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SEC's new year's resolution requires companies to enhance compensation and governance disclosure
Practical Law UK Legal Update 4-501-3590 (Approx. 3 pages)
SEC's new year's resolution requires companies to enhance compensation and governance disclosure
by Doreen E. Lilienfeld, Amy B. Gitlitz and Kenneth H. Hemler, Shearman & Sterling LLP
| Published on 26 Jan 2010 • USA (National/Federal) |
This article is part of the PLC Global Finance January 2010 e-mail update for the United States.
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On 16 December 2009, the US Securities and Exchange Commission voted to adopt final rules amending the proxy disclosure rules applicable to all US publicly listed registrants. This articles outlines the new disclosure requirements set out in the rules.
On 16 December 2009, the US Securities and Exchange Commission (SEC) voted to adopt final rules that amend the proxy disclosure rules applicable to all US publicly listed registrants (Final Rules) (US Securities and Exchange Commission Release Nos. 33-9089; 34-61175, IC-29092 (16 December 2009)) to "improve corporate disclosure regarding risk, compensation and corporate governance matters" (Press Release No. 2009-268, US Securities and Exchange Commission (16 December 2009)). Specifically, the Final Rules require registrants to provide disclosure regarding:
- Relationship between compensation policies and risk. The Final Rules require narrative disclosure of the registrant's compensation policies for all employees (not just named executive officers) if the policies create risks that are "reasonably likely to have a material adverse effect" on the registrant.
- Stock options and other equity awards. Registrants are required to report the full grant date fair value of awards in the year of grant (as opposed to the previous requirement that registrants disclose the dollar amount they recognised for financial statement reporting purposes for the fiscal year). Awards subject to corporate performance conditions must be computed based on the probable outcome of the performance conditions as of the grant date. Registrants providing this disclosure for fiscal years ending on or after 20 December 2009 must recompute the values in the Summary Compensation Table for each preceding fiscal year shown in the table as if the Final Rules were then in effect.
- Director and nominee qualifications. For each director and director nominee, registrants must disclose:
- the particular experience, qualifications, attributes or skills that qualify the individual to serve as a director;
- any directorships at other public registrants held by the individual within the last five years (even if the individual no longer holds that position); and
- an expanded list of legal proceedings (including various forms of fraud and violations of securities laws) involving the individual within the last ten years (as opposed to the previously required five-year period).
- Diversity in the director nomination process. The Final Rules require disclosure of whether and, if so, how, a registrant's nominating committee considers diversity in identifying director nominees. If the registrant has a diversity policy, the registrant must also disclose how the policy is implemented and how the committee or board assesses the effectiveness of the policy.
- Board leadership structure. Registrants must disclose their board leadership structure and the reasons they believe that their particular structure is appropriate. The Final Rules also require registrants to disclose whether and why they chose to combine the principal executive officer and board chair positions. Registrants that have combined these positions must discuss whether and why they have a lead independent director and the role the lead independent director plays in the registrant's leadership.
- Board's role in risk oversight. The Final Rules require registrants to disclose the board's involvement in the risk oversight process, including:
- the way the registrant perceives the role of its board in overseeing risk;
- the relationship between the board and management in overseeing risk;
- the way the board implements and manages its risk oversight function;
- whether those responsible for overseeing risk report directly to the board or to a committee; and
- whether and how the board monitors risk.
- Compensation consultants. The Final Rules require disclosure of the fees paid to compensation consultants in certain circumstances where a compensation consultant involved in determining or recommending the amount or form of executive or director compensation also provides non-executive services to the registrant. This additional disclosure is not required where the consultant's non-executive services are limited to broad-based plans or the provision of information, such as surveys, not customised for the registrant.
In addition, the Final Rules require registrants to disclose the results of shareholder votes on Form 8-K within four business days after the meeting at which the vote was held (as opposed to the previous requirement to disclose the results on Forms 10-Q or 10-K). If the voting results are not definitive by the end of the meeting, registrants are required to report the preliminary results on Form 8-K within four business days after the meeting and then file an amended report on Form 8-K within four business days after the final voting results are known.
The Final Rules provide that the amendments will become effective on 28 February 2010. If the registrant's fiscal year ends on or after 20 December 2009, its proxy statement must comply with the Final Rules if filed on or after 28 February 2010. If the registrant's fiscal year ended before 20 December 2009, its proxy statement is not required to be in compliance with the Final Rules, even if filed on or after 28 February 2010 (US Securities and Exchange Commission Compliance and Disclosure Interpretations: Proxy Disclosure Enhancements Transition (22 December 2009)).
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