The Securities and Exchange Commission held an open meeting on December 16, 2009 at which it adopted changes to the proxy disclosure rules applicable to public companies' compensation and governance activities. The rules were initially proposed in July 2009 and discussed in an update (http://www.faegre.com/showarticle.aspx?Show=9946) at that time. The rules, which have been modified since the proposing release was issued, will be effective for the 2010 proxy season. The full text of the final rules is available here. (http://www.sec.gov/news/press/2009/2009-268.htm)

Overall Compensation Policies

Under the new rules, a public company will need to discuss and analyze its compensation policies and actual compensation practices for employees generally—not just for executive officers—if risks arising from these policies or practices are reasonably likely to have a material adverse effect on the company. The adopted rule differs from the proposal in the following ways: (a) the "reasonably likely" modifier was added, (b) disclosure is required only in instances in which the possible material effect on the company would be adverse, (c) the disclosure will not appear in the Compensation Discussion and Analysis section of the proxy statement, and (d) the disclosure requirement will not apply to smaller reporting companies.

Stock and Option Awards of Executives and Directors

The Summary Compensation Table and Director Compensation Table will report the aggregate grant date fair value of stock and stock option awards granted during the fiscal year, instead of the dollar amount recognized for financial statement reporting purposes for the fiscal year. For stock and option awards subject to performance conditions, the dollar amount associated with the probable outcome must be reported in the table, and the maximum payout must be disclosed in a footnote to the table. The stock and option award amounts for the prior two fiscal years reported in the Summary Compensation Table will need to be recalculated to reflect the aggregate grant date fair value, but this recalculation will not change which persons are included in the table as named executive officers.

Directors and Nominees

The background information provided about each director and nominee will be expanded to include detailed information on the person's particular experience, qualifications, attributes or skills that qualify him or her to serve as a director. The proposing release would have required similar disclosure for each of the committees on which the director serves or will serve, but the SEC did not include this additional requirement in the final rule. As proposed, required disclosure of service on the boards of other public companies has been expanded from current directorships to directorships held within the last five years. Additionally, the look-back period for certain legal proceedings that need to be disclosed has been expanded from five years to 10 years, and the list of proceedings that need to be disclosed has been expanded to encompass the following:

  • any judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity;
  • any judicial or administrative proceedings based on violations of federal or state securities, commodities, banking or insurance laws and regulations, or any settlement to such actions; and
  • any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.

Board Leadership Structure and the Board's Role in Risk Oversight

As proposed, a public company will need to describe its board leadership structure and explain why that structure is appropriate in the company's circumstances. Specifically, the company will need to disclose whether and why the principal executive officer position is combined with the board chair position, and if the positions are combined, whether and why a lead independent director has been designated and what role that position has.

In addition, the proxy statement will need to include information about the board's role in overseeing the company's risk. This disclosure will address issues such as whether the board as a whole or a board committee is responsible for the board's risk oversight function, whether the company personnel responsible for risk management report directly to the board or committee, and whether and how the board or committee monitors risk.. Note that the proposing release addressed the board's role in risk "management," while the final rule contemplates risk "oversight" by the board.

Compensation Consultants

If a consultant has a role in determining or recommending the amount or form of executive officer or director compensation and also provides additional services to the company, the company will need to disclose information that allows investors to evaluate the potential for a conflict of interest. The final rule differs from the proposed rule in that a disclosure threshold has been added (disclosure is required only if at least $120,000 has been paid to the consultant in the fiscal year for services unrelated to executive officer or director compensation), there is no requirement to disclose the nature and extent of the additional services, and consultations limited to providing certain information, such as surveys that have not been customized, are excluded. In addition, the final rule has maintained the proposed exception for services related to broad-based plans.

Board Diversity

The final rules require disclosure of whether and how a company's nominating committee considers diversity in selecting candidates for board positions. The disclosure will include a discussion of the policies, if any, the board has implemented and information about how the board assesses the effectiveness of any policies it has. The word "diversity" is not defined in the rules, leaving it open to each company's interpretation, which may include diversity of experience. The diversity rules were not included in the proposing release, but the SEC solicited comments regarding board diversity in that release.

Other Rule Changes

In addition to these substantive changes designed to enhance disclosure, the SEC will now require companies to report voting results from shareholder meetings on new Item 5.07 of Form 8-K, instead of on Form 10-Q or Form 10-K. The preliminary voting results will need to be filed within four business days after the meeting, and the final results will need to be filed within four days of their availability. The SEC has deferred consideration of the procedural changes to the proxy solicitation rules it had previously proposed until it is ready to make final decisions regarding proxy access.

Implementing Changes from the Final Rules

The new rules will require public companies to take several actions to modify existing documents, obtain input from the board of directors and include additional disclosure in certain SEC filings.

  • Revise the D&O Questionnaire
    • Change the period for disclosure of involvement in certain legal proceedings from five years to 10 years.
    • Include questions related to involvement in legal proceedings related to certain kinds of fraud and securities violations, as well as discipline by a securities exchange, as described above.
    • Expand the question regarding membership on other public company boards to cover such board service over the last five years.
  • Schedule a Nominating Committee Meeting (or Add to the Agenda of a Scheduled Meeting).
    • Facilitate a discussion of the nominating committee regarding the experience, qualifications, and attributes of directors and nominees to serve on the company's board and articulate the committee's views on those qualifications.
    • Discuss the board's policy, if there is one, regarding consideration of diversity as a factor in the selection of director nominees. Prepare to describe any policy on diversity, understand how the board defines "diversity" for this purpose and how it implements its policy, and ask the board how it assesses the effectiveness of its policy on diversity.
  • Schedule a Board Meeting (or Add to the Agenda of a Scheduled Meeting)
    • Identify the allocation of oversight responsibility for various types of risks among the board and its committees and prepare to articulate this allocation in the proxy statement.
  • Prepare Additional Disclosures for Proxy Statement
    • Identify and articulate any compensation practices that are reasonably likely to have a material adverse effect on the company. The final rules contain examples of the types of policies that may require disclosure and the suggested content of that disclosure.
    • Report stock and option awards in the Summary Compensation Table and Director Compensation Table using the aggregate grant date fair value, handling performance-based awards as described above. Recast the amounts reported under Stock Awards and Options Awards in the Summary Compensation Table for the last two fiscal years by using the aggregate grant date fair value.
    • Describe the company's leadership structure and why that structure is appropriate for the company, including whether the company separates the roles of board chair and chief executive officer and, if not, whether and why a lead director has been designated and what role that position has
    • Identify all compensation consultants that play a role in determining or recommending compensation for executive officers and directors. Determine whether any of those consultants also receive compensation for other services that exceeds $120,000 for the fiscal year (or whether one of the exceptions for services related to broad-based plans or services limited to providing certain information may apply). For any such consultants, obtain information about the total fees paid for executive officer and director compensation services and for the other services. Determine whether the decision to engage the consultant to perform the other services was made or recommended by management and whether the board approved the engagement of the consultant for the services not related to executive officer and director compensation.
  • Update Form 8-K Disclosure Controls Checklist and Shareholder Meeting Checklist
    • Add a requirement to file a Form 8-K disclosing the results of each shareholder meeting within four business days after the meeting under Item 5.07.

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