On January 17, 2006, the SEC unanimously approved the issuance of a rule proposal addressing executive compensation, related party transactions, corporate governance disclosures, director and officer stock ownership, and related matters. If adopted, the rules would represent a major overhaul of the current executive compensation reporting system, which was adopted in 1992. While final rules will not be adopted in time to apply to the upcoming proxy season, since the proposals respond to investor demands for increased transparency regarding compensation matters, some companies may decide to voluntarily provide additional information in this year's proxy statement.

The following discussion of the rule proposal is based on comments made at the SEC's open meeting and the press release issued by the SEC on January 17. We will update it after the full text of the proposing release becomes available.

The proposal is for a combination of narrative and tabular presentations of information that are intended to provide comprehensive and comprehensible disclosure.

Compensation Discussion and Analysis (CD&A)

• The focus of this new narrative disclosure section--CD&A--is an overview answering key questions such as: What are the objectives of the company's compensation program? What is the company's compensation program designed to reward? What elements are included in the company's compensation program? Why are those elements included? How does the company determine the amount of compensation paid? How does that determination fit in with the company's objectives?
  
  
• The current requirement for a Compensation Committee Report and Stock Performance Graph would be eliminated under the proposed rule.
  
  
• The CD&A disclosure will be made by the company (not just the members of the compensation committee) and will be deemed to be "filed" (not just "furnished" as the Compensation Committee Report is currently), meaning there will be a higher level of liability associated with the disclosure and a greater likelihood of enforcement action for inadequate disclosure. The certifications of the CEO and CFO will cover the new CD&A disclosure.
  
  
• The proposed rule will not list a set of required disclosure items to be included in the narrative disclosure following each table. It instead provides a general rule and examples of the types of disclosure contemplated.
  
  
• All CD&A disclosure is to be in plain English. It is expected that the SEC staff will use the comment process to reinforce the importance of the use of plain English.

Summary Compensation Table

• The Summary Compensation Table remains the principal vehicle for conveying information about compensation paid and would continue to report on compensation paid during the last three years.
• The first column of the new Summary Compensation Table is a total compensation amount--a single, bottom-line figure of total compensation that is the sum of all of the other columns.
• Other columns are salary; bonus; dollar value of equity awards; cash incentive awards not tied to stock performance; and all other.
• The dollar value of equity awards column will report the fair value of the award on the grant date, in accordance with FAS 123R. Unlike FAS 123R, which recognizes the expense over the vesting period of the award, the entire fair value of the award will be reportable as compensation in the year of grant.
• The "all other" column will pick up every other item of compensation that does not fit within the other categories. No item of compensation may be excluded. Examples of items picked up by this column are perks (which will be reportable if they exceed $10,000 in the aggregate), gross-up payments, aggregate increases in actuarial value of pension plans accrued during the year, all earnings on deferred compensation that is not tax-qualified, and all company contributions to retirement plans.
• The release will include guidance on what constitutes a perk.
• The SEC staff noted that the reduction in the threshold for reporting perks was made in response to input from investors that, even where the dollar amounts of perks are small, they believe the types of perks provided are material to assessing a company's corporate governance.
• The proposals apply to the CEO, CFO, three additional executive officers and up to three additional employees who are not executive officers. Although not mentioned during the open meeting, we assume disclosure will still be required for departed executive officers who would otherwise have been among the most highly compensated. As proposed, the new rules may require companies to track compensation for a larger group of executives. If any employee has total compensation exceeding that of any of the named executive officers, that information will have to be disclosed, but only the amount of compensation and the person's job description will be required, not his or her identity.
• The determination of who the named executive officers are would be based on total compensation, rather than just on salary and bonus as is currently the case.
• Two supplemental tables would report grants of performance-based awards and grants of all other equity awards.

Additional Tables Regarding Equity-related Interests

• The proposals contemplate two additional tables regarding equity awards--a table of outstanding equity awards at fiscal year-end and a table of amounts realized through option exercise or stock vesting during the last year.
• These tables will rely on footnote or narrative disclosures to provide information about performance vesting terms and other material terms.
  
  
• The second table, showing amounts realized through option exercise or stock vesting, will include the number exercised/vested, the value realized and the fair value of the award on the grant date.

Retirement Plans and Other Post-employment Payments and Benefits

• The proposals would also provide for disclosure of post-employment executive compensation, including a table of retirement plan potential annual payments and benefits, which would disclose annual benefits payable to each named executive officer, and a table of non-qualified defined contribution and other deferred compensation plans, which would disclose year-end balance, executive and employer contributions, and earnings and withdrawals from such plans for the year.
• Disclosure regarding payments and benefits (including perks) payable upon termination of an executive or change of control is also proposed.

Director Compensation

• The proposal calls for disclosure of all compensation paid to directors in the past year in tabular format similar to that provided for executives.

Amendment to Form 8-K

• Item 1.01 of Form 8-K is proposed to be amended to more clearly capture material compensation developments involving named executive officers.
• All Form 8-K disclosure regarding employment agreements will be consolidated under a single 8-K item.

Related Party Transactions

• The proposals contemplate new disclosure requirements for a company's policies and procedures for review and approval of related party transactions.
• The proposed disclosure threshold is increased to $120,000 from the current $60,000 threshold.
• Many of the instructions currently contained in Item 404 of Regulation S-K will be eliminated, and the disclosure rule would become more principles-based.

Corporate Governance

• The proposals would consolidate existing corporate governance disclosure requirements into one item to simplify disclosure.
• Additional disclosures about the independence of compensation committee members and the committee's charter, similar to those already required about audit and nominating committees, are proposed.
• The proposals will allow greater use of the Internet to satisfy some disclosure requirements, such as the current obligation to include a copy of the audit committee charter in the proxy statement every three years.
• Disclosure of director independence determinations will be revised to conform to listing standards.

Security Ownership of Officers and Directors

• Although not mentioned at the open meeting, the SEC's press release states that the proposals would require disclosure of the number of shares pledged by management.

Small Business Issuers, Business Development Companies and Foreign Private Issuers

• Small business issuers are treated differently than larger companies under the proposals. They will be required to provide the information about total compensation and some of the new disclosures, but not all of the new requirements will apply.
• The proposed rules apply in their entirety to BDCs.
• The new proposals do not change the Division's policy as to disclosure of executive compensation by foreign private issuers. Executive compensation will continue to be disclosed on a group basis, not individually, unless such disclosure is required in the issuer's home country or that information is otherwise disclosed. However, the rules as to exhibits to be filed with the Form 20-F currently cause some confusion because they can be read to require disclosure of individual employment contracts, providing information not required to be disclosed under the disclosure rules. The proposals aim to eliminate this anomaly and clarify that such exhibits are not required if disclosure of the information contained in them is not required.

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