SEC PROPOSES TO AMEND COMPENSATION AND CORPORATE GOVERNANCE DISCLOSURE RULES The Securities and Exchange Commission (SEC) has proposed amendments to its rules regarding the disclosure of executive and director compensation and corporate governance and the timing of the reporting of information regarding voting results. In its release the SEC explained that the proposed amendments are designed to enhance transparency with regard to matters that are material to understanding a company s risk profile. The changes would require disclosure of additional information concerning the relationship of a company s overall compensation policies to risk, director and nominee qualifications, company leadership structure, and the potential conflicts of interests of compensation consultants. The amendments would also change the reporting of equity compensation awards in the summary compensation and director compensation tables. In lieu of the dollar amount recognized for financial statement reporting purposes issuers would be required to disclose the aggregate grant date fair value of awards computed in accordance with FAS 123R. The SEC also proposed amendments to Exchange Act Rules 14a-2, 14a-4 and 14a-12 to clarify certain issues relating to the solicitation of proxies and the granting of proxy authority. Compensation Discussion and Analysis Disclosure The SEC s current rules require an issuer to provide in its proxy materials a narrative discussion of its compensation programs and policies for its principal executive officer, principal financial officer and the three most highly compensated executive officers, other than the principal executive officer and principal financial officer (named executive officers). The proposed amendments would expand this discussion to include an issuer s compensation programs and policies for other employees if such programs and policies presented risks that may have a material effect on the issuer. The proposed amendments are designed to enable investors to evaluate whether compensation incentives can lead to excessive or inappropriate risk taking by employees. The following is a non-exclusive list of situations provided by the SEC that may trigger discussion and analysis because the compensation practices have the potential to raise risks material to the company (disclosure would be required only where the materiality threshold is crossed): A business unit carries a significant portion of the issuer s risk profile. 1
A business unit with compensation that is structured significantly differently than other units within the issuer. Business units that are significantly more profitable than others within the issuer. Business units where the compensation expense is a significant percentage of the unit s revenues. The compensation varies significantly from the overall risk and reward structure of the issuer (for example, where bonuses are awarded upon completion of a task, but the income and risk to the company from the task extend over a significantly longer period of time). The following is a non-exclusive list of questions that may need to be addressed: What is the general design philosophy of the compensation policies for employees whose behavior would be most affected by the incentives established by the policies? What consideration does the company give to risk assessment in structuring its compensation policies? How do the company s compensation policies relate to the realization of risks that may result from the actions of employees in the short term and the long term (e.g. through policies requiring claw backs or imposing holding periods)? What are the company s policies regarding adjustments to its compensation policies to address changes in its risk profile? Has the company adjusted compensation practices as a result of changes in its risk profile? How does the company monitor its compensation practices to determine whether its risk management objectives are being met? Compensation Table Disclosures Under the SEC s current rules the summary compensation table and director compensation table must disclose for each named executive officer and director, with respect to such individual s stock and option awards, the dollar amount recognized for financial statement reporting purposes for the fiscal year in accordance with FAS 123R. The proposed amendments would require disclosure of the aggregate grant date fair value of such awards computed in accordance with FAS 123R in place of the disclosure of the dollar amount recognized for financial statement reporting purposes. The requirement to report the full grant date fair value of each individual equity award in the Grants of Plan- Based Awards Table and corresponding footnote disclosure to the Director Compensation Table would be deleted. Instruction 2 to the salary and bonus columns of the summary compensation table would also be amended to remove the requirement to report in those columns the amount of salary or bonus forgone at a named executive officer s election. The non-cash awards received would be reportable in the column applicable to the form of award elected. Corporate Governance Disclosures Under current Item 401 issuers are required to disclose brief biographical information about directors and nominees for election for the past five years, and current Item 407 requires general disclosure about a 2
company s director qualification requirements. The proposed amendments would expand the required disclosure to include the particular experience, attributes and skills for each director and nominee that qualify that person to serve as a director at the time that the filing is made with the SEC, and as a member of any committee on which the person serves or is chosen to serve on. The expanded disclosure would apply to incumbent directors, nominees selected by the company s nominating committee and to any nominees put forward by other proponents. For example, the disclosure may include information about a director's or nominee s risk assessment skills and any specific past experience that would be useful to the company, as well as information about a director's or nominee s particular area of expertise and why the director's or nominee s service as a director would benefit the company. The proposed amendments would require disclosure of any directorships held by each director and nominee at any time during the past five years at public companies rather than only current directorships as required under the existing rule. The disclosure would be required even if the director or nominee no longer serves on that board. The amendment is designed to allow investors to better evaluate the relevance of a director s or nominee's past board memberships, or professional or financial relationships that might pose potential conflicts of interest such as membership on boards of major suppliers, customers, or competitors. The proposed amendments would extend the period time during which disclosure of legal proceedings is required from five to 10 years. The proposed amendments would require disclosure under Item 407 and Item 7 of Schedule 14A of the company s leadership structure and why the company believes it is the best structure for it at the time of the filing. Companies would be required to disclose whether and why they have chosen to combine or separate the principal executive officer and board chair positions. Companies in which the roles are combined would be required to disclose whether and why they have a lead independent director to chair meetings of the independent directors and describe the specific role the lead independent director plays in the leadership of the company. The proposed amendments would require additional disclosure concerning the board s role in the company s risk management process. 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 whole, to a committee, such as the audit committee, or to one of the other standing committees of the board; and whether and how the board, or board committee, monitors risk? The amendments are designed to increase the transparency for investors into how boards function and the board s involvement in the risk management process. This proposed disclosure would appear in proxy and information statements. Disclosure Regarding Compensation Consultants Companies are currently not required to disclose the fees paid to compensation consultants for executive 3
compensation consulting or other services, or to describe services that are not related to executive or director compensation. Under the proposed amendments if a compensation consultant played a role in determining or recommending the amount or form of executive or director compensation, and also provided additional services, then the company would be required to disclose: The nature and extent of all additional services provided during the last fiscal year by the compensation consultant. 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. Whether the board of directors or the compensation committee has approved all of these services in addition to executive compensation services. The amendments are designed to elicit information to enable investors to assess any incentives and potential conflict of interests a compensation consultant may have in recommending executive compensation and better assess the compensation decisions made by the board. Proposed amendments would not apply where compensation consultant s role is limited to recommendations solely in connection with consulting on broad-based plans that do not discriminate in favor of executive officers or directors of the company. For example, disclosure would not be required if a compensation consultant assists a company in developing a 401(k) plan or other broad-based, non-discriminatory plan in which all salaried employees, including executives, will be eligible to participate on the same terms, and the compensation consultant provides other services to the company that are not related to determining or recommending the level of executive or director compensation. Reporting of Voting Results on Form 8-K The proposed amendments would add a new Item 5.07 to Form 8-K to require a company to disclose on the Form 8-K the results of a shareholder vote within four business days after the end of the meeting and would delete the requirement from Forms 10-Q and 10-K. If the voting results relate to a contested election of directors and are not definitively determined at the end of the meeting, the Form 8-K would disclose the preliminary voting results within the four business day period after the preliminary voting results are determined, and file an amended report on Form 8-K within four business days after the final voting results are certified. Proxy Solicitation Process Exchange Act Rule 14a-2(b)(1) Introductory Text Exchange Act Rule 14a-2(b)(1) exempts from most requirements of the proxy rules solicitations by nonmanagement parties who are not seeking proxy authority and do not have a substantial interest in the subject matter of the solicitation. The proposed amendment would clarify that an unmarked copy of management s proxy card that is requested to be returned directly to management is not a form of revocation under Exchange Act Rule 4
14a2(b)(1) so that a person who furnishes such a duplicate proxy card is not disqualified from relying on the exemption. Exchange Act Rule 14a-2(b)(1)(ix) The proposed amendment would clarify that a person need not be a security holder of the class of securities being solicited and a benefit need not be related to or derived from any security holdings in the class being solicited for Exchange Act Rule 14a-2(b)(1)(ix) to disqualify the person from relying on the Exchange Act Rule 14a-2(b)(1) exemption. Exchange Act Rule 14a-4(d)(4) Exchange Act Rule 14a-4(d)(4) is an exception to the bona fide nominee requirement that permits a person soliciting support for nominees who, if elected, would constitute a minority of the board of directors (commonly referred to as a short slate ), to round out its short slate of nominees by seeking authority to vote for nominees named in the registrant s proxy statement. The proposed amendment would provide that a person soliciting in support of nominees who, if elected, would constitute a minority of the board to round out its short slate by seeking authority to vote for another soliciting person s nominees in addition to or instead of the issuer s nominees. The proposed exception would be available only when non-management parties are not acting together. A non-management soliciting person that seeks to round out its short slate with any nominee named in another non-management person s proxy statement would be required to represent in its proxy statement that: o it has not agreed and will not agree to act, directly or indirectly, as a group or otherwise engage in any activities that would be deemed to cause the formation of a group as determined under Section 13(d)(3) and in Regulation 13D-G with the other non-management person. o it is not a participant in the other non-management person s solicitation. Exchange Act Rule 14a-4(e) Exchange Act Rule 14a-4(e) requires that a proxy statement or form of proxy provide that the shares represented by the proxy be voted subject to reasonable specified conditions. The proposed amendment would specify that for there to be reasonable specified conditions, the conditions must be objectively determinable. The amendment is designed to enable the shareholder to make an informed decision in regard to granting proxy authority and confirm that any later withholding of shares from voting is consistent with the authority granted. Exchange Act Rule 14a-12(a)(1)(i) Exchange Act Rule 14a-12 permits a solicitation to be made before furnishing security holders with a proxy statement meeting the requirements of Exchange Act Rule 14a-3(a) if, among other requirements, each written communication includes the identity of the participants in the solicitation and a description of their direct or indirect interests or a legend advising security holders where they can obtain that information. The proposed amendment would clarify that the required participant information must be filed under cover of Schedule 14A as part of a proxy statement or other soliciting materials no later than the time the first soliciting communication is made. It is not sufficient to provide the information in a document filed later. 5
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