In an unusual departure from prior practice, the Securities and Exchange Commission released the final form of its proxy disclosure enhancements just hours after approving the changes at its open meeting yesterday. It generally takes the staff several days to finalize and publish the adopting release in the Federal Register. As a result, some confusion has arisen with respect to application of the effective time of the enhanced disclosure requirements.

Effective Time. The new rules will be applicable to the 2010 proxy season, although the exact sequence and timing of their application is unclear. The adopting release set out a February 28, 2010 effective date with no accompanying explanation as to its application to the proxy filing process at the SEC. For example, do the revised rules apply only to shareholder meetings held after that date, regardless of when the proxy materials are filed, or only to proxy materials (preliminary or definitive) filed after that date? We expect that the SEC staff will clarify these matters in the coming days.

Disclosure Enhancements. According to the SEC release, during the past few years, investors have increasingly focused on corporate accountability, and have expressed a desire for additional information that would enhance their ability to make informed voting and investment decisions. The rule amendments are intended to improve the quality of the disclosure that shareholders receive regarding compensation and corporate governance matters, and facilitate communications relating to voting decisions.

The SEC believes that the amendments will enhance the transparency of a company's compensation policies and practices, and heighten the impact of such policies and practices on risk taking, director and nominee qualifications, board leadership structure, and potential conflicts of compensation consultants, as well as provide investors with clearer and more meaningful executive compensation disclosure. As adopted, the amendments will require the following:

  • Where risks arising from a company's compensation policies and practices for employees are reasonably likely to have a material adverse effect on the company, discussion is required relative to the company's compensation policies or practices as they relate to risk management and risk-taking incentives that may affect the company's risk and management of that risk.
  • It will be necessary to report the aggregate grant date fair value of stock awards and option awards granted in the fiscal year in the Summary Compensation Table and Director Compensation Table. Values are to be computed in accordance with FASB ASC Topic 718, with a special instruction for awards subject to performance conditions.
  • New disclosure of the qualifications of directors and nominees for director must be made, as well as the reasons why that person should serve as a director of the company at the time at which the relevant filing is made with the Commission; the same information would be required with respect to directors nominated by others.
  • It will be necessary to make additional disclosure of any directorships held by each director and nominee at any time during the past five years, at any public company or registered investment company.
  • Companies must additionally disclose other legal actions involving a company's executive officers, directors, and nominees for director, and the time frame for which such disclosure is required will change from five to ten years.
  • New disclosure must be made about a company's board leadership structure and the board's role in the oversight of risk, including how the board administers its oversight function, and the effect that this has on the board's leadership structure.
  • New disclosure must be made regarding the consideration of diversity in the process by which candidates for director are considered for nomination by a company's nominating committee.
  • New disclosure must be made about the fees paid to compensation consultants and their affiliates under certain circumstances.
  • Vote results (preliminary or final) from a meeting of shareholders must be reported on Form 8-K, generally within four business days of the meeting.