SEC Issues New Proxy Disclosure Rules

April 2010

On Dec. 16, 2009, the U.S. Securities and Exchange Commission issued a set of final rules relating to enhanced proxy disclosures, which require reporting companies to provide greater and more detailed disclosures in their proxy filings.

Among other things, the Proxy Disclosure Enhancements require companies to report stock and option grants using aggregate grant date fair value (Item 402 of Regulation S-K); provide additional information about directors and nominees regarding their qualifications, prior directorships and legal proceedings (Item 401(e) of Regulation S-K); provide information about compensation consultants and possible conflicts of interest (Item 407 of Regulation S-K); and provide real-time results of shareholder votes (Item 5.07 of Form 8-K).

Perhaps most significantly, the Proxy Disclosure Enhancements impose an obligation in certain circumstances for companies to describe in detail their compensation policies and the impact of those policies on risk-taking, and describe the board leadership structure and the role played by the board in risk-management issues.

Prior to the new rules, reporting companies were not obligated to address these issues in their proxy materials. The amendments are consistent with the expressed view of the SEC that investors need a more transparent view of risk, governance and compensation matters in order to make informed investment decisions.

Risk management

The Proxy Disclosure Enhancements amend Rule 402 of Regulation S-K to add section 402(s), which requires certain reporting companies to include in their proxy materials a narrative description of their compensation policies and practices for all employees, including non-executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company.

The SEC provided some non-exclusive examples of where such disclosure would be appropriate, including compensation policies and practices:

• at a business unit of the company that carries a significant portion of the company’s risk profile;

• at a business unit with compensation structured significantly different than other units within the company;

• at a business unit that is significantly more profitable than others within the company;

• at a business unit where the compensation expense is a significant percentage of the unit’s revenues; and

• that vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.

The above examples are not intended to be exclusive or comprehensive, and companies must make their own analysis of whether or not such polices are “reasonably likely to have a material adverse effect on the company” and therefore require disclosure.

Similarly, the SEC included some examples of items that a company might address if it determined that disclosure was required, including:

• the general design philosophy of the company’s compensation policies and practices for employees whose behavior would be most affected by the incentives established by the policies and practices, as such policies and practices relate to or affect risk-taking by those employees on behalf of the company, and the manner of their implementation;

• the company’s risk assessment or incentive considerations, if any, in structuring its compensation policies and practices or in awarding and paying compensation;

• how the company’s compensation policies and practices relate to the realization of risks resulting from the actions of employees in both the short term and the long term, such as through policies requiring claw backs or imposing holding periods;

• the company’s policies regarding adjustments to its compensation policies and practices to address changes in its risk profile;

• material adjustments the company has made to its compensation policies and practices as a result of changes in its risk profile; and

• the extent to which the company monitors its compensation policies and practices to determine whether its risk management objectives are being met with respect to incentivizing its employees.

Perhaps anticipating some of the language likely to be included in such disclosures, the SEC warned that it “would not expect to see generic or boilerplate disclosure that the incentives are designed to have a positive effect, or that compensation levels may not be sufficient to attract or retain employees with appropriate skills in order to enable the company to maintain or expand operations.”

The disclosure obligations do not apply to smaller reporting companies.

Board leadership structure

The Proxy Disclosure Enhancements amend Rule 407 of Regulation S-K and Item 7 of Schedule 14A to require reporting companies to provide a narrative disclosure of their board leadership structure, including whether and why they have chosen to combine or separate the principal executive officer and board chair positions and the reasons why the company believes that the structure chosen is the appropriate one for the company.

In addition, companies where the role of principal executive officer and board chairman are combined must address whether or not (and why) they have a lead independent director and, if they do, what specific role the lead independent director plays in the leadership of the company.

Companies must also disclose how their board of directors oversees risk management, whether it is a committee or the whole board, and how the board acts to monitor risk.

Effective date

The Proxy Disclosure Enhancements were issued with an effective date of Feb. 28, 2010. However, because of some confusion as to how they would be applied, the SEC issued interpretive guidance on Dec. 22, 2009.

If the issuer’s fiscal year ends on or after Dec. 20, 2009, its Form 10-K and proxy statement must be in compliance with the Proxy Disclosure Enhancements if filed on or after Feb. 28, 2010.

If such an issuer is required to file a preliminary proxy statement and expects to file its definitive proxy statement on or after Feb. 28, 2010, then the preliminary proxy statement must be in compliance with the Proxy Disclosure Enhancements, even if filed before Feb. 28. If such an issuer files its 2009 Form 10-K before Feb. 28 and its proxy statement on or after Feb. 28, the proxy statement must be in compliance with the Proxy Disclosure Enhancements.

For additional information on this topic, please do not hesitate to contact Mark J. Tarallo or any other member of the Public Company practice group.

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