January 18, 2006

The SEC’s Executive Compensation Disclosure Proposals

Yesterday, at an open Commission meeting that lasted nearly two hours, the SEC proposed a broad overhaul of the executive compensation disclosure rules. The comment period is 60 days. Here is Chairman Cox’s opening statement and Commissioner Atkin’s statement.

Apologies for not blogging “live” from the meeting like – but as you can see from Michelle’s entries yesterday, there typically is not much action at open Commission meetings (she was soliciting $1 donations to pay for her train down to the meeting; my guess is she won’t travel again for such limited content – plus the meetings are webcast and thus few attend physically from outside the building).

In my book, the highlight of the open meeting was when Chairman Cox jokingly suggested that a bunch of schoolteachers be hired to do plain English reviews of company filings. Guess that might have spooked some Corp Fin lawyers as to whether they have any real job security!

As fleshed out in the SEC’s press release, the proposals would refine existing tabular disclosure and combine it with improved narrative disclosure (and cover the CEO, CFO and the three other highest paid executive officers and the directors), including these noteworthy developments:

1. A new “Compensation Discussion and Analysis” section would replace the Compensation Committee Report – focusing on the most important factors underlying each company’s compensation policies and decisions. Not sure yet if comp committee members names would still be listed underneath (not likely since the new section would be considered “filed” rather than “furnished”).

2. Executive compensation disclosure would be organized into three categories: (1) compensation over the last three years; (2) holdings of outstanding equity-related interests received as compensation that are the source of future gains; and (3) retirement plans and other post-employment payments and benefits.

3. The Summary Compensation Table would be reorganized – and include a new column for total compensation and a dollar value for all stock-based awards, measured at grant date fair value (computed pursuant to FAS 123R).

4. The perk threshold would be reduced to $10,000 – and more importantly, the proposing release will include interpretive guidance is provided for determining what is a perquisite (meaning that compliance is likely to be mandatory for this proxy season).

5. Two supplemental tables would report Grants of Performance-Based Awards and Grants of All Other Equity Awards.

And much more, such as tables for outstanding equity interests, retirement plan, post-employment, etc. There even would be a Director Compensation Table similar to the Summary Compensation Table. And there are proposed changes to the 8-K disclosure requirements, including consolidation of all Form 8-K disclosure regarding employment arrangements under a single item.

Tune in next week! On, we already have begun to post commentary and analysis in the new “The SEC’s Proposals” Practice Area. And join SEC Corp Fin Associate Director Paula Dubberly, Ron Mueller and Mark Borges next Thursday for the webcast: “Your Upcoming Proxy Disclosures—What You Need to Do Now!”

The SEC’s Related Party Transactions and Director Independence Proposals

As expected, the SEC’s proposals also would update related party disclosure requirements. Principal changes would include required disclosure regarding policies and procedures for approving related party transactions, a slight expansion of the categories of related persons and a change in the threshold for disclosure from $60,000 to $120,000.

The requirement to disclose these transactions would also be made more principles-based. They also would require disclosure if the company is a participant in a transaction in which a related person has a direct or indirect material interest.

A proposed new item (Item 407 of Regulations S-K and S-B) would require:

– disclosure of whether each director and director nominee is independent;

– a description of any relationships not otherwise disclosed that were considered when determining whether each director and director nominee is independent; and

– disclosure of any audit, nominating and compensation committee members who are not independent.

Perhaps the SEC has been sitting on the NYSE’s proposal – that touches upon director independence issues – to ensure that its own proposal doesn’t pose a conflict. So maybe we shall see the NYSE release put out for comment by the SEC sooner rather than later.

Learn what to do now! Join SEC Corp Fin Associate Director Paula Dubberly, Alan Dye, Amy Goodman and Beth Young for the February 1st webcast: “Related Party Transactions: What Disclosures You Need to Make Now!”

Now Comes the Fiery Rhetoric…

Over the past week, I’ve had fun spending time educating reporters about how the SEC’s disclosure framework works – and how executive compensation practices figure into all of this. Hey Mom, I was quoted in the Palm Beach Post and the Middle East North Africa Financial Network (which picked up a story from the Chicago Tribune)! All good stuff.

Then yesterday, I started getting a little crazy tooling around the Web and rebutting some bizarre postings from academics who have criticized Chairman Cox and claim that enhanced executive compensation disclosures will cost too much. I’ve heard a few arguments against enhanced disclosure, but none until now based on the projected cost of the disclosure. For the life of me, I don’t see how you can equate the SEC’s new proposal to the very costly internal control regulations (404 is much more than mere disclosure).

The only costs involved in the new proposal is the steep learning curve for those of us that draft disclosures, as most of the data that will underlie the new disclosures is readily available. All companies already collect compensation data for financial and tax reporting purposes – and many companies started collecting the data in a format similar to what the SEC now seeks as part of implementing tally sheets. In fact, I would argue that – down the line – the new tables will be easier to put together than the disclosure that is required under the existing disclosure framework.

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