SEC Transition Advice Expected Soon


On December 16, 2009, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to its rules requiring expanded disclosure regarding executive compensation and corporate governance matters. The new rules require companies to provide additional disclosure with respect to:

  • Overall compensation policies and the impact of such policies on corporate risk taking;
  • Director and board nominee qualifications, including how diversity is considered in the director nomination process;
  • Board leadership structure, including the board’s role in the risk management process; and
  • Compensation consultants.

The amendments also require disclosure of shareholder voting results in a Form 8-K (as opposed to waiting for the next Form 10-Q or 10-K).


The rules are effective on February 28, 2010 and will generally apply to the 2010 proxy season. However, the rules do not indicate whether they apply to proxy statements that are filed before February 28, 2010 if the annual meeting is held after that date. The SEC has indicated that they expect to provide guidance on the implementation of these rules before the end of the year.

Executive and Director Compensation

Expanded Compensation Disclosure

The rules require a company to address its compensation practices for all employees, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. If risks arising from such policies or practices are not reasonably likely to have a material adverse effect on the company, no additional disclosure is required. This new disclosure requirement compels companies to analyze their broader compensation policies and practices for all employees, not just executive officers. If a company has compensation policies and practices for different groups that mitigate or balance incentives, these should be considered in assessing the risks arising from the company’s compensation policies and practices. Unlike the proposed rule, this disclosure is not a part of the company’s Compensation Discussion and Analysis.

The SEC provides a non-exhaustive list of examples of situations where such disclosure may be warranted, which include:

  • A particular business unit accounts for a significant portion of the company’s risk profile;
  • The compensation of a particular business unit is structured significantly differently from that of other units;
  • A particular business unit is significantly more profitable than other units;
  • The compensation expense of a particular business unit represents a significant percentage of the company’s revenues; or
  • Compensation policies or practices vary significantly from the company’s overall risk and reward structure, such as when the timing for performance-based bonuses or incentive awards occurs significantly before receipt of anticipated income or expiration of associated risk to the company.

This new disclosure will undoubtedly be uncharted territory for most companies, and crafting it may require extensive analysis and consideration by all participants in the disclosure process. Smaller reporting companies will not be required to provide the new disclosure.

Revisions to Summary and Director Compensation Tables

The new rules revise the Summary Compensation Table and Director Compensation Table to require disclosure of the aggregate grant date fair value of stock and option awards computed in accordance with FASB ASC Topic 718, with an exception for performance-based awards, which is discussed below. Disclosure is based upon awards granted in a given fiscal year regardless of whether they relate to services performed in a previous period. This disclosure replaces the current approach that is based on the dollar amount recognized for financial statement reporting purposes for the fiscal year. The effect of this change is that the full value of the award will be reported in the year that the award is made, even if the award vests over a number of years. To facilitate year-to-year comparison, the SEC will require recomputation of prior year disclosures, but will not require the inclusion of different named executive officers for any recomputed year.

The rules provide that for awards, the size of which are contingent upon achievement of certain targets, the value to be disclosed should be based on the probable outcome of the performance condition as of the grant date. Additionally, the rules require footnote disclosure indicating the award’s potential maximum value.

Directors, Director Nominees and Executive Officers

The new rules expand the disclosure requirements regarding the qualifications of all directors and director nominees. Specifically, the new rules require companies to disclose for each director or nominee for director, as of the time of the applicable filing, the specific experience, attributes or skills that led the board to conclude that the person should serve as a director for the company. While the rules do not specify the particular information that should be disclosed, the SEC notes that this additional narrative disclosure may include, among other things, information about an individual’s risk assessment or financial reporting expertise. The expanded disclosure applies to incumbent directors and all nominees for director.

In addition, the new rules expand the required biographical information about directors and director nominees to include, in addition to disclosure of current directorships, disclosure of any public company directorships held during the past five years. The SEC expanded the list of legal proceedings and require disclosure of legal proceedings involving directors, director nominees or executive officers that occurred during the past ten years, as opposed to the current requirement of five years.


The new rules also require disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director. If the nominating committee has a policy regarding the consideration of diversity in nominating directors, it must disclose how this policy statement is implemented as well as how the nominating committee assesses the effectiveness of the policy.

Board Leadership Structure

The new rules require a company to briefly describe its board’s leadership structure. The company is also required to explain whether and why it has elected to combine the positions of principal executive officer and chairman of the board, if they are combined, and to disclose whether and why it has appointed a lead independent director. If a company has a lead independent director, it must disclose details about the specific role that person plays within the board’s leadership structure. This disclosure should also indicate why the company has determined that its leadership structure is appropriate. Also, the company is required to disclose the extent of the board’s role in the risk oversight of the company, such as how the board administers its oversight function and the effect that this has on the board’s leadership structure.

Compensation Consultants

The rules require that, in addition to the current requirement to describe the role of the compensation consultant in determining or recommending the amount or form of executive and director compensation, additional information about the services performed by and fees paid to compensation consultants and their affiliates is required under certain circumstances.

  • If the board or compensation committee engages its own compensation consultant to provide advice on executive and director compensation and the consultant or its affiliates provide other non-executive compensation consulting services to the company (such as benefits administration, human resources consulting or actuarial services), fee and related disclosure is required, provided the fees for the non-executive compensation consulting services exceed $120,000 during the previous fiscal year. Disclosure is also required of whether the decision to engage the compensation consultant or its affiliates for non-executive compensation consulting service was made or recommended by management and whether the board has approved these non-executive compensation consulting services provided by the compensation consultant or its affiliate.
  • If the board has not engaged its own consultant, fee disclosures are required if there is a consultant providing executive compensation consulting services and non-executive compensation consulting services to the company, provided the fees for the non-executive compensation consulting services exceed $120,000 during the company’s fiscal year.
  • Fee and related disclosure for consultants that work with management (whether for only executive compensation consulting services or for both executive compensation consulting and other non-executive compensation consulting services) is not required if the board has its own consultant.
  • Services involving only broad-based non-discriminatory plans or the provision of the information, such as surveys that are not customized for the company or are customized based on parameters that are not developed by the consultant are not treated as executive compensation consulting services under the compensation consultant disclosure.

The rules do not require disclosure of the nature and extent of all additional services provided by the compensation consultant or its affiliates to the company or its affiliates during the past fiscal year as was originally proposed.

Reporting of Shareholder Voting Results

Under the new rules, a company’s obligation to disclose shareholder vote results will be disclosed under a Form 8-K within four business days after the meeting instead of under a Form 10-Q or 10-K. In situations where definitive results are not available within that period (such as a contested election of directors), a company will be required to file preliminary voting results on Form 8-K within four business days after preliminary results are determined, and then file an amended Form 8-K within four business days after the final voting results have been certified.

Proxy Solicitation Process

The SEC deferred consideration of those proposals regarding the proxy solicitation process pending its consideration of its proposal to facilitate shareholder director nominations in company’s proxy materials.