On December 16, 2009, the U.S. Securities and Exchange Commission (the "SEC") approved the final amendments to its proxy disclosure rules, with some minor revisions to the proposed amendments that were issued in July. The new disclosure requirements were designed to improve the information companies provide to their shareholders and enhance investors' ability to make informed voting and investment decisions. A copy of the adopting release is available here.

The final rules will become effective February 28, 2010, in time for the 2010 proxy season. Accordingly, public companies should start to consider what steps to take in order to comply with these enhanced disclosure requirements, such as revising director and officer questionnaires and disclosure controls and procedures.

The rules implement substantial new disclosure requirements on the following topics:

Risk management

Disclosure about the board's leadership structure: Under the new disclosure requirements, the company must describe in the proxy statement its board leadership structure, including whether and why the company has chosen to combine or to separate the positions of principal executive officer and board chairman.

In some companies, the roles 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 must disclose their reasons for this decision and provide a description of the specific role the lead independent director plays in company leadership.

Disclosure about the board's role in risk oversight: Under the new disclosure requirements, disclosure of the board's involvement in the oversight of the risk management process will need to be made in the proxy statement, with the purpose of providing investors with enhanced information regarding the company's perception of the role of its board.

This disclosure must include the extent of the board's role in the risk oversight of the company such as how the board administers its oversight function and the effect this has on the board's leadership structure.

Disclosure about compensation policies and practices as they relate to risk management: Under the new disclosure requirements, the company must discuss in the proxy statement its compensation policies and practices as they relate to risk management and risk-taking incentives.

Companies must describe the risks arising from their compensation policies and practices with respect to all employees, to the extent that such policies are "reasonably likely to have a material adverse effect" on the company. The final rules heighten the disclosure threshold from the "may have a material effect" disclosure standard that was originally proposed.

Governance and director qualifications

Expanded proxy statement disclosure of governance and director qualifications: Under the new disclosure requirements, the company must provide more detailed disclosure of the background and qualifications of directors and director nominees, including a brief discussion of the specific experience, qualifications, attributes or skills that led to the company's conclusion that the person should serve as a director of the company in light of the company's business and structure.

Rather than listing only current public company board memberships, proxy disclosures must indicate any board memberships held during the preceding five years by each director and nominee in any public company or registered investment company, regardless of whether they are still serving in that position. This information is also required to be disclosed in the proxy materials with respect to any nominees put forward by another proponent in its proxy materials.

Consideration of diversity in the director nomination process: Under the new disclosure requirements, the company must describe in the proxy statement the process by which candidates for director are considered for nomination by the company's nominating committee.

Disclosure of whether the board or nominating committee has a policy with regard to the consideration of diversity in identifying director nominees is required. If the nominating committee or board has such a policy, the company must describe the implementation of the policy as well as the board's assessment of the policy's effectiveness.

The new disclosure requirements do not define the term "diversity." The SEC stresses that diversity is not limited solely to concepts such as race, gender and national origin but may also include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity. Companies may define the term in ways they consider appropriate.

Expanded proxy disclosure of legal actions involving executive officers, directors and director nominees: The new disclosure requirements require a more detailed discussion of legal proceedings in the proxy statement. Companies must provide new disclosure of legal actions relating to alleged violations of laws or regulations respecting securities, commodities, financial institutions, insurance companies, mail or wire fraud or fraud in connection with any business entity.

The SEC has also lengthened the time during which such disclosure is required from the preceding five years to the preceding 10 years.


Revised reporting of stock and option awards: The new disclosure requirements have revised the reporting of stock and options awards so the aggregate grant date fair value granted in the fiscal year will now be reported in the Summary Compensation Table and the Director Compensation Table of the proxy statement.

The aggregate grant date fair value is to be computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation --- Stock Compensation, rather than using the dollar amount recognized for financial statement purposes for the fiscal year. Companies must include a special instruction for awards subject to performance conditions.

This revised disclosure affects the calculation of total compensation, which will impact the determination of the company's named executive officers.

Compensation consultant fees: Under the new disclosure requirements, the company must disclose whether the compensation committee or management has engaged a compensation consultant to provide advice or recommendations on the amount or form of executive and director compensation and the compensation consultant provided additional services to company in an amount in excess of $120,000 during the company's last completed fiscal year.

Form 8-K reporting

Shareholder voting results:

The new disclosure requirements accelerate the deadline for reporting vote results from a meeting of shareholders. Rather than reporting the results in Forms 10-Q or 10-K, the company must report the results on Form 8-K within four business days of the meeting.