Proxy Disclosure and Solicitation Enhancements, 35076-35111 [E9-16764]
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Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 229, 239, 240, 249, 270
and 274
[Release Nos. 33–9052; 34–60280; IC–
28817; File No. S7–13–09]
RIN 3235–AK28
Proxy Disclosure and Solicitation
Enhancements
AGENCY: Securities and Exchange
Commission.
ACTION: Proposed rule.
SUMMARY: We are proposing
amendments to our rules to enhance the
compensation and corporate governance
disclosures registrants are required to
make about: Their overall compensation
policies and their impact on risk taking;
stock and option awards of executives
and directors; director and nominee
qualifications and legal proceedings;
company leadership structure; the
board’s role in the risk management
process; and potential conflicts of
interest of compensation consultants
that advise companies. The proposed
amendments to our disclosure rules
would be applicable to proxy and
information statements, annual reports
and registration statements under the
Securities Exchange Act of 1934, and
registration statements under the
Securities Act of 1933 as well as the
Investment Company Act of 1940. We
are also proposing amendments to
transfer from Forms 10–Q and 10–K to
Form 8–K the requirement to disclose
shareholder voting results. In addition,
we are proposing amendments to our
proxy rules to clarify the manner in
which they operate and address issues
that have arisen in the proxy solicitation
process.
DATES: Comments should be received on
or before September 15, 2009.
ADDRESSES: Comments may be
submitted by any of the following
methods:
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Electronic Comments
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–13–09. 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, on official
business days between the hours of 10
a.m. and 3 p.m. 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 available publicly.
FOR FURTHER INFORMATION CONTACT: N.
Sean Harrison, Special Counsel, at (202)
551–3430 or Anne Krauskopf, Senior
Special Counsel, at (202) 551–3500, in
the Division of Corporation Finance; or
with respect to questions regarding the
proposed proxy solicitation
amendments, Mark W. Green, Senior
Special Counsel, or Nicholas P. Panos,
Senior Special Counsel at (202) 551–
3440, in the Division of Corporation
Finance; or with respect to questions
regarding investment companies, Marc
Oorloff Sharma, Senior Counsel,
Division of Investment Management, at
(202) 551–6784, U.S. Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are
proposing amendments to Items 401,1
402,2 and 407 3 of Regulation S–K; 4
Rules 14a–2,5 14a–4,6 and 14a–12;7
Schedule 14A 8 and Forms 8–K,9 10–
Q,10 and 10–K 11 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’); 12 and Forms N–1A,13 N–2,14 and
N–3,15 registration forms used by
management investment companies to
register under the Investment Company
Act of 1940 (‘‘Investment Company
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml);
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–13–09 on the subject line;
or
• Use the Federal Rulemaking ePortal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
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1 17
CFR 229.401.
CFR 229.402.
3 17 CFR 229.407.
4 17 CFR 229.10 et al.
5 17 CFR 240.14a–2.
6 17 CFR 240.14a–4.
7 17 CFR 240.14a–12.
8 17 CFR 240.14a–101.
9 17 CFR 249.308.
10 17 CFR 249.308a.
11 17 CFR 249.310.
12 15 U.S.C. 78a et seq.
13 17 CFR 239.15A and 274.11A.
14 17 CFR 239.14 and 274.11a–1.
15 17 CFR 239.17a and 274.11b.
Act’’) 16 and to offer their securities
under the Securities Act of 1933
(‘‘Securities Act’’).17
I. Background and Summary
We are proposing a number of
revisions to our rules that would
improve the disclosure shareholders of
public companies receive regarding
compensation and corporate
governance, and facilitate
communications relating to voting
decisions. During the past few years,
shareholders have increasingly focused
on corporate accountability, and have
expressed the desire for additional
information that would enhance their
ability to make informed voting and
investment decisions. Several
rulemaking initiatives in recent years
have focused on these themes. In
addition to proposals that are largely
focused on disclosure enhancements,
we also are proposing some revisions to
the rules governing the proxy
solicitation process that would clarify
the manner in which soliciting parties
communicate with shareholders.
First, we are proposing revisions to
our rules governing disclosure of
executive and director compensation,
director biographical information and
qualifications, compensation
consultants, and other matters. Over the
past several years, we have engaged in
a number of rulemaking initiatives
designed to improve the presentation of
information about executive officer and
director compensation and relationships
with the company, and thereby assist
investors’ ability to make more informed
voting and investment decisions.18 The
turmoil in the markets during the past
18 months has reinforced the
importance of enhancing transparency,
especially with regard to activities that
materially contribute to a company’s
risk profile. We have decided to reexamine our disclosure rules to provide
investors with important and relevant
information upon which to base their
proxy voting and investment decisions.
The amendments proposed today
would add new disclosure requirements
on several topics that are designed to
enhance the information included in
2 17
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16 15
U.S.C. 80a–1 et seq.
U.S.C. 77a et seq.
18 See Release No. 33–8340 (Nov. 24, 2003) [68 FR
69204] (adopting rule amendments to improve the
disclosure regarding the nominating committee
process of public companies and the ways by which
security holders may communicate with boards at
the companies in which they invest); Release No.
33–8732A (Aug. 29, 2006) [71 FR 53518] (adopting
rule amendments that significantly revised the
disclosure of executive officer and director
compensation, related party transactions, director
independence and the security ownership of
officers and directors).
17 15
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proxy and information statements,19
including information about the
relationship of a company’s overall
compensation policies to risk, director
and nominee qualifications, company
leadership structure, and the potential
conflicts of interests of compensation
consultants. We believe that some of our
current disclosure requirements on
these topics could be improved to elicit
more informative disclosure for
investors. In addition, the proposals
would improve Summary Compensation
Table reporting of stock and option
awards. We are proposing to change the
manner in which stock and option
awards are reported both in the
Summary Compensation Table 20 and
Director Compensation Table.21 We
believe the current method for
presenting this information may have
inadvertently resulted in investor
confusion. The proposed amendments
would require disclosure in these tables
of the aggregate grant date fair value of
awards computed in accordance with
Financial Accounting Standards Board
(FASB) Statement of Financial
Accounting Standards No. 123 (revised
2004) Share-Based Payment (FAS
123R), instead of the dollar amount
recognized for financial statement
reporting purposes. We also propose to
accelerate the timing of the reporting of
information regarding voting results, so
that investors have access to this
important information on a more timely
basis.
Finally, we are proposing
amendments to Exchange Act Rules
14a–2, 14a–4 and 14a–12 to clarify
certain issues relating to the solicitation
of proxies and the granting of proxy
authority.22 In 1992, we adopted
significant amendments to the proxy
rules intended to remove unnecessary
impediments to the solicitation of proxy
authority and to allow management and
other persons seeking proxy authority
more efficiently and effectively to
19 The proposed amendments to Regulation S–K
would also be applicable to registration statements
under the Securities Act, and in some cases also
Form 10–K under the Exchange Act.
20 Item 402(c) and 402(n) of Regulation S–K [17
CFR 229.402(c) and 229.402(n)].
21 Item 402(k) and 402(r) of Regulation S–K [17
CFR 229.402(k) and 229.402(r)].
22 The Commission has taken action in recent
years in regard to proxy materials. For example, in
2007 we provided for the use of electronic proxy
solicitations, and recently we proposed to revise
our rules to facilitate inclusion of shareholder
nominations in company proxy materials. See
Release No. 34–56135 (July 26, 2007) [72 FR 42222]
(shareholder choice regarding proxy materials);
Release No. 33–9046 (June 10, 2009) [74 FR 29024]
(proposed amendments to facilitate rights of
shareholders to nominate directors).
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communicate with shareholders.23
Since that time, we have become aware
of a few interpretive issues regarding the
rules governing proxy solicitations,
particularly solicitations by
shareholders and other nonmanagement parties. We believe the
proposed revisions will provide
certainty in how the rules operate and
facilitate the proxy solicitation process.
If the amendments proposed in this
release are adopted, we anticipate that
they would be effective for the 2010
proxy season.
II. Discussion of the Proposed
Amendments
A. Enhanced Compensation Disclosure
1. Compensation Discussion and
Analysis Disclosure
In 2006, we amended our executive
compensation disclosure rules to
require a new principles-based,
narrative discussion that provides an
overview of a company’s compensation
program for its principal executive
officer, principal financial officer and
the three most highly compensated
executive officers, other than the
principal executive officer and principal
financial officer, and that provides an
analysis of the material elements of the
company’s compensation for these
named executive officers.24 This
Compensation Discussion and Analysis
(‘‘CD&A’’) requirement is designed to
elicit disclosure about the material
elements of the company’s
compensation for the named executive
officers, and is intended to put into
perspective for investors the tabular
compensation data required by our
rules.25
23 Release No. 34–31326 (Oct. 16, 1992) [52 FR
48276] (‘‘1992 adopting release’’).
24 See Release No. 33–8732A (Aug. 29, 2006) [71
FR 53518]; Release No. 33–8765 (Dec. 22, 2006) [71
FR 78338].
25 Shortly after implementation of the CD&A
requirements, in the spring of 2007, the
Commission staff undertook a review of the proxy
statements of 350 public companies in an effort to
both evaluate compliance with the revised rules
and provide guidance on how companies could
enhance their disclosures in this area. The staff
prepared a report of its observations of the CD&A
disclosures of these companies. In the report, the
staff described the principal comments they had
issued to the companies that were subject to the
review. Overall, the staff noted at the time that
companies appeared to have generally made a good
faith effort to comply with the new rules, and
investors had benefited from the new disclosures.
At the same time, the staff’s comments highlighted
areas where it believed companies may need to
provide additional or clearer disclosure in future
filings. Furthermore, the staff emphasized in its
report that companies should provide security
holders and investors with a more robust discussion
of the basis and the context for granting different
types and amounts of executive compensation, and
that companies should continue thinking about
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In addition to the compensation
policies for the named executive
officers, a company’s broader
compensation policies and
arrangements for other employees may
also be important. It has been suggested
that, at some companies, compensation
policies have become disconnected from
long-term company performance
because the interests of management
and some employees, in the form of
incentive compensation arrangements,
and the long-term well-being of the
company are not sufficiently aligned.26
Critics have argued that, in some cases,
the structure and the particular
application of incentive compensation
policies can create inadvertent
incentives for management and
employees to make decisions that
significantly, and inappropriately,
increase the company’s risk, without
adequate recognition of the risks to the
company.27 Companies, and in turn
investors, may be negatively impacted
where the design or operation of their
how the CD&A can be better organized and
presented for both the lay reader and the
professional, in order to make the disclosure as
useful and meaningful to security holders and
investors as possible. U.S. Securities and Exchange
Commission, Division of Corporation Finance, Staff
Observations in the Review of Executive
Compensation Disclosure, (2007) at https://
www.sec.gov/divisions/corpfin/guidance/
execcompdisclosure.htm.
26 See, for example, Financial Stability Forum,
FSF Principles of Sound Compensation Practices 1
(Apr. 2, 2009) (noting that ‘‘[h]igh short-term profits
led to generous bonus payments to employees
without adequate regard to the longer-term risks
they imposed on their firms’’), at https://
www.financialstabilityboard.org/publications/
r_0904b.pdf. The report also noted that ‘‘below the
level of the executive suite, most employees view
the performance of the firm as a whole as being
almost independent of their own actions. Actions
by other employees or business units are seen as
determining the firm’s fate. Similarly, stock
performance might be driven by various exogenous
factors. Thus, employees heavily discount the value
of the stock and act to bring the cash component
of bonus up.’’ Id. at 11.
27 See, for example, Calvin H. Johnson, The
Disloyalty of Stock and Stock Option
Compensation, 11 CONN. INS. L.J. 133 (2004–
2005); Michael C. Jensen, et al., Remuneration:
Where we’ve been, how we got here, what are the
problems, and how to fix them (2004) (unpublished
manuscript on file), available at https://
www.ssrn.com/abstract=561305. The relationship
between compensation incentives and risk also has
been recognized in the legislation authorizing the
Troubled Asset Relief Program (‘‘TARP’’).
Specifically, Section 111(b) of the Emergency
Economic Stabilization Act of 2008, as amended by
Section 7001 of the American Recovery and
Reinvestment Act of 2009, requires the Secretary of
the Treasury to require each TARP recipient to meet
appropriate standards for executive compensation
and corporate governance that shall include ‘‘limits
on compensation that exclude incentives for senior
executive officers of the TARP recipient to take
unnecessary and excessive risks that threaten the
value of such recipient during the period in which
any obligation arising from financial assistance
provided under the TARP remains outstanding.’’
See Pub. L. 111–5, § 7001, 123 Stat. 115, 517 (2009).
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compensation programs creates
incentives that influence behavior
inconsistent with the overall interests of
the company. Indeed, one of the many
contributing factors cited as a basis for
the current market turmoil is that at a
number of large financial institutions
the short-term incentives created by
their compensation policies were
misaligned with the long-term wellbeing of the companies.28 By contrast,
well-designed compensation policies
may enhance a company’s business
interests by encouraging innovation and
appropriate levels of risk taking.29
We are proposing to amend our CD&A
requirements to broaden their scope to
include a new section that will provide
information about how the company’s
overall compensation policies for
employees create incentives that can
affect the company’s risk and
management of that risk. We believe
investors would benefit from an
expanded discussion and analysis about
how the company rewards and
incentivizes its employees to the extent
it creates risk to the company. The
proposed amendments would require a
company to discuss and analyze its
broader compensation policies and
overall actual compensation practices
for employees generally, including nonexecutive officers, if risks arising from
those compensation policies or practices
may have a material effect on the
company.30 In preparing this disclosure,
we anticipate that companies will need
to consider the level of risk that
employees might be encouraged to take
to meet their incentive compensation
elements.31 We believe that disclosure
28 See, for example, Financial Stability Forum,
FSF Report on Enhancing Market and Institutional
Resilience 8 (Apr. 2008) (noting that
‘‘[c]ompensation schemes in financial institutions
encouraged disproportionate risk-taking with
insufficient regard to longer-term risks’’), at
https://www.financialstabilityboard.org/
publications/r_0804.pdf L. Story, On Wall Street,
Bonuses, Not Profits, Were Real, N.Y. TIMES, Dec.
18, 2008.
29 See, for example, U.S. Chamber of Commerce,
Letter to the Treasury Secretary, (Feb. 9, 2009)
(suggesting that ‘‘corporate governance policies
must promote long-term shareholder value and
profitability but should not constrain reasonable
risk-taking and innovation’’), at https://
www.uschamber.com/NR/rdonlyres/
ej2mxgcl4qbguyozahqba4xzsiht7wyqxcdcjhsyfbvl4
jwcurjanaslkfm4up6xgxuf5c57
ogpkxt44shucmryo3ja/ExecutiveCompensation
SecretaryGeithnerFeb62009.pdf.
30 See proposed Item 402(b)(2) of Regulation S–
K. If a company had a policy against providing
compensation that encouraged imprudent risktaking, but actually provided compensation that
encouraged such behavior and the effect may be
material on the company, disclosure under the new
provision would be required.
31 To the extent that such risk considerations are
a material aspect of the company’s compensation
policies or decisions for named executive officers,
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of a company’s overall compensation
policies in certain circumstances can
help investors identify whether the
company has established a system of
incentives that can lead to excessive or
inappropriate risk taking by employees.
Under the proposed amendments, the
situations that would require disclosure
will vary depending on the particular
company and its compensation
programs. We believe situations that
potentially could trigger discussion and
analysis include, among others,
compensation policies and practices:
• At a business unit of the company
that carries a significant portion of the
company’s risk profile;
• At a business unit with
compensation structured significantly
differently than other units within the
company;
• At business units that are
significantly more profitable than others
within the company;
• At business units where the
compensation expense is a significant
percentage of the unit’s revenues; or
• That vary significantly from the
overall risk and reward structure of the
company, such as when bonuses are
awarded upon accomplishment of a
task, while the income and risk to the
company from the task extend over a
significantly longer period of time.
This is a non-exclusive list of
situations where compensation
programs may have the potential to raise
material risks to the company. These are
only examples; disclosure under the
proposed rule amendment would only
be required if the materiality threshold
is triggered.
We believe that discussion and
analysis of a company’s broader
compensation policies may be
appropriate in these situations because
the policies may create risk to the
company that is not otherwise apparent
from a discussion solely focused on
executive compensation policies. For
example, if a particular business unit
that carries a significant portion of the
company’s overall risk is significantly
more profitable than others within the
company, compensation policies
relevant to employees of that unit could
be just as essential to the company’s
overall financial condition and
performance as those of its senior
executives. Similarly, in situations
where particular business units
compensate their employees
significantly differently from other units
or carry an overall risk and reward
structure that varies significantly from
the rest of the company, provided the
the company is required to discuss them as part of
its CD&A under the current rules.
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effects of the compensation policies may
be material to the company, those
differences should be disclosed and
explained so that investors can more
readily assess their significance and
appropriateness.
Consistent with the principles-based
approach of the CD&A, the proposed
amendments provide several examples
of the types of issues that would be
appropriate for a company to discuss
and analyze. We wish to emphasize,
however, that the application of a
particular example must be tailored to
the facts and circumstances of the
company and that the examples are nonexclusive. We believe that using
illustrative examples will help to
identify the types of disclosure that may
be appropriate. A company must assess
the importance to investors of the
information that is identified by the
example in light of the particular
situation of the company. Examples of
the issues that companies may need to
address regarding the compensation
policies or practices that may give rise
to risks that may have a material effect
on the company would include the
following:
• The general design philosophy of
the company’s compensation policies
for employees whose behavior would be
most affected by the incentives
established by the policies, as such
policies relate to or affect risk taking by
those employees on behalf of the
company, and the manner of its
implementation;
• The company’s risk assessment or
incentive considerations, if any, in
structuring its compensation policies or
in awarding and paying compensation;
• How the company’s compensation
policies relate to the realization of risks
resulting from the actions of employees
in both the short term and the long term,
such as through policies requiring claw
backs or imposing holding periods;
• The company’s policies regarding
adjustments to its compensation
policies to address changes in its risk
profile;
• Material adjustments the company
has made to its compensation policies
or practices as a result of changes in its
risk profile; and
• The extent to which the company
monitors its compensation policies to
determine whether its risk management
objectives are being met with respect to
incentivizing its employees.
• The level of detail required will
necessarily depend on the particular
facts at a company and within various
business units of a company.
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Request for Comment
• Would expanding the scope of the
CD&A to require disclosure concerning
a company’s overall compensation
program as it relates to risk management
and or risk-taking incentives provide
meaningful disclosures to investors?
Should the scope of the amendments be
limited in application to specific groups
of employees, such as executive
officers? Should it be limited to
companies of a particular size, like large
accelerated filers? Should it be limited
to particular industries like financial
services, including companies that have
segments in such industries? Is the cost
of tracking and disclosing the nature of
the risk different at different types of
companies or company segments and if
so, should that be reflected in our rules?
• In light of the complexity of the
issue and compensation programs
generally, we recognize that it may be
difficult to identify and describe which
compensation structures may expose a
company to material risks. We believe
the listed examples are situations where
compensation policies may induce risk
taking behavior, and therefore,
potentially have a material impact on
the company. Are the listed examples
appropriate issues for companies to
consider discussing and analyzing? Are
there any other specific items we should
list as possibly material information?
Are there any items that are listed that
should not be? If so, why?
• Should other elements of
compensation that may encourage
excessive risk taking be highlighted in
the CD&A?
• We have included a list of examples
of the types of issues that would be
appropriate for a company to discuss
and analyze. Is that list appropriate?
Rather than treat the list as examples,
should we require discussion of each
item?
• Are there other disclosure
requirements that would provide more
meaningful information about the effect
of the registrant’s compensation policies
on its risk profile or risk management?
• Are there certain risks that are more
clearly aligned with compensation
practices the disclosure of which would
be important to investors?
• If a company determines that
disclosure under the proposed
amendments is not required, should we
require the company to affirmatively
state in its CD&A that it has determined
that the risks arising from its broader
compensation policies are not
reasonably expected to have a material
effect on the company?
• Should smaller reporting
companies, who are currently not
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required to provide CD&A disclosure, be
required to provide disclosure about
their overall compensation policies as
they relate to risk management?
2. Revisions to the Summary
Compensation Table
The Item 402 amendments proposed
today also would revise Summary
Compensation Table and Director
Compensation Table disclosure of stock
awards and option awards to require
disclosure of the aggregate grant date
fair value of awards computed in
accordance with FAS 123R.32 The
proposed revised disclosure would
replace currently mandated disclosure
of the dollar amount recognized for
financial statement reporting purposes
for the fiscal year in accordance with
FAS 123R.33
A significant objective of the broad
executive compensation disclosure
amendments we adopted in 2006 was to
provide investors a single total figure
that includes all compensation and is
comparable across fiscal years and
companies.34 To accomplish this, we
needed to include a dollar amount for
option awards, which previously had
been reported in the Summary
Compensation Table as the number of
securities underlying stock options
granted.35 When we initially adopted
the 2006 amendments, we required
Summary Compensation Table and
Director Compensation Table disclosure
of the aggregate grant date fair value of
stock awards and option awards
computed in accordance with FAS
123R, the same as we propose today.36
Before those amendments became
32 Pursuant to FAS 168, the FASB Accounting
Standards Codification has superseded all
references to previous FASB standards for interim
or annual periods ending on or after September 15,
2009. For purposes of facilitating comments, our
proposals retain the well-known FAS 123R
nomenclature. However, if we adopt the Summary
Compensation Table and Director Compensation
Table proposals, we expect in the final rules to
update references accordingly.
33 In proposing these changes to the Summary
Compensation Table and Director Compensation
Table, we do not suggest that recognizing sharebased compensation costs over the periods during
which employees perform the related services is an
inappropriate measure for financial statement
reporting. Instead, we simply acknowledge that the
aggregate grant date fair value measure is more
useful to the users of executive compensation
disclosure and would facilitate CD&A disclosure.
34 See Release No. 33–8732A in note 24 above at
53170. We recognized that the timing for disclosing
different elements of compensation in the Summary
Compensation Table disclosure varies depending
on the form of the compensation.
35 See Release No. 33–6962 (Oct. 16, 1992) [57 FR
48126].
36 See Release No. 33–8732A in note 24 above at
53172. This approach was consistent with the
timing of option and stock awards disclosure that
had applied in the Summary Compensation Table
since 1992.
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effective, however, we reconsidered the
issue based on concerns that the actual
amounts ultimately paid out could
differ from the amounts initially
reported in the tables. In December
2006, we adopted the current disclosure
requirements for the stock award and
option award columns as Interim Final
Rules and solicited comment.37 In the
same rulemaking, we amended the
Grants of Plan-Based Awards Table to
require disclosure of the FAS 123R grant
date fair value of the individual equity
awards granted to named executive
officers in the last completed fiscal
year.38
Since the adoption of these current
disclosure requirements, we have
received comments from a variety of
sources that the information that
investors would find most useful and
informative in the Summary
Compensation Table and Director
Compensation Table is the full grant
date fair value of equity awards made
during the covered fiscal year.39 This is
because investors may consider
compensation decisions made during
the fiscal year—which usually are
reflected in the full grant date fair value
measure, but not the financial statement
recognition measure—to be material to
voting and investment decisions.40
Disclosure of full grant date fair value
permits investors to better evaluate the
amount of equity compensation
awarded. Investors have noted that
disclosure in the Summary
Compensation Table of how much
equity compensation the company
decides to award during a fiscal year is
more informative to voting and
37 See
Release No. 33–8765 in note 24 above.
402(d)(2)(viii) of Regulation S-K.
39 See, for example, letters regarding File No. S7–
03–06 from Ken Belcher (Dec. 28, 2006); Andrew
H. Dral (Dec. 30, 2006); Council of Institutional
Investors (Jan. 25, 2007); American Federation of
Labor and Congress of Industrial Organizations (Jan.
29, 2007); Teachers Insurance and Annuity
Association of America (Jan. 16, 2007); CALSTRS
(Jan. 16, 2007); Leggett & Platt, Inc. (Apr. 23, 2007);
and CFA Institute for Financial Market Integrity
(Dec. 20, 2007). These comment letters are available
at https://www.sec.gov/rules/proposed/s70306.shtml.
In its May 5, 2009, meeting with the staff of the
Division of Corporation Finance, the Joint
Committee on Employee Benefits of the American
Bar Association also recommended that we revise
Summary Compensation Table disclosure of stock
awards and option awards to report aggregate grant
date fair value.
40 See letter regarding File No. S7–03–06 from
Council of Institutional Investors (Jan. 25, 2007)
(stating that ‘‘the Summary Compensation Table
should disclose the decisions of the compensation
committee in the applicable year * * * [This]
methodology is consistent with the objective of
providing investors with the tools needed to
evaluate the annual decisions of the compensation
committee[.]’’). See also letter regarding File No.
S7–03–06 from Leggett & Platt, Inc. (Apr. 23, 2007)
(stating that ‘‘[t]his is clearly the information most
investors want’’).
38 Item
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investment decisions than the dollar
amount recognized for financial
statement reporting purposes.41
Investors have commented that because
full grant date fair value is indicative of
which executives the company intends
to compensate most highly, it is a more
useful measure to include in the
Summary Compensation Table as a
component of total compensation.42
Because total compensation is also the
basis for determining which executives,
in addition to the principal executive
officer and principal financial officer,
are the named executive officers whose
compensation is reported,43 the full
grant date fair value measure will better
align the identification of named
executive officers with company
compensation decisions. Summary
Compensation Table disclosure of the
full grant date fair value measure also
can facilitate companies’’ ability to
provide a CD&A that clearly and
concisely explains and analyzes
material compensation policies and
decisions.44
Some companies have recognized the
importance of full grant date fair value
information to investors and have
provided an ‘‘alternative’’ Summary
Compensation Table—substituting full
grant date fair value numbers in the
Stock Awards and Option Awards
41 See letter regarding File No. S7–03–06 from
Teachers Insurance and Annuity Association of
America (Jan. 16, 2007) (‘‘Our view is that executive
compensation disclosure and financial reporting are
separate and distinct. We believe that reporting the
aggregate fair value of awards in the Summary
Compensation Table is important to give an
accurate representation of the compensation
committee’s actions and intentions in any given
reporting period’’). See also letter from American
Federation of Labor and Congress of Industrial
Organizations in note above (‘‘By spreading out the
disclosure of the value of equity awards over a
number of years, the total impact of executive
compensation decisions will be concealed from
shareholders and the public’’).
42 See letter from American Federation of Labor
and Congress of Industrial Organizations in note 39
above (‘‘The methodology used to calculate total
compensation in the Summary Compensation Table
is extremely important to shaping behavior by
compensation committees and investors.
Shareholders will evaluate the disclosed total
compensation figure when voting in director
elections and when asked to ratify equity award
plans. Directors will shape their executive
compensation decisions to reflect these shareholder
views. For this reason, the total compensation
figure should represent the current decisions made
regarding executive compensation in the most
recent fiscal year.’’).
43 Pursuant to Instruction 1 to Items 402(a)(3) and
Instruction 1 to Item 402(m)(2), this determination
is made by reference to total compensation for the
last completed fiscal year.
44 Summary Compensation Table disclosure of
the dollar amount recognized for financial
statement reporting purposes can frustrate this
objective because it can result in lengthy, complex
CD&A explanations of the FAS 123R recognition
model. See The Corporate Counsel, Mar.–Apr. 2009,
at 3–4.
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columns—in addition to the Summary
Compensation Table disclosure
prescribed by the current rules.45
Because companies generally consider
the full grant date fair value of these
awards in making compensation
decisions, they may include such an
‘‘alternative’’ table in the CD&A to
illuminate their decisionmaking
process. Some users of executive
compensation disclosure also
independently substitute grant date fair
value information from the Grants of
Plan-Based Awards Table for the
financial statement recognition-based
numbers disclosed in the Summary
Compensation Table.46
Further, correlating Stock Awards and
Option Awards disclosure to financial
statement recognition can result in the
disclosure of a negative number in the
relevant column.47 Such a negative
45 Some compensation experts have also
suggested adding an alternative Summary
Compensation Table if the mandated Summary
Compensation Table ‘‘distorts’’ the compensation of
an executive. See Frederick D. Lipman & Steven E.
Hall, Executive Compensation Best Practices 50–52
(2008).
46 See Moody’s Investors Service, A User’s Guide
to the SEC’s New Rules for Reporting Executive Pay
(Apr. 2007), available at https://www.law.yale.edu/
documents/pdf/CBL/AUsersGuidetotheSECPay
Disclosures102762.pdf, and ( https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=987914) ( ‘‘Moody’s uses the full Statement
123(R) grant date fair value of stock awarded and
options granted, as disclosed in the grants of planbased awards table, instead of the figures disclosed
in the SCT stock awards and options awards
columns.’’).
47 Correlating Stock Awards and Option Awards
reporting to financial statement recognition often
can involve negative adjustments to the numbers
reported. In particular:
» Awards classified as ‘‘liability awards’’ under
FAS 123R (such as an award that is cash settled)
are initially measured at grant date fair value, but
for purposes of financial statement recognition are
re-measured at each financial statement reporting
date through the date the awards are settled.
» Under FAS 123R, compensation cost for
awards containing a performance-based vesting
condition is disclosed only if it is probable that the
performance condition will be achieved. If
achievement of the performance condition
subsequently is no longer considered probable, the
amount of compensation cost previously disclosed
in the Summary Compensation Table is reversed in
the period when it is determined that achievement
of the condition is no longer probable.
In addition, pursuant to the Instruction to Item
402(c)(2)(v) and (vi) and the Instruction to Item
402(n)(2)(v) and (vi), the compensation cost
reported for stock and option awards in the
Summary Compensation Table does not include the
estimate of forfeitures related to service-based
vesting conditions used for FAS 123R financial
statement recognition because this estimate is not
considered meaningful in reporting the
compensation of individual named executive
officers. Instead, compensation cost for awards with
service-based vesting is disclosed assuming that a
named executive officer will perform the service
required for the award to vest. If the named
executive officer fails to do so and forfeits the
award, the amount of compensation cost previously
disclosed in the Summary Compensation Table is
deducted in the period when the award is forfeited.
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number currently flows through to the
Total Compensation column, reducing
the amount of total compensation
reported. Because decreases in stock
price affect the financial reporting of the
value of stock options, using the
financial statement recognition measure
to disclose stock and option awards can
result in disclosure of negative total
compensation to principal executive
officers or principal financial officers,
confusing investors.48
Because total compensation also
determines identification of some
named executive officers, where a
company experiences significant
volatility in its stock price, such as the
significant decreases during 2008, the
current rules may also cause the list of
named executive officers to change
more frequently from year to year due
to factors unrelated to the company’s
compensation decisions.49 This can
potentially exclude from executive
compensation disclosure executives that
the company considers the most highly
compensated based on its compensation
decisions, including its decisions with
respect to equity awards.50 One reason
for the adoption of the financial
statement recognition model was the
potential to distort identification of
named executive officers when a single
large grant, to be earned for services to
be performed over multiple years,
affects the list of named executive
officers in the Summary Compensation
Table, even though the executive may
earn a consistent level of compensation
over the award’s term.51 Our experience
with the current rules, however, leads
us to believe that it is more meaningful
to shareholders if company
compensation decisions—including the
decision to grant such a large award—
48 See G. Morgenson, Weird and Weirder
Numbers on Pay Reports, N.Y. TIMES, Mar. 11,
2007.
49 See letter regarding File No. S7–03–06 from the
HR Policy Association (Jan. 29, 2007) (‘‘The
Amended Rules also will increase the annual
variability of the composition of the NEOs based on
accounting rules rather than compensation
programs. * * * Consistency with financial
accounting does not justify re-introducing such
variability into the table, especially with respect to
a core element of compensation such as equity
compensation that cannot be excluded in
determining total compensation.’’).
50 See letter regarding File No. S7–03–06 from
Ernst & Young (Jan. 29, 2007) (generally supporting
the current rules yet stating that ‘‘[w]e recommend
that the SEC adopt an approach that also excludes
the effects of any negative amounts, regardless of
their source in the determination of the NEOs. We
believe that such an approach would result in more
consistency from year to year in the identity of the
NEOs included in the SCT. Further, the NEOs
determined in this fashion would more likely be
those executives that the compensation committee
regards as the most highly compensated.’’).
51 See Release No. 33–8765 in note 24 above at
78340 (citing letter from Fenwick & West LLP).
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rather than factors unrelated to those
decisions, cause the named executive
officers to change.
A further significant reason for
adopting the current rules was concern
that disclosing the full grant date fair
value would overstate compensation
earned related to service rendered for
the year, and that actual amounts earned
later could be substantially different.52
However, companies have recognized
that the current rules also have the
potential to over-report compensation
for a given year.53 To the extent that
both methods possess this potential, we
believe that reporting based on the full
grant date fair value method is more
informative because it better reflects
compensation decisions. If a company
does not believe that full grant date fair
value reflects a named executive
officer’s compensation, it can provide
appropriate explanatory narrative
disclosure.
While we continue to recognize that
no one approach to disclosure of stock
and option awards addresses all the
issues regarding disclosure of equity
compensation, our experience and the
comment letters received since adoption
of the current requirements lead us to
believe that the goals of clear, concise
and meaningful executive compensation
disclosure would be better served by
amending the Summary Compensation
Table and Director Compensation Table
to report stock awards and option
awards based on aggregate grant date
fair value. Among other things, because
presentation of aggregate grant date fair
value would include the incremental
fair value of options repriced during the
fiscal year, the effect of option
repricings on total compensation would
be clearer. Further, because smaller
reporting companies do not provide a
Grants of Plan-Based Awards Table, the
current rules do not require them to
provide any disclosure of the grant date
fair value of awards made in the fiscal
year (although they are currently
required to provide the Summary
52 See Release No. 33–8765 in note 24 above. See
also Release No. 33–8765, in note 24 above at 78340
(citing letters of U.S. Chamber of Commerce (Apr.
7, 2006); Ernst & Young LLP (Apr. 10, 2006)).
53 See Frederick D. Lipman & Steven E. Hall in
note 45 above (stating that ‘‘[w]hen shareholders
look at the ‘Total’ column for a 2007 or a
subsequent year proxy statement, the executive’s
compensation would include the allocable share of
the 2005 option grant under FAS 123R. This figure
could substantially inflate the ‘Total’ column for
2007 or subsequent years, leading unsophisticated
shareholders or financial writers to the conclusion
that this amount was received in 2007, when in fact
the option grants were received in 2005. If 2007
were a particularly bad year financially for the
company or for shareholders’ stock values, there
could be a hue and cry that this was another
example of excessive CEO compensation’’).
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Compensation Table). The proposals
thus would make this information
available to smaller reporting company
investors.
The amendments we propose also
would:
• Rescind the requirement to report
the full grant date fair value of each
individual equity award in the Grants of
Plan-Based Awards Table 54 and
corresponding footnote disclosure 55 to
the Director Compensation Table
because these disclosures may be
considered duplicative of the aggregate
grant date fair value disclosure to be
provided in the Summary
Compensation Table under the
proposals; and
• Amend Instruction 2 to the salary
and bonus columns of the Summary
Compensation Table to provide that
registrants will not be required to report
in those columns the amount of salary
or bonus forgone at a named executive
officer’s election, and that non-cash
awards received instead are reportable
in the column applicable to the form of
award elected. With this amendment,
the Summary Compensation Table
disclosure would reflect the form of
compensation ultimately received by
the named executive officer.56
Request for Comment
• Is the proposed Summary
Compensation Table reporting of equity
awards a better approach for providing
investors clear, meaningful, and
comparable executive compensation
disclosure consistent with the objectives
of providing concise analysis in CD&A
and a clear understanding of total
compensation for the year? Would the
proposals facilitate better informed
investment and voting decisions?
• The proposal contemplates that the
Summary Compensation Table would
report the aggregate grant date fair value
of stock awards and option awards
granted during the relevant fiscal year,
just as the Grants of Plan-Based Awards
Table reports each grant of an award
made to a named executive officer in the
last completed fiscal year. Should the
Summary Compensation Table instead
54 See Item 402(d)(2)(viii) of Regulation S–K and
Instruction 7 to Item 402(d).
55 Current Instruction to Item 402(k)(2)(iii) and
(iv) of Regulation S–K.
56 This proposed amendment would apply to
General Instruction 2 to Item 402(c)(2)(iii) and (iv)
and General Instruction 2 to Item 402(n)(2)(iii) and
(iv). The current versions of these Instructions,
which require such forgone salary or bonus to be
reported in the Salary or Bonus column, as
applicable, were adopted in Release No. 33–8765 to
reflect that the original terms of the award, which
would have compensated the named executive
officer in cash, are not within the scope of FAS
123R.
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report the aggregate grant date fair value
of equity awards granted for services in
the relevant fiscal year, even if the
awards were granted after fiscal year
end? Explain why or why not. For
example, could such an approach be
applied in a manner inconsistent with
the purposes of our compensation
disclosure rules, for example by
distorting the determination of named
executive officers? If we change our
approach with respect to the Summary
Compensation Table, should the Grants
of Plan-Based Awards Table be
amended correspondingly to conform to
the scope of awards reported in that
table?
• If the Summary Compensation
Table is amended as proposed, should
the Grants of Plan-Based Awards Table
disclosure of the full grant date fair
value of each individual award be
retained, rather than rescinded as
proposed? Should the Grants of Plan
Based Awards Table continue to
disclose the incremental fair value with
respect to individual awards that were
repriced or otherwise materially
modified during the last completed
fiscal year? If so, why? If disclosure of
grant date fair value of individual
awards is retained, should it also be
made applicable to smaller reporting
companies?
• As described above, one reason for
adopting the financial statement
recognition model was the potential for
distortion in identifying named
executive officers when a single large
grant, to be earned by services to be
performed over multiple years, affects
the list of named executive officers in
the Summary Compensation Table, even
though the executive earns a consistent
level of compensation over the award’s
term. Are multi-year grants a common
practice, so that they would introduce
significant year-to-year variability in the
list of named executive officers if the
proposed amendments are adopted
relative to the variability under the
current rules? If so, how should our
rules address this variability?
• Under the proposal, all stock and
option awards would be reported in the
Summary Compensation Table at full
grant date fair value, including awards
with performance conditions. Would
the proposal discourage companies from
tying stock awards to performance
conditions, since the full grant date fair
value would be reported without regard
to the likelihood of achieving the
performance objective? If the proposal is
adopted, is any disclosure other than
that already currently required (e.g., in
the Compensation Discussion and
Analysis, the Grants of Plan-Based
Awards Table, and the Outstanding
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Equity Awards at Fiscal Year-End Table)
needed to clarify that the amount of
compensation ultimately realized under
a performance-based equity award may
be different?
• As proposed, Instruction 2 to the
salary and bonus columns would be
revised to provide that any amount of
salary or bonus forgone at the election
of a named executive officer pursuant to
a program under which a different, noncash form of compensation may be
received need not be included in the
salary or bonus column, but instead
would need to be reported in the
appropriate other column of the
Summary Compensation Table. Should
this approach cover elections to receive
salary or bonus in the form of equity
compensation only if the opportunity to
elect equity settlement is within the
terms of the original compensatory
arrangement, so that the original
arrangement is within the scope of FAS
123R? Why or why not?
• The Commission also has received
a rulemaking petition requesting that we
revise Summary Compensation Table
disclosure of stock and option awards a
different way.57 Instead of reporting the
aggregate grant date fair value of awards
granted during the year, as we propose,
the petition’s suggested approach would
report the annual change in value of
awards, which could be a negative
number if market values decline. For
restricted stock, restricted stock units
and performance shares, the reported
amount would be the change in stock
price from year-end to year-end. For
stock options, it would be the change in
the in-the-money value over the same
period. Would the approach suggested
by the rulemaking petition be easy to
understand or difficult to understand?
Would the information provided under
the suggested approach be useful to
investors? In particular, would investors
be able to evaluate the decision making
of directors with respect to executive
compensation if the value of equity
compensation on the date of the
compensation decision is not disclosed,
but instead investors are provided
information regarding changes in value
of the compensation, which changes
occur after the compensation decision is
made? Would it enhance or diminish
the ability of companies to explain in
CD&A the relationship between pay and
company performance? Would it be
more or less informative to voting and
investment decisions than the aggregate
grant date fair value approach we
57 See May 26, 2009, rulemaking petition
submitted by Ira T. Kay and Steven Seelig, Watson
Wyatt Worldwide, File No. 4–585, at https://
www.sec.gov/rules/petitions/2009/petn4-585.pdf.
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propose? Would it be a better measure
for computing total compensation,
including for purposes of identifying
named executive officers? Are there any
other ways of reporting stock and option
awards that would better reflect their
compensatory value? If so, please
explain. For example, are there any
potential amendments to the Grants of
Plan-Based Awards Table or the
Outstanding Equity Awards at Fiscal
Year-End Table that we should consider
to better illustrate the relationship
between pay and company
performance?
• The Summary Compensation Table
requires disclosure for each of the
registrant’s last three completed fiscal
years,58 and with respect to smaller
reporting companies, for each of the
registrant’s last two completed fiscal
years.59 Regarding transition, our goal is
to facilitate year-to-year comparisons in
a cost-effective way. To this end, we are
considering whether to require
companies providing Item 402
disclosure for a fiscal year ending on or
after December 15, 2009 to present
recomputed disclosure for each
preceding fiscal year required to be
included in the Summary Compensation
Table, so that the Stock Awards and
Option Awards columns would present
the applicable full grant date fair
values,60 and Total Compensation
would be recomputed correspondingly.
If a person who would be a named
executive officer for the most recent
fiscal year (2009) also was disclosed as
a named executive officer for 2007, but
not for 2008, we expect to require the
named executive officer’s compensation
for each of those three fiscal years to be
reported pursuant to the proposed
amendments.61 However, we would not
require companies to include different
named executive officers for any
preceding fiscal year based on
recomputing total compensation for
those years pursuant to the proposed
amendments or to amend prior years’’
Item 402 disclosure in previously filed
Forms 10–K or other filings. Would
recomputation of prior years included
in the 2009 Summary Compensation
Table to substitute aggregate grant date
fair value numbers for the financial
statement recognition numbers
Item 402(c)(1) of Regulation S–K.
Item 402(n)(1) of Regulation S–K.
60 This amount would be computed based on the
individual award grant date fair values reported in
that year’s Grants of Plan Based Award Table.
61 However, a smaller reporting company, which
is required to provide disclosure only for the two
most recent fiscal years, could provide Summary
Compensation Table disclosure only for 2009 if the
person was a named executive officer for 2009 but
not for 2008.
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59 See
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previously reported for those years
cause companies practical difficulties?
Is there a better approach that would
preserve the objective of year-to-year
comparability on a cost-effective basis
as a transitional matter?
B. Enhanced Director and Nominee
Disclosure
We are proposing amendments to
Item 401 of Regulation S–K to expand
the disclosure requirements regarding
the qualifications of directors and
nominees, past directorships held by
directors and nominees, and the time
frame for disclosure of legal proceedings
involving directors, nominees and
executive officers. Specifically, we are
proposing to require disclosure detailing
for each director and nominee for
director the particular experience,
qualifications, attributes or skills that
qualify that person to serve as a director
of the company as of the time that a
filing containing this disclosure is made
with the Commission, and as a member
of any committee that the person serves
on or is chosen to serve on (if known),
in light of the company’s business and
structure.62
Item 401 currently requires only brief
biographical information about directors
and nominees for the past five years,
and Item 407 requires general disclosure
about director qualification
requirements at a company. The
proposed amendments to Item 401
would expand the information required
about individual directors and
supplement the current director
qualification disclosures in Item 407 of
Regulation S–K. These revisions are
aimed at helping investors determine
whether a particular director and the
entire board composition is an
appropriate choice for a given company
as of the time that a filing containing
this disclosure is made with the
Commission.63
Companies today face ever-increasing
challenges from the business and social
environments in which they operate. As
recent market events have
demonstrated, the capacity to assess risk
and respond to complex financial and
62 We last adopted substantive revisions to the
disclosure concerning the background of directors,
executive officers and control persons in 1984,
when we amended Item 401 of Regulation S–K to
require disclosure of legal proceedings involving
Federal commodities laws and applied the
disclosure requirements to promoters and control
persons of newly public companies. See Release
No. 33–6545 (Aug. 9, 1984) [49 FR 32762].
63 See, for example, Richard Leblanc & James
Gillies, Inside the boardroom: How boards really
work and the coming revolution in corporate
governance, (2005) (noting that an effective board
‘‘must have a set of directors who collectively have
all the competencies required by the board to fulfill
its duties.’’).
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operational challenges can be important
attributes for directors of public
companies. Moreover, developments
such as the enactment of the SarbanesOxley Act of 2002 64 and corporategovernance related listing standards of
the major stock exchanges 65 also have
brought about significant changes in the
structure and composition of corporate
boards, such as requiring directors to
have particular knowledge in areas such
as finance and accounting. We believe
that the director qualification disclosure
requirements in Item 407 have resulted
in more general information being
provided about the qualifications of the
board as a whole, but not more specific
discussions of the background and skills
of individual directors.
The proposed amendments are
designed to provide investors with more
meaningful disclosure to help them in
their voting decisions by better enabling
them to determine whether and why a
director or nominee is a good fit for a
particular company, and to allow
companies flexibility in disclosing
material information on the background
and specific qualifications of each
director and nominee, including
information that goes beyond the fiveyear biographical requirement of Item
401. We are proposing that, for each
director or nominee, disclosure be
included that discusses the specific
experience, qualifications or skills that
qualify that person to serve as a director
and committee member. The types of
information that may be disclosed
include, for example, information about
a director’s or nominee’s risk
assessment skills and any specific past
experience that would be useful to the
company, as well as information about
a director’s or nominee’s particular area
of expertise and why the director’s or
nominee’s service as a director would
benefit the company at the time at
which the relevant filing with the
Commission is made. This expanded
disclosure would apply to incumbent
directors, to nominees for director who
are selected by a company’s nominating
committee, and to any nominees put
forward by other proponents. Regardless
of who has nominated the director, we
believe a discussion of why the
particular person is qualified to serve on
64 Pub.
L. 107–204, 116 Stat. 745 (2002).
2003, we approved revisions to the listing
standards of the New York Stock Exchange
(‘‘NYSE’’) and the National Association of
Securities Dealers (‘‘NASD’’) that, among other
things, imposed new independent director
requirements and enhanced independence
standards. See Self-Regulatory Organizations; NYSE
and NASD; Order Approving Proposed Rule
Changes Relating to Corporate Governance, Release
No. 34–48445 (Nov. 12, 2003) [68 FR 64154].
65 In
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the company’s board would be useful to
investors.
In addition to the expanded narrative
disclosure regarding director and
nominee qualifications, we are
proposing two additional changes to our
director and nominee biographical
disclosure requirements. First, we are
proposing to require disclosure of any
directorships held by each director and
nominee at any time during the past five
years at public companies, and second,
we are proposing to lengthen the time
during which disclosure of legal
proceedings is required from five to 10
years. With respect to other
directorships held by directors or
nominees, Item 401 requires disclosure
of any current director positions held by
each director and nominee in any
company with a class of securities
registered pursuant to Section 12 of the
Exchange Act,66 or subject to the
requirements of Section 15(d) of that
Act,67 or any company registered as an
investment company under the
Investment Company Act. We believe
that expanding this disclosure to
include membership on corporate
boards of those companies for the past
five years (even if the director or
nominee no longer serves on that board)
would allow investors to better evaluate
the relevance of a director’s or
nominee’s past board memberships, or
professional or financial relationships
that might pose potential conflicts of
interest (such as membership on boards
of major suppliers, customers, or
competitors).
Item 401 requires disclosure of
specified legal proceedings over the past
five years involving directors, executive
officers, and persons nominated to
become directors that are material to an
evaluation of the ability or integrity of
any director, director nominee or
executive officer.68 In 1994, we
U.S.C. 78l.
U.S.C. 78o(d).
68 Under Item 401(f), the registrant must disclose
any of the following events that occurred during the
past five years and that are material to an evaluation
of the director, director nominee or executive
officer:
(1) A petition under Federal bankruptcy laws or
any State insolvency law. A petition under the
Federal bankruptcy laws or any State insolvency
law was filed by or against, or a receiver, fiscal
agent or similar officer was appointed by a court for
the business or property of such person, or any
partnership in which he was a general partner at or
within two years before the time of such filing, or
any corporation or business association of which he
was an executive officer at or within two years
before the time of such filing;
(2) Such person was convicted in a criminal
proceeding or is a named subject of a pending
criminal proceeding (excluding traffic violations
and other minor offenses);
(3) Such person was the subject of any order,
judgment, or decree, not subsequently reversed,
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67 15
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proposed rules that would have
increased the reporting period for legal
proceedings from five to ten years.69
Because the legal proceedings listed in
Item 401 reflect upon an individual’s
competence and character to serve as a
public company official, we believe it is
appropriate to extend the required
reporting period from five to ten years
in order to give investors more extensive
information regarding an individual’s
competence and character.70
The disclosures that would be
required under the proposed
amendments to Item 401 would appear
in proxy and information statements on
Schedules 14A and 14C, annual reports
on Form 10–K and the registration
suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining
him from, or otherwise limiting, the following
activities: (i) Acting as a futures commission
merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person
regulated by the Commodity Futures Trading
Commission, or an associated person of any of the
foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated
person, director or employee of any investment
company, bank, savings and loan association or
insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity; (ii) Engaging in any type of business
practice; or (iii) Engaging in any activity in
connection with the purchase or sale of any security
or commodity or in connection with any violation
of Federal or State securities laws or Federal
commodities laws;
(4) Such person was the subject of any order,
judgment or decree, not subsequently reversed,
suspended or vacated, of any Federal or State
authority barring, suspending or otherwise limiting
for more than 60 days the right of such person to
engage in any activity described in paragraph
(f)(3)(i) of this section, or to be associated with
persons engaged in any such activity;
(5) Such person was found by a court of
competent jurisdiction in a civil action or by the
Commission to have violated any Federal or State
securities law, and the judgment in such civil
action or finding by the Commission has not been
subsequently reversed, suspended, or vacated; or
(6) Such person was found by a court of
competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission to have
violated any Federal commodities law, and the
judgment in such civil action or finding by the
Commodity Futures Trading Commission has not
been subsequently reversed, suspended or vacated.
The instruction to Item 401(f) indicates that if any
event specified in Item 401(f) has occurred and
information in a filing is omitted on the grounds
that it is not material, the registrant may furnish to
the Commission, at the time of filing, as
supplemental information and not as part of the
registration statement, report, or proxy or
information statement, materials to which the
omission relates, a description of the event and a
statement of the reasons for the omission of the
information.
69 Release No. 33–7106 (Nov. 1, 1994) [59 FR
55385].
70 Consistent with the current disclosure
requirement regarding legal proceedings, the
proceedings required to be disclosed under the
proposal would not need to be disclosed if they are
not material to an evaluation of the director or
director nominee. See 17 CFR 229.401(f).
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statement on Form 10 under the
Exchange Act, as well as in registration
statements under the Securities Act.
Currently, Item 407(c)(2)(v) of
Regulation S–K requires disclosure of
any specific minimum qualifications
that a nominating committee believes
must be met by a nominee for a position
on the board.71 We are interested in
understanding whether investors and
other market participants believe that
diversity in the boardroom is a
significant issue. As indicated below,
we are requesting comment on whether
additional disclosure in this area should
be required.
We also are proposing to apply the
expanded disclosure requirements
regarding director and nominee
qualifications, past directorships held
by directors and nominees, and the time
frame for disclosure of legal proceedings
involving directors, nominees, and
executive officers to management
investment companies that are
registered under the Investment
Company Act (‘‘funds’’). We believe
investors in funds would, for the same
reasons as investors in operating
companies, find this information useful.
The proposal would amend the
disclosures in Schedules 14A and 14C
to apply these expanded requirements
to fund proxy and information
statements where action is to be taken
with respect to the election of
directors.72 We are also proposing to
amend Forms N–1A, N–2, and N–3 to
require that funds include the expanded
disclosures regarding director
qualifications and past directorships in
their statements of additional
information.73
71 Management investment companies that are
registered under the Investment Company Act are
subject to the disclosure requirements of Item
407(c)(2)(v) of Regulation S–K pursuant to Item
22(b)(15)(ii)(A) of Schedule 14A. See 17 CFR
240.14a–101, Item 22(b)(15)(ii)(A). Management
investment companies typically issue shares
representing an interest in a changing pool of
securities, and include open-end and closed-end
companies. An open-end company is a management
company that is offering for sale or has outstanding
any redeemable securities of which it is the issuer.
A closed-end company is any management
company other than an open-end company. See
Section 5 of the Investment Company Act [15 U.S.C.
80a–5].
72 See proposed Item 22(b)(3)(i) of Schedule 14A
(qualifications); proposed Item 22(b)(4)(ii) of
Schedule 14A (directorships); proposed Item
22(b)(11) of Schedule 14A (legal proceedings).
73 See proposed Items 17(b)(3)(ii) & 17(b)(10) of
Form N–1A; proposed Items 18.6(b) & 18.17 of
Form N–2; proposed Items 20(e)(ii) & 20(o) of Form
N–3. Form N–1A is used by open-end management
investment companies. Form N–2 is used by closedend management investment companies. Form N–
3 is used by separate accounts, organized as
management investment companies, which offer
variable annuity contracts.
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Request for Comment
• Would the proposed amendments
provide investors with important
information regarding directors and
nominees for director? Are there any
additional changes that we should make
to further improve the disclosures about
director and nominee qualifications?
• If Item 401 is amended as proposed,
should the disclosure currently required
by Item 407(c)(2)(v) of Regulation S–K
regarding disclosure of any minimum
qualifications that a nominating
committee believes must be met by
someone nominated by the committee
for a position on the board, be retained?
Does the disclosure elicited by Item
407(c)(2)(v) provide useful information
that would supplement the information
provided pursuant to the proposed
amendment to Item 401?
• Should we amend Item 407(c)(2)(v)
to require disclosure of any additional
factors that a nominating committee
considers when selecting someone for a
position on the board, such as diversity?
Should we amend our rules to require
additional or different disclosure related
to board diversity?
• Would director qualification
disclosure for all of a company’s board
committees be useful to investors, or
should the disclosures be focused on
membership of certain key committees,
such as the audit, compensation and
nominating/governance committees?
• Should we require the proposed
director qualification disclosure less
frequently than annually? Even though
the overall composition of a board may
change, is it sufficient to require this
disclosure only when a director is first
nominated or periodically, such as
every three years? Should the disclosure
be required only when the director is
standing for election, or should it be
required each year, as proposed, in
order to facilitate shareholders’
assessments of the quality of the board
as a whole?
• Would it be helpful to investors if
we required companies to list and
describe all committees of the board
similar to the current disclosure
requirements for audit, compensation
and nominating/governance
committees? Would it also be helpful if
we required disclosure of whether the
board (or a committee) periodically
conducts an evaluation of the
performance of the board as a whole, the
committees of the board and/or each
individual director?
• Should we require disclosure of
other directorships for more than the
past five years? If so, for how long?
• Could requiring more director and
nominee qualification disclosure in any
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way hinder a company’s ability to find
potential candidates for the board? If so,
explain how.
• Should the current five-year
disclosure period for legal proceedings
be maintained? Should it be longer than
proposed, for example for fifteen or
twenty years? Should there be no time
limit? Would it be more appropriate to
require disclosure of legal proceedings
for longer periods with respect to
certain types of legal proceedings—for
example, criminal fraud convictions,
civil or administrative actions based on
fraud involving securities, commodities,
financial institutions, insurance
companies or other businesses? If so, for
what period or periods and why?
• Are there additional legal
proceeding disclosures that reflect on a
director’s, executive officer’s, or
nominee’s character and fitness to serve
as a public company official that should
be required to be disclosed? For
example, should we expand the current
requirements to require disclosure of:
Æ Any civil or administrative
proceedings resulting from involvement
in mail fraud, or wire fraud;
Æ Any judicial or administrative
findings, orders or sanctions based on
violations of Federal or State securities,
commodities, banking or insurance laws
and regulations or any settlement to
such actions;
Æ Any disciplinary sanctions
imposed by a stock, commodities or
derivatives exchange or other selfregulatory organization; or
Æ Situations where the director,
nominee, or executive officer was a
general partner of any partnership or
served as a director or executive officer
of any corporation subject to any
Federal or State agency receivership?
• Should we continue, as proposed,
to permit companies to exclude
disclosure of director, director nominee
or executive officer legal proceedings,
when the registrant concludes that the
information would not be material to an
evaluation of the ability or integrity of
the director, director nominee or
executive officer, or should this
disclosure be required in all cases?
• Should we make any special
accommodations in the proposed
amendments to Item 401 for smaller
reporting companies? If so, what
accommodations should be made and
why?
• Should the proposed amendments
regarding director and nominee
qualifications, past directorships held
by directors and nominees, and the time
frame for disclosure of legal proceedings
apply to registered management
investment companies? If so, where
should each of the disclosures be
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required (e.g., proxy statements,
statements of additional information,
and/or shareholder reports)? Does the
disclosure requirement need to be
modified in any way to make it more
appropriate for registered management
investment companies?
C. New Disclosure About Company
Leadership Structure and the Board’s
Role in the Risk Management Process
We are proposing a new disclosure
requirement to Item 407 of Regulation
S–K and a corresponding amendment to
Item 7 of Schedule 14A that would
require disclosure of the company’s
leadership structure and why the
company believes it is the best structure
for it at the time of the filing. This
proposed disclosure would appear in
proxy and information statements.
Under the proposed amendments,
companies also would be required to
disclose whether and why they have
chosen to combine or separate the
principal executive officer and board
chair positions. In some companies, the
role of principal executive officer and
board chairman are combined, and a
lead independent director is designated
to chair meetings of the independent
directors. Those companies would also
be required to disclose whether and
why the company has a lead
independent director, as well as the
specific role the lead independent
director plays in the leadership of the
company. In proposing this
requirement, we note that different
leadership structures may be suitable for
different companies depending on
factors such as the size of a company,
the nature of a company’s business, or
internal control considerations, among
other things. Regardless of the type of
leadership structure selected by a
company, the disclosure would provide
investors with insights about why the
company has chosen that particular
leadership structure.
In making voting and investment
decisions, investors should be provided
with meaningful information about the
corporate governance practices of
companies.74 One important aspect of a
company’s corporate governance
practices is its board’s leadership
structure. Our proposed amendments to
Item 407 are not intended to influence
a company’s decision regarding its
board leadership structure. Disclosure of
74 See, for example, National Association of
Corporate Directors, Key Agreed Principles to
Strengthen Corporate Governance for U.S. Publicly
Traded Companies, (Mar. 2009) (‘‘Every board
should explain, in proxy materials and other
communications with shareholders, why the
governance structures and practices it has
developed are best suited to the company.’’)
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board leadership structure and why the
company believes this is the best
structure will increase the transparency
for investors into how boards function.
We also are proposing to require
additional disclosure in proxy and
information statements about the
board’s role in the company’s risk
management process. Companies face a
variety of risks, including credit risk,
liquidity risk, and operational risk.
Similar to disclosure about the
leadership structure of a board,
disclosure about the board’s
involvement in the risk management
process should provide important
information to investors about how a
company perceives the role of its board
and the relationship between the board
and senior management in managing the
material risks facing the company.
Given the role that risk and the
adequacy of risk oversight have played
in the recent market crisis, we believe
it is important for investors to
understand the board’s, or board
committee’s role in this area. For
example, how does the board
implement and manage its risk
management function, through the
board as a whole or through a
committee, such as the audit
committee? 75 Such disclosure might
address questions such as whether the
persons who oversee risk management
report directly to the board as whole, to
a committee, such as the audit
committee, or to one of the other
standing committees of the board; and
whether and how the board, or board
committee, monitors risk. We believe
that this disclosure will provide key
insights into how a company’s board
perceives and manages a company’s
risks.
We also are proposing that registered
management investment companies
provide the new Item 407 disclosure
about leadership structure and the
board’s role in the risk management
process in proxy and information
statements.76 Similar to the
transparency provided to investors in
corporate issuers, we believe that
providing this disclosure to investors in
investment companies should enable
them to consider their management
structure preference, if any, when
deciding where to invest.77 We have,
75 Section 303A of the NYSE’s Listed Company
Manual provides that the audit committee of
companies listed on the exchange must ‘‘discuss
guidelines and policies to govern the process by
which risk assessment and management is
undertaken.’’
76 See proposed Item 22(b)(11) of Schedule 14A.
77 In the context of this rulemaking, we believe it
is appropriate to propose to require disclosure
about fund management that is similar to the
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35085
however, tailored the proposal to the
management structure of funds.
Accordingly, we propose to require that
a fund disclose whether the board chair
is an ‘‘interested person’’ of the fund, as
defined in Section 2(a)(19) of the
Investment Company Act.78 If the board
chair is an interested person, a fund
would be required to disclose whether
it has a lead independent director and
what specific role the lead independent
director plays in the leadership of the
fund. We are also proposing to require
similar disclosure in statements of
additional information filed as part of
registration statements on Forms N–1A,
N–2, and N–3.79
Request for Comment
• Are the proposed amendments to
Item 407 appropriate? Are there
additional disclosure requirements that
should also be included in these
proposed requirements?
• Are there certain considerations
that would affect the company’s
leadership structure that should be
highlighted in the proposed
amendment? If so, explain.
• Are there any additional disclosures
about a company’s leadership that
would be helpful to investors?
• Should we require disclosure of the
specific duties performed by the board’s
chair or independent lead director?
disclosure requirement for corporate issuers. In
another context and for other purposes, the
Commission previously considered a number of
issues, including disclosure, regarding fund
governance that we are not addressing here. See
Investment Company Governance, File No. S7–03–
04.
78 15 U.S.C. 80a–2(a)(19).
79 See proposed Item 17(b)(1) of Form N–1A;
proposed Item 18.5(a) of Form N–2; proposed Item
20(d)(i) of Form N–3. We are proposing to require
this disclosure in the statement of additional
information because not all funds hold annual
meetings for the election of directors.
A large number of funds are organized as entities
in jurisdictions which do not require funds to hold
an annual shareholder meeting to elect directors.
See, for example, Md. Code Ann., Corps. & Ass’ns
Code § 2–501(b) (2009) (law exempts funds from
annual meeting requirement in any year that the
fund is not required to act upon the election of
directors under the Investment Company Act); Del.
Code Ann. tit. 12, § 3806 (2009) (statutory trust law
structure has the effect of generally not requiring
shareholder meetings). See also Sheldon A. Jones et
al., The Massachusetts Business Trust and
Registered Investment Companies, 13 DEL. J. CORP.
L. 421 (1988) (noting that the organizational and
operational requirements of Massachusetts business
trusts are not specified by statute, and a fund’s
essential structure is contained in the trust
agreement, which generally includes a provision
eliminating the need for annual shareholder
meetings to elect directors). Closed-end funds
registered on national securities exchanges,
however, are required to hold an annual meeting to
elect directors under the rules of the exchanges.
See, for example, AMEX Company Guide § 704;
New York Stock Exchange Listed Company Manual
§ 302.00.
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• Should we require disclosure of
other board structure matters, such as
how a company determines the number
of independent directors to have on its
board, and/or how a company
determines the size of the board?
• Are there competitive or proprietary
concerns about the level of detail about
the company’s risk management
structure and function that the proposed
rule should account for? If so, please
identify these concerns and explain how
they should be accounted for.
• Should we make any special
accommodations in these proposed
amendments for smaller reporting
companies? If so, what accommodations
should be made and why?
• The proposals address risk
management oversight by the board of
directors as a part of the corporate
governance disclosures required in
proxy and information statements. We
are considering whether we should
revise our existing disclosure
requirements, such as in Items 303 80
and 305 81 of Regulation S–K, to require
additional disclosure regarding a
registrant’s risk management practices
in other registrant filings, such as
annual and quarterly reports? Should
we consider proposing additional
requirements? If so, what additional or
different disclosure requirements
should we consider proposing?
• Should we, as proposed, require a
registered management investment
company to provide disclosure about its
leadership structure and the board’s role
in the risk management process? Are
there alternative disclosures relating to
a fund’s leadership structure and board
involvement in the risk management
process that would be more helpful to
investors? If we require each of the
disclosures, where should such
disclosures appear (e.g., proxy
statements, statements of additional
information, and/or shareholder
reports)?
• As proposed, funds would be
required to include the proposed
disclosure in registration statements
filed on Forms N–1A, N–2, and N–3.
Should we differentiate between openend and closed-end funds? For example,
should we omit this requirement from
Form N–2 because closed-end funds
generally hold annual shareholder
meetings pursuant to exchange
requirements and their shareholders
will receive this disclosure in annual
proxy or information statements?
80 17
81 17
CFR 229.303.
CFR 229.305.
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D. New Disclosure Regarding
Compensation Consultants
In 2003, we amended Regulation S–K
to require new disclosures regarding
compensation committees similar to the
disclosures required regarding audit and
nominating committees of the board of
directors.82 In addition, in 2006, we
amended Item 407 to require registrants
to describe, among other things, any role
played by compensation consultants in
determining or recommending the
amount or form of executive and
director compensation, identifying such
consultants, stating whether they are
engaged directly by the compensation
committee or any other person,
describing the nature and scope of their
assignment, and the material elements
of the instructions or directions given to
the consultants with respect to the
performance of their duties under the
engagement.83
Many companies engage
compensation consultants to make
recommendations on appropriate
executive compensation levels, to
design and implement incentive plans,
and to provide information on industry
and peer group pay practices.84 These
services can benefit companies, such as
by providing management and the board
current information about compensation
trends or any regulatory requirements
related to executive compensation.
The services offered by compensation
consultants, however, are often not
limited to recommending executive
compensation plans or policies. Many
compensation consultants, or their
affiliates, provide a broad range of
additional services, such as benefits
administration, human resources
consulting and actuarial services.85 The
fees generated by these additional
services may be more significant than
the fees earned by the consultants for
their executive compensation services.86
82 See Release No. 33–8340 (Nov. 24, 2003) [68 FR
69204].
83 CFR 229.407(e)(3)(iii).
84 See, for example, J. Creswell, Pressing for
Independent Advice from Consultants, N.Y. TIMES,
Apr. 8 2007.
85 See, for example, Rulemaking Petition No. 4–
558 (May 12, 2008), at https://www.sec.gov/rules/
petitions.shtml.
86 In December 2007, the U.S. House of
Representatives Committee on Oversight and
Government Reform issued a report on the role
played by compensation consultants at large,
publicly-traded companies. The report found that
the fees earned by compensation consultants for
providing other services often far exceed those
earned for advising on executive compensation, and
that on average companies paid compensation
consultants over $2.3 million for other services and
less than $220,000 for executive compensation
advice. See Staff of House Comm. on Oversight and
Government Reform, 110th Cong., Report on
Executive Pay: Conflicts of Interest Among
Compensation Consultants (Comm. Print 2007).
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The provision of such additional
services by compensation consultants or
their affiliates may create the
appearance, or risk, of a conflict of
interest that may call into question the
objectivity of the consultants’ executive
pay recommendations. Increasingly,
some investors are becoming concerned
that the executive compensation
services provided by compensation
consultants may be influenced by the
provision of these additional services.87
Presently, companies are not required
to disclose the fees paid to
compensation consultants and their
affiliates for executive compensation
consulting or other services, or to
describe services that are not related to
executive or director compensation. We
are proposing amendments to Item 407
of Regulation S–K to require disclosure
about the fees paid to compensation
consultants and their affiliates when
they play any role in determining or
recommending the amount or form of
executive and director compensation, if
they also provide other services to the
company. In addition, the proposed
amendments would require a
description of any additional services
provided to the company by the
compensation consultants and any
affiliates of the consultants. These
disclosures are intended to enable
investors to assess any incentives a
compensation consultant may have in
recommending executive compensation
and better assess the compensation
decisions made by the board.
Under the proposed amendments to
Item 407, if a compensation consultant
or its affiliates played a role in
determining or recommending the
amount or form of executive or director
compensation, and also provided
additional services, then the company
would be required to disclose the
following: 88
• The nature and extent of all
additional services provided to the
company or its affiliates during the last
fiscal year by the compensation
87 See Rulemaking Petition No. 4–558 in note 85
above. See also letters regarding File No. S7–03–06
from CaIPERS, CaISTRS, New York State Common
Retirement System, Florida State Board of
Administration, New York City Pension Funds,
PGGM, ABP, Hermes, Universities Superannuation
Scheme, UniSuper, London Pensions Fund
Authority, F&C Asset Management, Co-operative
Insurance Society, Illinois State Board of
Investment, Ontario Teachers Pension Plan, Public
Sector and Commonwealth Super, and Railpen
Investments (Apr. 10, 2006); CFA Institute for
Financial Market Integrity (Apr. 13, 2006); and
Denise Nappier, Connecticut State Treasurer (Apr.
10, 2006) at https://www.sec.gov/rules/proposed/
s70306.shtml.
88 See proposed Item 407(e)(3)(iii) of Regulation
S–K.
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consultant and any affiliates of the
consultant;
• The aggregate fees paid for all
additional services, and the aggregate
fees paid for work related to
determining or recommending the
amount or form of executive and
director compensation;
• Whether the decision to engage the
compensation consultant or its affiliates
for non-executive compensation
services was made, recommended,
subject to screening or reviewed by
management; and
• Whether the board of directors or
the compensation committee has
approved all of these services in
addition to executive compensation
services.
These new requirements would apply
to all services provided by a
compensation consultant and its
affiliates if the compensation consultant
plays any role in determining or
recommending the amount or form of
executive or director compensation. The
proposed amendments would not apply
to those situations in which the
compensation consultant’s only role in
recommending the amount or form of
executive or director compensation is in
connection with consulting on broadbased plans that do not discriminate in
favor of executive officers or directors of
the company, such as 401(k) plans or
health insurance plans. For example, if
a company retains a compensation
consultant to assist it in developing a
401(k) plan in which all salaried
employees, including executives, will
be eligible to participate on the same
terms, and the compensation consultant
provides other services to the company
that are not related to determining or
recommending the level of executive or
director compensation, the new
disclosure requirements would not
apply to the services provided by that
compensation consultant.89 When a
compensation consultant’s only services
that touch on the form or amount of
executive or director compensation are
limited to broad-based, nondiscriminatory plans, even though
executives or directors may be eligible
to participate in them, we do not believe
that these services give rise to the type
of potential conflict of interest intended
to be addressed by our proposed
revisions.90
89 On the other hand, if a consultant provides
other services involving executive or director
compensation, and also provides services regarding
broad-based, non-discriminatory plans, the new
disclosure requirements would be applicable to all
services provided by the consultant or its affiliates.
90 We also propose to amend Item 407 along the
same lines to clarify that the existing disclosure
requirements are not triggered for a compensation
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Request for Comment
• Will this disclosure help investors
better assess the role of compensation
consultants and potential conflicts of
interest, and thereby better assess the
compensation decisions made by the
board?
• Would the disclosure of additional
consulting services and any related fees
adversely affect the ability of a company
to receive executive compensation
consulting or non-executive
compensation related services? If so,
how might we achieve our goal while
minimizing that impact?
• Are there competitive or proprietary
concerns that the proposed disclosure
requirements should account for? If so,
how should the amendments account
for them if the compensation consultant
provides additional services?
• Are there additional disclosures
regarding the potential conflicts of
interest of compensation consultants
that should be required? For example,
would requiring disclosure of any
ownership interest that an individual
consultant may have in the
compensation consultant or any
affiliates of the compensation consultant
that are providing the additional
services to the company help provide
information about potential conflicts? If
so, why?
• The proposed disclosure
requirement calls for disclosure of
services during the prior year. Should
we also require disclosure of any
currently contemplated services in order
to capture a situation where the
compensation consultant provides
services related to executive pay in one
year and in the next year receives fees
for other services? If so, should we
require that fees for the currently
contemplated services be estimated? Is
there a better way to require that
information, for instance through the
date of the filing? Should we require
disclosure for the prior three years?
• Is the proposed exclusion for
consulting services that are limited to
broad-based, non-discriminatory plans
appropriate? Should we consider any
other exclusions for services that do not
give rise to potential conflicts of
interest? If so, describe them.
• Should we establish a disclosure
threshold based on the amount of the
fees for the non-executive compensation
related services, such as above a certain
dollar amount or a percentage of income
or revenues? If so, how should the
threshold be computed?
consultant whose only services with regard to
executive or director compensation are limited to
these types of broad-based, non-discriminatory
plans.
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• Would disclosure of the individual
fees paid for non-executive
compensation related services provided
by the compensation consultants be
more useful to investors than disclosure
of the aggregate fees paid for noncompensation related service provided
as proposed?
• Would disclosure about the fees
paid to compensation consultants and
their affiliates help highlight potential
conflicts of interest on the part of these
compensation consultants and their
affiliates? Is fee disclosure necessary to
achieve this goal, or would it be
sufficient to require disclosure of the
nature and extent of additional services
provided by the compensation
consultant and its affiliates? Should
disclosure only be required for fees paid
in connection with executive
compensation related services?
• Should we make any special
accommodations in the proposed
amendments to Item 407(h) for smaller
reporting companies? If so, what
accommodations should be made and
why?
• Are there other categories of
consultants or advisors whose activities
on behalf of companies should be
disclosed to shareholders? If so, what
kind of disclosure would be
appropriate?
E. Reporting of Voting Results on Form
8–K
We are proposing to transfer the
requirement to disclose vote results
from Forms 10–Q and 10–K to Form 8–
K. Currently, Item 4 in Part II of Form
10–Q and Item 4 in Form 10–K require
the disclosure of vote results of any
matter that was submitted to a vote of
shareholders during the fiscal quarter
covered by either the Form 10–Q or
Form 10–K with respect to the fourth
fiscal quarter. Under the proposals, we
would add a new Item 5.07 to Form 8–
K to require a company to disclose on
the Form 8–K the results of a
shareholder vote, and to have that
information filed within four business
days after the end of the meeting at
which the vote was held. If the proposal
is adopted, we would delete the
requirement from Forms 10–Q and 10–
K.
We believe that more timely
disclosure of the voting result of an
annual or special meeting would benefit
investors and the markets. While
quarterly and annual reports generally
reflect historical information, we are
concerned that the delay between the
end of an annual or special meeting and
when the voting result of the meeting is
disclosed in a Form 10–Q or 10–K may
make the information less useful to
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investors and the markets. Depending
on the date of the shareholder meeting,
it could take a few months before the
vote is disclosed in a Form 10–Q or 10–
K. Because matters submitted for a
shareholder vote at an annual or special
meeting often involve issues that
directly impact shareholder interests—
for example, the composition of the
board, executive compensation policies,
or changes in shareholder rights—we
believe more timely disclosure of those
voting results is appropriate. In short,
we believe that if a matter is important
enough to submit to a vote at a meeting
of shareholders, it likely is important
enough to warrant current reporting of
the results on Form 8–K.
We understand that technological
advances in shareholder
communications and the growing use of
third-party proxy services have
increased the ability of companies to
tabulate vote results and disseminate
this information on a more expedited
basis than is currently required.
However, we recognize that in
situations such as contested elections,
companies may not have definitive vote
results within four business days after
the meeting. We have included an
instruction to the proposed item that
states that if the matter voted upon at
the meeting relates to a contested
election of directors and the voting
results are not definitively determined
at the end of the meeting, companies
should disclose on Form 8–K the
preliminary voting results within four
business days after the preliminary
voting results are determined, and file
an amended report on Form 8–K within
four business days after the final voting
results are certified. We think it is
important for investors to have at least
preliminary voting results because the
certification process may take a longer
amount of time.
Request for Comment
• To what extent would requiring the
reporting of voting results on Form 8–
K provide more timely information to
investors and the markets?
• Are there any possible adverse
consequences to requiring the
disclosure of preliminary voting results
in a contested election when the
outcome is not final? For example,
could the preliminary disclosure affect
the final outcome?
• Should the filing period under
Form 8–K for the reporting of voting
results be longer than four business
days? Should we require the reporting
of preliminary voting results? Are there
unique difficulties or significant costs in
finalizing voting results at smaller
reporting companies that would warrant
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a longer filing period for those
companies? What factors should we
consider in deciding whether to make
the filing period longer? Are there
situations other than contested elections
that might warrant a longer filing
period?
• Are there alternative methods to
disseminate this information to
investors sooner or within a similar time
frame that would be more effective or
appropriate?
• We are moving and accelerating the
disclosure requirement but not
proposing any other revisions to the
disclosures that are currently required
by Item 4 of Form 10–Q and Form 10–
K. Are there any changes to the
requirements as to what should be
disclosed that we should consider? For
instance, since disclosure must be
provided for all matters voted, on
including a separate tabulation for the
election of each director, should we
eliminate the portion of Instruction 4
that provides when paragraph (b) need
not be answered?
• Would the proposal impose any
significant costs or difficulties on
companies? If so, what type and amount
of costs? Are these short-term or onetime costs to adjust a company’s
reporting procedures, or long-term,
ongoing costs?
• Would the proposal create any
special burdens for smaller reporting
companies? If so, would scaled
disclosure be appropriate for these
companies and how should it be
accomplished? Alternatively, should
these requirements be phased in for
smaller reporting companies?
• Would the accuracy of disclosure of
voting results be affected as a result of
a Form 8–K filing requirement?
• Section 13a–11(c) under the
Exchange Act provides that ‘‘[n]o 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’’ Section
10(b) of the Exchange Act or Rule 10b–
5 thereunder. Should we amend Section
13a–11(c) to include proposed Item 5.07
in this list of Items with respect to
which the failure to file a report on
Form 8–K will not be deemed to be a
violation of Section 10(b) or Rule 10b–
5? Similarly, should we amend General
Instruction I.A.3(b) of Form S–3 to add
proposed Item 5.07 to the corresponding
list of Items on Form 8–K with respect
to which a company’s failure timely to
file the Form 8–K will not result in the
loss of S–3 eligibility? Why or why not?
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F. Proxy Solicitation Process
We are proposing revisions to our
rules governing the proxy solicitation
process to provide clarity and address
issues that have arisen. We believe these
proposals, if adopted, would provide
greater certainty to soliciting parties,
help shareholders receive timely and
complete information and facilitate
shareholder voting.
Specifically, the amendments would
provide that:
• An unmarked copy of
management’s proxy card that is
requested to be returned directly to
management is not a ‘‘form of
revocation’’ under Exchange Act Rule
14a–2(b)(1) 91 so that a person who
furnishes such a duplicate proxy card is
not disqualified from relying on the
exemption provided by that rule;
• A person need not be a security
holder of the class of securities being
solicited and a benefit need not be
related to or derived from any security
holdings in the class being solicited for
Exchange Act Rule 14a–2(b)(1)(ix) 92 to
disqualify the person from relying on
the Exchange Act Rule 14a–2(b)(1)
exemption;
• A person soliciting in support of
nominees who, if elected, would
constitute a minority of the board may
seek authority to vote for another
soliciting person’s nominees in addition
to or instead of the issuer’s nominees to
round out its short slate consistent with
Exchange Act Rule 14a–4(d)(4)’s
limitations on proxy authority; 93
• The ‘‘reasonable specified
conditions’’ under which the shares
represented by a proxy will not be voted
under Exchange Act Rule 14a–4(e) must
be objectively determinable; 94 and
• The participant information
required by Exchange Act Rule 14a–
12(a)(1)(i) 95 must be filed under cover
of Schedule 14A in a proxy statement or
other soliciting materials no later than
the time the first soliciting
communication is made.
1. Exchange Act Rule 14a–2(b)(1)
Introductory Text
Exchange Act Rule 14a–2(b)(1)
exempts from the generally applicable
disclosure, filing and most other
requirements of the proxy rules
solicitations by shareholders or other
non-management parties who are not
seeking proxy authority and do not have
a substantial interest in the subject
matter of the solicitation. When the
91 17
CFR 240.14a–2(b)(1).
CFR 240.14a–2(b)(1)(ix).
93 17 CFR 240.14a–4(d)(4).
94 17 CFR 240.14a–4(e).
95 17 CFR 240.14a–12(a)(1)(i).
92 17
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Commission adopted this rule in 1992,
we stated that the purpose of the rule
was to remove obstacles to the free and
unrestrained expression of views by
disinterested shareholders who do not
seek authority for themselves.96
Accordingly, the exemption is
unavailable to, among others, a person
who ‘‘furnish[es] or otherwise
request[s], or act[s] on behalf of a person
who furnishes or requests, a form of
revocation.’’ 97
Over time, questions have arisen
related to the scope of the term ‘‘form
of revocation,’’ in particular, whether a
person otherwise qualified to rely on the
exemption would be providing a ‘‘form
of revocation’’ and, therefore, be
ineligible to rely on the exemption if the
person provided a solicited shareholder
with an unmarked copy of
management’s proxy card and asked
that the card be returned directly to
management. Consistent with the
purpose underlying the exemption, we
believe that a person providing a
solicited shareholder with an unmarked
copy of management’s proxy card
requested to be returned directly to
management would not be seeking
authority for itself.98 As a result, this
action would not be providing a ‘‘form
of revocation’’ within the meaning of
the rule even if a solicited shareholder’s
use of that proxy card resulted in a
revocation of the shareholder’s prior
vote. We acknowledge that the U.S.
Court of Appeals for the Second Circuit
has concluded that in the case of a
proxy vote to authorize a proposed
merger under Delaware law, a duplicate
of management’s proxy card, when
included in a mailing opposing a
proposed merger, was a form of
revocation under the rule.99
We propose to clarify the rule to align
with our view by amending it to provide
expressly that a ‘‘form of revocation’’
does not include an unmarked copy of
management’s proxy card that the
soliciting shareholder requests be
returned directly to management.100
This amendment would aid efforts by
persons not seeking proxy authority to
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96 1992
adopting release in note 23 above.
97 Exchange Act Rule 14a–2(b)(1).
98 Indeed, the soliciting person has not foreclosed
any voting option available to the shareholder.
99 See Mony Group, Inc. v. Highfields Capital
Mgmt. L.P., 368 F.3d 138 (May 13, 2004). The
Second Circuit reversed the district court’s decision
that, consistent with the staff’s views, the unmarked
copy of management’s proxy card was not a ‘‘form
of revocation’’ within the meaning of Exchange Act
Rule 14a–2(b)(1). See Mony Group, Inc. v.
Highfields Capital Mgmt. L.P., 2004 U.S. Dist.
LEXIS 1840 (S.D.N.Y., Feb. 11, 2004).
100 This clarification is consistent with advice the
staff informally has provided in response to related
inquiries since the rule was adopted.
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facilitate voting by shareholders sharing
their views on matters submitted for
shareholder approval—such as in a ‘‘just
vote no’’ campaign—without having to
incur the costs and efforts of conducting
a fully-regulated proxy solicitation and
provide shareholders a convenient
opportunity to indicate their votes after
hearing those views without having to
request another proxy card from
management.101
Request for Comment
• Is the proposed amendment
appropriate, or should a form of proxy
provided in this setting be treated as a
form of revocation, thereby
disqualifying the soliciting person from
relying upon the exemption?
• Should a soliciting person that
provides an unmarked copy of
management’s proxy card be required to
file a Notice of Exempt Solicitation 102
even if the person does not meet the
thresholds for filing such notice under
Exchange Act Rule 14a–6(g)? 103 Should
such a soliciting person be required to
file and provide to solicited persons any
other information about itself, such as
any relationships with the registrant or
its affiliates, the amount of shares it
holds, whether such person intends to
hold its shares through the date of the
meeting at which the vote will take
place, or other information?
• Should the determination as to
whether an unmarked management
proxy card is a ‘‘form of revocation’’
depend on whether a non-management
soliciting person requests that
shareholders return the proxy card
directly to management, as proposed, or
should this treatment be available even
if the card is returned to the soliciting
person?
• Would the proposed amendment
have an effect on shareholder
communications in general or the
practices of shareholders and companies
with regard to unmarked proxy cards in
particular?
• Would the proposed amendment
raise concerns under applicable State
law?
2. Exchange Act Rule 14a–2(b)(1)(ix)
Exchange Act Rule 14a–2(b)(1)(ix)
provides that the Rule 14a–2(b)(1)
101 Providing shareholders with a marked copy of
a proxy card would be inconsistent with the
availability of the Rule 14a–2(b)(1) exemption
because it would be an attempt to indirectly solicit
proxy authority. Providing shareholders with a
marked copy of a proxy card in a non-exempt
solicitation would be impermissible because it
would violate the requirement of Rule 14a–4(b) [17
CFR 240.14a–4(b)] to provide shareholders the
opportunity to specify a choice.
102 17 CFR 240.14a–103.
103 17 CFR 240.14a–6(g).
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exemption is not available to ‘‘[a]ny
person who, because of a substantial
interest in the subject matter of the
solicitation, is likely to receive a benefit
from a successful solicitation that would
not be shared pro rata by all other
holders of the same class of securities,
other than a benefit arising from the
person’s employment with the
registrant.’’ A question has arisen as to
whether this limitation applies only
when both the person is a security
holder of the class being solicited and
the benefit relates to or is derived from
such holdings, or is generally applicable
to any person with a substantial interest
as described in the rule. We believe the
nature of the ‘‘substantial interest’’
contemplated by the rule is broader, and
propose to amend the rule to clarify this
point.104
If a soliciting person has a substantial
interest in the matter, we believe
shareholders should have the benefit of
the disclosure required by our rules
when deciding how to vote. We do not
believe it is appropriate to limit this
disclosure obligation to cases when the
soliciting party is a shareholder.105
Otherwise, a solicited holder may not
have sufficient information to make an
informed voting decision if the holder is
not aware of the soliciting person’s
substantial interest in the matter.
Consistent with our intent to limit the
exemption to disinterested persons and
to provide clarity and certainty to those
wishing to rely on the exemption, we
propose to amend the rule to clarify that
a person need not be a security holder
of the class of securities being solicited
and a benefit need not be related to or
derived from any security holdings in
the class being solicited for a person to
be disqualified from relying on the
exemption.
Request for Comment
• Does the proposed amendment
clearly specify when the Rule 14a–
2(b)(1) exemption would be
unavailable? Is additional detail
necessary to understand when the
104 In adopting this provision, the Commission
noted in the 1992 adopting release that the
substantial interest ‘‘standard is similar to that used
in Item 5 of Schedule 14A, which requires specified
persons conducting solicitations to describe briefly
any substantial interest in the matter to be acted
upon, other than an interest as a shareholder.’’
Specifically, Item 5 required at the time of the 1992
adopting release and requires now a description of
‘‘any substantial interest, direct or indirect, by
security holdings or otherwise, * * * in any matter
to be acted upon, other than elections to office.’’
105 For example, a soliciting party could have a
significant financial interest in the subject matter of
a solicitation without owning any shares of the
company whose shareholders are solicited if the
solicitation relates to a merger with a company that
the soliciting party wishes to acquire.
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exemption would be unavailable? If so,
please provide examples of details that
would be helpful.
• Would the proposed amendment
inappropriately narrow or broaden the
scope of the Rule 14a–2(b)(1) exemption
and, if so, how?
3. Exchange Act Rule 14a–4(d)(4)
Exchange Act Rule 14a–4(d)(1)
requires that, in order to solicit
authority to vote for the election of a
person to office, the person must be a
bona fide nominee who consents to
being named in the soliciting person’s
proxy statement and to serving if
elected. Exchange Act Rule 14a–4(d)(4)
is an exception to the bona fide nominee
requirement. This exception permits a
person soliciting support for nominees
who, if elected, would constitute a
minority of the board of directors
(commonly referred to as a ‘‘short
slate’’), to round out its short slate of
nominees up to the total number of
director positions then subject to
election by seeking authority to vote for
nominees named in the registrant’s
proxy statement.106 We adopted the
exception in 1992 to permit a form of
proxy that allows persons soliciting in
support of a short slate to exercise their
State law right to nominate and run
independently their own nominees and
vote for both company and shareholder
nominees.107 The current form of the
rule expressly permits rounding out a
short slate by seeking authority to vote
for nominees named in the registrant’s
proxy statement, but does not address
nominees named in other soliciting
persons’ proxy statements.
Recently, however, questions have
arisen regarding non-management
groups that each sought to solicit
support of a short slate and wished to
round out its short slate with nominees
named in the other group’s and the
registrant’s proxy statement.108 We
106 See
Exchange Act Rule 14a–4(d)(4).
adopting release in note 23 above at
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107 1992
48288.
108 See Eastbourne Capital, L.L.C., SEC No-Action
Letter (Mar. 30, 2009) and Icahn Associates Corp.,
SEC No-Action Letter (Mar. 30, 2009) at https://
www.sec.gov/divisions/corpfin/cf-noaction.shtml.
The Division issued a letter to each of two nonmanagement groups stating that, based on the facts
and representations presented, and conditioned on
the two groups’ acting and continuing to act
independently of each other, the Division would
not recommend enforcement action under Exchange
Act Rule 14a–4(d)(4) and Section 14(a) of the
Exchange Act [15 U.S.C. 78m(a)] if the group
solicited votes for its own short slate and sought the
authority to round out its short slate by voting for
nominees of the other group as well as
management’s nominees. While the Division would
continue to consider issuing such letters in the
absence of the adoption of the proposed
amendment, only the parties to whom the letters
were addressed can rely upon them.
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propose to revise the rule so the short
slate rounding exception to the bona
fide nominee requirement is available
whether a non-management soliciting
person attempts to round out its short
slate by seeking authority to vote for
nominees named in the registrant’s or
any other persons’ proxy statements.
Our intention in adopting the short
slate exception was to eliminate
unnecessary impediments to short slate
elections and ameliorate ‘‘the difficulty
experienced by shareholders in gaining
a voice in determining the composition
of the board of directors,’’ especially
those seeking minority
representation.109 We recognized the
need to address an unintended
consequence of the ‘‘bona fide
nominee’’ rule that effectively forced
security holders to choose between
voting for the management slate in order
to exercise their full voting rights or
voting for a less than full complement
of directors.110 Under the current rule,
however, only the registrant’s nominees
may be used to fill out the nonmanagement slate and, as a result, are
effectively advantaged, as security
holders may vote for them on two or
more proxy cards where nonmanagement nominees can only be
voted for on one. To modify the rule as
we propose is, therefore, consistent with
our intention in adopting the rule.
The proposed exception would be
available only when non-management
parties are not acting together. Persons
acting together may incur reporting
obligations under Sections 13(d) 111 and
13(g) 112 of the Exchange Act. In this
regard, a non-management person who
actively recommends or whose proxy
solicitor actively recommends nominees
in addition to those for whom the nonmanagement person expressly solicits
support would be considered to be
soliciting in support of both sets of
nominees for purposes of determining
whether the non-management person
were soliciting in support of nominees
who, if elected, would constitute more
than a minority of the board.113
Similarly, a non-management person
would be considered to be soliciting in
support of not only the nominees for
109 1992 adopting release in note 23 above at
48288.
110 1992 adopting release in note 23 above at
48287–48288.
111 15 U.S.C. 78m(d).
112 15 U.S.C. 78m(g).
113 A non-management person and its proxy
solicitor would not be actively recommending
nominees in addition to those for whom the person
expressly solicits support if the person and proxy
solicitor only state the person’s intention to vote for
another person’s nominees or expected nominees
other than those specifically named on the person’s
proxy card.
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whom it expressly solicits support but
also the nominees for whom any other
non-management person solicits
support if the non-management persons
are not acting independently of one
another. Accordingly, a nonmanagement soliciting person that seeks
to round out its short slate with any
nominee named in another nonmanagement person’s proxy statement
would be required by the proposed rule
to represent in its proxy statement that
it has not agreed and will not agree to
act, directly or indirectly, as a group or
otherwise engage in any activities that
would be deemed to cause the formation
of a group as determined under Section
13(d)(3) 114 and in Regulation 13D-G 115
with the other non-management person.
When a non-management person
actively recommends or solicits proxies
in support of another person’s nominees
in addition to those for whom the
person expressly solicits support and
identifies by name in its proxy
statement, that person may be a
participant within the meaning of
Instruction 3(a)(vi) to Item 4 of Schedule
14A in the other person’s solicitation.
Being a participant in the other person’s
solicitation potentially may result in the
person soliciting in support of a total
number of persons that would not
constitute a minority of the board of
directors if elected. Therefore, a nonmanagement soliciting person that seeks
to round out its short slate with any
nominee named in another nonmanagement person’s proxy statement
would also be required by the proposed
rule to represent in its proxy statement
that it is not a participant in the other
non-management person’s solicitation.
Request for Comment
• Are there different policy or
practical concerns we should take into
consideration when a short slate is
rounded out with other persons’
nominees rather than with the
registrant’s nominees alone? Would the
proposed amendment increase the risk
that a person would attempt to appear
to be eligible for the short slate rounding
exception even though the person, as a
practical matter, was alone, or in
combination with one or more other
non-management persons, soliciting in
support of more than a short slate? Are
there appropriate safeguards in the rule
to address this concern?
• As proposed, amended Exchange
Act Rule 14a–4(d)(4) would only permit
a soliciting person to round out a short
slate with both a registrant’s and other
persons’ nominees so long as the
114 15
115 17
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soliciting person does not form a group
with the other persons as determined
under Section 13(d)(3) and in
Regulation 13D–G and is not a
participant in the other persons’
solicitations. Are these restrictions
appropriate? Should Rule 14a–4(d)(4)
impose other conditions or limitations
on the availability of the proposed
amendment to the short slate exception?
For example, should a soliciting person
be permitted to seek authority to vote
for the nominees of other nonmanagement persons only if the other
non-management persons are seeking
minority representation on the board?
Should the Commission limit use of the
rule to situations where a soliciting
person will need to use its proxy
authority to vote for one or more of the
registrant’s nominees? For example,
should it be limited to require a
soliciting person to use its proxy
authority to vote for at least a specified
number of the registrant’s nominees or
at least the number of management
nominees that would constitute a
majority?
• It is possible that permitting a
soliciting person to round out its short
slate with other persons’ nominees
instead of or in addition to a registrant’s
nominees under amended Rule 14a–
4(d)(4), as proposed, could lead to a
change in a majority of a board. What
are the concerns, if any, about the
possible effects of a change in a majority
of a board, including the triggering of
takeover defensive measures, such as
poison pills, and other change in control
provisions, such as those found in loan
agreements, leases and employment
agreements? What are the issues, if any,
associated with a change in a majority
of a board where a company is subject
to the standards of a national securities
exchange or a national securities
association, including exchange rules
regarding director independence and
board and committee composition
standards?
• Would the proposed amendment
encourage shareholders to run more
short slates? In particular, is it likely
that such shareholders will run more
short slates, possibly targeting particular
companies, knowing that other
shareholders may also run short slates,
with the intent that, where another
shareholder targets the same company,
each shareholder can then round out its
own short slate with one or more
nominees from the other shareholder’s
slate, and thus increase the likelihood of
displacing management nominees and
potentially increasing each
shareholder’s negotiating power with
management? Does the proposed rule
adequately prevent shareholders from
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relying upon the provision when they
are acting in concert with other
shareholders? While the current rule
distinguishes between a person
soliciting support for its nominees
named in its proxy statement and
seeking proxy authority to vote for a
registrant’s nominees, does a
meaningful difference exist between
these actions if a soliciting person is
permitted, as proposed, to round out its
slate with a non-management person’s
nominees?
• The amended rule, as proposed,
would require a person to include in its
proxy statement representations
regarding the restrictions on forming a
group and acting as a participant. Are
these representations necessary, or
should the amended rule merely
include the restrictions as conditions to
reliance on the rule?
• Rule 14a–4(d)(4) currently, and as
proposed to be amended, would permit
a non-management person to round out
its short slate with one or more
shareholder nominees named in the
registrant’s proxy statement regardless
of whether the non-management person
nominated such shareholder nominees
and regardless of how the shareholder
nominees came to be named in the
registrant’s proxy statement.116 Should
we amend Rule 14a–4(d)(4) to make it
unavailable to some or all shareholder
nominees named in the registrant’s
proxy statement and, if so, why and
how? For example, should the rule be
unavailable where such a shareholder
nominee was nominated by the nonmanagement person, a person with
whom the non-management person has
formed or intends to form a group under
Section 13(d)(3) and Regulation 13D–G
or a person in whose solicitation the
non-management person is a
participant?
• Should we amend Rule 14a–4(d)(4)
so the exception it provides to the Rule
14a–4(d)(1) bona fide nominee
requirement extends to nonmanagement persons who do not have
their own nominees for whom to solicit
support but seek authority to vote for
nominees named in the registrant’s or
other persons’ proxy statements?
4. Exchange Act Rule 14a–4(e)
Exchange Act Rule 14a–4(e) requires
that a proxy statement or form of proxy
provide that the shares represented by
the proxy be voted ‘‘subject to
reasonable specified conditions.’’ When
116 We currently have pending rule proposals
related to shareholder nominees that, if adopted,
could result in a registrant being required to include
shareholder nominees in its proxy statement under
specified circumstances. See Release No. 33–9046
in note 22 above.
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35091
the Commission adopted the rule, it
stated that it previously had taken the
position that the solicitation of proxies
constitutes an implied representation by
the persons making the solicitation that
the shares represented by the proxy will
be voted and that the rule was amended
in order to make this representation
more explicit.117
As the Commission stated in 1992,
‘‘[p]rior to a shareholder granting the
legal power to someone else—whether
management or an outsider—to vote his
or her stock, the shareholder needs to
know what matters will be voted on,
and how the recipient of the proxy
intends to vote the shareholder’s
shares.’’ 118 Similarly, a shareholder
needs to know whether the recipient of
a proxy will only vote the shareholder’s
shares subject to some condition. We
believe that in order for there to be
‘‘reasonable specified conditions,’’ the
conditions must be objectively
determinable to enable the shareholder
to make an informed decision in regard
to granting proxy authority and confirm
that any later withholding of shares
from voting is consistent with the
authority granted.119 In addition, if the
conditions were not objectively
determinable, the recipient of the proxy
could seek to exercise a degree of
discretion that would be inconsistent
with Rule 14a–4(c)’s limits on when a
proxy can confer discretionary
authority.120 Accordingly, we propose
to amend Rule 14a–4(e) to clarify that
the reasonable specified conditions
must be objectively determinable.
Request for Comment
• Will specifying that reasonable
specified conditions must be objectively
117 Release No. 34–4185 (Nov. 5, 1948) [13 FR
6680].
118 1992 adopting release in note 23 above at
48277.
119 In a related context, we have stressed that
conditions must be objective for shareholders to be
able to understand what they are being asked to do.
In 2000, we published our views on the disclosure
and dissemination of ‘‘mini-tender’’ offers that
result in the bidder holding five percent or less of
the outstanding securities of a company. There, we
stated that ‘‘[i]t is important for security holders to
be able to evaluate the genuineness of the [tender]
offer’’ and ‘‘[w]e believe therefore that a tender offer
can be subject to conditions only where the
conditions are based on objective criteria, and the
conditions are not within the bidder’s control.’’ See
Release No. 34–43069 (July 24, 2000) [65 FR 46581].
120 17 CFR 240.14a–4(c). The conditions would
not be objectively determinable, for example, if
voting the shares was subject to the proxy holder
concluding in its sole discretion that it would not
be advisable to vote the shares. The conditions
would be objectively determinable, for example, if
voting the shares was subject to a third party’s filing
with the Commission, within seven days before the
scheduled date for the meeting for which proxies
were solicited, a Schedule TO [17 CFR 240.14d–
100] for a tender offer for over half of the issuer’s
shares.
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determinable have any harmful effect on
proxy solicitation practices?
• Does the phrase ‘‘objectively
determinable’’ achieve the objective of
clarifying the conditions shareholders
should know about before giving their
proxies or deciding to revoke their
proxies?
5. Exchange Act Rule 14a–12(a)(1)(i)
Exchange Act Rule 14a–12 permits a
solicitation to be made before furnishing
security holders with a proxy statement
meeting the requirements of Exchange
Act Rule 14a–3(a) 121 if, among other
requirements, each written
communication that is part of the
solicitation contains specified
participant information. Rule 14a–
12(a)(1)(i) requires such information to
include the identity of the participants
in the solicitation and a description of
their direct or indirect interests or a
legend advising security holders where
they can obtain that information.
Questions have arisen regarding when
and how the participant information to
which the legend refers must be filed.
The Commission amended Exchange
Act Rule 14a–12 in 1999 to, among
other things, provide that participant
information could be provided directly
in written materials as historically
required or, as a new alternative,
indirectly through the legend described
above.122 In affording the option to
provide participant information
indirectly through a legend, we
intended to offer a convenience but did
not intend to permit the participant
information to be provided later than it
would be if provided directly in the
written materials. If the legend is to give
meaningful information to shareholders,
the information referenced in the legend
must be available when the soliciting
person uses the soliciting material with
the legend. Accordingly, we propose to
amend the rule to clarify that the
required participant information must
be filed under cover of Schedule 14A as
part of a proxy statement or other
soliciting materials no later than the
time the first soliciting communication
is made. It is not sufficient to provide
the information in a document filed
later.
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Request for Comment
• Does the proposed amendment
adequately clarify the need to have the
participant information to which a
legend refers on file no later than when
the written material containing the
121 17
CFR 240.14a–3(a).
Release No. 33–7760 (Oct. 22, 1999) [64
FR 61408].
122 See
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legend is first sent or given to security
holders?
• Does the proposed amendment
adequately clarify how the participant
information must be filed?
• Does the requirement to have the
participant information on file no later
than when the written material
containing the legend is first sent or
given to security holders create practical
difficulties for parties soliciting proxies?
If so, to what extent does the
requirement impede the ability to solicit
and how much of a delay in providing
the participant information would be
needed to avoid impeding that ability?
If the requirement was revised to permit
any such delay, what would be the
effect of the delay on the ability of
solicited shareholders to make a voting
decision?
G. Transition
We anticipate that if the proposed
amendments are adopted, compliance
with the amendments would begin in
the 2010 proxy season following their
publication in the Federal Register.
Request for Comment
• Would this compliance schedule be
workable?
• Are any special transition
provisions necessary for any aspects of
the proposed amendments? If so, please
explain what would be needed and
why.
• Would any of the proposed
amendments to Regulation S–K present
any particular difficulty or expense in
preparing?
H. Other Requests for Comment
The Commission is exploring other
ways in which we could improve proxy
disclosures. We invite interested
persons to submit comments on the
advisability of pursuing any or all of the
following possible reforms, as well as to
provide other approaches that we might
consider to achieve our goals. We expect
to benefit from the comments we receive
before deciding whether to propose
changes.
• Are there any disclosures required
in the proxy statement that we should
consider proposing to eliminate in light
of the proposed amendments?
• Are there other initiatives we
should consider in order to improve the
disclosure in proxy statements,
particularly with regard to disclosure
regarding executive compensation? For
instance should we propose requiring
disclosure of the compensation paid to
each executive officer, not just the
named executive officers? Should we
consider proposing to eliminate the
instruction that provides that
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performance targets can be excluded
based on the potential adverse
competitive effect on the company of
their disclosure? Alternatively, should
we consider proposing to revise the
CD&A to require disclosure of
performance targets on an after-the-fact
basis, after the performance related to
the award is measured, such as three or
more fiscal years later, whether or not
the disclosure may result in competitive
harm?
• Under current Item 407(e)(5) of
Regulation S–K, the Compensation
Committee Report must state whether
the committee: (1) Has reviewed and
discussed the CD&A with management;
and (2) recommended to the board of
directors that the CD&A be included in
the company’s annual report and the
proxy or information statement.
Although the CD&A is considered
‘‘filed’’, the Compensation Committee
Report is ‘‘furnished.’’ 123 Because it is
furnished, the Compensation Committee
Report does not have the same liability
as the CD&A and other information that
is ‘‘filed.’’ For example, it is not
incorporated by reference or otherwise
considered a part of the company’s
Form 10–K, registration statements and
other filings, and is not covered by the
principal executive officer and principal
financial officer certifications required
under Exchange Act Rules 13a–14 124
and 15d–14.125 Should we consider
proposing to amend this rule to make
the CD&A be a part of the Compensation
Committee Report? Why or why not? If
we make the CD&A part of the
Compensation Committee Report,
should the Compensation Committee
Report be ‘‘filed’’? If we were to make
the CD&A part of the Compensation
Committee Report, are there any
requirements to the CD&A that we
should change?
• Should we consider requiring
disclosure regarding whether a member
of the compensation committee has
expertise in compensation matters and
whether the committee has the
resources to hire its own independent
legal counsel?
• Some investors may want more
information regarding whether
compensation arrangements are
reasonably designed to create incentives
among executives to increase long-term
enterprise value. Should we consider
supplementing any of the tabular and
123 For a discussion of the differences between the
Compensation Committee Report and the CD&A,
see Section II.3. ‘‘Filed’’ status of Compensation
Discussion and Analysis and the ‘‘Furnished’’
Compensation Committee Report in Release 33–
8732A.
124 17 CFR 240.13a–14.
125 17 CFR 240.15d–14.
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narrative disclosure requirements to
require additional disclosure about
whether or not a company has ‘‘hold to
retirement’’ and/or claw back provisions
and if not, why not?
• Are investors interested in
disclosure of whether the amounts of
executive compensation reflect any
considerations of internal pay equity?
For example, would investors find such
disclosure relevant in considering the
motivation and effectiveness of broad
based compensation plans? Should we
consider proposing additional
requirements to address this? For
instance, should we consider proposing
required disclosure regarding internal
pay ratios of a company, such as
disclosure of the ratio of the total
compensation of the named executive
officers, or total compensation of each
individual named executive officer, to
the total compensation of the average
non-executive employee of the
company?
• In order to give investors a better
understanding of the breadth and depth
of a company’s focus on compensation,
should we require disclosure regarding
the total number of compensation plans
a company has and the total number of
variables in all of its compensation
plans? Are there other ways to convey
the complexity and significance of all of
a company’s plans?
• Should we consider proposing to
supplement the required disclosure of
tax gross-up arrangements that the
company has for the named executive
officers to include a requirement to
disclose and quantify the savings to
each executive?
General Request for Comment
We request and encourage any
interested person to submit comments
on any aspect of our proposals, other
matters that might have an impact on
the amendments, and any suggestions
for additional changes. 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.
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III. Paperwork Reduction Act
A. Background
Certain provisions of the proposed
amendments contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (PRA).126 We are submitting
the proposed amendments to the Office
126 44
of Management and Budget (OMB) for
review in accordance with the PRA.127
The titles for the collection of
information are:
(1) ‘‘Regulation 14A and Schedule 14A’’
(OMB Control No. 3235–0059);
(2) ‘‘Regulation 14C and Schedule 14C’’
(OMB Control No. 3235–0057);
(3) ‘‘Form 10–K’’ (OMB Control No.
3235–0063);
(4) ‘‘Form 10–Q’’ (OMB Control No.
3235–0070);
(5) ‘‘Form 10’’ (OMB Control No. 3235–
0064);
(6) ‘‘Form S–1’’ (OMB Control No.
3235–0065);
(7) ‘‘Form S–4’’ (OMB Control No.
3235–0324);
(8) ‘‘Form S–11’’ (OMB Control No.
3235–0067);
(9) ‘‘Form 8–K’’ (OMB Control No.
3235–0060);
(10) ‘‘Rule 20a–1 under the Investment
Company Act of 1940, Solicitations
of Proxies, Consents, and
Authorizations’’ (OMB Control No.
3235–0158);
(11) ‘‘Form N–1A’’ (OMB Control No.
3235–0307);
(12) ‘‘Form N–2’’ (OMB Control No.
3235–0026);
(13) ‘‘Form N–3’’ (OMB Control No.
3235–0316); and
(14) ‘‘Regulation S–K’’ (OMB Control
No. 3235–0071).
The regulations, schedules and forms
were adopted under the Securities Act
and the Exchange Act, except for Forms
N–1A, N–2, and N–3, which we adopted
pursuant to the Securities Act and the
Investment Company Act, and Rule
20a–1, which we adopted pursuant to
the Investment Company Act. The
regulations, forms and schedules set
forth the disclosure requirements for
periodic reports; registration statements;
and proxy and information statements
filed by companies to help investors
make informed investment and voting
decisions. The hours and costs
associated with preparing, filing and
sending the form or schedule constitute
reporting and cost burdens imposed by
each 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 OMB control
number. Compliance with the proposed
amendments would be mandatory.
Responses to the information collections
would not be kept confidential and
there would be no mandatory retention
period for the information disclosed.
As discussed in more detail above, the
proposed amendments to Items 401,
402(b) and 407 of Regulation S–K would
U.S.C. 3501 et seq.
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increase existing disclosure burdens for
proxy and information statements,
annual reports on Form 10–K, and
registration statements on Forms 10,
S–1, S–4, and S–11 by requiring:
• New disclosure and analysis of how
a company’s overall compensation
policies for employees create incentives
that can affect the company’s risk and
management of that risk if it may have
a material effect on the company;
• New disclosure of the qualifications
of directors and nominees for director,
and the reason why a company or other
proponent believes each director or
nominee is qualified to serve as a
director of the company at the time at
which the relevant filing with the
Commission is made, and as a member
of any committee that the person serves
on or is chosen to serve on, in light of
the company’s business and structure;
• Additional disclosure of any
directorships held by each director and
nominee at any time during the past five
years at public companies;
• Lengthening the time during which
disclosure of legal proceedings
involving a company’s directors,
nominees for director and executive
officers is required from five to 10 years;
• New disclosure about a company’s
board leadership structure and the
board’s role in the risk management
process;
• New disclosure about the fees paid
to compensation consultants and their
affiliates when they play any role in
determining or recommending the
amount or form of executive and
director compensation, if they also
provide other services to the company.
In addition, new disclosure of any
additional services provided to the
company by the compensation
consultants and any affiliates of the
consultants; and
• Transferring the requirement for
companies to disclose the results of
shareholder votes on Forms 10–Q or 10–
K to Form 8–K.
The proposed amendments to Forms
N–1A, N–2, and N–3 would increase
existing disclosure burdens for such
forms by requiring:
• New disclosure of the qualifications
of directors and nominees for director,
and the reason why a company or other
proponent believes each director or
nominee is qualified to serve as a
director of the company at the time at
which the relevant filing with the
Commission is made, and as a member
of any committee that the person serves
on or is chosen to serve on, in light of
the company’s business and structure;
• Additional disclosure of any
directorships held by each director and
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nominee at any time during the past five
years at public companies; and
• New disclosure about a company’s
board leadership structure and the
board’s role in the risk management
process.
At the same time, the proposals
would not increase existing disclosure
burdens for proxy and information
statements, annual reports on Form 10–
K, and registration statements on Forms
10, S–1, S–4 and S–11 by:
• Revising Summary Compensation
Table and Director Compensation Table
disclosure of stock awards and option
awards to require disclosure of the
aggregate grant date fair value of such
awards, computed in accordance with
FAS 123R, rather than the dollar
amount recognized for financial
statement purposes for the fiscal year in
accordance with FAS 123R; and
• Eliminating the requirement to
report the full grant date fair value of
each individual equity award in the
Grants of Plan-Based Awards Table and
corresponding footnote disclosure to the
Director Compensation Table.
The proposed amendments to the
Summary Compensation Table, Grants
of Plan-Based Awards Table and
Director Compensation Table are
intended to provide investors with
clearer and more meaningful executive
compensation disclosure, to facilitate
informative and concise Compensation
Discussion and Analysis disclosure of
company policies and decisions
regarding named executive officers’
compensation, and to provide investors
with a clearer view of the annual
compensation earned by executives and
directors consistent with the timing of
current actions regarding plan awards,
including the effect on total
compensation of decisions to reprice
option awards.
Together, the proposed amendments
to the Summary Compensation Table,
Grants of Plan-Based Awards Table and
Director Compensation Table will
simplify executive compensation
disclosure because companies no longer
will need to report two separate
measures of equity compensation in
their compensation disclosure. For
purposes of Item 402 disclosure,
companies no longer will need to
explain or analyze a second, separate
measure of equity compensation that is
based on financial statement recognition
rather than compensation decisions. In
addition, we believe it is likely that
these proposals will make companies’
identification of named executive
officers more consistent from year to
year, providing investors more
meaningful disclosure and reducing
executive compensation tracking
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burdens in determining which executive
officers are the most highly
compensated.
The proposed amendments to the
rules governing the proxy solicitation
process would not increase any existing
disclosure burden. We believe these
proposals, if adopted, would provide
certainty to soliciting parties and
facilitate communications with
shareholders. The proposed
amendments to Exchange Act Rules
14a–2(b)(1), 14a–2(b)(1)(ix), 14a–4(e)
and 14a–12(a)(1)(i) merely would clarify
existing requirements. As a result, these
amendments would not affect any
existing disclosure burden. The
proposed amendment to Rule 14a–4(d)
would make the short slate rounding
exception to the bona fide nominee
requirement available whether a nonmanagement soliciting person attempts
to round out its short slate by seeking
authority to vote for nominees named in
the registrant’s proxy statement, as
currently permitted, or seeks to round
out its short slate with nominees named
in one or more other persons’ proxy
statements. Consequently, the proposed
amendment to Rule 14a–4(d) simply
would provide more flexibility to nonmanagement persons that seek to round
out their short slates and, as a result,
would not increase any existing
disclosure burden.128
B. Burden and Cost Estimates Related to
the Proposed Amendments
We anticipate that the proposed
disclosure amendments would increase
the burdens and costs for companies
that would be subject to the proposed
amendments. We estimated the average
number of hours a company would
spend completing the forms and the
average hourly rate for outside
professionals. In deriving our estimates,
we recognize that the burdens will
likely vary among individual companies
based on a number of factors, including
the size and complexity of their
organizations, and the nature of their
operations. We believe that some
companies will experience costs in
excess of this average in the first year of
compliance with proposals and some
companies may experience less than the
average costs.
128 The proposed amendment to Exchange Act
Rule 14a–4(d)(4) would require that a nonmanagement soliciting person that attempts to
round out its short slate by seeking authority to vote
for nominees named in another non-management
person’s proxy statement provide specified
representations to the effect that it is not acting
together with any such other non-management
person. The required representations would not,
however, affect any existing disclosure burden in
more than a negligible way.
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We estimate no annual incremental
increase in the paperwork burden for
companies to comply with the proposed
amendments to the Summary
Compensation Table, Director
Compensation Table, and Grants of
Plan-Based Awards Table. We base this
estimate on the fact that the amended
approach would require disclosure of
information that is collected to comply
with financial reporting requirements,
and will not impose additional burdens
compared to the burdens associated
with applying the currently required
disclosure. We also base this estimate
on the likelihood that, by eliminating
factors unrelated to company
compensation decisions, the proposed
amendments will make companies’
identification of named executive
officers more consistent from year to
year, thereby potentially reducing the
burden of tracking the compensation of
all executive officers in order to
determine which executive officers are
the most highly compensated.
For purposes of the PRA, we estimate
the annual incremental paperwork
burden for all companies (other than
registered management investment
companies) to prepare the disclosure
that would be required under our
proposals to be approximately 247,773
hours of company personnel time and a
cost of approximately $47,413,161 for
the services of outside professionals.
These estimates include the time and
the cost of preparing and reviewing the
disclosure, filing documents and
retaining records.
We derived the above estimates by
estimating the total amount of time it
would take a company to prepare and
review the proposed disclosure
requirements. This estimate represents
the average burden for all companies,
both large and small. Our estimates have
been adjusted to reflect the fact that
some of the proposed amendments
would be required in some but not all
of the above listed documents, and
would not apply to all companies.
With respect to reporting companies
(other than registered management
investment companies), all of the
proposed revisions to Regulation S–K
would be required in proxy and
information statements; however, only
the proposed revisions to Items 401 and
402 of Regulation S–K would be
required in Forms 10, 10–K, S–1, S–4
and S–11. Furthermore, the proposed
amendments to CD&A would not be
applicable to smaller reporting
companies because under current CD&A
reporting requirements these companies
are not required to provide CD&A in
their Commission filings. Based on the
number of proxy filings we received in
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the 2008 fiscal year, we estimate that
approximately 3,922 domestic
companies are smaller reporting
companies that have a public float of
less than $75 million. With respect to
registered management investment
companies, the proposed revisions
would be reflected in certain Regulation
S–K items, Schedule 14A, and Forms
N–1A, N–2 and N–3.
Our annual burden estimates are also
based on other assumptions. First, we
assumed that the burden hours of the
proposed amendments would be
comparable to the burden hours related
to similar disclosure requirements
under current reporting requirements,
such as the disclosure of audit fees and
non-audit services,129 CD&A and
executive compensation reporting,130
and the disclosure of the activities of
nominating committees.131 Second, we
assumed that substantially all of the
burdens associated with the proposed
amendments to Items 401 and 402 of
Regulation S–K would be associated
with Schedules 14A and 14C as these
would be the primary disclosure
documents that CD&A would be
prepared and presented.132 For each
reporting company (other than
registered management investment
companies), we estimated that the
proposed amendments would impose
on average the following incremental
burden hours:
• Sixteen hours for the proposed
amendments to CD&A;
• Four hours for the proposed
enhanced director and nominee
disclosure;
• Six hours for the proposed
disclosures about company leadership
structure and the board’s role in risk
management;
• Four hours for the proposed
disclosures regarding compensation
consultants; and
• One hour for the proposed reporting
of voting results on Form 8–K.
With respect to registered
management investment companies, we
estimated that the proposed
amendments would impose on average
the following incremental burden hours:
• Four hours for the proposed
enhanced director and nominee
disclosure in proxy statements and three
hours for such proposed disclosure in
registration statements; 133 and
• Six hours for the proposed
disclosures about company leadership
structure and the board’s role in risk
management.
3. Securities Act Registration Statements
and Exchange Act Registration
Statements
For purposes of the PRA, in the case
of reporting companies (other than
registered management investment
companies) we estimate the annual
incremental paperwork burden for
Securities Act registration statements
under the proposed amendments would
be approximately 20 hours per form.134
For registered management investment
companies, we estimate that the annual
incremental paperwork burden under
the proposed amendments to Forms N–
1A, N–2, and N–3 would be
approximately 9 hours per form. These
estimates include the time and the cost
of preparing disclosure that has been
appropriately reviewed by management,
in-house counsel, outside counsel, and
members of the board of directors.
The tables below illustrate the total
annual compliance burden of the
collection of information in hours and
in cost under the proposed amendments
for annual reports; quarterly reports;
current reports; proxy and information
statements; Form 10; Forms S–1, S–4,
S–11, N–1A, N–2, and N–3; and
Regulation S–K.135 The burden
estimates were calculated by
multiplying the estimated number of
responses by the estimated average
amount of time it would take a company
to prepare and review the proposed
disclosure requirements. For the
Exchange Act reports on Form 10–K,
10–Q, and Form 8–K, and the proxy and
information statements we estimate that
75% of the burden of preparation is
carried by the company internally and
that 25% of the burden of preparation
is carried by outside professionals
retained by the company at an average
cost of $400 per hour. For the
registration statements on Forms S–1,
S–4, S–11, N–1A, N–2, and N–3, and the
Exchange Act registration statement on
Form 10, we estimate that 25% of the
burden of preparation is carried by the
company internally and that 75% of the
burden of preparation is carried by
outside professionals retained by the
company at an average cost of $400 per
hour. There is no change to the
estimated burden of the collections of
information under Regulation S–K
because the burdens that this regulation
imposes are reflected in our revised
estimates for the forms. 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.
129 Release No. 33–8183 (Jan. 28, 2003) [68 FR
6006] (which we estimated to be two hours).
130 Release No. 33–8732A in note 24 above
(which we estimated to be 95 hours). For purposes
of the proposed amendments to CD&A, we adjusted
this number downward in recognition that the 95
hours included, among other things, the estimated
burdens of the preparation and review of additional
tabular and related narrative disclosures required
by Item 402 of Regulation S–K.
131 Release No. 33–8340 (Nov. 24, 2003) [68 FR
69204] (which we estimated to be three hours).
132 The burden estimates for Form 10–K assume
that the proposed amendments to Items 401 and
402 of Regulation S–K would be satisfied by either
including the information directly in an annual
report or incorporating the information by reference
from the proxy statement or information statement
on Schedule 14A or Schedule 14C. Our PRA
estimates include an estimate 1 hour burden in the
Form 10–K and schedules to account for the
incorporation of the information that would be
required under proposed amendments to Items 401
and 402 of Regulation S–K.
133 We estimated that the disclosure burden for
registration statements on Forms N–1A, N–2, and
N–3 is less than for proxy statements because the
proposed disclosure relating to involvement in legal
proceedings for the past 10 years applies only to
proxy statements and not to registration statements.
134 We calculated the 20 hours by adding 16
hours for the proposed amendments to CD&A to 4
hours for the proposed enhanced director and
nominee disclosure.
135 Figures in both tables have been rounded to
the nearest whole number.
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1. Proxy and Information Statements
For purposes of the PRA, in the case
of reporting companies (other than
registered management investment
companies) we estimated the annual
incremental paperwork burden for
proxy and information statements under
the proposed amendments would be
approximately 14 hours per form for
companies that are smaller reporting
companies, and 30 hours per form for
companies that are either accelerated or
large accelerated filers. In the case of
registered management investment
companies, we estimate the annual
incremental paperwork burden for
proxy and information statements under
the proposed amendments would be
approximately ten hours per form.
These estimates include the time and
the cost of preparing disclosure that has
been appropriately reviewed by
management, in-house counsel, outside
counsel, and members of the board of
directors.
2. Exchange Act Periodic Reports
For purposes of the PRA, we estimate
the annual incremental paperwork
burden for Form 10–K under the
proposed amendments would be
approximately 1 hour per form. This
estimate includes the time and the cost
of preparing disclosure that has been
appropriately reviewed by management,
in-house counsel, outside counsel, and
members of the board of directors.
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TABLE 1.—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS FOR ANNUAL REPORTS;
QUARTERLY REPORTS; PROXY AND INFORMATION STATEMENTS
Number of
responses 136
Total incremental burden
hours
75% Company
25%
Professional
Professional
costs
(A)
10–K ...............................................
10–Q 137 .........................................
8–K 138 ...........................................
Form 10 139 ....................................
Sch. 14A 140 ...................................
Accel. Filers ............................
SRC Filers ..............................
Sch. 14C ........................................
Accel. Filers ............................
SRC Filers ..............................
Rule 20a–1 .....................................
Reg. S–K ........................................
Total ........................................
Incremental
burden hours/
form
(B)
(C)=(A)*(B)
(D)=(C)*0.75
(E)=(C)*0.25
(F)=(E)*$400
13,545
32,462
115,795
238
7,300
3,378
3,922
680
315
365
1,225
N/A
........................
1
(1)
1
20
..........................
30
14
..........................
30
14
10
N/A
..........................
13,545
(7,300)
115,795
4,760
..........................
101,340
54,908
..........................
9,440
5,115
12,250
N/A
317,153
10,159
(5,475)
86,846
1,190
..........................
76,005
41,181
..........................
7,080
3,836
9,188
N/A
235,485
3,386
(1,825)
28,949
3,570
..........................
25,335
13,727
..........................
2,360
1,279
3,062
N/A
..........................
$1,354,500
(730,000)
11,579,500
1,428,000
..........................
10,134,000
5,490,800
..........................
1,415,984
511,472
1,225,000
N/A
32,667,261
TABLE 2—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS FOR REGISTRATION STATEMENTS
Number of
responses 141
Incremental
burden hours/
form
Total incremental burden
hours
25% Company
75%
Professional
Professional
costs
(A)
(B)
(C)=(A)*(B)
(D)=(C)*0.25
(E)=(C)*0.75
(F)=(E)*$400
Form S–1 .................................................
Form S–4 .................................................
Form S–11 ...............................................
Form N–1A ...............................................
Form N–2 .................................................
Form N–3 .................................................
Reg. S–K ..................................................
768
619
100
1,935
205
17
N/A
20
20
20
9
9
9
N/A
15,360
12,380
2,000
17,415
1,845
153
N/A
3,840
3,095
500
4,354
461
38
N/A
11,520
9,285
1,500
13,061
1,384
115
N/A
$4,608,000
3,714,000
600,000
5,224,500
553,500
45,900
N/A
Total ..................................................
........................
........................
49,153
12,288
........................
14,745,900
C. Request for Comment
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Pursuant to 44 U.S.C. 3506(c)(2)(B),
we request comment in order to:
• Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have
practical utility;
• Evaluate the accuracy of our
estimates of the burden of the proposed
collections of information;
136 The number of responses reflected in the table
equals the actual number of forms and schedules
filed with the Commission during the 2008 fiscal
year, except for Form 8–K. The number of responses
for Form 8–K reflects the number of Form 8–Ks
filed during the 2008 fiscal year plus an additional
7,371 filings.
137 We calculated the reduction in the burden
hours for Form 10–Q based on the number of proxy
statements filed with the Commission during the
2008 fiscal year. We assumed that there would be,
at a minimum, an equal number of Form 10–Qs
filed to report the voting results from a meeting of
shareholders. The reduction reflects the proposed
deletion of the disclosure of voting results from the
form.
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• Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
• 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; and
• Evaluate whether the proposed
amendments will have any effects on
any other collections of information not
previously identified in this section.
Any member of the public may direct
to us any comments concerning the
accuracy of these burden estimates and
any suggestions for reducing the
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,
138 We have included an additional 7,300
responses to Form 8–K to reflect the additional
Form 8–Ks that would be filed to report final voting
results. We have also included an additional 71
Form 8–Ks to reflect the number of Form 8–Ks that
would be filed to report preliminary voting results
which we based on the actual number of proxy
statements involving contested elections that were
filed with the Commission during the 2008 fiscal
year.
139 The burden allocation for Form 10 uses a 25%
internal to 75% outside professional allocation.
140 The estimates for Schedule 14A and Schedule
14C are separated to reflect our estimate of the
burden hours and costs related to the proposed
amendments to CD&A which would be applicable
to companies that are either accelerated or large
accelerated filers, but not applicable to companies
that are smaller reporting companies. We estimate
that 3,378 Schedule 14A responses were filed by
accelerated or large accelerated filers, and 315
Schedule 14C responses were filed by accelerated
or large accelerated filers.
141 The number of responses reflected in the table
equals the actual number of forms filed with the
Commission during the 2008 fiscal year, except for
Forms N–1A and N–3. The number of responses for
Forms N–1A and N–3 reflect the number of openended management investment companies
registered with the Commission.
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Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Proposed Rules
Washington, DC 20503, and send a copy
of the comments to Elizabeth M.
Murphy, Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090, with
reference to File No. S7–13–09.
Requests for materials submitted to the
OMB by us with regard to these
collections of information should be in
writing, refer to File No. S7–13–09 and
be submitted to the Securities and
Exchange Commission, Office of
Investor Education and Advocacy, 100 F
Street, NE., Washington, DC 20549–
0213. Because the OMB is required to
make a decision concerning the
collections of 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.
IV. Cost-Benefit Analysis
A. Introduction
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We are proposing amendments to
enhance the disclosures with respect to
a company’s overall compensation
policy and its impact on risk taking,
director and nominee qualifications and
legal proceedings, company leadership
structure and the board’s role in the risk
management process, and the interests
of compensation consultants. In
addition, we are proposing amendments
to transfer the requirement to disclose
voting results from Forms 10–Q and
10–K to Form 8–K.
We also are proposing amendments to
the disclosure requirements for
executive and director compensation to
require stock awards and option awards
reporting based on a measure that will
represent the aggregate grant date fair
value of the compensation decision in
the grant year, rather than the current
rule, which allocates the grant date fair
value over time commensurate with
financial statement recognition of
compensation costs.
Finally, we also are proposing
amendments to Exchange Act Rules
14a–2, 14a–4, and 14a–12 to provide
clarity and address issues that have
arisen in regard to the proxy solicitation
process. These amendments, discussed
in detail above,142 and their potential
consequences that could result in
benefits and costs are as follows.
1. Exchange Act Rule 14a–2(b)(1)
We propose to clarify the introductory
text of Exchange Act Rule 14a–2(b)(1) by
revising it to provide specifically that a
‘‘form of revocation’’ does not include
an unmarked copy of management’s
proxy card that the soliciting
142 See
Part II.F above.
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shareholder requests be returned
directly to management. As a result, a
person otherwise qualified to rely on the
exemption the rule provides still could
rely on it if the person provided a
solicited shareholder with an unmarked
copy of management’s proxy card and
requested that the card be returned
directly to management.143
Consequently, the proposed amendment
would provide certainty regarding the
availability of the exemption in relation
to this procedure. There may be persons
who have different views or are
uncertain about the application of the
exemption to the procedure and would
not, in the absence of the clarification,
undertake it. As a result, the
clarification may cause more persons to
avail themselves of the procedure.144
2. Exchange Act Rule 14a–2(b)(1)(ix)
We propose to clarify Exchange Act
Rule 14a–2(b)(1)(ix) by revising it to
provide specifically that a person need
not be a security holder of the class of
securities being solicited and a benefit
need not be related to or derived from
any security holdings in the class being
solicited for a person to have a
substantial interest in a matter that
would disqualify the person from
relying on the exemption Exchange Act
Rule 14a–2(b)(1) otherwise would
provide in regard to that matter. As a
result, the proposed amendment would
provide certainty regarding the fact that
a person need not be a security holder
of the class of securities being solicited
and a benefit need not be related to or
derived from any security holdings in
the class being solicited for the person
to have a substantial interest. There may
be persons who have different views or
are uncertain about this fact and would
not, in the absence of the clarification,
recognize that the exemption is not
available and act accordingly.
Consequently, the clarification may
cause more persons to refrain from
soliciting in the absence of an
exemption or to solicit in compliance
143 Rule 14a–2(b)(1) exempts from the generally
applicable disclosure filing and most other
requirements of the proxy rules solicitations by
non-management persons who are not seeking
proxy authority and do not have a substantial
interest in the subject matter of the solicitation. The
exemption is unavailable to, among others, a person
who ‘‘furnish[es] or otherwise request[s], or act[s]
on behalf of a person who furnishes or requests, a
form of revocation.’’
144 If more non-management persons use the
procedure and provide solicited shareholders with
more opportunities to vote as they suggest, then it
is possible that these non-management persons will
succeed more often in defeating management
proposals. As a practical matter, however, it seems
unlikely that many solicited shareholders would
vote differently merely because they have more
opportunities to vote as a non-management
soliciting person suggests.
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35097
with all of the generally applicable
proxy solicitation requirements.
3. Exchange Act Rule 14a–4(d)(4)
We propose to revise Exchange Act
Rule 14a–4(d)(4) to provide that the
short slate rounding exception to the
bona fide nominee requirement would
be available whether a non-management
soliciting person attempts to round out
its short slate by seeking authority to
vote for nominees named in the
registrant’s proxy statement, as
currently permitted, or seeks to round
out its short slate with nominees named
in any other persons’ proxy
statement.145 As a result, the proposed
amendment would end the situation
under the current rule in which only the
registrant’s nominees may be used to fill
out the non-management slate and, as a
result, are effectively advantaged as
security holders may vote for them on
two or more proxy cards where nonmanagement nominees can only be
voted for on one. Consequently, the
proposed amendment would provide
additional flexibility to nonmanagement persons with regard to the
nominees with whom they seek to
round out their short slates without
their seeking a no-action letter from the
staff.146 The codified additional
flexibility may cause more nonmanagement soliciting persons to seek
to round out their short slates with other
non-management persons’ nominees.147
145 Rule 14a–4(d)(1) requires that, in order to
solicit authority to vote for the election of a person
to office, the person must be a bona fide nominee,
consenting to being named in the soliciting person’s
proxy statement and serving if elected. Rule 14a–
4(d)(4) is an exception to the bona fide nominee
requirement. This exception permits a person
soliciting support of nominees who, if elected,
would constitute a minority of the board of
directors (commonly referred to as a ‘‘short slate’’),
to round out its short slate of nominees up to the
total number of director positions then subject to
election by seeking authority to vote for nominees
named in the registrant’s proxy statement.
146 As discussed above, the Division of
Corporation Finance has issued two no-action
letters in regard to short slate rounding with
persons named in a non-management person’s
proxy statement under circumstances generally the
same as those contemplated by the proposed
amendment. While the Division would continue to
consider issuing such letters in the absence of the
adoption of the proposed amendment, only the
parties to whom the letters were addressed can rely
upon them. See Eastbourne Capital, L.L.C. in note
above; Icahn Associates Corp. in note 108 above.
147 It is possible that more non-management
soliciting persons will seek to round out their short
slates with other non-management persons’
nominees and, as a result, more non-management
nominees and fewer management nominees will be
elected. As a practical matter, however, it is unclear
how often non-management persons would seek to
round out their short slates in this manner and, if
they did, whether they would attract enough votes
to increase the number of successful nonmanagement nominees and decrease the number of
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4. Exchange Act Rule 14a–4(e)
We propose to clarify Exchange Act
Rule 14a–4(e) by revising it to provide
specifically that the ‘‘reasonable
specified conditions’’ under which the
shares represented by a proxy will not
be voted must be objectively
determinable.148 As a result, the
proposed amendment would provide
certainty regarding the fact that the
‘‘reasonable specified conditions’’ under
which the shares represented by a proxy
will not be voted must be objectively
determinable. There may be persons
who have different views or are
uncertain about this fact and would not,
in the absence of the clarification,
recognize that the conditions must be
objectively determinable and act
accordingly. Consequently, the
clarification may cause some persons to
revise the conditions they otherwise
would state to make them objectively
determinable or refrain from soliciting
because they do not wish to state
objectively determinable conditions.
pwalker on DSK8KYBLC1PROD with PROPOSALS2
5. Exchange Act Rule 14a–12(a)(1)(i)
We propose to clarify Exchange Act
Rule 14a–12(a)(1)(i) by revising it to
provide specifically that when a
soliciting communication is made
before providing shareholders with a
full proxy statement and that
communication includes required
participant information through a
legend advising security holders where
they can obtain the information, the
information to which the legend refers
must be filed under cover of Schedule
14A, as part of a proxy statement or
other soliciting materials, no later than
the time the first soliciting
communication is made.149 As a result,
the proposed amendment would
provide certainty regarding when the
participant information to which the
legend refers must be filed. There may
be persons who have different views or
are uncertain about this fact and would
successful management nominees. In this regard,
we note that there appear to have been few
instances in the past in which more than one nonmanagement person sought to round out a short
slate with respect to a single election of directors.
148 Exchange Act Rule 14a–4(e) requires that a
proxy statement or form of proxy provide that the
shares represented by the proxy be voted ‘‘subject
to reasonable specified conditions.’’
149 Exchange Act Rule 14a–12 permits a
solicitation to be made before furnishing security
holders with a proxy statement meeting the
requirements of Rule 14a–3(a) if, among other
requirements, each written communication that is
part of the solicitation contains specified
participant information. Rule 14a–12(a)(1)(i)
requires such information to include the identity of
the participants in the solicitation and a description
of their direct or indirect interests or a legend
advising security holders where they can obtain
that information.
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not, in the absence of the clarification,
recognize that the participant
information must be filed by the time
the first soliciting communication is
made. Consequently, the clarification
may cause some persons to file the
participant information earlier than they
otherwise would or delay the start of a
solicitation due to taking additional
time to prepare and file the participant
information.
B. Benefits
1. Disclosure Amendments
The proposed disclosure amendments
are intended to enhance transparency of
a company’s compensation policies and
its impact on risk taking; director and
nominee qualifications; company
leadership structure and the role of the
board in the risk management process;
potential conflicts of interest of
compensation consultants; and voting
results at annual and special meetings.
a. Benefits Related to Expanded
Compensation Discussion and Analysis
Disclosure
Expanding the Compensation
Discussion and Analysis to include a
discussion of the company’s overall
compensation program and how it
relates to the company’s approach to
risk management may benefit investors
in several ways. Incentive schemes and
other compensation for employees may
affect risk-taking behavior in the
company’s operations. To the extent
that risks arising from a company’s
overall compensation policies for
employees generally may have a
material effect on the company,
investors will benefit through an
enhanced ability to monitor it. They
would also potentially benefit from the
ability to use this additional information
in allocating capital across companies,
toward companies where employee
incentives appear better aligned with
operational success and investors’
appetite for risk. The new disclosure
may also encourage the board and
senior management to examine and
improve incentive structures for
management and employees of the
company. These benefits should also
lead to increased value to investors.
b. Benefits Related to Revisions to
Summary Compensation Table
Disclosure
As a result of the proposed Summary
Compensation Table revision,
companies would no longer need to
prepare and report the allocation of
equity awards’ grant date fair value over
time commensurate with financial
statement recognition of compensation
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costs for executive and director
compensation tabular reporting or as a
footnote to the Director Compensation
Table. Further, in preparing stock
awards and option awards disclosure in
the Summary Compensation Table and
Director Compensation Table,
companies no longer would need to
incur additional costs to exclude the
estimate for forfeitures related to
service-based vesting used for financial
statement reporting purposes. The
elimination of costs of preparing and
reporting this information is a benefit of
the proposed amendments. The effects
of the proposed amendments in making
this information more readily available
to investors may be useful to their
voting and investment decisions.
Reporting stock awards and option
awards in the Summary Compensation
Table based on aggregate grant date fair
value is designed to make it easier for
investors to assess compensation
decisions and evaluate the decisions of
the compensation committee. For
example, under the amendments the
Summary Compensation Table values
will correspond to awards granted for
the fiscal year, potentially allowing
companies to better explain in
Compensation Discussion and Analysis
how decisions with respect to these
awards relate to other compensation
decisions in the context of total
compensation for the year. Further, the
effect on total compensation of
decisions to reprice options will be
more evident because aggregate grant
date fair value will be a component of
total compensation reported in the
Summary Compensation Table.
However, because the proposals would
eliminate the requirement to report the
grant date fair value of individual
awards in the Grants of Plan-Based
Awards Table, there would not be
disclosure of incremental fair value with
respect to individual awards that were
repriced or otherwise materially
modified during the year, potentially
limiting this benefit.
Under the proposed amendments, the
identification of named executive
officers based on total compensation for
the last completed fiscal year will reflect
the aggregate grant date fair value of
equity awards granted in that year. As
a result, the named executive officers
other than the principal executive
officer and principal financial officer
may change. Investors may benefit from
receiving compensation disclosure with
respect to executives who would not
have been named executive officers
under the current rules. To the extent
that this proposed change better aligns
the identification of named executive
officers with compensation decisions for
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Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Proposed Rules
the year, it may make it easier for
companies to track executive
compensation for reporting purposes.
Smaller reporting companies are not
required to provide a Grants of PlanBased Awards Table or a Compensation
Discussion and Analysis, but are
required to provide a Summary
Compensation Table. Investors in these
companies may benefit from reporting
stock awards and option awards based
on full grant date fair value in the grant
year, as opposed to the current reporting
approach based on financial statement
recognition of the awards.
pwalker on DSK8KYBLC1PROD with PROPOSALS2
c. Benefits Related to Enhanced Director
and Nominee Disclosure
The proposed amendments to Item
401 of Regulation S–K would
potentially benefit investors by
increasing the amount and quality of
information that they receive
concerning the background and skills of
directors and nominees for director,
enabling investors to make betterinformed voting and investment
decisions. This increased information
also may improve investor confidence
because investors could determine more
easily whether a particular director and
the entire board composition is an
appropriate choice for a given company
at the time.
Disclosure of management’s or other
proponents’ rationale for their
nominees’ membership on the board
and on specific committees may benefit
investors by enabling them to better
assess the rationale in favor of a
particular nominee. Investors would be
able to adjust their holdings, allocating
more capital to companies in which
they believe board members are most
likely to be able to effectively fulfill
their duties to shareholders. In
particular, in cases that do not meet
investors’ expectations, investors may
respond by attempting to exert more
influence on management or the board
than would occur otherwise, thereby
enhancing shareholder value.
Expanded disclosure of membership
on previous corporate boards may also
benefit investors by making it easier for
them to evaluate whether nominees’
past board memberships present
potential conflicts of interest (such as
membership on boards of major
suppliers, customers, or competitors).
Investors may also be able to more
easily evaluate the performance, in both
operations and governance, of the other
companies on whose boards the
nominees serve or have served. The
public may also benefit from better
understanding any potential positive or
negative effects on corporate
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performance resulting from directors
serving on other boards.
Expanded disclosure of legal
proceedings involving directors,
nominees and executive officers, from
the current five year requirement to ten
years, would benefit investors by
providing more information by which
they could determine the suitability of
a director or nominee.
d. Benefits Related to New Disclosure
about Company Leadership Structure
and the Board’s Role in the Risk
Management Process
Investors may benefit from new
disclosure about company leadership
structure. In particular, they may benefit
from understanding management’s
explanation regarding whether or not
the principal executive officer serves as
chairman of the board and, in the case
of registered investment management
company, whether the chairman is an
‘‘interested person’’ of the fund. In
deciding whether to separate principal
executive officer and chairman
positions, companies may consider
several factors, including the
effectiveness of communication with the
board and the degree to which the board
can exercise independent judgment
about management performance, and
shareholders may, in different cases, be
best served by different decisions.
Disclosures of the board’s role in the
risk management process may also
benefit investors. Expanded disclosure
of the board’s role in risk management
may enable investors to better evaluate
whether the board is exercising
appropriate oversight of risk
management. Investors would be able to
adjust their holdings, allocating more
capital to companies in which they
believe the board is adequately focused
on risks. Improved capital allocation
will also benefit the financial markets
by increasing market efficiency.
e. Benefits Related to New Disclosure
Regarding Compensation Consultants
New disclosure regarding
compensation consultants may benefit
investors by illuminating potential
conflicts of interest. Providing better,
more complete information in cases
where non-executive compensation
services occur allows investors to
determine for themselves whether there
are concerns related to the
compensation consultants’ financial
interests and objectivity. Compensation
consultants may earn fees from other
services to the company, including
benefits administration, human
resources consulting, and actuarial
services. With an incentive to retain
these additional revenue streams, they
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35099
may face incentives to cater, to some
degree, to management preferences in
recommending executive compensation
packages. To the degree that these
relationships are more transparent
under the proposed amendments,
investors benefit through their ability to
better monitor the process of setting
executive pay. This benefit may be
limited to the degree that compensation
consultants have potential conflicts of
interest related to other material
relationships with the company or other
conflicts not specifically enumerated in
the proposed amendments.
f. Benefits Related to Reporting of
Voting Results on Form 8–K
The proposed amendments to Form
8–K would facilitate security holder
access to faster disclosure of the vote
results of a company’s annual or special
meeting. To find this information,
investors no longer would need to wait
for this information to be disclosed in a
Form 10–Q or 10–K, which could be
filed months after the end of the
meeting.
2. Proxy Solicitation Process
Amendments
We believe the proposed proxy
solicitation process amendments may
result in benefits as follows.
a. Exchange Act Rule 14a–2(b)(1)
Introductory Text
The proposed amendment to the
introductory text of Exchange Act Rule
14a–2(b)(1) may cause more persons to
furnish an unmarked copy of
management’s proxy card requested to
be returned directly to management.150
Consequently, the proposed amendment
may result in the benefit of aiding
efforts by persons not seeking proxy
authority to facilitate voting by
shareholders sharing their views on
matters submitted for shareholder
approval—such as in a ‘‘just vote no’’
campaign—without having to incur the
costs and efforts of conducting a fullyregulated proxy solicitation and provide
shareholders a convenient opportunity
to indicate their votes after hearing
those views.
b. Exchange Act Rule 14a–2(b)(1)(ix)
The proposed amendment to
Exchange Act Rule 14a–2(b)(1)(ix) may
cause more persons to refrain from
soliciting in the absence of an
exemption or solicit in compliance with
all of the generally applicable proxy
solicitation requirements.151 To the
extent such persons refrain from
150 See
151 See
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Part IV.A.2 above.
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soliciting without an exemption,
shareholders may benefit by not being
called upon to make a voting decision
in regard to a matter while possibly
being unaware of the soliciting person’s
substantial interest in the matter. To the
extent such persons solicit in
compliance with all of the generally
applicable proxy solicitation
requirements, shareholders may benefit
by having information regarding the
soliciting person’s substantial interest in
the matter that they otherwise might not
have.
c. Exchange Act Rule 14a–4(d)(4)
The proposed amendment to
Exchange Act Rule 14a–4(d)(4) may
cause more non-management soliciting
persons to seek to round out their short
slates with other non-management
persons’ nominees.152 The amendment’s
effective codification of a no-action
position the staff has taken in the past
may benefit non-management soliciting
persons who wish to round out their
short slates with other non-management
persons’ nominees by enabling them to
avoid the cost of seeking a no-action
letter. To the extent more nonmanagement soliciting persons seek to
round out their slates with other nonmanagement persons’ nominees,
shareholders may benefit from having
more choices in deciding for whom they
will vote.
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d. Exchange Act Rule 14a–4(e)
The proposed amendment to
Exchange Act Rule 14a–4(e) may cause
some persons to revise the conditions
they otherwise would state to make
them objectively determinable or refrain
from soliciting because they do not wish
to state objectively determinable
conditions.153 To the extent such
persons revise the conditions they state
to make them objectively determinable,
solicited shareholders may benefit by
being better able to make an informed
decision in regard to granting proxy
authority and confirm that any later
withholding of shares from voting is
consistent with the authority granted.
To the extent such persons refrain from
soliciting, shareholders may benefit
from not being called upon to make a
decision in regard to granting proxy
authority or confirming that any later
withholding of shares from voting is
consistent with the authority granted
where such decisions would be more
difficult due to a lack of objectively
determinable conditions.
152 See
153 See
Part IV.A.3 above.
Part IV.A.4 above.
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e. Exchange Act Rule 14a–12(a)(1)(i)
The proposed amendment to
Exchange Act Rule 14a–12(a)(1)(i) may
cause some persons to file legendreferenced participant information
earlier than they otherwise would or
delay the start of a solicitation due to
taking additional time to prepare and
file the participant information.154 To
the extent such persons file the
participant information sooner or delay
the start of a solicitation until ready to
file the participant information,
shareholders may benefit from having
the participant information with which
they can begin to evaluate the
solicitation from the time they first are
solicited.
C. Costs
1. Disclosure Amendments
The proposed rules would impose
new disclosure requirements on
companies. Some of the proposed
disclosures are designed to build upon
existing requirements to elicit a more
detailed discussion of overall
compensation policy and its impact on
risk taking, director and nominee
qualifications and legal proceedings and
the interests of compensation
consultants. To the degree that the
proposed amendments require
collecting information currently
available, costs related to information
collection will be limited.
a. Costs Related to Expanded
Compensation Discussion and Analysis
Disclosure
Expanded Compensation Discussion
and Analysis disclosure will increase
costs to companies as the proposed
amendments would impose additional
information gathering and drafting
requirements. We believe that there may
be information gathering costs, even
though the information required may be
readily available because this
information may need to be reported up
from business units and analyzed. Using
our PRA burden estimates, we estimate
the aggregate annual cost of the
proposed amendments to CD&A to be
approximately $29,950,652.155 In
addition, there may be costs in assessing
Part II.A.5 above.
estimate is based on the estimated total
burden hours of 86,683 (the annual responses for
the schedules and forms that would include the
proposed CD&A amendments multiplied by 16
hours), an assumed split of the burden hours
between internal staff and external professionals
with respect to proxy and information statements,
an assumed 25%/75% split of the burden hours
between internal staff and external professionals
with respect to registration statements, and an
hourly rate of $200 for internal staff time and $400
for external professionals.
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154 See
155 This
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whether risk arising from compensation
policies and practices may have a
material effect on the company, and if
they may, there will be cost in drafting
the additional disclosure. This could
include the cost of hiring additional
advisors to assist in the analysis as well
as potential liability if risk is not
identified as having a material effect on
the company.
b. Costs Related to Revisions to
Summary Compensation Table
Disclosure
Investors may face some costs related
to revisions in executive compensation
reporting. The proposed amendments
would rescind the requirement to report
the full grant date fair value of each
individual equity award in the Grants of
Plan-Based Awards Table and
corresponding footnote disclosure in the
Director Compensation Table. Although
the Outstanding Equity Awards at Fiscal
Year-End Table would continue to
provide useful disclosure of the
contractual terms of outstanding equity
awards, the contribution of an
individual grant to the aggregate grant
date fair value of awards would not be
disclosed under the proposed
amendments. Investors will therefore be
less able to determine the manner in
which an individual grant affects the
aggregate grant date fair value of equity
awards granted in the year.
Grant date fair value guidelines under
FAS 123R call for management to
exercise judgment. For example, the
valuation of stock options requires
assumptions about stock volatility and
choice among several valuation
methods. For financial statement
recognition purposes, this grant date fair
value measure of compensation cost is
expensed over the expected term of the
option. Compensation cost for awards
containing a performance-based vesting
condition is recognized only if it is
probable that the performance condition
will be achieved. If achievement of the
performance condition later is no longer
considered probable, the amount of
compensation cost previously
recognized is reversed in the period
when it is determined that achievement
of the condition is no longer probable.
In addition, awards that are classified as
‘‘liability awards’’ under FAS 123R
(such as an award that is cash settled)
are re-measured at each financial
statement reporting date through the
date the awards are settled. Some
investors may believe that Summary
Compensation Table and Director
Compensation Table disclosure of stock
awards and option awards measured
based on financial statement recognition
principles provides a clearer
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understanding of compensation earned
in the reporting period because it takes
into account potential adjustments
regarding such factors as term of the
option and changes in market value over
time. To the extent that an investor
would prefer to also see disclosure of
this measure for purposes of voting or
investment decisions, the proposed
amendments may entail a cost.
In particular, the required remeasurement of liability awards under
the current rules may help to reveal
situations in which companies grant
awards that subsequently change in
value. For example, if a company grants
an option-based liability award under
the proposed amendments, the impact
of subsequent events on the stock price,
and therefore on the award value, would
not be reflected in the Summary
Compensation Table in the current or
subsequent year. In contrast, under the
current rule, reported compensation in
the next year could be higher or lower
as the result of re-measurement. To the
extent that investors prefer to see
changes in value of liability award
compensation decisions reflected in the
Summary Compensation Table,
presentation of grant date fair value in
the table may represent a cost. This cost,
however, is limited to the degree that
changes in value of liability based
awards are reflected elsewhere in the
proxy statement or can be inferred from
previously disclosed award terms.
Additionally, awards classified as
‘‘equity awards’’ under FAS 123R are
not re-measured, and therefore any
changes in the value of such awards are
not currently reflected in the Summary
Compensation Table and will also not
be reflected under the proposed
amendments.
Under the proposed amendments to
the Summary Compensation Table and
as noted in the Benefits section, the
identification of named executive
officers based on total compensation for
the last completed fiscal year will reflect
the aggregate grant date fair value of
equity awards granted in that year, so
that some executives subject to
executive compensation disclosure may
be different.
Smaller reporting companies, which
are not required to provide the Grants of
Plan-Based Awards Table, may incur
some costs on a transitional basis in
switching from the currently required
measure of stock awards and option
awards to full grant date fair value
reporting. We expect that any such
additional costs will be limited by the
fact that full grant date fair value
information required under the
proposals is also collected to comply
with financial reporting purposes.
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Because companies other than smaller
reporting companies currently are
required to report the grant date fair
value of individual equity awards, we
expect that they will incur only
negligible costs in switching to the
proposed Summary Compensation
Table and Director Compensation Table
disclosure requirements.
c. Costs Related to Enhanced Director
and Nominee Disclosure
Companies may face some
information gathering and reporting
costs related to enhanced director and
nominee disclosure. Using our PRA
burden estimates, we estimate the
aggregate annual cost to operating
companies to be approximately
$11,775,000.156 With respect to our PRA
burden estimates for registered
management investment companies, we
estimate the aggregate annual cost to be
approximately $3,489,800.157
Companies may also experience
increased costs as it may be more
difficult to find candidates willing to
serve on boards if they do not want this
information disclosed in a Commission
filing. To the extent that information is
available and verifiable, however, we
expect that certain costs will be limited.
d. Costs Related to New Disclosure
About Company Leadership Structure
and the Board’s Role in the Risk
Management Process
Companies may face some costs
related to new disclosure about
company leadership structure.
Disclosure of the board’s role in the risk
management process may have some
similar costs. The information gathering
costs are likely to be less significant
than the costs to prepare the disclosure.
Using our PRA burden estimates, we
estimate the aggregate annual cost to
operating companies to be
approximately $11,970,000.158 With
156 This estimate is based on the estimated total
burden hours of 38,820 (the annual responses for
the schedules and forms that would include the
proposed enhanced director and nominee
disclosure multiplied by 4 hours), an assumed
75%/25% split of the burden hours between
internal staff and external professionals with
respect to proxy and information statements, an
assumed 25%/75% split of the burden hours
between internal staff and external professionals
with respect to registration statements, and an
hourly rate of $200 for internal staff time and $400
for external professionals.
157 This estimate is based on the estimated total
burden hours of 11,371, an assumed 75%/25% split
of the burden hours between internal staff and
external professionals with respect to proxy
statements, an assumed 25%/75% split of the
burden hours between internal staff and external
professionals with respect to registration
statements, and an hourly rate of $200 for internal
staff time and $400 for external professionals.
158 This estimate is based on the estimated total
burden hours of 47,880 (the annual responses for
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35101
respect to our PRA burden estimates for
registered management investment
companies, we estimate the aggregate
annual cost to be approximately
$6,367,200.159 Although the
amendments are not intended to drive
behavior, there may be possible costs if
a company re-evaluates its leadership
structure or the board’s role in the risk
management process.
e. Costs Related to New Disclosure
Regarding Compensation Consultants
Companies may face some costs
related to new disclosure about other
services provided by compensation
consultants and aggregate fees. Using
our PRA burden estimates, we estimate
the aggregate annual cost to be
approximately $7,980,000.160 The costs
to a company in contracting with
compensation consultants could be
increased under these amendments, and
compensation consultants also may alter
their mix of services. For instance, costs
may increase if companies decide to
contract with multiple different
compensation consultants for services
that had previously been provided by
only one compensation consultant.
Possible increased costs might include
the costs associated with the time each
new compensation consultant will need
to learn about the company and decline
in any economies of scale the
compensation consultant may have
factored into fees charged to the
company. To the extent that fees for
compensation consultants decline,
rather than increase as a result of any
improvement in competition under the
proposed amendments, this represents a
potential cost to compensation
consultants, if any increase in the
volume of business does not offset fee
reductions.
f. Costs Related to Reporting of Voting
Results on Form 8–K
Shareholders who are used to
receiving this information in Form 10–
Q filing may incur costs of adapting
Schedules 14A and 14C multiplied by 6 hours), an
assumed 75%/25% split of the burden hours, and
an hourly rate of $200 for internal staff time and
$400 for external professionals.
159 This estimate is based on the estimated total
burden hours of 20,292, an assumed 75%/25% split
of the burden hours between internal staff and
external professionals with respect to proxy
statements, an assumed 25%/75% split of the
burden hours between internal staff and external
professionals with respect to registration
statements, and an hourly rate of $200 for internal
staff time and $400 for external professionals.
160 This estimate is based on the estimated total
burden hours of 31,920 (the annual responses for
Schedules 14A and 14C multiplied by 4 hours), an
assumed 75%/25% split of the burden hours, and
an hourly rate of $200 for internal staff time and
$400 for external professionals.
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their research practices to find this
information in 8–K filings, which may
involve searching through a number of
filings. This adjustment may be costly,
in particular, to those investors who
process this information using
automated systems. A separate filing to
report the information and potentially
report both preliminary and final voting
results may also increase direct costs to
companies for filing fees, filing creation,
and report dissemination because it may
require two Form 8–K filings. However,
the cost for preparing a quarterly report
on Form 10–Q would be less because
this disclosure would not appear in that
Form. Companies engaged in a
contested election may face some
additional information gathering and
reporting costs related to reporting
shareholder voting results on Form 8–K,
as these companies would need to file
a Form 8–K to report preliminary voting
results in addition to reporting final
vote results. Using our PRA burden
estimates, we estimate the aggregate
annual cost to be approximately
$1,842,750.161
2. Proxy Solicitation Process
Amendments
We believe the proposed proxy
solicitation process amendments may
result in costs as follows.
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a. Exchange Act Rule 14a–2(b)(1)
Introductory Text
The proposed amendment to the
introductory text of Exchange Act Rule
14a–2(b)(1) may cause more persons to
furnish an unmarked copy of
management’s proxy card requested to
be returned directly to management.162
If more persons avail themselves of that
procedure, companies may increase
soliciting activity in an effort to
counterbalance its use and, as a result,
incur additional costs.
b. Exchange Act Rule 14a–2(b)(1)(ix)
The proposed amendment to
Exchange Act Rule 14a–2(b)(1)(ix) may
cause more persons to refrain from
soliciting in the absence of an
exemption or solicit in compliance with
all of the generally applicable proxy
solicitation requirements.163 To the
extent such persons refrain from
soliciting, shareholders may be denied
the opportunity to consider such
persons’ views in making a voting
161 This estimate is based on the estimated 7,371
additional Form 8–K filings, an assumed 75%/25%
split of one burden hour between internal staff and
external professionals, and an hourly rate of $200
for internal staff time and $400 for external
professionals.
162 See Part IV.A.1 above.
163 See Part IV.A.2 above.
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decision. To the extent such persons
solicit in compliance with all of the
generally applicable proxy solicitation
requirements, they may incur greater
costs than they otherwise would
have.164
c. Exchange Act Rule 14a–4(d)(4)
The proposed amendment to
Exchange Act Rule 14a–4(d)(4) may
cause more non-management soliciting
persons to seek to round out their short
slates with other non-management
persons’ nominees.165 Consequently,
companies may increase soliciting
activity in an effort to counterbalance
such rounding out and, as a result, incur
additional costs.
d. Exchange Act Rule 14a–4(e)
The proposed amendment to
Exchange Act Rule 14a–4(e) may cause
some persons to revise the conditions
they otherwise would state to make
them objectively determinable or refrain
from soliciting because they do not wish
to state objectively determinable
conditions.166 To the extent such
persons revise the conditions to make
them objectively determinable or refrain
from soliciting, shareholders may lose
the opportunity to grant proxy authority
to a person that might exercise some
degree of discretion in a manner that
could be beneficial to the shareholders.
The inability to grant proxy authority to
a person that might exercise some
degree of discretion may cause some
shareholders to decide to attend a
meeting and, as a result, incur costs
accordingly.
e. Exchange Act Rule 14a–12(a)(1)(i)
The proposed amendment to
Exchange Act Rule 14a–12(a)(1)(i) may
cause some persons to file legendreferenced participant information
earlier than they otherwise would or
delay the start of a solicitation due to
taking additional time to prepare and
file the participant information.167 To
the extent such persons file the
participant information sooner, they
may incur additional costs to accelerate
the preparation and filing of the
information. To the extent such persons
delay the start of a solicitation until
when ready to file the participant
information, they may lose time during
which the shareholders can consider the
164 We recently cited certain evidence that
indicated the average cost to a soliciting
shareholder engaged in a proxy contest is $368,000.
See Release No. 33–9046 in 22 above at 29073.
165 See Part IV.A.3 above.
166 See Part IV.A.4 above.
167 See Part IV.A.5 above.
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solicitation and, thereby, reduce the
likelihood of a successful solicitation.
D. Request for Comment
We request data to quantify the costs
and the value of the benefits described
above. We seek estimates of these costs
and benefits, as well as any costs and
benefits not already defined, that may
result from the adoption of these
proposed amendments. We also request
qualitative feedback on the nature of the
benefits and costs described above and
any benefits and costs we may have
overlooked.
V. Consideration of Impact on the
Economy, Burden on Competition and
Promotion of Efficiency, Competition
and Capital Formation
Section 23(a)(2) of the Exchange Act
also requires us,168 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.
Section 2(b) of the Securities Act,169
Section 3(f) of the Exchange Act,170 and
Section 2(c) of the Investment Company
Act require us,171 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
Regulation S–K are intended to provide
additional important information to
investors about corporate boards and
management structure; and the clarity of
executive compensation 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 disclosure amendments
would enhance our reporting
requirements. These proposed
amendments are designed to enhance
transparency of a company’s
compensation policies and its impact on
risk taking; director and nominee
qualifications; board leadership
structure; the potential conflicts of
168 15
U.S.C. 78w(a)(2).
U.S.C. 77b(b).
170 15 U.S.C. 78c(f).
171 15 U.S.C. 80a–2(c).
169 15
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compensation consultants; and to
provide investors with clearer and more
meaningful executive compensation
disclosure. The proposed amendments
would also accelerate the reporting of
the results of shareholder votes at a
company’s annual or special meeting.
The proposed amendments should
improve the ability of investors to make
informed voting and investment
decisions, and, therefore lead to
increased efficiency and
competitiveness of the U.S. capital
markets.
The proposed disclosure amendments
should also increase efficiency and
competitiveness of the U.S. capital
markets by providing investors with
additional information on risk
incentives and companies’ risk
management practices. This information
could be used by investors in allocating
capital across companies, toward
companies where the risk incentives
appear better aligned with an investor’s
appetite for risk. The new disclosure
may also encourage competition
amongst companies to demonstrate
superior risk management practices and
improved incentive structures for
management and employees of the
company.
The proposed disclosure amendments
also may affect competition among
compensation consultants. Additional
disclosure of consulting fees may
provide an informational advantage to
firms and increase competition, as firms
can use this information to bid for
additional services and potentially
negotiate lower rates.
The proposed amendments to our
rules governing the proxy solicitation
process are intended to provide clarity
and address issues that have arisen. We
believe these proposals would provide
certainty to soliciting parties and
facilitate communications with
shareholders. Additional clarity and
facilitated communications would
promote efficiency.
We request comment on whether the
proposed amendments would promote
efficiency, competition, and capital
formation. Commenters are requested to
provide empirical data and other factual
support for their view to the extent
possible.
VI. Small Business Regulatory
Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (SBREFA) 172 we solicit data to
determine whether the proposed rule
amendments constitute a ‘‘major’’ rule.
Under SBREFA, a rule is considered
172 5
‘‘major’’ where, if adopted, it results or
is likely to result in:
• An annual effect on the economy of
$100 million or more (either in the form
of an increase or a decrease);
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment or innovation.
Commenters should provide
empirical data on (a) the annual effect
on the economy; (b) any increase in
costs or prices for consumers or
individual industries; and (c) any effect
on competition, investment or
innovation. We request your comments
on the reasonableness of this estimate.
VII. Initial Regulatory Flexibility Act
Analysis
This Initial Regulatory Flexibility
Analysis (IRFA) has been prepared in
accordance with the Regulatory
Flexibility Act.173 It relates to proposed
revisions to the rules under the
Securities Act, Exchange Act and
Investment Company Act regarding
executive compensation and corporate
governance disclosures and the proxy
solicitation process.
A. Reasons for, and Objectives of, the
Proposed Action
These proposals are designed to
enhance the executive compensation
and corporate governance disclosures
provided by companies, and clarify and
address issues that have arisen in the
proxy solicitation process. Specifically,
in regard to disclosure, the proposals are
intended to enhance the transparency of
a company’s compensation policies and
its impact on risk taking; director and
nominee qualifications; board
leadership structure; the potential
conflicts of compensation consultants;
and to provide investors with clearer
and more meaningful executive
compensation disclosure. We are also
proposing amendments to our proxy
rules that would clarify the manner in
which they operate and to eliminate
potential obstacles to shareholder
communication.
B. Legal Basis
We are proposing the amendments
pursuant to Sections 3(b), 6, 7, 10 and
19(a) of the Securities Act; Sections 12,
13, 14(a), 15(d), and 23(a) of the
Exchange Act, and Sections 8, 20(a),
24(a), 30, and 38 of the Investment
Company Act.
U.S.C. 603.
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C. Small Entities Subject to the
Proposed Action
The proposed amendments would
affect some companies that are small
entities. The Regulatory Flexibility Act
defines ‘‘small entity’’ to mean ‘‘small
business,’’ ‘‘small organization,’’ or
‘‘small governmental jurisdiction.’’ 174
The Commission’s rules define ‘‘small
business’’ and ‘‘small organization’’ for
purposes of the Regulatory Flexibility
Act for each of the types of entities
regulated by the Commission. Securities
Act Rule 157 175 and Exchange Act Rule
0–10(a) 176 defines a company, other
than an investment company, to be a
‘‘small business’’ or ‘‘small
organization’’ if it had total assets of $5
million or less on the last day of its most
recent fiscal year. We estimate that there
are approximately 1,229 companies,
other than registered investment
companies, that may be considered
small entities. The proposed
amendments would affect small entities
that have a class of securities that are
registered under Section 12 of the
Exchange Act or that are required to file
reports under Section 15(d) of the
Exchange Act. In addition, 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. 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.177 We believe
that the proposals would affect small
entities that are investment companies.
We estimate that there are
approximately 212 investment
companies that may be considered small
entities.
D. Reporting, Recordkeeping, and Other
Compliance Requirements
The proposed disclosure amendments
are designed to enhance the
transparency of boards of directors,
provide investors with a better
understanding of the functions and
activities of boards, and to provide
investors with clearer and more
meaningful compensation disclosure.
These amendments would require small
entities that are operating companies to
provide:178
174 5
U.S.C. 601(6).
CFR 230.157.
176 17 CFR 240.0–10(a).
177 17 CFR 270.0–10(a).
178 The proposed requirements to discuss and
analyze a company’s overall compensation
175 17
U.S.C. 601.
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• Disclosure of the aggregate grant
date fair value of equity awards
computed in accordance with FAS
123R;
• Additional disclosure about
compensation consultants employed by
companies, including disclosure about
the full scope of services provided by
the consultants or its affiliates and the
related fees for such services; and
• Disclosure of the results of
shareholder votes on Form 8–K within
four business days after the end of the
meeting.
In addition, these amendments would
require small entities that are operating
companies or registered management
investment companies to provide:
• Disclosure of the qualifications of
directors and nominees for director, and
a brief discussion of the specific
experience, qualifications, attributes or
skills that qualify that person to serve as
a director for the company at that time,
and as a member of any committee that
the person serves on or is chosen to
serve on, in light of the company’s
business and structure;
• Added disclosure regarding certain
legal proceedings involving a company’s
directors, nominees for director and
executive officers; and
• Disclosure about a company’s board
leadership structure and the board’s role
in the risk management process.
The proposed proxy rule amendments
would provide certainty to soliciting
parties and facilitate communications
with shareholders and, as a result,
would not impose any reporting or
recordkeeping requirements on small
entities. These proposed amendments
would affect both large and small
entities equally. The proposed proxy
rule amendments set forth clear,
uniform standards to aid companies and
other soliciting parties in the process of
soliciting proxies under our rules.
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E. Duplicative, Overlapping, or
Conflicting Federal Rules
We believe the proposed amendments
would not duplicate, overlap, or conflict
with other Federal rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs
us to consider alternatives that would
accomplish our stated objectives, while
minimizing any significant adverse
impact on small entities. In connection
with the proposed disclosure
amendments, we considered the
following alternatives:
• Establishing different compliance or
reporting requirements or timetables
programs as they may have a material impact on
risk management practices would not apply to
smaller reporting companies.
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that take into account the resources
available to small entities;
• Clarifying, consolidating or
simplifying compliance and reporting
requirements under the rules for small
entities;
• Using performance rather than
design standards; and
• Exempting small entities from all or
part of the requirements.
Currently, small entities are subject to
some different compliance or reporting
requirements under Regulation S–K and
the proposed amendments would not
affect these requirements. Under
Regulation S–K, small entities are
required to provide abbreviated
compensation disclosure with respect to
the principal executive officer and two
most highly compensated executive
officers for the last two completed fiscal
years. Specifically, small entities may
provide the executive compensation
disclosure specified in Items 402(l)
through (r) of Regulation S–K, rather
than the corresponding disclosure
specified in Items 402(a) through (k) of
Regulation S–K. Items 402(l) through (r)
also do not require small entities to
provide CD&A or the Grants of PlanBased Awards Table. Therefore small
entities would not be required to
disclose their overall compensation
practices. Other than the proposed
amendments to the Grants of Plan-Based
Awards Table, the remaining proposed
disclosure requirements would apply to
small entities to the same extent as
larger issuers.
As noted above, the proposed
amendments to CD&A would not apply
to small entities. We are not proposing
to expand the existing alternative
reporting requirements under Item 402
of Regulation S–K, or establish
additional different compliance
requirements or an exemption from
coverage of the proposed amendments
for small entities. The proposed
amendments would provide investors
with greater transparency regarding
director and nominee qualifications;
board leadership structure and their role
in the risk management process;
potential conflicts of compensation
consultants; and voting results at annual
and special meetings. We do not believe
these disclosures will create a
significant new burden; we do,
however, believe uniform, comparable
disclosures across all companies will
help shareholders and the markets.
The proposed amendments would
clarify, consolidate and simplify the
reporting requirements for all public
companies including small entities. The
proposed amendments would require
clear and straightforward disclosure of
director and nominee qualifications,
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board leadership structure and the
potential conflicts of interest of
compensation consultants. We have
used design rather than performance
standards in connection with the
proposed amendments for two reasons.
First, based on our past experience, we
believe the proposed revisions would be
more useful to investors if there were
specific disclosure requirements. The
proposed disclosures are intended to
result in more comprehensive and clear
disclosure. Second, the specific
disclosure requirements in the proposed
amendments would promote consistent
disclosure among all companies. We
seek comment on whether we should
exempt small entities from any of the
proposed disclosures or scale the
proposed amendments to reflect the
characteristics of small entities and the
needs of their investors.
G. Solicitation of Comments
We encourage the submission of
comments with respect to any aspect of
this Initial Regulatory Flexibility
Analysis. In particular, we request
comments regarding:
• How the proposed amendments can
achieve their objective while lowering
the burden on smaller entities;
• The number of small entity
companies that may be affected by the
proposed amendments;
• The existence or nature of the
potential impact of the proposed
amendments on small entity companies
discussed in the analysis; and
• How to quantify the impact of the
proposed amendments.
Respondents 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 rule amendments are
adopted, and will be placed in the same
public file as comments on the proposed
amendments themselves.
VIII. Statutory Authority and Text of
the Proposed Amendments
The amendments contained in this
release are being proposed under the
authority set forth in Sections 3(b), 6, 7,
10, and 19(a) of the Securities Act;
Sections 12, 13, 14, 15(d) and 23(a) of
the Exchange Act; and Sections 8, 20(a),
24(a), 30 and 38 of the Investment
Company Act.
List of Subjects in 17 CFR Parts 229,
239, 240, 249, 270 and 279
Reporting and recordkeeping
requirements, Securities.
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Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Proposed Rules
Text of the Proposed Amendments
For the reasons set out in the
preamble, the Commission proposes to
amend title 17, chapter II, of the Code
of Federal Regulations as follows:
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
1. 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, 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.
*
*
*
*
*
2. Amend § 229.401 by:
a. Revising paragraph (e)(1);
b. In paragraph (e)(2) revising the
phrase ‘‘Indicate any other
directorships’’ to read ‘‘Indicate any
other directorships held, including any
other directorships held during the past
five years,’’;
c. In paragraph (f), introductory text,
revise the phrase ‘‘during the past five
years’’ to read ‘‘during the past ten
years’’.
The revisions read as follows:
§ 229.401 (Item 401) Directors, executive
officers, promoters and control persons.
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*
*
*
*
*
(e) Business experience—(1)
Background. Briefly describe the
business experience during the past five
years of each director, executive officer,
person nominated or chosen to become
a director or executive officer, and each
person named in answer to paragraph
(c) of Item 401, including: Each person’s
principal occupations and employment
during the past five years; the name and
principal business of any corporation or
other organization in which such
occupations and employment were
carried on; and whether such
corporation or organization is a parent,
subsidiary or other affiliate of the
registrant. In addition, for each director
or person nominated or chosen to
become a director, briefly discuss the
specific experience, qualifications,
attributes or skills that qualify that
person to serve as a director for the
registrant at the time that the disclosure
is made, and as a member of any
committee that the person serves on or
is chosen to serve on (if known), in light
of the registrant’s business and
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structure. If material, this disclosure
should cover more than the past five
years, and include information about
the person’s risk assessment skills,
particular areas of expertise, or other
relevant qualifications. When an
executive officer or person named in
response to paragraph (c) of Item 401
has been employed by the registrant or
a subsidiary of the registrant for less
than five years, a brief explanation shall
be included as to the nature of the
responsibility undertaken by the
individual in prior positions to provide
adequate disclosure of his or her prior
business experience. What is required is
information relating to the level of his
professional competence, which may
include, depending upon the
circumstances, such specific
information as the size of the operation
supervised.
*
*
*
*
*
3. Amend § 229.402 by:
a. Redesignating paragraph (b)(1)
introductory text and paragraphs
(b)(1)(i) through (vi) as paragraphs
(b)(1)(i) introductory text and (b)(1)(i)(A)
through (F);
b. Redesignating paragraph (b)(2)
introductory text and paragraphs
(b)(2)(i) through (xv) as paragraphs
(b)(1)(ii) introductory text and
(b)(1)(ii)(A) through paragraph
(b)(1)(ii)(O);
c. Redesignating the Instructions to
Item 402(b) as Instructions to Item
402(b)(1)(i) and (b)(1)(ii);
d. Adding a heading to newly
redesignated paragraph (b)(1)(i);
e. Revising the introductory text to
newly redesignated paragraph (b)(1)(ii);
f. Revising newly redesignated
Instructions to Item 402(b)(1)(i) and
(b)(1)(ii);
g. Adding new paragraph (b)(2);
h. Adding Instructions 1, 2, and 3 to
Item 402(b);
i. Revising Instruction 2 to Item
402(c)(2)(iii) and (iv), paragraphs
(c)(2)(v) and (c)(2)(vi), the Instructions
to Item (c)(2)(v) and (vi), and paragraph
(c)(2)(ix)(G);
j. Revising the Grants of Plan-Based
Awards Table in paragraph (d)(1);
k. Removing the period at the end of
paragraphs (d)(2)(iii) and (d)(2)(iv) and
adding a semicolon in its place;
l. Adding ‘‘and’’ at the end of
paragraph (d)(2)(vi), removing ‘‘and’’ at
the end of paragraph (d)(2)(vii) and
adding a period in its place;
m. Removing paragraph (d)(2)(viii)
and Instruction 7 to Item 402(d);
n. Revising paragraphs (k)(2)(iii) and
(k)(2)(iv) and the Instruction to Item
(k)(2)(iii) and (iv);
o. Revising paragraph (k)(2)(vii)(I) and
Instruction to Item 402(k);
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35105
p. Revising Instruction 2 to Item
402(n)(2)(iii) and (iv);
q. Revising paragraphs (n)(2)(v),
(n)(2)(vi) and the Instruction to Item
402(n)(2)(v) and (vi);
r. Revising paragraph (n)(2)(ix)(G);
s. Revising paragraphs (r)(2)(iii),
(r)(2)(iv) and (r)(2)(vii)(I) before the
Instruction, and Instruction to Item
402(r).
The revisions and additions read as
follows:
§ 229.402
(Item 402) Compensation.
*
*
*
*
*
(b) Compensation discussion and
analysis. (1)(i) Compensation discussion
and analysis for the named executive
officers. * * *
*
*
*
*
*
(ii) While the material information to
be disclosed under Compensation
Discussion and Analysis for the Named
Executive Officers will vary depending
upon the facts and circumstances,
examples of such information may
include, in a given case, among other
things, the following:
*
*
*
*
*
Instruction 1 to Item 402(b)(1)(i) and
(b)(1)(ii). The purpose of the
Compensation Discussion and Analysis
for the Named Executive Officers 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.
Instruction 2 to Item 402(b)(1)(i) and
(b)(1)(ii). The Compensation Discussion
and Analysis for the Named Executive
Officers should be of the information
contained in the tables and otherwise
disclosed pursuant to this Item. It
should also cover actions regarding
executive compensation that were taken
after the registrant’s last fiscal year’s
end. Actions that should be addressed
might include, as examples only, the
adoption or implementation of new or
modified programs and policies or
specific decisions that were made or
steps that were taken that could affect
a fair understanding of the named
executive officer’s compensation for the
last fiscal year. Moreover, in some
situations it may be necessary to discuss
prior years in order to give context to
the disclosure provided.
(2) Compensation discussion and
analysis of the registrant’s overall
compensation program as it relates to
the registrant’s risk management. To the
extent that risks arising from the
registrant’s compensation policies and
overall actual compensation practices
for employees generally may have a
material effect on the registrant, discuss
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the registrant’s policies or practices of
compensating its employees, including
non-executive officers, as they relate to
risk management practices and/or risktaking incentives. While the situations
requiring disclosure will vary
depending on the particular registrant
and compensation policies, situations
that may trigger disclosure include,
among others, compensation policies:
At a business unit of the company that
carries a significant portion of the
registrant’s risk profile; at a business
unit with compensation structured
significantly differently than other units
within the registrant; at business units
that are significantly more profitable
than others within the registrant; at
business units where compensation
expense is a significant percentage of
the unit’s revenues; and that vary
significantly from the overall risk and
reward structure of the registrant, such
as when bonuses are awarded upon
accomplishment of a task, while the
income and risk to the registrant from
the task extend over a significantly
longer period of time. The purpose of
this paragraph (b)(2) is to provide
investors material information
concerning how the registrant
compensates and incentivizes its
employees that may create risk. While
the information to be disclosed pursuant
to this paragraph (b)(2) will vary
depending upon the nature of the
registrant’s business and the
compensation approach, the following
are examples of the issues that the
registrant may need to address for the
business units or employees discussed:
(i) The general design philosophy of
the registrant’s compensation policies
for employees whose behavior would be
most impacted by the incentives
established by the policies, as such
policies relate to or affect risk taking by
employees on behalf of the registrant,
and the manner of its implementation;
(ii) The registrant’s risk assessment or
incentive considerations, if any, in
structuring compensation policies or in
awarding and paying compensation;
(iii) How the registrant’s
compensation policies relate to the
realization of risks resulting from the
actions of employees in both the short
term and the long term, such as through
policies requiring claw backs or
imposing holding periods;
(iv) The registrant’s policies regarding
adjustments to its compensation
policies to address changes in its risk
profile;
(v) Material adjustments the company
has made to its compensation policies
or practices as a result of changes in risk
profile; and
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(vi) The extent to which the registrant
monitors its compensation policies to
determine whether its risk management
objectives are being met with respect to
incentivizing its employees.
Instruction 1 to Item 402(b). The
Compensation Discussion and Analyses
provided pursuant to paragraph (b)
should focus on the material principles
underlying the registrant’s
compensation policies and decisions
and the most important factors relevant
to analysis of those policies and
decisions. The Compensation
Discussion and Analyses shall reflect
the individual circumstances of the
registrant and shall avoid boilerplate
language and repetition of the more
detailed information set forth in the
tables and narrative disclosures that
follow.
Instruction 2 to Item 402(b).
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 other factors or criteria
involving confidential trade secrets or
confidential commercial or financial
information, the disclosure of which
would result in competitive harm for
the registrant. The standard to use when
determining whether disclosure would
cause competitive harm for the
registrant is the same standard that
would apply when a registrant requests
confidential treatment of confidential
trade secrets or confidential commercial
or financial information pursuant to
Securities Act Rule 406 (17 CFR
230.406) and Exchange Act Rule 24b–2
(17 CFR 240.24b–2), each of which
incorporates the criteria for nondisclosure when relying upon
Exemption 4 of the Freedom of
Information Act (5 U.S.C. 552(b)(4)) and
Rule 80(b)(4) (17 CFR 200.80(b)(4))
thereunder. A registrant is not required
to seek confidential treatment under the
procedures in Securities Act Rule 406
and Exchange Act Rule 24b–2 if it
determines that the disclosure would
cause competitive harm in reliance on
this instruction; however, in that case,
the registrant must discuss how difficult
it will be for the executive or how likely
it will be for the registrant to achieve the
undisclosed target levels or other
factors.
Instruction 3 to Item 402(b).
Disclosure of target levels that are nonGAAP financial measures will not be
subject to Regulation G (17 CFR 244.100
through 244.102) and Item 10(e)
(§ 229.10(e)); however, disclosure must
be provided as to how the number is
calculated from the registrant’s audited
financial statements.
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(c) * * *
(2) * * *
Instructions to Item 402(c)(2)(iii) and
(iv).
*
*
*
*
*
2. Registrants need not include in the
salary column (column (c)) or bonus
column (column (d)) any amount of
salary or bonus forgone at the election
of a named executive officer pursuant to
a registrant’s program under which
stock, equity-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 (e)); option awards (column
(f)); all other compensation (column
(i))), or, if made pursuant to a nonequity incentive plan and therefore not
reportable in the Summary
Compensation Table when granted, a
footnote must be added to the salary or
bonus column so disclosing and
referring to the Grants of Plan-Based
Awards Table (required by paragraph
(d) of this Item) where the award is
reported.
(v) For awards of stock, the aggregate
grant date fair value computed in
accordance with FAS 123R (column (e));
(vi) For awards of options, with or
without tandem SARs (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R (column (f));
Instruction 1 to Item 402(c)(2)(v) and
(vi). For awards reported in columns (e)
and (f), 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.
Instruction 2 to Item 402(c)(2)(v) and
(vi). If at any time during the last
completed fiscal year, the registrant has
adjusted or amended the exercise price
of 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 registrant
shall include, as awards required to be
reported in column (f), the incremental
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fair value, computed as of the repricing
or modification date in accordance with
FAS 123R, with respect to that repriced
or modified award.
*
*
*
*
*
(ix) * * *
(G) The dollar value of any dividends
or other earnings paid on stock or
option awards, when those amounts
were not factored into the grant date fair
value required to be reported for the
stock or option award in columns (e) or
(f); and
*
*
*
*
*
(d) * * *
(1) * * *
GRANTS OF PLAN-BASED AWARDS
Estimated future payouts under nonequity incentive plan awards
Threshold
($)
Name
Estimated future payouts under equity
incentive plan awards
Target ($)
Maximum
($)
Threshold
(#)
Target (#)
Maximum
(#)
(c)
(d)
(e)
(f)
(g)
(h)
Grant date
(a)
(b)
All other
stock
awards:
number of
shares of
stock or
units (#)
All other
option
awards:
number of
securities
underlying
options (#)
Exercise or
base price
of option
awards
($/Sh)
(i)
(j)
(k)
PEO
PFO
A
B
C
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*
*
*
*
*
(k) * * *
(2) * * *
(iii) For awards of stock, the aggregate
grant date fair value computed in
accordance with FAS 123R (column (c));
(iv) For awards of stock options, with
or without tandem SARs (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R (column (d));
Instruction to Item 402(k)(2)(iii) and
(iv). For each director, disclose by
footnote to the appropriate column, the
aggregate number of stock awards and
the aggregate number of option awards
outstanding at fiscal year end.
*
*
*
*
*
(vii) * * *
(I) The dollar value of any dividends
or other earnings paid on stock or
option awards, when those amounts
were not factored into the grant date fair
value required to be reported for the
stock or option award in column (c) or
(d); and
*
*
*
*
*
Instruction to Item 402(k). In addition
to the Instructions to paragraph
(k)(2)(vii) of this Item, the following
apply equally to paragraph (k) of this
Item: Instructions 2 and 4 to paragraph
(c) of this Item; Instructions to
paragraphs (c)(2)(iii) and (iv) of this
Item; Instructions to paragraphs (c)(2)(v)
and (vi) of this Item; Instructions to
paragraph (c)(2)(vii) of this Item; and
Instructions to paragraph (c)(2)(viii) 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 (k)
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of this Item that correspond to
analogous disclosures provided for in
paragraph (c) of this Item to which they
refer.
*
*
*
*
*
(n) * * *
(2) * * *
Instructions to Item 402(n)(2)(iii) and
(n)(2)(iv). 1. * * *
2. Smaller reporting companies need
not include in the salary column
(column (c)) or bonus column (column
(d)) any amount of salary or bonus
forgone at the election of a named
executive officer pursuant to a smaller
reporting company’s program under
which stock, equity-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 (e)); option awards (column
(f)); all other compensation (column
(i))), or, if made pursuant to a nonequity incentive plan and therefore not
reportable in the Summary
Compensation Table when granted, 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 (o) of this Item)
where the material terms of the award
are reported.
(v) For awards of stock, the aggregate
grant date fair value computed in
accordance with FAS 123R (column (e));
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(vi) For awards of options, with or
without tandem SARs (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R (column (f));
Instruction 1 to Item 402(n)(2)(v) and
(n)(2)(vi). For awards reported in
columns (e) and (f), include a footnote
disclosing all assumptions made in the
valuation by reference to a discussion of
those assumptions in the smaller
reporting company’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.
Instruction 2 to Item 402(n)(2)(v) and
(n)(2)(vi). If at any time during the last
completed fiscal year, the smaller
reporting company has adjusted or
amended the exercise price of 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 smaller
reporting company shall include, as
awards required to be reported in
column (f), the incremental fair value,
computed as of the repricing or
modification date in accordance with
FAS 123R, with respect to that repriced
or modified award.
*
*
*
*
*
(ix) * * *
(G) The dollar value of any dividends
or other earnings paid on stock or
option awards, when those amounts
were not factored into the grant date fair
value required to be reported for the
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stock or option award in column (e) or
(f); and
*
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(r) * * *
(2) * * *
(iii) For awards of stock, the aggregate
grant date fair value computed in
accordance with FAS 123R (column (c));
(iv) For awards of options, with or
without tandem SARs (including
awards that subsequently have been
transferred), the aggregate grant date fair
value computed in accordance with
FAS 123R (column (d));
*
*
*
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(vii) * * *
(I) The dollar value of any dividends
or other earnings paid on stock or
option awards, when those amounts
were not factored into the grant date fair
value required to be reported for the
stock or option award in column (c) or
(d); and
*
*
*
*
*
Instruction to Item 402(r). In addition
to the Instruction to paragraph (r)(2)(vii)
of this Item, the following apply equally
to paragraph (r) of this Item: Instructions
2 and 4 to paragraph (n) of this Item; the
Instructions to paragraphs (n)(2)(iii) and
(iv) of this Item; the Instructions to
paragraphs (n)(2)(v) and (vi) of this Item;
the Instructions to paragraph (n)(2)(vii)
of this Item; the Instruction to paragraph
(n)(2)(viii) of this Item; the Instructions
to paragraph (n)(2)(ix) of this Item; and
paragraph (o)(7) 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 (r) of this Item that
correspond to analogous disclosures
provided for in paragraph (n) of this
Item to which they refer.
*
*
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*
4. Amend § 229.407 by revising
paragraph (e)(3)(iii) and adding
paragraph (h) before the Instructions to
Item 407 to read as follows:
§ 229.407 (Item 407) Corporate
governance.
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(e) * * *
(3) * * *
(iii) Any role of compensation
consultants in determining or
recommending the amount or form of
executive and director compensation
(other than any role limited to
consulting on any broad-based plan that
does not discriminate in scope, terms, or
operation, in favor of executive officers
or directors of the registrant, and that is
available generally to all salaried
employees) during the registrant’s last
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completed fiscal year, identifying such
consultants, stating whether such
consultants were engaged directly by
the compensation committee (or persons
performing the equivalent functions) or
any other person, describing the nature
and scope of their assignment, and the
material elements of the instructions or
directions given to the consultants with
respect to the performance of their
duties under the engagement. If any
compensation consultants or their
affiliates played a role in determining or
recommending the amount or form of
executive and director compensation
and they also provided additional
services to the registrant or its affiliates
during the registrant’s last completed
fiscal year (including consulting on any
broad-based plan that does not
discriminate in scope, terms, or
operation, in favor of executive officers
or directors of the registrant, and that is
available generally to all salaried
employees), then disclose the nature
and the extent of all additional services
provided, as well as the aggregate fees
for determining or recommending the
amount or form of executive and
director compensation and the aggregate
fees for such additional services.
Disclose whether the decision to engage
the compensation consultant or their
affiliates for these other services was
made, subject to screening, or
recommended, by management, and
whether the compensation committee or
the board approved such other services
of the compensation consultants or their
affiliates.
*
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*
*
(h) Company leadership structure.
Briefly describe the registrant’s
leadership structure, such as whether
the same person serves as both principal
executive officer and chairman of the
board, or whether two individuals serve
in those positions, and, in the case of a
registrant that is an investment
company, whether the chairman of the
board is an ‘‘interested person’’ of the
registrant as defined in section 2(a)(19)
of the Investment Company Act. If one
person serves as both principal
executive officer and chairman of the
board, or if the chairman of the board
of a registrant that is an investment
company is an ‘‘interested person’’ of
the registrant, disclose whether the
registrant has a lead independent
director and what specific role the lead
independent director plays in the
leadership of the registrant. This
disclosure should indicate why the
registrant has determined that its
leadership structure is appropriate given
the specific characteristics or
circumstances of the registrant. In
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addition, disclose the extent of the
board’s role in the registrant’s risk
management and the effect that this has
on the company’s leadership structure.
*
*
*
*
*
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
5. 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, 78mm, 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.
*
*
*
*
*
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
6. 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, 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.
*
*
*
*
*
7. Amend § 240.14a–2 by revising
paragraph (b)(1) introductory text; and
paragraph (b)(1)(ix) to read as follows:
§ 240.14a–2 Solicitations to which
§ 240.14a–3 to § 240.14a–15 apply.
*
*
*
*
*
(b) * * *
(1) Any solicitation by or on behalf of
any person who does not, at any time
during such solicitation, seek directly or
indirectly, either on its own or another’s
behalf, the power to act as proxy for a
security holder and does not furnish or
otherwise request, or act on behalf of a
person who furnishes or requests, a
form of revocation, abstention, consent
or authorization. Provided, however,
that for purposes of this paragraph
(b)(1), the term ‘‘form of revocation’’
does not include an unmarked duplicate
of a form of proxy that the registrant
provides to security holders if the
person who furnishes such unmarked
duplicate requests that it be returned
directly to the registrant, and provided
further that the exemption set forth in
this paragraph shall not apply to:
*
*
*
*
*
(ix) Any person, whether or not a
security holder of the registrant who,
because of a substantial interest in the
subject matter of the solicitation, is
likely to receive a benefit from a
successful solicitation other than a
benefit:
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(A) Realized as a security holder of
the registrant that would be shared pro
rata by all other holders of the same
class of securities; or
(B) Arising from the person’s
employment with the registrant; and
*
*
*
*
*
8. Amend § 240.14a–4 by revising
paragraphs (d)(4) and (e) to read as
follows:
§ 240.14a–4
Requirements as to proxy.
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(d) * * *
(4) To consent to or authorize any
action other than the action proposed to
be taken in the proxy statement, or
matters referred to in paragraph (c) of
this section. A person shall not be
deemed to be a bona fide nominee and
the person shall not be named as such
unless the person has consented to
being named in the proxy statement and
to serve if elected. Provided, however,
that nothing in this § 240.14a–4 shall
prevent any person soliciting in support
of nominees who, if elected, would
constitute a minority of the board of
directors, from seeking authority to vote
for nominees named in the registrant’s
or one or more other persons’ proxy
statements, so long as the soliciting
party:
(i) Seeks authority to vote in the
aggregate for the number of director
positions then subject to election;
(ii) Represents that it will vote for all
the nominees named in such other
proxy statements, other than those
nominees specified by the soliciting
party;
(iii) Provides the security holder an
opportunity to withhold authority with
respect to any other nominee named in
such other proxy statements by writing
the name of that nominee on the form
of proxy;
(iv) States on the form of proxy and
in the proxy statement that there is no
assurance that the nominees named in
such other proxy statements will serve
if elected with any of the soliciting
party’s nominees; and
(v) If seeking authority to vote for
nominees named in one or more other
non-registrant persons’ proxy
statements, represents in the proxy
statement that:
(A) It has not agreed and will not
agree to act, directly or indirectly, as a
group or otherwise engage in any
activities that would be deemed to cause
the formation of a ‘‘group’’ as
determined under section 13(d)(3) of the
Exchange Act (15 U.S.C. 78m(d)(3)) and
in Regulation 13D–G (§§ 240.13d–1
through 240.13d–102) with any such
other non-registrant person or persons;
and
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(B) It has not acted and otherwise will
not act as a ‘‘participant,’’ as defined in
Schedule 14A (§ 240.14a–101), in any
solicitation by any such other nonregistrant person or persons.
(e) The proxy statement or form of
proxy shall provide, subject to
objectively determinable reasonable
specified conditions, that the shares
represented by the proxy will be voted
and that where the person solicited
specifies by means of a ballot provided
pursuant to paragraph (b) of this section
a choice with respect to any matter to
be acted upon, the shares will be voted
in accordance with the specifications so
made.
*
*
*
*
*
9. Amend § 240.14a–12 by revising
paragraph (a)(1)(i) to read as follows:
§ 240.14a–12 Solicitation before furnishing
a proxy statement.
(a) * * *
(1) * * *
(i) The identity of the participants in
the solicitation (as defined in
Instruction 3 to Item 4 of Schedule 14A
(§ 240.14a–101)) and a description of
their direct or indirect interests, by
security holdings or otherwise, or, if
that information previously has been
filed either as part of a proxy statement
or other soliciting materials under a
cover page in the form set forth in
Schedule 14A (§ 240.14a–101) in
connection with the solicitation, a
prominent legend in clear, plain
language advising security holders
where they can obtain that filed
information; and
*
*
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*
10. Amend § 240.14a–101 by:
a. Revising paragraph (b) of Item 7;
b. In Item 22:
i. Redesignating paragraph (b)(3) as
paragraph (b)(3)(ii);
ii. Adding new paragraph (b)(3)(i);
and
iii. Redesignating Instruction to
paragraph (b)(3) as Instruction to
paragraph (b)(3)(ii);
iv. Redesignating paragraph (b)(4),
introductory text, and paragraph (b)(4)(i)
through paragraph (b)(4)(iv) as new
paragraph (b)(4)(i), introductory text,
and paragraph (b)(4)(i)(A) through
paragraph (b)(4)(i)(D);
v. Adding new paragraph (b)(4)(ii);
and
vi. Revising paragraph (b)(11).
The revisions and additions read as
follows:
§ 240.14a–101 Schedule 14A. Information
required in proxy statement.
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*
Item 7. Directors and Executive Officers.
*
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35109
(b) The information required by Items
401, 404(a) and (b), 405 and 407(d)(4),
(d)(5) and (h) of Regulation S–K
(§ 229.401, § 229.404(a) and (b),
§ 229.405 and § 229.407(d)(4), (d)(5) and
(h) of this chapter).
*
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*
*
Item 22. Information required in
investment company proxy statement.
*
*
*
*
*
(b) Election of Directors. * * *
(3)(i) For each director or nominee for
election as director, briefly discuss the
specific experience, qualifications,
attributes, or skills that qualify that
person to serve as a director for the
Fund at the time that the disclosure is
made, and as a member of any
committee that the person serves on or
is chosen to serve on (if known), in light
of the Fund’s business and structure. If
material, this disclosure should cover
more than the past five years, and
include information about the person’s
risk assessment skills, particular areas of
expertise, or other relevant
qualifications.
*
*
*
*
*
(4) * * *
(ii) Unless disclosed in the table
required by paragraph (b)(1) of this Item
or in response to paragraph (b)(4)(i) of
this Item, indicate any directorships
held during the past five years by each
director or nominee for election as
director in any company with a class of
securities registered pursuant to section
12 of the Exchange Act (15 U.S.C. 78l)
or subject to the requirements of section
15(d) of the Exchange Act (15 U.S.C.
78o(d)) or any company registered as an
investment company under the
Investment Company Act of 1940 (15
U.S.C. 80a–1 et seq.), as amended, and
name the companies in which the
directorships were held.
*
*
*
*
*
(11) Provide in tabular form, to the
extent practicable, the information
required by Items 401(f) and (g), 404(a),
405, and 407(h) of Regulation S–K
(§§ 229.401(f) and (g), 229.404(a),
229.405, and 229.407(h) of this chapter).
Instruction to Item 22(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).
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PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
11. 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.
*
*
*
*
*
12. Amend Form 8–K (referenced in
§ 249.308) by adding Item 5.07 under
the caption ‘‘Information to Be Included
in the Report’’ after the General
Instructions 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
*
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*
*
General Instructions
*
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*
*
*
Information To Be Included in the
Report
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Item 5.07 Submission of Matters to a
Vote of Security Holders
If any matter was submitted to a vote
of security holders, through the
solicitation of proxies or otherwise,
furnish the following information:
(a) The date of the meeting and
whether it was an annual or special
meeting.
(b) If the meeting involved the
election of directors, the name of each
director elected at the meeting and the
name of each other director whose term
of office as a director continued after the
meeting.
(c) A brief description of each other
matter voted upon at the meeting and
state the number of votes cast for,
against or withheld, as well as the
number of abstentions and broker nonvotes as to each such matter, including
a separate tabulation with respect to
each nominee for office.
(d) A description of the terms of any
settlement between the registrant and
any other participant (as defined in
Instruction 3 to Item 4 of Schedule 14A
(17 CFR 240.14a–101)) terminating any
solicitation subject to Rule 14a–12(c),
including the cost or anticipated cost to
the registrant.
Instruction 1 to Item 5.07. The four
business day period for reporting the
event under this Item 5.07 shall begin to
run on the day on which the meeting
ended. If the matter voted upon at the
meeting relates to a contested election of
directors and the information called for
by this Item is not definitively
determined at the end of the meeting,
the registrant shall disclose on Form 8–
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K under this Item 5.07 the preliminary
voting results within four business days
after the preliminary voting results are
determined; provided that in such an
event, the registrant shall file an
amended report on Form 8–K under this
Item 5.07 within four business days
after the final voting results are
certified.
Instruction 2 to Item 5.07. If any
matter has been submitted to a vote of
security holders otherwise than at a
meeting of such security holders,
corresponding information with respect
to such submission shall be furnished.
The solicitation of any authorization or
consent (other than a proxy to vote at a
stockholders’ meeting) with respect to
any matter shall be deemed a
submission of such matter to a vote of
security holders within the meaning of
this item.
Instruction 3 to Item 5.07. Paragraph
(a) need be answered only if paragraph
(b) or (c) is required to be answered.
Instruction 4 to Item 5.07. Paragraph
(b) need not be answered if (i) proxies
for the meeting were solicited pursuant
to Regulation 14A under the Act, (ii)
there was no solicitation in opposition
to the management’s nominees as listed
in the proxy statement, and (iii) all of
such nominees were elected. If the
registrant did not solicit proxies and the
board of directors as previously reported
to the Commission was re-elected in its
entirety, a statement to that effect in
answer to paragraph (b) will suffice as
an answer thereto.
Instruction 5 to Item 5.07. Paragraph
(c) must be answered for all matters
voted upon at the meeting, including
both contested and uncontested
elections of directors.
Instruction 6 to Item 5.07. If the
registrant has furnished to its security
holders proxy soliciting material
containing the information called for by
paragraph (d), the paragraph may be
answered by reference to the
information contained in such material.
Instruction 7 to Item 5.07. If the
registrant has published a report
containing all the information called for
by this item, the item may be answered
by a reference to the information
contained in such report.
*
*
*
*
*
Note: The text of Form 10–Q does not, and
this amendment will not, appear in the Code
of Federal Regulations.
13. Amend Form 10–Q (referenced in
§ 249.308a) by removing Item 4 in Part
II—Other Information, and
redesignating Items 5 and 6 as Items 4
and 5.
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Note: The text of Form 10–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
14. Amend Form 10–K (referenced in
§ 249.310) by removing Item 4 in Part I,
and redesignating Items 5 through 15 as
Items 4 through 14.
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
PART 274—FORMS PRESCRIBED
UNDER THE INVESTMENT COMPANY
ACT OF 1940
15. 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.
*
*
*
*
*
16. Form N–1A (referenced in
§§ 239.15A and 274.11A), Item 17 is
amended by:
a. Revising the heading to paragraph
(b);
b. Revising paragraph (b)(1);
c. Redesignating paragraph (b)(3),
introductory text, and paragraph (b)(3)(i)
through paragraph (b)(3)(iv) as
paragraph (b)(3)(i), introductory text,
and paragraph (b)(3)(i)(A) through
paragraph (b)(3)(i)(D);
d. Adding new paragraph (b)(3)(ii);
and
e. Adding paragraph (b)(10).
The revisions and additions read as
follows:
Note: The text of Form N–1A does not, and
these amendments will not, appear in the
Code of Federal Regulations.
Form N–1A
*
*
*
*
*
Item 17. Management of the fund.
*
*
*
*
*
(b) Leadership Structure and Board of
Directors.
(1) Briefly describe the Fund’s
leadership structure, including the
responsibilities of the board of directors
with respect to the Fund’s management
and whether the chairman of the board
is an interested person of the Fund. If
the chairman of the board is an
interested person of the Fund, disclose
whether the Fund has a lead
independent director and what specific
role the lead independent director plays
in the leadership of the Fund. This
disclosure should indicate why the
Fund has determined that its leadership
structure is appropriate given the
specific characteristics or circumstances
of the Fund. In addition, disclose the
extent of the board’s role in the Fund’s
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risk management and the effect that this
has on the Fund’s leadership structure.
*
*
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*
*
(3) * * *
(ii) Unless disclosed in the table
required by paragraph (a)(1) of this Item
17 or in response to paragraph (b)(3)(i)
of this Item 17, indicate any
directorships held during the past five
years by each director in any company
with a class of securities registered
pursuant to section 12 of the Securities
Exchange Act (15 U.S.C. 78l) or subject
to the requirements of section 15(d) of
the Securities Exchange Act (15 U.S.C.
78o(d)) or any company registered as an
investment company under the
Investment Company Act, and name the
companies in which the directorships
were held.
*
*
*
*
*
(10) For each director, briefly discuss
the specific experience, qualifications,
attributes, or skills that qualify that
person to serve as a director for the
Fund at the time that the disclosure is
made, and as a member of any
committee that the person serves on, in
light of the Fund’s business and
structure. If material, this disclosure
should cover more than the past five
years, and include information about
the person’s risk assessment skills,
particular areas of expertise, or other
relevant qualifications.
*
*
*
*
*
17. Form N–2 (referenced in §§ 239.14
and 274.11a–1), Item 18 is amended by:
a. Redesignating paragraph 5,
introductory text, and paragraph 5(a)
through paragraph 5(d) as paragraph
5(b), introductory text, and paragraph
5(b)(1) through paragraph 5(b)(4);
b. Adding new paragraph 5(a);
c. Redesignating paragraph 6,
introductory text, and paragraph 6(a)
through paragraph 6(d) as paragraph
6(a), introductory text, and paragraph
6(a)(1) through paragraph 6(a)(4);
d. Adding new paragraph 6(b); and
e. Adding paragraph 17.
The additions read as follows:
Note: The text of Form N–2 does not, and
these amendments will not, appear in the
Code of Federal Regulations.
Form N–2
pwalker on DSK8KYBLC1PROD with PROPOSALS2
*
*
*
*
*
Item 18. Management
*
*
*
*
*
5.(a) Briefly describe the Registrant’s
leadership structure, including whether
the chairman of the board is an
interested person of the Registrant, as
defined in section 2(a)(19) of the 1940
Act (15 U.S.C. 80a–2(a)(19)). If the
chairman of the board is an interested
VerDate Nov<24>2008
18:32 Jul 16, 2009
Jkt 217001
person of the Registrant, disclose
whether the Registrant has a lead
independent director and what specific
role the lead independent director plays
in the leadership of the Registrant. This
disclosure should indicate why the
Registrant has determined that its
leadership structure is appropriate given
the specific characteristics or
circumstances of the Registrant. In
addition, disclose the extent of the
board’s role in the Registrant’s risk
management and the effect that this has
on the Registrant’s leadership structure.
*
*
*
*
*
6. * * *
(b) Unless disclosed in the table
required by paragraph 1 of this Item 18
or in response to paragraph 6(a) of this
Item 18, indicate any directorships held
during the past five years by each
director in any company with a class of
securities registered pursuant to section
12 of the Exchange Act (15 U.S.C. 78l)
or subject to the requirements of section
15(d) of the Exchange Act (15 U.S.C.
78o(d)) or any company registered as an
investment company under the 1940
Act, and name the companies in which
the directorships were held.
*
*
*
*
*
17. For each director, briefly discuss
the specific experience, qualifications,
attributes, or skills that qualify that
person to serve as a director for the
Registrant at the time that the disclosure
is made, and as a member of any
committee that the person serves on, in
light of the Registrant’s business and
structure. If material, this disclosure
should cover more than the past five
years, and include information about
the person’s risk assessment skills,
particular areas of expertise, or other
relevant qualifications.
*
*
*
*
*
18. Form N–3 (referenced in
§§ 239.17a and 274.11b), Item 20 is
amended by:
a. Redesignating paragraph (d),
introductory text, and paragraph (d)(i)
through paragraph (d)(iv) as paragraph
(d)(ii), introductory text, and paragraph
(d)(ii)(A) through paragraph (d)(ii)(D);
b. Adding new paragraph (d)(i);
c. Redesignating paragraph (e),
introductory text, and paragraph (e)(i)
through paragraph (e)(iv) as paragraph
(e)(i), introductory text, and paragraph
(e)(i)(A) through paragraph (e)(i)(D);
e. Adding new paragraph (e)(ii); and
f. Adding paragraph (o).
The additions read as follows:
Note: The text of Form N–3 does not, and
these amendments will not, appear in the
Code of Federal Regulations.
PO 00000
Frm 00037
Fmt 4701
Sfmt 4702
Form N–3
*
*
*
*
*
Item 20. Management
*
*
*
*
*
(d)(i) Briefly describe the Registrant’s
leadership structure, including whether
the chairman of the board is an
interested person of the Registrant, as
defined in Section 2(a)(19) of the 1940
Act (15 U.S.C. 80a–2(a)(19)) and the
rules thereunder. If the chairman of the
board is an interested person of the
Registrant, disclose whether the
Registrant has a lead independent
director and what specific role the lead
independent director plays in the
leadership of the Registrant. This
disclosure should indicate why the
Registrant has determined that its
leadership structure is appropriate given
the specific characteristics or
circumstances of the Registrant. In
addition, disclose the extent of the
board’s role in the Registrant’s risk
management and the effect that this has
on the Registrant’s leadership structure.
(e) * * *
(ii) Unless disclosed in the table
required by paragraph (a) of this Item 20
or in response to paragraph (e)(i) of this
Item 20, indicate any directorships held
during the past five years by each
director in any company with a class of
securities registered pursuant to section
12 of the Exchange Act (15 U.S.C. 78l)
or subject to the requirements of section
15(d) of the Exchange Act (15 U.S.C.
78o(d)) or any company registered as an
investment company under the 1940
Act, and name the companies in which
the directorships were held.
*
*
*
*
*
(o) For each director, briefly discuss
the specific experience, qualifications,
attributes, or skills that qualify that
person to serve as a director for the
Registrant at the time that the disclosure
is made, and as a member of any
committee that the person serves on, in
light of the Registrant’s business and
structure. If material, this disclosure
should cover more than the past five
years, and include information about
the person’s risk assessment skills,
particular areas of expertise, or other
relevant qualifications.
*
*
*
*
*
By the Commission.
Dated: July 10, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–16764 Filed 7–16–09; 8:45 am]
BILLING CODE 8010–01–P
E:\FR\FM\17JYP2.SGM
17JYP2
]]>Agencies
[Federal Register Volume 74, Number 136 (Friday, July 17, 2009)]
[Proposed Rules]
[Pages 35076-35111]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-16764]
[[Page 35075]]
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Part V
Securities and Exchange Commission
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17 CFR Parts 229, 239, 240, 249, 270 and 274
Proxy Disclosure and Solicitation Enhancements; Proposed Rule
Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 /
Proposed Rules
[[Page 35076]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 239, 240, 249, 270 and 274
[Release Nos. 33-9052; 34-60280; IC-28817; File No. S7-13-09]
RIN 3235-AK28
Proxy Disclosure and Solicitation Enhancements
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing amendments to our rules to enhance the
compensation and corporate governance disclosures registrants are
required to make about: Their overall compensation policies and their
impact on risk taking; stock and option awards of executives and
directors; director and nominee qualifications and legal proceedings;
company leadership structure; the board's role in the risk management
process; and potential conflicts of interest of compensation
consultants that advise companies. The proposed amendments to our
disclosure rules would be applicable to proxy and information
statements, annual reports and registration statements under the
Securities Exchange Act of 1934, and registration statements under the
Securities Act of 1933 as well as the Investment Company Act of 1940.
We are also proposing amendments to transfer from Forms 10-Q and 10-K
to Form 8-K the requirement to disclose shareholder voting results. In
addition, we are proposing amendments to our proxy rules to clarify the
manner in which they operate and address issues that have arisen in the
proxy solicitation process.
DATES: Comments should be received on or before September 15, 2009.
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);
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-13-09 on the subject line; or
Use the Federal Rulemaking ePortal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-13-09. 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, on official business days between the hours of 10 a.m. and 3
p.m. 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 available publicly.
FOR FURTHER INFORMATION CONTACT: N. Sean Harrison, Special Counsel, at
(202) 551-3430 or Anne Krauskopf, Senior Special Counsel, at (202) 551-
3500, in the Division of Corporation Finance; or with respect to
questions regarding the proposed proxy solicitation amendments, Mark W.
Green, Senior Special Counsel, or Nicholas P. Panos, Senior Special
Counsel at (202) 551-3440, in the Division of Corporation Finance; or
with respect to questions regarding investment companies, Marc Oorloff
Sharma, Senior Counsel, Division of Investment Management, at (202)
551-6784, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Items 401,\1\
402,\2\ and 407 \3\ of Regulation S-K; \4\ Rules 14a-2,\5\ 14a-4,\6\
and 14a-12;\7\ Schedule 14A \8\ and Forms 8-K,\9\ 10-Q,\10\ and 10-K
\11\ under the Securities Exchange Act of 1934 (``Exchange Act''); \12\
and Forms N-1A,\13\ N-2,\14\ and N-3,\15\ registration forms used by
management investment companies to register under the Investment
Company Act of 1940 (``Investment Company Act'') \16\ and to offer
their securities under the Securities Act of 1933 (``Securities
Act'').\17\
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\1\ 17 CFR 229.401.
\2\ 17 CFR 229.402.
\3\ 17 CFR 229.407.
\4\ 17 CFR 229.10 et al.
\5\ 17 CFR 240.14a-2.
\6\ 17 CFR 240.14a-4.
\7\ 17 CFR 240.14a-12.
\8\ 17 CFR 240.14a-101.
\9\ 17 CFR 249.308.
\10\ 17 CFR 249.308a.
\11\ 17 CFR 249.310.
\12\ 15 U.S.C. 78a et seq.
\13\ 17 CFR 239.15A and 274.11A.
\14\ 17 CFR 239.14 and 274.11a-1.
\15\ 17 CFR 239.17a and 274.11b.
\16\ 15 U.S.C. 80a-1 et seq.
\17\ 15 U.S.C. 77a et seq.
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I. Background and Summary
We are proposing a number of revisions to our rules that would
improve the disclosure shareholders of public companies receive
regarding compensation and corporate governance, and facilitate
communications relating to voting decisions. During the past few years,
shareholders have increasingly focused on corporate accountability, and
have expressed the desire for additional information that would enhance
their ability to make informed voting and investment decisions. Several
rulemaking initiatives in recent years have focused on these themes. In
addition to proposals that are largely focused on disclosure
enhancements, we also are proposing some revisions to the rules
governing the proxy solicitation process that would clarify the manner
in which soliciting parties communicate with shareholders.
First, we are proposing revisions to our rules governing disclosure
of executive and director compensation, director biographical
information and qualifications, compensation consultants, and other
matters. Over the past several years, we have engaged in a number of
rulemaking initiatives designed to improve the presentation of
information about executive officer and director compensation and
relationships with the company, and thereby assist investors' ability
to make more informed voting and investment decisions.\18\ The turmoil
in the markets during the past 18 months has reinforced the importance
of enhancing transparency, especially with regard to activities that
materially contribute to a company's risk profile. We have decided to
re-examine our disclosure rules to provide investors with important and
relevant information upon which to base their proxy voting and
investment decisions.
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\18\ See Release No. 33-8340 (Nov. 24, 2003) [68 FR 69204]
(adopting rule amendments to improve the disclosure regarding the
nominating committee process of public companies and the ways by
which security holders may communicate with boards at the companies
in which they invest); Release No. 33-8732A (Aug. 29, 2006) [71 FR
53518] (adopting rule amendments that significantly revised the
disclosure of executive officer and director compensation, related
party transactions, director independence and the security ownership
of officers and directors).
---------------------------------------------------------------------------
The amendments proposed today would add new disclosure requirements
on several topics that are designed to enhance the information included
in
[[Page 35077]]
proxy and information statements,\19\ including information about the
relationship of a company's overall compensation policies to risk,
director and nominee qualifications, company leadership structure, and
the potential conflicts of interests of compensation consultants. We
believe that some of our current disclosure requirements on these
topics could be improved to elicit more informative disclosure for
investors. In addition, the proposals would improve Summary
Compensation Table reporting of stock and option awards. We are
proposing to change the manner in which stock and option awards are
reported both in the Summary Compensation Table \20\ and Director
Compensation Table.\21\ We believe the current method for presenting
this information may have inadvertently resulted in investor confusion.
The proposed amendments would require disclosure in these tables of the
aggregate grant date fair value of awards computed in accordance with
Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS
123R), instead of the dollar amount recognized for financial statement
reporting purposes. We also propose to accelerate the timing of the
reporting of information regarding voting results, so that investors
have access to this important information on a more timely basis.
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\19\ The proposed amendments to Regulation S-K would also be
applicable to registration statements under the Securities Act, and
in some cases also Form 10-K under the Exchange Act.
\20\ Item 402(c) and 402(n) of Regulation S-K [17 CFR 229.402(c)
and 229.402(n)].
\21\ Item 402(k) and 402(r) of Regulation S-K [17 CFR 229.402(k)
and 229.402(r)].
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Finally, we are proposing amendments to Exchange Act Rules 14a-2,
14a-4 and 14a-12 to clarify certain issues relating to the solicitation
of proxies and the granting of proxy authority.\22\ In 1992, we adopted
significant amendments to the proxy rules intended to remove
unnecessary impediments to the solicitation of proxy authority and to
allow management and other persons seeking proxy authority more
efficiently and effectively to communicate with shareholders.\23\ Since
that time, we have become aware of a few interpretive issues regarding
the rules governing proxy solicitations, particularly solicitations by
shareholders and other non-management parties. We believe the proposed
revisions will provide certainty in how the rules operate and
facilitate the proxy solicitation process.
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\22\ The Commission has taken action in recent years in regard
to proxy materials. For example, in 2007 we provided for the use of
electronic proxy solicitations, and recently we proposed to revise
our rules to facilitate inclusion of shareholder nominations in
company proxy materials. See Release No. 34-56135 (July 26, 2007)
[72 FR 42222] (shareholder choice regarding proxy materials);
Release No. 33-9046 (June 10, 2009) [74 FR 29024] (proposed
amendments to facilitate rights of shareholders to nominate
directors).
\23\ Release No. 34-31326 (Oct. 16, 1992) [52 FR 48276] (``1992
adopting release'').
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If the amendments proposed in this release are adopted, we
anticipate that they would be effective for the 2010 proxy season.
II. Discussion of the Proposed Amendments
A. Enhanced Compensation Disclosure
1. Compensation Discussion and Analysis Disclosure
In 2006, we amended our executive compensation disclosure rules to
require a new principles-based, narrative discussion that provides an
overview of a company's compensation program for its principal
executive officer, principal financial officer and the three most
highly compensated executive officers, other than the principal
executive officer and principal financial officer, and that provides an
analysis of the material elements of the company's compensation for
these named executive officers.\24\ This Compensation Discussion and
Analysis (``CD&A'') requirement is designed to elicit disclosure about
the material elements of the company's compensation for the named
executive officers, and is intended to put into perspective for
investors the tabular compensation data required by our rules.\25\
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\24\ See Release No. 33-8732A (Aug. 29, 2006) [71 FR 53518];
Release No. 33-8765 (Dec. 22, 2006) [71 FR 78338].
\25\ Shortly after implementation of the CD&A requirements, in
the spring of 2007, the Commission staff undertook a review of the
proxy statements of 350 public companies in an effort to both
evaluate compliance with the revised rules and provide guidance on
how companies could enhance their disclosures in this area. The
staff prepared a report of its observations of the CD&A disclosures
of these companies. In the report, the staff described the principal
comments they had issued to the companies that were subject to the
review. Overall, the staff noted at the time that companies appeared
to have generally made a good faith effort to comply with the new
rules, and investors had benefited from the new disclosures. At the
same time, the staff's comments highlighted areas where it believed
companies may need to provide additional or clearer disclosure in
future filings. Furthermore, the staff emphasized in its report that
companies should provide security holders and investors with a more
robust discussion of the basis and the context for granting
different types and amounts of executive compensation, and that
companies should continue thinking about how the CD&A can be better
organized and presented for both the lay reader and the
professional, in order to make the disclosure as useful and
meaningful to security holders and investors as possible. U.S.
Securities and Exchange Commission, Division of Corporation Finance,
Staff Observations in the Review of Executive Compensation
Disclosure, (2007) at https://www.sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm.
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In addition to the compensation policies for the named executive
officers, a company's broader compensation policies and arrangements
for other employees may also be important. It has been suggested that,
at some companies, compensation policies have become disconnected from
long-term company performance because the interests of management and
some employees, in the form of incentive compensation arrangements, and
the long-term well-being of the company are not sufficiently
aligned.\26\ Critics have argued that, in some cases, the structure and
the particular application of incentive compensation policies can
create inadvertent incentives for management and employees to make
decisions that significantly, and inappropriately, increase the
company's risk, without adequate recognition of the risks to the
company.\27\ Companies, and in turn investors, may be negatively
impacted where the design or operation of their
[[Page 35078]]
compensation programs creates incentives that influence behavior
inconsistent with the overall interests of the company. Indeed, one of
the many contributing factors cited as a basis for the current market
turmoil is that at a number of large financial institutions the short-
term incentives created by their compensation policies were misaligned
with the long-term well-being of the companies.\28\ By contrast, well-
designed compensation policies may enhance a company's business
interests by encouraging innovation and appropriate levels of risk
taking.\29\
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\26\ See, for example, Financial Stability Forum, FSF Principles
of Sound Compensation Practices 1 (Apr. 2, 2009) (noting that
``[h]igh short-term profits led to generous bonus payments to
employees without adequate regard to the longer-term risks they
imposed on their firms''), at https://www.financialstabilityboard.org/publications/r_0904b.pdf. The
report also noted that ``below the level of the executive suite,
most employees view the performance of the firm as a whole as being
almost independent of their own actions. Actions by other employees
or business units are seen as determining the firm's fate.
Similarly, stock performance might be driven by various exogenous
factors. Thus, employees heavily discount the value of the stock and
act to bring the cash component of bonus up.'' Id. at 11.
\27\ See, for example, Calvin H. Johnson, The Disloyalty of
Stock and Stock Option Compensation, 11 CONN. INS. L.J. 133 (2004-
2005); Michael C. Jensen, et al., Remuneration: Where we've been,
how we got here, what are the problems, and how to fix them (2004)
(unpublished manuscript on file), available at https://www.ssrn.com/abstract=561305. The relationship between compensation incentives
and risk also has been recognized in the legislation authorizing the
Troubled Asset Relief Program (``TARP''). Specifically, Section
111(b) of the Emergency Economic Stabilization Act of 2008, as
amended by Section 7001 of the American Recovery and Reinvestment
Act of 2009, requires the Secretary of the Treasury to require each
TARP recipient to meet appropriate standards for executive
compensation and corporate governance that shall include ``limits on
compensation that exclude incentives for senior executive officers
of the TARP recipient to take unnecessary and excessive risks that
threaten the value of such recipient during the period in which any
obligation arising from financial assistance provided under the TARP
remains outstanding.'' See Pub. L. 111-5, Sec. 7001, 123 Stat. 115,
517 (2009).
\28\ See, for example, Financial Stability Forum, FSF Report on
Enhancing Market and Institutional Resilience 8 (Apr. 2008) (noting
that ``[c]ompensation schemes in financial institutions encouraged
disproportionate risk-taking with insufficient regard to longer-term
risks''), at https://www.financialstabilityboard.org/publications/r_0804.pdf L. Story, On Wall Street, Bonuses, Not Profits, Were Real,
N.Y. TIMES, Dec. 18, 2008.
\29\ See, for example, U.S. Chamber of Commerce, Letter to the
Treasury Secretary, (Feb. 9, 2009) (suggesting that ``corporate
governance policies must promote long-term shareholder value and
profitability but should not constrain reasonable risk-taking and
innovation''), at https://www.uschamber.com/NR/rdonlyres/ej2mxgcl4qbguyozahqba4xzsiht7wyqxcdcjhsyfbvl4jwcurjanaslkfm4up6xgxuf5c57ogpkxt44shucmryo3ja/ExecutiveCompensationSecretaryGeithnerFeb62009.pdf.
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We are proposing to amend our CD&A requirements to broaden their
scope to include a new section that will provide information about how
the company's overall compensation policies for employees create
incentives that can affect the company's risk and management of that
risk. We believe investors would benefit from an expanded discussion
and analysis about how the company rewards and incentivizes its
employees to the extent it creates risk to the company. The proposed
amendments would require a company to discuss and analyze its broader
compensation policies and overall actual compensation practices for
employees generally, including non-executive officers, if risks arising
from those compensation policies or practices may have a material
effect on the company.\30\ In preparing this disclosure, we anticipate
that companies will need to consider the level of risk that employees
might be encouraged to take to meet their incentive compensation
elements.\31\ We believe that disclosure of a company's overall
compensation policies in certain circumstances can help investors
identify whether the company has established a system of incentives
that can lead to excessive or inappropriate risk taking by employees.
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\30\ See proposed Item 402(b)(2) of Regulation S-K. If a company
had a policy against providing compensation that encouraged
imprudent risk-taking, but actually provided compensation that
encouraged such behavior and the effect may be material on the
company, disclosure under the new provision would be required.
\31\ To the extent that such risk considerations are a material
aspect of the company's compensation policies or decisions for named
executive officers, the company is required to discuss them as part
of its CD&A under the current rules.
---------------------------------------------------------------------------
Under the proposed amendments, the situations that would require
disclosure will vary depending on the particular company and its
compensation programs. We believe situations that potentially could
trigger discussion and analysis include, among others, compensation
policies and practices:
At a business unit of the company that carries a
significant portion of the company's risk profile;
At a business unit with compensation structured
significantly differently than other units within the company;
At business units that are significantly more profitable
than others within the company;
At business units where the compensation expense is a
significant percentage of the unit's revenues; or
That vary significantly from the overall risk and reward
structure of the company, such as when bonuses are awarded upon
accomplishment of a task, while the income and risk to the company from
the task extend over a significantly longer period of time.
This is a non-exclusive list of situations where compensation
programs may have the potential to raise material risks to the company.
These are only examples; disclosure under the proposed rule amendment
would only be required if the materiality threshold is triggered.
We believe that discussion and analysis of a company's broader
compensation policies may be appropriate in these situations because
the policies may create risk to the company that is not otherwise
apparent from a discussion solely focused on executive compensation
policies. For example, if a particular business unit that carries a
significant portion of the company's overall risk is significantly more
profitable than others within the company, compensation policies
relevant to employees of that unit could be just as essential to the
company's overall financial condition and performance as those of its
senior executives. Similarly, in situations where particular business
units compensate their employees significantly differently from other
units or carry an overall risk and reward structure that varies
significantly from the rest of the company, provided the effects of the
compensation policies may be material to the company, those differences
should be disclosed and explained so that investors can more readily
assess their significance and appropriateness.
Consistent with the principles-based approach of the CD&A, the
proposed amendments provide several examples of the types of issues
that would be appropriate for a company to discuss and analyze. We wish
to emphasize, however, that the application of a particular example
must be tailored to the facts and circumstances of the company and that
the examples are non-exclusive. We believe that using illustrative
examples will help to identify the types of disclosure that may be
appropriate. A company must assess the importance to investors of the
information that is identified by the example in light of the
particular situation of the company. Examples of the issues that
companies may need to address regarding the compensation policies or
practices that may give rise to risks that may have a material effect
on the company would include the following:
The general design philosophy of the company's
compensation policies for employees whose behavior would be most
affected by the incentives established by the policies, as such
policies relate to or affect risk taking by those employees on behalf
of the company, and the manner of its implementation;
The company's risk assessment or incentive considerations,
if any, in structuring its compensation policies or in awarding and
paying compensation;
How the company's compensation policies relate to the
realization of risks resulting from the actions of employees in both
the short term and the long term, such as through policies requiring
claw backs or imposing holding periods;
The company's policies regarding adjustments to its
compensation policies to address changes in its risk profile;
Material adjustments the company has made to its
compensation policies or practices as a result of changes in its risk
profile; and
The extent to which the company monitors its compensation
policies to determine whether its risk management objectives are being
met with respect to incentivizing its employees.
The level of detail required will necessarily depend on
the particular facts at a company and within various business units of
a company.
[[Page 35079]]
Request for Comment
Would expanding the scope of the CD&A to require
disclosure concerning a company's overall compensation program as it
relates to risk management and or risk-taking incentives provide
meaningful disclosures to investors? Should the scope of the amendments
be limited in application to specific groups of employees, such as
executive officers? Should it be limited to companies of a particular
size, like large accelerated filers? Should it be limited to particular
industries like financial services, including companies that have
segments in such industries? Is the cost of tracking and disclosing the
nature of the risk different at different types of companies or company
segments and if so, should that be reflected in our rules?
In light of the complexity of the issue and compensation
programs generally, we recognize that it may be difficult to identify
and describe which compensation structures may expose a company to
material risks. We believe the listed examples are situations where
compensation policies may induce risk taking behavior, and therefore,
potentially have a material impact on the company. Are the listed
examples appropriate issues for companies to consider discussing and
analyzing? Are there any other specific items we should list as
possibly material information? Are there any items that are listed that
should not be? If so, why?
Should other elements of compensation that may encourage
excessive risk taking be highlighted in the CD&A?
We have included a list of examples of the types of issues
that would be appropriate for a company to discuss and analyze. Is that
list appropriate? Rather than treat the list as examples, should we
require discussion of each item?
Are there other disclosure requirements that would provide
more meaningful information about the effect of the registrant's
compensation policies on its risk profile or risk management?
Are there certain risks that are more clearly aligned with
compensation practices the disclosure of which would be important to
investors?
If a company determines that disclosure under the proposed
amendments is not required, should we require the company to
affirmatively state in its CD&A that it has determined that the risks
arising from its broader compensation policies are not reasonably
expected to have a material effect on the company?
Should smaller reporting companies, who are currently not
required to provide CD&A disclosure, be required to provide disclosure
about their overall compensation policies as they relate to risk
management?
2. Revisions to the Summary Compensation Table
The Item 402 amendments proposed today also would revise Summary
Compensation Table and Director Compensation Table disclosure of stock
awards and option awards to require disclosure of the aggregate grant
date fair value of awards computed in accordance with FAS 123R.\32\ The
proposed revised disclosure would replace currently mandated disclosure
of the dollar amount recognized for financial statement reporting
purposes for the fiscal year in accordance with FAS 123R.\33\
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\32\ Pursuant to FAS 168, the FASB Accounting Standards
Codification has superseded all references to previous FASB
standards for interim or annual periods ending on or after September
15, 2009. For purposes of facilitating comments, our proposals
retain the well-known FAS 123R nomenclature. However, if we adopt
the Summary Compensation Table and Director Compensation Table
proposals, we expect in the final rules to update references
accordingly.
\33\ In proposing these changes to the Summary Compensation
Table and Director Compensation Table, we do not suggest that
recognizing share-based compensation costs over the periods during
which employees perform the related services is an inappropriate
measure for financial statement reporting. Instead, we simply
acknowledge that the aggregate grant date fair value measure is more
useful to the users of executive compensation disclosure and would
facilitate CD&A disclosure.
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A significant objective of the broad executive compensation
disclosure amendments we adopted in 2006 was to provide investors a
single total figure that includes all compensation and is comparable
across fiscal years and companies.\34\ To accomplish this, we needed to
include a dollar amount for option awards, which previously had been
reported in the Summary Compensation Table as the number of securities
underlying stock options granted.\35\ When we initially adopted the
2006 amendments, we required Summary Compensation Table and Director
Compensation Table disclosure of the aggregate grant date fair value of
stock awards and option awards computed in accordance with FAS 123R,
the same as we propose today.\36\ Before those amendments became
effective, however, we reconsidered the issue based on concerns that
the actual amounts ultimately paid out could differ from the amounts
initially reported in the tables. In December 2006, we adopted the
current disclosure requirements for the stock award and option award
columns as Interim Final Rules and solicited comment.\37\ In the same
rulemaking, we amended the Grants of Plan-Based Awards Table to require
disclosure of the FAS 123R grant date fair value of the individual
equity awards granted to named executive officers in the last completed
fiscal year.\38\
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\34\ See Release No. 33-8732A in note 24 above at 53170. We
recognized that the timing for disclosing different elements of
compensation in the Summary Compensation Table disclosure varies
depending on the form of the compensation.
\35\ See Release No. 33-6962 (Oct. 16, 1992) [57 FR 48126].
\36\ See Release No. 33-8732A in note 24 above at 53172. This
approach was consistent with the timing of option and stock awards
disclosure that had applied in the Summary Compensation Table since
1992.
\37\ See Release No. 33-8765 in note 24 above.
\38\ Item 402(d)(2)(viii) of Regulation S-K.
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Since the adoption of these current disclosure requirements, we
have received comments from a variety of sources that the information
that investors would find most useful and informative in the Summary
Compensation Table and Director Compensation Table is the full grant
date fair value of equity awards made during the covered fiscal
year.\39\ This is because investors may consider compensation decisions
made during the fiscal year--which usually are reflected in the full
grant date fair value measure, but not the financial statement
recognition measure--to be material to voting and investment
decisions.\40\ Disclosure of full grant date fair value permits
investors to better evaluate the amount of equity compensation awarded.
Investors have noted that disclosure in the Summary Compensation Table
of how much equity compensation the company decides to award during a
fiscal year is more informative to voting and
[[Page 35080]]
investment decisions than the dollar amount recognized for financial
statement reporting purposes.\41\ Investors have commented that because
full grant date fair value is indicative of which executives the
company intends to compensate most highly, it is a more useful measure
to include in the Summary Compensation Table as a component of total
compensation.\42\ Because total compensation is also the basis for
determining which executives, in addition to the principal executive
officer and principal financial officer, are the named executive
officers whose compensation is reported,\43\ the full grant date fair
value measure will better align the identification of named executive
officers with company compensation decisions. Summary Compensation
Table disclosure of the full grant date fair value measure also can
facilitate companies'' ability to provide a CD&A that clearly and
concisely explains and analyzes material compensation policies and
decisions.\44\
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\39\ See, for example, letters regarding File No. S7-03-06 from
Ken Belcher (Dec. 28, 2006); Andrew H. Dral (Dec. 30, 2006); Council
of Institutional Investors (Jan. 25, 2007); American Federation of
Labor and Congress of Industrial Organizations (Jan. 29, 2007);
Teachers Insurance and Annuity Association of America (Jan. 16,
2007); CALSTRS (Jan. 16, 2007); Leggett & Platt, Inc. (Apr. 23,
2007); and CFA Institute for Financial Market Integrity (Dec. 20,
2007). These comment letters are available at https://www.sec.gov/rules/proposed/s70306.shtml. In its May 5, 2009, meeting with the
staff of the Division of Corporation Finance, the Joint Committee on
Employee Benefits of the American Bar Association also recommended
that we revise Summary Compensation Table disclosure of stock awards
and option awards to report aggregate grant date fair value.
\40\ See letter regarding File No. S7-03-06 from Council of
Institutional Investors (Jan. 25, 2007) (stating that ``the Summary
Compensation Table should disclose the decisions of the compensation
committee in the applicable year * * * [This] methodology is
consistent with the objective of providing investors with the tools
needed to evaluate the annual decisions of the compensation
committee[.]''). See also letter regarding File No. S7-03-06 from
Leggett & Platt, Inc. (Apr. 23, 2007) (stating that ``[t]his is
clearly the information most investors want'').
\41\ See letter regarding File No. S7-03-06 from Teachers
Insurance and Annuity Association of America (Jan. 16, 2007) (``Our
view is that executive compensation disclosure and financial
reporting are separate and distinct. We believe that reporting the
aggregate fair value of awards in the Summary Compensation Table is
important to give an accurate representation of the compensation
committee's actions and intentions in any given reporting period'').
See also letter from American Federation of Labor and Congress of
Industrial Organizations in note above (``By spreading out the
disclosure of the value of equity awards over a number of years, the
total impact of executive compensation decisions will be concealed
from shareholders and the public'').
\42\ See letter from American Federation of Labor and Congress
of Industrial Organizations in note 39 above (``The methodology used
to calculate total compensation in the Summary Compensation Table is
extremely important to shaping behavior by compensation committees
and investors. Shareholders will evaluate the disclosed total
compensation figure when voting in director elections and when asked
to ratify equity award plans. Directors will shape their executive
compensation decisions to reflect these shareholder views. For this
reason, the total compensation figure should represent the current
decisions made regarding executive compensation in the most recent
fiscal year.'').
\43\ Pursuant to Instruction 1 to Items 402(a)(3) and
Instruction 1 to Item 402(m)(2), this determination is made by
reference to total compensation for the last completed fiscal year.
\44\ Summary Compensation Table disclosure of the dollar amount
recognized for financial statement reporting purposes can frustrate
this objective because it can result in lengthy, complex CD&A
explanations of the FAS 123R recognition model. See The Corporate
Counsel, Mar.-Apr. 2009, at 3-4.
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Some companies have recognized the importance of full grant date
fair value information to investors and have provided an
``alternative'' Summary Compensation Table--substituting full grant
date fair value numbers in the Stock Awards and Option Awards columns--
in addition to the Summary Compensation Table disclosure prescribed by
the current rules.\45\ Because companies generally consider the full
grant date fair value of these awards in making compensation decisions,
they may include such an ``alternative'' table in the CD&A to
illuminate their decisionmaking process. Some users of executive
compensation disclosure also independently substitute grant date fair
value information from the Grants of Plan-Based Awards Table for the
financial statement recognition-based numbers disclosed in the Summary
Compensation Table.\46\
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\45\ Some compensation experts have also suggested adding an
alternative Summary Compensation Table if the mandated Summary
Compensation Table ``distorts'' the compensation of an executive.
See Frederick D. Lipman & Steven E. Hall, Executive Compensation
Best Practices 50-52 (2008).
\46\ See Moody's Investors Service, A User's Guide to the SEC's
New Rules for Reporting Executive Pay (Apr. 2007), available at
https://www.law.yale.edu/documents/pdf/CBL/AUsersGuidetotheSECPayDisclosures102762.pdf, and ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=987914) ( ``Moody's
uses the full Statement 123(R) grant date fair value of stock
awarded and options granted, as disclosed in the grants of plan-
based awards table, instead of the figures disclosed in the SCT
stock awards and options awards columns.'').
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Further, correlating Stock Awards and Option Awards disclosure to
financial statement recognition can result in the disclosure of a
negative number in the relevant column.\47\ Such a negative number
currently flows through to the Total Compensation column, reducing the
amount of total compensation reported. Because decreases in stock price
affect the financial reporting of the value of stock options, using the
financial statement recognition measure to disclose stock and option
awards can result in disclosure of negative total compensation to
principal executive officers or principal financial officers, confusing
investors.\48\
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\47\ Correlating Stock Awards and Option Awards reporting to
financial statement recognition often can involve negative
adjustments to the numbers reported. In particular:
[ctrcir] Awards classified as ``liability awards'' under FAS
123R (such as an award that is cash settled) are initially measured
at grant date fair value, but for purposes of financial statement
recognition are re-measured at each financial statement reporting
date through the date the awards are settled.
[ctrcir] Under FAS 123R, compensation cost for awards containing
a performance-based vesting condition is disclosed only if it is
probable that the performance condition will be achieved. If
achievement of the performance condition subsequently is no longer
considered probable, the amount of compensation cost previously
disclosed in the Summary Compensation Table is reversed in the
period when it is determined that achievement of the condition is no
longer probable.
In addition, pursuant to the Instruction to Item 402(c)(2)(v)
and (vi) and the Instruction to Item 402(n)(2)(v) and (vi), the
compensation cost reported for stock and option awards in the
Summary Compensation Table does not include the estimate of
forfeitures related to service-based vesting conditions used for FAS
123R financial statement recognition because this estimate is not
considered meaningful in reporting the compensation of individual
named executive officers. Instead, compensation cost for awards with
service-based vesting is disclosed assuming that a named executive
officer will perform the service required for the award to vest. If
the named executive officer fails to do so and forfeits the award,
the amount of compensation cost previously disclosed in the Summary
Compensation Table is deducted in the period when the award is
forfeited.
\48\ See G. Morgenson, Weird and Weirder Numbers on Pay Reports,
N.Y. TIMES, Mar. 11, 2007.
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Because total compensation also determines identification of some
named executive officers, where a company experiences significant
volatility in its stock price, such as the significant decreases during
2008, the current rules may also cause the list of named executive
officers to change more frequently from year to year due to factors
unrelated to the company's compensation decisions.\49\ This can
potentially exclude from executive compensation disclosure executives
that the company considers the most highly compensated based on its
compensation decisions, including its decisions with respect to equity
awards.\50\ One reason for the adoption of the financial statement
recognition model was the potential to distort identification of named
executive officers when a single large grant, to be earned for services
to be performed over multiple years, affects the list of named
executive officers in the Summary Compensation Table, even though the
executive may earn a consistent level of compensation over the award's
term.\51\ Our experience with the current rules, however, leads us to
believe that it is more meaningful to shareholders if company
compensation decisions--including the decision to grant such a large
award--
[[Page 35081]]
rather than factors unrelated to those decisions, cause the named
executive officers to change.
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\49\ See letter regarding File No. S7-03-06 from the HR Policy
Association (Jan. 29, 2007) (``The Amended Rules also will increase
the annual variability of the composition of the NEOs based on
accounting rules rather than compensation programs. * * *
Consistency with financial accounting does not justify re-
introducing such variability into the table, especially with respect
to a core element of compensation such as equity compensation that
cannot be excluded in determining total compensation.'').
\50\ See letter regarding File No. S7-03-06 from Ernst & Young
(Jan. 29, 2007) (generally supporting the current rules yet stating
that ``[w]e recommend that the SEC adopt an approach that also
excludes the effects of any negative amounts, regardless of their
source in the determination of the NEOs. We believe that such an
approach would result in more consistency from year to year in the
identity of the NEOs included in the SCT. Further, the NEOs
determined in this fashion would more likely be those executives
that the compensation committee regards as the most highly
compensated.'').
\51\ See Release No. 33-8765 in note 24 above at 78340 (citing
letter from Fenwick & West LLP).
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A further significant reason for adopting the current rules was
concern that disclosing the full grant date fair value would overstate
compensation earned related to service rendered for the year, and that
actual amounts earned later could be substantially different.\52\
However, companies have recognized that the current rules also have the
potential to over-report compensation for a given year.\53\ To the
extent that both methods possess this potential, we believe that
reporting based on the full grant date fair value method is more
informative because it better reflects compensation decisions. If a
company does not believe that full grant date fair value reflects a
named executive officer's compensation, it can provide appropriate
explanatory narrative disclosure.
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\52\ See Release No. 33-8765 in note 24 above. See also Release
No. 33-8765, in note 24 above at 78340 (citing letters of U.S.
Chamber of Commerce (Apr. 7, 2006); Ernst & Young LLP (Apr. 10,
2006)).
\53\ See Frederick D. Lipman & Steven E. Hall in note 45 above
(stating that ``[w]hen shareholders look at the `Total' column for a
2007 or a subsequent year proxy statement, the executive's
compensation would include the allocable share of the 2005 option
grant under FAS 123R. This figure could substantially inflate the
`Total' column for 2007 or subsequent years, leading unsophisticated
shareholders or financial writers to the conclusion that this amount
was received in 2007, when in fact the option grants were received
in 2005. If 2007 were a particularly bad year financially for the
company or for shareholders' stock values, there could be a hue and
cry that this was another example of excessive CEO compensation'').
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While we continue to recognize that no one approach to disclosure
of stock and option awards addresses all the issues regarding
disclosure of equity compensation, our experience and the comment
letters received since adoption of the current requirements lead us to
believe that the goals of clear, concise and meaningful executive
compensation disclosure would be better served by amending the Summary
Compensation Table and Director Compensation Table to report stock
awards and option awards based on aggregate grant date fair value.
Among other things, because presentation of aggregate grant date fair
value would include the incremental fair value of options repriced
during the fiscal year, the effect of option repricings on total
compensation would be clearer. Further, because smaller reporting
companies do not provide a Grants of Plan-Based Awards Table, the
current rules do not require them to provide any disclosure of the
grant date fair value of awards made in the fiscal year (although they
are currently required to provide the Summary Compensation Table). The
proposals thus would make this information available to smaller
reporting company investors.
The amendments we propose also would:
Rescind the requirement to report the full grant date fair
value of each individual equity award in the Grants of Plan-Based
Awards Table \54\ and corresponding footnote disclosure \55\ to the
Director Compensation Table because these disclosures may be considered
duplicative of the aggregate grant date fair value disclosure to be
provided in the Summary Compensation Table under the proposals; and
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\54\ See Item 402(d)(2)(viii) of Regulation S-K and Instruction
7 to Item 402(d).
\55\ Current Instruction to Item 402(k)(2)(iii) and (iv) of
Regulation S-K.
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Amend Instruction 2 to the salary and bonus columns of the
Summary Compensation Table to provide that registrants will not be
required to report in those columns the amount of salary or bonus
forgone at a named executive officer's election, and that non-cash
awards received instead are reportable in the column applicable to the
form of award elected. With this amendment, the Summary Compensation
Table disclosure would reflect the form of compensation ultimately
received by the named executive officer.\56\
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\56\ This proposed amendment would apply to General Instruction
2 to Item 402(c)(2)(iii) and (iv) and General Instruction 2 to Item
402(n)(2)(iii) and (iv). The current versions of these Instructions,
which require such forgone salary or bonus to be reported in the
Salary or Bonus column, as applicable, were adopted in Release No.
33-8765 to reflect that the original terms of the award, which would
have compensated the named executive officer in cash, are not within
the scope of FAS 123R.
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Request for Comment
Is the proposed Summary Compensation Table reporting of
equity awards a better approach for providing investors clear,
meaningful, and comparable executive compensation disclosure consistent
with the objectives of providing concise analysis in CD&A and a clear
understanding of total compensation for the year? Would the proposals
facilitate better informed investment and voting decisions?
The proposal contemplates that the Summary Compensation
Table would report the aggregate grant date fair value of stock awards
and option awards granted during the relevant fiscal year, just as the
Grants of Plan-Based Awards Table reports each grant of an award made
to a named executive officer in the last completed fiscal year. Should
the Summary Compensation Table instead report the aggregate grant date
fair value of equity awards granted for services in the relevant fiscal
year, even if the awards were granted after fiscal year end? Explain
why or why not. For example, could such an approach be applied in a
manner inconsistent with the purposes of our compensation disclosure
rules, for example by distorting the determination of named executive
officers? If we change our approach with respect to the Summary
Compensation Table, should the Grants of Plan-Based Awards Table be
amended correspondingly to conform to the scope of awards reported in
that table?
If the Summary Compensation Table is amended as proposed,
should the Grants of Plan-Based Awards Table disclosure of the full
grant date fair value of each individual award be retained, rather than
rescinded as proposed? Should the Grants of Plan Based Awards Table
continue to disclose the incremental fair value with respect to
individual awards that were repriced or otherwise materially modified
during the last completed fiscal year? If so, why? If disclosure of
grant date fair value of individual awards is retained, should it also
be made applicable to smaller reporting companies?
As described above, one reason for adopting the financial
statement recognition model was the potential for distortion in
identifying named executive officers when a single large grant, to be
earned by services to be performed over multiple years, affects the
list of named executive officers in the Summary Compensation Table,
even though the executive earns a consistent level of compensation over
the award's term. Are multi-year grants a common practice, so that they
would introduce significant year-to-year variability in the list of
named executive officers if the proposed amendments are adopted
relative to the variability under the current rules? If so, how should
our rules address this variability?
Under the proposal, all stock and option awards would be
reported in the Summary Compensation Table at full grant date fair
value, including awards with performance conditions. Would the proposal
discourage companies from tying stock awards to performance conditions,
since the full grant date fair value would be reported without regard
to the likelihood of achieving the performance objective? If the
proposal is adopted, is any disclosure other than that already
currently required (e.g., in the Compensation Discussion and Analysis,
the Grants of Plan-Based Awards Table, and the Outstanding
[[Page 35082]]
Equity Awards at Fiscal Year-End Table) needed to clarify that the
amount of compensation ultimately realized under a performance-based
equity award may be different?
As proposed, Instruction 2 to the salary and bonus columns
would be revised to provide that any amount of salary or bonus forgone
at the election of a named executive officer pursuant to a program
under which a different, non-cash form of compensation may be received
need not be included in the salary or bonus column, but instead would
need to be reported in the appropriate other column of the Summary
Compensation Table. Should this approach cover elections to receive
salary or bonus in the form of equity compensation only if the
opportunity to elect equity settlement is within the terms of the
original compensatory arrangement, so that the original arrangement is
within the scope of FAS 123R? Why or why not?
The Commission also has received a rulemaking petition
requesting that we revise Summary Compensation Table disclosure of
stock and option awards a different way.\57\ Instead of reporting the
aggregate grant date fair value of awards granted during the year, as
we propose, the petition's suggested approach would report the annual
change in value of awards, which could be a negative number if market
values decline. For restricted stock, restricted stock units and
performance shares, the reported amount would be the change in stock
price from year-end to year-end. For stock options, it would be the
change in the in-the-money value over the same period. Would the
approach suggested by the rulemaking petition be easy to understand or
difficult to understand? Would the information provided under the
suggested approach be useful to investors? In particular, would
investors be able to evaluate the decision making of directors with
respect to executive compensation if the value of equity compensation
on the date of the compensation decision is not disclosed, but instead
investors are provided information regarding changes in value of the
compensation, which changes occur after the compensation decision is
made? Would it enhance or diminish the ability of companies to explain
in CD&A the relationship between pay and company performance? Would it
be more or less informative to voting and investment decisions than the
aggregate grant date fair value approach we propose? Would it be a
better measure for computing total compensation, including for purposes
of identifying named executive officers? Are there any other ways of
reporting stock and option awards that would better reflect their
compensatory value? If so, please explain. For example, are there any
potential amendments to the Grants of Plan-Based Awards Table or the
Outstanding Equity Awards at Fiscal Year-End Table that we should
consider to better illustrate the relationship between pay and company
performance?
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\57\ See May 26, 2009, rulemaking petition submitted by Ira T.
Kay and Steven Seelig, Watson Wyatt Worldwide, File No. 4-585, at
https://www.sec.gov/rules/petitions/2009/petn4-585.pdf.
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The Summary Compensation Table requires disclosure for
each of the registrant's last three completed fiscal years,\58\ and
with respect to smaller reporting companies, for each of the
registrant's last two completed fiscal years.\59\ Regarding transition,
our goal is to facilitate year-to-year comparisons in a cost-effective
way. To this end, we are considering whether to require companies
providing Item 402 disclosure for a fiscal year ending on or after
December 15, 2009 to present recomputed disclosure for each preceding
fiscal year required to be included in the Summary Compensation Table,
so that the Stock Awards and Option Awards columns would present the
applicable full grant date fair values,\60\ and Total Compensation
would be recomputed correspondingly. If a person who would be a named
executive officer for the most recent fiscal year (2009) also was
disclosed as a named executive officer for 2007, but not for 2008, we
expect to require the named executive officer's compensation for each
of those three fiscal years to be reported pursuant to the proposed
amendments.\61\ However, we would not require companies to include
different named executive officers for any preceding fiscal year based
on recomputing total compensation for those years pursuant to the
proposed amendments or to amend prior years'' Item 402 disclosure in
previously filed Forms 10-K or other filings. Would recomputation of
prior years included in the 2009 Summary Compensation Table to
substitute aggregate grant date fair value numbers for the financial
statement recognition numbers previously reported for those years cause
companies practical difficulties? Is there a better approach that would
preserve the objective of year-to-year comparability on a cost-
effective basis as a transitional matter?
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\58\ See Item 402(c)(1) of Regulation S-K.
\59\ See Item 402(n)(1) of Regulation S-K.
\60\ This amount would be computed based on the individual award
grant date fair values reported in that year's Grants of Plan Based
Award Table.
\61\ However, a smaller reporting company, which is required to
provide disclosure only for the two most recent fiscal years, could
provide Summary Compensation Table disclosure only for 2009 if the
person was a named executive officer for 2009 but not for 2008.
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B. Enhanced Director and Nominee Disclosure
We are proposing amendments to Item 401 of Regulation S-K to expand
the disclosure requirements regarding the qualifications of directors
and nominees, past directorships held by directors and nominees, and
the time frame for disclosure of legal proceedings involving directors,
nominees and executive officers. Specifically, we are proposing to
require disclosure detailing for each director and nominee for director
the particular experience, qualifications, attributes or skills that
qualify that person to serve as a director of the company as of the
time that a filing containing this disclosure is made with the
Commission, and as a member of any committee that the person serves on
or is chosen to serve on (if known), in light of the company's business
and structure.\62\
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\62\ We last adopted substantive revisions to the disclosure
concerning the background of directors, executive officers and
control persons in 1984, when we amended Item 401 of Regulation S-K
to require disclosure of legal proceedings involving Federal
commodities laws and applied the disclosure requirements to
promoters and control persons of newly public companies. See Release
No. 33-6545 (Aug. 9, 1984) [49 FR 32762].
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Item 401 currently requires only brief biographical information
about directors and nominees for the past five years, and Item 407
requires general disclosure about director qualification requirements
at a company. The proposed amendments to Item 401 would expand the
information required about individual directors and supplement the
current director qualification disclosures in Item 407 of Regulation S-
K. These revisions are aimed at helping investors determine whether a
particular director and the entire board composition is an appropriate
choice for a given company as of the time that a filing containing this
disclosure is made with the Commission.\63\
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\63\ See, for example, Richard Leblanc & James Gillies, Inside
the boardroom: How boards really work and the coming revolution in
corporate governance, (2005) (noting that an effective board ``must
have a set of directors who collectively have all the competencies
required by the board to fulfill its duties.'').
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Companies today face ever-increasing challenges from the business
and social environments in which they operate. As recent market events
have demonstrated, the capacity to assess risk and respond to complex
financial and
[[Page 35083]]
operational challenges can be important attributes for directors of
public companies. Moreover, developments such as the enactment of the
Sarbanes-Oxley Act of 2002 \64\ and corporate-governance related
listing standards of the major stock exchanges \65\ also have brought
about significant changes in the structure and composition of corporate
boards, such as requiring directors to have particular knowledge in
areas such as finance and accounting. We believe that the director
qualification disclosure requirements in Item 407 have resulted in more
general information being provided about the qualifications of the
board as a whole, but not more specific discussions of the background
and skills of individual directors.
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\64\ Pub. L. 107-204, 116 Stat. 745 (2002).
\65\ In 2003, we approved revisions to the listing standards of
the New York Stock Exchange (``NYSE'') and the National Association
of Securities Dealers (``NASD'') that, among other things, imposed
new independent director requirements and enhanced independence
standards. See Self-Regulatory Organizations; NYSE and NASD; Order
Approving Proposed Rule Changes Relating to Corporate Governance,
Release No. 34-48445 (Nov. 12, 2003) [68 FR 64154].
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The proposed amendments are designed to provide investors with more
meaningful disclosure to help them in their voting decisions by better
enabling them to determine whether and why a director or nominee is a
good fit for a particular company, and to allow companies flexibility
in disclosing material information on the background and specific
qualifications of each director and nominee, including information that
goes beyond the five-year biographical requirement of Item 401. We are
proposing that, for each director or nominee, disclosure be included
that discusses the specific experience, qualifications or skills that
qualify that person to serve as a director and committee member. The
types of information that may be disclosed include, for example,
info
