U.S. Securities and Exchange Commission Issues Compliance and Disclosure Interpretations on New Disclosure Rules

On January 20, 2010, the Staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission updated its Regulation S-K Compliance and Disclosure Interpretations to address issues relating to the SEC’s new proxy disclosure rules. These interpretations cover the following points:

• Disclosure of specific experience, qualifications, attributes or skills of directors and nominees cannot be provided on a group basis for directors or nominees sharing similar characteristics (such as all of them being audit committee financial experts or current or former CEOs of major companies). These disclosures must be provided on an individual basis. [Question 116.05]
• The disclosure of the specific experience, qualifications, attributes or skills for continuing directors who are not up for re-election needs to be as of the time that the filing containing the disclosure is made. This may require implementation of new disclosure controls and procedures. [Question 116.06]
• If an executive officer leaves the company during the year that an equity award is granted, thereby forfeiting the award, the grant date fair value of the award is nevertheless included for the purposes of determining total compensation and identifying the named executive officers for that year. [Question 117.04]
• The grant date fair value to be reported for awards that are subject to time-based vesting excludes the effect of estimated forfeitures. [Question 119.20]
• If narrative disclosure is required for compensation policies and practices as they relate to risk management, the Staff recommends that such disclosure be presented together with the rest of the company’s compensation disclosures (though not in the company’s Compensation Discussion and Analysis (CD&A) section). [Question 128A.01]
• The "additional services" provided by executive compensation consultants that are subject to the new compensation consultant fee disclosure requirement are not limited to services for non-executives. [Question 133.10]
• Two types of fees are relevant for compensation consultant fee disclosure: fees for "determining or recommending the amount or form of executive and director compensation" and fees for “additional services.” The Staff has stated that the facts and circumstances will determine the appropriate characterization of fees paid for (i) consulting on broad-based plans that do not discriminate in favor of executive officers of directors and (ii) providing non-customized survey data. This is relevant because if a consultant provides services beyond these types of services, it is necessary to determine if the consultant provided “additional services” in excess of $120,000. Generally, fees for consulting on broad-based, non-discriminatory plans in which executive officers or directors participate and for providing non-customized survey data are fees for "determining or recommending the amount or form of executive and director compensation," while fees for benefits administration, human resources services, actuarial services and merger integration services are “additional services.” [Question 133.11]

The Staff also updated its Proxy Disclosure Enhancements Transition guidance to clarify the following points:

• If an annual meeting takes place before February 28, 2010, and the applicable Form 10-K or Form 10-Q is due after February 28, 2010, the voting results should be reported in the “Other Information” item of such form. [Question 6]
• If a reporting company with a fiscal year ending on or after December 20, 2009, files a Securities Act or Exchange Act registration statement on or after December 20, 2009, it must comply with the new disclosure rules in order for the registration statement to be declared effective on or after February 28, 2010. However, if the registration statement is on Form S-3, it will incorporate by reference the company’s 2009 Form 10-K. [Question 7]

For more information about the SEC’s disclosure changes, see our Securities Update titled “US Securities and Exchange Commission Adopts Executive Compensation and Other Disclosure Changes.”

We will be discussing these compliance and disclosure interpretations, as well as other aspects of the new proxy disclosure rules, on February 2, 2010, during our webinar “Hot Topics for the 2010 Proxy Season.”