• SEC Revises Executive Compensation Disclosure Rules
  • August 4, 2006
  • Law Firm: Dorsey & Whitney LLP - Minneapolis Office
  • Yesterday, the SEC approved amendments to the executive compensation disclosure rules. See the SEC's press release available on its website here: http://sec.gov/news/press/2006/2006-123.htm. 

    The final rules also amend the disclosure requirements for related party transactions, director independence and other corporate governance matters and security ownership of officers and directors.  In addition, the new rules modify Form 8-K requirements for disclosing new or amended executive employment arrangements.

    The new rules will be effective for proxy statements and Forms 10-K for fiscal years ending on or after December 15, 2006.  For Forms 8-K, compliance will be required for triggering events that occur 60 days or more after publication of the final rules in the Federal Register.

    The final rules have not yet been published.  According to the SEC’s press release and the discussion at the SEC meeting yesterday, the final rules will be substantially as proposed earlier this year, with a few important changes. In particular:

    ·          The so-called "Katie Couric" disclosure requirement—requiring companies to disclose the titles and pay of up to three additional highly paid non-executive employees—was not included in the final rules.  Instead, the SEC will re-propose revised rules for public comment.  The revised rule proposal would apply only to large accelerated filers and would exclude employees that have no responsibility for significant policy decisions within the company or a significant subsidiary or business unit.

    ·          The SEC approved new requirements for disclosing option grant practices and policies, requiring that companies disclose more about the timing of option grants and the setting of exercise prices.  Specifically, companies will need to disclose the closing market price of the stock on the option grant date if higher than the exercise price.  They will also need to disclose if the date action was taken to approve the grant is different than the stated grant date.  As previously proposed, companies will need to disclose the fair value of the option grant as determined under FAS 123R. This new disclosure will be reflected both in the tables and in the Compensation Discussion and Analysis section, or CD&A.  The CD&A requirements have been expanded to require companies to disclose clearly their practices and procedures for timing option grants and setting exercise prices, including whether options were granted to executives before the release of material non-public information. The SEC’s final rule release will include guidance for companies on this disclosure.

    ·          The SEC retained the existing requirements for a performance graph and compensation committee report, albeit in revised form.  Under the final rules, the performance graph will be moved from the proxy statement to the annual report to shareholders under Regulation S-K Item 201. The compensation committee report will be different in scope and will contain a statement as to whether the compensation committee has reviewed and discussed the CD&A with management and recommended that the CD&A be included in the company’s annual report on Form 10-K and proxy statement.  While the revised compensation committee report will be "furnished" to the SEC (as is currently the case), the CD&A will be required to be "filed" as previously proposed.  As a result, the CD&A will be subject to the liability and disclosure requirements of the federal securities laws, including the CEO and CFO certification requirements.

    ·          A separate column in the summary compensation table will report the annual change in the actuarial present value of accumulated pension benefits and above-market or preferential earnings on nonqualified deferred compensation, so that these amounts can be deducted from total compensation for purposes of determining the named executive officers, or NEOs.  The final rules will continue the practice under current rules of only requiring disclosure of above-market or preferential earnings on deferred compensation accounts in the Summary Compensation Table, rather than all earnings, as previously proposed.  However, the Nonqualified Deferred Compensation Table will require disclosure of all earnings, as previously proposed.

    ·          The Pension Benefits Table will require disclosure of the actuarial present value of each NEO's accumulated benefit under each pension plan, computed using the same assumptions (except for the normal retirement age) and measurement period as used for financial reporting purposes under GAAP, rather than disclosure of the estimated annual retirement payments, as previously proposed.

    ·          The columns of the Summary Compensation Table were revised to place the Total Compensation column on the far right and to add the new column described above.  The SEC attached a form of this table to its press release linked above.


    The new rules are designed to bring greater transparency to the disclosure of executive compensation and attempt to strike a balance between "rules-based" disclosure requirements (aimed at encouraging comparability of disclosure from company to company) and "principles-based" requirements (aimed at flushing out all elements of compensation at a particular company regardless of how they may be categorized).  The SEC has been clear that companies that hide or mislead investors about their compensation practices will be subject to enforcement action.  In this environment, boards, compensation committees and management will need to prepare executive compensation disclosure thoughtfully and carefully—using solid disclosure controls and procedures—to ensure that they are providing a complete, accurate and timely description of their compensation programs, practices and procedures.