SEC Releases New C&DIs on Proxy Disclosure Enhancement Rules

January 21, 2010

Yesterday, the Staff of the Division of Corporation Finance of the SEC released nine new Compliance and Disclosure Interpretations (C&DIs) providing guidance on issues raised by the new proxy disclosure enhancement rules adopted on December 16, 2009.

Two of the new C&DIs are notable for companies generally:

Question 117.04 deals with reporting the grant date fair market value of equity awards in the Summary Compensation Table as computed in accordance with FASB ASC Topic 718 (instead of the expense recognized for financial statement purposes for the relevant year, as previously required). The new rules do not address how to disclose an award that actually is forfeited by the end of the year in which it is granted. Under the old rules, the forfeiture of an award would have resulted in a reversal of the original expense recorded, and the Summary Compensation Table would have accordingly also reflected no expense for the year in which the award was granted. According to Question 117.04, an award that is forfeited in the year of grant should nevertheless be included for purposes of determining total compensation and identifying named executive officers. This interpretation could affect the identification of the “up to two additional executive officers” to be included in the Summary Compensation Table who are no longer serving as executive officers at year-end, since the grant date value of forfeited equity awards granted in that year will be included in determining their total compensation for the year.

Question 116.05 addresses Item 401(e)(1) of Regulation S-K, which requires registrants to disclose, with respect to directors and director nominees, “the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time that the disclosure is made, in light of the registrant’s business and structure.” Question 116.05 states that a company may not satisfy this requirement by providing disclosure on a group basis, even if the directors or nominees share similar characteristics. Instead, the disclosure must be provided on an individual basis and must identify the particular and specific experience, qualifications, attributes or skills of the individual in question that led the board to conclude that he or she should serve as a director. Companies describing a shared qualification among directors should ensure that the substance of the qualification is sufficiently unbundled, and its components appropriately attributed to the relevant individuals, such that it provides the level of specificity called for by the C&DI. To use an example cited by the Staff in the C&DI, there are many attributes that qualify a director as an audit committee financial expert, and any two experts may have varying combinations of those attributes. To meet the Staff guidance, the attributes must be unbundled and attributed to the proper director.

The other new C&DIs address specific inquiries in respect of the following topics:

  • Disclosure of director experience and qualifications for a company with a classified board, when the director is not up for re-election (Question 116.06);
  • Exclusion of estimated forfeitures from the grant date fair market value of equity awards subject to time-based
    vesting (Question 119.20);
  • The placement of Item 402(s) disclosure regarding compensation policies and practices and risk management (Question 128A.01);
  • Disclosure of compensation consultant fees (Questions 133.10 and 133.11); and
  • Certain transition issues (Questions 6 and 7).