Canada: SEC Proposes Amendments To U.S. Compensation And Corporate Governance Disclosure

The U.S. Securities and Exchange Commission (SEC) has proposed new rules expanding compensation and corporate governance disclosure.1 Proposed amendments to compensation disclosure include:

  1. Expanding disclosure in the Compensation Discussion and Analysis (CD&A) to address how overall compensation policies for employees (including employees who are not named executive officers) create risk incentives that can affect the company's risk and the management of that risk taking;
  2. Reporting the aggregate grant date fair value of stock and option awards of executives and directors, as opposed to the amount recognized for financial statement reporting purposes; and
  3. Additional disclosure regarding fees paid to (and services provided by) compensation consultants and their affiliates if they also provide other services to the company.

Proposed changes to corporate governance-related disclosure broaden the disclosure regarding incumbent directors and director nominees, and would require new disclosure relating to company leadership structure and the board's role in the risk management process. In addition, the SEC is proposing amendments to the timing of disclosure of shareholder voting results.2

Comments on the proposed amendments must be submitted to the SEC by September 15, 2009. If adopted, the Commission has indicated that the amendments will likely become effective for the 2010 proxy season.

Compensation Disclosure

Compensation Discussion and Analysis

The proposed amendments would require a company to discuss and analyze in the CD&A its compensation policies and practices for employees generally, not just executive officers, if risks arising from those compensation policies or practices may have a material effect on the company. Companies will need to consider the level of risk that employees might be encouraged to take to meet their compensation incentives.

The Proposing Release sets forth a non-exclusive list of situations where compensation policies and practices may have the potential to raise material risks to the company and potentially trigger disclosure, including compensation policies and practices:

  • at a business unit that carries a significant portion of the company's risk profile;
  • at a business unit with compensation structured significantly differently than other units within the company;
  • at business units that are significantly more profitable than others within the company;
  • at business units where the compensation expense is a significant percentage of revenues; or
  • that vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.

The Proposing Release also provides examples of issues that companies may need to address when disclosure is required (i.e., when the company has made the threshold determination that its compensation policies and practices may give rise to risks that may have a material effect on the company) including:

  • the general design philosophy of the compensation policies for employees whose behavior would be most affected by the incentives established by the policies, as such policies relate to or affect risk taking by those employees on behalf of the company, and the manner of their implementation;
  • the company's risk assessment or incentive considerations, if any, in structuring its compensation policies or in awarding and paying compensation;
  • how the company's compensation policies relate to the realization of risks resulting from the actions of employees in both the short term and the long term, such as through policies requiring clawbacks or imposing holding periods;
  • the company's policies regarding adjustments to its compensation policies to address changes in its risk profile;
  • material adjustments the company has made to its compensation policies or practices as a result of changes in its risk profile; and
  • the extent to which the company monitors its compensation policies to determine whether its risk management objectives are being met with respect to incentivizing employees.

Equity Awards

The proposed amendments modify Item 402 of Regulation S-K to revise the Summary Compensation Table (SCT) and Director Compensation Table disclosure of stock and option awards. Such awards would be required to be disclosed based on the aggregate grant date fair value of such awards computed in accordance with SFAS 123R received by each named executive officer and director during the year of grant.3 In contrast, the current rule requires disclosure of the dollar amount recognized for financial statement reporting purposes in accordance with SFAS 123R for the fiscal year.

The SEC stated in the Proposing Release that it believes that investors consider compensation decisions made during the fiscal year – usually reflected in the full grant date fair value and not the amount recognized for financial statement purposes – to be material to voting and investment decisions, and that disclosure of the full grant date fair value permits investors to better evaluate the amount of equity compensation awarded. Under the proposal, the SCT would report the value of awards granted in the applicable fiscal year.4 Thus, for example, an award granted in 2009 for services rendered in respect of 2008 would not be reported until the 2010 proxy statement is filed.5

The proposal also amends Instruction 2 to the salary and bonus columns of the SCT to provide that registrants will not report in those columns the amount of salary or bonus forgone at a named executive officer's election. The non-cash awards received instead would be reportable in the column applicable to the form of compensation ultimately elected.

Compensation Consultants

The SEC proposal would require the following additional disclosure if a compensation consultant or its affiliates plays a role in determining or recommending the amount or form of executive or director compensation, and also provides additional services such as benefits administration, human resources consulting or actuarial services:

  • the nature and extent of all additional services provided to the company and its affiliates during the last fiscal year by the compensation consultant and its affiliates;
  • the aggregate fees paid for all additional services and the aggregate fees paid for work related to determining or recommending the amount or form of executive and director compensation;
  • whether the decision to engage the compensation consultant or its affiliates for non-executive compensation services was made, recommended, subject to screening or reviewed by management; and
  • whether the board of directors or the compensation committee approved the additional services in addition to executive compensation services.

Currently, companies are not required to disclose the fees paid to compensation consultants for executive compensation or other services, or to describe services that are not related to executive or director compensation.

In the Proposing Release, the SEC noted that because fees generated for additional services are often greater than the fees earned by the consultants for their executive compensation services, the provision of additional services may create the appearance, or risk, of a conflict of interest that could call into question the objectivity of the consultant's executive pay recommendations.

The new requirements would not apply where a consultant's only role in recommending the amount or form of executive or director compensation is in connection with consulting on broad-based plans that do not discriminate in favor of executive officers or directors, such as 401(k) plans or health insurance plans.

Corporate Governance Disclosure

Director and Nominee Disclosure

The proposed amendments expand required disclosure regarding the qualifications of incumbent directors and director nominees (including shareholder nominees), past directorships held by directors and nominees, and the time frame for disclosure of legal proceedings involving directors, nominees and executive officers.

Specifically, the amendments would require disclosure of the particular experiences, skills, qualifications and attributes that qualify the person to serve as a director and committee member in light of the company's business and structure. The SEC indicated that the amendments are aimed at helping investors determine whether and why a director or nominee and the entire board composition is an appropriate choice for a particular company. The expanded disclosure could cover more than the past five years, if material.

In addition, the amendments require disclosure of any public company directorships held at any time during the past five years by the director or nominee, as opposed to the current requirement to disclose only current directorships, and lengthen the time during which disclosure of legal proceedings involving directors, nominees or executive officers is required from five to ten years.

Company Leadership Structure and the Board's Role in the Risk Management Process

The SEC notes that when making voting and investment decisions, investors should be provided with meaningful information about the corporate governance practices of companies, including the board's leadership structure. As proposed to be revised, Regulation S-K would require disclosure in proxy and information statements regarding the company's leadership structure and why the company believes it is the best structure for it at the time of the filing. At a minimum, the proposed amendments would require (i) discussion of whether and why the company has chosen to combine or separate the principal executive officer and board chairman positions; and (ii) if one person serves as both the principal executive officer and the chair, disclosure of whether the company has a lead independent director and, if so, the role of the lead independent director.6

The proposals also include additional disclosure in proxy and information statements about the board's role in the company's risk management process generally (i.e., credit, liquidity and operational risk), and the effect that this has on the company's leadership structure.7 For example, how does the board implement and manage its risk management function – through the board as a whole or through a committee, such as the audit committee? Do the persons who oversee risk management report directly to the board as a whole or to a board committee? How does the board monitor risk? The SEC notes that disclosure about the board's involvement in the risk management process will provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.

Reporting of Vote Results

The SEC is proposing to transfer the requirement to disclose shareholder vote results from Forms 10-Q and 10-K to a new Item 5.07 of Form 8-K, and to have that information filed within four business days after the end of the meeting at which the vote was held. This would significantly shorten the delay in results disclosure. If the matter voted upon relates to a contested election of directors and if the vote was not definitively determined, companies would be required to disclose only preliminary voting results within four business days after their determination, and subsequently file an amended Form 8-K within four business days after the final results are certified.

For more information about these developments, please contact the authors.

This publication is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Recipients of this publication are advised to seek specific legal advice by contacting members of Osler regarding any specific legal issues. The information in this publication is current as of its original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose. Receipt of or use of this publication does not create a lawyer-client relationship.


1 See SEC Release No. 33-9052 (July 10, 2009) (Proposing Release) available at

2 The SEC also proposed changes to the proxy solicitation rules that are not covered by this Osler Update. These technical amendments to the proxy solicitation process are designed to clarify the manner in which soliciting parties communicate with shareholders.

3 The proposed rule would also rescind the requirement to report the full grant date fair value of each individual equity award in the Grants of Plan-Based Awards Table and the corresponding footnote disclosure to the Director Compensation Table because these disclosures would be duplicative of the proposed rule.

4 As the SCT requires disclosure for the last three fiscal years, the SEC indicated that it was considering (and requested comment on) whether it would be appropriate to require companies to present recomputed disclosure for each preceding year using the applicable grant date fair value, with the Total Compensation column recomputed accordingly.

5 However, the SEC also requested comment on whether the SCT should, instead, report the value of equity awards granted for services in a fiscal year, even if the grant was made after the end of the fiscal year when the services were performed.

6 Proposals are before Congress which would require that the principal executive officer and chair positions be separated.

7 Proposals are before Congress which would require public companies to establish a risk management committee.

James Lurie is a partner in the Business Law Department of the firm's New York office. Sandra Cohen is a partner in the firm's New York office practising in the Pensions and Benefits Department, with a cross-appointment to the Tax Department. Kate Coolican is an associate in the Business Law Department of the firm's New York office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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