On December 16, 2009, the SEC approved new rules requiring enhanced disclosures regarding risk management in relation to compensation policies, revisions to disclosure of a company's valuation of stock and option awards, and director and director nominee qualification disclosures, among other things. The rules will take effect on February 28, 2010. However, the SEC's adopting release and the SEC at the open meeting failed to provide detailed guidance on implementation of the effective date. We are currently interpreting the effective date to mean that the new rules apply to proxy statements filed on or after February 28, 2010, and not to proxy statements filed before that date for annual meetings after that date. It is not clear how this effective date will apply to preliminary and definitive proxy statements that straddle the February 28, 2010 date. We will continue to monitor this matter for further guidance from the SEC or the SEC staff. The SEC's adopting release, including the full text of the rules, is available at: http://www.sec.gov/rules/final/2009/33-9089.pdf.

On a related matter, the SEC has delayed any action on its proposed changes to the proxy rules designed to facilitate shareholder proxy access, and recently has reopened the comment period on the proposed rules until January 19, 2010. See our June 24, 2009 Executive Alert "SEC Proposes Rules to Facilitate Shareholder Nominations of Directors."

Compensation Policies and Risk Management

The new rules require companies to include a discussion and analysis of compensation policies for all employees, not just executive officers, if risks arising from those policies are "reasonably likely to have a material adverse effect on the company." This disclosure will be required under Item 402 of Regulation S-K but will not be a part of Compensation Disclosure & Analysis as was proposed, since the discussion will not be limited to executive officer compensation. The final rule contains a non-exhaustive list of situations that may trigger discussion. Smaller reporting companies will not be required to provide the new disclosure. The final rule does not require companies to make an affirmative statement that risks arising from their compensation practices are not likely to have a material adverse effect.

Valuation of Equity Compensation Awards

The new rules revise the current requirements regarding valuation of equity compensation awards in the Summary Compensation Table and Director Compensation Table. All such awards will now be required to be valued according to their aggregate grant date fair value (instead of the dollar amount recognized under FAS 123R for financial statement purposes for the year). The value of awards with performance conditions will be based on the probable outcome of the award, with footnoted disclosure of the maximum value of the award based on the maximum performance level. Companies will be required to present recomputed disclosures for all years shown in the table.

Director and Director Nominee Qualifications

The new rules require enhanced disclosures about each director and director nominee, including those not up for reelection, regarding the particular experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director. All public company board memberships held by directors or nominees during the past five years (instead of only current board memberships under current rules) are required to be disclosed. The time period for director or nominee involvement in legal proceedings required to be disclosed has been lengthened from five years to ten years, and the rules have been amended to require disclosure of additional categories of legal proceedings.

Diversity Considerations in the Board Nomination Process

The new rules, unlike the rules as proposed originally, include a disclosure requirement regarding whether, and if so, how, a nominating committee (or board) considers diversity during the nomination process. If a committee (or board) has a policy regarding how diversity is to be taken into consideration, procedures regarding implementation and evaluation of the effectiveness of this policy must also be disclosed. The rule and accompanying commentary expressly do not define "diversity," as the SEC has determined that companies should be allowed to determine the factors that are appropriate for diversity considerations.

Board Leadership Structure and Risk Oversight

The new rules require disclosure of a company's board leadership structure, as well as a discussion of the reasons why the company believes that this is the appropriate structure for the board at the time of filing. This would include whether and why the principal executive officer and board chairman positions are separate or combined, as well as whether and why the board has a lead independent director, and the specific role that lead independent director plays. This rule also requires disclosure of the board's role in the company's risk oversight process.

Compensation Consultant Disclosure

The new rules require disclosure of fees paid to compensation consultants in situations in which the company employs the consultant for recommendations on the amount or form of executive and director compensation and also for additional services. Disclosure is required only if the fees for the additional services exceed $120,000 during the year with respect to which the disclosure is made.

Expedited Disclosure of Shareholder Voting Results on Form 8-K

The new rules eliminate the Form 10-Q and 10-K requirements to disclose shareholder voting results, and provide for this disclosure in Item 5.07 of Form 8-K. The rule requires disclosure of these results within four business days following the completion of the relevant shareholder meeting. If the final results are not known at that juncture, the company must file a Form 8-K disclosing preliminary results within four business days, and an amended Form 8-K within four business days of determination of the final outcome.