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SEC adopts new executive compensation disclosure rules

On July 26, 2006,the Securities and Exchange Commission (SEC) adopted substantial changes to the rules requiring disclosure of executive compensation, related person transactions and security ownership of officers and directors. The revisions will affect disclosures in proxy statements, annual reports and registration statements of public companies. The SEC will also require that most of the disclosure be provided in plain English. Highlights of the changes include:

Compensation Discussion and Analysis 
The SEC has added a new disclosure requirement in the form of a Compensation Discussion and Analysis (“CD&A”). The CD&A will address the objectives and implementation of a company’s executive compensation program. The CD&A must include confirmation that the compensation committee has reviewed and discussed the CD&A with management and, based on this review and discussion, has recommended that it be included in the Annual Report on Form 10-K and the proxy statement.

Tabular Disclosure 
Following the CD&A, executive compensation disclosure will be provided in three categories: compensation over the last three years; holdings of outstanding equity-related interests received as compensation that are sources of future gains; and retirement plans, deferred compensation and other post-employment payments and benefits.

Summary Compensation Table 
The principal disclosure vehicle for executive compensation will be the revised summary compensation table. This table will show compensation for each named executive officer over the past three years. It will be followed by narrative disclosure and another table showing grants of plan-based awards to explain and supplement the information in the summary compensation table. In addition to columns for salary and bonus, the summary compensation table will present the dollar value of all equity-based awards, the amount of compensation under non-equity incentive plans, the annual change in value of accumulated pension benefits and earnings on nonqualified deferred compensation, the aggregate amount of all other compensation not reported in other columns (including perquisites with an aggregate value of at least $10,000) and total compensation.

Disclosure Regarding Option Grants
The SEC will require a clear tabular presentation of option information such as the grant date fair market value, the closing price on the grant date and the date the compensation committee or board of directors granted the award. Furthermore, the CD&A will include enhanced option disclosure such as the reasons the company selects particular grant dates and the methods by which it determines the terms of awards. The SEC currently is focusing on the timing of stock option grants and will issue additional guidance in the future about disclosure of option programs, plans and policies, including the timing of option grants in coordination with the release of material nonpublic information and the selection of exercise prices that differ from fair market value on the grant date.

Director Compensation 
Director compensation for the previous year will be disclosed in a director compensation table, along with a related narrative. The director compensation table will follow a format similar to the summary compensation table used for executive officers.

Related Person Transactions
The amendments increase the dollar threshold for related person transactions required to be disclosed from $60,000 to $120,000, require disclosure of a company’s policies and procedures for review, approval and ratification of related person transactions and eliminate the distinction between indebtedness and other types of related person transactions.

Director Independence and Other Corporate Governance Matters
The existing disclosure requirements concerning director independence and related corporate governance matters will be consolidated. In addition, the disclosure requirements relating to director independence will be updated to reflect the SEC’s current requirements and current exchange listing standards.

Pledged Stock
The amendments will require disclosure of the number of shares of the company’s stock previously pledged by management.

Annual Reports on Form 10-K for fiscal years ending on or after December 15, 2006, and proxy statements utilized on or after that date, must comply with the new disclosure rules. Therefore, companies should prepare for the new disclosure requirements described above as soon as possible.

  • Partner

    Chris is a member of the Business Services Department and Chair of the Private Equity/Mergers & Acquisitions Practice Group.  He practices in the areas of mergers and acquisitions, health care, securities, private equity ...

  • Partner

    June is a member of the Business Services Department. Her practice focuses on U.S. and state securities laws compliance, Sarbanes-Oxley Act and corporate governance issues, and financial institution regulatory matters. She ...

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