SEC Staff Updates Interpretations under Reg. S-K and Enhanced Proxy Dislcosure Transition

The SEC Division of Corporation Finance has updated its compliance and disclosure interpretations to add new questions and answers under Regulation S-K and the proxy disclosure enhancements transition. The guidance was updated on January 20, 2010.

In disclosing the experience, qualifications, attributes or skills for directors and nominees, a company may not provide the information on a group basis, even if the individuals share similar characteristics, such as qualifications as audit committee financial experts or former CEOs of major companies. The information must be provided on an individual basis.

The company must disclose why a person's particular and specific experience, qualifications, attributes or skills led the board to nominate that person to serve as a director in light of the company's business and structure at the time the filing is made.

The composition of the entire board is important for shareholder decision making, even where a person serves on a classified board and is not up for re-election at the upcoming shareholders' meeting. For each person who is not up for re-election, the evaluation of the director's particular and specific experience, qualifications, attributes and skills and the reason why the director should continue serving on the board, should reflect the time that the filing containing the disclosure is made.

The staff noted that for some boards, particularly those that do not conduct annual self-evaluations, this may require additional disclosure controls and procedures to ensure that the information about directors who are not up for re-election at the upcoming meeting is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

If a company granted an equity award to an executive officer in 2009 and the same award is forfeited in 2009 because the officer left the company, the grant date fair value of the award should be included for purposes of determining the 2009 total compensation and identifying the 2009 named executive officers.

The grant date fair value reported for awards that are subject to time-based vesting excludes the effect of estimated forfeitures. Service conditions that affect vesting are not reflected in estimating the fair value of an award at the grant date because those conditions are not restrictions that stem from the forfeitability of instruments to which employees have not yet earned the right.

The SEC's new rules do not specify where the Item 402(s) narrative about compensation policies and practices as they relate to risk management should be presented. However, the staff recommends that the disclosure be presented together with the registrant's other Item 402 disclosure. The staff said it would have concerns if the Item 402(s) disclosure is difficult to locate or is presented in a manner that obscures the information.

The additional services provided by executive compensation consultants that are subject to the disclosure requirements of Item 407(e)(iii)(A) and (B) are not limited to services for non-executives.

Whether compensation consultants' fees with respect to broad-based and non-customized plans are considered to be for determining or recommending the amount or form of executive and director compensation or are considered to be for additional services depends on the facts and circumstances of each service.

Fees for consulting on broad-based, non-discriminatory plans in which executive officers or directors participate, and for providing information relating to executive and director compensation such as survey data (in each case, that would otherwise qualify for the exclusion from disclosure if they are the only services provided), are considered to be fees for determining or recommending the amount or form of executive and director compensation for purposes of reporting fees under Item 407(e)(3)(iii).

Consulting on broad-based non-discriminatory plans does not include any related services such as benefits administration, human resources services, actuarial services and merger integration services, all of which are additional services that are subject to the disclosure requirements of Item 407(e)(3)(iii)(A) and (B). If the non-customized information relates to matters other than executive and director compensation, the fees would be for additional services.

If a company's Form 10-K or 10-Q is due on or after February 28, 2010, the results of the meeting should be reported in the "other information" item of each form, rather than in the "submission of matters to a vote of security holders" item, which will be rescinded from Forms 10-K and 10-Q on February 28, 2010.

Compliance with the Regulation S-K amendments would be required for reporting issuers with fiscal years ending on or after December 20, 2009 that file a 1933 or 1934 Act registration statement on or after that date in order for it be to declared effective on or after February 28, 2010. If the registration statement is on Form S-3, it will incorporate by reference the issuer's 2009 Form 10-K.

If the issuer's fiscal year ends on or after December 20, 2009, its Form 10-K and proxy statement must be in compliance with the new proxy disclosure requirements if filed on or after February 28, 2010. If the issuer's fiscal year ends before December 20, 2009, its 2009 Form 10-K and related proxy statement are not required to be in compliance with the new proxy disclosure requirements, even if filed on or after February 28, 2010.

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