December 26, 2006

SEC’s Surprise Amendment of Executive Compensation Rules: Effective for 2007!

In a surprise move, the SEC adopted interim final rules late Friday, which more closely conform the amounts reported for stock-based awards in the Summary Compensation Table and other tables to the expense for such awards reflected in financial statements as dictated by FAS 123(R). These new rules go into effect for this coming year, as they are effective upon publication in the Federal Register. Note that the SEC is also soliciting comment on these rule changes, so it’s possible that the SEC may take further action addressing them (including their effective date). Here is the SEC’s press release – and here is the adopting release.

This holiday gift from the SEC has a hint of Festivus to it. Perhaps a feat of strength from the Commission? Or a subtle way for the agency to air a grievance?

What The New Rules Mean for You: Modifications to Align with FAS 123(R)

The purpose of the SEC’s new rules is to more closely align the SEC’s disclosure requirements with the accounting dictates of FAS 123(R). The bottom line of these new rules for us means that the value of equity awards granted in a particular year will now be spread out over a number of years instead of all in the year of grant – and this will change who are the highest paid executive officers when determining NEOs.

So the good news is that the new rules should reduce anomalies arising from one-time grants and are more consistent with other parts of the SEC’s compensation disclosure rules (such as reporting cash compensation as it is accrued or as performance goals are met). But the bad news is that a lot of companies have already done a lot of work preparing to make disclosures under what suddenly are “old” rules – and under the new rules, companies will have to reassess who are their “Named Executive Officers.”

The rule changes will impact the value of equity awards that are reportable in the Stock Awards and Option Awards columns of the Summary Compensation Table, as they will now be amortized over the same period – and in the same manner – as they are accounted for under FAS 123(R) (with some exceptions; for example, the SEC requires a “no forfeiture” assumption in the case of service-based awards for SCT purposes – so if a company’s FAS 123(R) expense assumes any service-based forfeitures for the NEOs, the SCT amount and the corresponding amount in the financials will differ). Under the new rules, there likely also will be changes in the amounts disclosed in the Grants of Plan-Based Awards Table as well as the Director Compensation Table.

Coming Soon! Stay tuned: we are planning a bonus segment to cover how you should implement these new rules in connection with our January 18th Web Conference: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” This critical Conference will be available to 2007 members of at no charge – so renew your membership for 2007 or try a no-risk trial today.

SEC Issues FPI Deregistration Re-Proposing Release

On Friday, the SEC issued its re-proposing release regarding foreign private issuer deregistration.