On December 16, 2009, the SEC issued significant new rules requiring enhanced disclosure of compensation and corporate governance matters by registered companies. The new requirements, which are generally effective for the 2010 proxy season, are summarized in our December 18, 2009 client memorandum "SEC Issues Final Rules Concerning Corporate Governance and Disclosure of Executive Compensation" (the "Proxy Disclosure Memo"), which is available here. (http://tinyurl.com/yf3kzdj) Because of their complexity, the staff of the SEC's Division of Corporation Finance has already issued fourteen Compliance & Disclosure Interpretations ("C&DIs") relating to the new disclosure requirements (five on December 22, 2009 and nine on January 20, 2010), providing guidance on the requirements and certain transition issues.

This memorandum is intended only to summarize the recent C&DIs. For a more complete description of the new disclosure requirements, please refer to our Proxy Disclosure Memo using the link provided above.

General C&DIs

Enhanced Director and Nominee Disclosure (See Proxy Disclosure Memo, page 4). The new rules require more detailed discussion of the backgrounds of board nominees and incumbent directors. Issuers must include a description of each such indivdual's specific experience, qualifications and attributes or skills that led to the conclusion that he or she should serve as a director. With regard to this requirement, the Staff has issued the following guidance:

  • The disclosure of the specific experience, qualifications, attributes or skills leading to the conclusion that a person was qualified to serve as a director may not be disclosed on a group basis, but must be disclosed for each director or nominee individually, with particular and specific information provided for each such director or nominee.
  • For issuers with a staggered board, disclosure of specific experience, qualifications, attributes or skills must be disclosed for all nominees and directors, including continuing directors who are not up for re-election. For continuing directors, the disclosure should be made in the context of why they are qualified to continue serving in their position as directors. The SEC noted that for some boards (particularly those without self-evaluation procedures), this may require additional disclosure controls to gather, process and report the information.

Tabular Disclosures (See Proxy Disclosure Memo, page 3). The new rules require that the Summary Compensation Table and the Directors Compensation Table include the grant date fair value of equity awards granted during the applicable fiscal year. With regard to this requirement, the Staff issued the following guidance:

  • In calculating the grant date fair value of equity awards in accordance with the new rules, if an issuer grants an equity award to an executive that is later forfeited (e.g., because the executive resigns), the grant date fair value of the award should still be included for purposes of 2009 total compensation and for identifying 2009 named executive officers.
  • For awards subject to time-based vesting, the amount to be reported remains the grant date fair value, without regard to the value of any estimated forfeitures (i.e., no reduction of the grant date fair value should be made based on estimated forfeitures), as FASB ASC Topic 718 provides that "service conditions that affect vesting are not reflected in estimating the fair value of an award at the grant date..."

Compensation Discussion and Analysis (See Proxy Disclosure Memo, page 2). The new rules require that an issuer discuss its compensation policies and practices for employees generally, if it is determined that the risks arising from those policies and practices are reasonably likely to have a material adverse effect on the registrant. The new rules do not require that this new disclosure be contained in the registrant's Compensation Discussion and Analysis section (which disclosure is considered "filed" with the SEC). With respect to the placement of the new discussion regarding risk, if any, the Staff issued the following guidance:

  • The disclosure should be clearly presented with the rest of the disclosures required by Item 402 of Regulation S-K. The Staff specifically noted that it would take issue if such information was presented in a way that was difficult to locate or that was obscured. This is consistent with the Staff's recent positions on a number of disclosure items, where they have focused on making sure that important information is easy to understand and not buried within other unrelated information.

Disclosure Regarding Compensation Consultants (See Proxy Disclosure Memo, page 5). The new rules expand the disclosure requirements relating to compensation consultants that work with the registrant's board of directors and/or management where, generally, the compensation consultant provides "additional services" to the company (services in addition to its work related to executive and director compensation). With regard to this requirement, the Staff issued the following guidance:

  • "Additional services" as used in the context of compensation consultants is not limited to services for non-executives.
  • The determination of whether the fees paid to compensation consultants should be categorized as "determining or recommending the amount or form of compensation" or for "additional services" under the "broad based" or "custom parameters" exceptions of the new rules is a fact-based analysis and differs on a case-by-case basis. The Staff provided, for example, that services involving consulting on broad-based benefit plans in which officers or directors participate and for providing survey information relating to executive or director compensation are considered to be for "determining or recommending the amount or form of compensation." Conversely, benefits administration, human resources services, actuarial services and acquisition integration services in the context of broad-based non-discriminatory plans fall into the category of "additional services." Also, if non-customized information relates to matters other than executive or director compensation, the fees for such information would be for "additional services."

Transition Guidance

The new rules become effective on February 28, 2010, and are applicable to those companies whose fiscal year ends on or after December 20, 2009. The Staff issued several C&DIs providing specific guidance on compliance through the transition period. Specifically:

  • If an issuer's fiscal year ends on or after December 20, 2009, its Form 10-K and proxy statement must comply with the new rules if filed on or after February 28, 2010. If an issuer files a preliminary proxy statement prior to that date, but expects to file its definitive proxy statement on or after February 28, 2010, then the preliminary proxy statement must comply with the new rules.
  • Issuers not required to comply with the new rules may voluntarily comply, however, if the issuer voluntarily complies with the new rules regarding the Summary Compensation Table and Director Compensation Table, it must also comply with all other new rules that apply to the form filed.
  • If an issuer's fiscal year ends before December 20, 2009, its Form 10-K and proxy statement are not required to comply with the new rules, even if filed on or after February 28, 2010. Such issuers are not required to comply until they make their filings for the fiscal year 2010.
  • With regard to new registrants, if the new registrant first files its registration statement on or after December 20, 2009, it must comply with the new rules in order for such registration statement to be declared effective on or after February 28, 2010.
  • An issuer with a fiscal year ending on or after December 20, 2009, which files a registration statement on or after December 20, 2009, generally would be required to comply with the new rules for such registration statement in order for it to be declared effective on or after February 28, 2010. However, an exception will be made for registration statements filed on Form S-3, as the issuer's 2009 10-K will be incorporated by reference.
  • Issuers must disclose the results of any shareholder vote at a meeting that takes place on or after February 28, 2010 on Form 8-K, without regard to whether the associated proxy statement was filed prior to February 28, 2010.
  • For shareholder meetings held prior to February 28, 2010, where the results of any shareholder vote will be reported on a Form 10-K or Form 10-Q filed on or after February 28, 2010, the results should be reported in the "Other Information" Item of such form, as the "Submission of Matters to Vote of Security Holders" Item will be removed from Form 10-K and Form 10-Q as of February 28, 2010.

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.