On December 22, 2006, the Securities and Exchange Commission (Commission) amended its recently adopted rules governing disclosure of executive and director compensation. The amendments are intended to more closely align the disclosure relating to stock and option awards with the issuer’s recognition of accounting expense for such awards under FAS 123R. Generally, under FAS 123R, a public company must recognize an expense equal to the value of stock and option awards over the required service period (i.e., the vesting period) applicable to the award.

These amendments are the first major modification to the comprehensive disclosure regime that the Commission adopted on July 26, 2006, 1 and demonstrate the Commission’s continuing efforts to improve the quality of executive compensation disclosure.

The Commission adopted the amendments in the form of final interim rules that became effective upon publication in the Federal Register on December 29, 2006. The compliance date for the amendments is the same as the compliance dates for the new disclosure rules adopted on July 26, 2006. Accordingly, the amended disclosure rules apply to public company proxy statements, information statements and registration statements filed with the Commission on or after December 15, 2006, and Forms 10-K and 10-KSB filed with the Commission for fiscal years ending on or after December 15, 2006.

The following is a summary of the material requirements and changes reflected in the most recent amendments.

How do the amendments change the way in which equity awards must be reported?

The amendments make two fundamental changes to the manner in which stock and option awards granted to executives and directors are disclosed. First, instead of reporting the entire grant date “fair value” of stock and option awards in the year of grant, the amendments require the fair value to be reflected in the Summary Compensation Table or Director Compensation Table over the vesting period of such awards, consistent with the FAS 123R treatment of such awards for financial reporting purposes. Second, the full grant date fair value of such awards must now be reported, on a grant-by-grant basis, in the Grants of Plan-Based Awards Table. 2 For example, if a company recognizes a $300,000 accounting charge relating to an executive stock award ratably over its three-year vesting period, the Grants of Plan-Based Awards Table will reflect the entire $300,000 for the year of grant, but the Summary Compensation Table will reflect $100,000 in value each year for the three-year vesting period.

Why did the Commission adopt these amendments?

The overall goal of the Commission in making these changes is to provide investors with more complete and useful information regarding executive and director compensation. Specifically, the Commission noted that disclosure of amounts in the Summary Compensation Table and Director Compensation Table in a manner consistent with FAS 123R reporting will give investors a better picture of compensation earned by an executive or director during a particular reporting period. In addition, the amendments will minimize the potential for distortion caused by large equity grants that vest over multiple years, particularly given the fact that the annual values reported directly affect the composition of the named executive officer group included in the Summary Compensation Table. Following FAS 123R reporting principles more consistently, and disclosing equity compensation as it is earned, should help to make the named executive officer group more consistent from year to year.

The Commission also noted that this incremental disclosure, in combination with the new disclosure of the full grant date fair value of awards in the Grants of Plan-Based Awards Table, will provide investors with a more complete perspective of the compensation decisions made in the last completed fiscal year. The combined disclosure should also facilitate Compensation Discussion & Analysis (CD&A) disclosure of a company’s decisions regarding compensation awarded to, earned by or paid to the named executive officers in each year.

How have the Summary Compensation Table and Director Compensation Table been changed?

 As noted above, although the value of an equity award disclosed in the Stock Awards or Option Awards column of the Summary Compensation Table 3 is still based on the grant date “fair value” of the award, as determined pursuant to FAS 123R, the full grant date fair value of the award is no longer required to be disclosed in this table in the year of grant. Instead, the grant date fair value of an award will be reported incrementally over the vesting period of such award. Thus, the value of equity awards disclosed in the Stock Awards and Option Awards columns for a given year will more closely align with the compensation cost of such awards recognized in the company’s financial statements for the same year.

Corresponding changes apply to the Stock Awards and Option Awards columns of the Director Compensation Table.

What special considerations arise from incorporating FAS 123R principles into disclosure in the Summary Compensation Table?

Incorporating FAS 123R principles into the Summary Compensation Table raises a number of special considerations, including the following:

Equity versus Liability Awards. The classification of an award under FAS 123R as an “equity award” or “liability award” affects the measurement of compensation cost recognized in each financial statement reporting period. Generally, liability awards are awards with cash-based settlement or certain repurchase and other features that do not result in an employee bearing the risks and rewards associated with share ownership. For an equity award under FAS 123R, the compensation cost is fixed and, absent modification of the award, is not revised with subsequent changes in market prices or other assumptions used for purposes of determining value. Liability awards, on the other hand, are initially measured at their grant date fair value, but for purposes of recognition in the financial statements they are then re-measured at each financial reporting date until the awards are settled. These re-measurements of liability awards are required to be reflected in the Summary Compensation Table, in the years in which they occur.

Aggregation Groups. FAS 123R requires a company to aggregate individuals receiving awards into relatively homogenous groups for purposes of determining expected term assumptions used in computing grant date fair value. Where a company uses more than one group, the grant date fair value of an award is determined using the expected term assumption for the group that includes the named executive officers.

Vesting Conditions. FAS 123R requires companies to estimate at the grant date the number of awards that will ultimately be earned, and those estimates are revised for each reporting period as awards vest or are forfeited. The new disclosure rules do not change these FAS 123R requirements, but for purposes of the Summary Compensation Table, awards with a service-based vesting condition are reported based on an assumption that the named executive officers will satisfy the conditions and fully vest in the award. In contrast, awards with a performance-based vesting condition will be disclosed in the Summary Compensation Table only if it is probable that the performance condition will be achieved.

 • If a subsequent forfeiture of a service-based award occurs, the amount previously disclosed in the Summary Compensation Table   must be reversed for the period in which the forfeiture occurs.

• If a performance-based condition previously considered probable later becomes improbable, the amount disclosed in the Summary Compensation Table will be reversed.

• These timing adjustments related to vesting could result in a negative number for purposes of disclosure in the Summary Compensation Table for a given year. That might occur, for example, where the awards forfeited exceed the value of awards recognized for such year. Such a negative number will be disclosed in the relevant column and will affect the calculation of the “Total” column used for determining who is a named executive officer.

What other conforming changes are made to the Summary Compensation Table?

Information relating to forfeiture of awards is required to be described in footnote disclosure accompanying the Summary Compensation Table. The new rules also require that the amount of salary and bonus foregone at the election of a named executive officer in favor of receiving non-cash compensation must be included in the applicable Salary and Bonus columns, with a footnote referring to the disclosure of such non-cash compensation under the Grants of Plan-Based Awards Table.

What specific changes apply to the Grant of Plan-Based Awards Table?

As noted above, the new disclosure rules add a new column in the Grant of Plan-Based Awards Table. The new column will disclose the full grant date fair value of an equity award for the year of grant, computed in accordance with FAS 123R, without regard to the amount actually expensed in the company’s financial statements for that year. This disclosure previously was required to appear in the Summary Compensation Table and Director Compensation Table. This disclosure is now required as on a grant-by-grant basis, consistent with other disclosure in the Grants of Plan-Based Awards Table.

In addition, the Grants of Plan-Based Awards Table is now required to include information relating to the incremental fair value for repriced or materially modified options, stock appreciation rights and similar option-like instruments, computed as of the repricing or modification date in accordance with FAS 123R. This disclosure does not apply to modifications that equalize the fair value of an award, such as a modification that occurs pursuant to an anti-dilution provision that requires adjustment in a recapitalization or similar transaction, where the provision equally affects all holders of the equity interest in question.

To conform disclosure for directors, the Director Compensation Table must include footnote disclosure of the full grant date fair value of awards to directors, computed in accordance with FAS 123R, and information relating to repriced or materially modified awards.

Conclusion

These recent amendments have received much publicity -- some perceiving them as a retreat by the SEC from its strong position of full disclosure, and others seeing them as a welcome clarification to what could have been an “apples and oranges” presentation of annual compensation in the Summary Compensation Table. Many companies have already prepared draft proxy disclosure tables that will need to be revamped in light of this last-minute change. While the tabular changes themselves should be fairly straightforward, they can affect the determination of which officers qualify as named executive officers, particularly where there were large equity grants made in 2006 that vest over a number of years.