On December 16, 2009, the Securities and Exchange Commission (the “SEC”) approved amendments to the rules governing executive compensation and corporate governance to enhance the disclosures that companies are required to include in their proxy statements. The SEC’s press release is available on its website here and the final rules are available here.

The new rules will become effective on February 28, 2010. Among other things, the new rules require companies to provide enhanced disclosure regarding:

  • compensation policies and the impact of these policies on risk taking;
  • value of stock and option awards granted to executives and directors;
  • director and nominee experience, qualifications and legal proceedings;
  • company leadership structure, including the board’s role in the risk management process; and
  • potential conflicts of interest of compensation consultants that advise companies.

The new rules also require disclosure of the results of shareholder votes on a Form 8-K within four business days after a shareholder meeting.

The final rules are substantially as proposed in July of this year, with a few minor changes. In particular:

  • A requirement was added that nominating committees disclose whether they consider “diversity” when reviewing potential nominees and an assessment of the implementation of any diversity policies. The rules do not define “diversity,” and the SEC stressed that it is up to companies to determine what that means.
  • The new rules require discussion of compensation policies and their effect on risk taking with respect to all employees, not just executives. However, disclosure is only required for risks that are “reasonably likely to have a material adverse effect” on a company.
  • The new disclosure requirements regarding potential conflicts of interest of compensation consultants include exceptions for circumstances that should not raise the potential conflicts of interest.
  • The new rules do not include the changes to the proxy solicitation process that were in the proposed rules. The SEC decided to defer consideration of those proposed amendments, pending consideration of current proposals intended to facilitate shareholder director nominations in companies’ proxy materials. The SEC recently re-opened the comment period with respect to those proposed shareholder director nomination rules.

We will be distributing a more comprehensive review of the new rules in the near future.