• SEC Proposes Revised "Katie Couric" Executive Compensation Provision
  • September 29, 2006 | Authors: Elise M. Adams; Yelena M. Barychev; Matthew K. Breitman; Christin R. Cerullo; Francis E. Dehel
  • Law Firms: Blank Rome LLP - New York Office ; Blank Rome LLP - Philadelphia Office; Blank Rome LLP - New York Office ; Blank Rome LLP - Philadelphia Office
  • On the heels of its July 2006 overhaul of the executive compensation rules, on August 29, 2006, the Securities and Exchange Commission (“SEC”) issued a separate release seeking additional comments on the highly controversial “Katie Couric” provision first proposed as part of its recently adopted executive compensation rules.

    As originally proposed in January 2006, this provision would have required companies to provide narrative disclosure for up to three employees (without specifically naming them) who were not executive officers during the prior fiscal year, if their total compensation exceeded that of any of the named executive officers. This disclosure item as originally proposed would have required companies to state the amount of each such employee’s total compensation for the most recent fiscal year and a description of each employee’s job position. The SEC’s stated reason for this proposal was to give shareholders information about the use of corporate assets to compensate its most highly paid employees. The SEC noted that its present rules require companies to provide compensation information only with respect to executive officers, defined generally to include only those employees that perform a policy making function with respect to the company, and that compensation information as to other employees has not been previously required. This proposal, as originally drafted, would have required Katie Couric’s employer, for instance, to disclose information regarding her compensation even though she is not an executive officer.

    In this revised release, the SEC reproposed and submitted for additional comment the disclosure requirement to provide compensation disclosure for up to three additional employees, without naming them. However, the revised proposal limits the employees and companies for which disclosure may be required. The SEC requested comment on the following aspects of the proposed rule:

    Limiting Employees to Persons Responsible for Making Significant Policy Decisions.

    The SEC proposed a new requirement that would exclude employees who have no responsibility for significant policy decisions within the company, a significant subsidiary or a principal business unit, division or function. The SEC stated that “significant policy decisions” could include strategic, technical, editorial, creative, managerial or similar responsibilities. Directing this standard primarily to companies in the news, financial services, and media industries—which have raised substantial concerns regarding the application of this provision—the SEC stated that such employees could include, for example, a television network news director, the principal creative leader of the entertainment division of a media company, or the head of a principal business unit developing major technological innovations. However, the SEC stated that individuals such as investment professionals (including traders and fund portfolio managers), entertainment personalities, actors, singers and professional athletes would not fall under this category so long as they did not otherwise have responsibility for significant policy decisions.

    Although persons such as portfolio managers and entertainment personalities are supposed to be excluded, if an employee has or acquired broader duties than is typical for that job role, the employee could be deemed to have responsibility for significant policy decisions notwithstanding his or her title. For instance, a portfolio manager may have responsibility for significant policy decisions (and thus would be covered by this rule) if he or she also has oversight over equity funds generally for an investment adviser. Also, an actor or entertainment personality that has overall editorial or creative control over a network’s (or a network division’s) programming or content may similarly be deemed to be covered by the rule.

    Two of the many criticisms of the original proposed rule that were lodged by members of the media, financial services and entertainment industries included the fact that the rules would raise privacy issues or negatively impact the competition of industry members for employees. The SEC stated that the proposed limitation was designed to address these concerns.

    Limiting Covered Entities to “Large Accelerated Filers.”

    The SEC also proposed limiting the disclosure to companies that are “large accelerated filers.” A large accelerated filer is an issuer that:

    • has an aggregate worldwide market value of voting and non-voting common stock held by its non affiliates of at least $700 million, calculated as of the last business day of the issuer’s most recently completed second fiscal quarter;
    • has filed at least one annual report under the Securities Exchange Act of 1934;
    • has been subject to the periodic reporting requirements of the Exchange Act for a period of at least 12 calendar months; and
    • is not eligible to file periodic reports as a “small business issuer.”

    The SEC asked whether this limitation would serve to address compliance burdens by focusing the disclosure obligation on companies that are most likely to have employees covered by the rule, or whether a different limitation would be appropriate.

    In addition, the SEC posed additional questions regarding the application of this proposed rule for further comment. Most notably, the release requested comment on the following topics:

    Whether This Information is Even Material to Investors.

    Another criticism raised by opponents of the proposed rule was whether this information was material to investors in the first place. In the executive compensation rules adopting release, the SEC stated that it remained concerned about disclosure of compensation paid to employees if greater than the compensation of a company’s named executive officers. In the follow-on release, the SEC asked whether the proposed limitation on employees who make significant policy decisions would address the concerns of some commenters that the information is not material. However, it appears that the SEC has already taken the position in the executive compensation adopting release that disclosure of this information is material to an investor’s understanding of a company’s compensation policies.

    How to Determine the Three Most Highly Paid Employees.

    The SEC asked whether it should apply the calculation method applicable to executive officers in determining which non-executive officer individuals are the most highly compensated. Under this standard, all compensation would be included, other than pension plan benefits and above-market or preferential earnings on nonqualified deferred compensation plans. Also, the SEC asked whether the total amount of compensation that is to be disclosed for the highest paid non-executive officers should include the same amounts disclosed by named executive officers and if companies should break out the amount of pension benefits and above-market or preferential earnings on nonqualified deferred compensation separately.

    How Non-Executive Employees’ Compensation is Determined.

    The SEC asked for comment on the role of the compensation committee in determining the compensation of the additional non-executive employees about whom disclosure would be required. If the compensation committee does not set their compensation, the SEC asked whether additional information should be provided on how their compensation is determined and whether and why such information would be material to investors.

    Questions

    Any person who has a question regarding this Corporate and Securities Update may obtain additional guidance from a member of our Public Companies Practice Group.