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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Introductory Remarks at the SEC Open Meeting


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
July 26, 2006

Good morning. This is a meeting of the Securities and Exchange Commission under the Government in Sunshine Act on July 26, 2006. Today we will consider new disclosure rules for executive pay that will give investors a much clearer picture of exactly how much they're paying the executives who work for them.

Investors care about executive compensation. In January, we proposed the first comprehensive revisions to the executive compensation rules since 1992. We expected the response would be significant. In fact, we tapped into a veritable wellspring of national interest and opinion. With more than 20,000 comments, and counting, it is now official that no issue in the 72 years of the Commission's history has generated such interest.

Our purpose in enacting these rules is straightforward: to advance the interests of shareholders through better disclosure. It is not the job of the SEC to judge what constitutes the "right" level of compensation for an executive or to place limits on what executives are paid. That is the responsibility of the compensation committee of the board of directors, who represent the shareholders and their interests.

The better information that both shareholders and boards of directors will get as a result of these new rules will help them make better decisions about the appropriate amount to pay the men and women entrusted with running their companies.

To be truly useful, that better information has to be presented in a clear and understandable form that they can use. Shareholders and their representatives need intelligible disclosure that can be understood by a lay reader without benefit of specialized expertise, and without an advanced degree. It's our job to see to it they get it.

The rules package we're acting on today will clarify executive pay; demystify any financial dealings between executives and the companies they work for (what we call related party transactions); and shed welcome new light on the degree of director independence and the quality of corporate governance at our nation's public companies.

The rule changes before us will give shareholders a new Compensation Discussion and Analysis section, which is similar in concept and design to the narrative disclosures in the familiar Management's Discussion and Analysis section of today's reports.

This will give companies an opportunity to explain their compensation policies, and to share with investors how they arrived at the particular levels and forms of compensation for their highest paid executives.

For the first time, our rules will require that all elements of executive compensation be disclosed. There will be improved disclosure of perquisites; more precise and understandable disclosure of retirement benefits; a clear explanation of any future payments that could be made to an executive in the event of his or her termination or a change in control; and a thoroughly modernized presentation of stock option compensation that includes strong new protections against undisclosed backdating or spring loading of options.

These new options disclosure rules are based on the solid premise that from the standpoint of SEC regulation, options are a perfectly legitimate form of compensation, and there is nothing inherently wrong with choosing any particular date or using any particular methodology for determining an option's strike price - as long as it is fully and fairly disclosed to shareholders and properly accounted for.

The rules we are issuing today underscore the importance of providing investors with a clear and complete picture of how their company uses options to compensate executives.

Specifically, the rules will require:

  • Disclosure of the full grant date fair value of an option at the time the award was actually made;
  • A comparison of the exercise price to the grant date market price, whenever the exercise price is lower than the market price;
  • Disclosure of the date when the compensation committee took action on an option grant if that date differs from the grant date; and
  • A plain English description of how the company determined the timing of option awards to executives.

Among the most important features of these new rules is that there will now be one bottom-line number, including all options, for an executive's total compensation. And that number will be comparable from company to company.

At the end of the day, it will be up to shareholders, directors, investors and the market to decide how they will use this improved disclosure. But I am absolutely certain that this new information will benefit our markets and the nation's economy. In that sense, the executive compensation rules we are adopting today should be seen as part of a much larger effort, one that is being undertaken every day by the Commission, to give investors better tools to look after their interests.

I would like to thank the staff in the Division of Corporation Finance for their hard work on these proposals, particularly John White, Paula Dubberly, David Lynn, Ann Krauskopf, Carolyn Sherman, Daniel Greenspan, and Kimberley Drexler, as well as their colleagues in the Office of the General Counsel, the Division of Investment Management, the Office of the Chief Accountant, and the Office of Economic Analysis, who all provided valuable assistance.

I will now recognize John White for a more detailed description of the proposals.


Modified: 07/26/2006