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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Opening Statement Before the SEC Open Meeting


Daniel Greenspan

Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission

Washington, D.C.
July 26, 2006

Good morning.

Today the Division of Corporation Finance recommends that the Commission adopt amendments to the executive compensation, related person transaction, director independence and other corporate governance disclosure requirements.

The Commission received many comment letters in response to the proposals it issued in January. Commenters largely supported the objectives of the proposals and favored adoption. The Commission received various suggestions about ways to modify the proposals. Having considered the comments, we recommend that the Commission adopt the proposals substantially as proposed, with a number of modifications addressing issues raised by commenters.

Executive and Director Compensation

With regard to compensation disclosures, the recommended amendments would refine the currently required tabular disclosure and combine it with improved narrative disclosure to elicit clearer and more complete disclosure of compensation of the principal executive officer, principal financial officer, the three other highest paid executive officers, and the directors. The calculation of who is a named executive officer would be based on total compensation excluding earnings on nonqualified deferred compensation and changes in pension value.

Compensation Discussion and Analysis

At the heart of the recommended changes to the Commission’s executive compensation disclosure requirements is a new Compensation Discussion and Analysis section. This section would be a principles-based overview explaining the policies and decisions related to named executive officer compensation in one place. We recommend the Commission adopt this new requirement substantially as proposed.

The Compensation Discussion and Analysis would be filed and would thus be a part of the disclosure subject to certification by a company’s principal executive officer and principal financial officer. We also recommend adopting a new, brief Compensation Committee Report that would be similar to the Audit Committee Report, would be “furnished,” and would appear over the names of the compensation committee or persons performing similar functions. The required Compensation Committee Report would require a statement as to whether the compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on this review and discussion, recommended to the Board of Directors that it be included in the company’s annual report on Form 10-K and proxy statement.

In conjunction with the Compensation Discussion and Analysis requirement, the Commission also proposed to eliminate the Performance Graph. We recommend that the Performance Graph be retained but no longer be coupled with executive compensation disclosure. Given the widespread support for the Performance Graph expressed by commenters, we recommend moving it to Item 201 of Regulation S-K and requiring it to be included in annual reports to security holders that accompany or precede proxy statements relating to annual meetings at which directors are to be elected.

Summary Compensation Table

Under the amendments that we recommend, the Summary Compensation Table would serve as the principal disclosure vehicle for executive compensation over the last three years. The Summary Compensation Table would include:

  • A column reporting the amount of compensation under non-equity incentive plans;
  • Columns showing the dollar value for stock and options awards based on the grant date fair value of the award determined pursuant to FAS 123R. Earnings on equity-based awards would not be required to be reported to the extent that they are already factored into the grant date fair value of the awards and only the incremental value of repriced or otherwise materially modified awards would be required to be disclosed;
  • A column reporting the annual change in the actuarial present value of accumulated pension benefits and above-market or preferential earnings on nonqualified deferred compensation;
  • A column showing the aggregate amount of all other compensation not reported in the other columns of the table, including perquisites. Perquisites would be included in the table unless the aggregate amount is less than $10,000. We recommend you provide interpretive guidance for determining what is a perquisite; and
  • A column reporting total compensation, which would the last column in the table and would aggregate the total value of each form of compensation quantified in the other columns.

The Summary Compensation Table would be supplemented by an additional table entitled Grants of Plan-Based Awards. Required disclosure would include clear tabular presentations of awards including:

  • disclosure of the grant date;
  • the closing market price on the grant date if it is greater than the exercise price of the award; and
  • the date the compensation committee took action to grant the awards if that is different from the grant date.

If it is material to an understanding of the tables, companies may be required to disclose performance targets for incentive plans in the narrative disclosure or in the Compensation Discussion and Analysis. We recommend that you adopt as proposed an instruction allowing a company to keep the specific performance measurement confidential if it is confidential commercial or financial information and its disclosure would result in competitive harm to the company. We recommend that this instruction be adopted with revisions clarifying that the applicable standard for nondisclosure is the same as the standard used for requesting confidential treatment under the Commission’s existing rules.

Disclosure of Three Highly-Paid Non-Executive Employees

As proposed, the narrative disclosure that accompanies the table would have required disclosure for up to three employees who were not executive officers during the last completed fiscal year, but whose total compensation was greater than that of any of the named executive officers.

In response to comments, we recommend you re-propose this provision. We recommend the revised proposal require only large accelerated filers to provide disclosure for each of the three most highly compensated employees, whether or not such persons are executive officers, whose total compensation is greater than any of the named executive officers. In making the determination of who are among these three most highly compensated employees, companies would not consider employees with no responsibility for significant policy decisions within the company, a significant subsidiary or a principal business unit, division, or function. We recommend that in the revised proposal the individuals would not need to be named, but would rather be identified by job position when reporting their total compensation. For the purposes of determining which employees are included and what disclosure is required, the revised proposal would exclude from the computation of total compensation the increase in actuarial present value of the employee’s accumulated benefit under all pension plans and also earnings on deferred compensation. This approach would be consistent with how companies would determine who are named executive officers for the purposes of the disclosure in the executive compensation tables. The re-proposal would be subject to notice and public comment.

Equity-Related Compensation and Holdings

Disclosure regarding outstanding equity interests would also be required, including:

  • The Outstanding Equity Awards at Fiscal-Year End Table, which would show outstanding awards representing potential amounts that may be received in the future, including information on the amount of securities underlying exercisable and unexercisable options, and the individual exercise prices and the expiration dates for each outstanding option (rather than on an aggregate basis); and
  • The Option Exercises and Stock Vested Table, which would show amounts realized on equity compensation during the last fiscal year. We recommend this table not include a column for reporting the grant date fair value that would have been previously disclosed.

We also recommend that the Commission provide guidance in the Release regarding disclosure of company programs, plans and practices relating to the granting of options, including in particular the timing of option grants in coordination with the release of material nonpublic information and the selection of exercise prices that differ from the underlying stock’s price on the grant date. In addition to the required tabular disclosure about equity-based awards which would apply to option grants, companies will need to consider discussing and analyzing these topics in their Compensation Discussion and Analysis disclosure. We recommend that the Release include a discussion of the questions and elements that companies might consider addressing in their disclosure.

Retirement Plan and Post-Employment Disclosure

Tabular disclosure about retirement and post-employment compensation would include:

  • the Pension Benefits Table; and
  • the Nonqualified Deferred Compensation Table.

In response to commenters’ concerns about the risk of manipulation in the calculation of estimated pension benefits and the need for improved comparability, we recommend revising the Pension Benefits Table to require disclosure of the actuarial present value of each named executive officer’s accumulated pension benefit, rather than the estimated annual retirement benefits as was proposed. We recommend that this value be computed using the same assumptions and the same measurement period used for financial statement purposes, except that companies would use the normal retirement age as specified in the plan. We further recommend that estimates be based on current levels of compensation, so that future levels of compensation would not need to be estimated.

The nonqualified deferred compensation table would disclose executive contributions, company contributions, withdrawals, all earnings for the year (not just the above-market or preferential portion) and the year-end balance of deferred compensation plans.

We also recommend adopting, substantially as proposed, the requirement for narrative disclosure of any arrangement that provides for payments or benefits with regard to any termination of a named executive officer, a change in responsibilities, or a change in control of the company including a reasonable estimated range of amounts payable. We recommend modifying the proposal to specify that the required quantitative disclosure be based on assumptions that the triggering event took place on the last business day of the company’s last completed fiscal year and that the price per share was the closing market price on that date.

Director Compensation

Director compensation for the last fiscal year would be required in a Director Compensation Table (along with related narrative), which would be similar in format to the Summary Compensation Table described above. As appropriate, companies would need to consider including disclosure analogous to that found in the Compensation Discussion and Analysis section, such as with regard to practices related to option grants.

Related Person Transactions

We believe that a materially complete picture of financial relationships with a company involves disclosure regarding related person transactions. Therefore, we recommend adopting, substantially as proposed, significant revisions to the related person transaction disclosure requirements of Item 404 of Regulations S-K and S-B. The amendments that we recommend include:

  • increasing the dollar threshold for transactions required to be disclosed from $60,000 to $120,000;
  • requiring new disclosure of a company’s policies and procedures for the review, approval or ratification of related person transactions; and
  • eliminating the distinction between indebtedness and other types of related person transactions and eliminating requirements for disclosure of specific types of director relationships.

Director Independence

We recommend adopting, substantially as proposed, new Item 407 of Regulations S-K and S-B, to consolidate and update existing disclosure requirements regarding director independence and related corporate governance matters. In response to comment, we recommend that this item require a description only by specific category or type of any transactions, relationships or arrangements not otherwise disclosed that were considered by the board of directors when making its independence determinations.

We also recommend adoption, substantially as proposed, of disclosure requirements regarding compensation committees that would be similar to that currently required for audit and nominating committees.

Plain English

To ensure disclosure that is clear and comprehensible for investors, we recommend that the Commission require that the amended items generally be provided in plain English.

Form 8-K and Item 403

We recommend you adopt the changes to Form 8-K and the security ownership disclosure requirements for directors and named executive officers of Item 403 as proposed.

Compliance Dates

We recommend the following compliance dates:

  • For current reports on Form 8-K, compliance would be required for triggering events that occur 60 days or more after publication in the Federal Register;
  • For Annual Reports on Form 10-K, compliance would be required for fiscal years ending on or after December 15, 2006; and
  • For most other filings, including proxy statements, filed on or after December 15, 2006 that are required to include executive compensation and related person transaction disclosure, compliance would be required for fiscal years ending on or after December 15, 2006.

As proposed, we recommend that, during the three years following adoption of the rule, companies not be required to restate compensation or related person transaction disclosure under the new rules for prior fiscal years that were already reported under the old rules.

Thank you. We would be pleased to answer your questions.



Modified: 07/26/2006