On July 10, 2009 the SEC published its proposed rules regarding proxy disclosure and solicitation enhancements designed to better inform and empower investors, to improve corporate governance, and to help restore investor confidence.1 The SEC views these measures as imperative to an effective proxy voting process. Public comments on the proposed rules are due September 15, 2009. If adopted, the proposed rules will likely be effective for the 2010 proxy season.  

The proposed changes to proxy disclosure relate to:  

  • compensation policies of non-executive employees and the relationship of compensation to risk;  
  • summary compensation table disclosure of equity awards;  
  • qualifications of directors, executive officers and nominees;  
  • company leadership structure;  
  • potential conflicts of interests of compensation consultants;  
  • reporting of stock and option awards granted to company executives and directors; and  
  • timelier reporting of election results.  

In addition, the proposed rules revise how some of the proxy solicitation rules operate.  

The purpose of this Client Advisory is to summarize how and to what extent the proposed rules will affect proxy disclosure and solicitation. We also outline some of the issues companies should begin to consider.  

  1. Enhanced Compensation Disclosure  
  1. Compensation Discussion and Analysis Disclosure  

In 2006 the SEC required a principles-based discussion and analysis of executive compensation through a new set of disclosure rules commonly known as the Compensation Discussion and Analysis (“CD&A”). The SEC is looking to extend these disclosure requirements to other nonexecutive employees because of its concern that certain risks to companies may not be apparent from a discussion focused solely on executive compensation policies. For example, compensation policies for non-executive employees of a business unit that carries a significant portion of a company’s overall risk but is significantly more profitable than others within the company could pose as much risk to the company’s overall financial condition as those of its senior executives.  

Indeed, the SEC cited compensation policies that incentivized short-term profits at the expense of a company’s long-term interests as a major contributing factor to the current market turmoil. One of the goals of the proposed amendments is to aid investors in identifying compensation incentives that may create excessive risks and inform them about how those risks are managed.  

Situations identified by the SEC that could trigger a discussion and analysis of compensation policies and practices include: business units of • a company that carry a significant portion of the company’s risk profile;  

  • business units with compensation structured significantly differently than other units within a company;  
  • business units that are significantly more profitable than others within a company;  
  • business units where the compensation expense is a significant percentage of the unit’s revenues; or  
  • business units that vary significantly from the overall risk and reward structure of a 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.  

The kinds of compensation policies and practices identified by the SEC that may need to be specifically addressed include:  

  • the general design philosophy of a 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 a company, and the manner of its implementation;  
  • a company’s risk assessment or incentive considerations, if any, in structuring its compensation policies or in awarding and paying compensation;  
  • the relationship between a company’s compensation policies and the realization of risks resulting from the actions of employees in both the short term and the long term, such as through policies requiring compensation claw backs or imposing holding periods;  
  • a company’s policies regarding adjustments to its compensation policies to address changes in its risk profile;  
  • the material adjustments a company has made to its compensation policies or practices as a result of changes in its risk profile; and  
  • the extent to which a company monitors its compensation policies to determine whether its risk management objectives are being met with respect to incentivizing its employees.  

The SEC is still considering whether it should require: (i) an affirmative statement in a company’s 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; and/or (ii) smaller reporting companies that are not currently required to provide CD&A disclosure to provide disclosure about their overall compensation policies as they relate to risk management.  

  1. Revisions to the Summary Compensation Table  

Currently, Item 402 of Regulation S-K requires disclosure in the Summary Compensation Table of stock and option awards at the dollar amount recognized in the fiscal year for financial statement reporting purposes. The SEC has faced criticism since the adoption of the current requirements in 2006 that the dollar amount recognized for financial statement reporting purposes is not as informative to investors as how much equity compensation a company decided to award to executives. Further, because decreases in stock price affect the financial reporting of equity awards and therefore total compensation, using the financial statement recognition measure to disclose stock and option awards can cause the list of named executive officers to change due to factors unrelated to a company’s compensation decisions. Moreover, the financial statement recognition measure has resulted in disclosure of negative total compensation to executives that can be confusing to investors. To address these concerns, the proposed amendments would require disclosure of the aggregate grant date fair value of awards in both the Summary Compensation Table and the Director Compensation Table.

Since the grant date fair value would be presented in the Summary Compensation Table, this amount would no longer be required to appear in the Grant of Plan-Based Awards Table. The proposed rule would also not require companies to report the amount of salary or bonus forgone at an executive officer’s election and non-cash awards received would be reportable in the column applicable to the form of the award elected.  

  1. Enhanced Director and Nominee Disclosure

The proposed amendments to Item 401 of Regulation S-K would expand disclosure 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. The increased disclosures would include detailing for each director and director nominee the particular experience, qualifications, attributes or skills that qualify that person to serve as a director of a company as of the time that a filing containing this disclosure is made with the Commission. This disclosure requirement would also extend to qualifications for membership in any committee on which that person serves.  

In addition, the proposed amendments to Item 401 would expand two other disclosure requirements. First, because past membership on corporate boards may reveal potential conflicts of interests (such as memberships on boards of major suppliers, customers or competitors), the proposed amendments would lengthen the time during which disclosure of any directorships in public companies and registered investment companies would be required to include the past five years instead of the existing requirement to disclose only current director positions. Second, because legal proceedings specified in Item 401 reflect upon a director’s, officer’s, or nominee’s competence and character to serve as a public company official, the proposed rules would extend from five years to 10 years the reporting period for legal proceedings involving these persons.  

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, registration statements on Form 10 under the Exchange Act, as well as in registration statements under the Securities Act.  

The SEC is still determining whether it should require disclosure of: (i) any other additional factors that a nominating committee considers when selecting a board member, such as diversity; (ii) all of a company’s board committees or just certain key committees (e.g., the audit, compensation, and nominating/governance committees); and/ or (iii) the qualification disclosures less frequently than annually, such as only when a director is first nominated or periodically such as every three years.  

  1. New Disclosure about Company Leadership Structure

The proposed amendments to Item 407 of Regulation S-K (and the corresponding amendment to Item 7 of Schedule 14A) would require new disclosure about a 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.  

Companies would also be required to disclose whether and why they have chosen to combine or separate the principal executive officer and board chair positions. Where 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, companies would be required to disclose whether and why a company has a lead independent director, as well as the specific role the lead independent director plays in the leadership of the company.  

The SEC is still determining whether it should require disclosure of (i) the specific duties performed by the board’s chair or independent lead director, and/or (ii) other board structure matters, such as how a company determines the number of independent directors to have or the size of the board generally.  

  1. New Disclosure about the Board’s Role in the Risk Management Process

The SEC is proposing to require additional disclosure about the board’s role in a company’s risk management process. Similar to disclosure about the leadership structure of a board, disclosure about the board’s involvement in the risk management process would provide 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. Such disclosure might address questions such as whether 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.  

  1. New Disclosure regarding Compensation Consultants  

The proposed amendments to Item 407 of Regulation S-K would 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. The rule is intended to address concerns that executive pay recommendations may be influenced by the fact that fees generated from additional services may be more significant than the fees earned by consultants for their executive compensation services or otherwise influential on the independence of the consultants. The proposed amendments would also require a description of any additional services provided to a company by the compensation consultants and their affiliates.  

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 a company would be required to disclose:  

  • the nature and extent of all additional services provided to the company or its affiliates during the last fiscal year by the compensation 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.  

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 broad-based plans that do not discriminate in favor of executive officers or directors of a company, such as 401(k) plans or health insurance plans.  

The SEC is still determining whether it should limit the disclosure to a threshold based on the amount of fees for the non-executive compensation related services, such as a certain dollar amount or a percentage of income or revenues.  

  1. Reporting of Voting Results on Form 8-K

The SEC believes that more timely disclosure of the voting results of annual and special meetings would benefit investors and markets. Accordingly, they are proposing to transfer the requirement to disclose the results of shareholder votes from Forms 10-Q and 10-K to Form 8-K by adding a new Item 5.07 to Form 8-K, and to require that information be filed within four business days after the end of the meeting at which the vote was held.  

In situations such as contested elections, companies may not have definitive vote results within four business days after the meeting. Anticipating this, the SEC has included an instruction to proposed Item 5.07 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.  


Because it is likely that the SEC will adopt much of these rules in final form after the comment period expires, companies should begin to consider some important action items.  

  • Carefully consider new director nominee qualification disclosures. If adopted, the new director nominee qualification disclosures will require companies to redraft their current director questionnaires and proxy disclosures. However, simply satisfying the bare minimum qualification disclosures in a few succinct sentences may not be the best course of action if the proposed proxy access rule is adopted. If adopted, the proxy access rule will allow shareholders to nominate directors under certain circumstances. In this scenario, it may be beneficial to fully disclose in the most meaningful and comprehensible way the information that investors will be relying on to make voting decisions in order to garner support for the nominee. When stockholders are comparing well-qualified nominees, the nominees with short descriptions may not appear particularly attractive.  
  • Review relationships with compensation consultants. To minimize any questions regarding their independence, consider having only the company’s compensation committee (not management) engage consultants that will advise on executive compensation and limit the services provided by these compensation consultants to those that relate directly to executive compensation.  
  • Examine leadership structures with a view towards detailed disclosure. Consider the advisability of changes to leadership structure because of the heightened attention that it will receive. For example, a company that combines the role of CEO and chairman might compare that policy with other similarly situated companies and consider splitting the roles. Even if the board decides not to change positions, this analysis will better enable the board to disclose why its structure benefits the company.  
  • Examine compensation structure and determine the extent to which it is designed to motivate and reward risk-taking behavior by employees that could have a material impact on long-term company performance. If the proposed rules are adopted, companies will be required to disclose the risk associated with incentivizing compensation. To this end, boards should undertake a fresh review of their existing CD&A to incorporate information about compensation risks, analyze the steps taken to manage this risk and consider adopting formal riskmanagement procedures within a specific committee, such as the audit committee.  

In order to provide greater certainty to soliciting parties, help stockholders receive timely and complete information and facilitate stockholder voting, the SEC is proposing revisions to the rules governing the proxy solicitation process.  

  1. Exchange Act Rule 14a-2(b)(1)

Exchange Act Rule 14a-2(b)(1) exempts from the 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. The exemption is unavailable to a person who furnishes or requests, or acts on behalf of a person who furnishes or requests, a form of revocation.  

The SEC proposes to clarify Exchange Act Rule 14a-2(b)(1) by amending the introductory text to provide expressly that a “form of revocation” does not include an unmarked copy of a company’s proxy card that the soliciting stockholder requests be returned directly the company. This amendment is intended to aid efforts by persons not seeking proxy authority to facilitate voting by stockholders sharing their views on matters submitted for stockholder 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 to provide stockholders a convenient opportunity to indicate their votes after hearing those views without having to request another proxy card from the company.  

  1. Exchange Act Rule 14a-2(b)(1)(ix)

Exchange Act Rule 14a-2(b)(1)(ix) provides that the Rule 14a-2(b)(1) exemption from the proxy rules 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.” The SEC intends the nature of “substantial interest” to be broader than its current application and proposes to amend Exchange Act Rule 14a-2(b)(1)(ix) 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. The SEC believes this amendment will further its intent to limit the exemption to disinterested persons and provide clarity to those wishing to rely on the exemption.  

  1. Exchange Act Rule 14a-4(d)(4)

Exchange Act Rule 14a-4(d)(4) permits a person soliciting support for nominees, who if elected, would constitute a minority of the board (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. However, the rule only permits the registrant’s nominees to be used to fill out the non-management slate and, as a result, they are effectively advantaged, as security holders may vote for them on two or more proxy cards where non-management nominees can only be voted for on one. The SEC proposes to revise Exchange Act Rule 14a-4(d)(4) so that the short slate rounding exception 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.  

The proposed exception would be available only when non-management parties are not acting together. The proposed rule would require a non-management soliciting person who seeks to round out its short slate with any nominee named in another non-management person’s proxy statement 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) and in Regulation 13D-G with the other non-management person.  

A non-management soliciting person who seeks to round out their short slate with any nominee named in another non-management person’s proxy statement would also be required by the proposed rule to represent in their proxy statement that they are not a participant in the other non-management person’s solicitation within the meaning of Instruction 3(a)(vi) to Item 4 of Schedule 14A.  

  1. 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.” The SEC proposes to amend the rule to clarify that the reasonable specified conditions must be objectively determinable.  

The SEC believes that “reasonable specified conditions” must be objectively determinable to enable stockholders to make informed decisions in regard to granting proxy authority and confirm that any later withholding of shares from voting is consistent with the authority granted. The SEC believes this amendment will also eliminate the danger that a 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.

  1. 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) 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. The SEC proposes 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 would no longer be sufficient to provide the information in a document filed at a later date.  


The SEC is still considering and seeking comment on significant issues in connection with these proposed amendments:  

  • Should any current required disclosures be eliminated or modified if these new amendments are adopted?  
  • Should the SEC require the disclosure of compensation paid to each executive officer and not just the named executive officers?  
  • Should the disclosure of performance targets be mandatory, and not allowed an exclusion as it is now?  
  • Should the SEC make the CD&A a part of the Compensation Committee Report (“CCR”) and thus have the CCR be considered “filed” and not merely “furnished?”  
  • Should the SEC require disclosures regarding whether a member of the compensation committee has expertise in compensation matters?  
  • Should the SEC require disclosure regarding whether a company has “hold to retirement” and/or claw-back provisions?  
  • Should the SEC require disclosure of the amounts of executive compensation based on internal pay equity?  
  • Should the SEC require disclosure of the total number of compensation plans a company has and the total number of variables in all of its compensation plans?  
  • Should the SEC require disclosure and quantification of the savings to each executive with respect to tax gross-up arrangements?