On January 20, 2010, the Securities and Exchange Commission issued nine new Compliance & Disclosure Interpretations (the “January C&DIs”) relating to its proxy disclosure enhancement rules adopted on December 16, 2009 (the “New Proxy Disclosure Rules”). The January C&DIs provide guidance on the new disclosure requirements relating to director qualifications, compensation consultants, equity awards and compensation policies and practices. The January C&DIs also supplement the C&DIs issued by the Staff on December 22, 2009 (the “December C&DIs”) by providing additional guidance on transition issues.

Most of the January C&DIs are technical in nature, but some of the new interpretations provide a broader perspective on the Staff’s approach to implementation of the new disclosure requirements. Companies preparing proxy statements intended to comply with the New Proxy Disclosure Rules should review and analyze the January C&DIs. In addition, the January C&DIs may affect whether some calendar year companies decide to file their proxy materials prior to February 28, 2010 in order to delay the requirement to comply with the New Proxy Disclosure Rules until 2011.

This Corporate Update summarizes and provides commentary on the January C&DIs. For a summary and discussion of the New Proxy Disclosure Rules and the December C&DIs, see our Corporate Update “The SEC’s Proxy Disclosure Enhancements: Analysis and Next Steps.”

Director Qualifications

The New Proxy Disclosure Rules require companies to disclose the “specific experience, qualifications, attributes or skills” of a director or a nominee that led the board to conclude that the director or nominee should serve on the board, in light of the company’s business and structure. If there was previously any doubt, the January C&DIs make clear that, when the SEC says “specific,” the SEC really means it.

The January C&DIs state that director qualification disclosure cannot be provided on a group basis if directors or nominees share similar characteristics (e.g., if several directors are current or former CEOs of large companies). In addition, disclosure that a director or nominee qualifies as an audit committee financial expert is, by itself, insufficient to comply with the new director qualification disclosure requirements.

The January C&DIs underscore the need for companies to describe in significant detail the particular qualifications and experience of each of their directors in relation to the business of the company. The development of this disclosure may be difficult for some directors. Historically, many directors have been selected because of their general business experience and broad management skills. In complying with the New Proxy Disclosure Rules, the challenge will be to articulate such experience and skills in a very specific way and relate them directly to the company’s business.

In the January C&DIs, the Staff also makes clear that the new director qualification disclosure requirements apply with equal force to directors of a company with a classified board who are not standing for re-election. The determination that such a director should continue to serve on the board must be made as of the time the proxy statement is filed. The Staff noted that, for some boards (including particularly boards that do not conduct annual self-evaluations), new disclosure controls and procedures may need to be implemented to comply with the disclosure requirements for directors not standing for re-election.

Transition Issues

In the December C&DIs, the Staff stated that a company with a fiscal year ending after December 20, 2009 need not comply with the New Proxy Disclosure Rules, if its definitive proxy statement was filed with the SEC before February 28, 2010. As a result, some calendar year companies have been considering an early filing of the proxy statement in order to delay compliance until 2011.

However, the December C&DIs did not address the issue of whether a company that made an early proxy statement filing would be required to amend it to comply with the New Proxy Disclosure Rules, if the company later filed a new 1933 Act registration statement. In the January C&DIs, the Staff stated that such amendment would be required in order to have a registration statement declared effective on or after February 28, 2010, except in the case of Form S 3 registration statements.

While this guidance from the Staff will be welcome news for calendar year companies planning to delay compliance for another year, the Staff’s position has an important catch. The exception for Form S 3 registration statements apparently does not apply to other forms of registration statements that incorporate proxy statement disclosure. Consequently, a company delaying compliance will be required to amend its proxy filing if it files a new registration statement on Form S 8 (covering securities issuable under an employee incentive or benefit plan) or on Form S 4 (covering securities issuable in an M&A transaction).

The Staff should provide further guidance and apply the exception to compliance with the New Proxy Disclosure Rules to Form S 8 and Form S 4 registration statements. Otherwise, the transition rule allowing calendar year companies to file their proxy statements before February 28, 2010 in order to defer compliance with the New Proxy Disclosure Rules will be of limited value.

The January C&DIs also dealt with a more technical transition issue. Companies holding their 2010 annual meetings prior to February 28, 2010 need not comply with the new requirement to report the voting results on Form 8 K. Instead, the Staff indicated that such results reported on or after February 28, 2010 should be disclosed in the next Form 10 K or Form 10 Q in the “Other Information” item of the report, because the “Submission of Matters to a Vote of Security Holders” item will be eliminated from these forms effective February 28, 2010.

Compensation Consultants

Subject to certain exceptions, the New Proxy Disclosure Rules require disclosure regarding fees paid to an executive compensation consultant in any fiscal year, if (i) the consultant was engaged by the board or company management to advise on the amount or form of executive or director compensation, (ii) the consultant also provided “additional services” (e.g., consulting services relating to the compensation of non-executive employees) and (iii) the fees paid for these “additional services” exceeded $120,000 during such fiscal year. In the January C&DIs, the Staff stated that the “additional services” category may include services which relate to executives (other than advice on executive compensation) as well as non-executive employees.

Generally, information regarding two types of services (consulting on broad-based employee benefit plans, and providing information that either is not customized for a particular company or is customized based on parameters that are not developed by the consultant) does not need to be disclosed. However, these two types of services must be disclosed, if the consultant provides related advice or other “additional services.” The January C&DIs deal with the question of whether these two types of services, if they are required to be disclosed, constitute services relating to director or officer compensation or “additional services.”

The Staff advised that the answer depends on the facts and circumstances of each service. Services involving consulting on broad-based benefit plans in which officers or directors participate and providing survey information relating to executive or director or director compensation are considered advice on executive officer or director compensation rather than “additional services.” On the other hand, certain other services relating to broad-based plans, such as benefits administration, human resources services, actuarial services and acquisition integration services, fall into the category of “additional services.” Also, providing non-customized survey or other information that does not relate to executive officer or director compensation is considered “additional services.”

Equity Awards

The January C&DIs provide guidance on the new requirement to disclose the full grant date fair value of equity awards made to executive officers in the Summary Compensation Table. Specifically, the January C&DIs provide that:

  • The grant date fair value of equity awards with time-based vesting should exclude the effect of estimated forfeitures of such awards; and
  • The grant date fair value of an equity award made to an executive officer must be included for purposes of determining total compensation and identifying the named executive officers for a fiscal year, even if the executive officer leaves the company and forfeits the award prior to the end of the fiscal year.

Compensation Policies and Practices and Risk

The New Proxy Disclosure Rules require narrative disclosure of a company’s compensation policies and practices, if they create risks that are “reasonably likely to have a material adverse effect on the company.” Although this information must be provided in a section of the proxy statement separate from the CD&A, the New Proxy Disclosure Rules do not specify where the disclosure should be presented.

Few, if any, companies are expected to characterize their compensation practices and policies as likely to result in risks that will have a material adverse effect on the company. However, if a company determines it is required to make this disclosure, the January C&DIs states that the disclosure must be presented together with the other executive compensation information required to be disclosed under Item 402 of Regulation S K. The purpose of this requirement is to ensure that the new disclosure relating to compensation policies and practices that encourage risk is not difficult to locate or provided in an obscure manner.