Additional SEC Guidance on New Proxy Disclosure Enhancement Rules

The SEC's Division of Corporation Finance recently published guidance on its website relating to the transition rules and substantive requirements of the "proxy disclosure enhancements" adopted in December 2009. These are published on the Compliance and Disclosure Interpretations page (www.sec.gov/divisions/corpfin/cfguidance.shtml) under "Regulation S-K" ("S-K") and "Proxy Disclosure Enhancements Transition" ("PDET"). These interpretations cover the following points:

Director Biographical Information

• The disclosure of each director's or nominee's experience, qualifications, attributes or skills must be provided on an individual basis. For each person, a company must disclose why the person's particular and specific experience, qualifications, attributes or skills led the board to conclude that such person should serve as a director of the company, in light of the company's business and structure, at the time that a filing containing the disclosure is made. According to the staff, it would not be sufficient to disclose simply that a person should serve as a director because he or she is an audit committee financial expert. Nor may a company provide the disclosures on a group basis even if the directors or nominees share similar characteristics, such as they all are audit committee financial experts or they all are current or former CEOs of major companies. [S-K Question 116.05]
• Disclosure regarding a director's experience, qualifications, attributes or skills that led the board to conclude that the director should serve on the board is required in each annual meeting proxy statement, even for directors on a classified board who are not up for reelection. The evaluation of the director's particular and specific experience, qualifications, attributes or skills and the conclusion as to why the director should continue serving on the board should be as of the time that the proxy statement containing the disclosure is filed. For some companies, particularly those that do not conduct annual board evaluations, this may require implementation of new disclosure controls and procedures to ensure that the information is recorded, processed, summarized and reported in a timely manner. [S-K Question 116.06]

Compensation

• If an executive officer leaves the company during the year that an equity award is granted, thereby causing the award to be forfeited, the grant date fair value of the award is nevertheless included for purposes of determining total compensation and identifying the named executive officers for that year. [S-K Question 117.04]
• The grant date fair value reported for awards that are subject to time-based vesting excludes the effect of estimated forfeitures as noted in Instruction 3 to the Stock Awards and Option Awards columns of the Summary Compensation Table. [S-K Question 119.20]
• If the new narrative disclosure regarding compensation policies and practices as they relate to risk management is required, the staff recommends that such disclosure be presented together with the rest of the company's compensation disclosures (though not in the Compensation Discussion and Analysis). [S-K Question 128A.01]

Compensation Consultants

• The "additional services" provided by executive compensation consultants that are subject to the new compensation consultant fee disclosure requirement of Items 407(e)(3)(iii)(A) and (B) are not limited to services for nonexecutives. [S-K Question 133.10]
• The required compensation consultant disclosure of Item 407(e)(3)(iii) requires a description of the name and role of the consultant, who hired the consultant, the type of services rendered and, under certain circumstances, the amount of the fees paid. The rule refers to two types of fees: fees for "determining or recommending the amount or form of executive and director compensation" and fees for "additional services." If the consultant received fees for "additional services" in excess of $120,000, disclosure of all the fees is generally required. Fees paid for (i) consulting on broad-based plans that do not discriminate in favor of executive officers of directors and (ii) providing noncustomized survey data, however, need not be disclosed as long as these are the only services provided by the consultant. If the consultant provided other services, these fees must also be included in the amounts disclosed. For purposes of determining whether they are counted toward the $120,000 threshold for "additional services," the Staff states that, generally, fees for consulting on broadbased, nondiscriminatory plans in which executive officers or directors participate and for providing noncustomized survey data relating to executive officer and director compensation are fees for "determining or recommending the amount or form of executive and director compensation," while fees for other services such as noncustomized information for other than executive and director compensation, benefits administration services, human resources services, actuarial services and merger integration services should be considered "additional services." [S-K Question 133.11

Transition Rules for New Disclosure Requirements

• If an annual meeting takes place before February 28, 2010, and the applicable Form 10-K or Form 10-Q is due on or after February 28, 2010, the voting results should be reported in Part II Item 9B of Form 10-K or Part II Item 5 of Form 10-Q. [PDET Question 6]
• If a reporting company with a fiscal year ending on or after December 20, 2009, such as a calendar year-end company, files a registration statement, it must comply with the new disclosure rules in order for the registration statement to be declared effective on or after February 28, 2010. However, if the registration statement is on Form S-3, it will incorporate by reference the company's 2009 Form 10-K, which, if filed before February 28, 2010, may comply with the old disclosure rules. [PDET Question 7]

For more information, please contact Robert Murphy at 202-906-8721,Rick McDonald at 248-203-0859, or Mark Metz at 313-568-5434.

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