounts deferred would
help to clarify the extent to which amounts disclosed in the proposed
Nonqualified Defined Contribution and Other Deferred Compensation Plans
Table described below represent compensation already reported, rather
than additional compensation.
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\72\ This is the case today for salary and bonus. This aspect of
current Instruction 1 to Item 402(b)(2)(iii)(A) and (B) will be
expanded and redesignated as Proposed Instruction 4 to Item 402(c).
\73\ Currently, the requirement is triggered only if the officer
elects the deferral. We propose to revise this to cover all
deferrals no matter who has initiated them.
\74\ See Section II.B.5.b., describing the Nonqualified Defined
Contribution and Other Deferred Compensation Plans Table. Disclosure
of these amounts as contributions would be required for nonqualified
deferred compensation plans. This disclosure would not be required
for qualified plans. Nonqualified deferred compensation plans and
arrangements provide for the deferral of compensation that does not
satisfy the minimum coverage, nondiscrimination and other rules that
``qualify'' broad-based plans for favorable tax treatment under the
Internal Revenue Code.
---------------------------------------------------------------------------
We are also proposing a change eliminating the delay that exists
under current rules where salary and bonus for the most recent fiscal
year are determined following compliance with Item 402 disclosure.
Under our proposal, where salary and bonus cannot be calculated as of
the most recent practicable date, a current report under Item 5.02 of
Form 8-K would be triggered by a payment, decision or other occurrence
as a result of which such amounts become calculable in whole or
part.\75\ The Form 8-K would include disclosure of the salary or bonus
amount and a new total compensation figure including that salary or
bonus amount.
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\75\ Proposed Instruction 3 to Item 5.02(e) of Form 8-K and
proposed Instruction 1 to Item 402(c)(2)(iv) and (v). Currently, in
the event that such amounts are not determinable at the most recent
practicable date, they are generally reported in the annual report
on Form 10-K or proxy statement for the following fiscal year. We
believe providing the information more quickly is appropriate and
are therefore proposing the use of a current report on Form 8-K.
Proposed Instruction 1 to Item 402(c)(2)(iv) and (v) would require
that the company disclose in a footnote that the salary or bonus is
not calculable through the latest practicable date and the date that
the salary or bonus is expected to be determined.
---------------------------------------------------------------------------
Request for Comment
Is the proposed presentation of deferred compensation in
the Summary Compensation Table and related footnotes, along with the
proposals outlined below, the best means for communicating the portion
of compensation that is deferred?
Are there ways that we could better clarify how the
amounts that would be identified as deferred in a footnote to the
Summary Compensation Table relate to the amounts that would be required
in the Nonqualified Defined Contribution and Other Deferred
Compensation Plans Table?
Is the proposed change to Form 8-K to eliminate the delay
in disclosing salary or bonus when they cannot be calculated as of the
most recent practicable date appropriate?
c. Plan-Based Awards
The next three proposed columns--Stock Awards, Option Awards and
Non-Stock Incentive Plan Compensation -- cover plan-based awards.
i. Stock Awards and Option Awards Columns
The Stock Awards Column (proposed column (f)) would disclose stock-
related awards that derive their value from the company's equity
securities or permit settlement by issuance of the company's equity
securities, such as restricted stock, restricted stock units, phantom
stock, phantom stock units, common stock equivalent units or other
similar instruments that do not have option-like features.\76\
Valuation would be based on the grant date fair value of the award
determined pursuant to Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123R) for financial reporting purposes. Stock awards
subject to performance-based conditions would also be included in this
column to ensure consistent reporting of stock awards and to ensure
their inclusion in the proposed Summary Compensation Table.\77\
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\76\ Generally speaking, a restricted stock award is an award of
stock subject to vesting conditions, such as performance-based
conditions or conditions based on continued employment for a
specified period of time. This type of award is referred to an
``nonvested equity shares'' in FAS 123R. Phantom stock, phantom
stock units, common stock equivalent units and other similar awards
are typically awards where an executive obtains a right to receive
payment in the future of an amount based on the value of a
hypothetical, or notional, amount of shares of common equity (or in
some cases stock based on that value). To the extent that the terms
of phantom stock, phantom stock units, common stock equivalents or
other similar awards include option-like features, the awards would
be required to be included in the Option Awards column. Currently,
restricted stock awards are valued in the Summary Compensation Table
by multiplying the closing market price of the company's
unrestricted stock on the date of grant by the number of shares
awarded.
\77\ These performance-based stock awards can currently be
reported at the company's election as incentive plan awards. See
current Instruction 1 to Item 402(b)(2)(iv). Our proposal would
eliminate this option. See the discussion of what are considered
performance-based conditions in note 87, below.
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Awards of options, stock appreciation right grants, and similar
stock-based compensation instruments that have option-like features
(proposed column (g)) would be disclosed in a manner similar to the
proposed treatment of stock and other stock-based awards.\78\ Instead
of the current disclosure of the number of securities underlying the
awards, this column would require disclosure of the grant date fair
value of the award as determined pursuant to FAS 123R for financial
reporting purposes. In order to calculate a total dollar amount o
