On January 27, 2006, the SEC proposed amendments to the disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters and security ownership of officers and directors. These amendments would apply to disclosure in proxy and information statements, periodic reports, current reports and other filings under the Securities Exchange Act of 1934 and the Securities Act of 1933.
The proposed amendments will not be effective for the 2006 proxy season. However, the adopting release for the proposed amendments contains interpretive guidance relating to the current compensation disclosure requirements, in particular as to what constitutes a perquisite or personal benefit. This guidance is immediately applicable, and companies should review their characterizations of items that have mixed business and personal aspects (e.g., club memberships, personal financial and tax advice, and personal use of vehicles and other property owned or leased by the company), and determine whether additional amounts need to be included in the Summary Compensation Table. Companies must also recognize that 2006 compensation determinations and decision-making processes will need to be disclosed in their 2007 proxy statements, most likely under substantially all of the proposed amendments, and should accordingly implement controls and procedures to track information likely to be required for the 2007 proxy statements.
In particular, the SEC has proposed the following:
- adding a “Compensation Discussion and Analysis” section, consisting of a narrative and several tables, which section would replace the current compensation committee report and performance graph;
- amending and supplementing the compensation tables to provide investors with a clearer and more complete picture of the compensation earned by a company’s principal executive officer, principal financial officer, and highest paid executive officers and members of board of directors, including the addition of a new “Total Compensation” column for “named executive officers” that will include the fair value of equity awards;
- requiring expanded and more quantified disclosure of the fair value of equity awards and benefits on termination or change of control;
- amending Form 8-K to remove employment compensation arrangements from the scope of Item 1.01, and to expand disclosure under Item 5.02 to encompass material changes in compensation to the principal executive officer, the principal financial officer and all person who were named executive officers for the previous fiscal year;
- amending beneficial ownership disclosure such that named executive officers, directors and director nominees will be required to disclose the number of shares pledged as security;
- raising the disclosure threshold for related party transactions to $120,000 (to adjust for inflation) (or for small business companies, the lesser of $120,000 or 1% of the small business company’s total assets for last three completed fiscal years);
- requiring disclosure regarding the company’s policies and procedures for the review, approval or ratification of related person transactions;
- requiring disclosure regarding the independence of directors, including whether each director and nominee for director of the registrant is independent, as well as a description of any relationships that were considered when determining whether each director and nominee for director is independent; and
- requiring executive compensation and related party disclosure to be in plain English.
For further information, please contact Robert L. Wernli, Jr. at (858) 720-8941.