SEC Approves Expansion of Disclosures on Risk, Compensation and Corporate Governance

The Securities and Exchange Commission voted 4-1 on December 16, 2009, to approve the adoption of rule amendments to expand disclosure of information relating to risk, compensation and corporate governance of public companies. The Commission’s adopting release can be found at The July 2009 proposing release also included amendments to the proxy solicitation process, which the SEC has deferred for consideration together with the pending shareholder access rule proposal.

Except as otherwise noted below, the final rules become effective February 28, 2010.

The final rules reflect many of the comments the Commission received since the amendments were proposed in July 2009. Significant provisions of the final rules, as well as notable changes from the July proposal, are highlighted below.

RISK AND OVERALL COMPENSATION POLICIES: The final rules require a discussion of a company’s overall compensation policies and practices for all employees, not just executive officers, as they relate to the company’s risk taking. In response to comments, the SEC modified the final rules to require disclosure only when these compensation policies and practices create risks that are “reasonably likely to have a material adverse effect” on the company.

REVISIONS TO COMPENSATION TABLES: The final rules require reporting of stock and option awards in the summary compensation and director compensation tables at their aggregate grant date fair value, replacing the current requirement to report only the annual dollar amount recognized for financial statement reporting purposes. The Commission added a new instruction to report in the tables the value of performance awards at the grant date based on the probable outcome of the performance conditions and to report the maximum potential value in a footnote. These revisions are effective for tables relating to fiscal years ending on or after December 20, 2009, and require disclosure on this basis for all three years reported in the summary compensation table.

DIRECTORS AND NOMINEES: The final rules require a company to provide detailed information on the particular experience, qualifications, attributes and skills of each director and board nominee that led the board to conclude that the individual should serve on the board. In addition, a company must disclose any public company directorships held by each director and nominee in the previous five years, as compared to only current directorships as is now required. The Commission also extended from five years to 10 years the reporting period for legal proceedings involving directors, nominees and executive officers and further expanded the list of legal proceedings that must be included.

BOARD DIVERSITY: The final rules require a company to discuss whether and how the board considers diversity in the nominating process. If a company has a policy of considering overall diversity of the board as a factor in identifying director nominees, it must explain how the policy is implemented and how the board or the nominating committee assesses the effectiveness of the policy.

LEADERSHIP STRUCTURE AND RISK OVERSIGHT: Under the final rules, a company must describe its particular leadership structure and why the board believes that structure is the most appropriate for the company. In addition, the company must describe the board’s role in risk oversight, including whether risk oversight is done at the committee level or the full board.

COMPENSATION CONSULTANTS: The final rules require disclosure of fees paid to compensation consultants in certain circumstances, but the Commission added a $120,000 threshold to the disclosure requirement.

EXPEDITED REPORTING OF VOTING RESULTS: The final rules require accelerated reporting of voting results of shareholder meetings on a Form 8-K filed within four business day after the meeting. To eliminate delays resulting from tallying of votes in contested matters, companies may report preliminary votes on the required Form 8-K, with final results reported in an amendment.