SEC Adopts Executive Compensation Rules

Transcription

1 November 2006 / Issue 15 A legal upate from Dechert s Financial Services Group SEC Aopts Executive Compensation Rules On July 28, 2006, the Securities an Exchange Commission (the SEC ) aopte a number of changes to the rules requiring isclosure of executive an irector compensation, relate person transactions, irector inepenence an other corporate governance matters, an security ownership of officers an irectors. 1 Most of these changes impact the isclosure of such matters by operating companies. This upate, however, is esigne to highlight the new isclosure requirements that will affect registere investment companies. 2 Disclosure Changes In general, with these amenments, the SEC sought to increase the quality an usefulness of isclosure surrouning executive compensation. Registere investment companies are affecte by two main isclosure areas: relate person transactions; an irector inepenence an corporate governance issues. Relate Person Transactions Amene Item 404(a) of Regulation uner the Securities Act of 1933 articulates a broa principle for isclosure it states that a company must provie isclosure regaring any transaction since the beginning of the company s last fiscal year, or any currently propose transaction in which the company was or is to be a participant, where the amount in- 1 2 Executive Compensation an Relate Person Disclosure, Rel. No A (Aug. 29, 2006) ( Aopting Release ). For a broaer overall view of the amenments, see DechertOnPoint, August 2006, Issue 46, prepare by our Employee Benefits an Executive Compensation Group available at volve excees $120,000; an in which any relate person ha or will have a irect or inirect material interest. The amenments to Item 404(a) elete an Instruction, which state that the materiality of any interest is to be etermine on the basis of the significance of the information to investors in light of all the circumstances of the particular case. The Instruction went on to state that the importance of the interest to the person having the interest, the relationship of the parties to the transaction with each other an the amount involve in the transactions are among the factors to be consiere in etermining the significance of the information to investors. In the Aopting Release, the SEC suggeste that the Instruction was elete because it was repetitive of the general materiality stanar applicable to Item 404. The Aopting Release makes clear though that the amenment was not intene to change the materiality stanar applicable to Item 404(a), where the materiality of any interest is etermine on the basis of the significance of the information to investors in light of all the circumstances. 3 Amene Item 404(a) also eliminates the Instruction which inicate that the ollar threshol in the Item was not a bright line materiality stanar, which the SEC believes is more consistent with a principles-base approach an will lea to more appropriate isclosure outcomes than application of the instruction that was eliminate. 3 Aopting Release, at n.413 (citing Basic v. Levinson an TSC Inustries v. Northway).

2 In aition, the amenments: Call for isclosure if a company is a participant in a transaction, rather than if it is a party to the transaction, as par-ticipant more accurately connotes the company s involvement Moify the $60,000 threshol for isclosure to $120,000 to ajust for inflation Inclue a efine term for transaction to provie that it inclues a series of similar transactions an to make clear its broa scope Inclue a efine term for relate persons an an expane efinition of immeiate family member Prior to the amenments, isclosure of inebteness transactions was separately aresse in Item 404(c) of Regulation. The amenments, however, incorporate the isclosure formerly require by Item 404(c) into the isclosure now require by Item 404(a). As the SEC notes in the Aopting Release, this makes the isclosure requirements for inebteness an for other relate person transactions congruent. Director Inepenence an Corporate Governance Matters The amenments also consoliate existing isclosure requirements with respect to irector inepenence an relate corporate governance matters. The SEC aopte new Item 407 of Regulation, which upates isclosure requirements regaring irector inepenence to reflect the SEC's current requirements an current exchange an national quotation system listing stanars. The highlights of the isclosure uner this requirement will inclue: Disclosure of any auit, nominating, an compensation committee members who are not inepenent Disclosure about the compensation committee s processes an proceures for the consieration of executive an irector compensation It shoul be note that registere investment companies have been require to isclose this information prior to these amenments an that the amenments o not significantly alter the isclosure require for registere investment companies. Please see the attache Appenix, which highlights the ifferences between the ol an new isclosure requirements, as applicable to registere investment companies. Compliance Dates Registere investment companies must comply with these isclosure requirements in initial registration statements an post-effective amenments that are annual upates to effective registration statements on Forms N-1A, N-2 (except those file by business evelopment companies), an N-3, an in any new proxy or information statements, file with the Commission on or after December 15, The upate was authore by Jennifer O. Epstein ( ; jennifer.epstein@echert.com), Weny Robbins Fox ( ; weny.fox@echert.com), an Megan C. Johnson ( ; megan.johnson@echert.com). Disclosure of whether each irector an irector nominee is inepenent A escription, by specific category or type, of any transactions, relationships, or arrangements not isclose as a relate person transaction that were consiere by the boar of irectors when etermining if applicable inepenence stanars were satisfie November 2006 / Issue 14 2

3 New Executive Compensation an Relate Person Transaction Disclosure Requirements Affecting Registere Investment Companies Relate Person Disclosure Items 404(a) an 404(c) of Reg. Item 404(a) of Reg. The instructions to Item 404(a) were amene so that they no longer elineate what transactions are reportable or excluable from isclosure base on bright lines that can epart from a more appropriate materiality analysis. Instea, amene 404(a) consists of a general statement of the principle for isclosure of transactions with relate persons, followe by specific isclosure requirements an instructions. Amene 404(a) also integrates the isclosure formerly require uner 404(c) relate to inebteness transactions. Note that 404(a) oes not require isclosure regaring inebteness transactions of significant shareholers (or their immeiate family members). Amene Item 404(a) changes the threshol amount from $60,000 to $120,000 (see below) an also changes the efinitions of transaction, relate person, immeiate family member an amount involve (see below). Thus, Item 404(a) now requires a company to escribe any transaction, since the beginning of the registrant's last fiscal year, or any currently propose transaction, in which the registrant was or is to be a participant an the amount involve excees $120,000, an in which any relate person ha or will have a irect or inirect material interest. These revisions impact proxy materials of registere investment companies because Item 22(b)(11) of Scheule cross-references Item 404(a). Item 404(a) Definitions Transaction No efinition Instruction 2 to Item 404(a) of Reg. New efinition: Inclues, but not limite to, any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships (also inclues inebteness an guarantees of inebteness). November 2006 / Issue 15 3

4 New Executive Compensation an Relate Person Transaction Disclosure Requirements Affecting Registere Investment Companies Relate person Certain parties are specifically liste in Item 404(a) of Reg., but there was not a efinition of relate parties Instruction 1(a) to Item 404(a) of Reg. New efinition: Any person who was at any time uring the specifie perio for which isclosure uner Item 404(a) is require: (1) any irector or executive officer of the company an his or her immeiate family members; an (2) if isclosure was provie in a proxy or information statement relating to the election of irectors, any nominee for irector, an the immeiate family members of any nominee for irector. The term also inclues any security holer known by the company to beneficially own more than 5% of any class of voting securities or any immeiate family member of that security holer, who was in such category when a transaction in which the security holer or family member ha a irect or inirect material interest occurre or existe. Immeiate family member Instruction 2 to Item 404(a) of Reg.. Definition inclue only a person's spouse, parents, chilren, siblings, mothers an fathers-in-law, sons an aughters-inlaw, an brothers an sisters-in-law Instruction 1(a)(iii) to Item 404(a) of Reg. New efinition: Expane category, now inclues chil, stepchil, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, aughter-in-law, brother-in-law, or sister-in-law, an any person (other than a tenant or employee) sharing the househol of a irector, nominee for irector, executive officer, or significant shareholer of the company. Amount involve Instructions 3 an 4 of Item 404(a) of Reg. Instruction 3 to Item 404(a) of Reg. New efinition: The ollar value of the transaction or series of similar transactions, which inclues: (1) in the case of any lease or other transaction proviing for perioic payments or installments, the aggregate amount of all perioic payments or installments ue on or after the beginning of the company s last fiscal year, incluing any require or optional payments ue uring or at the conclusion of the lease or other transaction proviing for perioic payments or installments; an (2) in the case of inebteness, the largest aggregate amount of all inebteness outstaning at any time since the beginning of the company s last fiscal year an all amounts of interest payable on it uring the last fiscal year. New efinition incorporates concept of inebteness with integration of former Item 404(c) into amene Item 404(a). November 2006 / Issue 15 4

5 New Executive Compensation an Relate Person Transaction Disclosure Requirements Affecting Registere Investment Companies Exceptions to Item 404(a) isclosure requirements Item 404(a) of Reg. Instruction 5 to 404(a) of Reg. Disclosure of an employment relationship or transaction involving an executive officer an any relate compensation solely resulting from that employment relationship or transaction is not require if (1) the compensation is reporte pursuant to Rule 402 of Regulation ; or (2) if the executive officer is not an immeiate family member, an such compensation woul have been reporte uner Item 402 as compensation earne for services to the company if the executive officer was a name executive officer, an such compensation ha been approve, or recommene to the boar of irectors of the company for approval, by the compensation committee of the boar of irectors (or group of inepenent irectors performing a similar function) of the company. The remaining exceptions remain unchange. Note that Item 402 requires tabular an narrative isclosure of the compensation of the principal executive officer, principal financial officer, the three other highest pai executive officers an the irectors. The executive compensation isclosure is organize into three broa categories: compensation over the last three years; holings of outstaning equity-relate interests receive as compensation that are the source of future gains; an retirement plans, eferre compensation, an other post-employment payments an benefits. Disclosure threshol of certain interests, transactions, an relationships of each incumbent or nominee irector (who is not or woul not be an intereste person of an investment company within the meaning of Section 2(a)(19) of the 1940 Act). Scheule Items 22(b)(7), 22(b)(8), an 22(b)(9) Form N-1A Items 12(b)(6), 12(b)(7), an 12(b)(8) Form N-2 Items 18.9, 18.10, an Scheule Items 22(b)(7), 22(b)(8), an 22(b)(9). Form N-1A Items 12(b)(6), 12(b)(7), an 12(b)(8). Form N-2 Items 18.9, 18.10, an Disclosure threshol raise from $60,000 to $120,000. Disclosure regaring promoters Item 401(g)(1) of Reg. Item 401(g)(1) of Reg. Item 22(b)(11) of Scheule cross-references Item 401(g) of Reg.. Item 401(g) requires isclosure regaring the ientity of promoters an transactions with promoters if the company has use a promoter at any time uring the last 5 years. Previously, Item 401(g) i not require isclosure regaring the ientity of promoters an transactions with promoters if a company ha been organize more than 5 years ago, regarless of whether the company ha a promoter in the past 5 years. November 2006 / Issue 15 5

6 New Executive Compensation an Relate Person Transaction Disclosure Requirements Affecting Registere Investment Companies Security ownership isclosure Item 403(b) of Reg. Item 403(b) of Reg. Item 6() of Scheule cross-references Item 403(b) of Reg.. Amenment provies that a company must inclue a footnote to the currently require share ownership tables regaring the number of shares plege as security by name executive officers, irectors, an nominees. Amenments also require isclosure of beneficial ownership of irectors qualifying shares. Corporate governance relate isclosures Item 7(e) of Scheule require investment companies to furnish information require by former Item 22(b) in lieu of information require by Items 7(a) through ()(1) an ()(2)(ii)(D) Item 7(e) of Scheule requires investment companies to furnish information require by amene Item 22(b) in lieu of all information in Item 7. The information require by Item 7 an Item 22(b) has been relocate to new Item 407 of Reg.. Items 22(b)(15), (16) an (17) of Scheule now inclue cross references to new Item 407 of Reg.. The substance of the isclosure requirements has not been altere. Number of total Boar meetings hel uring last fiscal year an information about attenance Security holer communication with boar Items 7(f) an (h) of Scheule Item 22(b)(15)(i) of Scheule Item 22(b)(15)(i) of Scheule cross-references new Items 407(b)(1) an (2) an (f) of Reg., an correspons to the information require pursuant to former Items 7(f) an 7(h) of Scheule. Nominating Committee information Items 7()(2)(i) an 7()(2)(ii) of Scheule Item 22(b)(15)(ii) of Scheule Amene Item 22(b)(15)(ii) of Scheule crossreferences Items 407(c)(1) an (2) of Reg., an correspons generally to the information require pursuant to former Items 7()(2)(i) an 7()(2)(ii) of Scheule. Disclosure regaring exemption from inepenence requirements for Nominating Committee members No requirement Instruction to Item 22(b)(15)(ii)(B) of Scheule Requires isclosure of basis for conclusion that registere investment company may rely on exemption from inepenence requirements for nominating committee membership of its listing exchange or quotation system. Auit Committee isclosure (close-en investment companies only) Item 7()(3) of Scheule Item 22(b)(16)(i) of Scheule Item 22(b)(16)(i) cross-references Items 407()(1) ()(3), an correspons to the information require pursuant to former Item 7()(3). Note that Item 407()(1) provies that the auit committee charter nee not be elivere to security holers so long as it is poste on the company s website. Disclosure regaring exemption from inepenence requirements for Auit Committee members No requirement Instruction to Item 22(b)(16)(ii) of Scheule Requires isclosure of basis for conclusion that registere investment company may rely on exemption from inepenence requirements for auit committee membership of its listing exchange or quotation system. November 2006 / Issue 15 6

7 New Executive Compensation an Relate Person Transaction Disclosure Requirements Affecting Registere Investment Companies Disclosure regaring irectors who have resigne or ecline to stan for reelection Item 7(g) of Scheule Item 22(b)(17) of Scheule No substantive change. Practice group contacts For more information, please contact the authors, one of the attorneys liste, or any Dechert attorney with whom you are in regular contact. Visit us at Margaret A. Bancroft Jennifer O. Epstein Davi J. Harris Allison R. Beakley Ruth S. Epstein Robert W. Helm Saner M. Bieber Susan C. Ervin Jane A. Kanter Stephen H. Bier Joseph R. Fleming Stuart J. Kaswell Timothy M. Clark Brenan C. Fox George J. Mazin Elliott R. Curzon Davi M. Geffen Jack W. Murphy Douglas P. Dick Newport Beach Terrie J. Hanna John V. O Hanlon john.ohanlon@echert.com November 2006 / Issue 15 7

8 Fran Pollack-Matz Robert A. Robertson Newport Beach Patrick W. D. Turley Jeffrey S. Puretz Keith T. Robinson Brian S. Vargo Philaelphia Jon S. Ran Alan Rosenblat Davi A. Vaughan Kimberly D. Rasevic Freerick H. Sherley Charlotte Anthony H. Zacharski Hartfor U.S. Austin Charlotte Harrisburg Hartfor Newport Beach Palo Alto Philaelphia Princeton San Francisco U.K./Europe Brussels Lonon Luxembourg Munich Paris 2006 Dechert LLP. All rights reserve. Materials have been abrige from laws, court ecisions, an aministrative rulings an shoul not be consiere as legal opinions on specific facts or as a substitute for legal counsel. November 2006 / Issue 15 8