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U.S. Securities and Exchange Commission

Proxy Disclosure Enhancements

A Small Entity Compliance Guide1

Introduction

On December 16, 2009, the Securities and Exchange Commission adopted amendments to its disclosure rules and forms to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies. The amendments are intended to improve disclosures regarding risk, corporate governance, director qualifications, and compensation. In particular, the amendments will require small companies to provide new disclosure about:

  • the background and qualifications of directors and nominees;

  • legal actions involving a company's executive officers, directors and nominees;

  • the consideration of diversity in the process by which candidates for director are considered for nomination;

  • board leadership structure and the board's role in risk oversight;

  • stock and option awards to company executives and directors; and

  • potential conflicts of interests of compensation consultants.

Under the amendments, quicker reporting of shareholder voting results would also be required.

The amendments take effect on February 28, 2010.

What are the requirements of the amendments?

New Director and Nominee Disclosure

The Commission amended Item 401 of Regulation S-K to expand the disclosure requirements regarding the qualifications of directors and nominees, as well as past directorships held by directors and nominees. Specifically, the amendments will require disclosure, for each director and director nominee of the company, of the following:

  • The particular experience, qualifications, attributes or skills that led the company's board to conclude that the person should serve as a director of the company; and

  • Any directorships at public companies and registered investment companies that each director and director nominee held at any time during the past five years.

For small companies that are registered management investment companies ("funds"), the amendments will require:

  • Disclosure, for each director and director nominee of the fund, of the particular experience, qualifications, attributes or skills that led the fund's board to conclude that the person should serve as a director of the fund; and

  • Disclosure of any directorships held by each director and nominee at any time during the past five years at public companies or registered management investment companies.

Expanded Disclosure About Legal Proceedings Involving Executive Officers, Directors, and Nominees for Director

The amendments to Item 401 of Regulation S-K also lengthen the time during which disclosure of legal proceedings involving directors, director nominees and executive officers is required from five to ten years. In addition, the legal proceedings covered under this item have been expanded to require disclosure of 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 (excluding settlements between private parties); and

  • Any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.

New Disclosure of How Diversity is Considered in the Director Nomination Process

The Commission amended Item 407(c)(2)(vi) of Regulation S-K to require disclosure of whether, and if so how, the nominating committee or the board (if there is no nominating committee) considers diversity in identifying director nominees. If the nominating committee or the board has a policy with regard to the consideration of diversity in identifying director nominees, then the amendments require disclosure of how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.

New Disclosure about Board Leadership Structure and the Board's Role in Risk Oversight

In addition to the new diversity disclosure in Item 407 of Regulation S-K, the Commission added new paragraph (h) to Item 407. New Item 407(h) will require disclosure about:

  • A company's board leadership structure, such as whether the company has chosen to combine or separate the chairman of the board and chief executive officer positions, and why the company believes the leadership structure of its board is the most appropriate for the company at the time of the filing;

  • A fund's board leadership structure, such as whether the chairman of the board is an "interested person" of the fund, and why the fund believes the leadership structure of its board is the most appropriate for the fund at the time of the filing;

  • If one person serves as both chairman of the board and chief executive officer, or in the case of a fund is an "interested person," whether and why a company or fund has a lead independent director and the specific role of such director; and

  • The extent of the board's role in the risk oversight of the company.

Revised Disclosure in the Summary Compensation Table

The Commission amended Item 402 of Regulation S-K to revise the method of reporting stock and option awards in the Summary Compensation Table and the Director Compensation Table to better reflect the compensation committee's decisions with regard to these awards. Previously, Item 402 required companies to disclose in the Summary Compensation Table and Director Compensation Table the dollar amount recognized for financial statement reporting purposes for the fiscal year. Under the amendments to Item 402, companies will be required to report the aggregate grant date fair value of any stock or option awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. In addition, the Commission adopted a specific instruction for awards subject to performance conditions to address concerns that the amendments might discourage use of the awards.

New Disclosure about Potential Conflicts of Interests of Compensation Consultants

The Commission amended Item 407(e)(3)(iii) of Regulation S-K to require companies to provide new disclosure about the fees for executive compensation services in certain circumstances, as well as related disclosures. This new disclosure is intended to provide investors with information to help them better assess the potential conflicts of interest a compensation consultant may have in recommending executive compensation. The amendments can be summarized as follows:

  • If the board or compensation committee has engaged its own consultant to provide advice or recommendations on the amount or form of executive and director compensation, and this consultant or its affiliates provided additional services to the company in an amount in excess of $120,000 during the company's last fiscal year, then the amendments require disclosure of the aggregate fees for the executive compensation services, as well as the aggregate fees for the additional services. Disclosure is also required of whether the decision to engage the compensation consultant or its affiliates for the additional services was made or recommended by management, and whether the board or compensation committee has approved such other services.

  • If the board or compensation committee has not engaged its own compensation consultant, but there is a consultant providing executive compensation consulting services to management that also provided additional services to the company in an amount in excess of $120,000 during the company's last fiscal year, then the amendments require disclosure of the aggregate fees for the executive compensation consulting services, as well as the aggregate fees for any additional services.

  • Services involving only broad-based non-discriminatory plans or the provision of information, such as surveys, that is not customized for the company, or is customized based on parameters that are not developed by the consultant, are not treated as executive compensation consulting services for purposes of the compensation consultant disclosure rules.

Faster Reporting of Shareholder Voting Results

The Commission amended Forms 8-K, 10-Q and 10-K to transfer the requirement to disclose shareholder voting results from Forms 10-Q and 10-K to Form 8-K. The amendments add a new item to Form 8-K that will require companies to disclose the results of a shareholder vote, and to have that information reported within four business days after the end of the shareholders' meeting at which the vote was held.

Other Resources

The adopting release for these amendments can be found on the SEC's Web site at http://www.sec.gov/rules/final/2009/33-9089.pdf.

Regulation S-K can be accessed through the "Corporation Finance" section of the SEC's Web site at http://www.sec.gov/divisions/corpfin/ecfrlinks.shtml.

The SEC's disclosure forms can be accessed on the Commission's Web site at http://www.sec.gov/about/forms/secforms.htm.

Compliance and disclosure interpretations related to the amendments are available at http://www.sec.gov/divisions/corpfin/cfguidance.shtml.

Transition guidance for registered investment companies under the rule and form amendments can be found at http://www.sec.gov/divisions/investment/guidance/icproxydisclosuretransition.htm.

Contacting the SEC

The SEC's Division of Corporation Finance is available to assist small companies and others with questions regarding the amendments. You can contact the Division for this purpose at (202) 551-3500 or at https://tts.sec.gov/cgi-bin/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning small companies may be directed to the Division's Office of Small Business Policy by e-mail at the address above, or by telephone at (202) 551-3460.

The SEC's Division of Investment Management is also available to assist small companies with questions regarding fund disclosure. You can contact the Division of Investment Management's Office of Disclosure Regulation at (202) 551-6784.

1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for a rule itself. Only a rule itself can provide complete and definitive information regarding its requirements.

 

http://www.sec.gov/rules/final/2009/33-9089-secg.htm


Modified: 01/24/2012