July 27, 2006

SEC Adopts Executive Compensation Disclosure Rules

Yesterday, the SEC adopted new executive compensation disclosure rules (as well as related-party transaction and Form 8-K rules) as expected. The SEC appeased the mass media by focusing quite a bit on option backdating in its press release. Otherwise, there was not too much in the way of change from the proposals as described at a two-hour open Commission meeting – but that’s not to say that the changes wrought by the new rules will not be dramatic! And of course, the adopting release will be key to ascertain the extent to which fine-tuning changes were made to the SEC’s proposals other than the ones identified below.

Some useful information is in this opening statement from the Corp Fin Staff – and the SEC also issued this sample Summary Compensation Table. Here are Chairman Cox’s opening remarks.

The new Compensation Discussion and Analysis remains the centerpiece of the SEC’s new rules – and it is required to be “filed.” In addition, a new Compensation Committee report is now required to be “furnished.” This new CCR is designed to keep compensation committees on their toes, as it is required to address whether the committee has reviewed and discussed the CD&A with management. While the SEC is strictly neutral as to the level and design of compensation, we expect boards that have embraced sound practices will go beyond the statements required under this new rule and will proactively state that they consider the amounts paid to be reasonable and appropriate.

In the Summary Compensation Table, only above-market or preferential earnings (rather than all earnings) on non-qualified deferred compensation is required to be included. The required defined benefit pension plan disclosure is now limited to the actuarial present value of a Named Executive Officer’s accumulated benefits.

In terms of gauging who should be identified as the NEOs, the SEC tweaked its proposal so that the metric is not the new Total Compensation column – rather, companies can back out the numbers from the two columns regarding preferential earnings on deferred compensation and increases in pension values when they identify their NEOs. This tweak addresses comments that using the Total Compensation numbers would unnecessarily skew inclusion of longer-term officers as NEOs.

I was surprised that the SEC re-proposed the so-called “Katie Couric” proposal (ie. requiring disclosure compensation for three employees who are not executive officers). As re-proposed, this rule would carve out non-executive officers with no responsibility for significant policy decisions and would only apply to large accelerated filers. This re-proposal likely will draw significant comment as before – and some clarification may be necessary because it’s worded in the negative, so it’s difficult to tell if it is intended to pick up Rule 3b-7 officers. To me, this part of the SEC’s overhaul is extremely minor in the entire scheme of things; I’m consistently amazed how some incidental issue in a rulemaking project distracts so many from the bigger – and more pressing – issues.

More extensive notes – which identify a few other changes from the proposals known so far – are posted on under “The SEC’s New Rules.”

The new rules apply to the upcoming proxy season, compliance is required for fiscal years ending on or after December 15, 2006. For the new Form 8-K rules, compliance is required sooner – for triggering events that occur 60 days or more after the rules are published in the Federal Register. I’m still amazed the Staff got these rules out in such short order…

Act Fast to Get Your Washington DC Hotel Room

Now that the new executive compensation disclosure rules have been adopted, you need to act fast to reserve a hotel room for our Conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – which will be held live in Washington DC at the Marriott Wardman Park on September 11-12. Rooms are filling up fast – here is how to obtain special room rates.

If you come to Washington DC to take in the conference, you still will get access to the video archive of the Conference, which will be important when you actually sit down to draft – and review – disclosures during the proxy season. The Conference is still available by videoconference if you can’t make it to Washington DC on those days.

If you haven’t yet, check out this detailed conference agenda to understand the types of challenges you should expect to face from the new rules.

Option Backdating (And Much More) at the NASPP Annual Conference

With the option backdating scandal dominating the headlines and creating so much work for outside counsel, the NASPP has just added former SEC General Counsel Ralph Ferrara as the keynote speaker for its 14th Annual Conference in Las Vegas – and Ralph will join Stan Keller and Professor Jesse Fried on a panel to discuss “How to Avoid the Next Scandal (and Protect Yourself).” In addition, Stan Keller and Susan Daley will headline a new panel that will parse the issues implicated by the option backdating scandal.

This is in addition to more than 40 other panels on key compensation topics, many of them key to understand the practices that will now need to be described in next year’s proxy statements. And the NASPP’s Annual Conference includes the “3rd Annual Executive Compensation Conference” as part of the Conference – it falls on the middle day of the NASPP Conference – at no extra charge. Register today!