August 13, 2007

Corp Fin Updates Executive Compensation and Related Person Transaction Interps

When the new Corp Fin “Compliance and Disclosure Interpretations” were launched back at the beginning of the year, the Staff promised more frequent updates to the Division’s interpretive material. The Staff delivered on that promise last week with some new and revised interpretations on Item 402 of Regulation S-K and Item 404 of Regulation S-K.

For the most part, these new and updated interpretations cover positions that are already pretty well known at this point, including some of the interpretations reflected in the notes that we posted from the 2007 JCEB meeting. As such, it does not appear that this update represents the more comprehensive guidance that everyone has been expecting in advance of the proxy season.

On the Item 404 front, the Staff indicated in new Interpretation 2.12 that, with respect to employment arrangements, the “amount involved in the transaction” would include all compensation paid to the employee, not just salary. This interpretation is consistent with the way the Staff had restated old Telephone Interpretation I.35 in Compliance and Disclosure Interpretation 2.07, where it changed a reference to a child’s “salary” to “compensation.” New Interpretation 2.13 deals with a relatively straightforward application of the rule to a situation where an executive officer’s compensation is not disclosed under Item 404 by operation of Instruction 5.a. to Item 404(a), yet the compensation paid to that executive officer’s immediate family member who works for the company must be disclosed, because the immediate family member does not have the benefit of Instruction 5.a. given that person’s non-executive officer status.

Mark Borges has already posted his analysis of some of the new and revised executive compensation interpretations on his blog, with more to come. One of the notable new executive compensation interpretations is a definitive Staff position on the disclosure of negative numbers arising from amounts recognized for compensation from equity-based awards. For this significant interpretation, Mark notes:

“As you know, given the reporting requirements for equity awards in the Summary Compensation Table, it is possible that, in any given fiscal year, the amount reportable for an award may be a negative number (because the previously reported compensation expense has been reversed under SFAS 123(R), because the award was forfeited during the fiscal year, achievement of a performance-based condition has been determined to be no longer probable, or, in the case of an award accounted for as a liability accounting, the stock price has declined during the year. New Q&A 4.11 asks what portion of an award that was previously expensed and has been reversed under SFAS 123(R) may be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column?

As expected the Staff has taken the position that only the previously expensed portions of awards that were previously reported in the Summary Compensation Table may be reversed in the Summary Compensation Table. As a result, an expensed amount relating to a period or periods before the new rules became effective or, perhaps more importantly, before a person became a named executive officer should not be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column.

While everyone will not agree, this answer seems sensible to me, as it minimizes the distortive effect of negative numbers on the Total Compensation column in the table. In other words, a company gets to reverse an expense amount in the Stock Awards or Option Awards column (and, thus, affect an NEO’s total compensation for the fiscal year) only to the extent that the amount being reversed was previously reported in the SCT (and in total compensation) under the new rules.”

Farewell to Commissioner Campos

This has been a summer of many farewells at the SEC (including my own), and now the greener pastures fever has spread to the tenth floor of SEC headquarters. Last week, Commissioner Roel Campos announced that he will be leaving the Commission. I’ve got to say that Commissioner Campos is truly a class act – it was always a great pleasure to work with him and his very talented staff. His broad range of experience, including work as both a prosecutor and a business executive, was evident whenever he judiciously weighed the pros and cons of matters before the SEC. Investors will be losing a true friend on the Commission when Campos leaves for the private sector.

The departure of Commissioner Campos explains (in part?) a cryptic statement that Chairman Cox made while testifying last month before the Senate Committee on Banking, Housing and Urban Affairs. When pressed about his vote for two opposing approaches to shareholder access issue, Cox stated: “In order to put a rule in place, I’ve got to have a clear idea of what the Commissioners want to do and which Commissioners I’m voting with – which Commissioners by the way are members of the SEC – all of these things somewhat up in the air right now.” If you also consider Commissioner Nazareth’s continued service following an already expired term, there is no doubt that we will see a significant change in SEC dynamics as important rule changes come up for adoption this autumn and into next year.

Access Proposals: Should They Stay or Should They Go?

The Council of Institutional Investors is seeking a straight answer on whether or not the SEC Staff will agree that access proposals may be excluded from company proxy materials under Rule 14a-8(i)(8) (the director election basis for exclusion). In this letter to Chairman Cox, the CII requests clarification on what the Staff intends to do with access proposals now that the SEC has published its release containing both an interpretation of Rule 14a-8(i)(8) and proposed changes to the text of the rule designed to implement that interpretation.

At the open meeting for the rule proposals, Commissioner Campos asked Corp Fin to explain how the Staff would respond to a no-action request seeking to exclude a shareholder access proposal. John White indicated that, based on their current thinking, the Staff would approach any such proposal the same was as they did last season, which apparently was a reference to the Staff’s “no view” response to HP. In his recent Senate testimony, Chairman Cox completely avoided the issue when asked about it by Senator Dodd. Then, in a speech a couple of weeks ago at the Federal Reserve Bank of Chicago, Commissioner Atkins indicated that the interpretive portion of the release “governs our administration of that provision, [and] will provide the necessary clarity and uniformity for both investors and companies alike until an amendment is adopted in the future.”

The CII wants some certainty on how things are going to proceed, which may be all the more important now as the departure of Commissioner Campos raises questions about where things are headed on the shareholder access front.

– Dave Lynn