On December 16, 2009, the Securities and Exchange Commission (SEC) adopted amendments to its disclosure rules that will require reporting companies to make new or revised disclosures about: (1) compensation policies; (2) valuations of stock and option awards to executives and directors; (3) director and nominee qualifications, legal proceedings and diversity; (4) the board’s leadership structure and role in risk oversight; and (5) potential conflicts of interest of compensation consultants that advise the company and its board. In addition, companies will be required to disclose the results of shareholder voting more promptly. Timing of Implementation. These new disclosure requirements will be applicable to proxy and information statements, annual reports and registration statements, beginning on February 28, 2010. In general, that means that many calendar-year end companies will have to comply with the new rules when preparing their next annual meeting proxy statements. Determining when a particular company becomes subject to the new regime depends on when its fiscal year ends and the timing of its annual filings:
- If a company’s fiscal year ends on or after December 20, 2009, its Form 10-K and proxy statement must be in compliance with the new rules if filed on or after February 28, 2010.
- If a company is required to file a preliminary proxy statement and expects to file its definitive proxy statement on or after February 28, 2010, then the preliminary proxy statement must also be in compliance with the new rules, even if filed before February 28, 2010.
- If a company files its 2009 Form 10-K before February 28, 2010 and its proxy statement on or after February 28, 2010, the proxy statement must be in compliance with the new rules.
- In addition, if a company’s annual meeting takes place after February 28, 2010 but the definitive proxy statement and Form 10-K are filed prior to February 28, 2010, the definitive proxy and the Form 10-K will not be subject to the new rules, but the company will still have to report the results of the voting at the annual meeting pursuant to a Form 8-K, in compliance with the new rules (as discussed below).
- If the company’s fiscal year ends before December 20, 2009, its 2009 Form 10-K and related proxy statement are not required to be in compliance with the new rules even if filed on or after February 28, 2010.
The new rules will require companies to discuss and analyze their compensation policies and practices as they relate to risk management practices or risk-taking initiatives, if risks arising from those policies or practices are "reasonably likely" to have a "material adverse effect" on the company. This new required disclosure is principles-based and the situations that will require disclosure will vary depending on the nature of the company and its compensation program. Since this requirement will apply to policies and practices affecting all employees, not just executive officers, it will not be part of the company’s Compensation Discussion & Analysis disclosure. Smaller reporting companies will not be required to provide this new disclosure.
Stock and Option Awards to Executives and Directors. The new rules will require that the value of options and stock awards reported in the summary compensation table and director compensation table be disclosed at the aggregate "grant date fair value" of such awards. Previously, disclosure of the company’s annual accounting expense with respect to the awards was required. The new "grant date fair value" approach may affect the total compensation reported and, as a result, also may change the composition of the named executive officer group. The new rules also confirm that awards granted in the fiscal year, rather than awards that are earned in the fiscal year, are to be provided in the table. Companies will be required to re-compute the information for all three of the years shown in the table. Also, awards that are subject to performance conditions are to be reported based on the probable outcome of performance conditions, while the maximum potential value of such awards is to be disclosed in the footnotes to the table.
Director and Nominee Qualifications, Legal Proceedings and Diversity. The new rules will require annual disclosure of the particular experience, qualifications, attributes or skills that led the board to conclude that each director and any director nominee should serve as director of the company Disclosure of specific experience, qualifications or skills that qualify a person to serve as a committee member is only required if the individual was elected or nominated because of specific qualifications, attributes or experiences related to service on a specific committee. The new rules also require disclosure of any directorships at public companies or registered investment companies held by each director and nominee at any time during the previous five years, rather than only current directorships. The "look back" period for disclosure of legal proceedings involving directors, director nominees and executive officers will be extended from five to 10 years. The list of legal proceedings that must be disclosed also will be expanded to include any judicial or administrative order involving mail or wire fraud, fraud in connection with any business entity, violations of federal or state securities, commodities, banking or insurance laws and regulations, and any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or self-regulatory organization. Settlements of private civil litigation need not be disclosed. In addition, the new rules would require a company’s nominating committee (or board) to disclose whether and how it considers diversity in identifying director nominees. If such a policy exists, additional disclosure of how this policy is implemented and how the board assesses the effectiveness of its policy also will be required. Companies may wish to consider updating their director and officer questionnaires to reflect the requirements of this new required disclosure.
Board Leadership Structure; the Board’s Role in Risk Oversight. The new rules will require disclosure of whether and why a company has chosen to combine or separate the principal executive officer and board chairman positions, and the reasons why the company believes that its board leadership structure is the most appropriate structure for the company. If one person serves as both principal executive officer and board chairman, the company must state whether and why it has a lead independent director and describe such director’s role. The company also must describe the board’s role in the oversight of risk.
Potential Conflicts of Interest of Compensation Consultants that Advise Companies and their Boards of Directors. Under the new rules specific disclosure concerning compensation consultant fees is required if the consultant or its affiliates provide the compensation committee (or management, if the compensation committee does not engage its own consultant) with both executive and non-executive compensation consulting services and the fees for the non-executive services exceed $120,000 during the relevant fiscal year.
Reporting of Voting Results on Form 8-K. Companies will now be required to disclose the results of a shareholder vote on Form 8-K within four business days after the end of the meeting at which the vote was held, instead of on Form 10-Q or Form 10-K. If obtaining definitive voting results takes longer than four business days, companies must disclose the preliminary voting results on Form 8-K within that period, and then file an amended Form 8-K reporting final results within four business days after they are known.