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                                                                                                                              September 8, 2006

                                                                                                                              Part II

                                                                                                                              Securities and
                                                                                                                              17 CFR Parts 228, 229 et al.
                                                                                                                              Executive Compensation and Related
                                                                                                                              Person Disclosure; Final Rule and
                                                                                                                              Proposed Rule
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                                         53158            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         SECURITIES AND EXCHANGE                                 November 7, 2006 and in Forms 10–K                    FOR FURTHER INFORMATION CONTACT:
                                         COMMISSION                                              and 10–KSB for fiscal years ending on                 Anne Krauskopf, Carolyn Sherman, or
                                                                                                 or after December 15, 2006. Companies                 Daniel Greenspan, at (202) 551–3500, in
                                         17 CFR Parts 228, 229, 232, 239, 240,                   other than registered investment                      the Division of Corporation Finance,
                                         245, 249 and 274                                        companies must comply with these                      U.S. Securities and Exchange
                                         [Release Nos. 33–8732A; 34–54302A; IC–                  disclosure requirements in Securities                 Commission, 100 F Street, NE.,
                                         27444A; File No. S7–03–06]                              Act registration statements and                       Washington, DC 20549–3010 or, with
                                                                                                 Exchange Act registration statements                  respect to questions regarding
                                         RIN 3235–AI80                                           (including pre-effective and post-                    investment companies, Kieran Brown in
                                                                                                 effective amendments), and in any                     the Division of Investment Management,
                                         Executive Compensation and Related
                                                                                                 proxy or information statements filed on              at (202) 551–6784.
                                         Person Disclosure
                                                                                                 or after December 15, 2006 that are
                                         AGENCY:  Securities and Exchange                        required to include Item 402 and 404                  SUPPLEMENTARY INFORMATION:     We are
                                         Commission.                                             disclosure for fiscal years ending on or              amending: Items 201,1 306,2 401,3 402,4
                                         ACTION: Final rule.                                     after December 15, 2006. Registered                   403 5 and 404 6 of Regulations S–K 7 and
                                                                                                 investment companies must comply                      S–B,8 Item 601 9 of Regulation S–K, Item
                                         SUMMARY: The Securities and Exchange                    with these disclosure requirements in                 1107 10 of Regulation AB,11 Item 304 12
                                         Commission is adopting amendments to                    initial registration statements and post-             of Regulation S–T,13 and Rule 100 14 of
                                         the disclosure requirements for                         effective amendments that are annual                  Regulation BTR.15 We are also adding
                                         executive and director compensation,                    updates to effective registration                     new Item 407 to Regulations S–K and S–
                                         related person transactions, director                   statements on Forms N–1A, N–2 (except                 B. In addition, we are amending Rules
                                         independence and other corporate                        those filed by business development                   13a–11,16 14a–3,17 14a–6,18 14c–5,19
                                         governance matters and security                         companies) and N–3, and in any new                    15d–11 20 and 16b–3 21 under the
                                         ownership of officers and directors.                    proxy or information statements, filed                Securities Exchange Act of 1934.22 We
                                         These amendments apply to disclosure                    with the Commission on or after                       are adding Rules 13a–20 and 15d–20
                                         in proxy and information statements,                    December 15, 2006.
                                         periodic reports, current reports and                                                                         under the Exchange Act. We are further
                                                                                                 ADDRESSES: Comments may be                            amending Schedule 14A 23 under the
                                         other filings under the Securities
                                                                                                 submitted by any of the following                     Exchange Act, as well as Exchange Act
                                         Exchange Act of 1934 and to registration
                                                                                                 methods:                                              Forms 8–K,24 10,25 10SB,26 10–Q,27 10–
                                         statements under the Exchange Act and
                                         the Securities Act of 1933. We are also                 Electronic Comments                                   QSB,28 10–K,29 10–KSB 30 and 20–F.31
                                         adopting a requirement that disclosure                                                                        Finally, we are amending Forms SB–2,32
                                         under the amended items generally be                       • Use the Commission’s Internet                    S–1,33 S–3,34 S–4 35 and S–11 36 under
                                         provided in plain English. The                          comment form (                     the Securities Act of 1933,37 Forms N–
                                         amendments are intended to make                         rules/final.shtml): or
                                         proxy and information statements,                          • Send an e-mail to rule-                            1 17 CFR 229.201 and 17 CFR 228.201.
                                         reports and registration statements            Please include File                   2 17 CFR 229.306 and 17 CFR 228.306.
                                         easier to understand. They are also                     Number S7–03–06 on the subject line;                    3 17 CFR 229.401 and 17 CFR 228.401.

                                         intended to provide investors with a                    or                                                      4 17 CFR 229.402 and 17 CFR 228.402.
                                                                                                                                                         5 17 CFR 229.403 and 17 CFR 228.403.
                                         clearer and more complete picture of the                   • Use the Federal Rulemaking Portal                  6 17 CFR 229.404 and 17 CFR 228.404.
                                         compensation earned by a company’s                      ( Follow the                7 17 CFR 229.10 et seq.
                                         principal executive officer, principal                  instructions for submitting comments.                   8 17 CFR 228.10 et seq.

                                         financial officer and highest paid                      Paper Comments
                                                                                                                                                         9 17 CFR 229.601.

                                         executive officers and members of its                                                                           10 17 CFR 229.1107.

                                         board of directors. In addition, they are                 • Send paper comments in triplicate                   11 17 CFR 229.1100 et seq.

                                         intended to provide better information                  to Nancy M. Morris, Secretary,                          12 17 CFR 232.304.
                                                                                                                                                         13 17 CFR 232.10 et seq.
                                         about key financial relationships among                 Securities and Exchange Commission,
                                                                                                                                                         14 17 CFR 245.100.
                                         companies and their executive officers,                 100 F Street, NE., Washington DC                        15 17 CFR 245.100 et seq.
                                         directors, significant shareholders and                 20549–1090.                                             16 17 CFR 240.13a–11.
                                         their respective immediate family                       All submissions should refer to File                    17 17 CFR 240.14a–3.
                                         members. In Release No. 33–8735,                        Number S7–03–06. This file number                       18 17 CFR 240.14a–6.

                                         published elsewhere in the proposed                     should be included on the subject line                  19 17 CFR 240.14c–5.

                                         rules section of this issue of the Federal              if e-mail is used. To help us process and
                                                                                                                                                         20 17 CFR 240.15d–11.

                                         Register, we also request additional                    review your comments more efficiently,
                                                                                                                                                         21 17 CFR 240.16b–3.
                                                                                                                                                         22 15 U.S.C. 78a et seq.
                                         comments regarding the proposal to                      please use only one method. The                         23 17 CFR 240.14a–101.
                                         require compensation disclosure for                     Commission will post all comments on                    24 17 CFR 249.308.
                                         three additional highly compensated                     the Commission’s Internet Web site                      25 17 CFR 249.210.
                                         employees.                                              (                 26 17 CFR 249.210b.

                                         DATES:  Effective Date: November 7,                     Comments are also available for public                  27 17 CFR 249.308a.

                                         2006.                                                   inspection and copying in the                           28 17 CFR 249.308b.
                                                                                                                                                         29 17 CFR 249.310.
                                            Comment Date: Comments regarding                     Commission’s Public Reference Room,
                                                                                                                                                         30 17 CFR 249.310b.
                                         the request for comment in Section                      100 F Street, NE., Washington, DC,                      31 17 CFR 249.220f.
                                         II.C.3.b. of this document should be                    20549. All comments received will be                    32 17 CFR 239.10.
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                                         received on or before October 23, 2006.                 posted without change; we do not edit                   33 17 CFR 239.11.
                                            Compliance Dates: Companies must                     personal identifying information from                   34 17 CFR 239.13.
                                         comply with these disclosure                            submissions. You should submit only                     35 17 CFR 239.25.

                                         requirements in Forms 8–K for                           information that you wish to make                       36 17 CFR 239.18.

                                         triggering events that occur on or after                publicly available.                                     37 15 U.S.C. 77a et seq.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                 53159

                                         1A,38 N–2,39 and N–3 40 under the                          c. Other Potential Post-Employment                 XI. Final Regulatory Flexibility Act Analysis
                                         Securities Act and the Investment                             Payments                                          A. Need for the Rules and Amendments
                                         Company Act of 1940,41 and Form N–                         6. Officers Covered                                  B. Significant Issues Raised by Public
                                                                                                    a. Named Executive Officers                             Comment
                                         CSR 42 under the Investment Company
                                                                                                    b. Identification of Most Highly                     C. Small Entities Subject to the Rules and
                                         Act and the Exchange Act.                                     Compensated Executive Officers; Dollar               Amendments
                                         Table of Contents                                             Threshold for Disclosure                          D. Reporting, Recordkeeping and Other
                                                                                                    7. Interplay of Items 402 and 404                       Compliance Requirements
                                         I. Background and Overview
                                                                                                    8. Other Changes                                     E. Agency Action to Minimize Effect on
                                         II. Executive and Director Compensation
                                                                                                    9. Compensation of Directors                            Small Entities
                                               Disclosure                                           D. Treatment of Specific Types of Issuers          XII. Statutory Authority and Text of the
                                            A. Options Disclosure                                   1. Small Business Issuers
                                            1. Background                                                                                                   Amendments
                                                                                                    2. Foreign Private Issuers
                                            2. Required Option Disclosures                          3. Business Development Companies                  I. Background and Overview
                                            a. Tabular Disclosures                                  E. Conforming Amendments
                                            b. Compensation Discussion and Analysis                                                                       On January 27, 2006, we proposed
                                                                                                 III. Revisions to Form 8–K and the Periodic
                                            i. Timing of Option Grants                                                                                 revisions to our rules governing
                                                                                                       Report Exhibit Requirements
                                            ii. Determination of Exercise Price                     A. Items 1.01 and 5.02 of Form 8–K                 disclosure of executive compensation,
                                            B. Compensation Discussion and Analysis                 1. Item 1.01—Entry into a Material                 director compensation, related party
                                            1. Intent and Operation of the                             Definitive Agreement                            transactions, director independence and
                                               Compensation Discussion and Analysis                 2. Item 5.02—Departure of Directors or             other corporate governance matters,
                                            2. Instructions to Compensation Discussion                 Certain Officers; Election of Directors;        current reporting regarding
                                               and Analysis                                            Appointment of Certain Officers;
                                            3. ‘‘Filed’’ Status of Compensation
                                                                                                                                                       compensation arrangements and
                                                                                                       Compensatory Arrangements of Certain            beneficial ownership.43 We received
                                               Discussion and Analysis and the                         Officers
                                               ‘‘Furnished’’ Compensation Committee                                                                    over 20,000 comment letters in response
                                                                                                    B. Extension of Limited Safe Harbor under
                                               Report                                                  Section 10(b) and Rule 10b–5 to Item
                                                                                                                                                       to our proposals. In general,
                                            4. Retention of the Performance Graph                      5.02(e) of Form 8–K and Exclusion of            commenters supported the proposals
                                            C. Compensation Tables                                     Item 5.02(e) from Form S–3 Eligibility          and their objectives. We are adopting
                                            1. Compensation to Named Executive                         Requirements                                    the rules and amendments substantially
                                               Officers in the Last Three Completed                 C. General Instruction D to Form 8-K               as proposed, with certain modifications
                                               Fiscal Years—The Summary                             D. Foreign Private Issuers                         to address a number of points that
                                               Compensation Table and Related                    IV. Beneficial Ownership Disclosure
                                                                                                                                                       commenters raised.
                                                                                                 V. Certain Relationships and Related                     The amendments to the compensation
                                            a. Total Compensation Column                               Transactions Disclosure
                                            b. Salary and Bonus Columns                                                                                disclosure rules are intended to provide
                                                                                                    A. Transactions with Related Persons
                                            c. Plan-Based Awards                                                                                       investors with a clearer and more
                                                                                                    1. Broad Principle for Disclosure
                                            i. Stock Awards and Option Awards                       a. Indebtedness                                    complete picture of compensation to
                                               Columns                                              b. Definitions                                     principal executive officers, principal
                                            ii. Non-Equity Incentive Plan                           2. Disclosure Requirements                         financial officers, the other highest paid
                                               Compensation Column                                  3. Exceptions                                      executive officers and directors. Closely
                                            d. Change in Pension Value and                          B. Procedures for Approval of Related              related to executive officer and director
                                               Nonqualified Deferred Compensation                      Person Transactions                             compensation is the participation by
                                               Earnings Column                                      C. Promoters and Control Persons
                                            i. Earnings on Deferred Compensation                                                                       executive officers, directors, significant
                                                                                                    D. Corporate Governance Disclosure                 shareholders and other related persons
                                            ii. Increase in Pension Value                           E. Treatment of Specific Types of Issuers
                                            e. All Other Compensation Column                                                                           in financial transactions and
                                                                                                    1. Small Business Issuers
                                            i. Perquisites and Other Personal Benefits              2. Foreign Private Issuers                         relationships with the company. We are
                                            ii. Additional All Other Compensation                   3. Registered Investment Companies                 also adopting revisions to our disclosure
                                               Column Items                                         F. Conforming Amendments                           rules regarding related party
                                            f. Captions and Table Layout                            1. Regulation Blackout Trading Restriction         transactions and director independence
                                            2. Supplemental Grants of Plan-Based                    2. Rule 16b–3 Non-Employee Director                and board committee functions.
                                               Awards Table                                            Definition                                         Finally, some compensation
                                            3. Narrative Disclosure to Summary                      3. Other Conforming Amendments
                                               Compensation Table and Grants of Plan-                                                                  arrangements must be disclosed under
                                                                                                 VI. Plain English Disclosure                          our rules relating to current reports on
                                               Based Awards Table                                VII. Transition
                                            a. Narrative Description of Additional                                                                     Form 8–K. Accordingly, we are
                                                                                                 VIII. Paperwork Reduction Act
                                               Material Factors                                     A. Background                                      reorganizing and more appropriately
                                            b. Request for Additional Comment on                    B. Summary of Information Collections              focusing our requirements on the type of
                                               Compensation Disclosure for up to Three              C. Summary of Comment Letters and                  compensation information that should
                                               Additional Employees                                    Revisions to Proposals                          be disclosed on a real-time basis.
                                            4. Exercises and Holdings of Previously                 D. Revisions to Paperwork Reduction Act               Since the enactment of the Securities
                                               Awarded Equity                                          Burden Estimates                                Act and the Exchange Act,44 the
                                            a. Outstanding Equity Awards at Fiscal                  1. Securities Act Registration Statements,
                                               Year-End Table                                          Exchange Act Registration Statements,              43 Executive Compensation and Related Party
                                            b. Option Exercises and Stock Vested Table                 Exchange Act Annual Reports, Proxy              Disclosure, Release No. 33–8655 (Jan. 27, 2006) [71
                                            5. Post-Employment Compensation                            Statements and Information Statements           FR 6542] (the ‘‘Proposing Release’’).
                                            a. Pension Benefits Table                               2. Exchange Act Current Reports                       44 Initially, disclosure requirements regarding
                                            b. Nonqualified Deferred Compensation                IX. Cost-Benefit Analysis                             executive and director compensation were set forth
                                               Table                                                A. Background                                      in Schedule A to the Securities Act and Section
                                                                                                    B. Summary of Amendments                           12(b) of the Exchange Act, which list the type of
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                                                                                                                                                       information to be included in Securities Act and
                                           38 17 CFR 239.15A and 274.11A.                           C. Benefits                                        Exchange Act registration statements. Item 14 of
                                           39 17 CFR 239.14 and 274.11a–1.                          D. Costs                                           Schedule A called for disclosure of the
                                           40 17 CFR 239.17a and 274.11b.                        X. Consideration of Burden on Competition             ‘‘remuneration, paid or estimated to be paid, by the
                                           41 15 U.S.C. 80a–1 et seq.                                  and Promotion of Efficiency,                    issuer or its predecessor, directly or indirectly,
                                           42 17 CFR 249.331 and 274.128.                              Competition and Capital Formation                                                          Continued

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                                         53160             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         Commission has on a number of                              We are thus today adopting an                            Following the Compensation
                                         occasions explored the best methods for                  approach that builds on the strengths of                Discussion and Analysis, we have
                                         communicating clear, concise and                         the requirements adopted in 1992 rather                 organized detailed disclosure of
                                         meaningful information about executive                   than discarding them. However, today’s                  executive compensation into three
                                         and director compensation and                            amendments do represent a thorough                      broad categories:
                                         relationships with the company.45 The                    rethinking of the rules in place prior to                  • Compensation with respect to the
                                         Commission also has had to reconsider                    these amendments, combining a                           last fiscal year (and the two preceding
                                         executive and director compensation                      broader-based tabular presentation with                 fiscal years), as reflected in an amended
                                         disclosure requirements in light of                      improved narrative disclosure                           Summary Compensation Table that
                                         changing trends in executive                             supplementing the tables. This                          presents compensation paid currently or
                                         compensation. Most recently, in 1992,                    approach will promote clarity and                       deferred (including options, restricted
                                         the Commission adopted amendments                        completeness of numerical information                   stock and similar grants) and
                                         to the disclosure rules that eschewed a                  through an improved tabular                             compensation consisting of current
                                         mostly narrative disclosure approach                     presentation, continue to provide the                   earnings or awards that are part of a
                                         adopted in 1983 in favor of formatted                    ability to make comparisons using                       plan, and as supplemented by a table
                                         tables that captured all compensation,                   tables, and call for material qualitative               providing back-up information for
                                         while categorizing the various elements                  information regarding the manner and                    certain data in the Summary
                                         of compensation and promoting                            context in which compensation is                        Compensation Table;
                                         comparability from year to year and                      awarded and earned.                                        • Holdings of equity-related interests
                                         from company to company.46                                 The amendments that we publish                        that relate to compensation or are
                                            We believe this tabular approach                      today require that all elements of                      potential sources of future gains, with a
                                         remains a sound basis for disclosure.                    compensation must be disclosed. We                      focus on compensation-related equity
                                         However, especially in light of the                      also have sought to structure the revised               interests that were awarded in prior
                                         complexity of and variations in                          requirements sufficiently broadly so that               years and are ‘‘at risk,’’ whether or not
                                         compensation programs, the very                          they will continue to operate effectively               these interests are in-the-money, as well
                                         formatted nature of those rules has                      as new forms of compensation are                        as recent realization on these interests,
                                         resulted in too many cases in disclosure                 developed in the future.                                such as through vesting of restricted
                                         that does not inform investors                             Under the amendments,                                 stock or the exercise of options and
                                         adequately as to all elements of                         compensation disclosure will now begin                  similar instruments; and
                                         compensation. In those cases investors                   with a narrative providing a general                       • Retirement and other post-
                                         may lack material information that we                    overview. Much like the overview that                   employment compensation, including
                                         believe they should receive.                             we have encouraged companies to                         retirement and deferred compensation
                                                                                                  provide with their Management’s                         plans, other retirement benefits and
                                         during the past year and ensuing year to (a) the         Discussion and Analysis of Financial                    other post-employment benefits, such as
                                         directors or persons performing similar functions,       Condition and Results of Operations                     those payable in the event of a change
                                         and (b) its officers and other persons, naming them                                                              in control.
                                         wherever such remuneration exceeded $25,000              (MD&A),47 the new Compensation
                                         during any such year.’’ Section 12(b) of the             Discussion and Analysis calls for a                        We are requiring improved tabular
                                         Exchange Act as enacted required disclosure of ‘‘(D)     discussion and analysis of the material                 disclosure for each of the above three
                                         the directors, officers, and underwriters, and each      factors underlying compensation                         categories and appropriate narrative
                                         security holder of record holding more than 10 per
                                                                                                  policies and decisions reflected in the                 disclosure that provides material
                                         centum of any class of any equity security of the                                                                information necessary to an
                                         issuer (other than an exempted security), their          data presented in the tables. This
                                         remuneration and their interests in the securities of,   overview addresses in one place these                   understanding of the information
                                         and their material contracts with, the issuer and any    factors with respect to both the separate               presented in the individual tables.50 We
                                         person directly or indirectly controlling or
                                                                                                  elements of executive compensation and                  have made some modifications from the
                                         controlled by, or under direct or indirect common                                                                proposal in response to comments.
                                         control with, the issuer;’’ and ‘‘(E) remuneration to    executive compensation as a whole. We
                                                                                                                                                             In Release No. 33–8735, published
                                         others than directors and officers exceeding $20,000     are adopting the overview substantially
                                         per annum.’’                                                                                                     elsewhere in the proposed rules section
                                                                                                  as proposed, but, in response to
                                            45 In 1938, the Commission promulgated its first                                                              of this issue of the Federal Register and
                                                                                                  comments, we are requiring a separate
                                         executive and director compensation disclosure                                                                   for which comments are due on or
                                         rules for proxy statements. Release No. 34–1823          report of the compensation committee
                                                                                                                                                          before October 23, 2006, we also solicit
                                         (Aug. 11, 1938) [3 FR 1991]. At different times          similar to the report required of the
                                         thereafter, the Commission has adopted rules                                                                     additional comments regarding the
                                                                                                  audit committee,48 which will be
                                         mandating narrative, tabular, or combinations of                                                                 proposed disclosure requirement of the
                                         narrative and tabular disclosure as the best method
                                                                                                  considered furnished and not filed.49                   total compensation and job description
                                         for presenting compensation disclosure in a manner                                                               of up to an additional three most highly
                                                                                                     47 Item 303 of Regulation S–K [17 CFR 229.303].
                                         that is clear and useful to investors. See, e.g.,
                                         Release No. 34–3347 (Dec. 18, 1942) [7 FR 10653]         See also Commission Guidance Regarding                  compensated employees who are not
                                         (introducing first tabular disclosure); Release No.      Management’s Discussion and Analysis of Financial
                                         34–4775 (Dec. 11, 1952) [17 FR 11431] (introducing       Condition and Results of Operations, Release No.        treated as filed or as soliciting material or
                                         separate table for pensions and deferred                 33–8350 (Dec. 19, 2003) [68 FR 75055], at Section       specifically incorporates it by reference into a filing
                                         remuneration); Uniform and Integrated Reporting          III.A.                                                  under the Securities Act or the Exchange Act, other
                                         Requirements: Management Remuneration, Release              48 The Audit Committee Report, required by Item      than by incorporating by reference the report from
                                         No. 33–6003 (Dec. 4, 1978) [43 FR 58151] (the            306 of Regulations S–B [17 CFR 228.306] and S–K         a proxy or information statement into the Form 10–
                                         ‘‘1978 Release’’) (expanding tabular disclosure to       [17 CFR 229.306] prior to these amendments, will        K. Instructions 1 and 2 to Item 407(e)(5).
                                         cover all forms of compensation); and Disclosure of      now be required by Item 407(d) of Regulations S–           50 This narrative disclosure, together with the
                                         Executive Compensation, Release No. 33–6486              B and S–K.                                              Compensation Discussion and Analysis noted
                                         (Sept. 23, 1983) [48 FR 44467] (the ‘‘1983 Release’’)       49 The Compensation Committee Report that we         above, will replace the narrative discussion that
                                         (limiting tabular disclosure to cash remuneration).      adopt today is not deemed to be ‘‘soliciting            was required in the Board Compensation Report on
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                                            46 Executive Compensation Disclosure, Release         material’’ or to be ‘‘filed’’ with the Commission or    Executive Compensation prior to these
                                         No. 33–6962 (Oct. 16, 1992) [57 FR 48126] (the           subject to Regulation 14A or 14C [17 CFR 240.14a–       amendments. The narrative disclosure, along with
                                         ‘‘1992 Release’’); See also Executive Compensation       1 et seq. or 240.14c–1 et seq.], other than as          the rest of the amended executive officer and
                                         Disclosure; Securityholder Lists and Mailing             specified, or to the liabilities of Section 18 of the   director compensation disclosure, other than the
                                         Requests, Release No. 33–7032 (Nov. 22, 1993) [58        Exchange Act [15 U.S.C. 78r], except to the extent      new Compensation Committee Report, will be
                                         FR 63010] (the ‘‘1993 Release’’), at Section II.         a company specifically requests that the report be      company disclosure filed with the Commission.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                 53161

                                         executive officers or directors but who                 related to named executive officers,                  this and other corporate governance
                                         earn more than the named executive                      have been required to be disclosed on                 disclosure requirements regarding
                                         officers. In particular, we have specific               Form 8–K within four business days of                 director independence and board
                                         requests for comment as to whether the                  the applicable triggering event.                      committees, including new disclosure
                                         proposal should be modified to apply                    Consistent with our intent that Form 8–               requirements about the compensation
                                         only to large accelerated filers who                    K capture only events that are                        committee, into a single expanded
                                         would disclose the total compensation                   unquestionably or presumptively                       disclosure item.55
                                         for the most recent fiscal year and a                   material to investors, we are today                      In order to ensure that these amended
                                         description of the job position for each                amending the Form 8–K requirements                    requirements result in disclosure that is
                                         of their three most highly compensated                  substantially as proposed.                            clear, concise and understandable for
                                         employees whose total compensation is                      We believe that executive and director             investors, we are adding Rules 13a–20
                                         greater than any of the named executive                 compensation is closely related to                    and 15d–20 under the Exchange Act to
                                         officers, whether or not such persons are               financial transactions and relationships              require that most of the disclosure
                                         executive officers. Under this approach,                involving companies and their directors,              provided in response to the amended
                                         employees who have no responsibility                    executive officers and significant                    items be presented in plain English.
                                         for significant policy decisions within                 shareholders and respective immediate                 This extends the plain English
                                         either the company, a significant                       family members. Disclosure                            requirements currently applicable to
                                         subsidiary or a principal business unit,                requirements regarding these matters                  portions of registration statements under
                                         division, or function, would be                         historically have been interconnected,                the Securities Act to the disclosure
                                         excluded from the determination of the                  given that relationships among these                  required under the items that we have
                                         three most highly compensated                           parties and the company can include                   amended, which impose requirements
                                         employees and no disclosure regarding                   transactions that involve compensation                for Exchange Act reports and proxy or
                                         them would be required.                                 or analogous features. Such disclosure                information statements incorporated by
                                            Finally, we are adopting a director                  also represents material information in               reference into those reports.
                                         compensation table that is similar to the               evaluating the overall relationship with                 Finally, we are amending our
                                         amended Summary Compensation                            a company’s executive officers and                    beneficial ownership disclosure
                                         Table.51                                                directors. Further, this disclosure                   requirements as proposed to require
                                            We also highlight in the release that                provides material information regarding               disclosure of shares pledged by named
                                         the principles-based disclosure rules we                the independence of directors. The                    executive officers, directors and director
                                         are adopting today, including but not                   related party transaction disclosure                  nominees, as well as directors’
                                         limited to the Compensation Discussion                  requirements were adopted piecemeal                   qualifying shares.56
                                         and Analysis section, may require                       over the years and were combined into                 II. Executive and Director
                                         disclosure of various aspects of a                      one disclosure requirement beginning in               Compensation Disclosure
                                         company’s use of options in                             1982.52 In light of many developments
                                         compensating its executives and                         since then, including the increasing                     Executive and director compensation
                                         directors, including any programs, plans                focus on corporate governance and                     disclosure has been required since 1933,
                                         or practices a company may have with                    director independence, we believe it is               and the Commission has had disclosure
                                         regard to the timing or dating of option                necessary to revise our requirements.                 rules in this area applicable to proxy
                                         grants.                                                 Today’s amendments update, clarify                    statements since 1938. In 1992, the
                                            We are also modifying, as proposed,                  and somewhat expand the related party                 Commission proposed and adopted
                                         some of the Form 8–K requirements                       transaction disclosure requirements.                  substantially revised rules that embody
                                         regarding compensation. Form 8–K                        The amendments fold into the                          our current requirements.57 In doing so,
                                         requires disclosure within four business                disclosure requirements for related                   the Commission moved away from
                                         days of the entry into, amendment of,                   party transactions what had been a                    narrative disclosure and back to using
                                         and termination of, material definitive                 separate disclosure requirement                       tables that permit comparability from
                                         agreements that are entered into outside                                                                      year to year and from company to
                                                                                                 regarding indebtedness of management
                                         of the ordinary course of business.                                                                           company. As we noted in the Proposing
                                                                                                 and directors.53 Further, we are
                                         Under our definition of material                                                                              Release, although the reasoning behind
                                                                                                 adopting a requirement that calls for a
                                         contracts in Item 601 of Regulation S–                                                                        this approach remains fundamentally
                                                                                                 narrative explanation of the
                                         K for the purposes of determining what                                                                        sound, significant changes are
                                                                                                 independence status of directors under
                                         exhibits are required to be filed, many                                                                       appropriate. Much of the concern with
                                                                                                 a company’s director independence
                                         agreements regarding executive                                                                                the tables adopted in 1992 had also been
                                                                                                 policies. We intend this requirement to
                                         compensation are deemed to be material                                                                        their strength: they were highly
                                                                                                 be consistent with recent significant
                                         agreements entered into outside the                                                                           formatted and rigid.58 Thus, information
                                                                                                 changes to the listing standards of the
                                         ordinary course. When, in 2004, for                                                                           not specifically called for in the tables
                                                                                                 nation’s principal securities trading                 had sometimes not been provided. For
                                         purposes of consistency, we looked to                   markets.54 We also are consolidating
                                         this definition for use in the Form 8–K                                                                       example, the highly formatted and
                                         requirements, we incorporated all of                       52 Disclosure of Certain Relationships and
                                                                                                                                                       specific approach had led some to
                                         these executive compensation                            Transactions Involving Management, Release No.
                                         agreements into the Form 8–K                            33–6441 (Dec. 2, 1982) [47 FR 55661] (the ‘‘1982      about director relationships that could affect
                                                                                                 Release’’).                                           independence specified in Item 404(b) of
                                         disclosure requirements. Therefore,                                                                           Regulation S–K prior to these amendments.
                                                                                                    53 Prior to these amendments, related party
                                         many agreements regarding executive                     transactions were disclosed under Item 404(a) of        55 New Item 407 of Regulations S–K and S–B.
                                         compensation, including some not                        Regulations S–K and S–B, while indebtedness was         56 Item 403(b) of Regulations S–K and S–B.

                                                                                                 separately required to be disclosed under Item          57 1992 Release.
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                                            51 We had proposed similar amendments, which         404(c) of Regulation S–K.                               58 See, e.g., Council of Institutional Investors’

                                         we did not act on, regarding director compensation         54 See, e.g., NASD and NYSE Rulemaking:            Discussion Paper on Executive Pay Disclosure,
                                         in 1995. Streamlining and Consolidation of              Relating to Corporate Governance, Release No. 34–     Executive Compensation Disclosure: How it Works
                                         Executive and Director Compensation Disclosure,         48745 (Nov. 4, 2003) [68 FR 64154] (the ‘‘NASD and    Now, How It Can Be Improved, at 11 (available at
                                         Release No. 33–7184 (Aug. 6, 1995) [60 FR 35633]        NYSE Listing Standards Release’’). This new 
                                         (the ‘‘1995 Release’’), at Section I.B.                 requirement will replace the disclosure requirement   CII%20pay%20primer%20edited.pdf).

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                                         53162            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         suggest that items that did not fit                     increments over a set time period. For                poor employee morale and resultant
                                         squarely within a ‘‘box’’ specified by the              example, if the grant vests at a rate of              turnover, especially at companies where
                                         rules need not have been disclosed.59 As                20% per year for five years, the option               option compensation is an important
                                         another example, because the tables did                 for the last 20% is earned by the                     component of total compensation. In
                                         not call for a single figure for total                  employee’s provision of five years of                 addition, options with shorter vesting
                                         compensation, that information had                      services. Most options become                         periods or longer term options
                                         generally not been provided prior to                    exercisable upon vesting and remain                   approaching their vesting dates may
                                         today’s amendments, although there had                  exercisable until their stated expiration.            provide incentives to employees to
                                         been considerable commentary                            Generally, upon termination of the                    focus on increasing the company’s stock
                                         indicating that a single total figure is                employment relationship, however, an                  price in the short term rather than
                                         high on the list of information that some               employee loses unvested options, and                  working toward achieving longer term
                                         investors wish to have. To preserve the                 has a limited term (e.g., 90 days) to                 business goals and objectives that would
                                         strengths of the former approach and                    exercise vested options.61                            enable the company to achieve and
                                         build on them, we are taking several                       Options have most often been issued                sustain future success.
                                         steps in adopting amendments to Item                    ‘‘at-the-money’’—i.e., with an exercise                 The Commission does not seek to
                                         402,60 substantially as we proposed:                    price equal to the market price of the                encourage or discourage the use of stock
                                            • First, we are retaining the tabular                underlying stock at the date of grant—                options or any other particular form of
                                         approach to provide clarity and                         but may also be issued either ‘‘in-the-               executive compensation. The federal
                                         comparability while improving the                       money’’—i.e., with an exercise price                  securities laws, however, do require full
                                         tabular disclosure requirements;                        below the market price of the                         and fair disclosure of compensation
                                            • Second, we are confirming that all                 underlying stock at the date of grant—                information to the extent material or
                                         elements of compensation must be                        or ‘‘out-of-the-money’’—i.e., with an                 required by Commission rule.
                                         included in the tables;                                 exercise price above the market price of              2. Required Option Disclosures
                                            • Third, we are providing a format for               the underlying stock at the date of grant.
                                         the amended Summary Compensation                        An option holder benefits only when                      The Commission acknowledged the
                                         Table that requires disclosure of a single              the company’s stock price is above the                importance to investors of proper
                                         figure for total compensation; and                      exercise price when the employee                      disclosure of executives’ option
                                            • Finally, we are requiring narrative                exercises the option. Hence, setting a                compensation throughout the Proposing
                                         disclosure comprising both a general                    lower exercise price increases the value              Release. The existing body of rules
                                         discussion and analysis of                              of the option.                                        regarding disclosure of executive stock
                                         compensation and specific material                         As some commentators have                          option grants, however, has not
                                         information regarding tabular items                     observed, using options for                           previously contained a line-item
                                         where necessary to an understanding of                  compensation purposes may have                        requirement with respect to information
                                         the tabular disclosure.                                 advantages. These commentators point                  regarding programs, plans or practices
                                                                                                 out that, unlike salary and bonus                     concerning the selection of stock option
                                         A. Options Disclosure                                                                                         grant dates or exercise prices.62 The
                                                                                                 compensation, stock option
                                         1. Background                                           compensation does not require the                     disclosure we proposed in January,
                                            Many companies use stock options to                  payment of cash by the company, and                   along with related disclosure we also
                                         compensate their employees, including                   therefore can be particularly attractive              adopt today, should provide investors
                                         executives. In a simple stock option, a                 to companies for which cash is a scarce               with more information about option
                                         company may grant an employee the                       resource. Stock option compensation                   compensation.63 We have summarized
                                         right to purchase a specified number of                 may also provide an incentive for                        62 Our existing rules for companies’ disclosure do
                                         shares of the company’s stock at a                      employees to work to increase the                     prohibit material misrepresentations of option grant
                                         specific price, called the exercise price               company’s stock price. Additionally,                  dates, as well as any resulting material
                                         and usually set as the market price of                  some companies may be able to use                     misstatements of affected financial statements.
                                         the company’s stock on the grant date.                  stock option compensation to help                     Companies are also required under our existing
                                                                                                                                                       rules to disclose any material information that may
                                         While some options require no future                    retain employees, because an employee                 be necessary to make their other disclosures, in the
                                         service from the employee, most include                 with unvested in-the-money options                    light of the circumstances under which they are
                                         vesting provisions, such that the                       forfeits their potential value if he leaves           made, not misleading. See, e.g., Rule 12b–20 under
                                         employee does not earn the option                       the company’s employ.                                 the Exchange Act [17 CFR 240.12b–20].
                                                                                                                                                          63 We note that Exchange Act Rule 16a–3 [17 CFR
                                         unless he remains employed by the                          At the same time, other commentators
                                                                                                                                                       240.16a–3] setsforth the general reporting
                                         company for a specified period of                       stress that option compensation is not                requirements under Exchange Act Section 16(a).
                                         service. Often a company will grant a                   without costs and disadvantages.                      Prior to August 2002, a number of transactions
                                         specific number of options that will                    Options granted to employees, if                      between an issuer and its officers or directors—such
                                                                                                 ultimately exercised with the resulting               as the granting of options—were required to be
                                         then vest proportionately in staggered                                                                        disclosed following the end of the fiscal year in
                                                                                                 issuance of the underlying stock, give                which the transaction took place although
                                           59 For examples, see, e.g., The Corporate Counsel     rise to a dilution of the interests in the            individuals could disclose those transactions earlier
                                         (Sept.–Oct. 2005) at 6–7; The Corporate Counsel         company held by existing stockholders.                if they chose to. In implementing Section 403(a) of
                                         (Sept.–Oct. 2004) at 7; but see Alan L. Beller,                                                               the Sarbanes-Oxley Act of 2002, in August 2002, the
                                         Director, Division of Corporation Finance, U.S.
                                                                                                 Options that are not in-the-money may
                                                                                                                                                       Commission required immediate disclosure of these
                                         Securities and Exchange Commission, Remarks             not provide a retention benefit, and                  transactions for the first time. As a result, since
                                         Before Conference of the NASPP, The Corporate           some managers believe that options that               August 2002, grants, awards and other acquisitions
                                         Counsel and the Corporate Executive (Oct. 20,           fall out-of-the-money (or are                         of equity-based securities from the issuer, including
                                         2004), available at                                                                  those pursuant to employee benefit plans (which
                                                                                                 ‘‘underwater’’) not only fail to motivate
                                                                                                                                                       were previously reportable on an annual basis on
                                                                                                 employees but, in fact, can result in
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                                           60 The discussion that follows focuses on                                                                   Form 5) have been required to be reported by
                                         amendments to Item 402 of Regulation S–K, with                                                                officers and directors on Form 4 within two
                                         Section II.D.1. explaining the different amendments       61 More complex stock options can include           business days. Ownership Reports and Trading by
                                         to Item 402 of Regulation S–B. References               provisions that alter the terms of the instrument     Officers, Directors and Principal Security Holders,
                                         throughout the following discussion are to Items of     based on whether performance or other targets are     Release No. 34–46421 (Aug. 27, 2002) [56 FR 56461]
                                         Regulation S–K, unless otherwise indicated.             met.                                                  at Section II.B.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                               53163

                                         below the various provisions of the                     b. Compensation Discussion and                           Although the facts would be slightly
                                         rules that we adopt today that relate to                Analysis                                              different, a company also may
                                         options disclosure.64                                                                                         coordinate its grant of stock options
                                                                                                    Companies will also be required to                 with the release of negative material
                                         a. Tabular Disclosures                                  address matters relating to executives’               non-public information. Again, such
                                            The following disclosures are                        option compensation in the new                        timing could occur in at least two ways:
                                                                                                 Compensation Discussion and Analysis
                                         required in the tables we adopt today.                                                                           • The company delays granting
                                         These provisions are discussed in more                  section, particularly as they relate to the
                                                                                                                                                       options until after the release of material
                                         detail later in the section relating to                 timing and pricing of stock option
                                                                                                                                                       non-public information that is likely to
                                         each particular table.                                  grants. Without being an exhaustive list,
                                                                                                                                                       result in a decrease in its stock price; or
                                                                                                 several of the examples provided in
                                            • As proposed and adopted, grants of                                                                          • The company chooses to release
                                                                                                 Item 402(b)(2) illustrate how these types
                                         stock options will be disclosed in the                                                                        material non-public information that is
                                                                                                 of issues and questions might be
                                         Summary Compensation Table at their                                                                           likely to result in a decrease in its stock
                                                                                                 covered in a company’s disclosure. For
                                         fair value on the date of grant, as                                                                           price prior to an upcoming stock option
                                                                                                 example, Item 402(b)(2)(iv) shows that
                                         determined under FAS 123R. By basing                                                                          grant.
                                                                                                 how the determination is made as to
                                         the executive compensation disclosure                                                                            The Commission does not express a
                                                                                                 when awards are granted could be
                                         on the full grant date fair value                                                                             view as to whether or not a company
                                                                                                 required disclosure. This example was
                                         computed in accordance with FAS                                                                               may or may not have valid and
                                                                                                 included in part to note that material
                                         123R, companies will give shareholders                                                                        sufficient reasons for such timing of
                                                                                                 information to be disclosed under
                                         an accurate picture of the value of                                                                           option grants, consistent with a
                                                                                                 Compensation Discussion and Analysis
                                         options at the time they are actually                                                                         company’s own business purposes.
                                                                                                 may include the reasons a company
                                         granted to the highest-paid executive                                                                         Some commentators have expressed the
                                                                                                 selects particular grant dates for awards,
                                         officers.65                                                                                                   view that following these practices may
                                                                                                 such as for stock options. Similarly,
                                            • A separate table including                         other examples we provide in Item                     enable a company to receive more
                                         disclosure of equity awards, the Grants                 402(b)(2) illustrate how the material                 benefit from the incentive or retention
                                         of Plan-Based Awards Table, requires                    information to be disclosed under                     effect of options because recipients may
                                         disclosure of the grant date as                         Compensation Discussion and Analysis                  value options granted in this manner
                                         determined pursuant to FAS 123R.66                      might need to include the methods a                   more highly or because doing so
                                         The grant date is generally considered                  company uses to select the terms of                   provides an immediate incentive for
                                         the day the decision is made to award                   awards, such as the exercise prices of                employee retention because an
                                         the option as long as recipients of the                 stock options.                                        employee who leaves the company
                                         award are notified promptly. Even if the                                                                      forfeits the potential value of unvested,
                                         option’s exercise price is set based on                 i. Timing of Option Grants                            in-the-money options. Other
                                         trading prices as of an earlier date or                                                                       commentators believe that timing option
                                                                                                   We understand that some companies
                                         dates, the grant date does not change.                                                                        grants in connection with the release of
                                                                                                 grant options in coordination with the
                                            • If the exercise price is less than the             release of material non-public                        material non-public information may
                                         closing market price of the underlying                  information. If the company had since                 unfairly benefit executives and
                                         security on the date of the grant, a                    the beginning of the last fiscal year, or             employees.
                                         separate, adjoining column would have                   intends to have during the current fiscal                Regardless of the reasons a company
                                         to be added to this table showing that                  year, a program, plan or practice to                  or its board may have, the Commission
                                         market price on the date of the grant.67                select option grant dates for executive               believes that in many circumstances the
                                            • If the grant date is different from the            officers in coordination with the release             existence of a program, plan or practice
                                         date the compensation committee or full                 of material non-public information, the               to time the grant of stock options to
                                         board of directors takes action or is                   company should disclose that in the                   executives in coordination with material
                                         deemed to take action to grant an                       Compensation Discussion and Analysis                  non-public information would be
                                         option, a separate, adjoining column                    section. For example, a company may                   material to investors and thus should be
                                         would have to be added to this table                    grant awards of stock options while it                fully disclosed in keeping with the rules
                                         showing the date the compensation                       knows of material non-public                          we adopt today. Consistent with
                                         committee or full board of directors took               information that is likely to result in an            principles-based disclosure, companies
                                         action or was deemed to take action to                  increase in its stock price, such as                  should consider their own facts and
                                         grant the option.68                                     immediately prior to a significant                    circumstances and include all relevant
                                            Further, if the exercise or base price               positive earnings or product                          material information in their
                                         of an option grant is not the closing                   development announcement. Such                        corresponding disclosures.70 If the
                                         market price per share on the grant date,               timing could occur in at least two ways:              company has such a program, plan or
                                         we require a description of the                           • The company grants options just                   practice, the company should disclose
                                         methodology for determining the                         prior to the release of material non-                 that the board of directors or
                                         exercise or base price.69                               public information that is likely to                  compensation committee may grant
                                                                                                 result in an increase in its stock price              options at times when the board or
                                           64 We also note that under our rules regarding
                                                                                                 (whether the date of that release of                  committee is in possession of material
                                         disclosure of director compensation, the concerns                                                             non-public information. Companies
                                         and considerations for disclosure of option timing      material non-public information is a
                                         or dating practices in the executive compensation       regular date or otherwise pre-                        might also need to consider disclosure
                                         realm would also apply when the recipients of the       announced, or not); or                                about how the board or compensation
                                         stock option grants are directors of the company.                                                             committee takes such information into
                                                                                                   • The company chooses to delay the
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                                           65 Item 402(c)(2)(vi).
                                           66 Item 402(d)(2)(ii) and Item 402(a)(6)(iv).         release of material non-public                          70 Relevant material information might include
                                           67 Item 402(d)(2)(vii).                               information that is likely to result in an            disclosure in response to the examples in Item
                                           68 Item 402(d)(2)(ii).                                increase in its stock price until after a             402(b)(2) in the Compensation Discussion and
                                           69 Instruction 3 to Item 402(d).                      stock option grant date.                              Analysis section, discussed below.

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                                         account when determining whether and                    relevant material information in their                   explain material elements of the
                                         in what amount to make those grants.                    corresponding disclosures.                               particular company’s compensation for
                                            Although it is not an exhaustive list,                 Similar to such a practice of setting                  named executive officers by answering
                                         there are some elements and questions                   the exercise price based on a date other                 the following questions:
                                         about option timing to which we believe                 than the actual grant date, some                            • What are the objectives of the
                                         a company should pay particular                         companies have provisions in their                       company’s compensation programs?
                                         attention when drafting the appropriate                 option plans or have followed practices                     • What is the compensation program
                                         corresponding disclosure.                               for determining the exercise price by                    designed to reward?
                                            • Does a company have any program,                   using formulas based on average prices                      • What is each element of
                                         plan or practice to time option grants to               (or lowest prices) of the company’s                      compensation?
                                         its executives in coordination with the                 stock in a period preceding,                                • Why does the company choose to
                                         release of material non-public                          surrounding or following the grant date.                 pay each element?
                                         information?                                            In some cases these provisions may                          • How does the company determine
                                            • How does any program, plan or                      increase the likelihood that recipients                  the amount (and, where applicable, the
                                         practice to time option grants to                       will be granted in-the-money options.                    formula) for each element?
                                         executives fit in the context of the                    As these provisions or practices relate to                  • How do each element and the
                                         company’s program, plan or practice, if                 a material term of a stock option grant,                 company’s decisions regarding that
                                         any, with regard to option grants to                    they should be discussed in the                          element fit into the company’s overall
                                         employees more generally?                               Compensation Discussion and Analysis                     compensation objectives and affect
                                            • What was the role of the                           section.                                                 decisions regarding other elements?
                                         compensation committee in approving                     B. Compensation Discussion and                              As proposed, the second question also
                                         and administering such a program, plan                  Analysis                                                 asked what the compensation program
                                         or practice? How did the board or                                                                                is designed not to reward. Commenters
                                                                                                   We are adopting a new Compensation                     stated that compensation committees
                                         compensation committee take such
                                                                                                 Discussion and Analysis section.71 As                    often may not consider this objective in
                                         information into account when
                                         determining whether and in what                         we proposed, this section will be an                     developing compensation programs,
                                         amount to make those grants? Did the                    overview providing narrative disclosure                  expressing concern that the question
                                         compensation committee delegate any                     that puts into context the compensation                  could generate potentially limitless
                                         aspect of the actual administration of a                disclosure provided elsewhere.72                         disclosure that would not add meaning
                                         program, plan or practice to any other                  Commenters generally supported the                       to disclosure of what the compensation
                                         persons?                                                new Compensation Discussion and                          program is designed to award.74 In
                                                                                                 Analysis section.73 This overview will
                                            • What was the role of executive                                                                              response to this concern, we have not
                                         officers in the company’s program, plan                    71 Item 402(b). In addition to the narrative
                                                                                                                                                          included this question in the rule as
                                         or practice of option timing?                           Compensation Discussion and Analysis, we are
                                            • Does the company set the grant date                amending the rules so that, to the extent material,      1. Intent and Operation of the
                                         of its stock option grants to new                       additional narrative disclosure will be provided
                                                                                                 following certain tables to supplement the               Compensation Discussion and Analysis
                                         executives in coordination with the                     disclosure in the table. See, e.g., Section II.C.3.a.,
                                         release of material non-public                                                                                      The purpose of the Compensation
                                                                                                 discussing the narrative disclosure to the Summary
                                         information?                                            Compensation Table and the Grants of Plan-Based          Discussion and Analysis disclosure is to
                                            • Does a company plan to time, or has                Awards Table. We are also requiring disclosure of        provide material information about the
                                         it timed, its release of material non-                  compensation committee procedures and processes          compensation objectives and policies
                                                                                                 as well as information regarding compensation            for named executive officers without
                                         public information for the purpose of                   committee interlocks and insider participation in
                                         affecting the value of executive                        compensation decisions as part of new Item 407 of        resorting to boilerplate disclosure. The
                                         compensation?                                           Regulation S–K. See Section V.D., below.                 Compensation Discussion and Analysis
                                            Disclosure would also be required
                                                                                                    72 See Jeffrey N. Gordon, Executive                   is intended to put into perspective for
                                                                                                 Compensation: What’s the Problem, What’s the             investors the numbers and narrative that
                                         where a company has not previously                      Remedy? The Case for Compensation Discussion
                                         disclosed a program, plan or practice of                and Analysis, 30 J. Corp. L. 695 (2005) (arguing that
                                                                                                                                                          follow it.
                                         timing option grants, but has adopted                   the Commission should require proxy disclosure
                                                                                                 that includes a ‘‘Compensation Discussion and            Investment Company Institute (‘‘ICI’’); Institutional
                                         such a program, plan or practice or has                 Analysis’’ section that collects and summarizes all      Shareholder Services (‘‘ISS’’); jointly, California
                                         made one or more decisions since the                    the compensation elements for senior executives,         Public Employees’ Retirement System, California
                                         beginning of the past fiscal year to time               providing a ‘‘bottom line assessment’’ of the            State Teachers’ Retirement System, Co-operative
                                         option grants.                                          different compensation elements and an                   Insurance Society—UK, F&C Asset Management—
                                                                                                 explanation as to why the board thinks such              UK, Illinois State Board of Investment, London
                                         ii. Determination of Exercise Price                     compensation is warranted).                              Pensions Fund Authority—UK, New York State
                                                                                                    73 See, e.g., letters from British Columbia           Common Retirement Fund, New York City Pension
                                           Separate from these timing issues,                    Investment Management Corporation (‘‘BCIMC’’);           Funds, Ontario Teachers’ Pension Plan, PGGM
                                         some companies may have a program,                      Leo J. Burns (‘‘L. Burns’’); CFA Centre for Financial    Investments—Netherlands, Public Sector and
                                         plan or practice of awarding options and                Market Integrity, dated April 13, 2006 (‘‘CFA Centre     Commonwealth Super (PSS/CSS)—Australia,
                                                                                                 1’’); Chamber of Commerce of the United States of        RAILPEN Investments—UK, State Board of
                                         setting the exercise price based on the                 America (‘‘Chamber of Commerce’’); Board of Fire         Administration (SBA) of Florida, Stichting
                                         stock’s price on a date other than the                  and Police Pension Commissioners of the City of          Pensioenfonds ABP—Netherlands, UniSuper
                                         actual grant date. Such a program, plan                 Los Angeles (‘‘F&P Pension Board’’); F&C Asset           Limited—Australia, and Universities
                                         or practice would also require                          Management; Foley & Lardner LLP (‘‘Foley’’);             Superannuation Scheme—UK (‘‘Institutional
                                                                                                 Hermes Investment Management Limited;                    Investors Group’’); The Pension Boards—United
                                         disclosure, including, as appropriate, in               Governance for Owners USA, Inc. (‘‘Governance for        Church of Christ (‘‘PB–UCC’’); State of Wisconsin
                                         the tables described in II.A.2.a above                  Owners’’); International Association of Machinists       Investment Board; and T. Rowe Price Associates,
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                                         and in the Compensation Discussion                      and Aerospace Workers (‘‘IAM’’); Board of Trustees       Inc.
                                         and Analysis section. Again, as with the                of the International Brotherhood of Electrical             74 See, e.g., letters from American Bar

                                                                                                 Workers Pension Benefit Fund (‘‘IBEW PBF’’);             Association, Committee on Federal Regulation of
                                         timing matters discussed above,                         International Brotherhood of Teamsters                   Securities (‘‘ABA’’); Committee on Securities
                                         companies should consider their own                     (‘‘Teamsters’’); Remuneration Committee of the           Regulation of the New York City Bar (‘‘NYCBA’’);
                                         facts and circumstances and include all                 International Corporate Governance Network;              and WorldatWork (‘‘WorldatWork’’).

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                                                            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                 53165

                                            As described in the Proposing Release                     • Policies for allocating between long-            reduce or increase the size of any award
                                         and as adopted, the Compensation                          term and currently paid out                           or payout), as proposed, but also
                                         Discussion and Analysis requirement is                    compensation;                                         whether such discretion has been
                                         principles-based, in that it identifies the                  • Policies for allocating between cash             exercised. By doing this, we move to the
                                         disclosure concept and provides several                   and non-cash compensation, and among                  Compensation Discussion and Analysis
                                         illustrative examples. Some commenters                    different forms of non-cash                           overview an example of a material factor
                                         suggested that a principles-based                         compensation;                                         that had been proposed for the narrative
                                         approach would be better served                              • For long-term compensation, the                  disclosure that follows the Summary
                                         without examples, on the theory that                      basis for allocating compensation to                  Compensation Table,79 and expand its
                                         ‘‘laundry lists’’ would lead to                           each different form of award;                         scope so that it is no longer limited to
                                         boilerplate.75 Other commenters                              • How the determination is made as                 non-equity incentive plans. Because of
                                         expressed the opposite view—that more                     to when awards are granted, including                 the policy significance of decisions to
                                         specific description of required                          awards of equity-based compensation                   waive or modify performance goals, we
                                         disclosure topics would more effectively                  such as options;                                      believe that they are more appropriately
                                         elicit meaningful disclosure.76                              • What specific items of corporate                 discussed in the Compensation
                                                                                                   performance are taken into account in                 Discussion and Analysis.
                                            As we explained in the Proposing                                                                                As discussed in Section II.A. above, a
                                                                                                   setting compensation policies and
                                         Release, overall we designed the                                                                                company’s policies, programs and
                                                                                                   making compensation decisions;
                                         proposals to state the requirements
                                                                                                      • How specific elements of                         practices regarding the award of stock
                                         sufficiently broadly to continue                                                                                options and other equity-based
                                                                                                   compensation are structured and
                                         operating effectively as future forms of                                                                        instruments to compensate executives
                                                                                                   implemented to reflect these items of
                                         compensation develop, without                                                                                   may require disclosure and discussion
                                                                                                   the company’s performance and the
                                         suggesting that items that do not fit                                                                           in the Compensation Discussion and
                                                                                                   executive’s individual performance;
                                         squarely within a ‘‘box’’ specified by the
                                                                                                      • The factors considered in decisions              Analysis. As with all disclosure in the
                                         rules need not be disclosed. We believe                                                                         Compensation Discussion and Analysis,
                                                                                                   to increase or decrease compensation
                                         that the adopted principles-based                         materially;                                           a company must evaluate the specific
                                         Compensation Discussion and Analysis,                        • How compensation or amounts                      facts and circumstances of its grants of
                                         utilizing a disclosure concept along                      realizable from prior compensation are                options and equity-based instruments
                                         with illustrative examples, strikes an                    considered in setting other elements of               and provide such disclosure if it
                                         appropriate balance that will effectively                 compensation (e.g., how gains from                    supplies material information about the
                                         elicit meaningful disclosure, even as                     prior option or stock awards are                      company’s compensation objectives and
                                         new compensation vehicles develop                         considered in setting retirement                      policies for named executive officers.
                                         over time.                                                benefits);                                               Further in response to comment,80 we
                                            We wish to emphasize, however, that                       • The impact of accounting and tax                 have revised the example addressing
                                         the application of a particular example                   treatments of a particular form of                    how the determination is made as to
                                         must be tailored to the company and                       compensation;                                         when awards are granted so that it is not
                                         that the examples are non-exclusive. We                      • The company’s equity or other                    limited to equity-based compensation,
                                         believe using illustrative examples                       security ownership requirements or                    as was proposed, but we clarify in the
                                         helps to identify the types of disclosure                 guidelines and any company policies                   rule as adopted that it would include
                                         that may be applicable. A company                         regarding hedging the economic risk of                equity-based compensation, such as
                                         must assess the materiality to investors                  such ownership;                                       stock options.81 Regarding the example
                                         of the information that is identified by                     • Whether the company engaged in                   noting the impact of accounting and tax
                                         the example in light of the particular                    any benchmarking of total                             treatments of a particular form of
                                         situation of the company. We also note                    compensation or any material element                  compensation, some commenters urged
                                         that in some cases an example may not                     of compensation, identifying the                      that companies be required to continue
                                         be material to a particular company, and                  benchmark and, if applicable, its                     to disclose their Internal Revenue Code
                                         therefore no disclosure would be                          components (including component                       Section 162(m) policy.82 The adoption
                                         required. Because the scope of the                        companies); and                                       of this example should not be construed
                                         Compensation Discussion and Analysis                         • The role of executive officers in the            to eliminate this discussion. Rather, this
                                         is intended to be comprehensive, a                        compensation process.                                 example indicates more broadly that
                                         company must address the                                     At the suggestion of a commenter,77                any tax or accounting treatment,
                                         compensation policies that it applies,                    we have expanded the example                          including but not limited to Section
                                         even if not included among the                            addressing how specific forms of                      162(m), that is material to the
                                         examples. The Compensation                                compensation are structured to reflect                company’s compensation policy or
                                         Discussion and Analysis should reflect                    company performance to also address                   decisions with respect to a named
                                         the individual circumstances of a                         implementation. We have made a
                                                                                                                                                            79 This example had been proposed as Item
                                         company and should avoid boilerplate                      similar change with regard to the
                                         disclosure.                                               example regarding the executive’s                        80 See letter from ABA.

                                            We have adopted, substantially as                      individual performance.78 As adopted,                    81 This example is discussed in more detail above

                                         proposed, the following examples of the                   this example includes not only whether                in Section II.A., the discussion of stock option
                                         issues that would potentially be                          discretion can be exercised (either to                disclosure.
                                                                                                                                                            82 See, e.g., letters from Buck Consultants;
                                         appropriate for the company to address                    award compensation absent attainment
                                                                                                                                                         Frederic W. Cook & Co., Inc., dated March 9, 2006
                                         in given cases in the Compensation                        of the relevant performance goal(s) or to             (‘‘Frederic W. Cook & Co.’’); Thomas Rogers; and
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                                         Discussion and Analysis:                                                                                        WorldatWork. The Commission has construed the
                                                                                                     77 See letter from ABA.                             Board Compensation Committee Report on
                                                                                                     78 We  have also reordered this example, so it is   Executive Compensation (which had been required
                                           75 See,e.g., letter from Curt Kollar (‘‘C. Kollar’’).   clearer that the items of company performance         to be furnished by Item 402(k) prior to these
                                           76 See,e.g., letters from CFA Centre 1 and Hewitt       referenced are the ones noted in the immediately      amendments) to require discussion of this policy.
                                         Associates LLC (‘‘Hewitt’’).                              preceding example.                                    1993 Release at Section III.

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                                         53166             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         executive officer is covered by                          Analysis should also cover actions                   not prohibit or discourage discussion of
                                         Compensation Discussion and Analysis.                    regarding executive compensation that                that specific information.
                                         Tax consequences to the named                            were taken after the last fiscal year’s                We are adopting an instruction to
                                         executive officers, as well as tax                       end. Actions that should be addressed                make clear that, as was the case with the
                                         consequences to the company, may fall                    might include, as examples only, the                 Board Compensation Committee Report
                                         within this example.                                     adoption or implementation of new or                 on Executive Compensation required
                                            In addition, we have followed                         modified programs and policies or                    prior to the adoption of these
                                         commenters’ recommendations to add                       specific decisions that were made or                 amendments, companies are not
                                         the following specific examples                          steps that were taken that could affect              required to disclose target levels with
                                         addressing additional factors:                           a fair understanding of the named                    respect to specific quantitative or
                                            • Company policies and decisions                      executive officer’s compensation for the             qualitative performance-related factors
                                         regarding the adjustment or recovery of                  last fiscal year. Moreover, in some                  considered by the compensation
                                         awards or payments if the relevant                       situations it may be necessary to discuss            committee or the board of directors, or
                                         company performance measures upon                        prior years in order to give context to              any other factors or criteria involving
                                         which they are based are restated or                     the disclosure provided.                             confidential trade secrets or confidential
                                         otherwise adjusted in a manner that                         The Compensation Discussion and                   commercial or financial information, the
                                         would reduce the size of an award or                     Analysis should be sufficiently precise              disclosure of which would result in
                                         payment; 83 and                                          to identify material differences in                  competitive harm to the company.89
                                            • The basis for selecting particular                  compensation policies and decisions for              Some commenters objected that this
                                         events as triggering payment with                        individual named executive officers                  instruction would impair the quality of
                                         respect to post-termination agreements                   where appropriate. Where policies or                 information disclosed by making it
                                         (e.g., the rationale for providing a single              decisions are materially similar, officers           difficult to assess the link between pay
                                         trigger for payment in the event of a                    can be grouped together. Where,                      and company performance, and
                                         change-in-control).84                                    however, the policy or decisions for a               suggested that competitive harm would
                                                                                                  named executive officer are materially               be mitigated if disclosure were required
                                            Commenters also requested
                                                                                                  different, for example in the case of a              on an after-the-fact basis, after the
                                         clarification as to whether
                                                                                                  principal executive officer, his or her              performance related to the award is
                                         Compensation Discussion and Analysis
                                                                                                  compensation should be discussed                     measured.90 Different commenters
                                         is limited to compensation for the last
                                                                                                  separately.                                          stated that performance targets often are
                                         fiscal year, like the former Board                                                                            based on confidential, competitively
                                         Compensation Committee Report on                         2. Instructions to Compensation                      sensitive business plans, and that
                                         Executive Compensation that was                          Discussion and Analysis                              requiring disclosure could encourage
                                         required prior to these amendments.85                       We are adopting instructions to make              the use of more generic targets that
                                         While the Compensation Discussion and                    clear that the Compensation Discussion               could hinder a company’s goal of pay-
                                         Analysis must cover this subject, the                    and Analysis should focus on the                     for-performance.91 Other commenters
                                         Compensation Discussion and Analysis                     material principles underlying the                   observed that companies rarely use a
                                         may also require discussion of post-                     company’s executive compensation                     performance metric for a single year or
                                         termination compensation                                 policies and decisions, and the most                 plan cycle, but select measures because
                                         arrangements, on-going compensation                      important factors relevant to analysis of            of their relevance to the company’s
                                         arrangements, and policies that the                      those policies and decisions, without                business strategy over several years, so
                                         company will apply on a going-forward                    using boilerplate language or repeating              that even disclosure on an after-the-fact
                                         basis.86 Compensation Discussion and                     the more detailed information set forth              basis could reveal proprietary business
                                            83 See, e.g., letters from Amalgamated Bank Long-
                                                                                                  in the tables and related narrative                  information that would be useful to
                                         View Funds (‘‘Amalgamated’’); CFA Centre 1; and          disclosures that follow. The instructions            competitors.92 Having considered these
                                         Council of Institutional Investors, dated March 29,      also provide that the Compensation                   comments, we remain persuaded that
                                         2006 (‘‘CII’’). Section 304 of the Sarbanes-Oxley Act    Discussion and Analysis should concern               this disclosure, even on an after-the-fact
                                         of 2002 [codified at 15 U.S.C. 7243] provides that                                                            basis could pose significant risk of
                                         if a company is required to prepare an accounting
                                                                                                  the information contained in the tables
                                         restatement due to the material noncompliance of         and otherwise disclosed.87 Because this              competitive harm and we are therefore
                                         the issuer, as a result of misconduct, with any          section is intended to provide                       not requiring it in those cases in which
                                         financial reporting requirement under the securities     meaningful analysis, it may specifically             the factors or criteria considered involve
                                         laws, the principal executive officer and principal
                                                                                                  refer to the tabular or other disclosures            confidential trade secrets or confidential
                                         financial officer of the company shall reimburse the                                                          commercial or financial information, the
                                         company for any bonus or other incentive-based or        where helpful to make the discussion
                                         equity-based compensation received by that person        more robust. A commenter raised a                    disclosure of which would result in
                                         from the company during the 12-month period              concern that the instruction not to                  competitive harm to the company.
                                         following the first public issuance or filing with the
                                                                                                  repeat information set forth in the other              As noted in the Proposing Release, in
                                         Commission (whichever first occurs) of the                                                                    applying this instruction, we intend the
                                         financial document embodying such financial              disclosures might somehow limit the
                                         reporting requirement, and any profits realized from     disclosure made in Compensation                      standard for companies to use in making
                                         the sale of securities of the company during that 12-    Discussion and Analysis.88 We have                   a determination that this information
                                         month period. This example would not necessarily
                                         be limited to policies covering only situations
                                                                                                  revisited this instruction, which is                    89 Instruction 4 to Item 402(b). Prior to these
                                         contemplated by Section 304.                             intended to encourage analysis and to                amendments, Instruction 2 to Item 402(k) had
                                            84 See letter from Anonymous, dated April 10,         forestall mere repetition of the                     provided a similar exclusion for this type of
                                         2006.                                                    information in the tables, to provide that           information.
                                            85 See, e.g., letters from Buck Consultants;                                                                  90 See, e.g., letters from American Federation of
                                                                                                  repetition and boilerplate language
                                         Frederic W. Cook & Co.; and Mercer Human                                                                      Labor and Congress of Industrial Organizations,
                                                                                                  should be avoided. The instruction does
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                                         Resource Consulting, Inc., dated April 10, 2006                                                               dated April 5, 2006 (‘‘AFL-CIO’’); CII; Governance
                                         (‘‘Mercer’’).                                                                                                 for Owners; IAM; and The Honorable Barney Frank,
                                            86 Forward looking information in the                 [15 U.S.C. 77z–2] and Exchange Act Section 21E [15   United States Representative (MA).
                                         Compensation Discussion and Analysis will fall           U.S.C. 78u–5].                                          91 See, e.g., letter from Sullivan & Cromwell LLP
                                                                                                    87 Instruction 2 to Item 402(b).                   (‘‘Sullivan’’).
                                         within the safe harbors for disclosure of such
                                         information. See, e.g., Securities Act Section 27A         88 See letter from ABA.                               92 See, e.g., letter from Mercer.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                    53167

                                         does not have to be disclosed to be the                 particular factors or criteria involve                 of 2002.99 Likewise, a company’s
                                         same one that would apply when                          confidential trade secrets or confidential             disclosure controls and procedures 100
                                         companies request confidential                          commercial or financial information and                apply to the preparation of the
                                         treatment of confidential trade secrets or              why disclosure would result in                         company’s proxy statement and Form
                                         confidential commercial or financial                    competitive harm. If the Commission or                 10–K, including the Compensation
                                         information that otherwise is required to               its staff ultimately determines that a                 Discussion and Analysis.
                                         be disclosed in registration statements,                company has not met these standards,                      We noted in the Proposing Release
                                         periodic reports and other documents                    then the company will be required to                   that in adopting the rules that have
                                         filed with us.93 Under this approach, to                disclose publicly the factors or criteria              applied since 1992, the Commission
                                         the extent a performance target has                     used. In response to a commenter’s                     took into account comments that the
                                         otherwise been disclosed publicly, non-                 concern,95 we have also added an                       Board Compensation Committee Report
                                         disclosure pursuant to this instruction                 instruction to clarify that disclosure of              on Executive Compensation should be
                                         would not be permitted. To make these                   a target level that applies a non-GAAP                 furnished rather than filed to allow for
                                         standards clearer and respond to                        financial measure will not be subject to               more open and robust discussion in the
                                         commenters’ concerns that companies                     the general rules regarding disclosure of              reports.101 The Board Compensation
                                         may exploit the instruction to exclude                  non-GAAP financial measures but the                    Committee Reports on Executive
                                         information in inappropriate                            company must disclose how the number                   Compensation that were provided prior
                                         circumstances, we are revising this                     is calculated from the audited financial               to today’s amendments in general did
                                         instruction as adopted to clearly apply                 statements.96                                          not suggest that this treatment resulted
                                         the same standard as for confidential                      One commenter stated that the                       in such discussion, nor the more
                                         treatment requests. Companies will not                  Compensation Discussion and Analysis                   transparent disclosure that the
                                         be required, however, to submit                         of a new public company should be                      comments suggested would result.102
                                         confidential treatment requests in order                permitted to be a prospective-only                     Further, we noted that we believe that
                                         to rely on the instruction.94 To mitigate               discussion.97 While we agree the most                  it is appropriate for companies to take
                                         commenters’ concerns that omission of                                                                          responsibility for disclosure involving
                                                                                                 significant disclosure in that situation
                                         specific performance targets would                                                                             board matters as with other disclosure.
                                                                                                 may be future plans, we do not believe
                                         impair the quality of disclosure, the                                                                             Some commenters supported the
                                                                                                 a prospective-only discussion is                       proposal to have the Compensation
                                         instruction requires additional                         appropriate. Instead, companies may
                                         disclosure regarding the significance of                                                                       Discussion and Analysis filed, noting
                                                                                                 emphasize the new plans or policies.                   among other things that filing should
                                         the undisclosed target. Specifically, if
                                         the company uses target levels for                      3. ‘‘Filed’’ Status of Compensation                    lead to increased accuracy and better
                                         specific quantitative or qualitative                    Discussion and Analysis and the                        disclosure.103 Other commenters
                                         performance-related factors, or other                   ‘‘Furnished’’ Compensation Committee                   objected to this treatment, claiming that
                                         factors or criteria that it does not                    Report                                                 certification by principal executive
                                         disclose in reliance on the instruction,                                                                       officers and principal financial officers
                                                                                                   We proposed that the Compensation                    with regard to the disclosure included
                                         the company must discuss how difficult                  Discussion and Analysis would be
                                         it will be for the executive or how likely                                                                     in the annual report on Form 10–K,
                                                                                                 considered a part of the proxy statement               including particularly the
                                         it will be for the company to achieve the               and any other filing in which it was
                                         undisclosed target levels or other                                                                             Compensation Discussion and Analysis,
                                                                                                 included. Unlike the Board                             would inappropriately insert these
                                         factors. In addition, as discussed below,               Compensation Committee Report on
                                         the Compensation Discussion and                                                                                officers into the compensation
                                                                                                 Executive Compensation that was
                                         Analysis will be considered soliciting                  required prior to these amendments, we                    99 Exchange Act Rules 13a–14 [17 CFR 240.13a–
                                         material and will be filed with the                     proposed that the Compensation                         14] and 15d–14 [17 CFR 240.15d–14]. See also
                                         Commission. This disclosure will be                     Discussion and Analysis would be                       Certification of Disclosure in Companies’ Quarterly
                                         subject to review by the Commission                     soliciting material and would be filed                 and Annual Reports, Release No. 34–46427 (Aug.
                                         and its staff. Therefore, if a company                                                                         29, 2002) [67 FR 57275], at n. 35 (the ‘‘Certification
                                                                                                 with the Commission. Therefore, it                     Release’’) (stating that ‘‘the certification in the
                                         uses target levels that otherwise would                 would be subject to Regulation 14A or                  annual report on Form 10–K or 10–KSB would be
                                         need to be disclosed but does not                       14C and to the liabilities of Section 18               considered to cover the Part III information in a
                                         disclose them in reliance on the                        of the Exchange Act.98 In addition, to
                                                                                                                                                        registrant’s proxy or information statement as and
                                         instruction, the company may be                                                                                when filed’’).
                                                                                                 the extent that the Compensation                          100 Exchange Act Rules 13a–15 [17 CFR 240.13a–
                                         required to demonstrate to the
                                                                                                 Discussion and Analysis and any of the                 15] and 15d–15 [17 CFR 240.15d–15].
                                         Commission or its staff that the
                                                                                                 other disclosure regarding executive                      101 1992 Release, at Section II.H.
                                                                                                                                                           102 See also Martin D. Mobley, Compensation
                                           93 See Securities Act Rule 406 [17 CFR 230.406],
                                                                                                 officer and director compensation or
                                                                                                                                                        Committee Reports Post-Sarbanes-Oxley:
                                         Exchange Act Rule 24b–2 [17 CFR 240.24b–2],             other matters are included or                          Unimproved Disclosure for Executive
                                         Exemption 4 of the Freedom of Information Act [5        incorporated by reference into a                       Compensation Policies and Practices, 2005 Colum.
                                         U.S.C. 552(b)(4)], and Rule 80(b)(4) promulgated        periodic report, the disclosure would be               Bus. L. Rev. 111 (2005).
                                         under the Freedom of Information Act [17 CFR            covered by the certifications that                        103 See, e.g., letters from AFL–CIO; American
                                         200.80(b)(4)].                                                                                                 Federation of State, County and Municipal
                                           94 While the instruction adopted today, like the      principal executive officers and                       Employees; California Public Employees’
                                         instruction that it replaces, does not require a        principal financial officers are required              Retirement System (‘‘CalPERS’’); Paul Hodgson,
                                         company to seek confidential treatment under the        to make under the Sarbanes-Oxley Act                   Senior Research Associate, Executive and Board
                                         procedures in Securities Act Rule 406 and                                                                      Compensation, the Corporate Library (‘‘Corporate
                                         Exchange Act Rule 24b–2 with regard to the                95 See
                                                                                                                                                        Library’’); Connecticut Retirement Plans and Trust
                                         exclusion of the information from the disclosure                  letter from ABA.                             Funds, dated April 10, 2006 (‘‘CRPTF’’);
                                                                                                   96 Instruction   5 to Item 402(b). The non-GAAP
                                         provided in response to this item, the standards                                                               Southwestern Pennsylvania and Western Maryland
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                                         specified in Securities Act Rule 406, Exchange Act      financial measure provisions are specified in          Area Teamsters and Employers Pension Fund
                                         Rule 24b–2, Exemption 4 of the Freedom of               Regulation G [17 CFR 244.100–102], Item 10(e) of       (‘‘Teamsters PA/MD’’); Teamsters Local 671 Health
                                         Information Act and Rule 80(b)(4) promulgated           Regulation S–K [17 CFR 229.10] and Item 10(h) of       Services and Insurance Plan (‘‘Teamsters Local
                                         under the Freedom of Information Act still apply        Regulation S–B [17 CFR 228.10].                        671’’); Walden Asset Management (‘‘Walden’’); and
                                                                                                    97 See letter from ABA.
                                         and are subject to review and comment by the staff                                                             Western PA Teamsters & Employers Welfare Fund
                                         of the Commission.                                         98 15 U.S.C. 78r.                                   (‘‘Western PA Teamsters Fund’’).

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                                         53168              Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         committee’s deliberative process,                            will be required to be included or                       Discussion and Analysis and the new
                                         potentially calling into question the                        incorporated by reference into the                       Compensation Committee Report, as
                                         committee’s independence.104 Further,                        company’s annual report on Form 10–K,                    described immediately above.113
                                         many commenters expressed the view                           so that it is presented along with the                      Given the widespread availability of
                                         that the Compensation Discussion and                         Compensation Discussion and Analysis                     stock performance information about
                                         Analysis should, in effect, be the report                    when that disclosure is provided in the                  companies, industries and indexes
                                         of the compensation committee,                               Form 10–K or incorporated by reference                   through business-related Web sites or
                                         submitted under the names of its                             from a proxy or information                              similar sources, we proposed to
                                         members, for which they should be                            statement.108 Like the Audit Committee                   eliminate the requirement for the
                                         accountable.105                                              Report, the Compensation Committee                       Performance Graph in the belief that it
                                           Some of these objections may reflect                       Report will only be required one time                    was outdated, particularly since the
                                         a misconception of the purpose of the                        during any fiscal year.109 The name of                   disclosure in the Compensation
                                         Compensation Discussion and Analysis.                        each member of the company’s                             Discussion and Analysis regarding the
                                         Although the Compensation Discussion                         compensation committee (or, in the                       elements of corporate performance that
                                         and Analysis discusses company                               absence of a compensation committee,                     a given company’s policies might reach
                                         compensation policies and decisions,                         the persons performing equivalent                        is intended to allow broader discussion
                                         the Compensation Discussion and                              functions or the entire board of                         than just that of the relationship of
                                         Analysis does not address the                                directors) must appear below the                         compensation to the performance of the
                                         deliberations of the compensation                            disclosure.110 This report will be                       company as reflected by stock price.
                                         committee, and is not a report of that                       ‘‘furnished’’ rather than ‘‘filed.’’ The                 Many commenters objected to
                                         committee. Consequently, in certifying                       principal executive officer and principal                eliminating the Performance Graph,
                                         the Compensation Discussion and                              financial officer will be able to look to                however, stating that it provides an
                                         Analysis, principal executive officers                       the Compensation Committee Report in                     easily accessible visual comparison of a
                                         and principal financial officers will not                    providing their certifications required                  company’s performance relative to its
                                         need to certify as to the compensation                       under Exchange Act Rules 13a–14 and                      peers and the market, and provides a
                                         committee deliberations.                                     15d–14.111                                               standardized source for this type of
                                           However, in response to concerns of                                                                                 information.114 In light of the
                                                                                                      4. Retention of the Performance Graph                    significance of this disclosure to a broad
                                         commenters that compensation
                                         committees should continue to be                                In light of the Compensation                          spectrum of commenters, we have
                                         focused on the executive compensation                        Discussion and Analysis requirement,                     decided to retain the Performance Graph
                                         disclosure process, we are adopting a                        we proposed to eliminate both the                        in the amendments we adopt today.
                                         Compensation Committee Report                                Board Compensation Committee Report                         However, we remain of the view that
                                         similar to the Audit Committee                               on Executive Compensation and the                        the Performance Graph should not be
                                         Report.106 Drawing on commenters’                            Performance Graph.112 The report and                     presented as part of executive
                                         suggestions for a new Compensation                           the graph were intended to be related                    compensation disclosure. In particular,
                                         Committee Report,107 the rules we adopt                      and to show the relationship, if any,                    as noted above, the disclosure in the
                                         today require the compensation                               between compensation and corporate                       Compensation Discussion and Analysis
                                         committee to state whether:                                  performance, as reflected by stock price.                regarding the elements of corporate
                                           • The compensation committee has                           The rules we adopt today eliminate the                   performance that a given company’s
                                         reviewed and discussed the                                   Board Compensation Committee Report                      policies consider is intended to
                                         Compensation Discussion and Analysis                         on Executive Compensation, as we                         encourage broader discussion than just
                                         with management; and                                         proposed, in favor of the more                           that of the relationship of executive
                                           • Based on the review and                                  comprehensive Compensation                               compensation to the performance of the
                                         discussions, the compensation                                                                                         company as reflected by stock price.
                                         committee recommended to the board of                           108 The audit committee report is only required in    Presenting the Performance Graph as
                                         directors that the Compensation                              a company proxy or information statement relating        compensation disclosure may weaken
                                                                                                      to an annual meeting of security holders at which        this objective. Accordingly, we have
                                         Discussion and Analysis be included in                       directors are to be elected (or special meeting or
                                         the company’s annual report on Form                          written consents in lieu of such meeting). See           decided to retain the requirements for
                                         10–K and, as applicable, the company’s                       Instruction 3 to Item 407(d).                            the Performance Graph, but have moved
                                         proxy or information statement.                                 109 Instruction 3 to Item 407(e)(5). The audit        them to the disclosure item entitled
                                           Unlike the Audit Committee Report,                         committee instruction is specified in Instruction 2      ‘‘Market Price of and Dividends on the
                                                                                                      to Item 407(d).
                                         the Compensation Committee Report                               110 Item 407(e)(5)(ii).
                                                                                                                                                               Registrant’s Common Equity and
                                                                                                         111 We note that one commenter suggested that         Related Stockholder Matters.’’ 115 As
                                           104 See, e.g., letters from The Corporate &
                                                                                                      the Compensation Discussion and Analysis should
                                         Securities Law Committee and the Employment &                not be required of companies that have only                113 Section  II.B.3.
                                         Labor Law Committee of the Association of                    registered the offer and sale of debt securities. See      114 See, e.g., letters from CalSTRS; CFA Centre 1;
                                         Corporate Counsel (‘‘ACC’’); Compass Bancshares,             letter from Financial Security Assurance Holdings        CII; IUE–CWA Pension Fund and 401(k) Plan
                                         Inc. (‘‘Compass Bancshares’’); National Association          Ltd. The Compensation Discussion and Analysis is         (‘‘IUE–CWA’’); John W. Hamm; NYCBA; Standard
                                         of Manufacturers (‘‘NAM’’); Peabody Energy                   intended to put into perspective for investors the       Life Investments Limited (‘‘Standard Life’’); and
                                         Corporation (‘‘Peabody Energy’’); and WorldatWork.           numbers and narrative that follow it. This section       Vivient Consulting LLC.
                                           105 See, e.g., letters from Jesse Brill, Chair of
                                                                                                      will provide a broader discussion than just that of         115 New Item 201(e) of Regulation S–K [17 CFR
                                and Chair of the                   the relationship of compensation to the                  229.201(e)] will require the Performance Graph.
                                         National Association of Stock Plan Professionals,            performance of the company as reflected by stock         Consistent with our belief that the Performance
                                         dated March 1, 2006 (‘‘J. Brill 1’’); CFA Centre 1;          price. Therefore, we believe it is appropriate for all   Graph should not be linked to the compensation
                                         CRPTF; Frederic W. Cook & Co.; and Hewitt.                   companies that are not small business issuers or         disclosure, we have not retained the portion of the
                                           106 We are moving the audit committee report               foreign private issuers filing on forms specified for    language that was included in Instruction 4 to Item
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                                         previously required by Item 306 of Regulations S–            their use to include the information.                    402(l) prior to these amendments, which
                                         K and S–B to Item 407(d) under the amendments                   112 Prior to these amendments, the Board              conditioned that other performance measures in
                                         adopted today. See Section V.D., below.                      Compensation Committee Report on Executive               addition to total return may be included in the
                                           107 See, e.g., letters from J. Brill 1; California State   Compensation had been required by Item 402(k)            graph only so long as the compensation committee
                                         Teachers’ Retirement System (‘‘CalSTRS’’); CFA               and the Performance Graph had been required by           (or persons performing equivalent functions or the
                                         Centre 1; and Professor William J. Heisler.                  Item 402(l).                                             entire board if there is no such committee) provided

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                   53169

                                         retained, the Performance Graph will      interests that were awarded in prior                                   Discussion and Analysis) to explain
                                         continue to be ‘‘furnished’’ rather than  years 119 and are ‘‘at risk,’’ as well as                              how disclosures relate to each other in
                                         ‘‘filed.’’ The Performance Graph will be  recent realization on these interests,                                 their particular circumstances.
                                         required only in the company’s annual     such as through vesting of restricted                                    Commenters stated their general
                                         report to security holders that           stock or the exercise of options and                                   support for the format and presentation
                                         accompanies or precedes a proxy or        similar instruments; 120 and                                           of the proposed tables.122 We are
                                         information statement relating to an        3. Retirement and other post-                                        adopting the tables substantially as
                                         annual meeting of security holders at     employment compensation, including                                     proposed with some revisions, as noted
                                         which directors are to be elected (or     retirement and deferred compensation                                   below, in response to comments.
                                         special meeting or written consents in    plans, other retirement benefits and
                                         lieu of such meeting), and will not be                                                                           1. Compensation to Named Executive
                                                                                   other post-employment benefits, such as
                                         deemed to be soliciting material under                                                                           Officers in the Last Three Completed
                                                                                   those payable in the event of a change
                                         the proxy rules or incorporated by                                                                               Fiscal Years—The Summary
                                                                                   in control.121
                                         reference into any filing except to the                                                                          Compensation Table and Related
                                                                                     Reorganizing the tables along these                                  Disclosure
                                         extent that the company specifically      themes should help investors
                                         incorporates it.116                       understand how compensation                                               Under today’s amendments, the
                                         C. Compensation Tables                    components relate to each other. At the                                Summary Compensation Table
                                                                                   same time, we are retaining the ability                                continues to serve as the principal
                                            To enhance the benefits of the tabular
                                                                                   for investors to use the tables to                                     disclosure vehicle regarding executive
                                         approach to eliciting compensation
                                                                                   compare compensation from year to                                      compensation. This table, as amended,
                                         disclosure,117 we proposed to reorganize
                                                                                   year and from company to company.                                      shows the named executive officers’
                                         and streamline the tables to provide a
                                                                                     As we noted in the Proposing Release,                                compensation for each of the last three
                                         clearer and more logical picture of total
                                                                                   by more clearly organizing the                                         years, whether or not actually paid out.
                                         compensation and its elements for
                                                                                   compensation tables to explain how the                                 Consistent with the requirements prior
                                         named executive officers. We are
                                         adopting reorganized compensation         elements relate to each other, we may in                               to today’s amendments, the amended
                                         tables and related narrative disclosure   some situations be requiring disclosure                                Summary Compensation Table
                                         that cover three broad categories:        of both amounts earned (or potentially                                 continues to require disclosure of
                                            1. Compensation with respect to the    earned) and amounts subsequently paid                                  compensation for each of the company’s
                                         last fiscal year (and the two preceding   out. This approach raises the possible                                 last three completed fiscal years.123
                                         fiscal years), as reflected in a revised  perception of ‘‘double counting’’ some                                    As we proposed, the amendments add
                                         Summary Compensation Table that           elements of compensation in multiple                                   disclosure of a figure representing total
                                         presents compensation paid currently or tables. However, a particular item of                                    compensation, as reflected in other
                                         deferred (including options, restricted   compensation only appears once in the                                  columns of the Summary Compensation
                                         stock and similar grants) and             Summary Compensation Table. In order                                   Table, and simplify the presentation
                                         compensation consisting of current        to explain the item of compensation, it                                from that of the table prior to these
                                         earnings or awards that are part of a     may also appear in one or more of the                                  amendments. As described in greater
                                         plan, and as supplemented by one table other tables. We believe the possible                                     detail below, the amendments also
                                         providing back-up information for         perception of double disclosure is                                     provide for a supplemental table
                                         certain data in the Summary               outweighed by the clearer and more                                     disclosing additional information about
                                         Compensation Table; 118                   complete picture the disclosure in the                                 grants of plan-based awards. Narrative
                                            2. Holdings of equity-based interests  additional tables will provide to                                      disclosure will follow the two tables,
                                         that relate to compensation or are        investors. We strongly encourage                                       providing disclosure of material
                                         potential sources of future               companies to use the narrative                                         information necessary to an
                                         compensation, focusing on                 following the tables (and where                                        understanding of the information
                                         compensation-related equity-based         appropriate the Compensation                                           disclosed in the tables.

                                         a description of the link between the measure and          117 The tabular disclosure and related narrative      in the Option Exercises and Stock Vested Table
                                         the level of compensation in the Board                  disclosure under amended Item 402 applies, as it         discussed below in Section II.C.4.b.
                                         Compensation Committee Report on Executive              did prior to today’s amendments, to named                   121 Disclosure regarding retirement and post-

                                         Compensation. As a result, companies may include        executive officers, with amended Item 402(k)             employment compensation is required in the
                                         other performance measures, such as return on           applying to directors, as described in Section II.C.9.   Pension Benefits Table, discussed below in Section
                                         average common shareholders’ equity, so long as         below. As discussed below in Section II.C.6.a., we       II.C.5.a., the Nonqualified Deferred Compensation
                                         the meaning of any such measures is clear from the      are adopting certain changes to the definition of        Table, discussed below in Section II.C.5.b., and the
                                         Performance Graph and any related legend or other       named executive officer.                                 narrative disclosure requirement for other potential
                                                                                                    118 The table supplementing the Summary               post-employment payments discussed below in
                                           116 Instructions 7 and 8 to Item 201(e). A ‘‘small    Compensation Table is the Grants of Plan-Based           Section II.C.5.c.
                                                                                                 Awards Table, discussed below in Section II.C.2.,           122 See, e.g., letters from CFA Centre 1; jointly,
                                         business issuer’’ as defined in Regulation S–B, is
                                                                                                 which combines into a single table the disclosure        Jennifer Clowes, Lindsey Erskine, Kendra Freeck
                                         not required to provide the Performance Graph.          of the proposed Grants of Performance-Based              and Kapri Malesich; F&P Pension Board; IAM;
                                         Instruction 6 to Item 201(e). Because Nasdaq has        Awards Table and the proposed Grants of All Other        IBEW PBF; Plumbers & Pipefitters National Pension
                                         registered as a national securities exchange under      Equity Awards Table. The accompanying narrative          Fund; and Standard Life.
                                         Section 6 of the Exchange Act [15 U.S.C. 78f], the      disclosure requirement is discussed below in                123 Prior to today’s amendments, an instruction to
                                         former separate reference to ‘‘Nasdaq market’’ is not   Section II.C.3.a.                                        Item 402(b) permitted the exclusion of information
                                         retained. See Release No. 34–53128 (Jan. 13, 2006)         119 Under the disclosure rules as adopted, these
                                                                                                                                                          for fiscal years prior to the last completed fiscal
                                         ordering that the application of The NASDAQ Stock       interests will be disclosed as current compensation      year if the company was not a reporting company
                                         Market LLC for registration as a national securities    for those prior years.                                   pursuant to Exchange Act Section 13(a) or 15(d) at
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                                         exchange be granted. We also adopt a conforming            120 Information regarding holdings of such equity-    any time during that year, unless the company
                                         revision to Rules 304(d) and (e) of Regulation S–T      based interests that relate to compensation will be      previously was required to provide information for
                                         [17 CFR 232.304(d) and (e)], and we make technical      disclosed in the Outstanding Equity Awards at            any such year in response to a Commission filing
                                         revisions to those rules to correctly reference Item    Fiscal Year-End Table, discussed below in Section        requirement. This instruction has been retained and
                                         22(b)(7)(ii) of Form N–1A and to eliminate the          II.C.4.a. Information regarding realization on           redesignated as Instruction 1 to Item 402(c) in the
                                         references to ‘‘prospectuses.’’                         holdings of equity-based interests will be required      amended rule.

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                                         53170             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                                                                                       SUMMARY COMPENSATION TABLE
                                                                                                                                                                       in pen-
                                                                                                                                                         Non-eq-     sion value
                                                                                                                                                          uity in-    and non-       All other
                                                                                                                               Stock        Option
                                                                                                 Salary        Bonus                                     centive      qualified       com-           Total
                                             Name and principal position            Year                                      awards        awards
                                                                                                  ($)           ($)                                     plan com-     deferred      pensation         ($)
                                                                                                                                ($)           ($)       pensation       com-            ($)
                                                                                                                                                            ($)      pensation

                                                          (a)                        (b)           (c)             (d)          (e)            (f)         (g)            (h)           (i)           (j)

                                         PEO 124

                                         PFO 125




                                         a. Total Compensation Column                            expressed their support for the proposal                 As we noted in the Proposing Release,
                                                                                                 to include a Total column.127                          the Summary Compensation Table is
                                           We are modifying the Summary                             Other commenters expressed                          designed to disclose all compensation.
                                         Compensation Table to provide a clearer                 concerns that, as proposed, the total                  Each element of compensation is only
                                         picture of total compensation. As we                    number was an amalgam of dissimilar                    disclosed once in the Summary
                                         proposed, we are requiring that all                     types of compensation.128 These                        Compensation Table, although it may
                                         compensation be disclosed in dollars                    concerns centered on the mix of                        also be disclosed in some of the other
                                         and that a total of all compensation be                 compensation elements reported in the                  tables. We realize that the timing of
                                         provided.126 The new ‘‘Total’’ column                   Summary Compensation Table being                       when particular items of compensation
                                         aggregates the total dollar value of each               measured at different times and having                 are disclosed in the Summary
                                         form of compensation quantified in the                  different valuation methods, so that a                 Compensation Table varies depending
                                         other columns (revised columns (c)                      Total column in effect would combine                   on the form of the compensation.132
                                         through (i)). This column responds to                   ‘‘apples’’ with ‘‘oranges.’’ 129 To address            Given the various forms and
                                         concerns that investors, analysts and                   this issue, some commenters suggested                  complexities of compensation and the
                                         other users of Item 402 disclosure have                 dividing the Total column into two                     different periods they may be designed
                                         not been able to compute aggregate                      separate columns reporting Total Earned                to relate to,133 it is unavoidable that the
                                         amounts of compensation using the                       Compensation and Total Contingent                      timing of disclosure may vary from
                                                                                                 Compensation.130 Others recommended                    element to element in this table.134
                                         disclosure in the table as specified prior
                                         to these amendments in a manner that                    two separate Summary Compensation
                                                                                                 Tables—one for compensation that had                   Secretaries & Governance Professionals (‘‘SCSGP’’);
                                         was accurate or comparable across years                                                                        Towers Perrin, dated April 10, 2006 (‘‘Towers
                                                                                                 been earned or realized and another for
                                         or companies. Many commenters                                                                                  Perrin’’); and Watson Wyatt Worldwide (‘‘Watson
                                                                                                 compensation that remained contingent                  Wyatt’’).
                                           124 ‘‘PEO’’ refers to principal executive officer.
                                                                                                 or an opportunity.131                                     132 Compensation is generally calculated in a

                                                                                                                                                        manner that reflects the cost of the compensation
                                         See Section II.C.6.a. below for a description of the       127 See, e.g., letters from CFA Centre 1; CII;      to the company and its shareholders.
                                         proposed named executive officers for whom                                                                        133 See, e.g., letter from ABA (noting that option
                                                                                                 Frederic W. Cook & Co.; ISS; Standard Life; and
                                         compensation disclosure is required.                    Walden. In addition, over 20,000 form letters from     grants made early in the year may be viewed by the
                                           125 ‘‘PFO’’ refers to principal financial officer.
                                                                                                 individuals specifically supported this proposal.      compensation committee primarily as an award for
                                           126 Instruction 2 to Item 402(c) (requiring all       See Letter Type A, available at     the prior year’s performance or as an incentive for
                                         compensation values in the Summary                      proposed/s70306.shtml.                                 future performance).
                                                                                                                                                           134 The approach as to the timing of disclosure
                                         Compensation Table to be reported in dollars and           128 See, e.g., letters from Fenwick & West LLP

                                                                                                 (‘‘Fenwick’’); Chamber of Commerce; and Hodak          that we proposed and that we adopt today is the
                                         rounded to the nearest dollar). Prior to today’s
                                                                                                                                                        same approach that has been used in the Summary
                                         amendments, some stock-based compensation was           Value Advisors, LLC (‘‘Hodak Value Advisors’’).
                                                                                                                                                        Compensation Table since it was first proposed in
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                                         disclosed in per share increments rather than in           129 See, e.g., letters from Caterpillar Inc. and
                                                                                                                                                        1992. See Executive Compensation Disclosure,
                                         dollar amounts. Instruction 2 to Item 402(c) further    Corporate Library.                                     Release No. 33–6940 (June 23, 1992) [57 FR 29582]
                                         requires, where compensation was paid or received          130 See, e.g., letters from Business Roundtable
                                                                                                                                                        (noting that the Summary Compensation Table will
                                         in a different currency, footnote disclosure            (‘‘BRT’’) and Mercer.                                  ‘‘provide shareholders a concise, comprehensive
                                         identifying that currency and describing the rate          131 See, e.g., letters from Eli Lilly and Company   overview of compensation awarded, earned or paid
                                         and methodology used for conversion to dollars.         (‘‘Eli Lilly’’); Hewitt; Society of Corporate          in the reporting period’’).

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                    53171

                                            We note that some commenters were                    response to these comments, we have                      rules where salary or bonus for the most
                                         particularly concerned that non-equity                  moved the Total column to the final                      recent fiscal year is determined
                                         incentive plan awards are reported                      column in the table.                                     following compliance with Item 402
                                         when earned, while equity incentive                                                                              disclosure. Under our new rules, where
                                                                                                 b. Salary and Bonus Columns
                                         plan awards are reported based on grant                                                                          salary or bonus cannot be calculated as
                                         date value when awarded.135 No single                      The first columns providing                           of the most recent practicable date, a
                                         accepted standard for measuring non-                    compensation information that we are                     current report under Item 5.02 of Form
                                         equity incentive plan awards at grant                   requiring are the salary and bonus                       8–K will be triggered by a payment,
                                         date currently exists. Some commenters                  columns (columns (c) and (d),                            decision or other occurrence as a result
                                         nonetheless suggested that we require                   respectively), which are retained                        of which either of such amounts become
                                         grant date fair value estimates of non-                 substantially in their previous form.                    calculable in whole or part.145 The Form
                                         equity incentive plan awards in the                     However, we are adopting some                            8–K will include disclosure of the salary
                                         Summary Compensation Table.136 We                       changes, as proposed, that will give an                  or bonus amount and a new total
                                         do not believe it is appropriate at this                investor a clearer picture of the total                  compensation figure including that
                                         time for us to develop such a standard                  amount earned.                                           salary or bonus amount.
                                         expressly for compensation disclosure                      As we proposed, compensation that is
                                                                                                 earned, but for which payment will be                    c. Plan-Based Awards
                                         purposes. Nevertheless, we believe that
                                         the Summary Compensation Table that                     deferred, must be included in the salary,                   As we proposed, the next three
                                         we adopt today, including a total of all                bonus or other column, as appropriate.                   columns—Stock Awards, Option
                                         of the various elements presented,                      A new instruction, applicable to the                     Awards and Non-Equity Incentive Plan
                                         provides meaningful disclosure to                       entire Summary Compensation Table,                       Compensation—cover plan-based
                                         investors and allows for comparability                  provides that if receipt of any amount of                awards.
                                         between companies and within a                          compensation is currently payable but
                                                                                                 has been deferred for any reason, the                    i. Stock Awards and Option Awards
                                         company.                                                                                                         Columns
                                            However, in response to comments,                    amount so deferred must be included in
                                         we have created a separate column for                   the appropriate column.141 This                             As proposed and adopted, the Stock
                                         the annual change in actuarial value of                 treatment is no longer limited to salary                 Awards column (column (e)) discloses
                                         defined benefit plans and earnings on                   and bonus, as it was prior to these                      stock-related awards that derive their
                                         nonqualified deferred compensation.137                  amendments, and under the amended                        value from the company’s equity
                                                                                                 rules this treatment applies regardless of               securities or permit settlement by
                                         As proposed, these compensation
                                                                                                 the reason for the deferral.142                          issuance of the company’s equity
                                         elements would have been included in
                                                                                                    We also proposed that the amount so                   securities and, as we have clarified, are
                                         the aggregate amount reported in the All
                                                                                                 deferred must be disclosed in a footnote                 thus within the scope of FAS 123R for
                                         Other Compensation column. We
                                                                                                 to the applicable column. As described                   financial reporting, such as restricted
                                         believe that presenting these items in a
                                                                                                 below, the amount deferred will also                     stock, restricted stock units, phantom
                                         separate column will permit investors
                                                                                                 generally be reflected as a contribution                 stock, phantom stock units, common
                                         and other users of the Summary
                                                                                                 in the deferred compensation                             stock equivalent units or other similar
                                         Compensation Table to readily identify
                                                                                                 presentation.143 The proposed footnote                   instruments that do not have option-like
                                         elements included in the Total column
                                                                                                 disclosure was intended to clarify the                   features.146 Valuation is based on the
                                         that may relate principally to longevity
                                                                                                 extent to which amounts disclosed in
                                         of service. These items will not be used
                                                                                                 the Nonqualified Deferred                                   145 New Item 5.02(f) of Form 8–K and Instruction
                                         to determine the officers included in the                                                                        1 to Item 402(c)(2)(iii) and (iv). Prior to these
                                                                                                 Compensation Table described below
                                         table.138                                               represent compensation already
                                                                                                                                                          amendments, in the event that such amounts were
                                            We proposed that the new column                                                                               not determinable at the most recent practicable
                                                                                                 reported, rather than additional                         date, they were generally reported in the annual
                                         disclosing total compensation would
                                                                                                 compensation. Because commenters                         report on Form 10–K or proxy statement for the
                                         appear as the first column providing                                                                             following fiscal year. We believe providing the
                                                                                                 thought it could lead to potential double
                                         compensation information.139 Some                                                                                information more quickly is appropriate and are
                                                                                                 counting, we have not adopted this                       therefore adopting the use of a current report on
                                         commenters suggested moving this
                                                                                                 proposed footnote requirement.144                        Form 8–K. Instruction 1 to Item 402(c)(2) (iii) and
                                         column to the right of the table, so that                  As proposed, we have eliminated the                   (iv) requires that the company disclose in a footnote
                                         it would follow—rather than precede—                    delay that existed under the former                      that the salary or bonus is not calculable through
                                         the relevant component numbers.140 In                                                                            the latest practicable date and the date that the
                                                                                                                                                          salary or bonus is expected to be determined. We
                                                                                                   141 Instruction    4 to Item 402(c).
                                           135 See,                                                                                                       proposed to include this requirement in an
                                                     e.g., letters from ACC; Amalgamated; BDO      142 Prior  to the amendments, this requirement was     instruction to proposed paragraph (e) of Item 5.02
                                         Seidman, LLP (‘‘BDO Seidman’’); CII; IUE–CWA;           triggered only if the officer elected the deferral. We   of Form 8–K. We are adopting it as a separate
                                         and Mercer.                                             are amending this requirement as we proposed to
                                            136 See, e.g., letters from CII; IUE–CWA; and
                                                                                                                                                          paragraph of Item 5.02 in order to make it clearer
                                                                                                 cover all deferrals, no matter who has initiated the     that it is a separate triggering event.
                                         CRPTF. Information about the amounts that could         deferrals.                                                  146 Generally speaking, a restricted stock award is
                                         be earned under non-equity incentive plans is              143 See Section II.C.5.b., describing the
                                                                                                                                                          an award of stock subject to vesting conditions,
                                         required to be disclosed in the Grants of Plan-Based    Nonqualified Deferred Compensation Table.                such as performance-based conditions or conditions
                                         Awards Table when such awards are granted.              Disclosure of these amounts as contributions will
                                            137 See Section II.C.1.d.i. below, which describes
                                                                                                                                                          based on continued employment for a specified
                                                                                                 now be required for nonqualified deferred                period of time. This type of award is referred to as
                                         a modification of the proposed Summary                  compensation plans. This disclosure will not be          ‘‘nonvested equity shares’’ in FAS 123R. Phantom
                                         Compensation Table disclosure of nonqualified           required for qualified plans. Nonqualified deferred      stock, phantom stock units, common stock
                                         deferred compensation earnings to present only the      compensation plans and arrangements provide for          equivalent units and other similar awards are
                                         above-market or preferential portion in this table.     the deferral of compensation that does not satisfy       typically awards where an executive obtains a right
                                            138 See Section II.C.6.b. below describing how in
                                                                                                 the minimum coverage, nondiscrimination and              to receive payment in the future of an amount based
                                         response to commenters this column is excluded          other rules that ‘‘qualify’’ broad-based plans for       on the value of a hypothetical, or notional, amount
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                                         from total compensation for the purpose of              favorable tax treatment under the Internal Revenue       of shares of common equity (or in some cases stock
                                         identifying named executive officers.                   Code.                                                    based on that value). To the extent that the terms
                                            139 Columns (a) and (b) specify the executive           144 See, e.g., letter from WorldatWork. As            of phantom stock, phantom stock units, common
                                         officer and the year in question.                       described in Section II.C.5.b. below, however, we        stock equivalents or other similar awards include
                                            140 See,e.g., letters from Buck Consultants;         have adopted the corresponding footnote proposed         option-like features, the awards will be required to
                                         Frederic W. Cook & Co.; and SCSGP.                      for the Nonqualified Deferred Compensation Table.                                                    Continued

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                                         53172             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         grant date fair value of the award                       generally recognized for financial                       we stated in the Proposing Release, we
                                         determined pursuant to FAS 123R for                      reporting purposes over the period in                    believe that this approach is more
                                         financial reporting purposes. Stock                      which the employee is required to                        consistent with the purpose of executive
                                         awards granted pursuant to an equity                     provide service in exchange for the                      compensation disclosure. We are
                                         incentive plan are also included in this                 award (generally the vesting period).                    adopting an approach that subscribes to
                                         column to ensure consistent reporting of                 Some commenters suggested that rather                    the measurement method of FAS 123R
                                         stock awards and to ensure their                         than requiring disclosure of the grant                   based on grant date fair value, but also
                                         inclusion in the revised Summary                         date fair value of equity awards, we                     provides for immediate disclosure of
                                         Compensation Table.147                                   should require a company to disclose                     compensation. This timing of disclosure
                                            Awards of options, stock appreciation                 just the portion of the award expensed                   of option awards remains the same as it
                                         rights, and similar equity-based                         in the company’s financial                               has been since 1992. The only change is
                                         compensation instruments that have                       statements.151 These commenters                          that the awards are now disclosed in
                                         option-like features that, as we have                    expressed concerns that disclosing the                   dollars rather than numbers of units or
                                         clarified, are within the scope of FAS                   full grant date fair value would be                      shares. Disclosing these awards as they
                                         123R, must be disclosed in the Option                    inconsistent with the company’s                          are expensed for financial statement
                                         Awards column (column (f)) in a                          financial statements, would overstate                    reporting purposes would not mirror the
                                         manner similar to the treatment of stock                 compensation earned related to service                   timing of disclosure of non-equity
                                         and other equity-based awards under                      rendered for the year, and would be                      incentive plan compensation. While we
                                         the amendments.148 Instead of the                        inconsistent with the presentation of                    have imported a financial statement
                                         disclosure of the number of securities                   non-equity incentive plan                                reporting principle to enable disclosure
                                         underlying the awards as was the case                    compensation. Other commenters                           of compensation costs, executive
                                         prior to today’s amendments, this                        expressed support for requiring                          compensation disclosure must continue
                                         column requires disclosure of the grant                  companies to report the full grant date                  to inform investors of current actions
                                         date fair value of the award as                          fair value in the year of the award                      regarding plan awards—a function that
                                         determined pursuant to FAS 123R. In                      because it would provide a more                          would not be fulfilled applying
                                         order to calculate a total dollar amount                 complete representation of                               financial reporting recognition timing. If
                                         of compensation, the value rather than                   compensation.152                                         a company does not believe that the full
                                         the number of securities underlying an                      We are adopting these columns                         grant date fair value reflects
                                         award must be used. The FAS 123R                         substantially as proposed.153 Under our                  compensation earned, awarded or paid
                                         valuation must be used whether the                       amendments, the compensation cost                        during a fiscal year, it can provide
                                         award itself is in the form of stock,                    calculated as the grant date fair value                  appropriate explanatory disclosure in
                                         options or similar instruments or the                    will be shown as compensation in the                     the accompanying narrative section.
                                         award is settled in cash but the amount                  year in which the grant is made.154 As                   Furthermore, disclosing grant date fair
                                         of payment is tied to performance of the                                                                          value will give investors a clearer
                                         company’s stock.149                                      classified as liability awards under FAS 123R. For       picture of the value of any in-the-money
                                                                                                  an award classified as an equity award under FAS         awards. As we proposed, the number of
                                            Under FAS 123R, the compensation                      123R, the compensation cost recognized is fixed for
                                         cost is initially measured based on the                  a particular award, and absent modification, is not      shares underlying an award and other
                                         grant date fair value of an award,150 and                revised with subsequent changes in market prices         details regarding the award must be
                                                                                                  or other assumptions used for purposes of the            disclosed in a separate table covering
                                                                                                  valuation. In contrast, liability awards are initially   grants of plan-based awards
                                         be included in the Option Awards column. Prior to        measured at fair value on the grant date, but for
                                         these amendments, restricted stock awards were           purposes of recognition in financial statement           supplementing the Summary
                                         valued in the Summary Compensation Table by              reporting are then re-measured at each reporting         Compensation Table.155 This
                                         multiplying the closing market price of the
                                         company’s unrestricted stock on the date of grant
                                                                                                  date through the settlement date under FAS 123R.         supplemental table, which combines the
                                                                                                  These re-measurements would not be the basis for         disclosure that would have been
                                         by the number of shares awarded.                         executive compensation disclosure under our
                                            147 Prior to these amendments, these
                                                                                                  amended rules, unless the award has been                 required by the proposed Grants of
                                         performance-based stock awards could be reported         modified, as described later in this release.            Performance-Based Awards Table and
                                         at the company’s election as incentive plan awards          151 See, e.g., letters from the SEC Regulations       Grants of All Other Equity Awards
                                         under what was then specified in Instruction 1 to        Committee of the American Institute of Certified
                                         Item 402(b)(2)(iv). Our amendments today eliminate
                                                                                                                                                           Table, discloses equity awards granted
                                                                                                  Public Accountants (‘‘AICPA’’); Baker, Donelson,
                                         this alternative.                                        Bearman, Caldwell & Berkowitz, P.C.; Chamber of          pursuant to incentive plans separately
                                            148 A stock appreciation right usually gives the
                                                                                                  Commerce; Computer Sciences Corporation                  from other equity awards.
                                         executive the right to receive the value of the          (‘‘Computer Sciences’’); Deloitte & Touche LLP;             We are adopting as proposed an
                                         increase in the price of a specified number of shares    Ernst & Young LLP (‘‘E&Y’’); Fenwick; Foley; HR          instruction that requires a footnote
                                         over a specified period of time. These awards may        Policy Association (‘‘HRPA’’); American Bar
                                         be settled in cash or in shares.                         Association, Joint Committee on Employee Benefits
                                                                                                                                                           referencing the discussion of the
                                            149 As proposed, we are eliminating the               (‘‘ABA–JCEB’’); and KPMG LLP (‘‘KPMG’’).                 relevant assumptions in the notes to the
                                         requirement that had been specified in Options/             152 See, e.g., letters from CalPERS; CFA Centre 1;    company’s financial statements or the
                                         SAR Grants in Last Fiscal Year Table under Item          CRPTF; L. Burns; Governance for Owners; Laborers         discussion of relevant assumptions in
                                         402(c)(2)(vi) to report the potential realizable value   International Union of North America; Nancy Lucke
                                         of each option grant under 5% or 10% increases in        Ludgus (‘‘N. Ludgus’’); Institutional Investors
                                                                                                                                                           the MD&A.156 The same instruction also
                                         value or the present value of each grant (computed       Group; State Board of Administration (SBA) of
                                         under any option pricing model). These alternative       Florida (‘‘SBAF’’); Teamsters Local 671; Teamsters       purposes of FAS 123R or to affect the judgments as
                                         disclosures are no longer necessary insofar as the       PA/MD; United Church Foundation, Inc. (‘‘UCF’’);         to reasonable groupings for purposes of determining
                                         grant date fair value of equity-based awards is          Washington State Investment Board (‘‘WSIB’’); and        the expected term assumption required by FAS
                                         included in the Summary Compensation Table.              Western PA Teamsters Fund.                               123R. Under the rules we adopt today, where a
                                            150 Under FAS 123R, the classification of an             153 Item 402(c)(2)(v) and (vi).                       company uses more than one group, the
                                         award as an equity or liability award is an                 154 FAS 123R requires a company to aggregate          measurement of grant date fair value for purposes
                                         important aspect of the accounting because the           individuals receiving awards into relatively             of Item 402 would be derived using the expected
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                                         classification will affect the measurement of            homogenous groups with respect to exercise and           term assumption for the group that includes the
                                         compensation cost. Awards with cash-based                post-vesting employment termination behaviors for        named executive officers (or the group that includes
                                         settlement, repurchase features, or other features       the purpose of determining expected term, for            directors for purposes of Item 402(k)).
                                                                                                                                                             155 See Section II.C.2., discussing the Grants of
                                         that do not result in an employee bearing the risks      example executives and non-executives. The rules
                                         and rewards normally associated with share               we adopt today are not intended to change the            Plan-Based Awards Table required by Item 402(d).
                                         ownership for a specified period of time would be        method used to value employee stock options for            156 Instruction 1 to Item 402(c)(2)(v) and (vi).

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                      53173

                                         provides that the referenced sections                   Awards and Option Awards columns                            • Defined ‘‘non-equity incentive
                                         will be deemed to be part of the                        when paid. Several commenters noted                       plan’’ as ‘‘an incentive plan or portion
                                         disclosure provided pursuant to Item                    that the value of the right to receive                    of an incentive plan that is not an equity
                                         402. The referenced sections containing                 dividends is factored into the grant date                 incentive plan.’’ 168
                                         this disclosure are required in the                     fair value computed under FAS 123R.163
                                                                                                                                                           ii. Non-Equity Incentive Plan
                                         company’s annual report to                              If the stock award or option award
                                                                                                                                                           Compensation Column
                                         shareholders that must precede or                       entitles the holder to receive dividends,
                                         accompany the company’s proxy                           then such ‘‘dividend protection’’ is                         The Non-Equity Incentive Plan
                                         statement.157 In the case of Internet                   included in the grant date fair value                     Compensation column (column (g)) will
                                         disclosure of proxy materials,                          computed under FAS 123R. We are                           report, as proposed, the dollar value of
                                         companies could provide hyperlinks                      persuaded by the commenters that                          all amounts earned during the fiscal
                                         from the proxy statement to the                         subsequent disclosure of the value of                     year pursuant to non-equity incentive
                                         referenced sections contained in the                    dividends in these circumstances, as                      plans.169 This column includes all other
                                         annual report.158 While some                            they are received, would repeat in the                    incentive plan awards not included in
                                         commenters recommended requiring                        same table compensation that was                          the stock awards and option awards
                                         these valuation assumptions to be                       previously disclosed. Therefore, we                       columns.170 Compensation awarded
                                         presented in the proxy statement,159 we                 have revised the requirement. However,                    under an incentive plan that is not
                                         believe that investors will be able to                  we note that if the stock award or option                 within the scope of FAS 123R will be
                                         easily access this information without                  award does not entitle the holder to                      disclosed in the Summary
                                         requiring it to be repeated from other                  receive dividends, then ‘‘dividend                        Compensation Table in the year when
                                         documents.                                              protection’’ is not included in the grant                 the relevant specified performance
                                            We proposed that previously awarded                  date fair value computed under FAS                        criteria under the plan are satisfied and
                                         options or freestanding stock                           123R. Accordingly, the value of any                       the compensation earned, whether or
                                         appreciation awards that the company                    dividends received would not have been
                                                                                                 previously disclosed in the Summary                       rendering service for a specified (either explicitly or
                                         repriced or otherwise materially                                                                                  implicitly) period of time and (b) achieving a
                                         modified during the last fiscal year be                 Compensation Table as part of the grant                   specified performance target that is defined solely
                                         disclosed in the Summary                                date fair value of the award. In order to                 by reference to the employer’s own operations (or
                                         Compensation Table based on the total                   appropriately capture the compensation                    activities). Attaining a specified growth rate in
                                                                                                 in these latter circumstances, we are                     return on assets, obtaining regulatory approval to
                                         fair value of the award as so modified.                                                                           market a specified product, selling shares in an
                                         Under FAS 123R, only the incremental                    adopting a requirement to disclose any                    initial public offering or other financing event, and
                                         fair value, computed as of the repricing                earnings on stock awards or option                        a change in control are examples of performance
                                         or modification date, is recognized for                 awards that are not included in the                       conditions for purposes of this Statement. A
                                                                                                 grant date fair value computation for                     performance target also may be defined by reference
                                         such an award. Several commenters                                                                                 to the same performance measure of another entity
                                         recommended conforming Summary                          those awards in the All Other                             or group of entities. For example, attaining a growth
                                         Compensation Table reporting to the                     Compensation column of the Summary                        rate in earnings per share that exceeds the average
                                                                                                 Compensation Table when the                               growth rate in earnings per share of other entities
                                         incremental fair value recognition                                                                                in the same industry is a performance condition for
                                         approach of FAS 123R, objecting that                    dividends or other earnings are paid.164                  purposes of this Statement. A performance target
                                         the proposed total fair value approach                  In addition, the material terms of any                    might pertain either to the performance of the
                                         would inappropriately double count the                  equity award (including whether                           enterprise as a whole or to some part of the
                                                                                                 dividends will be paid, the applicable                    enterprise, such as a division or an individual
                                         fair value of many modified awards.160                                                                            employee.’’ An award also would be considered to
                                         As adopted, the new rules reflect this                  dividend rate and whether that rate is                    have a performance condition if it is subject to a
                                         recommendation.161 Grants of reload or                  preferential) may be factors to be                        market condition, which is ‘‘a condition affecting
                                         restorative options, however, are                       discussed in the related narrative                        the exercise price, exercisability, or other pertinent
                                                                                                 section.165                                               factors used in determining the fair value of an
                                         reportable based on total grant date fair                                                                         award under a share-based payment arrangement
                                         value because they are new awards that                     We had proposed a definition of                        that relates to the achievement of (a) a specified
                                         do not replace previously cancelled                     ‘‘non-stock incentive plan’’ that some                    price of the issuer’s shares or a specified amount
                                         awards.162                                              commenters stated would result in                         of intrinsic value indexed solely to the issuer’s
                                                                                                 confusing and potentially anomalous                       shares or (b) a specified price of the issuer’s shares
                                            We proposed that all earnings, such as                                                                         in terms of a similar (or index of similar) equity
                                         dividends, be included in the Stock                     treatment of some awards.166 To clarify                   security (securities).’’ An award that vests on an
                                                                                                 the reporting treatment of different                      accelerated basis upon the occurrence of a change
                                            157 See Exchange Act Rule 14a–3 [17 CFR              types of awards, we have:                                 in control is not considered an award under an
                                         240.14a–3].                                                • Adopted a separate definition of                     equity incentive plan if (a) the award contains no
                                                                                                                                                           other performance or market conditions and (b) the
                                            158 In addition, in December 2005, we proposed       ‘‘equity incentive plan’’ as ‘‘an incentive               award would otherwise vest based on the
                                         rules that would allow companies and other              plan or portion of an incentive plan                      completion of a specified employee service period.
                                         persons to use the Internet to satisfy proxy material   under which awards are granted that fall                     168 Item 402(a)(6)(iii). See also discussion of the
                                         delivery requirements. Internet Availability of Proxy
                                         Materials, Release No. 34–52926 (Dec. 8, 2005) [70      within the scope of FAS 123R’’; 167 and                   definition of ‘‘incentive plan’’ at Section II.C.1.f.
                                         FR 74597].                                                                                                           169 Item 402(c)(2)(vii). An incentive plan
                                            159 See, e.g., letters from Buck Consultants; CII;      163 See, e.g., letters from Cleary; Emerson Electric
                                                                                                                                                           generally provides for compensation intended to
                                         Frederic W. Cook & Co.; and IUE–CWA.                    Co. (‘‘Emerson’’); Foley; Hewitt; SCSGP; and
                                                                                                                                                           serve as an incentive for performance to occur over
                                            160 See, e.g., letters from AICPA; Cleary Gottlieb   Towers Perrin.
                                                                                                    164 Item 402(c)(2)(ix)(G).
                                                                                                                                                           a specified period, whether such performance is
                                         Steen & Hamilton LLP (‘‘Cleary’’); Compass                                                                        measured by reference to financial performance of
                                         Bancshares; Cravath, Swaine & Moore LLP                    165 Item 402(e)(1)(iii), discussed in Section
                                                                                                                                                           the company or an affiliate, the company’s stock
                                         (‘‘Cravath’’); Hewitt; KPMG; Leggett & Platt,           II.C.3.a. below.                                          price, or any other performance measure. See Item
                                         Incorporated (‘‘Leggett & Platt’’); SCSGP; and             166 See, e.g., letter from ABA.
                                                                                                                                                           402(a)(6)(iii) for the definition of ‘‘incentive plan.’’
                                         Sullivan.                                                  167 Item 402(a)(6)(iii). An equity incentive plan         170 Awards disclosed in this column, column (g),
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                                            161 Instruction 2 to Item 402(c)(2)(v) and (vi).
                                                                                                 includes plans that have a performance or market          are not covered by FAS 123R for financial reporting
                                            162 Generally speaking, reload or restorative        condition. As defined in Appendix E of FAS 123R,          purposes because they do not involve share-based
                                         options are grants of new options that are granted      a performance condition is ‘‘a condition affecting        payment arrangements. Awards that involve share-
                                         automatically when an executive exercises the old       the vesting, exercisability, exercise price or other      based payment arrangements should be disclosed in
                                         option. Reload or restorative options are treated as    pertinent factors used in determining the fair value      the Stock Awards or Option Awards columns, as
                                         new grants under FAS 123R.                              of an award that relates to both (a) an employee’s        appropriate.

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                                         53174            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         not payment is actually made to the                     reported in the table with respect to                    disclosed only to the extent of any
                                         named executive officer in that year.                   previous fiscal years.175                                portion that was ‘‘above-market or
                                            The grant of an award under a non-                      As proposed and adopted, earnings on                  preferential.’’ This limitation generated
                                         equity incentive plan will be disclosed                 outstanding non-equity incentive plan                    criticism that the rule prior to today’s
                                         in the supplemental Grants of Plan-                     awards are also included in the Non-                     amendments permitted companies to
                                         Based Awards Table in the year of grant,                Equity Incentive Plan Compensation                       avoid disclosure of substantial
                                         which may be some year prior to the                     column and identified and quantified in                  compensation.
                                         year in which compensation under the                    a footnote to the table.176                                 Some commenters supported this
                                         non-equity incentive plan is reported in                d. Change in Pension Value and                           proposal.181 However, many
                                         the Summary Compensation Table.171                      Nonqualified Deferred Compensation                       commenters asserted that the Summary
                                         As noted above, several commenters                      Earnings Column                                          Compensation Table should continue to
                                         recommended Summary Compensation                                                                                 require disclosure only of earnings at
                                                                                                    As we proposed, we are expanding
                                         Table reporting of non-equity incentive                                                                          above-market or preferential rates.182
                                                                                                 the Summary Compensation Table to
                                         plan awards on a grant date fair value                                                                           Commenters stated that differences in
                                                                                                 include information regarding the
                                         basis, consistent with the reporting of                                                                          earnings on nonqualified deferred
                                                                                                 aggregate increase in actuarial value to
                                         equity incentive plans.172 However,                     the named executive officer of all                       compensation among executives may
                                         because there is not one clearly required               defined benefit and actuarial plans                      result entirely from the executives’
                                         or accepted standard for measuring the                  (including supplemental plans) accrued                   investment acumen and decisions as to
                                         value at grant date of these non-equity                 during the year and earnings on                          amounts to defer. Commenters further
                                         incentive plan awards that reflects the                 nonqualified deferred compensation.                      claimed that deferred amounts invested
                                         applicable performance contingencies,                   However, as mentioned above, we have                     at market rates are conceptually no
                                         as there is for equity-based awards with                decided to present this information in a                 different from amounts invested directly
                                         FAS 123R, we are not including such a                   separate column rather than include it                   by an executive. Absent providing an
                                         value in the Summary Compensation                       in the All Other Compensation column                     above-market return, contributing
                                         Table. Instead, we continue the                         as proposed.177 Footnote identification                  additional amounts or guaranteeing
                                         disclosure approach of reflecting these                 and quantification of the full amount of                 investment returns, commenters
                                         items of compensation when earned.173                   each element is required.178 Any                         asserted that the company has no role in
                                            Once the disclosure has been                         amount attributable to the defined                       the annual growth of the account.
                                         provided in the Summary                                 benefit and actuarial plans that is a                       We are persuaded that Summary
                                         Compensation Table when the specified                   negative number should be disclosed by                   Compensation Table disclosure of
                                         performance criteria have been satisfied                footnote, but should not be reflected in                 nonqualified deferred compensation
                                         and the compensation earned, and the                    the amount reported in the column.179                    earnings should continue to be limited
                                         grant of the award has been disclosed in                                                                         to the above-market or preferential
                                         the Grants of Plan-Based Awards Table,                  i. Earnings on Deferred Compensation
                                                                                                                                                          portion.183 As under the rule prior to
                                         no further disclosure will be specifically                 We proposed to require disclosure of                  these amendments, the above-market or
                                         required when payment is actually                       all earnings on compensation that is                     preferential portion is determined for
                                         made to the named executive officer.                    deferred on a basis that is not tax-                     interest by reference to 120% of the
                                         Some commenters objected to Summary                     qualified, including non-tax qualified                   applicable federal long-term rate and for
                                         Compensation Table reporting of awards                  defined contribution retirement                          dividends by reference to the dividend
                                         for which the relevant performance                      plans.180 Prior to our amendments,                       rate on the company’s common stock.184
                                         condition has been satisfied that remain                these earnings were required to be                       Footnote or narrative disclosure of the
                                         subject to forfeiture conditions (such as                                                                        company’s criteria for determining any
                                         conditions requiring continued service                    175 Commenters’ issues concerning the scope of
                                                                                                                                                          portion considered to be above-market
                                         or conditions that provide for forfeiture               awards reportable in this column, in particular as
                                                                                                 compared to compensation reportable in the bonus
                                                                                                                                                          may be provided. The above-market or
                                         based on future company                                 column, are discussed in Section II.C.1.f. below.        preferential earnings in this column
                                         performance).174 We continue to believe                   176 Item 402(c)(2)(vii). These earnings were           would always be positive, as it would
                                         that satisfaction of the relevant                       reportable prior to today’s amendments in the Other      not be possible for above-market or
                                         performance condition (including an                     Annual Compensation or All Other Compensation            preferential losses to occur.
                                                                                                 columns of the Summary Compensation Table
                                         interim performance condition in a long                 under Items 402(b)(2)(iii)(C)(3) and 402(b)(2)(v)(C),       However, we do not overlook the fact
                                         term plan) is the event that is material                respectively.                                            that the company is obligated to pay the
                                         to investors for Summary Compensation                     177 See the discussion of the Total column in
                                                                                                                                                          executive the entire amount of the
                                         Table reporting purposes. We encourage                  Section II.C.1.a. above and the discussion of
                                                                                                                                                          nonqualified deferred compensation
                                         companies to use the related narrative                  determination of named executive officers in
                                                                                                 Section II.C.6. below.                                   account, which represents a claim on
                                         section to disclose material features that                178 Instruction 3 to Item 402(c)(2)(viii). In          company assets and is part of a plan that
                                         are not reflected in the tabular                        contrast, as proposed to be disclosed in the All         provides the executive with tax
                                         disclosure including, for example,                      Other Compensation Column, separate
                                         subsequent forfeitures of amounts                       identification and quantification of each element
                                                                                                                                                            181 See, e.g., letters from CFA Centre 1 and jointly,
                                                                                                 would have been required only if the element
                                                                                                 exceeded $10,000, although the amounts would             Lucian A. Bebchuk, Jesse M. Fried and Robert J.
                                           171 See Section II.C.2., discussing the Grants of                                                              Jackson, Jr. (‘‘Professor Bebchuk, et al.’’).
                                                                                                 have been included in that column without regard
                                         Plan-Based Awards Table.                                to size.                                                   182 See, e.g., letters from American Academy of
                                           172 See, e.g., letters from Amalgamated;                179 Instruction 3 to Item 402(c)(2)(viii).             Actuaries’ Pension Committee (‘‘Academy of
                                         Anonymous Compensation Consultant; BDO                    180 Nonqualified defined contribution and other        Actuaries’’); BRT; Frederic W. Cook & Co.;
                                         Seidman; CII; CRPTF; Mercer; and Teamsters Local        nonqualified deferred compensation plans are plans       Computer Sciences; Kimball International, Inc.;
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                                         671. See discussion at Section II.C.1.a. above.         providing for deferral of compensation that do not       NAM; and Sullivan.
                                           173 Prior to these amendments, Items                                                                             183 Item 402(c)(2)(viii)(B).
                                                                                                 satisfy the minimum coverage, nondiscrimination
                                         402(b)(2)(iv)(C) and 402(e) required disclosure of      and other rules that ‘‘qualify’’ broad-based plans for     184 Instruction 2 to Item 402(c)(2)(viii), which is
                                         long-term incentive plan payouts when earned.           favorable tax treatment under the Internal Revenue       based on the language which had appeared in
                                           174 See, e.g., letters from Mercer; Watson Wyatt;     Code. A typical 401(k) plan, by contrast, is a           Instructions 3 and 4 to Item 402(b)(2)(iii)(C) prior
                                         and Richard E. Wood.                                    qualified deferred compensation plan.                    to these amendments.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                      53175

                                         benefits.185 To reflect this obligation, we             the absence of such a disclosure                         under generally accepted accounting
                                         have decided to require disclosure of all               requirement creates an incentive to shift                principles.194
                                         earnings on nonqualified deferred                       compensation to pensions, results in the                    Other commenters objected to this
                                         compensation in the separate                            understatement of non-performance-                       item’s potential to ‘‘distort’’ the Total
                                         Nonqualified Deferred Compensation                      based compensation, and distorts pay                     column and the determination of named
                                         Table, as we proposed.186 The                           comparisons between executives and                       executive officers.195 As described
                                         disclosure required by that table                       between companies.                                       above, we continue to believe that
                                         discloses the rate at which the                                                                                  inclusion of this element in the table is
                                                                                                    We are adopting the requirement
                                         company’s obligation grows on an                                                                                 necessary to permit the Summary
                                                                                                 substantially as proposed.189 As
                                         annual basis.                                                                                                    Compensation Table to reflect total
                                           Further, the method of calculating                    proposed and adopted, an instruction
                                                                                                                                                          compensation. However, we have
                                         earnings on deferred compensation                       specifies that this disclosure applies to
                                                                                                                                                          addressed commenters’ concerns by
                                         plans is an example of a factor that may                each plan that provides for the payment
                                                                                                                                                          segregating this item and above-market
                                         be material and therefore described in                  of retirement benefits, or benefits that
                                                                                                                                                          or preferential earnings on nonqualified
                                         the narrative disclosure to the Summary                 will be paid primarily following
                                                                                                                                                          deferred compensation from the All
                                         Compensation Table and the Grants of                    retirement, including but not limited to
                                                                                                                                                          Other Compensation column, presenting
                                         Plan-Based Awards Table.187                             tax-qualified defined benefit plans and
                                                                                                                                                          their sum in a separate column so that
                                                                                                 supplemental executive retirement                        it will be deducted from the total for
                                         ii. Increase in Pension Value                           plans, but excluding defined                             purposes of determining the named
                                            We proposed to require Summary                       contribution plans.190 The retirement                    executive officers.196
                                         Compensation Table disclosure of the                    section, discussed below, provides more
                                         aggregate increase in actuarial value to                information regarding these covered                      e. All Other Compensation Column
                                         the executive officer of defined benefit                plans.191                                                   The next column in the Summary
                                         and actuarial plans (including                             Some commenters raised issues                         Compensation Table discloses all other
                                         supplemental plans) accrued during the                  regarding computation of the amount to                   compensation not required to be
                                         year.                                                   be disclosed.192 In response to these                    included in any other column.197 This
                                            In contrast to defined contribution                                                                           approach allows the capture of all
                                                                                                 comments, we have revised the
                                         plans, for which the Summary                                                                                     compensation in the Summary
                                                                                                 language of the requirement as adopted
                                         Compensation Table requires disclosure                                                                           Compensation Table and also allows a
                                                                                                 to clarify that the disclosure applies to
                                         of company contributions, the rules                                                                              total compensation calculation. We
                                                                                                 the change, from the pension plan
                                         prior to our amendments did not require                                                                          confirm that disclosure of all
                                                                                                 measurement date used for the
                                         disclosure of the annual change in value                                                                         compensation is clearly required under
                                                                                                 company’s audited financial statements
                                         of defined benefit plans, such as                                                                                the rules.198
                                                                                                 for the prior completed fiscal year to the
                                         pension plans, in which the named                                                                                   As proposed, we are clarifying the
                                                                                                 pension plan measurement date used for
                                         executive officers participated.188 The                                                                          disclosure required in the All Other
                                                                                                 the company’s audited financial
                                         annual increase in actuarial value of                                                                            Compensation column (revised column
                                                                                                 statements for the covered fiscal year, in
                                         these plans may be a significant element                                                                         (i)) in two principal respects:
                                         of compensation that is earned on an                    the actuarial present value of the named
                                                                                                 executive officer’s accumulated benefit                     • Consistent with the requirement
                                         annual basis, thus we proposed to                                                                                that the Summary Compensation Table
                                         include it in the computation of total                  under all defined benefit and actuarial
                                         compensation.                                           pension plans (including supplemental                      194 Instruction 1 to Item 402(c)(2)(viii) and

                                            Such disclosure is necessary to permit               plans). The disclosure therefore                         Instruction 2 to Item (h)(2). Regarding such key
                                         the Summary Compensation Table to                       includes both:                                           assumptions as itnerest rate, form of benefit,
                                                                                                                                                          number of years of service, level of compensation
                                         reflect total compensation for the year.                   • The increase in value due to an                     used to determine the benefit and mortality tables,
                                         Such disclosure also permits a full                     additional year of service, compensation                 a company must use the same assumptions as it
                                         understanding of the company’s                          increases, and plan amendments (if                       applies pursuant to Financial Accounting Standards
                                         compensation obligations to named                       any); and                                                Board Statement of Financial Accounting Standards
                                                                                                                                                          No. 87, Employers’ Accounting for Pensions (FAS
                                         executive officers, given that defined                     • The increase (or decrease) in value                 87) both for this Summary Compensation Table
                                         benefit plans guarantee what can be a                   attributable to interest.                                column and the separate Pension Benefits Table.
                                         lifetime stream of payments and allocate                                                                           195 See, e.g., letters from Eli Lilly and SCSGP.

                                         risk of investment performance to the                      As discussed below, this disclosure                     196 See Section II.C.6. below.

                                         company and its shareholders. In                        relates to the disclosure provided in the                  197 Item 402(c)(2)(ix).

                                         addition commentators have noted that                   Pension Benefits Table 193 and promotes                    198 The only exception, as discussed below, is for

                                                                                                 company-to-company comparability. In                     perquisites and personal benefits if they aggregate
                                            185 Nonqualified defined contribution and other      computing the amount to be disclosed,                    less than $10,00 for a named executive officer. The
                                                                                                                                                          1992 Release, at Section II.A.4., also noted ‘‘the
                                         nonqualified deferred compensation plans are            the company must use the assumptions                     revised item includes an express statement that it
                                         generally unfunded, and their taxation is governed      it uses for financial reporting purposes                 requires disclosure of all compensation to the
                                         by Section 409A of the Internal Revenue Code [26                                                                 named executive officers and directors for services
                                         U.S.C. 409A].                                                                                                    rendered in all capacities to the registrant and its
                                            186 This separate table is discussed in Section        189 Item 402(c)(2)(viii)(A).
                                                                                                   190 Instruction
                                                                                                                                                          subsidiaries.’’ See also Item 402(a)(2) as stated prior
                                         II.C.5.b. below.                                                            1 to Item 402(c)(2)(viii). Defined   to these amendments. Further, as described above,
                                            187 See Section II.C.3.a. below.                     benefit plans include, for example, cash balance         Summary Compensation Table disclosure of
                                            188 A typical defined contribution plan is a         plans in which the retiree’s benefit may be              nonqualified deferred compensation earnings is
                                         retirement plan in which the company and/or the         determined by the amount represented in an               limited to the above-market or preferential portion
                                         executive makes contributions of a specified            account rather than based on a formula referencing       of earnings. As was previously the case before these
                                         amount, and the amount that is paid out to the          salary while still employed.                             amendments, companies may omit information
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                                                                                                   191 See Section II.C.5.a., discussing the Pension
                                         executive depends on the return on investments                                                                   regarding group life, health, hospitalization and
                                         from the contributed amounts. A typical defined         Benefits Table.                                          medical reimbursement plans that do not
                                                                                                   192 See, e.g., letters from Academy of Actuaries;
                                         benefit plan is a retirement plan in which the                                                                   discriminate in scope, terms or operation in favor
                                         company pays the executive specified amounts at         Frederick W. Cook & Co.; ABA–JCEB; and Mercer.           of executive officers or directors of the company
                                         retirement which are not tied to investment               193 Item 402(h), discussed in Section III.C.5.a.       and that are available generally to all salaried
                                         performance of the contributions that fund the plan.    below.                                                   employees. See Item 402(a)(6)(ii).

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                                         53176             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         disclose all compensation, we state                     amount of compensation, we believe                       the Commission engage in a separate
                                         explicitly that compensation not                        $10,000 is a reasonable balance between                  rulemaking to adopt a definition of
                                         properly reportable in the other                        investors’ need for disclosure of total                  perquisites in Regulation S–K.205 As we
                                         columns reporting specified forms of                    compensation and the burden on a                         noted in the Proposing Release, for
                                         compensation must be reported in this                   company to track every benefit, no                       decades questions have arisen as to
                                         column; and                                             matter how small. Prior to today’s                       what is a perquisite or other personal
                                            • To simplify the Summary                            amendments, the rule permitted                           benefit required to be disclosed. We
                                         Compensation Table and eliminate                        omission of perquisites and other                        continue to believe that it is not
                                         confusing distinctions between items                    personal benefits if the aggregate                       appropriate for Item 402 to define
                                         currently reported as ‘‘Annual’’ and                    amount of such compensation was the                      perquisites or personal benefits, given
                                         ‘‘Long Term’’ compensation, we have                     lesser of either $50,000 or 10% of the                   that different forms of these items
                                         moved into this column all items                        total of annual salary and bonus,                        continue to develop, and thus a
                                         formerly reportable as ‘‘Other Annual                   allowing omission of too much                            definition would become outdated. As
                                         Compensation.’’ 199                                     information that investors may consider                  stated in the Proposing Release, we are
                                            We also are requiring that each item                 material.                                                concerned that sole reliance on a bright
                                         of compensation included in the All                        The amendments we adopt today                         line definition in our rules might
                                         Other Compensation column that                          require, as proposed, footnote disclosure                provide an incentive to characterize
                                         exceeds $10,000 be separately identified                that identifies perquisites and other                    perquisites or personal benefits in ways
                                         and quantified in a footnote. We believe                personal benefits. Prior to these                        that would attempt to circumvent the
                                         that the $10,000 threshold balances our                 amendments, the rule required                            bright lines. Many commenters sought
                                         desire to avoid disclosure of clearly de                identification and quantification only of                additional or modified interpretive
                                         minimis matters against the interests of                perquisites and other personal benefits                  guidance, including guidance with
                                         investors in the nature of items                        that were 25% of the total amount for                    respect to an item that is integrally and
                                         comprising compensation. Each item of                   each named executive officer.203 We                      directly related to the performance of
                                         compensation less than that amount                      have modified this requirement so that,                  the executive’s duties but has a personal
                                         will be included in the column (other                   unless the aggregate value of perquisites                benefit aspect as well.206 Accordingly,
                                         than aggregate perquisites and other                    and personal benefits is less than                       we are providing additional explanation
                                         personal benefits less than $10,000 as                  $10,000, any perquisite or other                         regarding how to apply this guidance.
                                         discussed below), but is not required to                personal benefit must be identified and,                 The amendments we adopt today
                                         be identified by type and amount.200                    if it is valued at the greater of $25,000                require perquisites and personal
                                         Items to be disclosed in the All Other                  or ten percent of total perquisites and                  benefits to be disclosed for both named
                                         Compensation column include, but are                    other personal benefits, its value must                  executive officers and directors.207
                                         not limited to, the items discussed                     be disclosed.204 Consistent with our                     Further, the disclosure requirements we
                                         below.                                                  objective to streamline the Summary                      adopt regarding potential payments
                                                                                                 Compensation Table, the revised                          upon termination or change-in-control
                                         i. Perquisites and Other Personal                                                                                include disclosure of perquisites.208
                                         Benefits                                                threshold is intended to avoid requiring
                                                                                                 separate quantification of perquisites                   Accordingly, this discussion also
                                            Perquisites and other personal                       having de minimis value. Where                           applies in the context of each of these
                                         benefits are included in the All Other                  perquisites are subject to identification,               disclosure requirements.
                                         Compensation column. As we proposed,                    they must be described in a manner that                     Among the factors to be considered in
                                         we are adopting changes to the                          identifies the particular nature of the                  determining whether an item is a
                                         disclosure of perquisites and other                     benefit received. For example, it is not                 perquisite or other personal benefit are
                                         personal benefits to improve disclosure                 sufficient to characterize generally as                  the following:
                                         and facilitate computing a total amount                                                                             • An item is not a perquisite or
                                                                                                 ‘‘travel and entertainment’’ different
                                         of compensation. Our amendments                                                                                  personal benefit if it is integrally and
                                                                                                 company-financed benefits, such as
                                         require the disclosure of perquisites and                                                                        directly related to the performance of
                                                                                                 clothing, jewelry, artwork, theater
                                         other personal benefits unless the                                                                               the executive’s duties.
                                                                                                 tickets and housekeeping services.                          • Otherwise, an item is a perquisite or
                                         aggregate amount of such compensation                      As was formerly the case, tax ‘‘gross-
                                         is less than $10,000. Some commenters                                                                            personal benefit if it confers a direct or
                                                                                                 ups’’ or other reimbursement of taxes
                                         thought this threshold was too high; 201                                                                         indirect benefit that has a personal
                                                                                                 owed with respect to any compensation,
                                         while other commenters thought it was                                                                            aspect, without regard to whether it may
                                                                                                 including but not limited to perquisites
                                         too low.202 While we realize that this                                                                           be provided for some business reason or
                                                                                                 and other personal benefits, must be                     for the convenience of the company,
                                         threshold may result in the total amount                separately quantified and identified in
                                         of compensation reportable in the                                                                                unless it is generally available on a non-
                                                                                                 the tax reimbursement category                           discriminatory basis to all employees.
                                         Summary Compensation Table being                        described below, even if the associated
                                         slightly less than a complete total                                                                                 We believe the way to approach this
                                                                                                 perquisites or other personal benefits                   is by initially evaluating the first prong
                                                                                                 are eligible for exclusion or would not                  of the analysis. If an item is integrally
                                           199 Prior to today’s amendments, Item
                                                                                                 require identification or footnote                       and directly related to the performance
                                         402(b)(2)(iii)(c) had required the separate column
                                         entitled ‘‘Other Annual Compensation.’’                 quantification under the rule.                           of the executive’s duties, that is the end
                                           200 See Section II.C.1.e.i. regarding separate           In the Proposing Release, we provided                 of the analysis—the item is not a
                                         standards for identification of perquisites and other   interpretive guidance about factors to be                perquisite or personal benefit and no
                                         personal benefits.                                      considered in determining whether an
                                           201 See, e.g., letters from Association of BellTel
                                                                                                 item is a perquisite or other personal                     205 See letter from Chamber of Commerce.
                                         Retirees (‘‘ABTR’’); AFL–CIO; Amalgamated;
                                                                                                 benefit. One commenter suggested that
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                                                                                                                                                            206 See, e.g., letter from SCSGP.
                                         Association of US West Retirees (‘‘AUSWR’’);
                                         Corporate Library; ISS; UCF; and Walden.                                                                           207 For directors, the disclosure will be required
                                           202 See e.g., letters from Buck Consultants;            203 The requirement had been set forth in              in the Director Compensation Table discussed
                                         Chamber of Commerce; Compass Bancshares;                Instruction 1 to Item 402(b)(2)(iii)(C) prior to these   below in Section II.C.9.
                                         Computer Sciences; Eli Lilly; Emerson; Hodak            amendments.                                                208 Item 402(j), discussed in Section II.C.5.c.

                                         Value Advisors; C. Kollar; NAM; and SCSGP.                204 Instruction 4 to Item 402(c)(2)(ix).               below.

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                                         compensation disclosure is required.                    disclosure requirements are triggered by                 that it is generally available on a non-
                                         Moreover, if an item is integrally and                  different and broader concepts.                          discriminatory basis to all employees.
                                         directly related to the performance of an                  As we noted in the Proposing Release,                    Applying the concepts that we outline
                                         executive’s duties under this analysis,                 business purpose or convenience does                     above, examples of items requiring
                                         there is no requirement to disclose any                 not affect the characterization of an item               disclosure as perquisites or personal
                                         incremental cost over a less expensive                  as a perquisite or personal benefit where                benefits under Item 402 include, but are
                                         alternative. For example, with respect to               it is not integrally and directly related                not limited to: club memberships not
                                         business travel, it is not necessary to                 to the performance by the executive of                   used exclusively for business
                                         disclose the cost differential between                  his or her job. Therefore, for example, a                entertainment purposes, personal
                                         renting a mid-sized car over a compact                  company’s decision to provide an item                    financial or tax advice, personal travel
                                         car.                                                    of personal benefit for security purposes                using vehicles owned or leased by the
                                            Because of the integral and direct                   does not affect its characterization as a                company, personal travel otherwise
                                         connection to job performance, the                      perquisite or personal benefit. A                        financed by the company, personal use
                                         elements of the second part of the                      company policy that for security                         of other property owned or leased by the
                                         analysis (e.g., whether there is also a                 purposes an executive (or an executive                   company, housing and other living
                                         personal benefit or whether the item is                 and his or her family) must use                          expenses (including but not limited to
                                         generally available to other employees)                 company aircraft or other company                        relocation assistance and payments for
                                         are irrelevant. An example of such an                   means of travel for personal travel, or                  the executive or director to stay at his
                                         item could be a ‘‘Blackberry’’ or a laptop              must use company or company-                             or her personal residence), security
                                         computer if the company believes it is                  provided property for vacations, does                    provided at a personal residence or
                                         an integral part of the executive’s duties              not affect the conclusion that the item                  during personal travel, commuting
                                         to be accessible by e-mail to the                       provided is a perquisite or personal                     expenses (whether or not for the
                                         executive’s colleagues and clients when                                                                          company’s convenience or benefit), and
                                         out of the office. Just as these devices                                                                         discounts on the company’s products or
                                                                                                    If an item is not integrally and                      services not generally available to
                                         represent advances over earlier                         directly related to the performance of                   employees on a non-discriminatory
                                         technology (such as voicemail), we                      the executive’s duties, the second step                  basis.
                                         expect that as new technology facilitates               of the analysis comes into play. Does the                   Beyond the examples provided, we
                                         the extent to which work is conducted                   item confer a direct or indirect benefit                 assume that companies and their
                                         outside the office, additional devices                  that has a personal aspect (without                      advisors, who are more familiar with the
                                         may be developed that will fall into this               regard to whether it may be provided for                 detailed facts of a particular situation
                                         category.                                               some business reason or for the                          and who are responsible for providing
                                            The concept of a benefit that is                     convenience of the company)? If so, is                   materially accurate and complete
                                         ‘‘integrally and directly related’’ to job              it generally available on a non-                         disclosure satisfying our requirements,
                                         performance is a narrow one. The                        discriminatory basis to all employees?                   can apply the two-step analysis to assess
                                         analysis draws a critical distinction                   For example, a company’s provision of                    whether particular arrangements require
                                         between an item that a company                          helicopter service for an executive to                   disclosure as perquisites or personal
                                         provides because the executive needs it                 commute to work from home is not                         benefits. In light of the importance of
                                         to do the job, making it integrally and                 integrally and directly related to job                   the subject to many investors, all
                                         directly related to the performance of                  performance (although it would benefit                   participants should approach the
                                         duties, and an item provided for some                   the company by getting the executive to                  subject of perquisites and personal
                                         other reason, even where that other                     work faster), clearly bestows a benefit                  benefits thoughtfully.211
                                         reason can involve both company                         that has a personal aspect, and is not                      The amendments we adopt today, as
                                         benefit and personal benefit. Some                      generally available to all employees on                  proposed, call for aggregate incremental
                                         commenters objected that ‘‘integrally                   a non-discriminatory basis. As we have                   cost to the company as the proper
                                         and directly related’’ is too narrow a                  noted, business purpose or convenience                   measure of value of perquisites and
                                         standard, suggesting that other business                does not affect the characterization of an               other personal benefits.212 Some
                                         reasons for providing an item should                    item as a perquisite or personal benefit                 commenters instead recommended
                                         not be disregarded in determining                       where it is not integrally and directly                  valuing perquisites based on current
                                         whether an item is a perquisite.209 We                  related to the performance by the                        market values.213 Consistent with our
                                         do not adopt this suggested approach.                   executive of his or her job.
                                         As we stated in the Proposing Release,                     A company may reasonably conclude                       211 The Commission has taken action in

                                         the fact that the company has                                                                                    circumstances where perquisites were not properly
                                                                                                 that an item is generally available to all               disclosed. See SEC v. Greg A. Gadel and Daniel J.
                                         determined that an expense is an                        employees on a non-discriminatory                        Skrypek, Litigation Release No. 19720 (June 7, 2006)
                                         ‘‘ordinary’’ or ‘‘necessary’’ business                  basis if it is available to those employees              and In the Matter of Tyson Foods, Inc. and Donald
                                         expense for tax or other purposes or that               to whom it lawfully may be provided.                     Tyson, Litigation Release No. 19208 (Apr. 28, 2005).
                                                                                                                                                            212 Instruction 4 to Item 402(c)(2)(is).
                                         an expense is for the benefit or                        For this purpose, a company may                            213 See e.g., letters from ABTR; AUSWR; CH;
                                         convenience of the company is not                       recognize jurisdictionally based legal                   Computer Sciences; Pearl Meyer & Partners; and
                                         responsive to the inquiry as to whether                 restrictions (such as for foreign                        Institutional Investors Group. As we stated in the
                                         the expense provides a perquisite or                    employees) or the employees’                             Proposing Release, the amount attributed to
                                         other personal benefit for disclosure                   ‘‘accredited investor’’ 210 status. In                   perquisites and other personal benefits for federal
                                         purposes. Whether the company should                                                                             income tax purposes is not the incremental cost for
                                                                                                 contrast, merely providing a benefit                     purposes of our disclosure rules unless,
                                         pay for an expense or it is deductible for              consistent with its availability to                      independently of the tax characterization, it
                                         tax purposes relates principally to                     employees in the same job category or                    constitutes such incremental cost. Therefore, for
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                                         questions of state law regarding use of                 at the same pay scale does not establish                 example, the cost of aircraft travel attributed to an
                                         corporate assets and of tax law; our                                                                             executive for federal income tax purposes is not
                                                                                                                                                          generally the incremental cost of such a perquisite
                                                                                                   210 ‘‘Accredited investor’’ is defined in Securities   or personal benefit for purposes of our disclosure
                                                 e.g., letters from NACCO Industries, Inc.
                                           209 See,                                              Act Rule 501(a)[17 CFR 230.501(a)] for purposes of       rules. See IRS Regulation § 1.61–21(g) [26 CFR
                                         (‘‘NACCO Industries’’) and NAM.                         Regulation D [17 CFR 230.501–508].                                                                  Continued

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                                         53178             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         approach of disclosing a company’s                          • ‘‘Gross-ups’’ or other amounts                    captions created distinctions that may
                                         compensation costs, we remain of the                     reimbursed during the fiscal year for the              have been confusing to both users and
                                         view that perquisites should be valued                   payment of taxes; 220 and                              preparers of the Summary
                                         based on aggregate incremental cost.                        • For any security of the company or                Compensation Table. As proposed, the
                                            Finally, commenters observed that                     its subsidiaries purchased from the                    amendments we adopt today do not
                                         investors cannot fully understand                        company or its subsidiaries (through                   separately identify some columns as
                                         disclosed perquisite amounts without                     deferral of salary or bonus) at a discount             ‘‘annual’’ and other columns as ‘‘long
                                         disclosure of the methodology used to                    from the market price of such security                 term’’ compensation. Consistent with
                                         compute them.214 We agree that this                      at the date of purchase, unless that                   this change, as described above, we are
                                         disclosure will improve investors’                       discount is available generally either to              merging the current Other Annual
                                         ability to compare the cost of perquisites               all security holders or to all salaried                Compensation column into the new All
                                         from company to company. The rule as                     employees of the company, the                          Other Compensation column, and
                                         adopted requires footnote disclosure of                  compensation cost, if any, computed in                 include current earnings information
                                         the methodology for computing the                        accordance with FAS 123R.221                           regarding non-equity incentive plan
                                         aggregate incremental cost for the                          An additional requirement to include                compensation in the column for that
                                         perquisites.215                                          the dollar value of any dividends or                   form of award.
                                                                                                  other earnings paid on stock or option                    In eliminating this distinction, we
                                         ii. Additional All Other Compensation                    awards when the dividends or earnings
                                         Column Items                                                                                                    also revise the former definition of
                                                                                                  were not factored into the grant date fair             ‘‘long term incentive plan’’ to eliminate
                                            We are adopting as proposed a                         value has been adopted for this column                 any distinction between a ‘‘long term’’
                                         requirement that items to be disclosed                   as discussed above.222                                 plan and one that may provide for
                                         in the All Other Compensation column                        In response to commenters’ concerns                 periods shorter than one year. Like the
                                         include, but are not limited to, the                     about double counting pension                          captions, the former approach created
                                         following items: 216                                     benefits,223 we have not retained the                  distinctions that may have been
                                            • Amounts paid or accrued pursuant                    aspect of proposed Instruction 2 to this               confusing to users and preparers. As
                                         to a plan or arrangement in connection                   column that would have required                        proposed and adopted, the amendments
                                         with any termination (or constructive                    disclosure of pension benefits paid to                 define an ‘‘incentive plan’’ as any plan
                                         termination) of employment or a change                   the named executive officer during the                 providing compensation intended to
                                         in control; 217                                          period covered by the table.224 As                     serve as incentive for performance to
                                            • Annual company contributions or                     adopted, an instruction provides that                  occur over a specified period.226 The
                                         other allocations to vested and unvested                 benefits paid pursuant to defined                      related definition of ‘‘incentive plan
                                         defined contribution plans; 218                          benefit and actuarial plans are not
                                            • The dollar value of any insurance                                                                          award’’ as an award provided under an
                                                                                                  reportable as All Other Compensation                   incentive plan is also adopted as
                                         premiums paid by the company with                        unless accelerated pursuant to a change
                                         respect to life insurance for the benefit                                                                       proposed.227
                                                                                                  in control.225 Similarly, distributions of                Noting that companies formerly
                                         of a named executive officer; 219                        nonqualified deferred compensation are                 reported as ‘‘bonuses’’ awards that
                                                                                                  not reportable as All Other                            would be short-term incentive plan
                                         1.61–21(g)] regarding Internal Revenue Service           Compensation.
                                         guidelines for imputing taxable personal income to                                                              awards under this definition,
                                         an employee who travels for personal reasons on          f. Captions and Table Layout                           commenters requested guidance as to
                                         corporate aircraft. These complex regulations are                                                               what distinguishes items reportable as
                                         known as the Standard Industry Fare Level or SIFL           Before today’s amendments, a portion
                                                                                                                                                         non-equity incentive plan compensation
                                         rules.                                                   of the table was labeled as ‘‘annual
                                           214 See, e.g., letter from Mercer.                                                                            from those reportable as bonuses under
                                                                                                  compensation’’ and another portion as
                                           215 Instruction 4 to Item 402(c)(2)(ix).                                                                      the amended rules.228 An award would
                                                                                                  ‘‘long term compensation.’’ These
                                           216 All of these items were required to be                                                                    be considered ‘‘intended to serve as an
                                         disclosed either under All Other Compensation or
                                                                                                  insurance premiums, rather than only premiums
                                                                                                                                                         incentive for performance to occur over
                                         under Other Annual Compensation proir to these                                                                  a specified period’’ if the outcome with
                                         amendments.                                              with respect to term life insurance (as was required
                                           217 Unlike the text of Item 402(b)(2)(v)(A) prior to   prior to these amendments), the requirement that       respect to the relevant performance
                                                                                                  had been previously specified in Item                  target is substantially uncertain at the
                                         these amendments, Item 402(c)(2)(ix)(D) as
                                                                                                  402(b)(2)(v)(E)(1) and (2) to disclose the value of
                                         amended does not refer to amounts payable under
                                                                                                  any remaining premiums with respect to
                                                                                                                                                         time the performance target is
                                         post-employment benefits. Instruction 5 to Item                                                                 established and the target is
                                                                                                  circumstances where the named executive officer
                                         402(c)(2)(ix) provides that an accrued amount is an
                                         amount for which payment has become due, such
                                                                                                  has an interest in the policy’s cash surrender value   communicated to the executive.
                                                                                                  is not retained in the amended rule.                   Compensation pursuant to such a non-
                                         as a severance payment currently owed by the                220 Item 402(c)(2)(ix)(B).
                                         company to an executive officer. These items, as
                                                                                                     221 Item 402(c)(2)(ix)(C). This requirement as
                                                                                                                                                         equity award would be reported in the
                                         well as amounts that are payable in the future, are                                                             Summary Compensation Table as non-
                                         also the subject of disclosure as post-termination       adopted has been revised from the proposal to
                                         compenstaion, as described in Section II.C.5.c.          clarify that no amount of compensation is required     equity incentive plan compensation and
                                         below. For any compensation as a result of a             to be disclosed if there is no compensation cost       the grant of the award would be
                                         business combination, other than pursuant to a plan      computed for the discounted securities purchase in     reported as a non-equity incentive plan
                                         or arrangement in connection with any termination        accordance with FAS 123R. For example, under
                                                                                                  FAS 123R, if the discount is five percent or less,
                                                                                                                                                         award in the Grants of Plan-Based
                                         of employment or change-in-control, such as a
                                         retention bonus, acceleration of option or stock         all qualified employees can participate in the offer   Awards Table.229 In contrast, a cash
                                         vesting period, or performance-based compensation        and there are no option features, then there is no
                                         intended to serve as an incentive for named              compensation cost to recognize for financial             226 Item   402(a)(6)(iii).
                                         executive officers to acquire other companies or         reporting purposes and thus no compensation is           227 Id.

                                         enter into a merger agreement, disclosure will now       reported for this item in the All Other                   228 See, e.g., letters from Hewitt; Mercer; NACCO
                                         be requlired in the appropriate Summary                  Compensation column.                                   Industries; and SCSGP.
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                                                                                                     222 Item 402(c)(2)(ix)(G).
                                         Compensation Table column and in the other tables                                                                  229 This table is described in Section II.C.2.
                                         or narrative disclosure where the particular element        223 See, e.g., letter from Cravath.
                                                                                                                                                         immediately below. Further, no longer reporting
                                         of compensation is required to be disclosed.                224 We have moved this disclosure requirement to
                                                                                                                                                         compensation pursuant to these awards as ‘‘bonus’’
                                           218 Item 402(c)(2)(ix)(E).                             the Pension Benefits Table, described in Section       in the Summary Compensation Table does not
                                           219 Item 402(c)(2)(ix)(F). Because the amendments      II.C.5.a. below.                                       affect the determination of named executive officers
                                         call for disclosure of the dollar value of any life         225 Instruction 2 to Item 402(c)(2)(ix).            because, as described in Section II.C.6.b. below, that

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                           53179

                                         award based on satisfaction of a                          tables were derived from two tables                        supplement the Summary
                                         performance target that was not pre-                      required under the rules prior to these                    Compensation Table would have shown
                                         established and communicated, or the                      amendments.                                                the equity-based compensation awards
                                         outcome of which is not substantially                        The first table we proposed to                          granted in the last fiscal year that are
                                         uncertain, would be reportable in the                     supplement the Summary                                     not performance-based, such as stock,
                                         Summary Compensation Table as a                           Compensation Table would have                              options or similar instruments where
                                         bonus.                                                    included information regarding non-                        the payout or future value is tied to the
                                                                                                   stock grants of incentive plan awards,                     company’s stock price, and not to other
                                         2. Supplemental Grants of Plan-Based
                                                                                                   stock-based incentive plan awards and                      performance criteria.231
                                         Awards Table
                                                                                                   awards of options, restricted stock and                      Because much of the information for
                                           Following the Summary                                   similar instruments under plans that are                   each proposed table is consistent, we
                                         Compensation Table, we proposed two                       performance-based (and thus provide                        have followed the recommendation of a
                                         supplemental tables to explain                            the opportunity for future compensation                    commenter to simplify the disclosure
                                         information in the Summary                                if conditions are satisfied).230 The                       format by combining the proposed
                                         Compensation Table. The proposed                          second table we proposed to                                disclosure in a single table.232

                                                                                                       GRANTS OF PLAN-BASED AWARDS
                                                                           Estimated future payouts under               Estimated future payouts under                             All other
                                                                                                                                                                    All other
                                                                          non-equity incentive plan awards               equity incentive plan awards                                option
                                                                                                                                                                      stock                        Exercise
                                                                                                                                                                     awards:                       or base
                                                             Grant                                                                                                   Number                        price of
                                                 Name                                                                                                                              of securi-
                                                             date                                                                                                   of shares                       option
                                                                         Threshold          Target      Maximum       Threshold        Target         Maximum                       ties un-
                                                                                                                                                                     of stock                      awards
                                                                            ($)              ($)          ($)            (#)            (#)             (#)                         derlying
                                                                                                                                                                     or units                       ($/Sh)
                                                                                                                                                                        (#)            (#)

                                                    (a)        (b)             (c)           (d)            (e)            (f)           (g)            (h)               (i)           (j)           (k)






                                           Disclosure in this table complements                    the proposed columns reporting vesting                     in a footnote to the appropriate
                                         Summary Compensation Table                                date, or performance or other period                       column.238
                                         disclosure of grant date fair value of                    until vesting or payout. As a commenter                       As proposed, the Grants of All Other
                                         stock awards and option awards by                         noted, vesting information typically                       Equity Awards Table would have
                                         disclosing the number of shares of stock                  cannot be reported easily in a single line                 permitted aggregation of option grants
                                         or units comprising or underlying the                     in a table.235 Similarly, because the                      with the same exercise or base price. We
                                         award. This supplemental table shows                      modifications we are making to the                         have not adopted such an instruction for
                                         the terms of grants made during the                       Outstanding Equity Awards at Fiscal                        this table, based on our belief that grant-
                                         current year, including estimated future                  Year-End Table require that table to                       by-grant disclosure is the most
                                         payouts for both equity incentive plans                   report the expiration dates of options                     appropriate approach, particularly given
                                         and non-equity incentive plans, with                      and similar awards,236 we are                              our particular disclosure concerns
                                         separate disclosure for each grant.233                    eliminating the proposed expiration                        regarding option grants. For incentive
                                           To simplify the presentation further,                   date column. Finally, the proposed                         plan awards, threshold, target and
                                         we have eliminated some of the                            column reporting the dollar amount of                      maximum payout information should be
                                         proposed columns. Because the                             consideration paid for the award, if any,                  provided, but if the award provides only
                                         narrative section identifies the material                 is not adopted, reflecting comments that                   for a single estimated payout, that
                                         terms of an award reported in this table                  this column would be used only                             amount should be reported as the
                                         as an example of a material factor to be                  rarely.237 Instead, in those rare instances                target.239 Where there is a tandem grant
                                         described,234 and thus will cover the                     where consideration is paid for an                         of two instruments, only one of which
                                         same information, we have eliminated                      award, this disclosure will be provided                    is granted under an incentive plan, only

                                         determination is not limited to consideration of          amendments by the Option/SAR Grants Table                    235 See  letter from ABA.
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                                         salary and bonus.                                         (formerly specified in Item 402(c)).                         236 See  Section II.C.4.a. below.
                                           230 Proposed Item 402(d).                                  232 See letter from Hewitt.                                237 Proposed Item 402(d)(2)(v). See, e.g., letters

                                           231 Proposed Item 402(e), containing much of the           233 Instruction 1 to Item 402(d).                       from Frederic W. Cook & Co. and SCSGP.
                                                                                                      234 Item 402(e)(1)(iii), described in Section              238 Instruction 5 to Item 402(d).
                                         information that was required prior to these
                                                                                                   II.C.3.a. immediately below.                                  239 Instruction 2 to Item 402(d).

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                                         53180               Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         the instrument that is not granted under                   grant date closing market price per share                compensation policies, the narrative
                                         an incentive plan is reported in the                       is the last sale price on the principal                  disclosures following the Summary
                                         table, with the tandem feature noted.240                   United States market for the security on                 Compensation Table and other tables
                                         Because the rules as adopted require                       the specified date.247 Moreover, if the                  focus on and provide specific context to
                                         Summary Compensation Table                                 exercise or base price is not the grant                  the quantitative disclosure in the tables.
                                         disclosure of the incremental fair value,                  date closing market price per share, we                  For example, narrative disclosure
                                         computed in accordance with FAS                            require a description of the                             following a table might explain material
                                         123R, of options, stock appreciation                       methodology for determining the                          aspects of a plan that are not evident
                                         rights and similar option-like                             exercise or base price either by footnote                from the quantitative tabular disclosure
                                         instruments granted in connection with                     to the table or in the accompanying                      and are not addressed in the
                                         a repricing transaction, rather than the                   narrative section.248 Further reflecting                 Compensation Discussion and Analysis.
                                         total fair value as we had proposed,                       the significance of grant date issues in                    The material factors that require
                                         grants of these instruments are not                        awards of option grants and in response                  disclosure will vary depending on the
                                         reported in this table.241 Disclosure                      to comments,249 we are also providing                    facts and circumstances. As one
                                         should be provided in the                                  that if the date on which the                            example, such material factors might
                                         Compensation Discussion and Analysis                       compensation committee (or a                             include descriptions of the material
                                         and the narrative disclosures for the                      committee of the board of directors                      terms in the named executive officers’
                                         Summary Compensation Table and                             performing a similar function or the full                employment agreements as those
                                         Grants of Plan-Based Awards, as                            board of directors) takes action or is                   descriptions might provide material
                                         appropriate, regarding awards granted                      deemed to take action to grant equity-                   information necessary to an
                                         in connection with repricing                               based awards is different from the date                  understanding of the tabular disclosure.
                                         transactions.                                              of grant, a column must be added to                      The narrative disclosure covers written
                                            As proposed and adopted, if the per-                    disclose the date of action.250 For these                or unwritten agreements or
                                         share exercise or base price of options,                   purposes, the ‘‘date of grant’’ or ‘‘grant               arrangements.254 Requiring this
                                         stock appreciation rights and similar                      date’’ is the grant date determined for                  disclosure in proximity to the Summary
                                         option-like instruments is less than the                   financial statement reporting purposes                   Compensation Table is intended to
                                         market price of the underlying security                    pursuant to FAS 123R.251 Finally, in                     make the tabular disclosure more
                                         on the grant date, a separate column                       combining the proposed tables, we have                   meaningful. Mere filing of employment
                                         must be added showing market price on                      adopted an instruction specifying that if                agreements (or summaries of oral
                                         the grant date.242 Some commenters                         a non-equity incentive plan award is                     agreements) may not be adequate to
                                         objected to our proposal to calculate                      denominated in units or other rights,                    disclose material factors depending on
                                         grant date market price for this purpose                   then a separate, adjoining column                        the circumstances. As stated in the
                                         using the closing price per share of the                   would be required to disclose the units                  Proposing Release, provisions regarding
                                         underlying security on that date. These                    or other rights awarded.252                              post-termination compensation need to
                                         commenters stated that plans requiring                                                                              be addressed in the narrative section
                                         awards to be granted with an exercise                      3. Narrative Disclosure to Summary
                                                                                                    Compensation Table and Grants of Plan-                   only to the extent disclosure of such
                                         price equal to the underlying security’s                                                                            compensation is required in the
                                         grant date fair market value may define                    Based Awards Table
                                                                                                                                                             Summary Compensation Table;
                                         ‘‘fair market value’’ based on a formula                   a. Narrative Description of Additional
                                                                                                                                                             otherwise these provisions will be
                                         related to the average market price on                     Material Factors
                                                                                                                                                             disclosable as post-termination
                                         the grant date or a range of days either                      As we proposed, we are requiring                      compensation.255
                                         before or after the grant date.243 Our                     narrative disclosure following the                         The factors that could be material
                                         proposed departure from the rule prior                     Summary Compensation Table and the                       include each repricing or other material
                                         to these amendments, which permitted                       Grants of Plan-Based Awards Table in                     modification of any outstanding option
                                         use of such formulas even for securities                   order to give context to the tabular                     or other equity-based award during the
                                         traded on an established market,244 was                    disclosure. A company will be required                   last fiscal year. This disclosure
                                         considered, and along with the                             to provide a narrative description of any                addresses not only option repricings,
                                         requirement to disclose the grant date,                    additional material factors necessary to                 but also other significant changes to the
                                         reflects the significance of issues in                     an understanding of the information
                                         awards of option grants.245 Moreover,                                                                               terms of equity-based awards.256 As
                                                                                                    disclosed in the tables.253 Unlike the                   proposed, we are eliminating the former
                                         commenters expressed concern                               Compensation Discussion and Analysis,
                                         regarding the manipulation of option                                                                                ten-year option repricing table.257 In its
                                                                                                    which focuses on broader topics                          place, the narrative disclosure following
                                         grant dates to achieve below-market                        regarding the objectives and
                                         exercise prices.246 The rule as adopted                                                                             the Summary Compensation Table will
                                                                                                    implementation of executive                              describe, to the extent material and
                                         uses the measure for grant date market
                                         price of the underlying security that we                     247 Because the concept of closing market price is
                                                                                                                                                             necessary to an understanding of the
                                         proposed, modified to specify that the                     used in a number of provisions of Item 402, we are
                                                                                                                                                             tabular disclosure, repricing, extension
                                                                                                    adopting a definition of the term closing market         of exercise periods, change of vesting or
                                           240 Instruction    4 to Item 402(d).                     price in Item 402(a)(6)(v). A foreign company            forfeiture conditions, change or
                                           241 See  discussion at Section II.C.1.c.i. above.        complying with this requirement may instead look
                                            242 Item 402(d)(2)(vii).                                to the principal foreign market in which the               254 Item 402(e)(1)(i).
                                                                                                    underlying securities trade.                               255 Item
                                            243 See, e.g., letters from Cravath; Eli Lilly; and
                                                                                                      248 Instruction 3 to Item 402(d).
                                                                                                                                                                        402(j), described in Section II.C.5.c.
                                         Sidley Austin LLP (‘‘Sidley Austin’’).                                                                                256 Item 402(e)(1)(ii).
                                                                                                      249 See, e.g., letter from CFA Centre 2.
                                            244 This requirement had been set forth in                                                                         257 The ten-year option repricing table had been
                                                                                                      250 Item 402(d)(2)(ii).
                                         Instruction 6 to Item 402(c) prior to today’s                                                                       required by Item 402(i) prior to its elimination with
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                                                                                                      251 Item 402(a)(6)(iv).
                                         amendments.                                                                                                         these amendments. We believe that the narrative
                                            245 See the discussion of options disclosure in           252 Instruction 6 to Item 402(d).
                                                                                                                                                             disclosure requirement will provide investors with
                                         Section II.A., above.                                        253 Item 402(e)(1). The standard of materiality that   material information regarding repricings and
                                            246 See, e.g., letter from CFA Centre for Financial     applies in Item 402(e) is that of Basic v. Levinson,     modifications and eliminate the arguably dated
                                         Market Integrity, dated May 30, 2006 (‘‘CFA Centre         485 U.S. 224 (1988) and TSC Industries v.                information contained in the former ten-year option
                                         2’’).                                                      Northway, 426 U.S. 438 (1976).                           repricing table.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                     53181

                                         elimination of applicable performance                    compensated officers,262 we specify as                   officers.268 After considering the issues
                                         criteria, change of the bases upon which                 an additional example an explanation of                  raised by these commenters, we remain
                                         returns are determined, or any other                     the level of salary and bonus in                         concerned about disclosure with respect
                                         material modification.258                                proportion to total compensation.263                     to employees, particularly within very
                                            Narrative text accompanying the                                                                                large companies, whether or not they
                                         tables will also describe, to the extent                 b. Request for Additional Comment on                     are executive officers, whose total
                                         material and necessary to an                             Compensation Disclosure for up to                        compensation for the last completed
                                         understanding of the tabular disclosure,                 Three Additional Employees                               fiscal year was greater than that of one
                                         award terms relating to disclosure                         As part of this narrative disclosure                   or more of the named executive officers.
                                         provided in the Grants of Plan-Based                     requirement, we had proposed an                          If any of these employees exert
                                         Awards Table. This could include, for                    additional item that would have                          significant policy influence at the
                                         example, a general description of the                    required disclosure for up to three                      company, at a significant subsidiary of
                                         formula or criteria to be applied in                     employees who were not executive                         the company or at a principal business
                                         determining the amounts payable, the                     officers during the last completed fiscal                unit, division, or function of the
                                         vesting schedule, a description of the                   year and whose total compensation for                    company, then investors seeking a fuller
                                         performance-based conditions and any                     the last completed fiscal year was                       understanding of a company’s
                                         other material conditions applicable to                  greater than that of any of the named                    compensation program may believe that
                                         the award, whether dividends or other                    executive officers.264 We received                       disclosure of these employees’ total
                                         amounts would be paid, the applicable                    extensive comment on this proposal.                      compensation is important
                                         rate and whether that rate is                            Some commenters supported the                            information.269 Knowing the
                                         preferential.259 As noted above and                      proposal or suggested that it should go                  compensation, and job positions within
                                         consistent with current disclosure                       further.265 Many commenters expressed                    the organization, of these highly
                                         requirements, however, companies will                    concern that the benefits of this                        compensated policy-makers whose total
                                         not be required to disclose any factor,                  disclosure to investors would be                         compensation for the last fiscal year was
                                         criteria, or performance-related or other                negligible, yet compliance might require                 greater than that of a named executive
                                         condition to payout or vesting of a                      the outlay of considerable company                       officer, should assist in placing in
                                         particular award that involves                           resources.266 Some commenters                            context and permit a better
                                         confidential trade secrets or confidential               expressed concern that the proposed                      understanding of the compensation
                                         commercial or financial information,                     disclosure would raise privacy issues or                 structure of the named executive
                                         disclosure of which would result in                      negatively impact competition for                        officers and directors.
                                         competitive harm to the company.260                      employees.267 While we continue to                          Our intention is to provide investors
                                            We proposed that this example also                    consider whether to adopt such a                         with information regarding the most
                                         include material assumptions                             requirement as part of the executive                     highly compensated employees who
                                         underlying the determination of the                      compensation disclosure rules, in                        exert significant policy influence by
                                         amount of increase in the actuarial                      Release No. 33–8735 we are requesting                    having responsibility for significant
                                         value of defined benefit and actuarial                   additional comment as to whether                         policy decisions. Responsibility for
                                         plans. However, in light of the                          potential modifications would address                    significant policy decisions could
                                         modifications we are adopting, we have                   the concerns that commenters have                        consist of, for example, the exercise of
                                         concluded that the better place to                       raised.                                                  strategic, technical, editorial, creative,
                                         discuss these assumptions is in the                        We note in particular that some                        managerial, or similar responsibilities.
                                         narrative section accompanying the                       commenters questioned the materiality                    Examples of employees who might not
                                         Pension Benefits Table.261                               of the information that would have been                  be executive officers but who might
                                            Further, in response to commenters’                                                                            have responsibility for significant policy
                                                                                                  required by the proposal, given that the
                                         concerns regarding the computation of                                                                             decisions could include the director of
                                                                                                  covered employees would not be in
                                         total compensation and the expanded                                                                               the news division of a major network;
                                         basis for determining the most highly                    policy-making positions as executive
                                                                                                                                                           the principal creative leader of the
                                                                                                     262 See Section II.C.1.a. above and Section
                                                                                                                                                           entertainment function of a media
                                            258 As described in Section II.C.1.c.i. above, the
                                                                                                  II.C.6.b. below.                                         conglomerate; or the head of a principal
                                         tabular disclosure will report the incremental fair
                                         value of the modification for financial reporting
                                                                                                     263 Item 402(e)(1)(iv).                               business unit developing a significant
                                         purposes. However, narrative disclosure will not            264 Proposed Item 402(f)(2).                          technological innovation. By contrast,
                                         apply to any repricing that occurs through a pre-           265 See, e.g., letters from Corporate Library; The    we are convinced by commenters that a
                                         existing formula or mechanism in the plan or award       Greenlining Institute; Institutional Investor Group;
                                         that results in the periodic adjustment of the option    and SBAF.                                                  268 See, e.g., letters from CalSTRS; Cleary; CNET
                                         or stock appreciation right exercise or base price,         266 See, e.g., letters from ABA; Chamber of
                                                                                                                                                           Networks; Compass Bancshares; DreamWorks;
                                         an antidilution provision, or a recapitalization or      Commerce; Eli Lilly; Leggett & Platt; N. Ludgus; and     Entertainment Industry Group; Fried, Frank, Harris,
                                         similar transaction equally affecting all holders of     Mercer.                                                  Shriver & Jacobson LLP (‘‘Fried Frank’’); FSR;
                                         the class of securities underlying the options or           267 See, e.g., letters from ABA-JCEB; BRT; jointly,
                                                                                                                                                           Hewitt; ICI; Intel; Kellogg; Kennedy; Leggett & Platt;
                                         stock appreciation rights. Instruction 1 to Item         CBS Corporation, The Walt Disney Company, NBC            Peabody Energy; Pearl Meyer & Partners; SCSGP;
                                         402(e).                                                  Universal, News Corporation, and Viacom, Inc.            SIA; Stradling Yocca Carlson & Rauth (‘‘Stradling
                                            259 Item 402(e)(1)(iii), which combines some
                                                                                                  (‘‘Entertainment Industry Group’’); Committee on         Yocca’’); Top Five Data Services, Inc. (‘‘Top Five
                                         information that had been required by Instruction        Corporate Finance of Financial Executives                Data’’); Towers Perrin; and Walden.
                                         2 to Item 402(b)(2)(iv) with information that had        International (‘‘FEI’’); Chamber of Commerce;              269 The Commission expressed similar concerns
                                         been required by Instruction 1 to Item 402(e) as they    Cleary; CNET Networks, Inc. (‘‘CNET Networks’’);         in 1978, when it stated ‘‘a key employee or director
                                         were stated in the rule before these amendments.         Compass Bancshares; Compensia; Cravath;                  of a subsidiary might be the highest-paid person in
                                            260 We have adopted Instruction 2 to Item
                                                                                                  DreamWorks Animation SKG (‘‘DreamWorks’’); Eli           the entire corporate structure and have managerial
                                         402(e)(1), which specifically applies to the narrative   Lilly; Emerson; Fenwick; The Financial Services          responsibility for major aspects of the registrant’s
                                         disclosure of Item 402(e)(1) the same standard           Roundtable (‘‘FSR’’); Professor Joseph A. Grundfest,     overall operations.’’ 1978 Release. See n. 327 for a
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                                         applicable to Compensation Discussion and                dated April 10, 2006 (‘‘Grundfest’’); ICI; Intel         discussion of the term ‘‘executive officer.’’ In light
                                         Analysis for determining whether disclosure would        Corporation (‘‘Intel’’); Kellogg Company                 of some of the comments that we received, we have
                                         result in competitive harm for the company. See          (‘‘Kellogg’’); Kennedy & Baris, LLP (‘‘Kennedy’’);       clarified that the definition of ‘‘executive officer’’
                                         Section II.B.2., above, for a discussion of this         Mercer; Peabody Energy; Pearl Meyer & Partners;          includes all individuals in a registrant policy-
                                         standard.                                                Securities Industry Association (‘‘SIA’’); Sullivan;     making role. See, e.g., letters from SCSGP and
                                            261 See Section II.C.5.a. below.                      SCSGP; and WorldatWork.                                  Cravath.

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                                         53182             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         salesperson, entertainment personality,                     For each of the company’s three most                those who are not executive officers,
                                         actor, singer, or professional athlete who               highly compensated employees,                          material to investors? In answering this
                                         is highly compensated but who does not                   whether or not they were executive                     question, commenters are encouraged to
                                         have responsibility for significant policy               officers during the last completed fiscal              address the following additional
                                         decisions would not be the type of                       year, whose total compensation for the                 questions:
                                         employee about whom we would seek                        last completed fiscal year was greater                   Æ Would modifications limiting the
                                         disclosure. Nor, as a general matter,                    than that of any of the named executive                disclosure to employees who make
                                         would investment professionals (such as                  officers, disclose each such employee’s                significant policy decisions within the
                                         a trader, or a portfolio manager for an                  total compensation for that year and                   company, a significant subsidiary of the
                                         investment adviser who is responsible                    describe the employee’s job position,                  company, or a principal business unit,
                                         for one or more mutual funds or other                    without naming the employee;                           division, or function of the company
                                         clients) be deemed to have                               provided, however, that employees with                 appropriately focus the disclosure on
                                         responsibility for significant policy                    no responsibility for significant policy               employees for whom compensation
                                         decisions at the company, at a                           decisions within the company, a                        information is material to investors?
                                         significant subsidiary or at a principal                 significant subsidiary of the company,                   Æ Would the approach that we are
                                         business unit, division or function                      or a principal business unit, division, or             considering provide investors with
                                         simply as a result of performing the                     function of the company are not                        material information about how policy-
                                         duties associated with those positions.                  included when determining who are                      making responsibilities are allocated
                                         On the other hand, an investment                         each of the three most highly                          within a company? Are the examples
                                         professional, such as a trader or                        compensated employees for the                          describing responsibility for significant
                                         portfolio manager, who does have                         purposes of this requirement, and                      policy decisions too broad or too
                                         broader duties within a firm (such as,                   therefore no disclosure is required                    narrow?
                                         for example, oversight of all equity                     under this requirement for any                           Æ Would the proposed rule, with the
                                         funds for an investment adviser) may be                  employee with no responsibility for                    modifications described above, provide
                                         considered to have responsibility for                    significant policy decisions within the                investors with material information
                                         significant policy decisions.                            company, a significant subsidiary of the               necessary to understand the company’s
                                            We continue to consider whether it is                 company, or a principal business unit,                 compensation policies and structure?
                                         appropriate to require some level of                     division, or function of the company?                  How should we address those concerns?
                                         narrative disclosure so that shareholders                   • Would it be appropriate to                          Æ What is typically the role of the
                                         will have information about these most                   determine the highest paid employees                   compensation committee in determining
                                         highly compensated employees. This                       in the same manner that named                          or approving the compensation of the
                                         consideration includes the appropriate                   executive officers are determined, by                  additional employees if they are not
                                         level of information about these                         calculating total compensation but                     executive officers? If the compensation
                                         employees and their compensation in                      excluding pension plan benefits and                    committee does not oversee their
                                         light of their roles.                                    above-market or preferential earnings on               compensation, is the additional
                                            As to issues regarding privacy and                    nonqualified deferred compensation                     employee compensation information
                                         competition for employees, to the extent                 plans, and by comparing that amount to                 material to investors? What types of
                                         that commenters objected that the                        the same amount earned by the named                    decisions would investors make based
                                         disclosure could result in a competitor                  executive officers (excluding the                      on this information?
                                         stealing a company’s top ‘‘talent,’’ 270 we              amount required to be disclosed for                      • Would the proposed rule, with the
                                         have tried to address these concerns by                  those named executive officers pursuant                modifications described above, raise
                                         focusing the disclosure on persons who                   to paragraph (c)(2)(viii) of Item 402)? If             privacy issues or negatively impact
                                         exert significant policy influence within                so, should the total amount disclosed                  competition for employees in a manner
                                         the company or significant parts of the                  include these amounts as it does for                   that would outweigh the materiality of
                                         company.                                                 named executive officers? Should the                   the disclosure to investors?
                                                                                                  pension benefit and above-market                         • Should we require that the three
                                         Request for Comment                                      earnings be separately disclosed in a                  additional employees be named? If not,
                                           We request additional comment on                       footnote so investors can calculate the                what additional information should be
                                         the proposal to require compensation                     amounts used in determining highest                    required? Should more information be
                                         disclosure for up to three additional                    paid employees?                                        required regarding the employee’s
                                         employees. In addition to general                           • Would modifying the proposed rule                 compensation or job position?
                                         comment, we encourage commenters to                      to apply only to large accelerated                       • Should we define ‘‘responsibility
                                         address the following specific questions:                filers271 properly focus this disclosure               for significant policy decisions’’?
                                           • Would the rule more appropriately                    obligation on companies that are more                  Should we use another test to describe
                                         require disclosure of the employees                      likely to have these additional highly                 those employees who exert a significant
                                         described above if it were structured in                 compensated employees? Would that                      policy influence on the company? Do
                                         the following or similar manner:                         modification address concerns that the                 the examples provided above help
                                                                                                  proposed rule would impose                             identify and delimit the number of
                                           270 See, e.g., letter from Entertainment Industry      disproportionate compliance burdens by                 employees whose compensation would
                                         Group. In addition, we note our intention is not to      limiting the disclosure obligation to                  be subject to disclosure under this
                                         suggest that these additional employees, whether or      companies that are presumptively better                provision? What would help companies
                                         not they are executive officers, are individuals                                                                identify these employees?
                                         whose compensation is required to be reported            able to track the covered employees?
                                         under the Exchange Act ‘‘by reason of such               Would a different limitation as to                       • What additional work and costs are
                                         employee being among the 4 highest compensated           applicability be appropriate?                          involved in collecting the information
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                                         officers for the taxable year,’’ as stated in Internal      • Is information regarding highly                   necessary to identify the three
                                         Revenue Code Section 162(m)(3)(B) [26 U.S.C.                                                                    additional employees? What are the
                                         162(m)(3)(B)]. See letter from Cleary (expressing        compensated employees, including
                                         concern that the additional individuals not fall
                                                                                                                                                         types of costs, and in what amounts? In
                                         within the purview of Section 162(m) of the                271 The term large accelerated filer is defined in   what way can the proposal be further
                                         Internal Revenue Code).                                  Exchange Act Rule 12b–2 [17 CFR 240.12b–2].            modified to mitigate the costs?

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                  53183

                                           • In connection with the original                       disclosure. In that event, for purposes of             executive officer exercises an option or
                                         proposal, we solicited comment on all                     seeking comment, we estimate that                      his or her stock award vests. We are
                                         aspects of the proposal, including this                   1,700 272 companies will on average                    adopting substantially as proposed two
                                         one. No commenter supplied cost                           retain outside counsel for 8 hours in the              tables: one table shows the amounts of
                                         estimates. We are now considering                         first year and 2 hours in each of two                  awards outstanding at fiscal year-end,
                                         whether to limit this provision to only                   succeeding years, at $400 per hour, for                and the other shows the exercise or
                                         large accelerated filers. For some large                  a total estimated average annual cost of               vesting of equity awards during the
                                         accelerated filers, the number of                         approximately $3 million. Assuming all                 fiscal year.273 In response to comment,
                                         employees potentially subject to this                     large accelerated filers spend 60 hours                we are requiring additional information
                                         requirement may already be known or                       in the first year and 10 hours in each of              regarding out-of-the-money awards.
                                         easy to identify. Other, more complex                     the two succeeding years, with an
                                                                                                   average internal cost of $175 per hour,                a. Outstanding Equity Awards at Fiscal
                                         companies may need to establish
                                                                                                   the total average annual burden of                     Year-End Table
                                         systems to identify such employees.
                                         Every large accelerated filer would need                  collecting and monitoring employee
                                                                                                                                                             As we noted in the Proposing Release,
                                         to evaluate whether any employees                         compensation would be approximately
                                                                                                   45,000 hours, or approximately $8                      outstanding awards that have been
                                         exerted significant policy influence at                                                                          granted but the ultimate outcomes of
                                                                                                   million. The total average annual cost is
                                         the company, at a significant subsidiary                                                                         which have not yet been realized in
                                                                                                   therefore estimated to be $11 million.
                                         or at a principal business unit, division                                                                        effect represent potential amounts that
                                                                                                   We invite comment on this estimate and
                                         or function and would have to track                                                                              the named executive officer might or
                                                                                                   its assumptions.
                                         their compensation in order to comply                                                                            might not realize, depending on the
                                         with the proposed requirement. These                      4. Exercises and Holdings of Previously                outcome for the measure or measures
                                         monitoring costs may be new to some                       Awarded Equity                                         (for example, stock price or performance
                                         companies. We believe the cost of                            The next section of the revised                     benchmarks) to which the award relates.
                                         actually disclosing the compensation                      executive compensation disclosure                      We are adopting a table that will
                                         would be incremental and minimal. The                     provides investors with an                             disclose information regarding
                                         monitoring and information collection                     understanding of the compensation in                   outstanding awards, for example, under
                                         costs are likely to be greatest in the first              the form of equity that has previously                 stock option (or stock appreciation
                                         year and significantly less in later years.               been awarded and remains outstanding,                  rights) plans, restricted stock plans,
                                         We also assume that costs would largely                   and is unexercised or unvested. As                     incentive plans and similar plans and
                                         be borne internally, although some                        proposed, this section also discloses                  disclose the market-based values of the
                                         companies may seek the advice of                          amounts realized on this type of                       rights, shares or units in question as of
                                         outside counsel in determining which                      compensation during the most recent                    the company’s most recent fiscal year
                                         employees meet the standard for                           fiscal year when, for example, a named                 end.274

                                                                                         OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
                                                                                                         Option awards                                                       Stock awards

                                                                                                                                                                                                   Equity in-
                                                                                                                                                                                     Equity in-      centive
                                                                                                                                                                                       centive         plan
                                                                                                              Equity in-                                                                 plan        awards:
                                                                                                             centive plan                                                 Market       awards:
                                                                         Number of          Number of                                                      Number                                  Market or
                                                                                                               awards:                                                   value of      Number
                                                                         securities       securities un-                                                  of shares                                   payout
                                                                                                              Number of           Option                                shares or       of un-
                                                   Name                  underlying          derlying                                         Option      or units of                                value of
                                                                                                              securities         exercise                                units of      earned
                                                                        unexercised        unexercised                                       expiration   stock that                               unearned
                                                                                                              underlying           price                                stock that     shares,
                                                                          options            options                                           date        have not                                  shares,
                                                                                                             unexercised            ($)                                 have not       units or
                                                                            (#)                (#)                                                          vested                                   units or
                                                                                                              unearned                                                    vested        other
                                                                        Exercisable       Unexercisable                                                       (#)                                      other
                                                                                                               options                                                      ($)      rights that   rights that
                                                                                                                  (#)                                                                 have not      have not
                                                                                                                                                                                       vested         vested
                                                                                                                                                                                          (#)           ($)

                                                     (a)                        (b)              (c)                 (d)           (e)           (f)          (g)            (h)         (i)           (j)



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                                           272 We estimate there are approximately 1,700             273 Some of this information had been required in      274 Item 402(f). Under the rules prior to today’s

                                         companies that are large accelerated filers. See          the Aggregated Option/SAR Exercises in Last Fiscal     amendments, such disclosure was provided only for
                                         Revisions to Accelerated Filer Definition and             Year and Fiscal Year-End Option/SAR Value Table,       holdings of outstanding stock options and stock
                                         Accelerated Deadlines for Reporting Periodic              which was required under Item 402(d) prior to          appreciation rights.
                                         Reports, Release No. 33–8644 (Dec. 21, 2005) [70 FR
                                                                                                   adoption of these amendments.
                                         76626], at Section V.A.2.

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                                         53184                 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                                                                     OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END—Continued
                                                                                                             Option awards                                                          Stock awards

                                                                                                                                                                                                          Equity in-
                                                                                                                                                                                            Equity in-      centive
                                                                                                                                                                                              centive         plan
                                                                                                                  Equity in-                                                                    plan        awards:
                                                                                                                 centive plan                                                    Market       awards:
                                                                             Number of          Number of                                                         Number                                  Market or
                                                                                                                   awards:                                                      value of      Number
                                                                             securities       securities un-                                                     of shares                                   payout
                                                                                                                  Number of           Option                                   shares or       of un-
                                                        Name                 underlying          derlying                                          Option        or units of                                value of
                                                                                                                  securities         exercise                                   units of      earned
                                                                            unexercised        unexercised                                        expiration     stock that                               unearned
                                                                                                                  underlying           price                                   stock that     shares,
                                                                              options            options                                            date          have not                                  shares,
                                                                                                                 unexercised            ($)                                    have not       units or
                                                                                (#)                (#)                                                             vested                                   units or
                                                                                                                  unearned                                                       vested        other
                                                                            Exercisable       Unexercisable                                                          (#)                                      other
                                                                                                                   options                                                         ($)      rights that   rights that
                                                                                                                      (#)                                                                    have not      have not
                                                                                                                                                                                              vested         vested
                                                                                                                                                                                                 (#)           ($)

                                                         (a)                        (b)              (c)                 (d)           (e)            (f)            (g)            (h)         (i)           (j)



                                           As proposed, the table included a                              • The number of securities                             reported.281 Because an award that a
                                         column reporting aggregate dollar                             underlying unexercised instruments                        named executive officer transferred for
                                         amounts of in-the-money unexercised                           that are unexercisable;                                   value is not an award for which the
                                         options.275 Some commenters believed                             • The exercise or base price; and                      outcome remains to be realized, the
                                         that this table should not include                               • The expiration date.                                 rules adopted today instead require
                                         information on out-of-the-money                                  After evaluating the comments                          disclosure in the Option Exercises and
                                         options because they believed that these                      received, we believe disclosure of                        Stock Vested Table of the amounts
                                         awards have no value to executives at                         individual exercise prices and                            realized upon transfer for value.282
                                                                                                                                                                   In view of our approach in the Grants
                                         the point they are out-of-the-money.276                       expiration dates is required to provide
                                                                                                                                                                 of Plan-Based Awards Table as adopted
                                         Several other commenters                                      a full understanding of the potential
                                                                                                                                                                 and the purposes of this table in
                                         recommended disclosure of the number                          compensation opportunity. In                              showing all outstanding equity awards,
                                         and key terms of out-of-the-money                             particular, with respect to out-of-the-                   we are adopting a column (column (d))
                                         instruments, so investors can                                 money awards, this allows investors to                    for reporting the number of securities
                                         understand the potential compensation                         see the amount the stock price must rise                  underlying unexercised options
                                         opportunity of these awards if the                            and the amount of time remaining for it                   awarded under equity incentive
                                         market price of the underlying shares                         to happen. Consequently, this                             plans.283 We have also revised the
                                         increases.277 We proposed to require                          disclosure is required for each                           format of the table to more clearly
                                         expiration date information in footnote                       instrument, rather than on the aggregate                  delineate between the information
                                         disclosure. We note that some                                 basis that was proposed.279                               regarding option awards and the
                                         commenters expressed concern that                                As suggested by another commenter,                     information regarding stock awards.
                                         disclosure of expiration and vesting                          we also modify the table to clarify that                    The remaining disclosure, relating to
                                         dates of the instruments would be                             these columns apply to options and                        numbers and market values of
                                                                                                       similar awards that have been                             nonvested stock and equity incentive
                                         lengthy.278 However, because we agree
                                                                                                       transferred other than for value.280 The                  plan awards, is adopted on an aggregate
                                         with other commenters that information
                                                                                                       proposal reflected interpretations of the                 basis, substantially as proposed. One
                                         regarding out-of-the-money options is                         former rule that the transfer of an option                commenter expressed the view that the
                                         material to investors, we have revised                        or similar award by an executive does                     table should not include unearned
                                         the columns applicable to unexercised                         not negate the award’s status as                          performance-based awards because it
                                         options, stock appreciation rights and                        compensation that should be                               would be difficult to disclose a
                                         similar instruments with option-like                                                                                    meaningful value before the
                                         features to require disclosure of:                               279 Multiple awards may be aggregated where the        performance conditions are satisfied.284
                                           • The number of securities                                  expiration date and the exercise and/or base price        Another commenter requested
                                                                                                       of the instruments is identical. A single award           clarification of valuation of awards that
                                         underlying unexercised instruments                            consisting of a combination of options, SARs and/
                                         that are exercisable;                                         or similar option-like instruments must be reported       are performance-based and nonvested,
                                                                                                       as separate awards with respect to each tranche           specifically whether value should be
                                             275 Proposed                                              with a different exercise and/or base price or            based on actual performance to date or
                                                           Item 402(g)(2)(iii).
                                             276 See,
                                                                                                       expiration date. Instruction 4 to Item 402(f)(2). We
                                                    e.g., letters from Frederic W. Cook & Co.;         have not adopted the proposed requirements to
                                         N. Ludgus; and SCSGP.                                         disclose whether an option that expired after fiscal
                                                                                                                                                                    281 See Registration of Securities on Form S–8,
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                                           277 See, e.g., letters from Amalgamated; Brian
                                                                                                       year-end had been exercised, in response to               Release No. 33–7646 (Feb. 25, 1999) [64 FR 11103],
                                         Foley & Company, Inc. (‘‘Brian Foley & Co.’’); Buck           comment that this would unnecessarily deviate             at Section III.D.
                                         Consultants; CII; Hodak Value Advisors; IUE–CWA;                                                                           282 Item 402(g), described in Section II.C.4.b.
                                                                                                       from the standard of reporting last fiscal year
                                         and SBAF.                                                     information. See letter from ABA.                         immediately below.
                                           278 See, e.g., letters from Leggett & Platt; SCSGP;            280 Instruction 1 to Item 402(f)(2). See letter from      283 Item 402(f)(2)(iv).

                                         and Sidley Austin.                                            ABA.                                                         284 See letter from Sullivan.

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                                                               Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                53185

                                         on achieving target performance                              payout, that amount should be reported.                options are reported in columns (b) or
                                         goals.285 As adopted, an instruction                         If the target amount is not determinable,              (c), or (g) and (h), as appropriate.287
                                         provides that the number of shares                           registrants must provide a                             b. Option Exercises and Stock Vested
                                         reported in the appropriate columns for                      representative amount based on the                     Table
                                         equity incentive plan awards (columns                        previous fiscal year’s performance.286
                                         (d) and (i)) or the payout value reported                    We have also adopted an instruction                      We are adopting substantially as
                                         in column (j) is based on achieving                          clarifying that stock or options under                 proposed a table that will show the
                                         threshold performance goals, except that                     equity incentive plans are reported in                 amounts received upon exercise of
                                         if the previous fiscal year’s performance                    columns (d) or (i) and (j), as appropriate,            options or similar instruments or the
                                         has exceeded the threshold, the                              until the relevant performance                         vesting of stock or similar instruments
                                         disclosure shall be based on the next                        condition has been satisfied. Once the                 during the most recent fiscal year. This
                                         higher performance measure (target or                        relevant performance condition has                     table will allow investors to have a
                                         maximum) that exceeds the previous                                                                                  picture of the amounts that a named
                                                                                                      been satisfied, if stock remains unvested
                                         fiscal year’s performance. If the award                                                                             executive officer realizes on equity
                                                                                                      or the option unexercised, the stock or
                                         provides only for a single estimated                                                                                compensation through its final stage.288

                                                                                                     OPTION EXERCISES AND STOCK VESTED
                                                                                                                                                      Option awards                    Stock awards

                                                                                                                                               Number of                        Number of
                                                                                                                                                                   Value                             Value
                                                                                         Name                                                    shares                           shares
                                                                                                                                                                realized on                       realized on
                                                                                                                                               acquired on                      acquired on
                                                                                                                                                                 exercise                           vesting
                                                                                                                                                exercise                          vesting
                                                                                                                                                                     ($)                               ($)
                                                                                                                                                   (#)                              (#)

                                                                                           (a)                                                      (b)              (c)             (d)              (e)






                                            We proposed that this table include                       awards consistent with the presentation                from the table proposed. Second, we are
                                         the grant date fair value of these                           in other tables.                                       adding a table and narrative disclosure
                                         instruments that would have been                                                                                    that will disclose information regarding
                                                                                                      5. Post-Employment Compensation                        nonqualified defined contribution plans
                                         disclosed in the Summary
                                         Compensation Table for the year in                              As we proposed, we are making                       and other deferred compensation. We
                                         which they were awarded. We proposed                         significant revisions to the disclosure                have adopted this table substantially as
                                         this column to eliminate the possible                        requirements regarding post-                           proposed. Finally, we are adopting
                                         impact of double disclosure by showing                       employment compensation to provide a                   revised requirements substantially as
                                         amounts previously disclosed. We have                        clearer picture of this potential future               proposed regarding disclosure of
                                         adopted the table without the grant date                     compensation. As we noted in the                       compensation arrangements triggered
                                         fair value column in response to                             Proposing Release, executive retirement                upon termination and on changes in
                                         commenters’ concerns that this column                        packages and other post-termination                    control.
                                         would confuse investors and increase                         compensation may represent a                           a. Pension Benefits Table
                                         the potential for double counting.289 As                     significant commitment of corporate
                                         described in the preceding section, in                       resources and a significant portion of                    We proposed significant revisions to
                                         response to comment that transfers of                        overall compensation. First, we are                    the rules disclosing retirement benefits
                                         awards for value also are realization                        replacing the former pension plan table,               to require disclosure of the estimate of
                                         events, amounts realized upon such                           alternative plan disclosure and some of                retirement benefits to be payable at
                                         transfers must be included in columns                        the other narrative descriptions with a                normal retirement age and, if available,
                                         (c) and (e) of this table.290 Finally, we                    table regarding defined benefit pension                early retirement. Disclosure under the
                                         have reformatted the columns to make                         plans and enhanced narrative                           rules prior to today’s amendments
                                         the presentation of stock and option                         disclosure. We have revised the table                  frequently did not provide investors
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                                                   e.g., letter from Hewitt.
                                             285 See,                                                 Year and FY-End Options/SAR Values Table that          Commentators have noted a need for comparable
                                             286 Instruction3 to Item 402(f).                         was required prior to these amendments, except         disclosure of restricted stock vesting.
                                          287 Instruction 5 to Item 402(f).                           unlike that table it also includes the vesting of        289 See, e.g., letters from Foley; SCSGP; and

                                          288 This table is similar to a portion of the               restricted stock and similar instruments.              Stradling Yocca.
                                         Aggregate Options/SAR Exercises in Last Fiscal                                                                        290 Item 402(g)(2)(iii) and (v).

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                                         53186             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         useful information regarding specific                    suggested disclosure of the present                     form(s) of benefit payment available
                                         potential pension benefits relating to a                 value of the current accrued benefit                    under the plan.
                                         particular named executive officer.291 In                computed as of the end of the                              Whether or not the plan allows for a
                                         particular, it may have been difficult to                company’s last completed fiscal year,294                lump-sum payment, presentation of the
                                         understand which amounts related to                      achieving comparability by reporting                    present value of the accrued plan
                                         any particular named executive officer,                  the economic value of the benefit that                  benefit provides investors an
                                         obscuring the value of a significant                     the executive has accumulated through                   understanding of the cost of promised
                                         component of compensation.                               the plan.                                               future benefits in present value
                                            We therefore proposed a new table                       Because the latter approach achieves
                                                                                                                                                          terms.296 Companies must use the same
                                         that would have required disclosure of                   comparability and transparency by
                                         the estimated retirement benefits                        disclosing a benefit that already has                   assumptions, such as interest rate
                                         payable at normal retirement age and, if                 accrued, we view it as preferable to an                 assumptions, that they use to derive the
                                         available, early retirement, under                       approach that would ‘‘normalize’’                       amounts disclosed in conformity with
                                         defined benefit plans. Under the                         disclosure based on hypothetical annual                 generally accepted accounting
                                         proposal, benefits would have been                       benefit assumptions prescribed by the                   principles, but would assume that
                                         quantified based on the form of benefit                  Commission that might bear no                           retirement age is normal retirement age
                                         currently elected by the named                           relationship to the assumptions that the                as defined in the plan, or if not so
                                         executive officer, such as joint and                     company actually applies with respect                   defined, the earliest time at which a
                                         survivor annuity or single life annuity.                 to the plan. Furthermore, this approach                 participant may retire under the plan
                                            Some commenters objected that the                     will make clearer the relationship of this              without any benefit reduction due to
                                         proposed revisions would result in                       table to the Summary Compensation                       age.297 The estimates are to be based on
                                         disclosure that would not be                             Table disclosure of increase in pension                 current compensation, and as such,
                                         comparable and could be                                  value. This approach will also lessen                   future levels of compensation need not
                                         manipulated.292 In particular, the                       the burden on companies, since they are                 be estimated for purposes of the
                                         calculation of benefits would depend on                  required to calculate the present value                 calculation. The valuation method and
                                         such factors as the form of benefit                      for the Summary Compensation Table.                     all material assumptions applied will be
                                         payment, the named executive officer’s                   Accordingly, the table we adopt today                   described in the narrative section
                                         marital status, and the actuarial                        requires disclosure of the actuarial                    accompanying this table.298 A separate
                                         assumptions applied, which would vary                    present value of the named executive                    row will be provided for each plan in
                                         from company to company and plan to                      officer’s accumulated benefit under the                 which a named executive officer
                                         plan. Explanations of the complicated                    plan and the number of years of service                 participates.299 For purposes of
                                         methodologies involved could hinder                      credited to the named executive officer                 allocating the current accrued benefit
                                         transparency.                                            under the plan reported in the table,                   between tax qualified defined benefit
                                            Some commenters suggested that the                    each computed as of the same pension                    plans and related supplemental plans, a
                                         Commission prescribe standard                            plan measurement date for financial                     company will apply the applicable
                                         assumptions for calculating annual                       statement reporting purposes with                       Internal Revenue Code limitations in
                                         benefits for disclosure purposes, such as                respect to the audited financial                        effect as of the pension plan
                                         a single life annuity and retirement at                  statements for the company’s last                       measurement date.300 At the suggestion
                                         age 65, in order to facilitate                           completed fiscal year.295 This disclosure               of a commenter, we have simplified the
                                         comparability.293 Other commenters                       applies without regard to the particular                name of the table.301

                                                                                                               PENSION BENEFITS
                                                                                                                                                              Number of                           Payments
                                                                                                                                                                                value of
                                                                                                                                                             years cred-                          during last
                                                                                    Name                                                   Plan name                          accumulated
                                                                                                                                                             ited service                         fiscal year
                                                                                                                                                                  (#)                                 ($)

                                                                                      (a)                                                       (b)               (c)               (d)               (e)


                                            291 The rules prior to today’s amendments             formula and estimated annual benefits payable to        deferred compensation plan disclosure, which, as
                                         provided that, for defined benefit or actuarial plans,   the officers upon retirement at normal retirement       described in Section II.C.5.b. immediately below,
                                         disclosure was required under Item 402(f) by way         age.                                                    reports an aggregate account balance.
                                         of a general table showing estimated annual benefits       292 See, e.g., letters from BRT; Chadbourne &            297 Instruction 2 to Item 402(h)(2). Of course, the
                                         under the plan payable upon retirement (including        Parke LLP (‘‘Chadbourne’’); Cleary; and ABA–JCEB.       benefits included in the plan document or the
                                         amounts attributable to supplementary or excess            293 See, e.g., letters from ABA and NACCO
                                                                                                                                                          executive’s contract itself is not an assumption.
                                         pension award plans) for specified compensation          Industries.                                                298 Item 402(h)(3) and Instruction 2 to Item
                                         levels and years of service. This table did not            294 See, e.g., letters from Buck Consultants;
                                                                                                                                                          402(h)(2). This requirement could be satisfied by
                                         provide disclosure for any specific named executive      Frederic W. Cook & Co.; Professor Bebchuk, et al.;      reference to a discussion of those assumptions in
                                         officer. This requirement applied to plans under         and SBAF.                                               the company’s financial statements, footnotes to the
                                         which benefits were determined primarily by final          295 Item 402(h)(2)(iv). If the number of years of
                                                                                                                                                          financial statements, or Management’s Discussion
                                         compensation (or average final compensation) and         credited service for a plan differs from the named      and Analysis. The sections so referenced would be
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                                         years of service, and included narrative disclosure.     executive officer’s number of actual years of service
                                                                                                                                                          deemed a part of the disclosure provided by this
                                         If named executive officers were subject to other        with the company, footnote quantification of the
                                         plans under which benefits were not determined           difference and any resulting benefit augmentation is    Item.
                                                                                                                                                             299 Instruction 1 to Item 402(h)(2).
                                         primarily by final compensation (or average final        required. Instruction 4 to Item 402(h)(2).
                                                                                                                                                             300 Instruction 3 to Item 402(h).
                                         compensation), narrative disclosure had been               296 Further, basing pension plan disclosure on the

                                         required prior to these amendments of the benefit        accumulated benefit is consistent with nonqualified        301 See letter from ABA.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                     53187

                                                                                                        PENSION BENEFITS—Continued
                                                                                                                                                               Number of                          Payments
                                                                                                                                                                                 value of
                                                                                                                                                              years cred-                         during last
                                                                                     Name                                                   Plan name                          accumulated
                                                                                                                                                              ited service                        fiscal year
                                                                                                                                                                   (#)                                ($)

                                                                                       (a)                                                       (b)              (c)               (d)               (e)





                                            We have moved the disclosure                            • The specific elements of                             disclosure of the compensation when
                                         proposed to be included in the                           compensation, such as salary and                         earned and only the above-market or
                                         Summary Compensation Table of                            various forms of bonus, included in                      preferential earnings on nonqualified
                                         pension benefits paid to a named                         applying the benefit formula,                            deferred compensation.305 The full
                                         executive officer during the last                        identifying each such element;                           value of those earnings and the accounts
                                         completed fiscal year to the Pension                       • Regarding participation in multiple                  on which they are payable was not
                                         Benefits Table so that pension benefits                  plans, the different purposes for each                   subject to disclosure, nor were investors
                                                                                                  plan; and                                                informed regarding the rate at which
                                         are disclosed only once in the Summary                     • Company policies with regard to
                                         Compensation Table.302 We remain of                                                                               these amounts, and the corresponding
                                                                                                  such matters as granting extra years of                  cost to the company, grow.306
                                         the view that disclosure of these                        credited service.
                                         payments would be material to                                                                                       As noted above, we are requiring
                                         investors, particularly where the named                  b. Nonqualified Deferred Compensation                    disclosure in the Summary
                                         executive officer receives them while                    Table                                                    Compensation Table only of the above-
                                         still employed by the company.303                           In order to provide a more complete                   market or preferential portion of
                                                                                                  picture of potential post-employment                     earnings on compensation that is
                                            The table will be followed by a
                                                                                                  compensation, we are adopting                            deferred on a basis that is not tax-
                                         narrative description of material factors
                                                                                                  substantially as proposed a new table to                 qualified. To provide investors with
                                         necessary to an understanding of each
                                                                                                  disclose contributions, earnings and                     disclosure of the full amount of
                                         plan disclosed in the table. Examples of                                                                          nonqualified deferred compensation
                                                                                                  balances under each defined
                                         such factors may include, in given                       contribution or other plan that provides                 accounts that the company is obligated
                                         cases, among other things:                               for the deferral of compensation on a                    to pay named executive officers,
                                            • The material terms and conditions                   basis that is not tax-qualified. These                   including the full amount of earnings
                                         of benefits available under the plan,                    plans may be a significant element of                    for the last fiscal year, we are also
                                         including the plan’s retirement benefit                  retirement and post-termination                          requiring new tabular and narrative
                                         formula and eligibility standards, and                   compensation. Prior to these                             disclosure of nonqualified deferred
                                         early retirement arrangements;304                        amendments, the rules had elicited                       compensation, as we proposed.307
                                                                                                NONQUALIFIED DEFERRED COMPENSATION
                                                                                                                          Executive         Registrant        Aggregate         Aggregate         Aggregate
                                                                                                                         contributions     contributions      earnings in      withdrawals/       balance at
                                                                          Name                                            in last FY        in last FY          last FY        distributions       last FYE
                                                                                                                              ($)               ($)               ($)                ($)              ($)

                                                                               (a)                                             (b)               (c)              (d)               (e)               (f)



                                            302 Item 402(h)(2)(v). See also Instruction 1 to      required to be reported in that column in any fiscal     or otherwise available to the executive under the
                                         Item 402(c)(2)(viii). We have included these             year covered by that table.                              plan. Item 402(h)(3)(i) and (ii).
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                                         amounts in this table rather than the Summary              304 For this purpose, ‘‘normal retirement age’’          305 See Section II.C.1.d.i. above.
                                         Compensation Table since the increase in the value       means the normal retirement age defined in the             306 See Lucian A. Bebchuk and Jesse M. Fried,
                                         of the pension benefit would have been previously        plan, or if not so defined, the earliest time at which
                                         disclosed in the Summary Compensation Table.             a participant may retire under the plan without any      Stealth Compensation via Retirement Benefits, 1
                                            303 Item 402(a)(5) as amended provides that a         benefit reduction due to age. ‘‘Early retirement age’’   Berkeley Bus. L.J. 291, 314–316 (2004).
                                         column may be omitted if there is no compensation        means early retirement age as defined in the plan,         307 Item 402(i).

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                                         53188                 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                                                                            NONQUALIFIED DEFERRED COMPENSATION—Continued
                                                                                                                                 Executive         Registrant        Aggregate         Aggregate        Aggregate
                                                                                                                                contributions     contributions      earnings in      withdrawals/      balance at
                                                                               Name                                              in last FY        in last FY          last FY        distributions      last FYE
                                                                                                                                     ($)               ($)               ($)                ($)             ($)

                                                                                    (a)                                               (b)              (c)               (d)               (e)               (f)




                                           One commenter noted that the title                            • The measures of calculating interest                   responsibilities,313 or a change in
                                         proposed—Nonqualified Defined                                 or other plan earnings (including                          control of the company.
                                         Contribution and Other Deferred                               whether such measure(s) are selected by                       Our amendments call for narrative
                                         Compensation Plans—suggested that tax                         the named executive officer or the                         disclosure of the following information
                                         qualified plans that provide for deferral                     company and the frequency and manner                       regarding termination and change in
                                         of compensation, such as Section 401(k)                       in which such selections may be                            control provisions: 314
                                         plans, would be covered.308 We have                           changed), quantifying interest rates and                      • the specific circumstances that
                                         adopted the commenter’s                                       other earnings measures applicable                         would trigger payment(s) or the
                                         recommendation to modify the title to                         during the company’s last fiscal year;                     provision of other benefits (references to
                                         clarify that the table covers only                            and                                                        benefits include perquisites and health
                                         deferred compensation that is not tax-                                                                                   care benefits);
                                         qualified, and we have also shortened                           • material terms with respect to                            • the estimated payments and
                                         the title consistent with our                                 payouts, withdrawals and other                             benefits that would be provided in each
                                         amendments regarding the Pension                              distributions.                                             covered circumstance, and whether they
                                         Benefits Table.                                                 Where plan earnings are calculated by                    would or could be lump sum or annual,
                                           As proposed and adopted, an                                 reference to actual earnings of mutual                     disclosing the duration and by whom
                                         instruction requires footnote                                 funds or other securities, such as                         they would be provided; 315
                                         quantification of the extent to which                         company stock, it is sufficient to                            • how the appropriate payment and
                                         amounts in the contributions and                              identify the reference security and                        benefit levels are determined under the
                                         earnings columns are reported as                              quantify its return. This disclosure may                   various circumstances that would
                                         compensation in the year in question                          be aggregated to the extent the same                       trigger payments or provision of
                                         and other amounts reported in the table                       measure applies to more than one                           benefits; 316
                                         in the aggregate balance column were                          named executive officer.                                      • any material conditions or
                                         reported previously in the Summary                                                                                       obligations applicable to the receipt of
                                         Compensation Table for prior years.309                        c. Other Potential Post-Employment                         payments or benefits, including but not
                                         This footnote provides information so                         Payments                                                   limited to non-compete, non-
                                         that investors can avoid ‘‘double                                                                                        solicitation, non-disparagement or
                                                                                                          We are adopting the significant                         confidentiality covenants; and
                                         counting’’ of deferred amounts by
                                                                                                       revisions that we proposed to our
                                         clarifying the extent to which amounts
                                                                                                       requirements to describe termination or                       313 We confirm that this aspect of the disclosure
                                         payable as deferred compensation
                                                                                                       change in control provisions. The                          requirement is not limited to a change in
                                         represent compensation previously                                                                                        responsibilities in connection with a change in
                                         reported, rather than additional                              Commission has long recognized that
                                         currently earned compensation.310                             ‘‘termination provisions are distinct                         314 Item 402(j).

                                           The table will be followed by a                             from other plans in both intent and                           315 We have eliminated the $100,000 disclosure

                                         narrative description of material factors                     scope and, moreover, are of particular                     threshold that was specified in the rule prior to
                                         necessary to an understanding of the                          interest to shareholders.’’ 312 Prior to                   today’s amendments. For post-termination
                                                                                                       today’s amendments, disclosure did not                     perquisites, however, the same disclosure and
                                         disclosure in the table.311 Examples of                                                                                  itemization thresholds used for the amended
                                         such factors may include, in given                            in many cases capture material                             Summary Compensation Table apply. See Section
                                         cases, among other things:                                    information regarding these plans and                      II.C.1.e.i. above. We have modified Item 402(j)(2)
                                           • The type(s) of compensation                               potential payments under them. We                          from the proposal in response to comments to
                                                                                                       therefore proposed and are adopting                        clarify that the required description covers both
                                         permitted to be deferred, and any                                                                                        annual and lump sum payments. See letter from
                                         limitations (by percentage of                                 disclosure of specific aspects of written                  ABA.
                                         compensation or otherwise) on the                             or unwritten arrangements that provide                        316 We have modified Item 402(j)(3) from the

                                         extent to which deferral is permitted;                        for payments at, following, or in                          proposal to clarify the scope of the required
                                                                                                       connection with the resignation,                           disclosure. The proposal would have required the
                                                                                                                                                                  company to describe and explain the specific
                                             308 See
                                                   letter from Foley.                                  severance, retirement or other                             factors used to determine the appropriate payment
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                                             309 Instructionto Item 402(i)(2).                         termination (including constructive                        and benefit levels under the various triggering
                                           310 As described in Section II.C.1.b. above, the
                                                                                                       termination) of a named executive                          circumstances. A commenter suggested that the
                                         rules as adopted do not include the corresponding                                                                        proposed language was overly broad and ambiguous
                                         footnote that was proposed for the Summary
                                                                                                       officer, a change in his or her
                                                                                                                                                                  and could result in mere repetition of the pension
                                         Compensation Table.                                                                                                      payout formula and actuarial assumptions. See
                                           311 Item 402(i)(3).                                           312 1983   Release, at Section III.E.                    letter from ABA.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                         53189

                                           • any other material factors regarding                  health care benefits are included in this              as was the case prior to these
                                         each such contract, agreement, plan or                    requirement, and quantifiable based on                 amendments, up to two additional
                                         arrangement.317                                           the assumptions used for financial                     individuals for whom disclosure would
                                           The item contemplates disclosure of                     reporting purposes under generally                     have been required but for the fact that
                                         the duration of non-compete and similar                   accepted accounting principles.322                     they were no longer serving as executive
                                         agreements, and provisions regarding                        We further clarify in response to                    officers at the end of the last completed
                                         waiver of breach of these agreements,                     comments that to the extent that the                   fiscal year shall be included.
                                         and disclosure of tax gross-up                            form and amount of any payment or                         As we noted in the Proposing Release,
                                         payments.                                                 benefit that would be provided in                      we believe that compensation of the
                                           A company will be required to                           connection with any triggering event is                principal financial officer is important
                                         provide quantitative disclosure under                     fully disclosed in the Pension Benefits                to shareholders because, along with the
                                         these requirements even where                             Table or the Nonqualified Deferred                     principal executive officer, the principal
                                         uncertainties exist as to amounts                         Compensation Table and the narrative                   financial officer provides the
                                         payable under these plans and                             disclosure related to those tables,                    certifications required with the
                                         arrangements. We clarify that in the                      reference may be made to that                          company’s periodic reports and has
                                         event uncertainties exist as to the                       disclosure.323 However, to the extent                  important responsibility for the fair
                                         provision of payments and benefits or                     that the form or amount of any such                    presentation of the company’s financial
                                         the amounts involved, the company is                      payment or benefit would be increased,                 statements and other financial
                                         required to make a reasonable estimate                    or its vesting or other provisions                     information.328 Like the principal
                                         (or a reasonable estimated range of                       accelerated upon any triggering event,                 executive officer, disclosure about the
                                         amounts), and disclose material                           such increase or acceleration must be                  principal financial officer will be
                                         assumptions underlying such estimates                     specifically disclosed in this section.324             required even if he or she was no longer
                                         or estimated ranges in its disclosure. In                 In addition, we have added an                          serving in that capacity at the end of the
                                         such event, the disclosure will be                        instruction that companies need not                    last completed fiscal year.329 As was the
                                         considered forward-looking information                    disclose payments or benefits under this               case for the chief executive officer prior
                                         as appropriate that falls within the safe                 requirement to the extent such                         to today’s amendments, all persons who
                                         harbors for disclosure of such                            payments or benefits do not                            served as the company’s principal
                                         information.318                                           discriminate in scope, terms or                        executive officer or principal financial
                                           We have modified the requirement                        operation, in favor of a company’s                     officer during the last completed fiscal
                                         somewhat in response to comments that                     executive officers and are available                   year are named executive officers.
                                         compliance with the proposal would                        generally to all salaried employees.325                   We are not requiring compensation
                                         involve multiple complex calculations
                                                                                                   6. Officers Covered                                    disclosure for all of the officers listed in
                                         and projections based on circumstantial
                                                                                                                                                          Items 5.02(b) and (c) of Form 8–K.330
                                         and variable assumptions.319 We adopt                     a. Named Executive Officers
                                                                                                                                                          Those Form 8–K Items were adopted to
                                         commenters’ suggestions that the                             As proposed, we are amending the                    provide current disclosure in the event
                                         quantitative disclosure required be                       disclosure rules so that the principal                 of an appointment, resignation,
                                         calculated applying the assumptions                       executive officer, the principal financial retirement or termination of the
                                         that:                                                     officer 326 and the three most highly
                                           • the triggering event took place on                                                                           specified officers, based on the principle
                                                                                                   compensated executive officers other                   that changes in employment status of
                                         the last business day of the company’s                    than the principal executive officer and
                                         last completed fiscal year; and                                                                                  these particular officers are
                                                                                                   principal financial officer comprise the               unquestionably or presumptively
                                           • the price per share of the company’s
                                                                                                   named executive officers.327 In addition, material. At the time when a decision is
                                         securities is the closing market price as
                                         of that date.320                                                                                                 made regarding the employment status
                                                                                                     322 Item 402(j)(1) and Instruction 2 to Item 402(j).
                                           We have also revised the rule to                                                                               of a particular officer, it will not always
                                                                                                   These would be the assumptions applied under
                                         provide that if a triggering event has                    Financial Accounting Standards Board Statement of be clear who will be the named
                                         occurred for a named executive officer                    Financial Accounting Standards No. 106,                executive officers for the current year.
                                                                                                   Employer’s Accounting for Postretirement Benefits
                                         who was not serving as a named                            Other Than Pensions (FAS 106). See, e.g., letters          provision describing the determination of named
                                         executive officer at the end of the last                  from Peabody Energy and WorldatWork.                       executive officer. Instruction 2 to Item 402(a)(3).
                                         completed fiscal year, disclosure under                      323 See letter from Academy of Actuaries.                  328 Exchange Act Rules 13a–14 and 15d–14.
                                         this provision is required for that named                    324 Instruction 3 to Item 402(j).                          329 Paragraphs (a)(3)(i) and (a)(3)(ii) of Item 402

                                         executive officer only with respect to                       325 Instruction 5 to Item 402(j).
                                                                                                                                                              provide that all individuals who served as a
                                                                                                      326 We are adopting the nomenclature used in            principal executive officer and principal financial
                                         the actual triggering event that
                                                                                                   Item 5.02 of Form 8–K, which refers to ‘‘principal         officer or in similar capacities during the last
                                         occurred.321 These modifications will                     executive officer’’ and ‘‘principal financial officer.’’   completed fiscal year must be considered named
                                         both facilitate company compliance and                       327 Item 402(a)(3). As defined in Securities Act        executive officers. Item 402(a)(4) specifies that if the
                                         provide investors with disclosure that is                 Rule 405 [17 CFR 230.405] and Exchange Act Rule            principal executive officer or principal financial
                                         more meaningful. We further clarify that                  3b–7 [17 CFR 240.3b–7], ‘‘the term ’executive              officer served in that capacity for only part of a
                                                                                                   officer,’ when used with reference to a registrant,        fiscal year, information must be provided as to all
                                            317 This would include, for example, disclosure of     means its president, any vice president of the             of the individual’s compensation for the full fiscal
                                                                                                   registrant in charge of a principal business unit,         year. Item 402(a)(4) also specifies that if a named
                                         whether an executive simultaneously receives both                                                                    executive officer (other than the principal executive
                                                                                                   division or function (such as sales, administration
                                         severance and retirement benefits, a practice                                                                        officer or principal financial officer) served as an
                                                                                                   or finance), any other officer who performs a policy-
                                         commonly known as a ‘‘double dip.’’ See letter from                                                                  executive officer of the company (whether or not in
                                                                                                   making function or any other person who performs
                                         WorldatWork.                                                                                                         the same position) during any part of the fiscal year,
                                            318 See, e.g., Securities Act Section 27A and
                                                                                                   similar policy-making functions for the registrant.
                                                                                                   Executive officers of subsidiaries may be deemed           then information is required as to all compensation
                                         Exchange Act Section 21E.                                 executive officers of the registrant if they perform       of that individual for the full fiscal year.
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                                            319 See, e.g., letters from Cleary; Foley; HRPA; and
                                                                                                   such policy-making functions for the registrant.’’            330 These are the registrant’s principal executive
                                         Top Five Data.                                            Therefore, as was formerly the case, a named               officer, president, principal financial officer,
                                            320 Instruction 1 to Item 402(j). See, e.g., letters
                                                                                                   executive officer may be an executive officer of a         principal accounting officer, principal operating
                                         from Emerson; Foley; and Frederic W. Cook & Co.           subsidiary or an employee of a subsidiary who              officer or any person performing similar functions.
                                            321 Instruction 4 to Item 402(j). See letter from      performs such policy-making functions for the              As described in Section III.A. below, the rules we
                                         ABA.                                                      registrant. We have clarified this point in the            adopt today also amend Item 5.02 of Form 8–K.

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                                         53190             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         Given these factors, it is reasonable for               consistent with our decision to                       requirements of Item 404.338 Further,
                                         the two groups not to be identical.                     eliminate the distinction between                     instructions to amended Item 404 clarify
                                                                                                 ‘‘annual’’ and ‘‘long-term’’                          what compensatory transactions with
                                         b. Identification of Most Highly
                                                                                                 compensation in the Summary                           executive officers and directors need not
                                         Compensated Executive Officers; Dollar
                                                                                                 Compensation Table.334 We realize that                be disclosed under Item 404.339
                                         Threshold for Disclosure                                                                                         As noted in the Proposing Release, the
                                                                                                 this may result in more frequent
                                           In the rule prior to today’s                          changes to the officers designated as                 result of these amendments may be that
                                         amendments, the determination of the                    named executive officers, but believe                 in some cases compensation
                                         most highly compensated executive                       that it will provide a clearer picture of             information will be required to be
                                         officers was based solely on total annual               compensation at a company.                            disclosed under Item 402, while the
                                         salary and bonus for the last fiscal year,              Accordingly, we require the most highly               related person transaction giving rise to
                                         subject to a $100,000 disclosure                        compensated executive officers to be                  that compensation is also disclosed
                                         threshold. We proposed to revise the                    determined based on total                             under Item 404. We believe that the
                                         dollar threshold for disclosure of named                compensation, reduced by the sum of                   possibility of additional disclosure in
                                         executive officers other than the                       the increase in pension values and                    the context of each of these respective
                                         principal executive officer and the                     nonqualified deferred compensation                    items is preferable to the possibility that
                                         principal financial officer to $100,000 of              above-market or preferential earnings                 compensation is not properly and fully
                                         total compensation for the last fiscal                  reported in column (h) of the Summary                 disclosed under Item 402.
                                         year. Given the proliferation of various                Compensation.335
                                                                                                    Prior to these amendments,                         8. Other Changes
                                         forms of compensation other than salary
                                         and bonus, we believe that total                        companies were permitted to exclude an                   Before today’s amendments, a
                                         compensation would more accurately                      executive officer (other than the chief               company was permitted to omit from
                                         identify those officers who are, in fact,               executive officer) due to either an                   Item 402 disclosure of ‘‘information
                                         the most highly compensated.                            unusually large amount of cash                        regarding group life, health,
                                           Several commenters objected to using                  compensation that was not part of a                   hospitalization, medical reimbursement
                                         total compensation to identify named                    recurring arrangement and was unlikely                or relocation plans that do not
                                         executive officers.331 In particular,                   to continue, or cash compensation                     discriminate in scope, terms or
                                         commenters stated that this measure                     relating to overseas assignments                      operation, in favor of executive officers
                                         would minimize the importance of the                    attributed predominantly to such                      or directors of the registrant and that are
                                         compensation committee’s                                assignments.336 Because payments                      available generally to all salaried
                                         compensation decisions for the most                     attributed to overseas assignments have               employees.’’ 340 Because relocation
                                         recent year and include significant                     the potential to skew the application of              plans, even when available generally to
                                         elements beyond the committee’s                         Item 402 disclosure away from                         all salaried employees, are susceptible
                                         control, such as the increase in pension                executives whose compensation                         to operation in a discriminatory manner
                                         value and earnings on nonqualified                      otherwise properly would be disclosed,                that favors executive officers, this
                                         deferred compensation. Some                             we are retaining this basis for exclusion,            exclusion may have deprived investors
                                         commenters recommended continuing                       as we proposed. However, we believe                   of disclosure of significant
                                         to rely solely on salary and bonus,                     that other compensation that is ‘‘not                 compensatory benefits. For this reason,
                                         stating that these measures more                        recurring and unlikely to continue’’                  we are deleting relocation plans from
                                         accurately reflect the executives who are               should be considered compensation for                 this exclusion, as we proposed. For the
                                         most highly valued in the company and                   disclosure purposes. There has been                   same reason, as we proposed, we are
                                         permit greater year-to-year                             inconsistent interpretation of the ‘‘not              also deleting relocation plans from the
                                         consistency.332 Other commenters                        recurring and unlikely to continue’’                  exclusion from portfolio manager
                                         expressed concern that including                        standard, and it is susceptible to                    compensation in forms used by
                                         episodic option awards would result in                  manipulation. We therefore are                        management investment companies to
                                         more frequent changes to the named                      eliminating this basis for exclusion, as              register under the Investment Company
                                         executive officer roster.333                            we proposed.337                                       Act and offer securities under the
                                           We are persuaded that it is                           7. Interplay of Items 402 and 404                     Securities Act.341 We also are revising
                                         appropriate to exclude from the named                                                                         the definition of ‘‘plan’’ so that it is
                                                                                                    We are amending Item 402 so that it                more principles-based, as we
                                         executive officer determination
                                                                                                 requires disclosure of all transactions               proposed.342 Finally, in order to
                                         compensation elements that principally
                                                                                                 between the company and a third party
                                         reflect executives’ decisions to defer
                                                                                                 where the primary purpose of the                         338 These relevant provisions were set forth in
                                         compensation and wealth accumulation
                                                                                                 transaction is to furnish compensation                paragraphs (a)(2) and (a)(5) of Item 402 before
                                         in pension plans, or are unduly                                                                               today’s amendments. Because paragraph (a)(5) of
                                                                                                 to a named executive officer as
                                         influenced by age or years of service.                                                                        Item 402 as it had been stated prior to these
                                                                                                 proposed. Also as proposed, amended
                                         However, as we stated in the Proposing                                                                        amendments was otherwise redundant with
                                                                                                 Item 402 will no longer exclude from its              paragraph (a)(2) of Item 402 as that provision had
                                         Release, basing identification of named
                                                                                                 disclosure requirements information                   been stated, we are eliminating the language that
                                         executive officers solely on the                                                                              had been set forth in paragraph (a)(5) in its entirety
                                                                                                 about compensatory transaction that
                                         compensation reportable in the salary                                                                         and making a conforming amendment to paragraph
                                                                                                 had been disclosed under the related
                                         and bonus categories may provide an                                                                           (a)(2) of Item 402.
                                                                                                 person transaction disclosure                            339 See Instruction 5 to Item 404(a), discussed in
                                         incentive to re-characterize
                                                                                                                                                       Section V.A.3., below.
                                         compensation. Further, limiting the                        334 See Section II.C.1.f. above, discussing the       340 This language appeared in Item 402(a)(7)(ii)
                                         determination to salary and bonus is not                effect of this change on compensation formerly        prior to today’s amendments, which generally
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                                                                                                 reported as ‘‘bonus.’’                                defined the term ‘‘plan.’’
                                           331 See, e.g., letters from ACC; Emerson; Leggett        335 Instruction 1 to Item 402(a)(3).                  341 Amendment to Instruction 2 to Item 15(b) of
                                         & Platt; SCSGP; and Unitrin.                               336 This exclusion had been set forth in           Form N–1A; amendment to Instruction 2 to Item
                                           332 See, e.g., letters from Frederic W. Cook & Co.    Instruction 3 to Item 402(a)(3) prior to these        21.2 of Form N–2; amendment to Instruction 2 to
                                         and Intel.                                              amendments.                                           Item 22(b) of Form N–3.
                                           333 See, e.g., letter from Intel.                        337 Instruction 3 to Item 402(a)(3).                  342 Item 402(a)(6)(ii).

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                 53191

                                         simplify the language of the individual                  compensation.344 In light of this                       presents information only with respect
                                         requirements, we have consolidated into                  complexity, we proposed to require                      to the company’s last completed fiscal
                                         one provision the definitions for the                    formatted tabular disclosure for director               year. Consistent with the modifications
                                         terms stock, option and equity as used                   compensation, accompanied by                            to the Summary Compensation Table,
                                         in Item 402.343                                          narrative disclosure of additional                      this table moves pension and
                                                                                                  material information. In doing so, we                   nonqualified deferred compensation
                                         9. Compensation of Directors
                                                                                                  revisited an approach that the                          plan disclosure from All Other
                                           Director compensation has continued                    Commission proposed in 1995 but did                     Compensation to a separate column.346
                                         to evolve from simple compensation                       not adopt at that time.345                              Because the same instructions as
                                         packages mostly involving cash                             Director compensation has continued                   provided in the Summary
                                         compensation and attendance fees to                      to evolve since 1995 so that we are                     Compensation Table govern analogous
                                         more complex packages, which can also                    today adopting a Director Compensation                  matters in the Director Compensation
                                         include equity-based compensation,                       Table, which resembles the revised                      Table, our modifications to those
                                         incentive plans and other forms of                       Summary Compensation Table, but                         instructions also apply to this table.

                                                                                                           DIRECTOR COMPENSATION
                                                                                                                                                              Change in
                                                                                                                                             Non-equity         pension
                                                                                   Fees earned                                                                                 All other
                                                                                                                            Option            incentive        value and
                                                                                    or paid in          Stock awards                                                          compensa-           Total
                                                          Name                                                              awards           plan com-       nonqualified
                                                                                      cash                   ($)                                                                  tion             ($)
                                                                                                                              ($)            pensation          deferred
                                                                                        ($)                                                                                        ($)
                                                                                                                                                 ($)          compensa-
                                                                                                                                                            tion earnings

                                                           (a)                              (b)              (c)                (d)              (e)              (f)             (g)               (h)






                                            As proposed and adopted, director                     compensation cost, if any, computed in                    An additional requirement to include
                                         fees earned or paid in cash would be                     accordance with FAS 123R;                               the dollar value of any dividends or
                                         reported separately from fees paid in                      • Amounts paid or accrued to any                      other earnings paid in stock or option
                                         stock. The All Other Compensation                        director pursuant to a plan or                          awards when the dividend or earnings
                                         column of the Director Compensation                      arrangement in connection with the                      were not factored into the grant date fair
                                         Table includes, but is not limited to:                   resignation, retirement or any other                    value has been adopted for this column
                                            • All perquisites and other personal                  termination of such director or a change                as discussed above.
                                         benefits if the total is $10,000 or greater;             in control of the company;                                In addition to the disclosure specified
                                            • All tax reimbursements;                               • Annual company contributions to                     in the columns of the table, we
                                            • For any security of the company or                  vested and unvested defined                             proposed to require, by footnote to the
                                         its subsidiaries purchased from the                      contribution plans;                                     appropriate column, disclosure for each
                                         company or its subsidiaries (through                       • All consulting fees;                                director of the outstanding equity
                                         deferral of fees or otherwise) at a                        • Awards under director legacy or                     awards at fiscal year end as would be
                                         discount from the market price of such                   charitable awards programs; 347 and                     required if the Outstanding Equity
                                         security at the date of purchase, unless                   • The dollar value of any insurance                   Awards at Fiscal Year-End table for
                                         the discount is generally available to all               premiums paid by, or on behalf of, the                  named executive officers were required
                                         security holders or to all salaried                      company for life insurance for the                      for directors. In response to a comment
                                         employees of the company, the                            director’s benefit.                                     that this disclosure would be provided

                                             343 Item                                               345 1995 Release. The 1995 proposed amendment           347 Under director legacy programs, also known as

                                                   e.g., National Association of Corporate
                                             344 See,                                             was coupled with a proposed amendment to permit         charitable award programs, registrants typically
                                         Directors and Pearl Meyer & Partners, 2003–2004          companies to reduce the detailed executive              agree to make a future donation to one or more
                                                                                                  compensation information provided in the proxy          charitable institutions in the director’s name,
                                         Director Compensation Survey (2004); National
                                                                                                  statement by instead furnishing that information in     payable by the company upon a designated event
                                         Association of Corporate Directors, Report of the
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                                                                                                  the Form 10–K. We did not act upon these proposed       such as death or retirement. The amount to be
                                         NACD Blue Ribbon Commission On Director                  amendments.                                             disclosed in the table shall be the annual cost of
                                         Compensation (2001); and Dennis C. Carey, et al,           346 As noted in n. 303 above, Item 402(a)(5)          such promises and payments, with footnote
                                         How Should Corporate Directors Be Compensated?,          provides that a column may be omitted if there is       disclosure of the total dollar amount and other
                                         Investment Dealers’ Digest Inc.—Special Issue:           no compensation required to be reported in that         material terms of each such program. Instruction 1
                                         Boards and Directors (Jan. 1996).                        column.                                                 to Item 402(k)(2)(vii).

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                                         53192             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         in the narrative accompanying the table,                  satisfying disclosure requirements                     consider all recommendations of the
                                         we have simplified the relevant                           designed to capture more complicated                   Advisory Committee.
                                         instruction to require footnote                           compensation arrangements may                             As proposed and adopted, small
                                         disclosure only of the aggregate                          impose new, unwarranted burdens on                     business issuers will be required to
                                         numbers of stock awards and option                        small business issuers.354                             provide, along with related narrative
                                         awards outstanding at fiscal year end.348                                                                        disclosure:
                                                                                                      Some commenters addressing the                         • The Summary Compensation
                                         As with the Summary Compensation                          proposed amendments to Item 402 of
                                         Table, the new rules make clear that all                                                                         Table; 358
                                                                                                   Regulation S–B expressed the view that                    • The Outstanding Equity Awards at
                                         compensation must be included in the                      all companies whose shares are publicly
                                         table.349 As is the case with the current                                                                        Fiscal Year-End Table; 359 and
                                                                                                   traded should have to meet the same                       • The Director Compensation
                                         director disclosure requirement,                          reporting and disclosure standards,
                                         companies will not be required to                                                                                Table.360
                                                                                                   regardless of their size, or urged that                   Small business issuers will be
                                         include in the director disclosure any                    exemptions for smaller public                          required to provide information in the
                                         amounts of compensation paid to a                         companies be limited,355 suggesting that               Summary Compensation Table only for
                                         named executive officer and disclosed                     they be required to file some form of a                the last two fiscal years. In addition,
                                         in the Summary Compensation Table                         basic Compensation Discussion and                      small business issuers will be required
                                         with footnote disclosure indicating what                  Analysis.356 We are not following these                to provide information for fewer named
                                         amounts reflected in that table are                       recommendations, because the                           executive officers, namely the principal
                                         compensation for services as a                            executive compensation arrangements                    executive officer and the two most
                                         director.350 An instruction to the                        of small business issuers generally are                highly compensated officers other than
                                         Director Compensation Table permits                       so much less complex than those of                     the principal executive officer.361 In
                                         the grouping of multiple directors in a                   other public companies that they do not                light of our decision to link the
                                         single row of the table if all of their                   warrant the more extensive disclosure                  Summary Compensation Table pension
                                         elements and amounts of compensation                      requirements imposed on companies                      plan disclosure to the disclosure in the
                                         are identical.351                                         that are not small business issuers and                Pension Benefits Table, which is not
                                            Following the table, narrative
                                                                                                   related regulatory burdens that could be               required for small business issuers, and
                                         disclosure will describe any material
                                                                                                   disproportionate for small business                    in response to comment,362 we have
                                         factors necessary to an understanding of
                                                                                                   issuers.                                               decided not to require that small
                                         the table. Such factors may include, for                                                                         business issuers include pension plan
                                         example, a breakdown of types of                             Other commenters who supported the
                                                                                                   Commission’s proposal to require less                  disclosure in the Summary
                                         fees.352 In addition, as noted in Section                                                                        Compensation Table. Narrative
                                         II.A., disclosure regarding option timing                 extensive disclosure for companies
                                                                                                   subject to Regulation S–B suggested that               discussion of a number of items to the
                                         or dating practices may be necessary                                                                             extent material replaces tabular or
                                         under this narrative disclosure                           the Commission amend the definition of
                                                                                                   small business issuer to encompass a                   footnote disclosure, for example
                                         requirement when the recipients of the                                                                           identification of other items in the All
                                         stock option grants are directors of the                  larger group of smaller public
                                                                                                   companies, such as by adopting the                     Other Compensation column and a
                                         company. As we proposed, we are not                                                                              description of post-employment
                                         requiring a supplemental Grants of Plan-                  definition of ‘‘smaller public company’’
                                                                                                   recommended by the Advisory                            payments and other benefits.363 In light
                                         Based Awards Table for directors.                                                                                of our request in Release No. 33–8735
                                                                                                   Committee on Smaller Public
                                         D. Treatment of Specific Types of                         Companies, and scale back the                          for further comment on the proposed
                                         Issuers                                                                                                          additional narrative disclosure
                                                                                                   disclosure thresholds for all such
                                                                                                                                                          requirement regarding up to three
                                         1. Small Business Issuers                                 smaller companies.357 We are not
                                                                                                                                                          highly compensated employees so that
                                                                                                   following this recommendation at this
                                            The Item 402 amendments continue                                                                              it might apply only to large accelerated
                                                                                                   time, but would instead defer
                                         to differentiate between small business                                                                          filers, we have not adopted this
                                                                                                   consideration until we can fully
                                         issuers and other issuers, as we                                                                                 proposal for Item 402 of Regulation S–
                                         proposed. In adopting the amendments,                                                                            B. Small business issuers are not
                                                                                                   available to small business issuers under Regulation
                                         we recognize that the executive                           S–B into Regulation S–K and make them available
                                                                                                                                                          required to provide a Compensation
                                         compensation arrangements of small                        to all microcap companies. Final Report of the
                                         business issuers typically are less                       Advisory Committee on Smaller Public Companies            358 Items 402(b) and 402(c) of Regulation S–B.

                                         complex than those of other public                        to the United States Securities and Exchange           Consistent with the instructions to the narrative
                                                                                                   Commission (Apr. 23, 2006). Any future                 disclosure required by Item 402(e) of Regulation S–
                                         companies.353 We also recognize that                      consideration of this recommendation would be the      K, we have added an instruction to Item 402(c) of
                                                                                                   subject of a separate rulemaking.                      Regulation S–B so that disclosure is not required
                                            348 Instruction to Item 402(k)(2)(iii) and (iv). See     354 Prior to today’s amendments, under both Item     regarding any repricing that occurs through
                                         letter from ABA.                                          402 of Regulation S7–B and Item 402 of Regulation      specified provisions. Instruction to Item 402(c) of
                                            349 The only exception is if all perquisites
                                                                                                   S–K, a small business issuer was not required to       Regulation S–B.
                                         received by the director total less than $10,000, they    provide the Compensation Committee Report, the            359 Item 402(d) of Regulation S–B.

                                         do not need to be disclosed. Further, as described        Performance Graph, the Compensation Committee             360 Item 402(f) of Regulation S–B.
                                         above for the Summary Compensation Table,                 Interlocks disclosure, the Ten-Year Option/SAR            361 Item 402(a) of Regulation S–B. Item 402(c)(7)
                                         disclosure of nonqualified deferred compensation          Repricings Table, and the Option Grant Table           of Regulation S–B requires an identification to the
                                         earnings is limited to the above-market or                columns disclosing potential realizable value or       extent material of any item included under All
                                         preferential portion.                                     grant date value. The rules prior to today’s           Other Compensation in the Summary
                                            350 Instruction 3 to Item 402(c).                      amendments also permitted small business issuers       Compensation Table. However, identification of an
                                            351 Instruction to Item 402(k)(2).                     to exclude the Pension Plan Table.                     item will not be considered material if it does not
                                            352 Item 402(k)(3).                                      355 See, e.g., letters from CII; CRPTF; IUE–CWA;     exceed the greater of $25,000 or 10% of all items
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                                            353 These amendments apply only to small               SBAF; and WSIB.                                        included in the specified category. All items of
                                         business issuers, as defined by Item 10(a)(1) of            356 See, e.g., letters from ISS and Institutional    compensation are required to be included in the
                                         Regulation S–B. The Commission’s Advisory                 Investors Group.                                       Summary Compensation Table without regard to
                                         Committee on Smaller Public Companies has                   357 See letters from America’s Community             whether such items are required to be identified.
                                                                                                                                                             362 See letter from ABA.
                                         recommended that the Commission incorporate the           Bankers (‘‘ACB’’); Independent Community Bankers
                                         scaled disclosure accommodations currently                of America (‘‘ICBA’’); and SCSGP.                         363 Items 402(c) and 402(e) of Regulation S–B.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                     53193

                                         Discussion and Analysis or the related                    required in the proxy and information                       • the Item 201(d) of Regulations S–K
                                         Compensation Committee Report.364                         statements of business development                        and S–B and proxy rule references to
                                                                                                   companies if action is to be taken with                   the Item 402 definition of ‘‘plan;’’ 373
                                         2. Foreign Private Issuers                                                                                            • the Item 601(b)(10) of Regulation S–
                                                                                                   respect to the election of directors or
                                            Prior to today’s amendments, a                         with respect to the compensation                          K reference to the Item 402 treatment of
                                         foreign private issuer was deemed to                      arrangements and other matters                            foreign private issuers; 374 and
                                         comply with Item 402 of Regulation S–                     enumerated in Items 8(b) through (d) of                     • the proxy rule references to Item
                                         K if it provided the information required                 Schedule 14A.369 Business development                     402 retirement plan disclosure.375
                                         by Items 6.B. and 6.E.2. of Form 20–F,                    companies will also be required to make                   III. Revisions to Form 8–K and the
                                         with more detailed information                            these disclosures in their annual reports                 Periodic Report Exhibit Requirements
                                         provided if otherwise made publicly
                                                                                                   on Form 10–K.370                                             As part of our broader effort to revise
                                         available. We proposed to continue this
                                         treatment of these issuers and clarify                       As a result of these amendments, the                   our executive and director
                                         that the treatment of foreign private                     persons covered by the compensation                       compensation disclosure requirements,
                                         issuers under Item 402 parallels that                     disclosure requirements will be                           we proposed revisions to Item 1.01 of
                                         under Form 20–F. Commenters                               changed. The compensation disclosure                      Form 8–K. This item requires real-time
                                         supported this approach, stating that it                  in the proxy and information statements                   disclosure about an Exchange Act
                                         showed appropriate deference to a                         and registration statements of business                   reporting company’s entry into a
                                         foreign private issuer’s home country                     development companies will be                             material definitive agreement outside of
                                         requirements.365 We are adopting these                    required to cover the same officers as for                the ordinary course of the company’s
                                         requirements as proposed.366                              operating companies, including the                        business, as well as any material
                                                                                                   principal executive officer and principal                 amendment to such an agreement. Our
                                         3. Business Development Companies                                                                                   staff’s experience since Item 1.01
                                                                                                   financial officer, as well as the three
                                            As proposed, we are applying the                       most highly compensated executive                         became effective in 2004 suggests that
                                         same executive compensation                               officers that have total compensation                     this item has elicited executive
                                         disclosure requirements to business                       exceeding $100,000,371 instead of each                    compensation disclosure regarding
                                         development companies that we are                         of the three highest paid officers of the                 types of matters that do not appear
                                         adopting for operating companies.367                      company that have aggregate                               always to be unquestionably or
                                         We received no comments on this                                                                                     presumptively material, which is the
                                                                                                   compensation from the company for the
                                         proposal. Our amendments eliminate                                                                                  standard we set for the expanded Form
                                                                                                   most recently completed fiscal year in
                                         the inconsistency between Form 10–K,                                                                                8–K disclosure events.376 We therefore
                                                                                                   excess of $60,000. In addition, the
                                         on the one hand, which requires                                                                                     proposed to revise Items 1.01 and 5.02
                                         business development companies to                         registration statements of business
                                                                                                                                                             of Form 8–K to require real-time
                                         furnish all of the information required                   development companies will no longer                      disclosure of employee compensation
                                         by Item 402 of Regulation S–K, and the                    be required to disclose compensation of                   events that more clearly satisfy this
                                         proxy rules and Form N–2, on the other,                   members of the advisory board or                          standard. We are adopting the revisions
                                         which require business development                        certain affiliated persons of the                         substantially as proposed.
                                         companies to provide some of the                          company.                                                     In addition to the amendments to
                                         information from Item 402 and other                          Finally, under the amendments, the                     Items 1.01 and 5.02 of Form 8–K, we
                                         information that applies to registered                    proxy and information statements and                      proposed to revise General Instruction D
                                         investment companies.                                     registration statements of business                       of Form 8–K to permit companies in
                                            Under the amendments, the                              development companies will not be                         most cases to omit the Item 1.01 heading
                                         registration statements of business                       required to include compensation from                     if multiple items including Item 1.01 are
                                         development companies will be                             the ‘‘fund complex.’’ Previously, this                    applicable, so long as all of the
                                         required to include all of the disclosures                information was required in some                          substantive disclosure required by Item
                                         required by Item 402 of Regulation S–                     circumstances.372                                         1.01 is included. We are adopting this
                                         K for all of the persons covered by Item                                                                            provision as proposed.
                                         402.368 This disclosure will also be                      E. Conforming Amendments
                                                                                                                                                             A. Items 1.01 and 5.02 of Form 8–K
                                           364 We   are also eliminating a provision of Item         The Item 402 amendments necessitate                       Item 1.01 of Form 8–K requires an
                                         402 of Regulation S–K that allows small business          conforming amendments to the Items of                     Exchange Act reporting company to
                                         issuers using forms that call for Regulation S–K          Regulations S–K and S–B and the proxy                     disclose, within four business days, the
                                         disclosure to exclude the disclosure required by
                                         certain paragraphs of that Item. This provision had
                                                                                                   rules that cross reference amended                        company’s entry into a material
                                         been set forth in Item 402(a)(1)(i) of Regulation S–      paragraphs of Item 402. On this basis,                    definitive agreement outside of its
                                         K prior to today’s amendments.                            we are amending:                                          ordinary course of business, or any
                                            365 See, e.g., letters from Federation of German

                                         Industries; DaimlerChrysler AG; and jointly, Allianz         369 Amendment to Item 8 of Schedule 14A. Under            373 Amendments to: Instruction 2 to paragraph (d)
                                         AG, Deutsche Bank AG and Siemens AG.
                                            366 Item 402(a)(1).                                    the amendments, business development companies            of Item 201 of Regulation S–B; Instruction 2 to
                                            367 Business development companies are a
                                                                                                   will no longer be required to respond to Item             paragraph (d) of Item 201 of Regulation S–K;
                                                                                                   22(b)(13) of Schedule 14A, and Item 22(b)(13)(iii) of     Exchange Act Rules 14a–6(a)(4) and 14c–5(a)(4);
                                         category of closed-end investment companies that
                                                                                                   Schedule 14A is being deleted. Amendments to              and Instruction 1 to Item 10 of Schedule 14A.
                                         are not required to register under the Investment
                                                                                                   Item 22(b)(13) of Schedule 14A.                              374 Amendment to Item 601(b)(10)(iii)(C)(5).
                                         Company Act [15 U.S.C. 80a–2(a)(48)].                        370 Item 11 of Form 10–K.                                 375 Amendments to Item 10(b)(1)(ii) and
                                            368 New Item 18.14 of Form N–2. Under the
                                                                                                      371 See Section II.C.6., above.                        Instruction to Item 10(b)(1)(ii) of Schedule 14A.
                                         amendments, business development companies will
                                                                                                      372 See instructions 4 and 6 to Item 22(b)(13)(i) of      376 We stated in Section I of Additional Form 8–
                                         no longer be required to respond to Item 18.13 of
                                         Form N–2, and Item 18.13(c) of Form N–2 is being          Schedule 14A; and instructions 4 and 6 to Item            K Disclosure Requirements and Acceleration of
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                                         deleted. Items 18.14 and 18.15 of Form N–2 are            18.13(a) of Form N–2 (prior to today’s amendments         Filing Date, Release No 33–8400 (Mar. 16, 2004) [69
                                         being redesignated as Items 18.15 and 18.16,              requiring certain entries in the compensation table       FR 15594] (the ‘‘Form 8–K Adopting Release’’):
                                         respectively. As a result of the redesignation of Item    in the proxy and information statements and               ‘‘The revisions that we adopt today will benefit
                                         18.15 of Form N–2, a change to the cross reference        registration statements of business development           markets by increasing the number of
                                         to this Item in Instruction 8(a) of Item 24 of the form   companies to include compensation from the fund           unquestionably or presumptively material events
                                         is also being made.                                       complex).                                                 that must be disclosed currently.’’

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                                         53194             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         amendment of such agreement that is                        • any other management contract or                    executive compensation disclosures that
                                         material to the company. When we                        any other compensatory plan, contract,                   are much more frequent and accelerated
                                         initially proposed this item, several                   or arrangement in which any other                        than those included in a company’s
                                         commenters stated that it would be                      executive officer of the company                         proxy statement. In addition,
                                         difficult to determine, within the                      participates, unless immaterial in                       particularly because of the terms of Item
                                         shortened Form 8–K filing period,                       amount or significance; and                              601(b)(10), Item 1.01 of Form 8–K
                                         whether a particular definitive                            • any compensation plan, contract or                  triggered compensation disclosure of the
                                         agreement met the materiality threshold                 arrangement adopted without the                          types of matters that, in some cases,
                                         of Item 1.01, and whether the agreement                 approval of security holders pursuant to                 appear to have fallen short of the
                                         was outside of the ordinary course of                   which equity may be awarded,                             ‘‘unquestionably or presumptively
                                         business.377 Some of these commenters                   including, but not limited to, options,                  material’’ standard associated with the
                                         suggested that we apply to Item 1.01 the                warrants or rights in which any                          expanded Form 8–K disclosure items.
                                         standards used in pre-existing Item                     employee (whether or not an executive                    Companies and their counsel have
                                         601(b)(10) of Regulation S–K, which                     officer of the company) participates                     raised concerns that the expanded Form
                                         governs the filing as exhibits to                       unless immaterial in amount or                           8–K requirements have resulted in real-
                                         Commission reports of material                          significance.379                                         time disclosure of compensation events
                                         contracts entered into outside the                         Therefore, entry into these types of                  that should be disclosed, if at all, in a
                                         ordinary course, because these                          contracts triggered the filing of a Form                 company’s proxy statement for its
                                         standards had been in place for many                    8–K within four business days.                           annual meeting or as an exhibit to the
                                         years and were familiar to reporting                    Importantly, the requirement for                         company’s next periodic report, such as
                                         companies.378                                           directors and named executive officers                   the Form 10–Q or Form 10–K.
                                            In response to the concerns raised by                does not include an exception for those                     As we stated in the Proposing Release,
                                         these comments, we adopted Item 1.01                    that are ‘‘immaterial in amount or                       we believe that much of the disclosure
                                         of Form 8–K so that it uses the                         significance.’’ The incorporation of the                 regarding employment compensation
                                         standards of Item 601(b)(10) to                         Item 601(b)(10) standards into Item 1.01                 matters required in real-time under the
                                         determine the types of agreements that                  of Form 8–K has therefore significantly                  Form 8–K requirements is viewed by
                                         are material to a company and not in the                affected executive compensation                          investors as material. However, we also
                                         ordinary course of business. Item                       disclosure practices. Prior to the Form                  believe it is appropriate to restore a
                                         601(b)(10) of Regulation S–K requires a                 8–K amendments in 2004, it was                           more balanced approach to this aspect
                                         company to file, as an exhibit to                       customary for a company’s annual                         of Form 8–K, an approach which is
                                         Securities Act and Exchange Act filings,                proxy statement to be the primary                        designed to elicit unquestionably or
                                         material contracts that are not made in                 vehicle for disclosure of executive and                  presumptively material information on a
                                                                                                 director compensation information.
                                         the ordinary course of business and are                                                                          real-time basis, but seeks to limit Form
                                                                                                 However, Item 1.01 of Form 8–K as
                                         to be performed in whole or part at or                                                                           8–K required disclosure of information
                                                                                                 originally adopted has resulted in
                                         after the filing of the registration                                                                             below that threshold.
                                         statement or report, or were entered into                  379 Item 601(b)(10)(iii) of Regulation S–K. We note
                                                                                                                                                             Accordingly, we are adopting
                                         not more than two years before the                      the provision in Item 601(b)(10)(iii)(A) that carves     amendments to Form 8–K that will
                                         filing. Item 601(b)(10)(iii) refers                     out any plan, contract or arrangement in which           uncouple Item 601(b)(10)(iii) of
                                         specifically to employment                              named executive officers and directors do not            Regulation S–K from the current
                                                                                                 participate that is ‘‘immaterial in amount or
                                         compensation arrangements and                           significance.’’ In 1980, the Commission adopted
                                                                                                                                                          disclosure requirements of Form 8–K.
                                         established a company’s obligation to                   amendments to Regulation S–K that consolidated           As proposed, we are eliminating
                                         file the following as exhibits:                         all of the exhibit requirements of various disclosure    employment compensation
                                            • any management contract or any                     forms into a single item in Regulation S–K.              arrangements from the scope of Item
                                                                                                 Amendments Regarding Exhibit Requirements,
                                         compensatory plan, contract or                          Release No. 33–6230 (Aug. 27, 1980) [45 FR 58822],
                                                                                                                                                          1.01 altogether and expanding Item 5.02
                                         arrangement, including but not limited                  at Section II.B. This item was a forerunner of the       of Form 8–K to cover only those
                                         to plans relating to options, warrants or               current Item 601. As part of that 1980 adopting          compensatory arrangements with
                                         rights, pension, retirement or deferred                 release, the definition of material contract             executive officers and directors that we
                                                                                                 contained in the new item was also revised in an
                                         compensation or bonus, incentive or                     effort to reduce the number of remunerative plans        believe are unquestionably or
                                         profit sharing (or if not set forth in any              or arrangements that must be filed. Not long after,      presumptively material. Commenters
                                         formal document, a written description                  though, the staff discovered that rather than reduce     generally supported these proposed
                                         thereof) in which any director or any                   the number of exhibits filed, the provision actually     amendments.380 We are adopting these
                                                                                                 had the opposite effect. The staff found that the
                                         named executive officer (as defined by                  revised definition of material contract ‘‘has resulted   amendments substantially as proposed.
                                         Item 402(a)(3) of Regulation S–K)                       in registrants filing a large volume of varied
                                                                                                 remunerative contracts involving directors and           1. Item 1.01—Entry Into a Material
                                                                                                 executive officers, contracts which are not material     Definitive Agreement
                                                                                                 and which would not have been filed under the
                                           377 See, e.g., letters on Additional Form 8–K
                                                                                                 previously existing ‘material in amount or                 Specifically, we are deleting the last
                                         Disclosure Requirements and Acceleration of Filing      significance’ standard.’’ Technical Amendment            sentence of former Instruction 1 to Item
                                         Date, Release No. 33–8106 (June 17, 2002) [67 FR        Regarding Exhibit Requirement, Release No. 33–           1.01 of Form 8–K, which references the
                                         42914] in File No. S7–22–02 from the Committee          6287 (Feb. 6, 1981) [46 FR 11952], at Section I.
                                         on Federal Regulation of Securities, Section of
                                                                                                                                                          portions of Item 601(b)(10) of Regulation
                                                                                                 Therefore, in February 1981, the Commission added
                                         Business Law of the American Bar Association,           ‘‘unless immaterial in amount or significance’’ to       S–K that specifically relate to
                                         dated September 12, 2002; Cleary, Gottlieb, Steen       the definition of ‘‘material contracts’’ as applied to   management compensation and
                                         & Hamilton, dated August 26, 2002; Intel                remunerative plans, contracts or arrangements            compensatory plans. In place of the
                                         Corporation, dated August 26, 2002; Professor           participated in by executives who are not named
                                         Joseph A. Grundfest, et al. dated October 3, 2002;
                                                                                                                                                          deleted sentence, we are adding a
                                                                                                 executive officers. Id. We reiterate that this phrase
                                                                                                                                                          sentence specifying that agreements
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                                         Perkins Coie LLP, dated August 26, 2002; Shearman       was intended to indicate that whether plans,
                                         & Sterling, dated August 30, 2002; and Sullivan &       contracts or arrangements in which executive
                                         Cromwell, dated August 26, 2002.                        officers other than named executive officers               380 See, e.g., letters from ABA; Chamber of
                                           378 See, e.g., letter in File No. S7–22–02 from the   participate are required to be disclosed under Item      Commerce; N. Ludgus; Committee on Securities
                                         Section of Business Law of the American Bar             601(b)(10) must be determined on the basis of            Regulation of the Business Law Section of the New
                                         Association.                                            materiality.                                             York State Bar Association; SCSGP; and Sullivan.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                     53195

                                         involving the subject matter identified                  amended Item 5.02, one commenter                            • With respect to the principal
                                         in Item 601(b)(10)(iii)(A) and (B) of                    noted that because the definition of                     executive officer, the principal financial
                                         Regulation S–K need not be disclosed                     ‘‘named executive officer’’ is                           officer, or persons falling within the
                                         under amended Item 1.01 of Form 8–K.                     determined with reference to a                           definition of named executive officer for
                                         This change also will apply to the                       company’s last completed fiscal year,                    the company’s previous fiscal year,
                                         disclosure of terminations of material                   greater clarity is needed to determine                   expanding the disclosure items to
                                         definitive agreements under Item 1.02 of                 how the standard should be applied for                   include a brief description of any
                                         Form 8–K, which references the                           current Form 8–K reporting throughout                    material new compensatory plan,
                                         definition of ‘‘material definitive                      the year.383 The commenter suggested                     contract or arrangement, or new grant or
                                         agreement’’ in Item 1.01 of Form 8–K.381                 that companies might find it difficult to                award thereunder (whether or not
                                         Instead of being required to be disclosed                identify their named executive officers                  written), and any material amendment
                                         based on the general requirements with                   for purposes of real-time disclosure                     to any compensatory plan, contract or
                                         regard to material definitive agreements                 under Item 5.02 during the period                        arrangement (or any modification to a
                                         in Item 1.01 and Item 1.02 of Form 8–                    following the completion of their last                   grant or award thereunder), whether or
                                         K, employment compensation                               fiscal year but prior to preparing their                 not such occurrence is in connection
                                         arrangements will now be covered                         proxy statements or Forms 10–K in the                    with a triggering event specified in Item
                                         under Item 5.02 of Form 8–K, as                          new fiscal year. Accordingly, we are                     5.02. Grants or awards or modifications
                                         amended.                                                 including a new Instruction to Item 5.02                 thereto will not be required to be
                                                                                                  that will clarify that for purposes of this              disclosed if they are consistent with the
                                         2. Item 5.02—Departure of Directors or                                                                            terms of previously disclosed plans or
                                                                                                  Item the named executive officers are
                                         Certain Officers; Election of Directors;                                                                          arrangements and they are disclosed the
                                                                                                  the persons for whom disclosure was
                                         Appointment of Certain Officers;                                                                                  next time the company is required to
                                                                                                  required in the most recent filing with
                                         Compensatory Arrangements of Certain                                                                              provide new disclosure under Item 402
                                                                                                  the Commission that required disclosure
                                         Officers                                                                                                          of Regulation S–K; 387 and
                                                                                                  under Item 402(c) of Regulation S–K or
                                            Item 5.02 generally requires                          Item 402(b) of Regulation S–B, as                           • Adding a requirement for disclosure
                                         disclosure within four business days of                  applicable.384                                           of salary or bonus for the most recent
                                         the appointment or departure of                             In general, our revisions to Form 8–                  fiscal year that was not available at the
                                         directors and specified officers. In                     K will both modify the overall                           latest practicable date in connection
                                         particular, Item 5.02(b) has required                    requirements for disclosure of                           with disclosure under Item 402 of
                                         disclosure if a company’s principal                      employment compensation                                  Regulation S–K.388 This disclosure will
                                         executive officer, president, principal                  arrangements on Form 8–K and locate                      also require a new total compensation
                                         financial officer, principal accounting                  all such disclosure under a single item.                 recalculation to reflect the new salary or
                                         officer, principal operating officer, or                 We are accomplishing this by taking the                  bonus information.
                                         any person performing similar                                                                                        In the case of each of these disclosure
                                                                                                  following steps:
                                                                                                                                                           items for amended Item 5.02, we
                                         functions, retires, resigns or is                           • Expanding the information
                                         terminated from that position and Item                                                                            emphasize that we are requiring that a
                                                                                                  regarding retirement, resignation or
                                         5.02(c) has required disclosure if a                                                                              brief description of the specified matter
                                                                                                  termination to include all persons
                                         company appoints a new principal                                                                                  be included. We have observed that in
                                                                                                  falling within the definition of named
                                         executive officer, president, principal                                                                           response to the requirements to disclose
                                                                                                  executive officers for the company’s
                                         financial officer, principal accounting                                                                           the entry into material definitive
                                                                                                  previous fiscal year, whether or not
                                         officer, principal operating officer, or                                                                          agreements under Item 1.01, some
                                                                                                  included in the list specified in Item
                                         any person performing similar                                                                                     companies have included disclosure
                                                                                                  5.02 prior to these amendments; 385                      that resembles an updating of the
                                         functions. Item 5.02 has also required                      • Expanding the disclosure items                      disclosure required under former Item
                                         disclosure if a director retires, resigns, is            covered under Item 5.02 beyond
                                         removed, or declines to stand for re-                                                                             402 of Regulation S–K. In the context of
                                                                                                  employment agreements to require a                       current disclosure under Form 8–K, we
                                         election.382 Before adopting today’s                     brief description of any material plan,
                                         amendments, the required disclosure                                                                               are seeking disclosure that informs
                                                                                                  contract or arrangement to which a                       investors of specified material events
                                         under Item 5.02 included a brief                         covered officer or director is a party or                and developments. However, the
                                         description of the material terms of any                 in which he or she participates that is                  information we are seeking does not
                                         employment agreement between the                         entered into or materially amended in                    require the information necessary to
                                         company and the officer and a                            connection with any of the triggering                    comply with Item 402.
                                         description of disagreements, if any.                    events specified in Item 5.02(c) and (d),                   In response to comments received,389
                                            As proposed, we are modifying Item                    or any grant or award to any such                        we have revised Instruction 2 to new
                                         5.02 to capture generally the                            covered person, or modification thereto,                 Item 5.02(e) from the text we proposed
                                         information already required under that                  under any such plan, contract or                         and created a new Item 5.02(f), as
                                         item, as well as additional information                  arrangement in connection with any                       described above. The revised Instruction
                                         regarding material employment                            such event; 386                                          2 to Item 5.02(e) that we are adopting:
                                         compensation arrangements involving
                                                                                                                                                           (i) Changes or eliminates prior
                                         named executive officers that, prior to                    383 See letter from ABA.                               references to ‘‘original terms’’ and uses
                                         today’s amendments, would be called                        384 Instruction  4 to Item 5.02.                       instead the phrase ‘‘previously
                                         for under Item 1.01.                                       385 Item 5.02(b) of Form 8–K will continue to
                                                                                                                                                           disclosed terms,’’ in order to minimize
                                            With respect to the additional                        cover the officers currently specified therein,
                                         disclosure that we are requiring for                     whether or not named executive officers for the
                                                                                                                                                             387 Item 5.02(e) and Instruction 2 to Item 5.02(e).
                                                                                                  previous or current years, and all directors.
                                         named executive officers under
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                                                                                                    386 Items 5.02(c)(3) and (d)(5). Plans, contracts or     388 Item 5.02(f). See Section II.C.1.b. above for a
                                                                                                  arrangements (but not material amendments or             discussion of the reporting delay that exists under
                                           381 Item 1.02(b) states: ‘‘For purposes of this Item                                                            the current disclosure rules when bonus and salary
                                                                                                  grants or awards or modifications thereto) may be
                                         1.02, the term material definitive agreement shall       denoted by reference to the description in the           are not determinable at the most recent practicable
                                         have the same meaning as set forth in Item 1.01(b).’’    company’s most recent annual report on Form 10–          date.
                                           382 Items 5.02(a) and (b) of Form 8–K.                 K or proxy statement.                                      389 See letter from ABA.

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                                         53196            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         ambiguity; and (ii) clarifies that, for                 In particular, the burden resulting from              contracts or compensatory plans in
                                         purposes of the Instruction, no                         a company’s sudden loss of eligibility to             which directors or members of
                                         distinction should be made between                      use Form S–3 could be a                               management participate generally were
                                         awards granted under cash or equity-                    disproportionately large negative                     required to be filed as exhibits, unless
                                         based plans. New Item 5.02(f) responds                  consequence of an untimely Form 8–K                   the foreign private issuer provided
                                         to comments we received that our                        filing under one of the specified                     compensation information on an
                                         proposed Instruction 3 to 5.02(e) should                items.393 We believe that this safe                   aggregate basis and not on an individual
                                         be codified as a separate item because                  harbor should be extended to Item                     basis. Under those pre-amendment
                                         it called for disclosure (determining                   5.02(e) of Form 8–K and, therefore, we                provisions, an issuer that provided any
                                         salary or bonus amounts for a completed                 are amending General Instruction                      individualized compensation disclosure
                                         fiscal year) that otherwise may not be                  I.A.3.(b) of Form S–3, which pertains to              was required to file as an exhibit to
                                         required under Item 5.02(e).390                         the eligibility requirements for use of               Form 20–F management employment
                                                                                                 Form S–3 to reflect this position.                    agreements that potentially relate to
                                         B. Extension of Limited Safe Harbor
                                                                                                                                                       matters that have not otherwise been
                                         Under Section 10(b) and Rule 10b–5 to                   C. General Instruction D to Form 8–K                  disclosed.
                                         Item 5.02(e) of Form 8–K and Exclusion                                                                           Our amendment of the exhibit
                                                                                                    We are adopting the revision to
                                         of Item 5.02(e) From Form S–3 Eligibility                                                                     instructions to Form 20–F 395 is
                                                                                                 General Instruction D as proposed.
                                         Requirements                                                                                                  intended to be consistent with the
                                                                                                 Frequently, an event may trigger a Form
                                            We are extending the safe harbors                    8–K filing under multiple items,                      existing disclosure requirements under
                                         regarding Section 10(b) and Rule 10b–5                  particularly under both Item 1.01 and                 Form 20–F relating to executive
                                         and Form S–3 eligibility in the event                   another item. General Instruction D to                compensation matters for foreign private
                                         that a company fails to timely file                     Form 8–K permits a company to file a                  issuers. In the same way that executive
                                         reports required by Item 5.02(e) of Form                single Form 8–K to satisfy one or more                compensation disclosure under Form
                                         8–K.                                                    disclosure items, provided that the                   20–F largely mirrors the disclosure that
                                            In March 2004, we adopted a limited                  company identifies by item number and                 a foreign private issuer makes under
                                         safe harbor from liability under Section                caption all applicable items being                    home country requirements or
                                         10(b) of the Exchange Act and Rule 10b–                 satisfied and provides all of the                     voluntarily, so too the public filing of
                                         5 thereunder for failure to timely file                 substantive disclosure required by each               management employment agreements as
                                         reports required by Form 8–K Items                      of the items. In order to promote prompt              an exhibit to Form 20–F under our
                                         1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a)             filings on Form 8–K and avoid potential               amendments will mirror the public
                                         and 6.03. Because we believed that                      non-compliance with Form 8–K due to                   availability of such agreements under
                                         these items may require management to                   inadvertent exclusions of captions, we                home country requirements or
                                         make rapid materiality and similar                      are amending General Instruction D to                 otherwise. In addition, we believe that
                                         judgments within the condensed                          permit companies to omit the Item 1.01                the amendments may encourage foreign
                                         timeframe required for filing of a Form                 heading in a Form 8–K that also                       private issuers to provide more
                                         8–K, we established a safe harbor that                  discloses any other item, so long as the              compensation disclosure in their filings
                                         applies until the filing due date of the                substantive disclosure required by Item               with the Commission by eliminating
                                         company’s quarterly or annual report for                1.01 is included in the Form 8–K. This                privacy concerns associated with filing
                                         the period in question. We concluded                    would not extend to allowing a                        an individual’s employment agreement
                                         that the risk of liability under these                  company to omit any other caption if                  when such agreement is not required to
                                         provisions for the failure to timely file               the Item 1.01 caption is included.                    be made public by a home country
                                         was disproportionate to the benefit of                                                                        exchange or securities regulator. As
                                         real-time disclosure and therefore                      D. Foreign Private Issuers                            foreign disclosure related to executive
                                         justified the need for a limited safe                      We are amending the exhibit                        remuneration varies in different
                                         harbor of a fixed duration. For the same                instructions to Form 20–F so that                     countries but continues to improve,396
                                         reasons, we believe that the safe harbor                foreign private issuers will be required              the revisions recognize that trend and
                                         should also extend to Item 5.02(e) of                   to file an employment or compensatory                 provide for greater harmonization of
                                         Form 8–K. We therefore are amending                     plan with management or directors (or                 international disclosure standards with
                                         Exchange Act Rules 13a–11(c) and 15d–                   portion of such plan) only when the                   respect to executive compensation in a
                                         11(c) accordingly.                                      foreign private issuer either is required             manner consistent with other
                                            In addition, a company forfeits its                  to publicly file the plan (or portion of              requirements of Form 20–F.
                                         eligibility to use Form S–3 if it fails to              it) in its home country or if the foreign             IV. Beneficial Ownership Disclosure
                                         timely file all reports required under                  private issuer has otherwise publicly
                                         Exchange Act Section 13(a) or 15(d)                     disclosed the plan.394                                  Item 403 requires disclosure of
                                         during the 12 month period prior to                        Under Item 6.B.1 of Form 20–F, a                   company voting securities beneficially
                                         filing of the registration statement.391                foreign private issuer must disclose the              owned by more than five percent
                                         For the same reasons, when adopting                     compensation of directors and                         holders,397 and company equity
                                         the expanded Form 8–K rules in 2004,                    management on an aggregate basis and,                 securities beneficially owned by
                                         we revised the Form S–3 eligibility                     additionally, on an individual basis,
                                                                                                                                                         395 New Instruction 4(c)(v) to Exhibits to Form
                                         requirements so that a company would                    unless individual disclosure is not                   20–F.
                                         not lose its eligibility to use Form S–3                required in the issuer’s home country                   396 Many jurisdictions now require or encourage
                                         registration statements if it failed to                 and is not otherwise publicly disclosed               disclosure of executive compensation information.
                                         timely file reports required by the Form                by the foreign private issuer. Under the              For example, enhanced disclosure of executive
                                         8–K items to which the Section 10(b)                    exhibit instructions to Form 20–F prior               remuneration is included as part of the European
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                                                                                                                                                       Commission’s 2003 Company Law Action Plan. See
                                         and Rule 10b–5 safe harbor applies.392                  to our amendments, management                         Guido Ferrarini and Niamh Moloney, Executive
                                                                                                                                                       Remuneration in the EU: The Context for Reform,
                                           390 Seeletter from ABA.                                 393 Id.                                             European Corporate Governance Institute, Law
                                           391 General Instruction I.A.3 to Form S–3.              394 We are also making a similar revision to Item   Working Paper N. 32/2005 (April 2005).
                                           392 Form 8–K Adopting Release, at Section II.E.       601(b)(10)(iii)(C)(5) of Regulation S–K.                397 Item 403(a).

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                  53197

                                         directors, director nominees and named                  complete tally of the securities                           • Item 404(a) contains a general
                                         executive officers.398 These disclosure                 beneficially owned by directors.                        disclosure requirement for related
                                         requirements provide investors with                        One commenter recommended that                       person transactions, including those
                                         information regarding concentrated                      we expand this section to also require                  involving indebtedness.
                                         holdings of voting securities and                       disclosure of hedging arrangements                         • Item 404(b) requires disclosure
                                         management’s equity stake in the                        whereby the executive has altered his or                regarding the company’s policies and
                                         company, including securities for which                 her economic interest in the securities                 procedures for the review, approval or
                                         these holders have the right to acquire                 that he or she beneficially owns.405                    ratification of related person
                                         beneficial ownership within 60 days.399                 These transactions frequently involve                   transactions.
                                         Item 403 also requires disclosure of                    the purchase or sale of a derivative                       • Item 404(c) requires disclosure
                                         arrangements known to the company                       security that the named executive                       regarding promoters and certain control
                                         that may result in a change in control of               officer would be required to report                     persons of a company.410
                                         the company.400                                         within two business days under Section                     • Item 407 consolidates corporate
                                            As proposed, we are amending Item                    16(a) of the Exchange Act.406 Because                   governance disclosure requirements.411
                                         403(b) 401 by adding a requirement for                  information concerning these                            Also, Item 407(a) requires disclosure
                                         footnote disclosure of the number of                    transactions frequently would be                        regarding the independence of directors,
                                         shares pledged as security by named                     available on a prompt basis in the                      including whether each director and
                                         executive officers, directors and director              Section 16(a) filings and companies                     nominee for director of the company is
                                         nominees.402 To the extent that shares                  would disclose their policies regarding                 independent, as well as a description by
                                         beneficially owned by named executive                   these transactions in Compensation                      specific category or type of any
                                         officers, directors and director nominees               Discussion and Analysis,407 we have not                 transactions, relationships or
                                         are used as collateral, these shares may                followed the commenter’s                                arrangements not disclosed under
                                         be subject to material risk or                          recommendation.                                         paragraph (a) of Item 404 that were
                                         contingencies that do not apply to other                                                                        considered when determining whether
                                                                                                 V. Certain Relationships and Related                    each director and nominee for director
                                         shares beneficially owned by these
                                                                                                 Transactions Disclosure                                 is independent.
                                         persons. These circumstances have the
                                         potential to influence management’s                        As we explained in the Proposing
                                                                                                                                                         A. Transactions With Related Persons
                                         performance and decisions.403 As a                      Release, we believe that, in addition to
                                         result, we believe that the existence of                disclosure regarding executive                             We are adopting amendments to Item
                                         these securities pledges could be                       compensation, a materially complete                     404 to make the certain relationships
                                         material to shareholders. Because                       picture of financial relationships with a               and related transactions disclosure
                                         significant shareholders who are not                    company involves disclosure regarding                   requirements clearer and easier to
                                         members of management are in a                          related party transactions. Therefore, we               follow. The revisions retain the
                                         different relationship with other                       are also adopting significant revisions to              principles for disclosure of related
                                         shareholders and have different                         Item 404 of Regulation S–K, previously                  person transactions that were previously
                                         obligations to them, the amendments do                  titled ‘‘Certain Relationships and                      specified in Item 404(a), but no longer
                                         not require disclosure of their pledges                 Related Transactions.’’ In 1982, various                include all of the instructions that
                                         pursuant to Item 403(a), other than                     provisions that had been adopted in a                   served to delineate what transactions
                                         pledges that may result in a change of                  piecemeal fashion and had been subject                  are reportable or excludable from
                                         control currently required to be                        to frequent amendment were                              disclosure based on bright lines that can
                                         disclosed.404 The amendments also                       consolidated into Item 404 of Regulation                depart from a more appropriate
                                         specifically require disclosure of                      S–K.408 Today we are amending Item                      materiality analysis. Instead, Item 404(a)
                                         beneficial ownership of directors’                      404 of Regulation S–K and S–B to                        as amended consists of a general
                                         qualifying shares, which was not                        streamline and modernize this                           statement of the principle for disclosure,
                                         required prior to these amendments,                     disclosure requirement, while making it                 followed by specific disclosure
                                         because we believe the beneficial                       more principles-based. Although the                     requirements and instructions. The
                                         ownership disclosure should include a                   amendments significantly modify this                    instructions to Item 404(a) explain the
                                                                                                 disclosure requirement, its purpose—to                  related persons covered by the Item, the
                                           398 Item  403(b).                                     elicit disclosure regarding transactions                scope of transactions covered by the
                                           399 As  specified in Exchange Act Rule 13d–3(d)(1)    and relationships, including                            Item, the method for computation of the
                                         [17 CFR 240.13d–3(d)(1)].                               indebtedness, involving the company                     amount involved in the transaction,
                                            400 Item 403(c).
                                                                                                 and related persons and the                             special requirements regarding
                                            401 Item 403(b) of Regulation S–K and Item 403(b)
                                                                                                 independence of directors and                           indebtedness, the interaction with Item
                                         of Regulation S–B are both amended in the same
                                         manner.                                                 nominees for director and the interests                 402, the materiality of certain interests,
                                            402 This was similar to a proposal the Commission    of management—remains unchanged.                        and the circumstances in which
                                         made in 2002. See Form 8–K Disclosure of Certain           As discussed in greater detail below,                disclosure need not be provided.
                                         Management Transactions, Release No. 33–8090            the amendments have four parts: 409
                                         (Apr. 12, 2002) [67 FR 19914].                                                                                  to Items of Regulation S–K, unless otherwise
                                            403 See, e.g., Marianne M. Jennings, The
                                                                                                   405 See                                               indicated.
                                         Disconnect Between and Among Legal Ethics,                        letter from ABA.                                 410 Prior to adoption of these amendments,
                                                                                                   406 15 U.S.C. 78p(a).
                                         Business Ethics, Law, and Virtue: Learning Not to                                                               disclosure regarding promoters was required under
                                                                                                   407 See Item 402(b)(2)(xiii) of Regulation S–K,
                                         Make Ethics So Complex, 1 U. St. Thomas L.J. 995,                                                               Item 404(d).
                                         1010 (Spring 2004) (arguing that the extension of       discussed in Section II.B.1., above.                       411 These matters previously were required to be
                                         loans to the CEO of WorldCom, which were                  408 See the 1982 Release. For a discussion of these
                                                                                                                                                         disclosed pursuant to various provisions, including
                                         collateralized by WorldCom shares owned by the          provisions, see also Disclosure of Certain              Item 7 of Schedule 14A and Items 306, 401(h), (i)
                                         CEO, contributed to WorldCom’s financial demise).       Relationships and Transactions Involving                and (j), 402(j) and 404(b). We are eliminating as
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                                         Regarding commenters’ views, contrast letters from      Management, Release No. 33–6416 (July 9, 1982)          proposed the requirement for disclosure regarding
                                         Frederic W. Cook & Co.; PB–UCC; and SBAF with           [47 FR 31394], at Section II.                           specific director and director nominee relationships
                                         letters from FSR; NACCO Industries; Unitrin; and          409 The discussion that follows focuses on            that had been set forth in Item 404(b) prior to
                                         Compass Bancshares.                                     changes to Regulation S–K, with Section V.E.1.          today’s amendments, in favor of the disclosures
                                            404 Item 403(c) of Regulation S–K. See also Items    explaining the modifications to Regulation S–B.         regarding director independence required by Item
                                         6 and 7(3) of Schedule 13D [17 CFR 240.13d–101].        References throughout the following discussion are      407(a).

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                                         53198             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                            Item 404(a) as adopted extends to                     determining the materiality of the                      filed pursuant to the Securities Act or
                                         disclosure of indebtedness, by                           information to investors.                               the Exchange Act.416
                                         consolidating the disclosure formerly                       We are also eliminating as proposed                     One commenter questioned whether
                                         required under Item 404(a) regarding                     an instruction to Item 404(a) which had                 changing the test of company
                                         transactions involving the company and                   indicated that the dollar threshold is not              involvement from being a ‘‘party’’ to a
                                         related persons with the disclosure                      a bright line materiality standard.414 It               transaction to being a ‘‘participant’’ in a
                                         regarding indebtedness which had been                    remains true, however, that when the                    transaction is intended to be a
                                         separately required by Item 404(c) prior                 amount involved in a transaction                        substantive change.417 The purpose of
                                         to these amendments. We have                             exceeds the prescribed threshold                        this change is to more accurately
                                         consolidated these two provisions                        ($120,000 under the amended rule we                     connote the company’s involvement in
                                         substantially as proposed in order to                    adopt today), a company should                          a transaction by clarifying that being a
                                         eliminate confusion regarding the                        evaluate whether the related person has                 ‘‘participant’’ encompasses situations
                                         circumstances in which each item                         a direct or indirect material interest in               where the company benefits from a
                                         applied and to streamline duplicative                    the transaction to determine if                         transaction but is not technically a
                                         portions of Item 404.                                    disclosure is required. We eliminated                   contractual ‘‘party’’ to the
                                                                                                  the instruction because it was repetitive               transaction.418
                                         1. Broad Principle for Disclosure                        of the general materiality standard                        Commenters expressed diverse views
                                            Item 404(a) as proposed and adopted                   applicable to the Item. We believe that                 on the appropriate disclosure threshold.
                                         articulates a broad principle for                        application of the materiality principles               While some commenters supported
                                         disclosure; it states that a company must                under the Item are more consistent with                 increasing the threshold for disclosure
                                         provide disclosure regarding:                            a principles-based approach and will                    from $60,000 to $120,000,419 others
                                            • Any transaction since the beginning                 lead to more appropriate disclosure                     recommended retaining the $60,000
                                         of the company’s last fiscal year, or any                outcomes than application of the                        threshold,420 using a minimal dollar
                                         currently proposed transaction;                          instruction that was eliminated. By                     threshold,421 not including any de
                                            • In which the company was or is to                   deleting this instruction, we do not                    minimis dollar threshold,422 or
                                         be a participant;                                        intend to change the materiality                        increasing the threshold even further
                                                                                                  standard applicable to Item 404(a). As                  through use of a sliding scale.423 We
                                            • In which the amount involved
                                                                                                  was the case with Item 404(a) prior to                  believe that a fixed dollar amount for
                                         exceeds $120,000; and
                                                                                                  adoption of these amendments, there                     the disclosure threshold will provide
                                            • In which any related person had or                                                                          the most certainty as to the size of
                                         will have a direct or indirect material                  may be situations where, although the
                                                                                                  instructions to Item 404(a) do not                      transactions that must be tracked for
                                         interest.                                                                                                        disclosure purposes under Item 404,424
                                                                                                  expressly provide that disclosure is not
                                            As proposed, amended Item 404(a) no                                                                           and that increasing the dollar amount of
                                                                                                  required, the interest of a related person
                                         longer includes an instruction that is                                                                           the threshold based on inflation is
                                                                                                  in a particular transaction is not a direct
                                         repetitive of the general materiality                                                                            appropriate given the amount of time
                                                                                                  or indirect material interest. In that case,
                                         standard applicable to the Item.412 By                                                                           that has elapsed since it was last set
                                                                                                  information regarding such interest and
                                         omitting this instruction, we do not                                                                             nearly twenty-five years ago.
                                                                                                  transaction is not required to be
                                         intend to change the materiality                                                                                    Finally, the rule changes include as
                                                                                                  disclosed under Item 404(a).
                                         standard applicable to Item 404(a). The                                                                          proposed a technical modification. Prior
                                                                                                     In addition, as proposed the
                                         materiality standard for disclosure                                                                              to today’s amendments, Item 404(a)
                                         embodied in Item 404(a) prior to these                      • Call for disclosure if a company is                stated that disclosure was required
                                         amendments is retained; a company                        a ‘‘participant’’ in a transaction, rather
                                         must disclose based on whether the                       than if it is ‘‘a party’’ to the transaction,              416 However, if the disclosure is being

                                         related person had or will have a direct                 as ‘‘participant’’ more accurately                      incorporated by reference into a registration
                                         or indirect material interest in the                                                                             statement on Form S–4, the additional two years of
                                                                                                  connotes the company’s involvement;                     disclosure will not be required, as specified in
                                         transaction. The materiality of any                         • Modify the $60,000 threshold for                   Instruction 1 to Item 404.
                                         interest will continue to be determined                  disclosure to $120,000 to adjust for                       417 See letter from Sullivan. See also letter from
                                         on the basis of the significance of the                  inflation;                                              SCSGP.
                                         information to investors in light of all                    • Include a defined term for
                                                                                                                                                             418 For example, disclosure would be required if

                                         the circumstances.413 As was the case                                                                            a company benefits from a transaction with a
                                                                                                  ‘‘transaction’’ to provide that it includes             related person that the company has arranged and
                                         before adoption of amended Item 404(a),                  a series of similar transactions and to                 in which it participates, notwithstanding the fact
                                         the relationship of the related persons to               make clear its broad scope; and                         that it is not a party to a contract.
                                         the transaction, and with each other, the                   • Include a defined term for ‘‘related                  419 See, e.g., letters from BRT and Sullivan.

                                         importance of the interest to the person                 persons.’’ 415                                             420 See, e.g., letters from Amalgamated and

                                         having the interest and the amount                                                                               CalSTRS.
                                                                                                     As was the case before these                            421 See letter from Teamsters (recommending a
                                         involved in the transaction are among                    amendments, disclosure is required for                  $250 disclosure threshold).
                                         the factors to be considered in                          three years in registration statements                     422 See, e.g., letters from CII and ISS.
                                                                                                                                                             423 See letter from SCSGP recommending a
                                            412 Prior to today’s amendments, Instruction 1 to        414 Prior to today’s amendments, Instruction 9 to    disclosure threshold for companies that are not
                                         Item 404(a) had stated that ‘‘[t]he materiality of any   Item 404(a) had stated that ‘‘There may be              small business issuers of the greater of $120,000 or
                                         interest is to be determined on the basis of the         situations where, although these instructions do not    a percentage (which it believes could be as low as
                                         significance of the information to investors in light    expressly authorize nondisclosure, the interest of a    two percent) of consolidated gross revenues of the
                                         of all the circumstances of the particular case. The     person specified in paragraphs (a)(1) through (4) in    recipient for certain types of transactions.
                                         importance of the interest to the person having the      a particular transaction or series of transactions is      424 The disclosure threshold in amended Item
                                         interest, the relationship of the parties to the         not a direct or indirect material interest. In that     404(a) of Regulation S–B is the lesser of $120,000
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                                         transaction with each other and the amount               case, information regarding such interest and           or one percent of the average of the small business
                                         involved in the transactions are among the factors       transaction is not required to be disclosed in          issuer’s total assets at year-end for the last three
                                         to be considered in determining the significance of      response to this paragraph.’’                           completed fiscal years because we believe that
                                         the information to investors.’’                             415 The ‘‘related persons’’ covered by the           transactions that are below $120,000 can be
                                            413 See Basic v. Levinson and TSC Industries v.       amended Item are discussed below in Section             significant for small business issuers given their
                                         Northway.                                                V.A.1.b.                                                relative size.

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                                                            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                      53199

                                         regarding situations involving ‘‘the                       of indebtedness transactions of                           or relationship or any series of similar
                                         registrant or any of its subsidiaries.’’                   significant shareholders (or their                        transactions, arrangements or
                                         Because companies must include                             immediate family members).429 Another                     relationships. The definition of
                                         subsidiaries in making materiality                         result of integrating the disclosure                      ‘‘transaction’’ also specifically notes that
                                         determinations in all circumstances, the                   requirements that had been specified in                   the term includes indebtedness and
                                         reference to ‘‘subsidiaries’’ is                           paragraph (c) of Item 404 into paragraph                  guarantees of indebtedness.
                                         superfluous, and we have therefore                         (a) of Item 404, is that the rule changes                    The definition of ‘‘related person’’
                                         eliminated it. This modification does                      set a $120,000 threshold and require                      identifies the persons covered, and
                                         not change the scope of disclosure                         disclosure if there is a direct or indirect               clarifies the time periods during which
                                         required under the Item.425                                material interest in an indebtedness                      they are covered. The term ‘‘related
                                                                                                    transaction, while prior to these                         person’’ 433 means any person who was
                                         a. Indebtedness                                                                                                      in any of the following categories at any
                                                                                                    amendments Item 404(c) required
                                            Section 402 of the Sarbanes-Oxley Act                   disclosure of all indebtedness exceeding                  time during the specified period for
                                         prohibits most personal loans by a                         $60,000.430 For example, under                            which disclosure under paragraph (a) of
                                         company to its officers and directors.426                  amended Item 404(a) disclosure is                         Item 404 is required:
                                         This development raises the issue of                       required if an executive officer had a                       • Any director or executive officer of
                                         whether disclosure of indebtedness of                      material indirect interest in an                          the company and his or her immediate
                                         the sort required under our rules prior                    indebtedness transaction (exceeding                       family members; and
                                         to the amendments should be                                $120,000) between the company and                            • If disclosure were provided in a
                                         maintained. We believe that the                            another entity due to that executive                      proxy or information statement relating
                                         approach to disclosure of indebtedness                     officer’s ownership interest in the other                 to the election of directors, any nominee
                                         involving related persons that we adopt                    entity. Disclosure of material indirect                   for director and the immediate family
                                         today is appropriate because of the                        interests of related persons in                           members of any nominee for director.
                                         scope of the direct and indirect interests                 transactions involving the company will                      In addition, a security holder known
                                         covered by our disclosure requirements,                    be required by Item 404(a) as amended,                    to the company to beneficially own
                                         because related persons include persons                    just as it was prior to adoption of these                 more than five percent of any class of
                                         not covered by the prohibitions, and                       amendments. We believe that disclosure                    the company’s voting securities or any
                                         because there are certain exceptions to                    requirements for indebtedness and for                     immediate family member of any such
                                         the prohibitions. We have, however,                        other related person transactions should                  person, when a transaction in which
                                         eliminated the distinction between                         be congruent. In particular, we believe                   such security holder or family member
                                         indebtedness and other types of related                    that loans by companies other than                        had a direct or indirect material interest
                                         person transactions.                                       financial institutions should be treated                  occurred or existed, is also a related
                                            As a result of integrating what had                     like any other related person                             person.
                                         been required to be disclosed under                        transactions; however, as discussed                          The definition of ‘‘related person’’
                                         paragraph (c) of Item 404 into paragraph                   below,431 we address certain ordinary                     that we have adopted will require
                                         (a) of Item 404, the rule proposals would                  course loans by financial institutions in                 disclosure of related person transactions
                                         have changed the situations in which                       an instruction to Item 404(a).                            involving the company and a person
                                         indebtedness disclosure is necessary by                                                                              (other than a significant shareholder or
                                         requiring disclosure of indebtedness                       b. Definitions                                            immediate family member of such
                                         transactions with regard to all related                       We have defined the terms                              shareholder) that occurred during the
                                         persons covered by the related person                      ‘‘transaction,’’ ‘‘related person’’ and                   last fiscal year, if the person was a
                                         transaction disclosure requirement,                        ‘‘amount involved’’ substantially as                      ‘‘related person’’ during any part of that
                                         including significant shareholders.427                     proposed in order to streamline Item                      year.434 A person who had a position or
                                         Some commenters questioned whether                         404(a) and to clarify the broad scope of                  relationship giving rise to the person
                                         disclosure of indebtedness of significant                  financial transactions and relationships                  being a ‘‘related person’’ during only
                                         shareholders would be useful to                            covered by the rule.                                      part of the last fiscal year may have had
                                         investors and whether companies would                         The term ‘‘transaction’’ has a broad                   a material interest in a transaction with
                                         have access to the information necessary                   scope in Item 404(a).432 This term is not                 the company during that year. While
                                         to provide this disclosure.428 In                          to be interpreted narrowly, but rather                    prior to these amendments Item 404(a)
                                         response to these comments, the                            broadly includes, but is not limited to,                  did not indicate whether disclosure was
                                         amendments do not require disclosure                       any financial transaction, arrangement                    required for the transaction in this
                                                                                                                                                              situation, the history of Item 404
                                            425 For the same reason, we have eliminated as             429 See Instruction 4.b. to Item 404(a). Disclosure
                                                                                                                                                              suggests that disclosure was required if
                                         proposed the references to ‘‘subsidiaries’’ in the         would be required, however, if the significant
                                         ‘‘compensation committee interlocks and insider            shareholder (or such shareholder’s immediate              the requisite relationship existed at the
                                         participation in compensation decisions’’                  family member) was also a related person specified        time of the transaction, even if the
                                         disclosure requirement adopted in Item 407(e)(4).          in Instruction 1.a. to Item 404(a), for example, if the   person was no longer a related person
                                         This revision does not change the scope of                 significant shareholder was also an executive
                                         disclosure required under the rule.                        officer.
                                                                                                                                                              at the end of the year.435 We believe
                                            426 Codified in Section 13(k) of the Exchange Act          430 Prior to these amendments, Item 404(c) also
                                                                                                                                                                433 Instruction  1 to Item 404(a).
                                         [15 U.S.C. 78m(k)].                                        had required disclosure of some specific indirect
                                            427 Prior to today’s amendments, the related            interests of directors, nominees for director, and          434 As  proposed, the principle for disclosure that
                                         person transaction disclosure requirement in Item          executive officers of the company in indebtedness         we have adopted only applies to nominees for
                                         404(a) covered significant shareholders, while the         through corporations, organizations, trusts, and          director if disclosure is being provided in a proxy
                                         indebtedness disclosure requirement in Item 404(c)         estates. Disclosure of these specific interests had       or information statement involving the election of
                                         did not. The significant shareholders covered by           been required by subparagraphs (c)(4) and (c)(5) of       directors. Also, as proposed, ongoing disclosure is
                                         Item 404(a) as adopted will continue to be any             Item 404. Under the amendments, these                     not required regarding nominees for director who
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                                         security holder who is known to the company to             subparagraphs have been eliminated as duplicative         were not elected (unless a nominee has been
                                         beneficially own more than five percent of any class       and the need for disclosure in these situations will      nominated again for director).
                                         of the company’s voting securities. See Instruction        be determined using a materiality analysis under             435 This position, which had been included in the
                                         1.b.i. to Item 404(a).                                     the principle for disclosure in Item 404(a).              proxy rule provisions that were the precursor to
                                                                                                       431 See Section V.A.3. below.
                                            428 See, e.g., letter from Sullivan. See also, letter                                                             Item 404, was deleted from those provisions in 1967
                                         from SCSGP.                                                   432 Instruction 2 to Item 404(a).                                                                 Continued

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                                         53200             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         that, because of the potential for abuse                prior to these amendments regarding                     the context of the transaction that is
                                         and the close proximity in time between                 how to determine the ‘‘amount                           material to investors in light of the
                                         the transaction and the person’s status                 involved’’ in transactions, and clarifies               circumstances of the particular
                                         as a ‘‘related person,’’ it is appropriate              that the amounts reported must be in                    transaction.
                                         to require disclosure for transactions in               dollars even if the amount was set or                      As was the case prior to adoption of
                                         which the person had a material interest                expensed in a different currency. As                    these amendments, the dollar value of
                                         occurring at any time during the fiscal                 adopted, the term ‘‘amount involved’’                   the related person’s interest in the
                                         year. For example, it is possible that a                means the dollar value of the                           transaction will be computed without
                                         material interest of a person in a                      transaction, or series of similar                       regard to the amount of the profit or loss
                                         transaction during this timeframe could                 transactions, and includes:                             involved in the transaction.441 One
                                         influence the person’s performance of                      • In the case of any lease or other                  commenter pointed out that the
                                         his or her duties.                                      transaction providing for periodic                      proposals expanded the application of
                                            We believe that transactions with                    payments or installments, the aggregate                 this provision to also cover the
                                         persons who have been or who will                       amount of all periodic payments or                      computation of the ‘‘amount involved’’
                                         become significant shareholders (or                     installments due on or after the                        when the provision was moved from an
                                         their immediate family members), but                    beginning of the company’s last fiscal                  instruction into the body of Item
                                         are not at the time of the transaction,                 year, including any required or optional                404(a).442 In streamlining Item 404(a),
                                         raise different considerations and are                  payments due during or at the                           we did not intend to change the scope
                                         harder to track, and thus we are                        conclusion of the lease or other                        of the prior instruction. Therefore, the
                                         excluding them as proposed. Disclosure                  transaction providing for periodic                      final rule clarifies the context in which
                                         will be required, however, regarding a                  payments or installments; 438 and                       profit or loss is not to be considered.
                                         transaction that begins before a                           • In the case of indebtedness, the                      Consistent with the principles-based
                                         significant shareholder becomes a                       largest aggregate amount of all                         approach that we are applying to related
                                         significant shareholder, and continues                  indebtedness outstanding at any time                    person transaction disclosure, we are
                                         (for example, through the on-going                      since the beginning of the company’s                    eliminating an instruction that, in the
                                         receipt of payments) on or after the time               last fiscal year and all amounts of                     case of a related person transaction
                                         that the person becomes a significant                   interest payable on it during the last                  involving a purchase or sale of assets by
                                         shareholder.                                            fiscal year.439                                         or to the company otherwise than in the
                                            We are adopting the definition of                                                                            ordinary course of business, called for
                                         ‘‘immediate family member’’ as                          2. Disclosure Requirements                              specific disclosure of the cost of the
                                         proposed. Under Item 404(a), the term                      Subparagraphs of Item 404(a) as                      assets to the purchaser, and if acquired
                                         ‘‘immediate family member’’ means any                   adopted provide the disclosure                          within two years of the transaction, the
                                         child, stepchild, parent, stepparent,                   requirements for related person                         cost of the assets to the seller and
                                         spouse, sibling, mother-in-law, father-                 transactions. The company will be                       related information about the price of
                                         in-law, son-in-law, daughter-in-law,                    required to describe the transaction,                   the assets. We note, however, that if
                                         brother-in-law, or sister-in-law, and any               including:                                              such information is material under the
                                         person (other than a tenant or employee)                   • The person’s name and relationship                 revised standards of Item 404(a),
                                         sharing the household of any director,                  to the company;                                         because, for example, the recent
                                         nominee for director, executive officer,                   • The person’s interest in the                       purchase price to the related person is
                                         or significant shareholder of the                       transaction with the company,                           materially less than the sale price to the
                                         company. The amended definition                         including the related person’s position                 company, or the sale price to the related
                                         differs from the former definition in that              or relationship with, or ownership in, a                person is materially more than the
                                         it includes stepchildren, stepparents,                  firm, corporation, or other entity that is              recent purchase price to the company,
                                         and any person (other than a tenant or                  a party to or has an interest in the                    disclosure of such prior purchase price
                                         employee) sharing the household of a                    transaction; and                                        and related information about the prices
                                         director, nominee for director, executive                  • The approximate dollar value of the                could be required.
                                         officer, or significant shareholder of the              amount involved in the transaction and                     Prior to adoption of today’s
                                         company.436                                             of the related person’s interest in the                 amendments, disclosure was required
                                            The amended definition of ‘‘amount                   transaction.440                                         under Item 404(c) regarding amounts
                                         involved’’ is adopted as proposed.437                      Companies will also be required to                   possibly owed to the company under
                                         The definition incorporates two                         disclose any other information regarding                Section 16(b) of the Exchange Act.443
                                         concepts that were included in Item 404                 the transaction or the related person in                We believe that the purpose of related
                                                                                                                                                         person transaction disclosure differs
                                         as duplicative of a note that applied to all of the        438 Prior to today’s amendments, Instruction 3 to    from the purpose of Section 16(b), and
                                         disclosure required in Schedule 14A (including the      Item 404(a) had provided guidance regarding             one commenter expressed support for
                                         related party disclosure requirement in Schedule        computing the amount involved in lease or other         eliminating this requirement.444
                                         14A). Adoption of Amendments to Proxy Rules and         agreements providing for periodic payments or           Accordingly, the rule amendments
                                         Information Rules, Release No. 34–8206 (Dec. 14,        installments.
                                         1967) [32 FR 20960], at ‘‘Schedule 14A—Item7(f).’’         439 Prior to today’s amendments, the basis for
                                                                                                                                                         eliminate this former Section 16(b)-
                                         Before today’s amendments, Note C to Schedule           determining the amount involved in indebtedness         related disclosure requirement.
                                         14A provided that ‘‘[i]nformation need not be           transactions had been set forth in Item 404(c).
                                         included for any portion of the period during which        440 Because of the manner in which the amount
                                                                                                                                                         3. Exceptions
                                         such person did not hold any such position or           involved in the transaction is calculated for              Some categories of transactions do not
                                         relationship, provided a statement to that effect is    indebtedness, as discussed above, disclosure with
                                         made.’’ We have amended Note C to Schedule 14A
                                                                                                                                                         fall within the principle for disclosure
                                                                                                 respect to indebtedness will include the largest
                                         as proposed so that it will no longer apply to          aggregate amount of principal outstanding during
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                                                                                                                                                           441 Item 404(a)(4).
                                         disclosure of related person transactions.              the period for which disclosure is provided, as well
                                            436 The persons included in these additions to the                                                             442 See letter from Sullivan.
                                                                                                 as the amount of principal and interest paid during
                                         definition are also included in the definition of       the period for which disclosure is provided, the          443 This requirement had been set forth in

                                         ‘‘family member’’ in General Instruction A.1.(a)(5)     aggregate amount of principal outstanding as of the     Instruction 4 to Item 404(c) prior to these
                                         to Securities Act Form S–8.                             latest practicable date, and the rate or amount of      amendments.
                                            437 Instruction 3 to Item 404(a).                    interest payable on the indebtedness. Item 404(a)(5).     444 See letter from SCSGP.

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                                                              Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                     53201

                                         and therefore Item 404(a) as amended                       Item 404(a).449 These exceptions thus                    Sarbanes-Oxley Act on personal loans to
                                         includes disclosure exceptions that we                     clarify the limited situations in which                  officers and directors.454
                                         believe are consistent with our                            disclosure of compensation to related                       Second, we are adopting as proposed
                                         principles-based approach.445 The first                    persons is not required under Item 404.                  an instruction indicating that a person
                                         category of transactions involves                             The second category of transactions                   who has a position or relationship with
                                         compensation. Disclosure of                                involves three types of situations that                  a firm, corporation, or other entity that
                                         compensation to an executive officer                       we believe do not raise the potential                    engages in a transaction with the
                                         will not be required if:                                   issues underlying our principle for                      company shall not be deemed to have
                                                                                                    disclosure. First, in the case of                        an indirect material interest within the
                                           • The compensation is reported
                                                                                                    transactions involving indebtedness, as                  meaning of paragraph (a) of Item 404 if:
                                         pursuant to Item 402 of Regulation S–                                                                                  • The interest arises only: (i) From
                                         K; or                                                      proposed we have adopted amendments
                                                                                                    so that the following items of                           the person’s position as a director of
                                           • The executive officer is not an                        indebtedness may be excluded from the                    another corporation or organization that
                                         immediate family member and such                           calculation of the amount of                             is a party to the transaction; or (ii) from
                                         compensation would have been                               indebtedness and need not be disclosed                   the direct or indirect ownership by such
                                         reported under Item 402 as                                 because they do not have the potential                   person and all other related persons, in
                                         compensation earned for services to the                    to impact the parties as do the                          the aggregate, of less than a ten percent
                                         company if the executive officer was a                     transactions for which disclosure is                     equity interest in another person (other
                                         named executive officer, and such                          required: Amounts due from the related                   than a partnership) which is a party to
                                         compensation had been approved, or                         person for purchases of goods and                        the transaction; or (iii) from both such
                                         recommended to the board of directors                      services subject to usual trade terms, for               position and ownership; or
                                         of the company for approval, by the                        ordinary business travel and expense                        • The interest arises only from the
                                         compensation committee of the board of                     payments and for other transactions in                   person’s position as a limited partner in
                                         directors (or group of independent                         the ordinary course of business.450 Also,                a partnership in which the person and
                                         directors performing a similar function)                   in the case of a transaction involving                   all other related persons, have an
                                         of the company.446                                         indebtedness, the amendments provide,                    interest of less than ten percent, and the
                                           As proposed, this disclosure                             as proposed, that if the lender is a bank,               person is not a general partner of and
                                         exception would have required                              savings and loan association, or broker-                 does not have another position in the
                                         compensation committee approval of an                      dealer extending credit under Federal                    partnership.455
                                         executive officer’s compensation if that                   Reserve Regulation T 451 and the loans                      Finally, disclosure will not be
                                         executive officer’s compensation was                       are not disclosed as nonaccrual, past                    required under paragraph (a) of Item 404
                                         not reported under Item 402. However,                      due, restructured or potential                           in three other types of circumstances.
                                         one commenter noted that in                                problems,452 disclosure under                            First, disclosure will not be required
                                         accordance with listing standards,                         paragraph (a) of Item 404 may consist of                 under paragraph (a) of Item 404 as to
                                         compensation committees may only                           a statement, if correct, that the loans to               any transaction where the rates or
                                         need to recommend to the board of                          such persons satisfied the following                     charges involved in the transaction are
                                         directors, rather than approve, the                        conditions:                                              determined by competitive bids, or the
                                         compensation of executive officers                            • They were made in the ordinary                      transaction involves the rendering of
                                         (other than the chief executive                            course of business;                                      services as a common or contract
                                         officer).447 We believe that it is                            • They were made on substantially                     carrier, or public utility, at rates or
                                         appropriate for this disclosure exception                  the same terms, including interest rates                 charges fixed in conformity with law or
                                         to apply a standard that is consistent                     and collateral, as those prevailing at the               governmental authority.456 We had
                                         with the listing standards and we have                     time for comparable loans with persons                   proposed to eliminate this exception
                                         thus modified this exception from the                      not related to the lender; and                           because we considered such bright-line
                                         proposal accordingly. Finally, as                             • They did not involve more than the                  presumptions as inconsistent with our
                                         proposed disclosure of compensation to                     normal risk of collectibility or present                 principles-based approach to the rule.
                                         a director will not be required if the                     other unfavorable features.453                           We are persuaded, however, by a
                                         compensation is reported pursuant to                          This exception is based on the                        commenter who indicated that the prior
                                         the director compensation disclosure                       exception that was included in                              454 Specifically, the language that was in
                                         requirement in Item 402(k).448                             Instruction 3 to Item 404(c) prior to                    Instruction 3 to paragraph (c) of Item 404 prior to
                                           As we explained in the Proposing                         these amendments, and has been                           these amendments has been modified to replace the
                                         Release, since the disclosure either                       modified as proposed to be more                          reference ‘‘comparable transactions with other
                                                                                                    consistent with the prohibition of the                   persons’’ with the phrase ‘‘comparable loans with
                                         would be reported under Item 402, or                                                                                persons not related to the lender.’’
                                         would not be required under Item 402,                         449 One commenter believed that the proposals
                                                                                                                                                                455 Instruction 6 to Item 404(a). This amendment

                                         we do not believe that these particular                    would have eliminated disclosure of related person
                                                                                                                                                             is based on the language that was in parts A and
                                         compensation transactions fall within                                                                               B of Instruction 8 to Item 404(a) prior to these
                                                                                                    transactions involving the employment of                 amendments. This amendment omits the portion of
                                         our Item 404 disclosure principle, or                      immediate family members. See letter from CRPTF.         that instruction (Instruction 8.C.) regarding interests
                                         they will have already been disclosed.                     Item 404(a), as amended, continues to require            arising solely from holding an equity or a creditor
                                                                                                    disclosure of these types of related person
                                         Transactions involving compensation                        transactions when the threshold for disclosure has
                                                                                                                                                             interest in a person other than the company that is
                                         that do not fall within these exceptions,                                                                           a party to the transaction, when the transaction is
                                                                                                    been met and the immediate family member has or          not material to the other person. This exception
                                         such as compensation of immediate                          will have a direct or indirect material interest.        may have resulted in inappropriate non-disclosure
                                         family members, are within the scope of                       450 Instruction 4.a. to Item 404(a), which is based
                                                                                                                                                             of transactions without regard to whether they were
                                         the principle for disclosure in amended                    on Instruction 2 to Item 404(c) as it was stated prior   material to the company. In addition, we are
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                                                                                                    to today’s amendments.                                   eliminating the language that had been set forth in
                                                                                                       451 12 CFR part 220.
                                                                                                                                                             Instruction 6 to Item 404(a) prior to these
                                           445 Instructions  4, 5, 6 and 7 to Item 404(a).             452 See Item III.C.1. and 2. of Industry Guide 3,     amendments, which had covered a subset of
                                           446 Instruction  5.a. to Item 404(a).                    Statistical Disclosure by Bank Holding Companies         transactions now covered by Instruction 6, as
                                           447 See letter from NYCBA.                               [17 CFR 229.802(c)].                                     amended, and therefore was duplicative.
                                           448 Instruction 5.b. to Item 404(a).                        453 Instruction 4.c. to Item 404(a).                     456 Instruction 7.a. to Item 404(a).

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                                         53202               Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         exception embodied a conclusion that                       undertaken in the ordinary course of                     • The types of transactions that are
                                         the terms of these types of transactions                   business of the company and conducted                 covered by such policies and
                                         would likely not be influenced by the                      on the same terms that the company                    procedures, and the standards to be
                                         related persons and therefore should be                    offers generally in transactions with                 applied pursuant to such policies and
                                         excluded as not material.457 As a result,                  persons who are not related persons.464               procedures;
                                         the instruction is retained in the rule as                 Former Item 404(a) did not include such                  • The persons or groups of persons on
                                         adopted.                                                   an ‘‘ordinary course of business’’                    the board of directors or otherwise who
                                            Second, disclosure need not be                          disclosure exception, and we are not                  are responsible for applying such
                                         provided under paragraph (a) of Item                       persuaded that it should be expanded to               policies and procedures; and
                                         404 if the transaction involves services                   include one. In this regard, we note that                • Whether such policies and
                                         as a bank depositary of funds, transfer                    transactions which should properly be                 procedures are in writing and, if not,
                                         agent, registrar, trustee under a trust                    disclosed under Item 404(a) might be                  how such policies and procedures are
                                         indenture, or similar services.458 We                      excluded under an ordinary course of                  evidenced.
                                         had proposed to eliminate this                             business exception, such as                              Item 404(b) requires identification of
                                         exception. We are persuaded by                             employment of immediate family                        any transactions required to be reported
                                         commenters’ concerns that eliminating                      members of officers and directors.                    under paragraph (a) of Item 404 where
                                         this exception may be detrimental to                       However, we note that whether a                       the company’s policies and procedures
                                         financial institutions and may not result                  transaction which was not material to                 do not require review, approval or
                                         in additional meaningful disclosure.459                    the company or the other entity                       ratification or where such policies and
                                         Accordingly, we are retaining this                         involved and which was undertaken in                  procedures have not been followed.
                                         exception.                                                 the ordinary course of business of the                   One commenter expressed concern
                                            Third, we are adopting an exception                     company and on the same terms that the                that it is not reasonable or customary for
                                         indicating that disclosure need not be                     company offers generally in transactions              a company’s related person transaction
                                         provided pursuant to paragraph (a) of                      with persons who are not related                      policy to extend to transactions
                                         Item 404 if the interest of the related                    persons, are factors that could be taken              occurring before an individual becomes
                                         person arises solely from the ownership                    into consideration when performing the                affiliated with a company.466 In
                                         of a class of equity securities of the                     materiality analysis for determining                  response, we have added an instruction
                                         company and all holders of that class of                   whether disclosure is required under                  indicating that disclosure need not be
                                         equity securities of the company                           the principle for disclosure.                         provided pursuant to paragraph (b) of
                                         received the same benefit on a pro rata                    B. Procedures for Approval of Related                 Item 404 regarding any transaction that
                                         basis.460 Commenters expressed concern                     Person Transactions                                   occurred at a time before the related
                                         that our proposal to eliminate the                                                                               person had the relationship that would
                                         former exception 461 would require                            We are adopting a new requirement
                                                                                                                                                          trigger disclosure under Item 404(a), if
                                         disclosure if a related person receives                    for disclosure of the policies and
                                                                                                                                                          the transaction did not continue after
                                         over $120,000 in dividends on company                      procedures established by the company
                                                                                                                                                          the related person had that
                                         stock in a year, even though those                         and its board of directors regarding
                                         dividends are paid on the same terms as                    related person transactions substantially
                                         for all other stockholders.462 We are                      as proposed. State corporate law and                  C. Promoters and Control Persons
                                         persuaded by the commenters that                           increasingly robust corporate
                                                                                                                                                             As proposed and adopted, the
                                                                                                    governance practices support or provide
                                         related person transaction disclosure is                                                                         amendments require a company to
                                                                                                    for such procedures in connection with
                                         not necessary for transactions where a                                                                           provide disclosure regarding the
                                                                                                    transactions involving conflicts of
                                         related person receives pro rata                                                                                 identity of promoters and its
                                                                                                    interest.465 We believe that this type of
                                         dividends or returns on the ownership                                                                            transactions with those promoters if the
                                                                                                    information may be material to
                                         of equity securities, and therefore we                                                                           company had a promoter at any time
                                                                                                    investors, and our amendments
                                         have adopted an instruction to provide                                                                           during the last five fiscal years.468 The
                                                                                                    therefore require disclosure of policies
                                         an exception from disclosure in these                                                                            disclosure will be required in Securities
                                                                                                    and procedures regarding related person
                                         limited circumstances.463                                                                                        Act registration statements on Form S–
                                                                                                    transactions under paragraph (b) of Item
                                            Some commenters requested that we                                                                             1 or on Form SB–2 and Exchange Act
                                                                                                    404, as amended.
                                         create a new exception for transactions                       Specifically, the amendments require               Form 10 or Form 10–SB. The disclosure
                                                                                                    a description of the company’s policies               includes:
                                           457 Letter  from SCSGP.
                                                                                                    and procedures for the review, approval                  • The names of the promoters;
                                           458 Instruction    7.b. to Item 404(a).
                                                                                                    or ratification of transactions with                     • The nature and amount of anything
                                            459 See, e.g., letters from American Bankers
                                                                                                    related persons that are reportable under             of value received by each promoter from
                                         Association (‘‘American Bankers’’); Compass
                                         Bancshares; and Whitney Holding Corporation                paragraph (a) of Item 404. The                        the company and the nature and amount
                                         (‘‘Whitney Holding’’).                                     description must include the material
                                            460 Instruction 7.c. to Item 404(a).                                                                            466 See
                                                                                                    features of these policies and                                  letter from NYCBA.
                                            461 Before the adoption of these amendments,                                                                    467 See
                                                                                                    procedures that are necessary to                                Instruction to Item 404(b). For example,
                                         Instruction 7.C. to Item 404(a) provided that no                                                                 disclosure would not be required under Item 404(b)
                                         information was required under Item 404(a) for             understand them. While the material                   in a company’s Form 10–K for the fiscal year ended
                                         transactions where the interest of the related person      features of such policies and procedures              December 31, 2005 of a transaction that occurred in
                                         arose solely from the ownership of securities of the       will vary depending on the particular                 March 2005 between the company and an
                                         company and such person received no extra or                                                                     immediate family member of a person who later
                                         special benefit not shared on a pro rata basis.
                                                                                                    circumstances, examples of such
                                                                                                                                                          became a director of the company in August 2005.
                                            462 See, e.g., letters from SCSGP and Sullivan.         features may include, in given cases,                 However, disclosure would be required under Item
                                            463 The instruction as adopted differs from the         among other things:                                   404(a) in this circumstance. This Instruction to Item
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                                         language of Instruction 7.C. prior to these                                                                      404(b) does not apply to transactions of significant
                                         amendments in that it is limited to ownership of a                  e.g., letters from SCSGP and Sullivan.
                                                                                                      464 See,                                            shareholders of the company, because Item 404(a)
                                         class of equity securities rather than securities            465 Del.
                                                                                                             Code Ann. tit. 8, § 144 (2004). See also     does not require disclosure of transactions with
                                         generally and focuses on benefits being provided           NYSE, Inc. Listed Company Manual Section 307.00       significant shareholders that are completed before
                                         pro rata to the holders of that class rather than the      and NASD Manual, Marketplace Rules 4350(h) and        they become significant shareholders.
                                         absence of certain extra or special benefits.              4360(i).                                                468 Item 404(c).

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                 53203

                                         of any consideration received by the                     these amendments, Item 404(b) had                      that imposed specific additional
                                         company; and                                             required disclosure of specific business               independence standards for boards of
                                            • Additional information regarding                    relationships between a director or                    directors, and the compensation and
                                         any assets acquired by the company                       nominee for director and the company                   nominating committees or persons
                                         from a promoter.                                         that could bear on the ability of                      performing similar functions. Each
                                            The amendments are consistent with                    directors and nominees for director to                 listed company (unless exempt)
                                         the previous disclosure requirements                     exercise independent judgment in the                   determines whether its directors and
                                         regarding promoters. However, prior to                   performance of their duties. We                        committee members are independent
                                         these amendments this disclosure was                     proposed to eliminate the disclosure                   based on definitions that it adopts
                                         not required if the company had been                     requirement that was stated under                      which, at a minimum, are required to
                                         organized more than five years ago, even                 paragraph (b) of Item 404 in favor of                  comply with the listing standards
                                         if the company otherwise had a                           more direct disclosure about the                       applicable to the company.
                                         promoter within the last five years. Our                 determination of the independence of                      The amendments we are adopting
                                         staff’s experience in reviewing                          directors and nominees for director,                   today, substantially as proposed,
                                         registration statements, especially of                   including information supplementing                    include a disclosure requirement to
                                         smaller companies, suggests that the                     the amended related person transaction                 identify the independent directors of the
                                         more appropriate five-year test for                      disclosure that would permit qualitative               company (and, in the case of disclosure
                                         which the disclosure should be                           assessment of those independence                       in proxy or information statements
                                         provided relates to the period of time                   determinations. While one commenter                    relating to the election of directors,
                                         during which the company had a                           suggested that we retain a revised                     nominees for director) under the
                                         promoter, as our revision provides,                      version of paragraph (b) to Item 404 as                definition for determining board
                                         rather than the date of organization of                  it was stated prior to these                           independence applicable to it.475 The
                                         the company.469 We are also requiring                    amendments,472 we continue to believe                  amendments also require disclosure of
                                         the same disclosure that is required for                 that disclosure focused on the                         any members of the compensation,
                                         promoters for any person who acquired                    determinations made regarding director                 nominating and audit committees that
                                         control, or is part of a group that                      independence is the appropriate                        the company has not identified as
                                         acquired control, of an issuer that is a                 approach. The comprehensive director                   independent under the definition of
                                         shell company.470 We are revising the                    independence disclosure requirement
                                         title of this item to include the term                   that we are adopting today recognizes                  Rule Change and Notice of Filing and Order
                                         control persons in order to clarify the                  the significant development of                         Granting Accelerated Approval to Amendment Nos.
                                         scope of the disclosure requirement.                     independence requirements since the                    2 and 3 to the Proposed Rule Change by the Chicago
                                                                                                                                                         Stock Exchange, Inc. Relating to Governance of
                                         D. Corporate Governance Disclosure                       disclosure requirements in former                      Issuers on the Exchange, Release No. 34–49911
                                                                                                  paragraph (b) of Item 404 were                         (June 24, 2004) [69 FR 39989]; Notice of Filing and
                                           We are consolidating our disclosure                    originally adopted. As directed by the                 Order Granting Accelerated Approval of Proposed
                                         requirements regarding director                          Sarbanes-Oxley Act of 2002, we adopted                 Rule Change by the Boston Stock Exchange, Inc. to
                                         independence and related corporate                       a rule requiring national securities
                                                                                                                                                         Amend Chapter XXVII, Section 10 of the Rules of
                                         governance disclosure requirements                                                                              the Board of Governors by Adding Requirements
                                                                                                  exchanges and national securities                      Concerning Corporate Governance Standards of
                                         under a single disclosure item and                       associations to adopt listing standards                Exchange-Listed Companies, Release No. 34–49955
                                         updating such disclosure requirements                    requiring independent audit committees                 (July 1, 2004) [69 FR 41555]; Notice of Filing and
                                         regarding director independence to                       meeting the standards of our rule.473                  Order Granting Accelerated Approval of Proposed
                                         reflect our current requirements and                                                                            Rule Change and Amendment Nos. 1 and 2 Thereto
                                                                                                  Further, in 2003 and 2004, we approved                 by the Chicago Board Options Exchange,
                                         current listing standards.471 Prior to                   amendments to additional listing                       Incorporated, Relating to Enhanced Corporate
                                                                                                  standards, including those of the New                  Governance Requirements for Listed Companies,
                                            469 We also adopt as proposed similar revisions to                                                           Release No. 34–49995 (July 9, 2004) [69 FR 42476];
                                         the disclosure requirement referencing promoters in
                                                                                                  York Stock Exchange and Nasdaq,474                     Notice of Filing and Order Granting Accelerated
                                         Item 401(g)(1) of Regulation S–K. In addition, as                                                               Approval of Proposed Rule Change and
                                         proposed our revisions add Form SB–2 to the list         Oversight Board rules. See PCAOB Rulemaking:           Amendment Nos. 1 and 2 Thereto by National
                                         of registration statement forms in Item 404 for          Public Company Accounting Oversight Board;             Stock Exchange Relating to Corporate Governance,
                                         which promoter disclosure is required. While this        Order Approving Proposed Technical Amendments          Release No. 34–49998 (July 9, 2004) [69 FR 42788];
                                         revision updates the registration statement forms        to Interim Standards Rules, Release No. 34–49624       and Notice of Filing and Immediate Effectiveness of
                                         listed in Item 404, it does not change the promoter      (Apr. 28, 2004) [69 FR 24199]; and Order Regarding     Proposed Rule Change by the Pacific Exchange, Inc.
                                         disclosure requirement of Form SB–2.                     Section 101(d) of the Sarbanes-Oxley Act of 2002,      to Amend the Corporate Governance Requirements
                                            470 Item 404(c)(2). The term ‘‘group’’ has the same   Release No. 33–8223 (Apr. 25, 2003) [68 FR 2336].      for PCX Listed Companies, Release No. 34–50677
                                                                                                    472 Letter from Fenwick.                             (Nov. 16, 2004) [69 FR 68205].
                                         meaning as in Exchange Act Rule 13d–5(b)(1) [17
                                         CFR 240.13d–5(b)(1)], that is, any two or more             473 See Section 10A(m) of the Exchange Act [15          The Commission has previously received a
                                         persons that agree to act together for the purpose       U.S.C. 78j–1(m)]; Exchange Act Rule 10A–3 [17 CFR      rulemaking petition submitted by the AFL/CIO,
                                         of acquiring, holding, voting or disposing of equity     240.10A–3]; and Standards Relating to Listed           which requested the Commission to amend Items
                                         securities of an issuer. The term ‘‘shell company’’      Company Audit Committees, Release No. 33–8220          401 and 404 of Regulation S–K to require disclosure
                                         is defined in Securities Act Rule 405 and Exchange       (Apr. 9, 2003) (the ‘‘Audit Committee Release’’) [68   about transactions with non-profit organizations
                                         Act Rule 12b–2.                                          FR 18788].                                             (letter dated Dec. 12, 2001 from Richard Trumka,
                                            471 Item 407 of Regulations S–K and S–B. As             474 NASD and NYSE Listing Standards Release.         Secretary-Treasurer, AFL/CIO, File No. 4–499,
                                         adopted, Item 407 consolidates corporate                 The other exchanges have also adopted corporate        available at
                                         governance disclosure requirements located in            governance listing standards. See Order Granting       499.pdf) and a rulemaking petition submitted by the
                                         several places under our rules and the principal         Approval of Proposed Rule Change by the American       Council of Institutional Investors, which requested
                                         markets’ listing standards, including in particular      Stock Exchange LLC and Notice of Filing and Order      amendments to Item 401 of Regulation S–K to
                                         requirements that had been specified in Items 306,       Granting Accelerated Approval of Amendment No.         require disclosure of certain transactions between
                                         401(h), (i) and (j), 402(j) and 404(b) of Regulation     2 Relating to Enhanced Corporate Governance            directors, executive officers and nominees (letter
                                         S–K and Item 7 of Schedule 14A under the                 Requirements Applicable to Listed Companies,           dated Oct. 1, 1997, as amended Oct. 19, 1998, from
                                         Exchange Act prior to these amendments. We are           Release No. 34–48863 (Dec. 1, 2003) [68 FR 68432];     Sarah A.B. Teslik, Executive Director, Council of
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                                         not making any changes to the substance of the           Notice of Filing and Order Granting Accelerated        Institutional Investors, File No. 4–404). We believe
                                         requirements under Item 306, Item 401(h), (i) or (j),    Approval of Proposed Rule Change and                   these requests have in large part been addressed by
                                         or Item 402(j) as part of this consolidation.            Amendment Nos. 1 and 2 Thereto by the                  revised listing standards instituted by the
                                         However, as proposed, Item 407 reorders some             Philadelphia Stock Exchange, Inc. Relating to          exchanges, so that we are not now taking additional
                                         provisions that were specified in Item 306 and           Corporate Governance, Release No. 34–49881 (June       action under these petitions.
                                         reflects the relevant Public Company Accounting          17, 2004) [69 FR 35408]; Order Approving Proposed         475 Item 407(a).

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                                         53204             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         independence for that board committee                       One commenter pointed out the rule                  identified as independent, a description,
                                         applicable to it.476                                     proposals did not make clear what                      by specific category or type, of any
                                           More specifically, if the company is                   disclosure would be required for listed                transactions, relationships or
                                         an issuer 477 with securities listed, or for             issuers that relied upon an exemption                  arrangements not disclosed pursuant to
                                         which it has applied for listing, on a                   from independence requirements, most                   paragraph (a) of Item 404 that were
                                         national securities exchange 478 or in an                notably a ‘‘controlled company’’                       considered by the board of directors of
                                         automated inter-dealer quotation system                  exemption.481 To clarify the disclosure                the company in determining that the
                                         of a national securities association 479                 required in this situation, we added a                 applicable independence standards
                                         which has requirements that a majority                   requirement to the amendments that if                  were met. Under our proposals,
                                         of the board of directors be                             the company is a listed issuer whose                   disclosure of the specific details of each
                                         independent, Item 407(a) requires                        securities are listed on a national                    such transaction, relationship or
                                         disclosure of those directors and                        securities exchange or in an inter-dealer              arrangement would have been required.
                                         director nominees that the company                       quotation system which has                             Several commenters objected to
                                         identifies as independent (and                           requirements that a majority of the                    providing this disclosure, given the
                                         committee members not identified as                      board of directors be independent, and                 potential for extensive detail about these
                                         independent), using the definition for                   also has exemptions to those                           types of transactions, relationships or
                                         independence for directors (and for                      requirements (for board or committee                   arrangements, and some suggested
                                         committee members) that it uses for                      member independence) upon which the                    instead providing disclosure by category
                                         determining compliance with the                          company relied, the company must                       or type of transaction.485 In response to
                                         applicable listing standards. If the                     disclose the exemption relied upon and                 the commenters, we have revised the
                                         company is not a listed issuer, we are                   explain the basis for its conclusion that              disclosure requirement to permit
                                         requiring disclosure of those directors                  such exemption is applicable.482 Similar               transactions, relationships or
                                         and director nominees that the company                   disclosure is required for those                       arrangements of each director or
                                         identifies as independent (and                           companies that are not listed issuers but              director nominee to be described by the
                                         committee members not identified as                      would qualify for an exemption under                   specific category or type. Consistent
                                         independent) using the definition for                    the listing standards selected. In                     with the rule proposals, the amended
                                         independence for directors (and for                      addition, this instruction clarifies that              rule requires that the disclosure be
                                         committee members) of a national                         small business issuers listed on                       made on a director by director basis,
                                         securities exchange or a national                        exchanges where at least half of the                   with separate disclosure of categories or
                                         securities association, specified by the                 members of the board of directors,                     types of transactions, relationships or
                                         company. The company will be required                    rather than a majority, are required to be             arrangements for each director and
                                         to apply the same definition                             independent must comply with the                       director nominee. We have also adopted
                                         consistently to all directors and also to                disclosure requirements specified in                   an instruction indicating that the
                                         use the independence standards of the                    Item 407(a).483                                        description of the category or type must
                                         same national securities exchange or                        The amendments require as proposed                  be sufficiently detailed so that the
                                         national securities association for                      that an issuer which has adopted                       nature of the transactions, relationships
                                         purposes of determining the                              definitions of independence for                        or arrangements is readily apparent.486
                                         independence of members of the                           directors and committee members must                      As proposed, this independence
                                         compensation, nominating and audit                       disclose whether those definitions are                 disclosure is required for any person
                                         committees.480                                           posted on the company’s Web site, and                  who served as a director of the company
                                                                                                  if they are not include the definitions as             during any part of the year for which
                                            476 Id. If the company does not have a separately
                                                                                                  an appendix to the company’s proxy or                  disclosure must be provided,487 even if
                                         designated compensation, nominating or audit             information statement at least once                    the person no longer serves as director
                                         committee or committee performing similar
                                         functions, it must provide this disclosure regarding     every three years or if the policies have              at the time of filing the registration
                                         independence under committee independence                been materially amended since the                      statement or report or, if the information
                                         standards with respect to all members of the board       beginning of the company’s last fiscal                 is in a proxy statement, if the director’s
                                         of directors.                                            year.484 Further, if the policies are not              term of office as a director will not
                                            477 Under the amendments, ‘‘listed issuer’’ has the

                                         same meaning as in Exchange Act Rule 10A–3.
                                                                                                  on the company’s Web site, or included                 continue after the meeting. In this
                                            478 Under the amendments, ‘‘national securities       as an appendix to the company’s proxy                  regard, we believe that the
                                         exchange’’ means a national securities exchange          or information statement, the company                  independence status of a director is
                                         registered pursuant to Section 6(a) of Exchange Act      must disclose in which of the prior                    material while the person is serving as
                                         [15 U.S.C. 78f(a)].                                      fiscal years the policies were included                director, and not just as a matter of
                                            479 Under the amendments, ‘‘inter-dealer
                                                                                                  in the company’s proxy or information                  reelection.488
                                         quotation system’’ means an automated inter-dealer
                                         quotation system of a national securities association    statement.
                                         registered pursuant to Section 15A(a) of the                In addition, the amendments require,                   485 See, e.g., letters from Chamber of Commerce;

                                         Exchange Act [15 U.S.C. 78o–3(a)], and a ‘‘national      for each director or director nominee                  FSR; and Sidley Austin.
                                                                                                                                                            486 Instruction 3 to Item 407(a).
                                         securities association’’ means a national securities
                                         association registered pursuant to Section 15A(a) of                                                               487 Instruction 2 to Item 407(a) has been revised

                                         the Exchange Act [15 U.S.C. 78o–3(a)] that has been      407, we adopt revised language for these provisions    to clarify this requirement. As proposed, disclosure
                                         approved by the Commission (as that definition           that reflects the general approach discussed above     under these amendments will not be required for
                                         may be modified or supplemented). Inter-dealer           with regard to disclosure of director independence     persons no longer serving as a director in
                                         quotation systems such as the OTC Bulletin Board,        for board and committee purposes.                      registration statements under the Securities Act or
                                                                                                    481 Letter from NYCBA.
                                         the Pink Sheets and the Yellow Sheets, which do                                                                 the Exchange Act filed at a time when the company
                                                                                                    482 Instruction 1 to Item 407(a).
                                         not maintain or impose listing standards and do not                                                             is not subject to the reporting requirements of
                                         have listing agreements or arrangements with the           483 See Section 121.B.(2)(c) of the American Stock   Exchange Act Section 13(a) or 15(d). As proposed,
                                         issuers whose securities are quoted through them,        Exchange Company Guide; paragraph (g) of Chapter       disclosure will not be required of anyone who was
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                                         are not within this definition. See Section II.F.1. in   XXVII, Listed Securities, Section 10, Corporate        a director only during the time period before the
                                         the Audit Committee Release.                             Governance, of the Rules of the Board of Governors     company made its initial public offering if he or she
                                            480 Similar disclosure had been required pursuant     of the Boston Stock Exchange; and Rule 19(a)(1) of     was no longer a director at the time of the offering.
                                         to Item 7(d)(2)(ii) and Item 7(d)(3)(iv) of Schedule     Article XXVIII, Listed Securities, of the Chicago         488 For this reason, we are not incorporating the

                                         14A prior to these amendments. As part of our            Stock Exchange Rules.                                  concept previously found in Instruction 4 to Item
                                         consolidation of these provisions into new Item            484 Item 407(a)(2).                                  404(b) into Item 407(a) as adopted.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                     53205

                                            We also amend the disclosure                         describing the nature and scope of their                    necessary. Therefore, we are adopting
                                         requirements regarding the audit                        assignment, and the material elements                       the compensation consultant disclosure
                                         committee and nominating committee                      of the instructions or directions given to                  requirement in Item 407(e) as proposed,
                                         applicable prior to these amendments in                 the consultants with respect to the                         except for the required disclosure
                                         order to eliminate duplicative                          performance of their duties under the                       regarding contacts with executive
                                         committee member independence                           engagement.                                                 officers, which has not been adopted.497
                                         disclosure and to update the required                      Several commenters viewed this item                         Further, the amendments consolidate
                                         audit committee charter disclosure                      as redundant with the Compensation                          into this compensation committee
                                         requirements for consistency with the                   Discussion and Analysis required under                      disclosure requirement the disclosure
                                         more recently adopted nominating                        Item 402, and suggested that they be                        requirements regarding compensation
                                         committee charter disclosure                            combined.493 While this item and the                        committee interlocks and insider
                                         requirements.489 As a result, as                        Compensation Discussion and Analysis                        participation in compensation
                                         proposed the audit committee charter                    both involve the determination of                           decisions, as proposed.498
                                         will no longer be required to be                        executive officer compensation, they                           Finally, for registrants other than
                                         delivered to security holders if it is                  have different focuses. Item 407(e)                         registered investment companies, the
                                         posted on the company’s Web site.490                    focuses on the company’s corporate                          amendments eliminate an existing
                                         We also are moving the disclosure                       governance structure that is in place for                   proxy disclosure requirement regarding
                                         required by Section 407 of the Sarbanes-                considering and determining executive                       directors who have resigned or declined
                                         Oxley Act regarding audit committee                     and director compensation—such as the                       to stand for re-election 499 which is no
                                         financial experts to Item 407, although                 scope of authority of the compensation                      longer necessary since it has been
                                         as proposed we are not making any                       committee and others in making these                        superseded by a disclosure requirement
                                         substantive changes to that                             determinations, as well as the resources                    in Form 8–K.500 For registered
                                         requirement.491                                         utilized by the committee. In contrast,                     investment companies, which do not
                                            The amendments require new                           the Compensation Discussion and                             file current reports on Form 8–K, the
                                         disclosures regarding the compensation                  Analysis focuses on material                                requirement has been moved to Item
                                         committee that are similar to the                       information about the compensation                          22(b) of Schedule 14A.501 Also as
                                         disclosures required regarding audit and                policies and objectives of the company                      proposed, the amendments combine
                                         nominating committees of the board of                   and seeks to put the quantitative                           various proxy disclosure requirements
                                         directors.492 The company must state                    disclosure about named executive                            regarding board meetings and
                                         whether the compensation committee                      officer compensation into perspective.                      committees into one location.502 In
                                         has a charter, and if it does make the                  We believe it is appropriate to discuss                     addition, we are adopting as proposed
                                         charter available through its Web site or               each of these matters separately and,                       two instructions to Item 407 to combine
                                         proxy materials in one of the ways that                 accordingly, we have not combined                           repetitive provisions, one relating to
                                         the audit and nominating committee                      them.                                                       independence disclosure, and the other
                                         charters may be made available. As                         As for the required disclosure                           relating to board committee charters.503
                                         proposed, the company will be required                  regarding compensation consultants,
                                                                                                                                                             E. Treatment of Specific Types of
                                         to describe its processes and procedures                some commenters objected to the
                                         for the consideration and determination                 proposed requirements,494 while other
                                         of executive and director compensation                  commenters suggested expanding the                          1. Small Business Issuers
                                         including:                                              requirement to include, among other                            We are adopting amendments to Item
                                            • The scope of authority of the                      things, a discussion of the work                            404 of Regulation S–B substantially as
                                         compensation committee (or persons                      performed by the compensation                               proposed. Amended Item 404 of
                                         performing the equivalent functions);                   consultant for the company or others.495                    Regulation S–B is substantially similar
                                            • The extent to which the                            In addition, some commenters suggested                      to amended Item 404 of Regulation S–
                                         compensation committee (or persons                      deleting the requirement in proposed                        K, except for the following two matters:
                                         performing the equivalent functions)                    Item 407(e) that companies identify any                        • Paragraph (b) of Item 404 of
                                         may delegate any authority to other                     executive officer of the company that                       Regulation S–K relating to policies and
                                         persons, specifying what authority may                  the compensation consultants contacted                      procedures for reviewing related person
                                         be so delegated and to whom;                            in carrying out their assignment.496 We                     transactions is not included in
                                            • Any role of executive officers in                  continue to believe that the involvement                    Regulation S–B, and
                                         determining or recommending the                         of compensation consultants and their                          • Regulation S–B provides for a
                                         amount or form of executive and                         interaction with the compensation                           disclosure threshold of the lesser of
                                         director compensation; and                              committee is material information that
                                            • Any role of compensation                           should be required. However, we are                            497 Under the rules as adopted, disclosure would
                                         consultants in determining or                           persuaded that disclosure regarding any                     also not be required under this Item if an employee
                                         recommending the amount or form of                      executive officers of the company that                      of a consulting firm met with company management
                                         executive and director compensation,                                                                                to work on matters not involving compensation. See
                                                                                                 the compensation consultants contacted                      letter from Hewitt.
                                         identifying such consultants, stating                   in carrying out their assignment is not                        498 Prior to these amendments, disclosure
                                         whether such consultants are engaged                                                                                regarding compensation committee interlocks and
                                         directly by the compensation committee                    493 See, e.g., letters from J. Brill 1; Hewitt; Mercer;   insider participation in compensation decisions
                                         (or persons performing the equivalent                   Pearl Meyer & Partners; and SCSGP.                          was required by Item 402(j).
                                                                                                   494 See, e.g., letters from Buck Consultants;                499 Prior to these amendments, this disclosure
                                         functions) or any other person,                                                                                     was required by Item 7(g) of Schedule 14A.
                                                                                                 Chamber of Commerce; Hewitt; Pearl Meyer &
                                                                                                                                                                500 Item 5.02(a) of Form 8–K.
                                                                                                 Partners; Mercer; and Steven Hall & Partners.
                                           489 However, we are not revising the provision                                                                       501 Item 22(b)(17) of Schedule 14A.
                                                                                                   495 See, e.g., letters from Brian Foley & Co.; 3C-
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                                         that the Audit Committee Report is furnished and        Compensation Consulting Consortium; BCIMC; CFA                 502 Item 407(b) includes disclosure requirements
                                         not filed.                                              Centre 1; Governance for Owners; Michelle Leder;            previously specified in paragraphs (d)(1), (f), and
                                           490 Item 407(d)(1) and Instruction 2 to Item 407.
                                                                                                 James McFadden; Institutional Investor Group;               (h)(3) of Item 7 of Schedule 14A.
                                           491 Item 407(d)(5).                                   SBAF; and Theodore Schlissel.                                  503 Instructions 1 and 2 to Item 407. Instruction
                                           492 These compensation committee disclosure             496 See, e.g., letters from Compensia; FedEx              2 also includes as proposed a requirement that the
                                         requirements are included in Item 407(e).               Corporation; Hewitt; and Mercer.                            charter be provided if it is materially amended.

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                                         53206            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         $120,000 or one percent of the average                  change from the proposal also results in                 disclosure of this information prior to
                                         of the small business issuer’s total assets             the structure of Item 404(a) of                          adoption of these amendments.
                                         at year-end for the last three completed                Regulation S–B more closely resembling                   2. Foreign Private Issuers
                                         fiscal years,504 to require disclosure for              the structure of Item 404(a) of
                                         small business issuers that may have                    Regulation S–K, particularly in                             Before today’s amendments, a foreign
                                         material related person transactions                    situations where Item 404(a) of                          private issuer would be deemed to
                                         even though smaller than the absolute                   Regulation S–K applies to time periods                   comply with Item 404 of Regulation S–
                                         dollar amount of $120,000.                              longer than one year.                                    K if it provided the information required
                                            Both amended items consist of                                                                                 by Item 7.B. of Form 20–F. The
                                                                                                    In addition, amended Item 404 of                      amendments retain this approach, but
                                         disclosure requirements regarding
                                         related person transactions and                         Regulation S–B retains a paragraph                       require that if more detailed information
                                         promoters. These provisions of Item 404                 requiring disclosure of a list of all                    is otherwise made publicly available or
                                         of Regulation S–B are substantially                     parents of the small business issuer                     required to be disclosed by the issuer’s
                                         identical to those of Item 404 of                       showing the basis of control and as to                   home jurisdiction or a market in which
                                         Regulation S–K, except for certain                      each parent, the percentage of voting                    its securities are listed or traded, that
                                         changes conforming amended Item 404                     securities owned or other basis of                       same information must also be disclosed
                                         of Regulation S–B to former Item 404 of                 control by the small business issuer’s                   pursuant to Item 404.511
                                         Regulation S–B. These changes consist                   immediate parent, if any.509
                                                                                                                                                          3. Registered Investment Companies
                                         of the following:                                          One conforming change that we are
                                            • Retaining in amended Item 404 of                   not making to Regulation S–B, however,                      We are revising Items 7 and 22(b) of
                                         Regulation S–B an instruction in former                 concerns the calculation of a related                    Schedule 14A, substantially as
                                         Item 404 of Regulation S–B regarding                    person’s interest in a given transaction.                proposed, to reflect the reorganization
                                         underwriting discounts and                              Prior to today’s amendments, Item                        that we have undertaken with respect to
                                         commissions;505 and                                     404(a) of Regulation S–B differed from                   operating companies. Under the
                                            • Not including an instruction in                    Item 404(a) of Regulation S–K with                       amendments, information that was
                                         amended Item 404 of Regulation S–B                      respect to, among other things, the                      required to be provided by registered
                                         regarding the treatment of foreign                                                                               investment companies under Item 7
                                                                                                 calculation of the dollar value of a
                                         private issuers that is included in                                                                              prior to the amendments is instead
                                                                                                 person’s interest in a related person
                                         amended Item 404 of Regulation S–K.506                                                                           required by Item 22(b).512 The
                                                                                                 transaction. Prior to these amendments,
                                            The two year time period for                                                                                  requirements of Item 7 that prior to the
                                                                                                 Instruction 4 to Item 404(a) of
                                         disclosure embodied in Item 404 of                                                                               amendments applied to registered
                                                                                                 Regulation S–K had specifically                          investment companies regarding the
                                         Regulation S–B prior to these
                                                                                                 provided that the amount of such                         nominating and audit committees, board
                                         amendments was retained in the
                                                                                                 interest was to be computed without                      meetings, the nominating process, and
                                         principle for disclosure in proposed
                                         Item 404(a) of Regulation S–B.                          regard to the amount of profit or loss                   shareholder communications generally
                                         Amended Item 404(a) of Regulation S–                    involved in the transaction. In contrast,                will be included in Item 22(b) by cross-
                                         B continues to require two years of                     Item 404(a) of Regulation S–B contained                  references to the appropriate paragraphs
                                         disclosure, but does so by including an                 no such instruction prior to these                       of new Item 407 of Regulation S–K.513
                                         instruction to Item 404(a) of Regulation                amendments. We are adopting                              The substance of these requirements has
                                         S–B 507 requiring a second year of                      amendments as proposed so that the                       not been altered. In addition, the
                                         disclosure, rather than by including the                method of calculation of a related                       revisions to Item 22(b) directly
                                         two year time period in the principle for               person’s interest in a transaction will be               incorporate disclosures relating to the
                                         disclosure in Item 404(a) of Regulation                 the same for both Regulation S–B and                     independence of members of
                                         S–B as was proposed. This change from                   Regulation S–K. We believe that
                                         the proposal clarifies that for purposes                differences, if any, between the types of                  511 Instruction 2 to Item 404 of Regulation S–K.
                                         of applying the definition of ‘‘related                 transactions that small business issuers                   512 Amendments     to Item 7(e) of Schedule 14A.
                                                                                                 may engage in with related persons as                    Business development companies will furnish the
                                         person’’ to determine whether                                                                                    information required by Item 7 of Schedule 14A, in
                                         disclosure is required of a transaction                 compared to transactions of larger                       addition to the information required by Items 8 and
                                         that occurred prior to a person having                  issuers would not warrant a different                    22(b) of Schedule 14A. See amendments to Items
                                         the relationship that resulted in the                   approach for calculating a related                       7, 8, and 22(b) of Schedule 14A.
                                                                                                                                                             513 Amendments to Items 22(b)(15)(i) and (ii)(A)
                                         person becoming a related person, a one                 person’s interest in a transaction.
                                                                                                                                                          and 22(b)(16)(i) of Schedule 14A. Amended Item
                                         year time period should be used rather                     As proposed, new Item 407 of                          22(b)(15)(i) requires the information required by
                                         than a two year time period.508 This                    Regulation S–K is substantially identical                new Items 407(b)(1) and (2) and (f), corresponding
                                                                                                                                                          to the information that registered investment
                                                                                                 to new Item 407 of Regulation S–B,510                    companies have been required to provide pursuant
                                            504 We are revising Item 404(a) of Regulation S–
                                                                                                 except that it would not require                         to Items 7(f) and 7(h) prior to today’s amendments.
                                         B from the proposal to clarify that the
                                         determination of a small business issuer’s total        disclosure regarding compensation                        Amended Item 22(b)(15)(ii)(A) requires the
                                                                                                 committee interlocks and insider                         information required by new Items 407(c)(1) and
                                         assets for purposes of this Item shall be made as of
                                                                                                                                                          (2), corresponding to the information that registered
                                         the issuer’s fiscal year-end for its last three         participation in compensation decisions                  investment companies have been required to
                                         completed fiscal years.                                 or the Compensation Committee Report,
                                            505 Instruction 8 to Item 404(a) of Regulation S–
                                                                                                                                                          provide pursuant to Items 7(d)(2)(i) and 7(d)(2)(ii)
                                                                                                 since Regulation S–B did not require                     (other than the nominating committee
                                                                                                                                                          independence disclosures required prior to today’s
                                            506 This is consistent with the requirements of
                                                                                                                                                          amendments by Item 7(d)(2)(ii)(C)). Amended Item
                                         Regulation S–B prior to these amendments.               31, 2005. However, if the transaction had occurred       22(b)(16)(i) requires closed-end investment
                                            507 Instruction 9 to Item 404(a) of Regulation S–    in February 2004, disclosure would not be required       companies to provide the information required by
                                         B.                                                      in the small business issuer’s 2005 Form 10–KSB.         new Items 407(d)(1) through (3), corresponding to
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                                            508 For example, if an employee had a material         509 Item 404(b) of Regulation S–B.
                                                                                                                                                          the information that closed-end investment
                                         interest in a transaction with the small business         510 The requirements that were specified in            companies have been required to provide prior to
                                         issuer which occurred in February 2005 and then         paragraphs (e), (f), and (g) of Item 401 of Regulation   today’s amendments pursuant to Item 7(d)(3) (other
                                         became an executive officer in July 2005, disclosure    S–B prior to these amendments are now specified          than the audit committee independence disclosures
                                         would be required in the small business issuer’s        in paragraphs (d)(5), (d)(4) and (c)(3), respectively,   required prior to today’s amendments by Items
                                         Form 10–KSB for the fiscal year ended December          of Item 407 of Regulation S–B.                           7(d)(3)(iv)(A)(1) and (B)).

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                53207

                                         nominating and audit committees that                      BTR defines terms used in Section                       non-director services, except for an
                                         are similar to those contained in new                     306(a) and Regulation BTR, including                    amount that does not exceed the Item
                                         Item 407(a) of Regulation S–K and                         the term ‘‘acquired in connection with                  404(a) dollar disclosure threshold;
                                         contained in Item 7 prior to the                          service or employment as a director or                     • Do not possess an interest in any
                                         amendments.514 We are also adding                         executive officer.’’ 520 Under this                     other transaction for which Item 404(a)
                                         instructions that are similar to new                      definition as originally adopted, one of                disclosure would be required; and
                                         Instruction 1 to Item 407(a).515                          the specified methods by which a                           • Are not engaged in a business
                                            As proposed, we are also raising from                  director or executive officer directly or               relationship required to be disclosed
                                         $60,000 to $120,000 the threshold for                     indirectly acquires equity securities in                under Item 404(b).
                                         disclosure of certain interests,                          connection with such service is an                         As described above, the Item 404
                                         transactions, and relationships of each                   acquisition ‘‘at a time when he or she                  amendments substantially revise or
                                         director or nominee for election as                       was a director or executive officer, as a               rescind the Item 404 provisions on
                                         director who is not or would not be an                    result of any transaction or business                   which the Non-Employee Director
                                         ‘‘interested person’’ of an investment                    relationship described in paragraph (a)                 definition was based. To minimize
                                         company within the meaning of Section                     or (b) of Item 404 of Regulation S–                     potential disruptions and because no
                                         2(a)(19) of the Investment Company                        K.’’ 521 To conform this provision of                   problems were brought to our attention
                                         Act.516 This disclosure is required in                    Regulation BTR to the Item 404                          regarding any aspect of the definition as
                                         investment company proxy and                              amendments, we are amending Rule                        it was stated before adoption of these
                                         information statements and registration                   100(a)(2) so that it references only                    amendments, we proposed a conforming
                                         statements. The increase in the                           transactions described in paragraph (a)                 amendment that would delete the
                                         disclosure threshold corresponds to the                   of Item 404, as we proposed.                            provision referring to business
                                         increase in the disclosure threshold for                                                                          relationships subject to disclosure under
                                         amended Item 404 from $60,000 to                          2. Rule 16b–3 Non-Employee Director                     Item 404(b) as it was stated prior to
                                         $120,000.                                                 Definition                                              today’s amendments, without otherwise
                                                                                                      We also are adopting conforming                      revising the text of the rule.
                                         F. Conforming Amendments                                                                                             In the interest of providing certainty
                                                                                                   amendments to the definition of Non-
                                           The changes to Item 404 necessitate                     Employee Director in Exchange Act                       regarding Non-Employee Director status
                                         conforming amendments to other rules                      Rule 16b–3.522 Section 16(b) provides                   and to recognize corporate governance
                                         that refer specifically to Item 404.                      an issuer (or shareholders suing on its                 changes since the definition was
                                         1. Regulation Blackout Trading                            behalf) the right to recover from an                    adopted, one commenter suggested
                                         Restriction                                               officer, director, or ten percent                       basing the definition instead on whether
                                                                                                   shareholder profits realized from a                     a director meets the independence
                                            We are adopting, as proposed,                                                                                  standards under the rules of the
                                                                                                   purchase and sale of issuer equity
                                         conforming changes to Regulation                                                                                  principal national securities exchange
                                         Blackout Trading Restriction,517 also                     securities within a period of less than
                                                                                                   six months. However, Rule 16b–3                         where the company’s securities are
                                         known as Regulation BTR, which we                                                                                 traded.524 If the company has no
                                         originally adopted to clarify the scope                   exempts transactions between issuers of
                                                                                                   securities and their officers and                       securities traded on an exchange, the
                                         and operation of Section 306(a) 518 of                                                                            commenter suggested relying on the
                                         the Sarbanes-Oxley Act of 2002 and to                     directors if specified conditions are met.
                                                                                                   In particular, acquisitions from and                    director’s eligibility to serve on the
                                         prevent evasion of the statutory trading                                                                          issuer’s audit committee under
                                         restriction.519 Rule 100 of Regulation                    dispositions to the issuer are exempt if
                                                                                                   the transaction is approved in advance                  Exchange Act Section 10A(m) and
                                           514 Amendments to Items 22(b)(15)(ii)(B) and            by the issuer’s board of directors, or                  Exchange Act Rule 10A–3.525 We are
                                         (16)(ii) of Schedule 14A. Amended Item                    board committee composed solely of                      not following the suggested approach.
                                         22(b)(15)(ii)(B) requires disclosure about the            two or more Non-Employee Directors.523                  As we stated in the Proposing Release,
                                         independence of nominating committee members                 Before adoption of these amendments,                 the standards for an exemption from
                                         that is similar to those required by Item                                                                         Section 16(b) liability should be readily
                                         7(d)(2)(ii)(C) prior to today’s amendments and
                                                                                                   the definition of ‘‘Non-Employee
                                         amended Item 22(b)(16)(ii) requires disclosure            Director,’’ among other things, limited                 determinable by reference to the
                                         about the independence of audit committee                 these directors to those who:                           exemptive rule, and not variable
                                         members that is similar to those required by Items           • Do not directly or indirectly receive              depending upon where the issuer’s
                                         7(d)(3)(iv)(A)(1) and (B) prior to today’s                                                                        securities are listed.526 Further, basing
                                                                                                   compensation from the issuer, its parent
                                           515 Instruction to Item 22(b)(15)(ii)(B) of Schedule    or subsidiary for consulting or other                   the Non-Employee Director definition
                                         14A; Instruction to Item 22(b)(16)(ii) of Schedule                                                                on eligibility to serve on the issuer’s
                                         14A.                                                      equity security, if the director or executive officer   audit committee could burden the audit
                                           516 Amendments to Items 22(b)(7), 22(b)(8), and         acquires the equity security in connection with his     committee with a compensation
                                         22(b)(9) of Schedule 14A; amendments to Items             or her service or employment as a director or           committee function.
                                         12(b)(6), 12(b)(7), and 12(b)(8) of Form N–1A;            executive officer. This provision equalizes the
                                         amendments to Items 18.9, 18.10, and 18.11 of             treatment of corporate executives and rank-and-file        As proposed and adopted, the Non-
                                         Form N–2; amendments to Items 20(h), 20(i), and           employees with respect to their ability to engage in    Employee Director definition continues
                                         20(j) of Form N–3.                                        transactions involving issuer equity securities         to permit consulting and similar
                                           517 17 CFR 245.100–104.                                 during a pension plan blackout period if the            arrangements subject to limits measured
                                           518 15 U.S.C. 7244(a), entitled ‘‘Prohibition of        securities were acquired in connection with their
                                                                                                   service to, or employment with, the issuer.             by reference to the revised Item 404(a)
                                         Insider Trading During Pension Fund Blackout
                                                                                                      520 This term is defined in Rule 100(a) of           disclosure requirements. Because the
                                           519 Insider Trades During Pension Fund Blackout         Regulation BTR.                                         disclosure threshold of Item 404(a) is
                                         Periods, Release No. 34–47225 (Jan. 22, 2003) [68
                                                                                                      521 Rule 100(a)(2) of Regulation BTR.
                                                                                                                                                           raised from $60,000 to $120,000,
                                                                                                      522 Exchange Act Rule 16b–3(b)(3)(ii), which
                                         FR 4337]. Section 306(a) makes it unlawful for any                                                                however, the effect in some cases may
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                                         director or executive officer of an issuer of any         defines a Non-Employee Director of a closed-end
                                                                                                   investment company as ‘‘a director who is not an
                                                                                                                                                           be to permit previously ineligible
                                         equity security (other than an exempted security),
                                         directly or indirectly, to purchase, sell, or otherwise   ‘interested person’ of the issuer, as that term is
                                                                                                                                                            524 See letter from Sullivan.
                                         acquire or transfer any equity security of the issuer     defined in Section 2(a)(19) of the Investment
                                         (other than an exempted security) during any              Company Act of 1940,’’ is not amended.                   525 15 U.S.C. 78j–1(m) and 17 CFR 240.10A–3.
                                         pension plan blackout period with respect to such            523 Exchange Act Rules 16b–3(d)(1) and 16b–3(e).      526 Proposing Release at n. 309.

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                                         53208            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         directors to be Non-Employee Directors.                 the Exchange Act. The amendments                        and/or (d)(5) of new Item 407, as
                                         In other cases, where revised Item                      modify:                                                 appropriate; 534
                                         404(a) may require disclosure of director                  • Forms that prior to these                             • Forms that prior to these
                                         indebtedness and disclosure of business                 amendments required disclosure of the                   amendments required disclosure of the
                                         relationships not subject to disclosure                 information required by Item 404 to                     information required by Item 401(j), to
                                         under former Item 404(b), some                          instead require disclosure of the                       instead require disclosure of the
                                         formerly eligible directors may become                  information required by amended Item                    information required by new Item
                                         ineligible.                                             404 and new Item 407(a); 530                            407(c)(3); 535 and
                                            In response to concerns of                                                                                      • Item 10 of Form N–CSR to include
                                         commenters about the potential                             • Some forms that prior to these                     a cross reference to new Item
                                         difficulty of making a determination,527                amendments required disclosure of the                   407(c)(2)(iv) of Regulation S–K and new
                                         we have revised the rule as it was                      information required by Item 404(a) or                  Item 22(b)(15) of Schedule 14A, in lieu
                                         proposed to include an additional note                  by Items 404(a) and (c), to instead                     of the former reference to Item
                                         to Rule 16b–3.528 The Non-Employee                      require disclosure of the information                   7(d)(2)(ii)(G) of Schedule 14A.
                                         Director definition contemplates that                   required by Items 404(a) and (b) as                        In addition, conforming amendments
                                         the director must satisfy the definition’s              amended, or amended Item 404(a), as                     have been made to a provision in
                                         tests at the time he or she votes to                    appropriate; 531                                        Regulation AB, which prior to these
                                         approve a transaction. For purposes of                     • A form that prior to these                         amendments required disclosure of the
                                         determining a director’s status under                   amendments cross-referenced an                          information required by Items 401, 402
                                         those tests that are based on Item 404(a),              instruction in Item 404 which we are                    and 404, so that instead it will require
                                         a company may rely on the disclosure                    eliminating to instead include the text                 disclosure of the information required
                                         provided under Item 404 of Regulation                   of this instruction; 532                                by amended Items 401, 402, 404 and
                                         S–K for the issuer’s most recent fiscal                    • Item 7 of Schedule 14A, to require                 paragraphs (a), (c)(3), (d)(4), (d)(5) and
                                         year contained in the most recent filing                disclosure of the information required                  (e)(4) of new Item 407.536
                                         in which Item 404 disclosure is                         by new Item 407(a) rather than the                      VI. Plain English Disclosure
                                         presented.529 Where a transaction                       disclosure that was required prior to
                                         disclosed in that filing was terminated                 these amendments by Item 404(b), to                       We are adopting as proposed a
                                         before the director’s proposed service as               eliminate paragraphs (d)–(h) of Item 7                  requirement that most of the disclosure
                                         a Non-Employee Director, that                                                                                   called for by amended Items 402, 403,
                                                                                                 that were duplicative of new Item 407
                                         transaction will not bar such service.                                                                          404 and 407 be provided in plain
                                                                                                 and replace them with a requirement to
                                         The issuer must believe in good faith                                                                           English. This plain English requirement
                                                                                                 disclose information specified by
                                         that any current or contemplated                                                                                will apply when information
                                                                                                 corresponding paragraphs of new Item
                                         transaction in which the director                                                                               responding to these items is included
                                         participates will not require Item 404(a)                                                                       (whether directly or through
                                                                                                    • Forms that prior to these                          incorporation by reference) in reports
                                         disclosure, based on information readily                amendments required disclosure of the
                                         available to the issuer and the director                                                                        required to be filed under Exchange Act
                                                                                                 information required by Item 402 to                     Sections 13(a) or 15(d). Commenters
                                         at the time such director proposes to act               instead require disclosure of the
                                         as a Non-Employee Director. At such                                                                             were generally supportive of the plain
                                                                                                 information required by amended Item                    English requirement,537 and some
                                         time as the issuer believes in good faith,              402 and new Item 407(e)(4), and, in the
                                         based on readily available information,                                                                         commenters suggested extending the
                                                                                                 case of proxy statements and annual                     plain English requirements to the proxy
                                         that a current (or contemplated)
                                                                                                 reports on Form 10–K, new Item                          statement as a whole and to other
                                         transaction with a director will require
                                                                                                 407(e)(5); 533                                          Commission filings.538
                                         Item 404(a) disclosure in a future filing,
                                         the director no longer is eligible to serve                • Some forms that prior to these                       In 1998, we adopted rule changes
                                         as a Non-Employee Director. However,                    amendments required disclosure of the                   requiring issuers preparing prospectuses
                                         this determination does not result in                   information required by Item 401 to                     to write the cover page, summary and
                                         retroactive loss of a Rule 16b–3                        instead require disclosure of the
                                                                                                                                                            534 See amendments to General Instruction
                                         exemption for a transaction previously                  information required by Item 401 as
                                                                                                                                                         I.B.4.(c) of Form S–3, and Item 10 of Form 10–K,
                                         approved by the director while serving                  amended and paragraphs (c)(3), (d)(4)                   which refer to Item 401 and paragraphs (c)(3), (d)(4)
                                         as a Non-Employee director consistent                                                                           and (d)(5) of new Item 407, and Item 7(b) of
                                         with the note. In making determinations                    530 See amendments to Item 15 of Form SB–2,          Schedule 14A, which refers to Item 401 and
                                                                                                 Item 11(n) of Form S–1, Item 18(a)(7)(iii) and Item     paragraphs (d)(4) and (d)(5) of new Item 407. The
                                         under the note, an issuer may rely on                   19(a)(7)(iii) of Form S–4, Item 23 of Form S–11,        amendments to Form 10–KSB require disclosure of
                                         information it obtains from the director,               Item 7 of Form 10, Item 13 of Form 10–K, Item 7         the information required by amended Item 401 and
                                         for example pursuant to a response to an                of Form 10–SB and Item 12 of Form 10–KSB. The           new Item 407(c)(3), (d)(4) and (d)(5) of Regulation
                                         inquiry.                                                amendments to Forms SB–2, 10–SB and 10–KSB              S–B. We are not making any changes to the
                                                                                                 require disclosure of the information required by       reference to Item 401 in Note G to Form 10–K,
                                         3. Other Conforming Amendments                          amended Item 404 and new Item 407(a) of                 however, because the portion of Item 401 applicable
                                                                                                 Regulation S–B.                                         in Note G (certain disclosure regarding executive
                                            The changes to Item 404, along with                     531 See amendment to Item 7(b) of Schedule 14A,      officers) does not include the part of Item 401 that
                                         the consolidation of provisions into                    which refers to amended Items 404(a) and (b), and       we are combining into new Item 407.
                                                                                                                                                            535 See amendments to Item 5 in Part II of Form
                                         Item 407, necessitate conforming                        Item 22(b)(11) and the Instruction to Item 22(b)(11)
                                                                                                 of Schedule 14A, and Item 5.02(c)(2) of Form 8–K,       10–Q, and Item 5 in Part II of Form 10–QSB. The
                                         amendments to various forms and                                                                                 amendments to Item 5 in Part II of Form 10–QSB
                                                                                                 which refer to amended Item 404(a). The
                                         schedules under the Securities Act and                  amendments to Form 8–K that reference Regulation        require disclosure of the information required by
                                                                                                 S–B require disclosure of the information required      new Item 407(c)(3) of Regulation S–B.
                                           527 See,e.g., letter from SCSGP.                      by amended Item 404(a) of Regulation S–B.                  536 See amendments to Item 1107(e) of Regulation
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                                           528 Note 4 to Rule 16b–3.                                532 See amendments to Item 23 of Form S–11.          AB.
                                           529 As under Rule 16b–3 prior to these                   533 See amendments to Item 8 of Schedule 14A,           537 See, e.g., letters from SCSGP; jointly, Angela

                                         amendments, each test referring to Item 404 is          Item 11(l) of Form S–1, General Instruction I.B.4.(c)   Chappa, Annie Gabel and Michelle Prater; SBAF;
                                         measured by reference to Regulation S–K, even if        of Form S–3, Items 18(a)(7)(ii) and 19(a)(7)(ii) of     and Standard Life.
                                         the disclosure requirements applicable to the           Form S–4, Item 22 of Form S–11, Item 6 of Form             538 See, e.g., letters from SCSGP; Foley; and

                                         company are governed by Regulation S–B.                 10 and Item 11 of Form 10–K.                            Mercer.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                  53209

                                         risk factors section of prospectuses in                 information, drawn to scale and not                     commenters recommended using a
                                         plain English and apply plain English                   misleading.                                             separate supplemental table, rather than
                                         principles to other portions of the                        The new rule also provides additional                footnotes, to identify the components of
                                         prospectus.539 These rules transformed                  guidance on drafting the disclosure that                All Other Compensation, including
                                         the landscape of public offering                        would comply with plain English                         individual perquisites, reported in the
                                         disclosure and made prospectuses more                   principles, including guidance as to the                Summary Compensation Table.542
                                         accessible to investors. We believe that                following practices that companies                      While we have not mandated such a
                                         plain English principles should apply to                should avoid:                                           separate table, we encourage companies
                                         the disclosure requirements that we are                    • Legalistic or overly complex                       to use additional tables wherever
                                         adopting, so disclosure provided in                     presentations that make the substance of                tabular presentation facilitates clearer,
                                         response to those requirements is easier                the disclosure difficult to understand;                 more concise disclosure. Several
                                         to read and understand. Clearer, more                      • vague ‘‘boilerplate’’ explanations                 commenters also requested that we
                                         concise presentation of executive and                   that are overly generic;                                specifically permit tabular disclosure of
                                         director compensation, related person                      • complex information copied                         the required potential post-employment
                                         transactions, beneficial ownership and                  directly from legal documents without                   payments disclosure.543 Because of the
                                         corporate governance matters can                        any clear and concise explanation of the                difficulty of prescribing a single format
                                         facilitate more informed investing and                  provision(s); and                                       that would cover all circumstances, the
                                         voting decisions in the face of complex                    • disclosure repeated in different                   rule as proposed and adopted does not
                                         information about these important areas.                sections of the document that increases                 mandate tabular disclosure. However,
                                            We are adding Exchange Act Rules                     the size of the document but does not                   consistent with the plain English
                                         13a–20 and 15d–20 to require that                       enhance the quality of the information.                 principles that we adopt today, we
                                         companies prepare their executive and                      Under the new rules, if disclosures                  encourage companies to develop their
                                         director compensation, related person                   about executive compensation,                           own tables to report post-termination
                                         transaction, beneficial ownership and                   beneficial ownership, related person                    compensation if such tabular
                                         corporate governance disclosures                        transaction or corporate governance                     presentation facilitates clearer, more
                                         included in Exchange Act reports using                  matters are incorporated by reference                   concise disclosure. Similarly, while we
                                         plain English, including the following                  into an Exchange Act report from a                      do not require tabular presentation of
                                         principles:                                             company’s proxy or information                          the narrative disclosure following the
                                            • Present information in clear,                      statement, the disclosure is required to                director compensation table, such as a
                                         concise sections, paragraphs and                        be in plain English in the proxy or                     breakdown of director fees, consistent
                                         sentences;                                              information statement.540 The plain                     with the plain English rules we adopt
                                            • Use short sentences;                               English rules are part of the disclosure                today, we encourage tabular
                                            • Use definite, concrete, everyday                   rules applicable to filings required                    presentation where it facilitates an
                                         words;                                                  under Sections 13(a) and 15(d) of the                   understanding of the disclosure.
                                            • Use the active voice;                              Exchange Act. We believe that these                     Companies should also consider ways
                                            • Avoid multiple negatives;                          plain English requirements are best                     in which design elements such as tables
                                            • Uuse descriptive headings and                      administered by the Commission under                    can facilitate the presentation of the
                                         subheadings;                                            these rules, and therefore we are not at                related person transaction disclosure
                                            • Use a tabular presentation or bullet               this time extending plain English                       and corporate governance disclosures.
                                         lists for complex material, wherever                    requirements to the entire proxy
                                         possible;                                               statement or to other Commission                        VII. Transition
                                            • Avoid legal jargon and highly                      filings.
                                         technical business and other                                                                                      A number of commenters
                                                                                                    We believe that several areas where                  recommended that we adopt the rules
                                         terminology;                                            commenters requested that information
                                            • Avoid frequent reliance on                                                                                 by September or October 2006 in order
                                                                                                 be required in a specific format, such as               for companies to have sufficient time to
                                         glossaries or defined terms as the                      tables, are best addressed by application
                                         primary means of explaining                                                                                     implement them for the 2007 proxy
                                                                                                 of our plain English principles. The                    season.544 One commenter expressed
                                         information;                                            plain English rules adopted today
                                            • Define terms in the glossary or other                                                                      concern on how the transition would
                                                                                                 specifically provide that, in designing                 apply to Securities Act registration
                                         section of the document only if the                     the presentation of the information,
                                         meaning is unclear from the context;                                                                            statements.545 In keeping with these
                                                                                                 companies may include tables or other                   comments, we believe we have adopted
                                            • Use a glossary only if it facilitates              design elements, so long as the design
                                         understanding of the disclosure; and                                                                            the new rules and amendments in
                                                                                                 is not misleading and the required                      sufficient time for compliance in the
                                            • In designing the presentation of the               information is clear, understandable,
                                         information, include pictures, logos,                                                                           2007 proxy season. Therefore, the
                                                                                                 consistent with applicable disclosure                   compliance dates are as follows:
                                         charts, graphs, schedules, tables or other              requirements, consistent with any other
                                         design elements so long as the design is                included information, and not                             542 See, e.g., letters from Amalgamated; CFA
                                         not misleading and the required                         misleading.541 In response to our                       Centre 1; CII; IUE–CWA; Mercer; and SBAF.
                                         information is clear, understandable,                   request for comment, several                              543 See, e.g., letters from Buck Consultants;
                                         consistent with applicable disclosure                                                                           Frederic W. Cook & Co.; HRPA; ISS; Mercer; and
                                         requirements and any other included                       540 See, e.g., General Instruction G(3) to Form 10–   The Value Alliance and Corporate Governance
                                                                                                 K and General Instruction E.3. to Form 10–KSB           Alliance.
                                            539 Plain English Disclosure, Release No. 33–7497    (specifying information that may be incorporated by       544 See, e.g., letters from ABA; ACC; Brian Foley

                                         (Jan. 28, 1998) [63 FR 6369] (adopting revisions to     reference from a proxy or information statement in      & Co.; Jesse Brill, Chair of
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                                         Securities Act Rule 421 [17 CFR 230.421]). We have      an annual report on Form 10–K or 10–KSB).      and Chair of the
                                         also required that risk factor disclosure included in     541 Of course, the tables required under the rules    National Association of Stock Plan Professionals,
                                         annual reports and Summary Term Sheets in               we adopt today must be included and cannot be           dated April 28, 2006; Buck Consultants; Foley;
                                         business combination filings be in plain English.       modified except as specifically allowed for in the      Frederic W. Cook & Co.; Fried Frank; Mercer; and
                                         See Item 1A. to Form 10–K and Item 1001 of              rules. See Item 402(a)(5) of Regulation S–K and Item    Sullivan.
                                         Regulation M–A [17 CFR 229.1001], respectively.         402(a)(4) of Regulation S–B.                              545 See letter from BDO Seidman.

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                                         53210              Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                            • For Forms 8–K, compliance is                        most recent fiscal year will be required                 Reduction Act.549 The titles for the
                                         required for triggering events that occur                to be reflected in the revised Summary                   collection of information are: 550
                                         60 days or more after publication in the                 Compensation Table when the new                             (1) ‘‘Regulation S–B’’ (OMB Control
                                         Federal Register;                                        rules and amendments applicable to the                   No. 3235–0417);
                                            • For Forms 10–K and 10–KSB,                          Summary Compensation Table become                           (2) ‘‘Regulation S–K’’ (OMB Control
                                         compliance is required for fiscal years                  effective, and therefore the information                 No. 3235–0071);
                                         ending on or after December 15, 2006;                    for years prior to the most recent fiscal                   (3) ‘‘Form SB–2’’ (OMB Control No.
                                            • For proxy and information                           year will not have to be presented at all.
                                         statements covering registrants other                                                                                (4) ‘‘Form S–1’’ (OMB Control No.
                                                                                                  For the subsequent year’s Summary                        3235–0065);
                                         than registered investment companies,
                                                                                                  Compensation Table, companies will be                       (5) ‘‘Form S–4’’ (OMB Control
                                         compliance is required for any proxy or
                                                                                                  required to present only the most recent                 Number 3235–0324);
                                         information statements filed on or after
                                         December 15, 2006 that are required to                   two fiscal years in the Summary                             (6) ‘‘Form S–11’’ (OMB Control
                                         include Item 402 and 404 disclosure for                  Compensation Table, and for the next                     Number 3235–0067);
                                         fiscal years ending on or after December                 and all subsequent years will be                            (7) ‘‘Regulation 14A and Schedule
                                         15, 2006;                                                required to present all three fiscal years               14A’’ (OMB Control Number 3235–
                                            • For Securities Act registration                     in the Summary Compensation Table.547                    0059);
                                         statements covering registrants other                    As another example, if a calendar year-                     (8) ‘‘Regulation 14C and Schedule
                                         than registered investment companies                     end company files its initial public                     14C’’ (OMB Control Number 3235–
                                         and Exchange Act registration                            offering on Form S–1 in November, the                    0057);
                                         statements (including pre-effective and                  initial filing will contain compensation                    (9) ‘‘Form 10’’ (OMB Control No.
                                         post-effective amendments, as                            disclosure regarding 2005 following the                  3235–0064);
                                                                                                                                                              (10) ‘‘Form 10–SB’’ (OMB Control No.
                                         applicable), compliance is required for                  prior rules. If the registration statement               3235–0419);
                                         registration statements that are filed                   does not become effective until after the                   (11) ‘‘Form 10–K’’ (OMB Control No.
                                         with the Commission on or after                          Item 402 disclosure must be updated,                     3235–0063);
                                         December 15, 2006 that are required to                   then an amendment will have to be filed                     (12) ‘‘Form 10–KSB’’ (OMB Control
                                         include Item 402 and 404 disclosure for                  that includes the 2006 compensation                      No. 3235–0420);
                                         fiscal years ending on or after December                 information that complies with the rules                    (13) ‘‘Form 8–K’’ (OMB Control No.
                                         15, 2006;                                                we adopt today. The Summary                              3235–0060); and
                                            • For initial registration statements                 Compensation Table, however, will only                      (14) ‘‘Form N–2’’ (OMB Control No.
                                         and post-effective amendments that are                   contain the information for 2006 and                     3235–0026).
                                         annual updates to effective registration                                                                             We adopted all of the existing
                                                                                                  will not need to contain the information
                                         statements that are filed on Forms N–                                                                             regulations and forms pursuant to the
                                                                                                  restated from 2005.
                                         1A, N–2 and N–3 (except those filed by                                                                            Securities Act and the Exchange Act. In
                                         business development companies),                            This transition approach will result in               addition, we adopted Form N–2
                                         compliance is required for registration                  phased-in implementation of the                          pursuant to the Investment Company
                                         statements and post-effective                            amended Summary Compensation Table                       Act. These regulations and forms set
                                         amendments that are filed with the                       and amended Item 404(a) disclosure                       forth the disclosure requirements for
                                         Commission on or after December 15,                      over a three-year period for Regulation                  annual 551 and current reports,
                                         2006; and                                                S–K companies, and a two-year period                     registration statements, proxy
                                            • For proxy and information                           for Regulation S–B companies. During                     statements and information statements
                                         statements covering registered                           this phase-in period, companies will not                 that are prepared by issuers to provide
                                         investment companies, compliance is                      be required to present prior years’                      investors with the information they
                                         required for any new proxy or                            compensation disclosure or Item 404(a)                   need to make informed investment
                                         information statement filed on or after                  disclosure under the former rules.                       decisions in registered offerings and in
                                         December 15, 2006.546                                                                                             secondary market transactions, as well
                                            Commenters expressed some                             VIII. Paperwork Reduction Act                            as informed voting decisions in the case
                                         confusion concerning the periods for                     A. Background                                            of proxy statements.
                                         which disclosure under the new rules                                                                                 Our amendments to the forms and
                                         and amendments will be required                            The new rules and amendments                           regulations are intended to:
                                         during the transition from the former                    contain ‘‘collection of information’’                       • Provide investors with a clearer and
                                         rules. As we noted in the Proposing                      requirements within the meaning of the                   more complete picture of compensation
                                         Release, companies will not be required                  Paperwork Reduction Act of 1995.548                      awarded to, earned by or paid to
                                         to ‘‘restate’’ compensation or related                   We published a notice requesting                         principal executive officers, principal
                                         person transaction disclosure for fiscal                 comment on the collection of                             financial officers, the highest paid
                                         years for which they previously were                     information requirements in the                          executive officers other than the
                                         required to apply our rules prior to the                 Proposing Release, and we submitted                      principal executive officer and principal
                                         effective date of today’s amendments.                    these requirements to the Office of                      financial officer, and directors;
                                         This means, for example, that only the                   Management and Budget for review in                        549 44 U.S.C. 3507(d) and 5 CFR 1320.11.
                                                                                                  accordance with the Paperwork                              550 The
                                           546 The  amendments to the cross-references in                                                                             paperwork burden from Regulations S–K
                                         Item 10 of Form N–CSR will appear in the Form                                                                     and S–B is imposed through the forms that are
                                                                                                    547 The other amended executive and director           subject to the requirements in those Regulations
                                         concurrent with the effective date of the
                                         amendments to our proxy rules, and will be               compensation disclosure requirements which relate        and is reflected in the analysis of those forms. To
                                         effective for a particular registrant’s Forms N–CSR      to the last completed fiscal year will not be affected   avoid a Paperwork Reduction Act inventory
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                                         that are filed after the filing of any proxy statement   by this transition approach. The Summary                 reflecting duplicative burdens, for administrative
                                         that includes a response to new Item 407(c)(2)(iv)       Compensation Table will be treated differently           convenience we estimate the burdens imposed by
                                         of Regulation S–K (as required by new Item               because, as amended, it requires disclosure of           each of Regulations S–K and S–B to be a total of
                                         22(b)(15) of Schedule 14A). The substance of the         compensation to the named executive officers for         one hour.
                                         information required by the Item has not been            the last three fiscal years.                               551 The pertinent annual reports are those on

                                         changed.                                                   548 44 U.S.C. 3501 et seq.                             Form 10–K or 10–KSB.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                       53211

                                           • Provide investors with better                       information necessary for computing the               person transaction disclosure
                                         information about key financial                         total amount of compensation, such as                 requirement;
                                         relationships among companies and                       the grant date fair value of equity-based                • New disclosure regarding a
                                         their executive officers, directors,                    awards computed in accordance with                    company’s policies and procedures for
                                         significant shareholders and their                      FAS 123R, and the aggregate annual                    the review, approval or ratification of
                                         respective immediate family members;                    change in the actuarial present value of              transactions with related persons;
                                           • Include more complete information                   the named executive officers’                            • New disclosure regarding corporate
                                         about independence regarding members                    accumulated benefit under defined                     governance matters such as the
                                         of the board of directors and board                     benefit and actuarial pension plans;                  independence of directors; and
                                         committees;                                                • Disclosure at lower thresholds of                   • Additional disclosure regarding
                                           • Reorganize and modify the type of                   information regarding perquisites and                 pledges of securities by officers and
                                         executive and director compensation                     other personal benefits;                              directors and directors’ qualifying
                                         information that must be disclosed in                      • A more focused presentation of                   shares.
                                         current reports; and                                    compensation plan awards in a Grants                     At the same time, the amendments
                                           • Require most of the disclosure                      of Plan-Based Awards Table, which                     will decrease existing disclosure
                                         required under these amendments to be                   builds upon former tabular disclosures                burdens for annual reports on Form 10–
                                         provided in plain English.                              regarding long term incentive plans and               K and registration statements on Forms
                                           The hours and costs associated with                   awards of option and stock appreciation               10, S–1, S–4 and S–11 by:
                                         preparing disclosure, filing forms, and                 rights to supplement the information                     • Eliminating tabular presentation
                                         retaining records constitute reporting                  required to be included in the amended                regarding projected stock option values
                                         and cost burdens imposed by the                         Summary Compensation Table;                           under alternative stock appreciation
                                         collection of information. An agency                       • Expanded disclosure regarding                    scenarios;
                                         may not conduct or sponsor, and a                       holdings and exercises by named                          • Eliminating a generalized tabular
                                         person is not required to respond to, a                 executive officers of previously awarded              presentation regarding defined benefit
                                         collection of information unless it                     stock, options and similar instruments                plans, which will offset in part the
                                         displays a currently valid control                      (with disclosure regarding outstanding                increased burdens regarding pension
                                         number.                                                 option awards required on an award-by-                plan disclosure; and
                                           The information collection                            award basis), including disclosure of                    • Eliminating a disclosure
                                         requirements related to annual and                      option exercise prices and expiration                 requirement regarding specific director
                                         current reports, registration statements,               dates, as well as the amounts (both the               relationships that could affect
                                         proxy statements and information                        number of shares and the value) realized              independence.
                                                                                                 upon the exercise of options and the                     In addition, the amendments may
                                         statements are mandatory. However, the
                                                                                                 vesting of stock;                                     increase or decrease existing disclosure
                                         information collection requirements
                                         relating exclusively to proxy and                          • Improved narrative disclosure                    burdens, or not affect them at all, for
                                                                                                 accompanying data presented in the                    annual reports on Form 10–K and
                                         information statements will only apply
                                                                                                 executive compensation tables and a                   registration statements on Forms 10, S–
                                         to issuers subject to the proxy rules.
                                                                                                 new Compensation Discussion and                       1, S–4 and S–11, depending on a
                                         There is no mandatory retention period
                                                                                                 Analysis section to explain material                  company’s particular circumstances, by:
                                         for the information disclosed, and the                                                                           • Eliminating the requirement to
                                         information disclosed will be made                      elements of compensation of named
                                                                                                 executive officers;                                   include in proxy or information
                                         publicly available on the EDGAR filing
                                                                                                    • With regard to Form 10–K, a short                statements a compensation committee
                                         system.                                                                                                       report on the repricing of options and
                                                                                                 Compensation Committee Report
                                         B. Summary of Information Collections                   regarding the compensation committee’s                stock appreciation rights and a table
                                                                                                 review and discussion with                            reporting on the repricing of options
                                            The amendments will increase
                                                                                                 management of the Compensation                        and stock appreciation rights over the
                                         existing disclosure burdens for annual
                                                                                                 Discussion and Analysis, and the                      past ten years, in favor of a narrative
                                         reports on Form 10–K 552 and
                                                                                                 compensation committee’s                              discussion of repricings, if any occurred
                                         registration statements on Forms 10, S–
                                                                                                 recommendation to the board of                        in the last fiscal year, which will be
                                         1, S–4 and S–11 by requiring:
                                                                                                 directors concerning the disclosure of                required to be included or incorporated
                                            • An expanded and reorganized
                                                                                                 the Compensation Discussion and                       by reference (as applicable) in annual
                                         Summary Compensation Table, which
                                                                                                 Analysis in the Form 10–K or proxy or                 reports and registration statements;
                                         will require expanded disclosure of a
                                                                                                 information statement;                                   • Increasing the dollar value
                                         ‘‘total compensation’’ amount, and
                                                                                                    • New tables and narrative disclosure              threshold for determining if related
                                           552 The amended disclosure requirements               regarding retirement plans and                        person transaction disclosure is
                                         regarding executive and director compensation,          nonqualified defined contribution and                 required from $60,000 to $120,000;
                                         beneficial ownership, related person transactions       other deferred compensation plans;                       • Narrowing the scope of an
                                         and parts of the amended corporate governance              • Expanded disclosure regarding                    instruction that provides bright line
                                         disclosure requirements are in Form 10–K,                                                                     tests for determining whether
                                         Schedule 14A and Schedule 14C. Form 10–K
                                                                                                 post-employment payments other than
                                         permits the incorporation by reference of               pursuant to retirement and deferred                   transactions with related persons are
                                         information in Schedule 14A or 14C to satisfy the       compensation plans;                                   required to be disclosed in particular
                                         disclosure requirements of Form 10–K. The analysis         • A new table and improved narrative               circumstances; and
                                         that follows assumes that companies would either        disclosure for director compensation to                  • Requiring disclosure about reliance
                                         provide the required disclosure in a Form 10–K
                                         only, if the company is not subject to the proxy        replace the more general disclosure                   on an exemption from requirements for
                                         rules, or would incorporate the required disclosure     requirements in place prior to these                  director independence when such an
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                                         into the Form 10–K by reference to the proxy or         amendments;                                           exemption is available.
                                         information statement if the company is subject to         • Disclosure regarding additional                     Specifically with respect to proxy and
                                         the proxy rules. This approach takes into account
                                         the burden from the amended disclosure
                                                                                                 related persons by expanding the                      information statements, the
                                         requirements that are included in both the Form         definition of ‘‘immediate family                      amendments will impose a new
                                         10–K and in Schedule 14A or Schedule 14C.               member’’ under an amended related                     disclosure requirement regarding the

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                                         53212            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         company’s processes and procedures for                  other modifications will be required to               KSB and registration statements on
                                         the consideration and determination of                  be included or incorporated by                        Forms 10–SB and SB–2 filed by small
                                         executive and director compensation                     reference in annual reports and                       business issuers by:
                                         with respect to the compensation                        registration statements, while the                       • Reducing by two the number of
                                         committee or persons performing the                     Compensation Committee Report will                    named executive officers for the
                                         equivalent functions, and disclosure                    only be required to be included or                    purposes of executive compensation
                                         regarding the availability of the                       incorporated by reference from the                    disclosure, to include only the principal
                                         compensation committee’s charter (if it                 proxy or information statement in the                 executive officer and the two most
                                         has one), either as an appendix to the                  annual report on Form 10–K. We                        highly compensated executive officers
                                         proxy or information statement at least                 estimate that, on balance, the changes                other than the principal executive
                                         once every three fiscal years or on the                 that are specific to proxy or information             officer;
                                         company’s Web site. These amendments                    statements will result in some                           • Reducing the required information
                                         will not require a compensation                         incremental burdens on proxy or                       in the Summary Compensation Table
                                         committee to establish or maintain a                    information statement collections of                  from three years to two years of data;
                                         charter. The amended disclosure that                    information, as described in more detail                 • Eliminating tabular disclosure of
                                         will be required regarding compensation                 below.                                                grants of options and stock appreciation
                                         committees is similar to what is                           The amendments will increase                       rights in the last fiscal year;
                                                                                                 existing disclosure burdens for annual                   • Eliminating tabular disclosure
                                         currently required for audit committees
                                                                                                 reports on Form 10–KSB 553 and                        regarding exercises of options and stock
                                         and nominating committees. The
                                                                                                 registration statements on Forms 10–SB                appreciation rights; and
                                         amendments will decrease disclosure                                                                              • Eliminating tabular disclosure
                                         requirements for proxy and information                  and SB–2 filed by small business issuers
                                                                                                 by requiring:                                         regarding long-term incentive plan
                                         statements by eliminating a disclosure                                                                        awards in the last fiscal year.
                                         requirement regarding the resignation of                   • An expanded and reorganized
                                                                                                 Summary Compensation Table, which                        In addition, the amendments may
                                         directors and a compensation committee                                                                        increase or decrease, or not affect,
                                         report on the repricing of options and                  will require expanded disclosure of a
                                                                                                 ‘‘total compensation’’ amount, and                    existing disclosure burdens for annual
                                         stock appreciation rights. The                                                                                reports on Form 10–KSB or registration
                                         amendments require the Compensation                     information necessary for computing the
                                                                                                 total amount of compensation, such as                 statements on Forms 10–SB and SB–2
                                         Discussion and Analysis disclosure in                                                                         filed by small business issuers
                                         the annual report on Form 10–K and in                   the grant date fair value of equity-based
                                                                                                 awards computed in accordance with                    depending on the small business
                                         proxy or information statements to be                                                                         issuer’s particular circumstances, by:
                                         accompanied by a short Compensation                     FAS 123R;
                                                                                                                                                          • Eliminating the requirement to
                                         Committee Report regarding the                             • Disclosure at lower dollar
                                                                                                                                                       include a compensation committee
                                         compensation committee’s review and                     thresholds for information regarding
                                                                                                                                                       report on the repricing of options and
                                         discussion with management of the                       perquisites and other personal benefits;
                                                                                                                                                       stock appreciation rights, in favor of a
                                         Compensation Discussion and Analysis,                      • Expanded disclosure regarding
                                                                                                                                                       narrative discussion of repricings, if any
                                         and the compensation committee’s                        holdings by named executive officers of
                                                                                                                                                       occurred in the last fiscal year, which
                                         recommendation to the board of                          previously awarded stock, options and
                                                                                                                                                       will be required to be included or
                                         directors with regard to the disclosure of              similar instruments (with disclosure
                                                                                                                                                       incorporated by reference (as
                                         the Compensation Discussion and                         regarding outstanding option awards
                                                                                                                                                       applicable) in annual reports and
                                         Analysis. This new Compensation                         required on an award-by-award basis),
                                                                                                                                                       registration statements;
                                         Committee Report, along with the                        including disclosure of option exercise                  • Changing the dollar value threshold
                                         Compensation Discussion and Analysis,                   prices and expiration dates.                          used for determining if related person
                                         is required instead of the Board                           • A new table for director
                                                                                                                                                       transaction disclosure is required from
                                         Compensation Committee Report on                        compensation, to replace narrative
                                                                                                                                                       $60,000 to the lesser of $120,000 or one
                                         Executive Compensation that was                         disclosure requirements that existed
                                                                                                                                                       percent of the average of the small
                                         previously required to be furnished with                prior to these amendments;
                                                                                                                                                       business issuer’s total assets at year-end
                                         proxy and information statements prior                     • A narrative description of
                                                                                                                                                       for the last three completed fiscal years;
                                         to these amendments. The extent to                      retirement plans;
                                         which eliminating the former                               • Disclosure regarding additional                     • Narrowing the scope of an
                                         requirements to provide the Board                       related persons under the amended                     instruction that provides bright line
                                         Compensation Committee Report on                        related person transaction disclosure                 tests for determining whether
                                         Executive Compensation and a                            requirement;                                          transactions with related persons are
                                         compensation committee report on the                       • New and reorganized disclosure                   required to be disclosed in particular
                                         repricing of options and stock                          regarding corporate governance matters                circumstances.
                                         appreciation rights reduces burdens for                 such as the independence of directors                    The amendments may increase or
                                         proxy and information statements will                   and members of the nominating,                        decrease existing disclosure burdens, or
                                         be offset to a substantial extent, as                   compensation and audit committees of                  not affect them at all, depending on the
                                         discussed above, by the periodic                        the board of directors; and                           particular circumstances, for Forms N–
                                         reporting and proxy or information                         • Additional disclosure regarding                  1A, N–2, and N–3 by increasing to
                                         statement requirements for                              pledges of securities by officers and                 $120,000 the former $60,000 threshold
                                         Compensation Discussion and Analysis,                   directors, and director qualifying shares.            in such forms for disclosure of certain
                                         the new Compensation Committee                             At the same time, the amendments                   interests, transactions, and relationships
                                         Report and a narrative disclosure                       will decrease existing disclosure                     of disinterested directors, although as
                                                                                                 burdens for annual reports on Form 10–
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                                         requirement regarding repricings and                                                                          discussed below we do not believe the
                                         other modifications of outstanding                        553 The same analysis as discussed above with
                                                                                                                                                       increase in the disclosure threshold will
                                         awards. The Compensation Discussion                     regard to the relationship of Form 10–K to the
                                                                                                                                                       significantly impact the hours of
                                         and Analysis and narrative disclosure                   disclosure required in proxy or information           company personnel time and cost of
                                         requirement regarding repricings and                    statements is also applied to Form 10–KSB.            outside professionals in responding to

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                53213

                                         these items. The amendments will                        process; and the cost analysis does not                  • Plan-by-plan disclosure of pension
                                         increase the existing disclosure burdens                reflect additional director time that will            benefits; 564
                                         for Form N–2 by requiring business                      be required to read the lengthy new                      • Numerical estimates of termination
                                         development companies to provide                        disclosure.555 The commenter also                     or change in control payments; 565
                                         additional disclosure regarding                         expressed the view that smaller to mid-                  • Amendments to the related person
                                         compensation. However, the                              size issuers will be negatively affected              transaction disclosure requirement; 566
                                         amendments will decrease the existing                   disproportionately more than larger                      • Disclosure of director relationships
                                         disclosure burden by no longer                          public companies, as disclosure                       (other than those disclosed under the
                                         requiring compensation disclosure with                  requirements increase and greater                     related person transaction disclosure
                                         respect to certain affiliated persons and               reliance on external support is thus                  requirement) considered by the board of
                                         the advisory board of business                          necessitated.                                         directors when making independence
                                         development companies and by no                            Other commenters stated their belief               determinations; 567 and
                                         longer requiring business development                                                                            • Disclosure regarding the use of
                                                                                                 that the Commission underestimated the
                                         companies to disclose certain                                                                                 compensation consultants by the
                                                                                                 cost of the proposed disclosure
                                         compensation from the fund complex.                                                                           compensation committee 568 as well as
                                                                                                 requirements.556 One of these
                                            The amendments will decrease the                                                                           the contacts between compensation
                                                                                                 commenters cited the limited
                                         Form 8–K disclosure burdens, by                                                                               consultants and executive officers of the
                                                                                                 availability of information from existing
                                         focusing the Form 8–K disclosure                                                                              company.569
                                                                                                 information systems and requested that                   Some commenters also noted their
                                         requirement on more presumptively                       the Commission afford an adequate                     belief that costs and burdens arising
                                         material employment agreements, plans                   transition period to accommodate the                  from the proposals would
                                         or arrangements of the narrower group                   proposed changes,557 while another                    disproportionately affect small business
                                         of named executive officers, which                      commenter suggested that the proposal                 issuers and smaller public
                                         should reduce the number of current                     would notably impose a reporting and                  companies.570
                                         reports on Form 8–K filed each year                     administrative burden that would add to                  We have made substantive
                                         relating to executive and director                      the already substantial reporting                     modifications to the proposals that
                                         compensation matters.                                   obligations imposed by the Sarbanes-                  address, in part, the concerns expressed
                                            We do not believe that our                           Oxley Act of 2002 and related rules.558               by commenters about costs. Some of the
                                         amendments regarding exhibit filing                     Another commenter noted that                          changes in the final rules include:
                                         requirements for Form 20–F and our                      companies will likely incur                              • Treating Compensation Discussion
                                         treatment of foreign private issuers                    considerable costs in preparing the first             and Analysis as filed (and not
                                         under the revised rules will impose any                 proxy statement under the revised rules,              furnished), but requiring a separate
                                         incremental increase or decrease in the                 even if, as was proposed, they do not                 Compensation Committee Report over
                                         disclosure burden for these issuers.                    have to ‘‘restate’’ compensation for prior            the names of compensation committee
                                         C. Summary of Comment Letters and                       years.559                                             members as a means of emphasizing the
                                         Revisions to Proposals                                     Other commenters noted that specific               committee’s involvement in the
                                                                                                 aspects of the proposals would result in              disclosure and providing additional
                                           We requested comment on the                           significant costs or burdens, including:              information to which the principal
                                         Paperwork Reduction Act analysis
                                                                                                    • Compensation Discussion and                      executive officer and principal financial
                                         contained in the Proposing Release. We                                                                        officer may look to in completing their
                                                                                                 Analysis generally, as well as the status
                                         did not receive comments on our                                                                               certifications;
                                                                                                 of this disclosure as filed rather than
                                         Paperwork Reduction Act estimates; 554                                                                           • Requiring disclosure of the actuarial
                                                                                                 furnished; 560
                                         however, a number of commenters                                                                               present value of the named executive
                                         expressed concerns that costs associated                   • Disclosure of the increase in
                                                                                                 actuarial value of pension plans in the               officers’ accumulated benefits under
                                         with the proposals were understated.                                                                          defined benefit and actuarial pension
                                         Commenters also raised concerns with                    Summary Compensation Table and its
                                                                                                 inclusion in the determination of named               plans in the Pension Benefits Table,
                                         costs and burdens associated with                                                                             which under the final rules will include
                                         particular aspects of the proposals.                    executive officer status; 561
                                                                                                    • Lowering the disclosure threshold                the actuarial present value of
                                           One commenter indicated that the                                                                            accumulated benefits computed by
                                         Commission needs to take into                           for perquisites and other personal
                                                                                                 benefits to $10,000, and changing the                 utilizing assumptions used for financial
                                         consideration that the disclosure is                                                                          reporting purposes under generally
                                         more detailed and lengthy, and                          threshold for separate identification and
                                                                                                 quantification; 562                                   accepted accounting principles (rather
                                         realistically will require more                                                                               than requiring disclosure of an estimate
                                         preparation time by more people;                           • Footnote disclosure to the
                                                                                                                                                       of the annual benefit payable upon
                                         historically, the individuals involved in               Outstanding Equity Awards at Year-End
                                                                                                                                                       retirement as proposed), and requiring
                                         the process outside a company have                      Table regarding expiration and vesting
                                                                                                                                                       in the Summary Compensation Table
                                         been attorneys and accountants who are                  dates; 563
                                         preparing or reviewing the documents,                                                                           564 See, e.g., letters from ABA; Hewitt; HRPA; and
                                         but compensation consultants and their                    555 See letter from Chamber of Commerce.            Towers Perrin.
                                                                                                   556 See, e.g., letters from Computer Sciences;
                                         advisors and special counsel to the                                                                             565 See, e.g., letters from Sullivan; Kellogg;
                                                                                                 HRPA; N. Ludgus; and Kathy B. Wheby.                  SCSGP; and Chamber of Commerce.
                                         directors would be introduced into the                    557 See letter from Computer Sciences.                566 See, e.g., letters from American Bankers;
                                                                                                   558 See letter from HRPA.
                                            554 One commenter noted our aggregate burden                                                               Whitney Holding; SCSGP; and FSR.
                                                                                                   559 See letter from Sullivan.                         567 See, e.g., letters from BRT; Chadbourne;
                                         estimates in commenting that the ‘‘administrative         560 See, e.g., letters from Hodak Value Advisors
                                         costs’’ noted in the Proposing Release did not                                                                Chamber of Commerce; FSR; Intel; SCSGP; Sidley
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                                         account for the need to overcome compliance risks       and Chamber of Commerce.                              Austin; and Sullivan.
                                                                                                   561 See, e.g., letters from E&Y and KPMG.             568 See, e.g., letters from Chamber of Commerce
                                         ‘‘where concern for satisfying new rules is
                                         multiplied by the potential legal risks associated        562 See, e.g., letters from Hodak Value Advisors;   and Compensia.
                                         with sufficiency and completeness under a regime        ACC; Eli Lilly; and NACCO Industries.                   569 See, e.g., letters from Mercer and Compensia.

                                         of CEO and CFO certification.’’ Letter from Hodak         563 See, e.g., letters from ABA; Leggett & Platt;     570 See, e.g., letters from ABA; ACB; ICBA; and

                                         Value Advisors.                                         SCSGP; and Sidley Austin.                             SCSGP.

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                                         53214            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         the aggregate annual change in that                     description of the methodology for                    Form N–2; 571 5 hours for Form 8–K;
                                         value, so that the Summary                              determining the exercise price of                     84.5 hours for Schedule 14A; and 84
                                         Compensation Table data will directly                   options if the exercise price is not                  hours for Schedule 14C. The estimated
                                         relate to the data presented in the                     determined based on the closing market                incremental burden arising from today’s
                                         Pension Benefits Table;                                 price on the date of grant, and the                   amendments for each of these forms has
                                            • Specifying that companies compute                  amount of securities underlying                       been estimated with reference to each of
                                         estimates of compensation under post-                   unexercised options, the exercise prices              these pre-existing burden estimates.
                                         termination arrangements applying the                   and the option expiration dates for each                 For purposes of the Paperwork
                                         assumptions that the triggering event                   outstanding option (rather than on an                 Reduction Act, we now estimate that the
                                         occurred on the last day of the                         aggregate basis as proposed);                         annual incremental increase in the
                                         company’s last completed fiscal year                                                                          paperwork burden for companies to
                                         and the price per share of the company’s                  • Require disclosure of the                         comply with our collection of
                                         securities is the closing market price on               Performance Graph (which would have                   information requirements to be
                                         that day;                                               been eliminated under the proposals) in               approximately 783,284 hours of in-
                                            • Specifying that companies must                     annual reports to security holders that               house company personnel time and to
                                         exclude the amounts for the aggregate                   precede or accompany a proxy or                       be approximately $133,883,300 for the
                                         annual change in the actuarial present                  information statement relating to an                  services of outside professionals.572
                                         value of accumulated benefits under                     annual meeting at which directors are to              These estimates include the additional
                                         defined benefit and actuarial pension                   be elected; and                                       time and the cost of collecting
                                         plans and the above-market or                             • Require disclosure about reliance                 information, preparing and reviewing
                                         preferential earnings on nonqualified                   on an exemption from requirements for                 disclosure, filing documents and
                                         deferred compensation when                              director independence when such an                    retaining records over our existing
                                         determining which executive officers                    exemption is available.                               burden estimate for preparing executive
                                         are named executive officers for the                                                                          compensation, related person
                                         purposes of disclosure in the                           D. Revisions to Paperwork Reduction                   transaction and corporate governance
                                         compensation tables;                                    Act Burden Estimates                                  disclosures. Our methodologies for
                                            • Including some instructions to the                                                                       deriving these revised estimates are
                                         related person disclosure requirement                      As discussed above, in consideration
                                                                                                                                                       discussed below.
                                         that were proposed to be eliminated, so                 of commenters’ concerns that the costs
                                                                                                                                                          Our revised estimates represent the
                                         that some bright line standards for non-                associated with the disclosure                        average burden for all issuers, both large
                                         disclosure, as modified, continue to                    requirements were understated in the                  and small.573 As described below, we
                                         apply with respect to specific                          Proposing Release, we are revising our                expect that the burdens and costs could
                                         transactions;                                           Paperwork Reduction Act burden                        be greater for larger issuers and lower
                                            • Requiring disclosure of director                   estimates that were originally submitted              for smaller issuers under the rules as
                                         relationships (other than any                           to the Office of Management and                       adopted. For Exchange Act annual
                                         transactions, relationships or                          Budget. In revising our estimates, we                 reports on Forms 10–K or 10–KSB,
                                         arrangements disclosed under the                        have considered the comments                          current reports on Form 8–K, proxy
                                         related person transaction disclosure                   identifying increased costs and burdens               statements and information statements,
                                         requirement) considered by the board of                 in the proposals, as well as the revisions            we estimate that 75% of the burden of
                                         directors when making independence                      that we have made in the final rules as               preparation is carried by the company
                                         determinations by specific category or                  compared to the proposals in response                 internally and that 25% of the burden
                                         type, rather than by individual                         to some of the commenters’ concerns.                  is carried by outside professionals
                                         transactions, relationships or                             The discussion that follows focuses                retained by the issuer at an average cost
                                         arrangements as proposed; and                           on the incremental change in burden                   of $400 per hour.574 For Securities Act
                                            • Not requiring that companies                       estimates resulting from the                          registration statements on Forms SB–2,
                                         identify the executive officers that                    amendments adopted today. The pre-                    S–1, S–4, S–11, or N–2 and Exchange
                                         compensation consultants have                           existing burden estimates to which                    Act registration statements on Forms 10
                                         contacted as proposed.                                  these incremental changes will be added
                                            Further, the final rules applicable to               reflect the current aggregate burden                    571 The pre-existing estimate for Form N–2
                                         small business issuers are adopted                                                                            represents the internal hour burden per response.
                                                                                                 assigned to each information collection,
                                         substantially as proposed, providing for                                                                      In addition there is a pre-existing external cost
                                                                                                 which already include the estimated                   estimate for Form N–2 of $12,766 per response.
                                         significantly less detailed disclosure
                                                                                                 burden of complying with the executive                  572 For administrative convenience, the
                                         regarding executive compensation for
                                                                                                 compensation, related person                          presentation of the totals related to the paperwork
                                         these companies as compared to the                                                                            burden hours have been rounded to the nearest
                                                                                                 transaction and corporate governance
                                         disclosure required for larger issuers.                                                                       whole number and the cost totals have been
                                            We made other modifications to the                   disclosure requirements in place before               rounded to the nearest hundred.
                                         proposals in response to issues raised by               adoption of these amendments. The                       573 Our estimates are based on annual responses

                                         commenters that could, depending on                     burden estimates (expressed as total                  on Form 10–K of 8,602 and annual responses on
                                                                                                 burden hours per form) prior to adding                Form 10–KSB of 3,504. Our estimates of the number
                                         the particular circumstances, increase                                                                        of annual responses to the collections of
                                         costs relative to the costs estimated for               the additional burdens imposed by the                 information are based on the number of filings
                                         the proposals. In this regard, the final                amended executive compensation,                       made in the period from October 1, 2004 through
                                         rules:                                                  related person transaction and corporate              September 30, 2005.
                                            • Require expanded disclosure about                  governance rules are as follows: 2,202                  574 At the proposing stage, we used an estimated

                                                                                                                                                       hourly rate of $300.00 to determine the estimated
                                         option grants and outstanding options,                  hours for Form 10–K; 1,646 hours for                  cost to public companies of executive compensation
                                                                                                 Form 10–KSB; 156 hours for Form 10;
jlentini on PROD1PC65 with RULES2

                                         including disclosure of the date the                                                                          and related disclosure prepared or reviewed by
                                         compensation committee or full board                    133 hours for Form 10–SB; 593 hours                   outside counsel. We recently have increased this
                                                                                                 for Form SB–2; 1,102 hours for Form S–                hourly rate estimate to $400.00 per hour after
                                         took action or was deemed to take                                                                             consulting with several private law firms. The cost
                                         action to grant an award if that date is                1; 4,048 hours for Form S–4; 1,892                    estimates in this release are based on the $400.00
                                         different from the grant date, a                        hours for Form S–11; 271.4 hours for                  hourly rate.

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                                                           Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                               53215

                                         or 10–SB, we estimate that 25% of the                    reorganization of the amended                        to prepare the amended disclosure in
                                         burden of preparation is carried by the                  disclosure requirements relative to the              year one, 80 hours in year two and 35
                                         company internally and that 75% of the                   disclosure requirements on these topics              hours in year three and thereafter,
                                         burden is carried by outside                             in place prior to adoption of these                  which results in an average of 95 hours
                                         professionals retained by the issuer at                  amendments, in particular the                        over the three year period to comply
                                         an average cost of $400 per hour.575 The                 requirements regarding Compensation                  with the amended disclosure
                                         portion of the burden carried by outside                 Discussion and Analysis, expanded                    requirements. This estimate takes into
                                         professionals is reflected as a cost, while              disclosures concerning options and                   account that the burden will be incurred
                                         the portion of the burden carried by the                 other equity-based awards and new                    by either including the required
                                         company internally is reflected in                       disclosure requirements regarding                    disclosure in the report directly or
                                         hours.                                                   pension benefits, non-qualified deferred             incorporating by reference from a proxy
                                                                                                  compensation, other potential post-                  or information statement. This
                                         1. Securities Act Registration
                                                                                                  employment payments and director                     estimated incremental burden is based
                                         Statements, Exchange Act Registration
                                                                                                  compensation.                                        on a consideration of the extent to
                                         Statements, Exchange Act Annual                             • Companies filing annual reports on              which the amendments will increase,
                                         Reports, Proxy Statements and                            Form 10–K that will be required to                   decrease or not affect the burden
                                         Information Statements                                   include disclosure under Item 402 of                 imposed by the requirements in place
                                            For the purposes of the Paperwork                     Regulation S–K, as we are amending it,               prior to these amendments, as described
                                         Reduction Act, we estimate that, over a                  and Item 407(e)(4) of Regulation S–K                 in Section VIII.B., above. The
                                         three year period,576 the annual                         (regarding compensation committee                    incremental burden represents the
                                         incremental disclosure burden imposed                    interlocks and insider participation),               estimate of the average burden across
                                         by the amendments will average 95                        will experience greater costs in                     the range of companies that file annual
                                         hours per Form 10–K; 50 hours per                        responding to these disclosure                       reports on Form 10–K, recognizing that
                                         Form 10–KSB; 85 hours per Form 10; 45                    requirements in the first year of                    larger companies with more complex
                                         hours per Forms 10–SB and SB–2; 74                       compliance with them, and, to a lesser               executive and director compensation
                                         hours per Form S–1; 17 hours per Form                    extent, in the second and third years, as            arrangements, more related person
                                         S–4; 85 hours per Form S–11; 3 hours                     systems and processes are implemented                transactions and more involved
                                         per Schedules 14A and 14C; and 5                         to obtain the relevant data and                      corporate governance structures may
                                         hours per Form N–2.577 While the                         disclosure controls and procedures with              require more time to comply with the
                                         amendments to Item 22(b) of Schedule                     respect to new or expanded disclosure                amended disclosure requirements,
                                         14A and increasing to $120,000 the                       requirements are implemented, with                   while smaller issuers with potentially
                                         former $60,000 threshold in Forms N–                     lower incremental costs expected in                  less complex circumstances are likely to
                                         1A, N–2, and N–3 for disclosure of                       subsequent years.                                    require less time to comply with the
                                         certain interests, transactions, and                        • The hours of company personnel                  amended requirements.
                                         relationships of disinterested directors                 time and outside professional time                      • For proxy statements on Schedule
                                         may increase or decrease existing                        required to prepare the disclosure                   14A and information statements on
                                         disclosure burdens, or not affect them at                regarding related person transactions                Schedule 14C, we estimate that it would
                                         all, depending on the particular                         under amended Item 404, director                     take companies 6 additional hours to
                                         circumstances, we estimate that, as                      independence under new Item 407(a)                   prepare the additional corporate
                                         discussed below, the amendments will                     and compensation committee functions                 governance and other compensation
                                         not impose an annual incremental                         under paragraphs (e)(1) through (e)(3) of            committee disclosures required only in
                                         disclosure burden.                                       Item 407 of both Regulation S–K and                  the proxy or information statement in
                                            These estimates were based on the                     Regulation S–B, will be greater as                   year one, and 2 hours in year two and
                                         following assumptions:                                   compared to the burden that was                      2 hours in year three and thereafter,
                                            • The hours of company personnel                      imposed in complying with the related                which results in an average of
                                         time and outside professional time                       party transaction disclosure                         approximately 3 hours over the three
                                         required to prepare the disclosure                       requirements and disclosure about the                year period.578 As with the estimates for
                                         regarding executive and director                         board of directors required by Item 404              Form 10–K, this estimated incremental
                                         compensation under amended Item 402                      of Regulations S–K and S–B and Item 7                burden is based on a consideration of
                                         of Regulation S–K will be greater in                     of Schedule 14A prior to these                       the extent to which the amendments
                                         light of the expansion and                               amendments. The new Compensation                     will increase, decrease or not affect the
                                                                                                  Committee Report that is required in the             burden imposed by the requirements in
                                            575 As mentioned above, we do not believe that
                                                                                                  Form 10–K (and is not required for                   place prior to these amendments, as
                                         the amendments increasing to $120,000 the current
                                         $60,000 threshold in Forms N–1A, N–2, and N–3
                                                                                                  small business issuers, because they are             described in Section VIII.B., above. The
                                         for disclosure of certain interests, transactions, and   not required to include Compensation                 incremental burden represents the
                                         relationships of disinterested directors will            Discussion and Analysis) will increase               estimate of the average burden across
                                         significantly impact the hours of company                the burdens. Other amendments to be
                                         personnel time and cost of outside professionals in
                                                                                                                                                       the range of companies that file proxy
                                         responding to these items.
                                                                                                  made by moving disclosure                            statements on Schedule 14A and
                                            576 We calculated an annual average over a three      requirements relating to corporate
                                         year period because OMB approval of Paperwork            governance to new Item 407 of                          578 Similarly, the hours of company personnel

                                         Reduction Act submissions covers a three year            Regulations S–K and S–B will not                     time and outside professional time required to
                                         period. Embedded in the three year period is the                                                              prepare the disclosure required by the amended
                                         recognition that the costs in the initial year of
                                                                                                  change the substance of the disclosure
                                                                                                                                                       conforming revisions to Item 22(b) relating to the
                                         compliance are likely to be higher than in later         requirements and will therefore not                  independence of members of nominating and audit
                                         years.                                                   increase burdens, particularly for proxy             committees of investment companies will be
jlentini on PROD1PC65 with RULES2

                                            577 In the Proposing Release, we estimated that
                                                                                                  or information statements where much                 approximately the same as for compliance with the
                                         the proposed revisions would average 67 hours per        of the disclosure about these topics is              requirements regarding disclosure of the
                                         Form 10–K; 35 hours per Form 10–KSB; 60 hours                                                                 independence of nominating and audit committee
                                         per Form 10; 30 hours per Forms 10–SB and SB–            currently required.                                  members of investment companies that were
                                         2; 60 hours per Forms S–1, S–4 and S–11; and 1.675          • For Form 10–K, we estimate that it              required by Item 7 of Schedule 14A prior to today’s
                                         hours per Form N–2.                                      would take issuers 170 additional hours              amendments.

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                                         53216             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         information statements on Schedule                      amendments, is generally required for                 business issuers that are not already
                                         14C, taking into account that larger                    three years in Securities Act and                     filing periodic reports pursuant to
                                         companies may require more time to                      Exchange Act registration statements, so              Exchange Act Sections 13(a) or 15(d)
                                         comply with the amended disclosure                      that any additional burden associated                 and thus will not have been required to
                                         requirements, while smaller companies                   with obtaining data and compiling the                 comply with the amended disclosure
                                         (including small business issuers) with                 related person transaction disclosure                 requirements prior to filing such
                                         potentially less complex circumstances                  under the amended requirements would                  registration statements, will take an
                                         may require less additional time to                     be with respect to this three year period.            estimated 45 additional hours on
                                         comply with the amended requirements.                      • Small business issuers filing annual             average to comply with the changes in
                                            • Companies filing registration                      reports on Form 10–KSB will be subject                the disclosure requirements. The
                                         statements on Forms 10, S–1, S–4 and                    to lower incremental costs than other                 additional time required by these
                                         S–11 that are not already filing periodic               issuers as a result of the amendments,                registrants to obtain the relevant data
                                         reports pursuant to Exchange Act                        given the reduced disclosure required                 and to compile the required information
                                         Sections 13(a) or 15(d) will in many                    by Item 402 of Regulation S–B relative                is offset to some extent by the fact that
                                         cases not have been required to comply                  to Item 402 of Regulation S–K, as                     only one year of compensation
                                         with the amended disclosure                             described above. As with companies                    information will generally be required
                                         requirements prior to filing such                       filing annual reports on Form 10–K, we                for presentation in the Summary
                                         registration statements, and will                       expect that small business issuers will               Compensation Table, as compared to
                                         therefore take an estimated 85                          experience greater costs in responding                two years for small business issuers
                                         additional hours on average to comply                   to the amended disclosure requirements                already subject to Exchange Act
                                         with the changes in the disclosure                      in the first year of compliance with                  reporting requirements.
                                         requirements. For Forms S–1 and S–4,                    them, as systems are implemented to                      • Based on our experience with the
                                         which permit incorporation of                           obtain the relevant data and disclosure               requirement we adopted in 1998 for
                                         information by reference to disclosure                  controls and procedures with respect to               issuers to write certain sections of
                                         provided in Exchange Act reports, we                    new or expanded disclosure                            prospectuses in plain English, drafting
                                         have estimated a lower average                          requirements are implemented, with                    documents in plain English will result
                                         incremental number of burden hours in                   lower incremental costs in subsequent                 in an initial increase in time and cost
                                         order to recognize that the incremental                 years.                                                burdens in the first year of
                                         burden arising from the amendments is                      • For Form 10–KSB, we estimate that                implementation, and to a lesser extent,
                                         already factored into the estimated                     it would take issuers an estimated 100                the second year, with those time or cost
                                         average incremental burden for Forms                    additional hours on average to prepare                burdens decreasing in the year
                                         10–K and 10–KSB.579 These estimated                     their disclosure under the amended                    following implementation of the new
                                         incremental burdens are based on a                      requirements in year one, 35 additional               rules. To the extent that companies
                                         consideration of the extent to which the                hours in year two and 15 additional                   incorporate required information by
                                         amendments will increase, decrease or                   hours in year three and thereafter,                   reference to proxy or information
                                         not affect the burden imposed by the                    which results in an average of 50                     statements, the amended plain English
                                         requirements in place prior to these                    additional hours over the three year                  requirements would apply to disclosure
                                         amendments, as described in Section                     period. This estimate assumes that the                in those filings; however, the
                                         VIII.B., above. The additional time                     burden would be incurred by either                    incremental burden of preparing plain
                                         required by these companies to obtain                   including the amended disclosure in the               English disclosure is factored into the
                                         the relevant data and to compile the                    report directly or incorporating by                   burden estimates for Forms 10–K and
                                         required executive compensation                         reference from a proxy or information                 10–KSB. The plain English rule
                                         information is offset to some extent by                 statement. This estimated incremental                 amendments will not affect the
                                         the fact that only one year of executive                burden is based on a consideration of                 substance of the required disclosure,
                                         compensation information will                           the extent to which the amendments                    and companies that have filed
                                         generally be required for presentation in               will increase, decrease or not affect the             registration statements under the
                                                                                                 burden imposed by the requirements in                 Securities Act are already familiar with
                                         the Summary Compensation Table, as
                                                                                                 place prior to these amendments, as                   the requirements.
                                         compared to three years for issuers
                                                                                                 described in Section VIII.B., above. The                 • The amendments to increase to
                                         already subject to Exchange Act
                                                                                                 incremental burden represents the                     $120,000 the former $60,000 threshold
                                         reporting requirements. By contrast,
                                                                                                 estimate of the average burden across                 for disclosure of certain interests,
                                         information regarding related person
                                                                                                 the range of companies that file annual               transactions, and relationships of
                                         transactions, as was the case prior to the
                                                                                                 reports on Form 10–KSB, recognizing                   disinterested directors in Forms N–1A,
                                            579 For Form S–1, we estimate an average
                                                                                                 that small business issuers with more                 N–2, and N–3 and in proxy and
                                         incremental burden of 74 hours, based on an             complex executive and director                        information statements may increase or
                                         estimate that 459 out of the 528 registration           compensation arrangements, more                       decrease existing disclosure burdens, or
                                         statements that we estimate will be filed on Form       related person transactions and more                  not affect them at all, depending on the
                                         S–1 will not include the disclosure contemplated        involved corporate governance                         particular circumstances. Because these
                                         by these rule changes through incorporation by
                                         reference to a Form 10–K or Form 10–KSB (459            structures may require more time to                   forms are already required to disclose
                                         filings times 85 hours = 39,015 hours, which when       comply with the amended disclosure                    these interests, transactions, and
                                         divided by the 528 total annual filings results in      requirements, while other small                       relationships in amounts exceeding
                                         approximately 74 hours per Form S–1). For Form          business issuers with potentially less                $60,000, we do not believe the increase
                                         S–4, we estimate an average incremental burden of
                                         17 hours, based on an estimate that 123 out of the      complex circumstances, particularly the               in the disclosure threshold will
                                         619 registration statements that we estimate will be    smallest companies in this group, are                 significantly impact the hours of
jlentini on PROD1PC65 with RULES2

                                         filed on Form S–4 will not include the disclosure       likely to require less time to comply                 company personnel time and cost of
                                         contemplated by these rule changes through              with the amended requirements.                        outside professionals in responding to
                                         incorporation by reference to a Form 10–K or Form
                                         10–KSB (123 filings times 85 hours = 10,455 hours,
                                                                                                    • Small business issuers filing                    these items, and we estimate these
                                         which when divided by the 619 total annual filings      registration statements on Forms 10–SB                amendments will neither increase nor
                                         results in approximately 17 hours per Form S–4).        and SB–2, including those small                       decrease the annual paperwork burden.

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                                                                 Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                                       53217

                                            • Business development companies                                        are implemented to obtain the relevant                           in the collection of information in hours
                                         filing Form N–2 will be required to                                        data and compliance efforts with respect                         and cost for Exchange Act periodic
                                         include Item 402 of Regulation S–K, as                                     to new or expanded disclosure                                    reports for companies other than
                                         we are amending it, and will experience                                    requirements are implemented, with                               registered investment companies, proxy
                                         higher costs in responding to these                                        lower incremental costs expected in                              statements, information statements,
                                         disclosure requirements in the first year                                  subsequent years.580                                             Securities Act registration statements
                                         of complying with them, and, to a lesser                                     Tables 1 and 2 below illustrate the                            and Exchange Act registration
                                         extent, in the second year, as systems                                     incremental annual compliance burden                             statements.

                                                               PERIODIC REPORTS, PROXY STATEMENTS AND INFORMATION STATEMENTS
                                                                                                                                                                                                                         $400 Profes-
                                                                                                                 Annual                  Incremental              Incremental                          25% Profes-
                                                                    Form                                                                                                            75% Issuer                              sional
                                                                                                               responses                  hours/form                burden                               sional              cost

                                                                                                                     (A)                        (B)               (C)=(A)*(B)       (D)=(C)*0.75       (E)=(C)*0.25      (F)=(E)*$400

                                         10–K 581. ...................................................                     8,602                          95             817,190      612,892.50         204,297.50        $81,719,000
                                         10–KSB ....................................................                       3,504                          50             175,200      131,400.00          43,800.00         17,520,000
                                         DEF 14A ..................................................                        7,250                           3              21,750       16,312.50           5,437.50          2,175,000
                                         DEF 14C ..................................................                          681                           3               2,043        1,532.25             510.75            204,300

                                               Total ..................................................     ........................   ........................         1,016,183     762,137.25         254,045.75        101,618,300

                                                              REGISTRATION STATEMENTS AND EXCHANGE ACT REGISTRATION STATEMENTS
                                                                                                                                                                                                                         $400 Profes-
                                                                                                                 Annual                  Incremental              Incremental                          25% Profes-
                                                                    Form                                                                                                            75% Issuer                              sional
                                                                                                               responses                  hours/form                burden                               sional              cost

                                                                                                                     (A)                        (B)               (C)=(A)*(B)       (D)=(C)*0.25       (E)=(C)*0.75      (F)=(E)*$400

                                         10 .............................................................                     72                          85               6,120        1,530.00           4,590.00          $1,836,000
                                         10–SB ......................................................                        166                          45               7,470        1,867.50           5,602.50           2,241,000
                                         SB–2 ........................................................                       885                          45              39,825        9,956.25          29,868.75          11,947,500
                                         S–1 ...........................................................                     528                          74              39,072        9,768.00          29,304.00          11,721,600
                                         S–4 ...........................................................                     619                          17              10,523        2,630.75           7,892.25           3,156,900
                                         S–11 .........................................................                       60                          85               5,100        1,275.00           3,825.00           1,530,000
                                         N–2 ...........................................................                     462                           5               2,310          577.50           1,732.50             693,000

                                               Total ..................................................     ........................   ........................          110,420       27,605.00          82,815.00          33,126,000

                                         2. Exchange Act Current Reports                                            approximately $861,000 for the services                          estimate that approximately 22,083
                                                                                                                    of outside professionals. This estimate                          current reports filed on Forms 8–K
                                           For purposes of the Paperwork                                            reflects the reduction in the number of                          would be filed annually pursuant to
                                         Reduction Act, we estimate that the                                        filings that could result from our                               Item 1.01 of Form 8–K;
                                         amendments affecting the collection of                                     amendments.582 These estimates were
                                         information requirements related to                                                                                                            • Based on a review of Item 1.01 of
                                                                                                                    based on the following assumptions:
                                         current reports on Form 8–K will reduce                                                                                                     Form 8–K filings made in September
                                                                                                                       • The number of annual responses for                          2005, we estimate that 6,625 of the
                                         the annual paperwork burden by                                             Form 8–K is estimated to be 110,416.583
                                         approximately 6,458 hours of company                                                                                                        22,083 current reports on Form 8–K that
                                                                                                                    Based on a study of current reports on
                                         personnel time and by a cost of                                                                                                             would be filed annually under Item 1.01
                                                                                                                    Form 8–K filed in September 2005, we
                                            580 For Form N–2, we estimate that it will take                         (representing all Form N–2 and N–2/A filings                     estimate that the changes to executive
                                         business development companies 150 additional                              during the year ended December 31, 2005) (2,295                  compensation and corporate governance disclosure
                                         hours to prepare the amended disclosure in year                            hours divided by 462 filings on Form N–2                         requirements applicable only in proxy or
                                         one, 75 hours in year two and 30 hours in year three                       (including amendments) = approximately 5 hours                   information statements (and thus not in Securities
                                         and thereafter, which results in an average of 85                          per Form N–2 (including amendments)).                            Act registration statements or Exchange Act reports
                                         hours for each business development company to                                We note that in the Proposing Release, we                     or registration statements) will impose an
                                         comply with the amended compensation                                       estimated 935 total annual filings on Form N–2 and               incremental burden.
                                         disclosures that would be required on Form N–2.                            N–2/A, but this higher number double counted                        582 The amendments do not change the exhibit

                                         We estimate an average annual incremental                                  certain filings that were made under both the                    filing requirements under Item 601(b)(10) of
                                         disclosure burden of 5 hours per Form N–2, based                           Securities Act and the Investment Company Act.                   Regulations S–K and S–B, therefore companies may
                                         on 85 hours per Form N–2 filing by business                                Our revised estimate is 462 annual filings.                      be required to file compensatory plans, contracts or
                                         development companies times 27 filings on Form                                581 The burden estimates for Form 10–K and 10–                arrangements as exhibits to filings even if current
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                                         N–2 by business development companies                                      KSB assume that the amended requirements are                     reporting on Form 8–K is no longer required for the
                                         (representing all Form N–2 and N–2/A filings by                            satisfied by either including information directly in            entry into or amendment of those plans, contracts
                                         business development companies during the year                             the annual reports or incorporating the information              or arrangements.
                                         ended December 31, 2005) (85 hours times 27 Form                           by reference from the proxy statement or                            583 This is based on the number of responses

                                         N–2 filings (including amendments) = 2,295 hours),                         information statement in Schedule 14A or Schedule                made in the period from October 1, 2004 through
                                         divided by 462 total annual filings on Form N–2                            14C, respectively. As described above, we now                    September 30, 2005.

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                                         53218            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         would relate to executive or director                   statements. While we believe that these               disclosure accompany the Summary
                                         compensation matters; and                               amendments will result in significant                 Compensation Table; 586
                                            • Based on a review of Item 1.01 of                  benefits, we also recognize that the                     • Provide a higher threshold for
                                         Form 8–K filings made in September                      amendments to the disclosure                          separate identification of categories of
                                         2005, we estimate that 1,722 fewer                      requirements will impose additional                   ‘‘All Other Compensation’’ in the
                                         current reports on Form 8–K would be                    costs. We have considered the costs and               Summary Compensation Table;
                                         filed annually as a result of more                      benefits in adopting these amendments.                   • Require a new Outstanding Equity
                                         focused current reporting of executive                                                                        Awards at Fiscal Year-End Table that
                                         officer and director compensation                       B. Summary of Amendments
                                                                                                                                                       includes expanded disclosure regarding
                                         transactions under new Item 5.02(e) of                     In light of the complexity of, and                 holdings of previously awarded stock,
                                         Form 8–K.584                                            variations in, compensation programs,                 options and similar instruments, which
                                                                                                 the sometimes inflexible and highly                   includes the value of stock and other
                                         IX. Cost-Benefit Analysis
                                                                                                 formatted nature of former Item 402 of                similar incentive plan awards that have
                                         A. Background                                           Regulations S–K and S–B has resulted,                 not vested, as well as information
                                            We are adopting amendments to our                    in some cases, in disclosure that does                regarding options on an award-by-award
                                         rules governing disclosure of executive                 not clearly inform investors as to all                basis;
                                         and director compensation, related                      elements of compensation. The changes                    • Require additional narrative
                                         person transactions, director                           to Item 402 apply a broader approach                  disclosure addressing the material terms
                                         independence and other corporate                        that eliminates some tables, simplifies               of defined benefit and defined
                                         governance matters and security                         or refocuses other tables, reflects total             contribution plans and other post-
                                         ownership of officers and directors. The                compensation in the Summary                           termination compensation
                                         revisions to the executive and director                 Compensation Table, and reorganizes                   arrangements; and
                                         compensation disclosure rules are                       the compensation tables to group                         • Require a new Director
                                         intended to provide investors with a                    together compensation elements that                   Compensation Table.
                                         clearer and more complete picture of                    have similar functions so that the                       Item 402 of Regulation S–B will not
                                         compensation to principal executive                     quantitative disclosure is both more                  include the following disclosures that
                                         officers, principal financial officers, the             informative and more easily understood.               will be required by amended Item 402
                                         highest paid executive officers and                     This improved quantitative disclosure                 of Regulation S–K:
                                         directors. We are also amending our                     will be complemented by enhanced                         • Compensation Discussion and
                                         rules relating to current reports on Form               narrative disclosure clearly and                      Analysis or a Compensation Committee
                                         8–K to require real-time disclosure of                  comprehensively describing the context                Report;
                                         only executive and director                             in which compensation is paid and                        • Information regarding two
                                         compensation events that are                            received. In particular, the narrative                additional executive officers;
                                         unquestionably or presumptively                         disclosure requirements will provide                     • A third fiscal year of Summary
                                         material, thereby reducing the number                   transparency regarding company                        Compensation Table disclosure;
                                         of filings for events relating to executive             compensation policies and procedures,                    • The supplementary Grants of Plan-
                                         officers other than named executive                     and is designed to be sufficiently                    Based Awards Table, the Option
                                         officers and those officers specified in                flexible to operate effectively as new                Exercises and Stock Vested Table, the
                                         Item 5.02. We are amending our closely                  forms of compensation continue to                     Pension Benefits Table, the
                                         related rules requiring disclosure                      evolve.                                               Nonqualified Deferred Compensation
                                         regarding the extent to which executive                                                                       Table, and the separate Potential
                                                                                                    We have also taken into account the                Payments Upon Termination or Change-
                                         officers, directors, significant                        relative burden of providing disclosure
                                         shareholders and other related persons                                                                        in-Control narrative section, while
                                                                                                 by smaller companies that file                        providing a general requirement to
                                         participate in financial transactions and               information pursuant to Regulation S–B
                                         relationships with the issuer. We are                                                                         discuss the material terms of retirement
                                                                                                 (as opposed to Regulation S–K). Under                 plans and the material terms of
                                         amending our beneficial ownership                       the amendments, the scope and
                                         disclosure requirement to require                                                                             contracts providing for payment upon a
                                                                                                 presentation of information in Item 402               termination or change in control.
                                         disclosure regarding pledges of                         of Regulation S–B will differ in a
                                         securities by management and directors’                 number of significant ways from Item                     In addition, the application of Item
                                         qualifying shares. Finally, we are                      402 of Regulation S–K. Item 402 of                    1.01 of Form 8–K to compensatory
                                         requiring that most of the disclosure                   Regulation S–B will:                                  arrangements has raised concerns that
                                         that will be called for by the                                                                                real-time disclosure may be required for
                                                                                                    • Limit the named executive officers               executive compensation events that are
                                         amendments be provided in plain
                                                                                                 for whom disclosure is required to a                  not unquestionably or presumptively
                                         English, so that investors can more
                                                                                                 smaller group, consisting of the                      material, and that are more
                                         easily understand this information
                                                                                                 principal executive officer and the two               appropriately disclosed, if at all, in the
                                         when it is required to be included in
                                                                                                 other highest paid executive officers; 585            company’s proxy statement for its
                                         Exchange Act reports or is incorporated
                                         by reference from proxy or information                     • Require a revised Summary                        annual meeting of shareholders. The
                                                                                                 Compensation Table to disclose                        amendments to Items 1.01 and 5.02 of
                                            584 For Form 8–K, the current burden estimate is     compensation information for the small
                                         5 hours per filing. We estimate that 75% of the         business issuer’s two most recent fiscal                586 Prior to these amendments, Item 402(b)(1) of

                                         burden of preparation is carried by the company         years, and to require that narrative                  Regulation S–B required disclosure in the Summary
                                         internally and that 25% of the burden is carried by                                                           Compensation Table of compensation of the named
                                         outside professionals retained by the issuer at an                                                            executive officers for each of the last three fiscal
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                                         average cost of $400 per hour. The computation of          585 Prior to these amendments, Item 402(a)(2) of   years, and narrative disclosure was not required to
                                         the reduction in burden is thus based on 1,722          Regulation S–B required compensation disclosure       accompany the Summary Compensation Table.
                                         fewer current reports on Form 8–K filed with a per      for all individuals serving as the small business     Under the amendments adopted today, new
                                         filing burden of 3.75 hours carried by the company      issuer’s chief executive officer and the small        narrative disclosure will address some elements of
                                         and 1.25 hours at a cost of $400 per hour (or $500      business issuer’s four highest paid executive         compensation previously required to be disclosed
                                         per filing).                                            officers other than the chief executive officer.      in tables.

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                        53219

                                         Form 8–K focus real-time disclosure on                  the amendments, some of the disclosure                least once every three fiscal years or on
                                         compensation arrangements with                          that had been required under the certain              the company’s Web site. The
                                         executives and directors that we believe                business relationship disclosure                      amendments to Item 407 of Regulation
                                         are unquestionably or presumptively                     requirement may be required by the                    S–K require a short Compensation
                                         material, and eliminate the obligation to               consolidated disclosure requirement                   Committee Report regarding the
                                         file Form 8–K with respect to other                     regarding transactions and relationships              compensation committee’s review and
                                         compensatory arrangements.                              with related persons in Item 404(a) of                discussion with management of the
                                            Further, the amendments streamline                   Regulation S–K. Item 404(b) of                        Compensation Discussion and Analysis,
                                         and modernize Item 404 of Regulation                    Regulation S–K as amended requires                    and the compensation committee’s
                                         S–K, while making it more principles-                   disclosure regarding the company’s                    recommendation to the Board with
                                         based. For example, indebtedness of                     policies for the review, approval or                  regard to the disclosure of the
                                         related persons is limited by the                       ratification of transactions with related             Compensation Discussion and Analysis.
                                         Sarbanes-Oxley Act, and the disclosure                  persons.                                              This new Compensation Committee
                                         requirement regarding indebtedness of                      We are adopting similar amendments                 Report, along with the Compensation
                                         related persons has been combined into                  to Item 404 of Regulation S–B, which                  Discussion and Analysis, is required
                                         the requirement regarding other                         will result in a more detailed related                instead of the Board Compensation
                                         transactions with related persons. This                 person transaction disclosure                         Committee Report on Executive
                                         consolidated disclosure requirement                     requirement than had existed in Item                  Compensation that was previously
                                         applies to an expanded group of related                 404 of Regulation S–B prior to these                  required by Item 402 of Regulation S–
                                         persons through amendments to the                       amendments. However, unlike Item 404                  K prior to today’s amendments.
                                         definition of the term ‘‘immediate                      of Regulation S–K, Item 404 of                           To the extent that shares beneficially
                                         family member.’’ While the pre-existing                 Regulation S–B as amended does not                    owned by named executive officers,
                                         principles for disclosure have been                     require disclosure regarding the                      directors and director nominees are
                                         retained, the amendments increase the                   company’s policies for the review,                    used as collateral for loans, these shares
                                         threshold for disclosure from $60,000 to                approval or ratification of transactions              are subject to risks or contingencies that
                                         $120,000 and eliminate or narrow the                    with related persons. We are retaining                do not apply to other shares beneficially
                                         scope of certain instructions delineating               the requirement that transactions                     owned by these persons. These
                                         what transactions are reportable or                     occurring within the last two years must              circumstances have the potential to
                                         excludable. The disclosure requirements                 be disclosed under Item 404 of                        influence management’s performance
                                         in Item 404 regarding transactions with                 Regulation S–B, whereas Item 404 of                   and decisions. As a result, we believe
                                         promoters have been slightly expanded                   Regulation S–K requires disclosure for                that the existence of these securities
                                         in the amendments to apply when a                       the last fiscal year, unless the                      pledges could be material to
                                         company had a promoter over the past                    information is included in a Securities               shareholders and should be disclosed.
                                         five years, as well as to require                       Act or Exchange Act registration                      We therefore are amending Item 403 of
                                         analogous disclosure regarding                          statement, where information as to the                Regulations S–K and S–B to require this
                                         transactions with control persons of a                  last three fiscal years is required.                  disclosure as well as disclosure
                                         shell company.                                             We are adopting a new disclosure                   regarding directors’ beneficial
                                            With respect to registered investment                requirement in Item 407 of Regulations                ownership of qualifying shares.
                                         companies and business development                      S–K and S–B that consolidates                            We are requiring that most of the
                                         companies, amendments to Items                          disclosures previously required in                    information that is required by these
                                         22(b)(7), 22(b)(8), and 22(b)(9) of                     several places throughout our rules                   amendments be provided in plain
                                         Schedule 14A and to Forms N–1A,                         addressing director independence,                     English in Exchange Act reports or in
                                         N–2, and N–3 similarly increase to                      board committee functions and other                   proxy or information statements
                                         $120,000 the former $60,000 threshold                   related corporate governance matters.                 incorporated by reference into those
                                         for disclosure of certain interests,                    This new Item, which requires new                     reports. The plain English requirements
                                         transactions, and relationships of each                 disclosure regarding independence of                  will make these documents easier to
                                         director (and, in the case of Items                     members of the board of directors and                 understand.
                                         22(b)(7), 22(b)(8), and 22(b)(9) of                                                                              The amendments to Item 402 of
                                                                                                 board committees, is intended to
                                         Schedule 14A, each nominee for                                                                                Regulation S–K, Items 402 and 404 of
                                                                                                 enhance disclosures regarding
                                         election as director) who is not or would                                                                     Regulation S–B, and Form 8–K will
                                                                                                 independence required by corporate                    affect all companies reporting under
                                         not be an ‘‘interested person’’ of the
                                                                                                 governance listing standards of national              Sections 13(a) and 15(d) of the Exchange
                                         fund within the meaning of Section
                                                                                                 securities exchanges and automated                    Act, other than registered investment
                                         2(a)(19) of the Investment Company Act
                                                                                                 inter-dealer quotation systems of a                   companies. The amendments to Item
                                         (and their immediate family members).
                                                                                                 national securities association.587 Item              404 of Regulation S–K will affect all
                                         In addition, amended Form N–2
                                                                                                 407 of Regulations S–K and S–B also                   companies reporting under Sections
                                         requires business development
                                                                                                 includes a new disclosure requirement                 13(a) and 15(d) of the Exchange Act,
                                         companies to include the compensation
                                         disclosure required by Item 402 of                      regarding the compensation committee’s                other than registered investment
                                         Regulation S–K, as amended.                             processes and procedures for the                      companies, and all companies,
                                            The amendments also replace the                      consideration and determination of                    including registered investment
                                         disclosure requirement for certain                      executive and director compensation,                  companies, filing proxy or information
                                         business relationships of directors that                and disclosure regarding the availability             statements with respect to the election
                                         had been required by Item 404(b) of                     of the compensation committee’s charter               of directors. The changes to Items 402
                                         Regulation S–K prior to these                           (if it has one), either as an appendix to             and 404 of Regulation S–K and
                                                                                                 the proxy or information statement at
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                                         amendments, which focused on                                                                                  Regulation S–B will also affect
                                         relationships relevant to director                         587 We are also adopting conforming revisions to
                                                                                                                                                       additional companies filing Securities
                                         independence, with requirements for                     Item 22(b) relating to the independence of members
                                                                                                                                                       Act and Exchange Act registration
                                         director independence disclosure in                     of nominating and audit committees of investment      statements. The changes to Item 22(b) of
                                         new Item 407 discussed below. Under                     companies.                                            Schedule 14A will affect business

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                                         53220            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         development companies and registered                    quality of compensation disclosure                    in executive and director compensation
                                         investment companies filing proxy                       across companies. Disclosure of total                 will affect investors’ decision-making
                                         statements with respect to the election                 compensation will benefit investors by                with respect to that company.
                                         of directors. The changes to Form N–1A                  reducing the need to make individual                     Disclosure under these new
                                         will affect open-end investment                         computations in order to assess the size              regulations will provide substantial
                                         companies registering with the                          of current compensation. Further,                     benefit to investors in terms of the
                                         Commission on Form N–1A. The                            improved executive and director                       accuracy, transparency, completeness
                                         changes to Form N–2 will affect closed-                 compensation disclosure will enhance                  and accessibility of executive
                                         end investment companies (including                     investors’ understanding of this use of               compensation and related person
                                         business development companies)                         corporate resources and the actions of                transaction disclosure. Improved
                                         registering with the Commission on                      boards of directors and compensation                  transparency in executive and director
                                         Form N–2. The changes to Form N–3                       committees in making decisions in this                compensation under these amendments
                                         will affect separate accounts, organized                area.588 Particularly with respect to the             could have other benefits in terms of the
                                         as management investment companies                      proxy statement for the annual meeting                allocative efficiency of affected
                                         and offering variable annuities,                        at which directors are elected, this                  corporations with regard to the use of
                                         registering with the Commission on                      improved disclosure will provide better               resources for executive compensation
                                         Form N–3.                                               information to shareholders for                       relative to other corporate needs, as well
                                                                                                 purposes of evaluating the actions of the             as improvements in efficiency of
                                         C. Benefits                                                                                                   managerial labor markets. Benefits such
                                                                                                 board of directors in fulfilling its
                                            As discussed, the overall goal of the                responsibilities to the company and its               as these depend on the extent to which
                                         executive and director compensation                     shareholders.                                         the amendments, including
                                         amendments is to provide investors                         With respect to the new                            requirements to disclose a total amount
                                         with clearer, better organized and more                 Compensation Committee Report                         of compensation and more detail
                                         complete disclosure regarding the mix,                  regarding the compensation committee’s                regarding compensation policies, alter
                                         size and incentive components of                        review and discussion with                            existing and future policies or practices
                                         executive and director compensation.                    management of the Compensation                        in these areas. We emphasize that we
                                         This goal is accomplished by                            Discussion and Analysis, and the                      are not seeking to foster any particular
                                         eliminating some tables and other                       compensation committee’s                              policy or practice. Our objective is to
                                         disclosures that we believe may no                      recommendation to the board of                        increase transparency to enable
                                         longer be useful to investors, revising                 directors with regard to disclosure of the            decision-makers to make more informed
                                         other tables so that they are more                      Compensation Discussion and Analysis,                 decisions, which could result in
                                         informative, and requiring new                          we believe that benefits will be derived              different policies or practices or an
                                         disclosure for retirement plans and                     from the attention of the compensation                increase in investor confidence in
                                         similar benefits, nonqualified deferred                 committee to the disclosure provided in               existing policies or practices.
                                         compensation, post-termination benefits                 Compensation Discussion and Analysis.                    Enhanced disclosure of outstanding
                                         and director compensation. The                          Further, the principal executive officer              option awards on an award-by-award
                                         amendments require enhanced narrative                   and principal financial officer can look              basis, and additional disclosure
                                         disclosure, in the form of a                            to the Compensation Committee Report                  regarding other equity-based awards,
                                         Compensation Discussion and Analysis                    when providing their certifications.                  will further benefit investors by making
                                         section and narrative disclosure                        Finally, the Board Compensation                       it easier to evaluate the components of
                                         accompanying the tables, to explain the                 Committee Report on Executive                         equity compensation for each named
                                         significant factors underlying the                      Compensation has been eliminated in                   executive officer and the valuations of
                                         compensation decisions reflected in the                 favor of company disclosure in the form               those equity awards provided by
                                         tabular data. The amendments also                       of the Compensation Discussion and                    companies in the Summary
                                         require companies to report the total                   Analysis, which will provide investors                Compensation Table.
                                         amount of compensation for named                        with enhanced disclosure about the                       The amendments to Form 8–K will
                                         executive officers and directors, and                   objectives and implementation of                      facilitate shareholder and investor
                                         provide important context to the                        executive compensation programs.                      access to real-time disclosure of public
                                         disclosure of total compensation.                          We believe that the extent to which                companies’ significant personnel and
                                            Improved disclosure under the                        increased transparency and                            compensation decisions by focusing this
                                         amendments of executive and director                    completeness in executive and director                disclosure only on what we believe are
                                         compensation, such as equity-based                      compensation disclosure will result in                the most important compensatory
                                         compensation, non-equity incentive                      broader benefits depends at least in part             arrangements with executive officers
                                         plan compensation, and retirement and                   on the extent to which current executive              and directors. This information will be
                                         other post-employment compensation,                     and director compensation practices are               filed pursuant to Item 5.02 of Form 8–
                                         combined with the ability of investors to               aligned with the interests of investors as            K. To find this information,
                                         track the elements of compensation and                  reflected in their investment and voting              shareholders and investors no longer
                                         the relative weights of those elements                  decisions. Any changes to a company                   will need to examine multiple Item 1.01
                                         over time (and the reasons why                          that might occur, including changes in                disclosures relating to other actions.
                                         companies allocate compensation in the                  corporate governance, changes in                      Companies will also be relieved of
                                         manner that they do), will better enable                control, changes in the employment of                 obligations to quickly report arguably
                                         investors to make comparisons both                      particular executives or other changes                less important compensation
                                         within and across companies. A                          could depend to some extent on the                    information on Form 8–K.
                                         presentation facilitating the                           degree to which improved transparency                    The amendments to Item 404 will
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                                         comparability of different elements of                                                                        provide investors with more complete
                                         compensation in different companies                       588 For a discussion of the debate concerning
                                                                                                                                                       disclosure of related person transactions
                                         should make it easier for investors to                  board of directors and managerial decision-making     and director independence, and new
                                                                                                 in the area of executive compensation, see, e.g.,
                                         analyze both the manner of                              Steven M. Bainbridge, Executive Compensation:         disclosure regarding a company’s
                                         compensation across companies and the                   Who Decides?, 83 Tex. L. Rev. 1615 (2005).            policies and procedures for the review,

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                                    53221

                                         approval or ratification of relationships                 Finally, presentation in plain English                 commenters’ concerns that it is
                                         with related persons. These                             will facilitate investor understanding of                appropriate for the compensation
                                         amendments will enhance investors’                      most of the matters contemplated by our                  committee to continue to focus on the
                                         understanding of how corporate                          amendments.                                              executive compensation disclosure
                                         resources are used in related person                                                                             process as well as concerns with
                                                                                                 D. Costs
                                         transactions, and provide improved                                                                               certifications, we are adopting a new
                                         information to shareholders for                            In our view, the amendments to the                    Compensation Committee Report
                                         purposes of better evaluating the actions               executive officer and director                           regarding the compensation committee’s
                                         of the board of directors and executive                 compensation, related person                             review and discussion with
                                         officers in fulfilling their                            transaction and corporate governance                     management of the Compensation
                                         responsibilities to the company and its                 disclosure requirements will increase                    Discussion and Analysis, and the
                                         shareholders.                                           the costs of complying with the                          compensation committee’s
                                            In addition, by combining similar                    Commission’s rules. We further believe                   recommendation to the board of
                                         provisions of former Item 404 into a                    that the costs related to preparing                      directors with regard to the disclosure of
                                         single combined disclosure                              required disclosure in plain English will                the Compensation Discussion and
                                         requirement, the amendments will                        be short-term costs arising mainly in the                Analysis. To the extent that members of
                                         reduce confusion that may have                          first two years of implementation.589                    the compensation committee would
                                         occurred regarding the disclosure                          We believe that compliance with                       need to spend additional time and
                                         required when more than one of the                      these amendments will, on balance, be                    resources reviewing the executive and
                                         provisions of Item 404 applied to a                     more costly for companies than                           director compensation disclosures and
                                         particular transaction or relationship                  compliance with the former disclosure                    potentially retaining experts and
                                         before these amendments. Improved                       requirements, with the highest                           advisors to assist them in that review,591
                                         corporate governance disclosure in new                  incremental annual costs occurring                       this requirement will result in
                                         Item 407 will provide investors with                    principally in the first two years as                    additional costs to issuers.
                                         better organized and more complete                      companies and their advisors determine                     In addition to the Compensation
                                         information regarding the independence                  how best to compile and report                           Discussion and Analysis section, we are
                                         of members of the board of directors.                   information in response to new or                        requiring narrative disclosure to
                                            The amendments to Item 403 of                        expanded disclosure requirements.                        accompany tabular presentations so that
                                         Regulation S–K and Regulation S–B will                     The improved quantitative and                         the data included in the tables may be
                                         provide investors with disclosure of                    textual disclosure regarding executive                   understood in context. We are also
                                         pledges of the securities beneficially                  and director compensation that we are                    expanding disclosure regarding
                                         owned by management and directors                       adopting will incrementally increase                     compensation-related equity-based and
                                         and full disclosure of beneficial                       costs for companies in several ways as                   other plan-based holdings, as well as
                                         ownership by directors, including                       a result of the following new or                         retirement and similar plans. Finally,
                                         directors’ qualifying shares. This                      expanded requirements. First, we are                     we are adopting a Director
                                         information will contribute to investor                 requiring that companies provide a                       Compensation Table that will require
                                         understanding of the economic                           Compensation Discussion and Analysis                     more detailed information regarding
                                         incentives for executives and directors                 involving a discussion and analysis of                   director compensation than was
                                         of public companies.                                    material factors underlying                              specified in the narrative disclosure
                                            Changes to Items 22(b)(7), 22(b)(8)                  compensation decisions reflected in the                  requirement that existed prior to today’s
                                         and 22(b)(9) of Schedule 14A and to                     tabular presentations.590 To respond to                  amendments. Each of these revisions
                                         Forms N–1A, N–2, and N–3 may                                                                                     seeks to elicit clearer and more
                                         increase or decrease existing disclosure                   589 The new plain English requirements will
                                                                                                                                                          complete information than was required
                                         burdens imposed on investment                           require both the rewriting of existing disclosures in    under the requirements in place before
                                                                                                 plain English, as well as drafting new disclosures
                                         companies, or not affect them at all,                   in plain English, such as Compensation Discussion        adoption of these amendments. We have
                                         depending on the particular                             and Analysis.                                            also decided to retain the Performance
                                         circumstances, by increasing the                           590 The Compensation Discussion and Analysis,         Graph in light of commenters’
                                         threshold for disclosure of certain                     unlike the Board Compensation Committee Report           overwhelming support for this
                                         interests, transactions, and relationships              on Executive Compensation that was required prior
                                                                                                 to the adoption of these amendments, but like all
                                                                                                                                                          disclosure requirement, but we are
                                         of each director (and, in the case of                   of the rest of the current compensation disclosure,      moving it to new paragraph (e) of Item
                                         Items 22(b)(7), 22(b)(8), and 22(b)(9) of               is considered filed and as such will be part of the      201 of Regulation S–K and requiring
                                         Schedule 14A, each nominee for                          documents for which certifications apply. The new        that it will be furnished in the annual
                                         election as director) who is not or would               Compensation Committee Report will be furnished          report to security holders rather than the
                                                                                                 rather than filed. The release adopting our
                                         not be an ‘‘interested person’’ of the                  certification requirements discussed the costs and       proxy or information statement. Since
                                         fund within the meaning of Section                      benefits of the requirements as follows:                 we originally proposed to delete the
                                         2(a)(19) of the Investment Company Act                     The new certification requirement may lead to         Performance Graph altogether, its
                                         (and their immediate family members).                   some additional costs for issuers. The new rules         retention requires us to consider the
                                            The amendments to the executive and                  require an issuer’s principal executive and financial
                                                                                                 officers to review the issuer’s periodic reports and
                                                                                                                                                          costs incurred by issuers to continue to
                                         director compensation, related person                   to make the required certification. To the extent that   comply with this requirement; however,
                                         transaction, beneficial ownership and                   corporate officers would need to spend additional
                                         corporate governance disclosure                         time thinking critically about the overall context of    executive and financial officers. Certification
                                         requirements will in many respects                      their company’s disclosure, issuers would incur          Release, at Section VII.
                                                                                                 costs (although investors would benefit from               591 While our rules do not require the retention
                                         make these requirements clearer for                     improved disclosure). The certification requirement      of consultants or other advisers, to the extent that
                                         companies and their advisors, which                     creates a new legal obligation for an issuer’s           companies do retain compensation consultants or
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                                         could have the benefit of improving                     principal executive and financial officers, but does     other professionals we understand that they would
                                         overall compliance with these                           not change the standard of legal liability. * * *        generally charge per-hour rates comparable to those
                                                                                                 Conversely, the new rules are likely to provide          rates charged by outside counsel, which we have
                                         provisions, including those provisions                  significant benefits by ensuring that information        estimated for the purposes of our Paperwork
                                         where disclosure requirements have not                  about an issuer’s business and financial condition       Reduction Act analysis are approximately $400 per
                                         changed substantively.                                  is adequately reviewed by the issuer’s principal         hour.

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                                         53222            Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         the substance of what is required with                  the expiration date with respect to each                applying standard assumptions as to the
                                         regard to the Performance Graph will                    award of unexercised options, stock                     share price of the company’s securities
                                         not change substantially from what was                  appreciation rights and similar                         and the date of the event triggering
                                         required prior to the adoption of these                 instruments with option-like features.                  termination.
                                         amendments.                                             Given the detailed information required,                   In addition, because the
                                            While the Summary Compensation                       the disclosure generated may be                         determination of named executive
                                         Table as amended will require reporting                 lengthy, but commenters indicated that                  officers will be based on total
                                         of the grant date fair value of equity-                 this information is meaningful to                       compensation rather than salary and
                                         based awards, we do not believe that                    them.592 Instead of disclosure on an                    bonus, some companies will incur
                                         this change will increase costs for                     aggregate basis, as was proposed and as                 higher costs tracking the compensation
                                         companies, because the computation of                   was required for some outstanding                       paid to all executive officers in order to
                                         the grant date fair values of stock,                    option awards before adoption of these                  determine which are the most highly
                                         options and similar instruments already                 amendments, the disclosure of                           compensated. At the same time,
                                         is required for financial statement                     individual awards will enable investors                 however, companies will not be
                                         purposes as a result of the                             to understand the extent and magnitude                  required to track the incremental change
                                         implementation of FAS 123R.                             to which an executive’s previously                      in the value of pension benefits or the
                                         Companies may incur additional costs,                   awarded options provide the potential                   amount of above-market or preferential
                                         however, in determining the year to year                to generate upside growth in the value                  earnings on nonqualified deferred
                                         incremental changes in the actuarial                    of these holdings.593 We have attempted                 compensation for purposes of
                                         present value of the named executive                    to minimize the cost of this rule as                    identifying named executive officers, as
                                         officers’ accumulated benefit under                     amended by requiring that companies                     they would have under the proposed
                                         defined benefit and actuarial pension                   list only the key terms of the securities,              requirements.
                                         plans for the purposes of reporting such                as opposed to computing the weighted                       Under the amendments regarding
                                         compensation in the Summary                             average of exercise prices or some other                Form 8–K, disclosure regarding
                                         Compensation Table. In an effort to                     calculation necessary for the purposes                  executive and director arrangements
                                         reduce costs in response to commenters’                 of aggregation.                                         and other plans that are no longer
                                         suggestions, we have revised the                           Additional costs may also be incurred                required to be reported within four days
                                         requirement to specify that in                          in preparing and presenting required                    under Item 1.01 of Form 8–K will be
                                         computing the amount to be disclosed                    disclosures regarding retirement                        required to be disclosed by way of the
                                         under the amendments, companies must                    benefits, deferred compensation and                     exhibit filing requirements on at least a
                                         use the same assumptions (other than                    post-termination or change in control                   quarterly basis. To the extent that a
                                         the normal retirement age) that they use                payments, to the extent that information                reduction in timeliness of this
                                         for financial reporting purposes under                  regarding these matters is not currently                information will reduce its value to
                                         generally accepted accounting                           collected in a way that would facilitate                investors, the amendments may impose
                                         principles. Another change which may                    disclosure under the amendments.                        costs on investors other than those
                                         help to make the calculation less costly                However, these costs will likely be                     associated with transitioning to the new
                                         is our revision to the proposal that the                mitigated to some extent for the                        threshold.
                                         incremental change in the actuarial                     following reasons:                                         We believe that there will be some
                                         present value of the named executive                       • As noted above, the calculation of                 increase in the cost of complying with
                                         officers’ accumulated benefit under                     the actuarial value of pension benefits                 the related person transaction disclosure
                                         defined benefit and actuarial pension                   required in the Pension Benefits Table                  requirement and corporate governance
                                         plans required in the Summary                           and the Summary Compensation Table                      disclosures. The amendments may
                                         Compensation Table directly                             will be standardized to a significant                   increase the cost of complying with the
                                         correspond to the disclosure required in                extent by requiring companies to use                    related person transaction disclosure
                                         the Pension Benefits Table. Therefore, a                many of the same assumptions for                        requirement by eliminating or reducing
                                         second and different calculation of                     purposes of these calculations as they                  the scope of certain instructions and by
                                         pension benefits is not being adopted as                use for financial reporting purposes                    expanding the group of related persons
                                         proposed. Costs may also arise from the                 under generally accepted accounting                     covered to include additional
                                         reporting of other compensation in the                  principles;                                             ‘‘immediate family members.’’ We did
                                         All Other Compensation Column of the                       • The Pension Benefits Table will not                not adopt, as proposed, a requirement
                                         Summary Compensation Table. We do                       require different calculations from those               for disclosure of indebtedness
                                         not believe that the addition of a                      called for in the Summary                               transactions with significant
                                         ‘‘Total’’ column to the Summary                         Compensation Table and will not                         shareholders. Similarly, with respect to
                                         Compensation Table in and of itself will                require the disclosure of estimated                     registered investment companies and
                                         increase costs, because former                          retirement benefits payable upon early                  business development companies,
                                         disclosure requirements already                         retirement, as proposed; and                            amendments to Items 22(b)(7), 22(b)(8),
                                         mandated the disclosure of all                             • We have adopted commenters’                        and 22(b)(9) of Schedule 14A and to
                                         compensation, and the mechanical                        suggestions that the quantitative                       Forms N–1A, N–2, and N–3 will
                                         process of adding up disclosure                         disclosure required for post-termination                increase to $120,000 the former $60,000
                                         amounts should not be significant.                      agreements in new Item 402(j) of                        threshold for disclosure of certain
                                            Companies will incur additional costs                Regulation S–K be calculated by                         interests, transactions, and relationships
                                         associated with disclosing the number                                                                           of each director (and, in the case of
                                         and key terms of out-of-the-money                         592 Several commenters recommended expanded           Items 22(b)(7), 22(b)(8), and 22(b)(9) of
                                         instruments in the Outstanding Equity                   disclosure of the number and key terms of out-of-       Schedule 14A, each nominee for
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                                         Awards at Fiscal Year-End Table. As                     the-money instruments. See n. 277. Other                election as director) who is not or would
                                         adopted, this table will require                        commenters suggested award-by-award disclosure          not be an ‘‘interested person’’ of the
                                                                                                 for options. See letters from Hodak Value Advisors
                                         companies to disclose, on an award-by-                  and The Rock Center for Corporate Governance.           fund within the meaning of Section
                                         award basis, the number of underlying                     593 See, e.g., letters from Brian Foley & Co.; Buck   2(a)(19) of the Investment Company Act
                                         securities, the exercise or base price and              Consultants; and Grundfest.                             (and their immediate family members).

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                                                          Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations                                        53223

                                         Since these forms already require such                  listing standards. Finally, additional                requirement under new Item 407(e) to
                                         disclosure using the $60,000 threshold,                 costs may be incurred by companies                    identify any executive officer within the
                                         we do not believe the amendments                        complying with Item 407(a) when                       company that a compensation
                                         would impose additional costs.                          companies rely on an exemption from                   consultant contacted in carrying out its
                                            Amended Item 404(b) of Regulation                    independence standards, as we are                     assignment. The overall effect of these
                                         S–K introduces new costs by imposing                    requiring disclosure regarding reliance               modifications to Items 404(a) and 407 as
                                         new disclosure requirements on                          on any such exemption, including the                  they were proposed will be to reduce
                                         companies regarding their policies for                  basis for the conclusion that the                     the number and type of transactions or
                                         review, approval or ratification of                     exemption is available.                               contacts for which disclosure will be
                                         related person transactions. In order to                   We believe that, overall, the costs                required under the new rules and lessen
                                         comply with disclosure requirements                     noted above which are associated with                 the aggregate burden imposed on
                                         regarding policies for the review,                      the amended disclosure requirements                   companies to comply with the new
                                         approval or ratification of related person              for related person transactions and                   rules. We recognize, as suggested by
                                         transactions, we understand that                        director independence will be offset to               commenters, that additional costs may
                                         companies will incur costs of collecting                some extent by cost decreases associated              be incurred in preparing the additional
                                         the type of information that will be                    with narrowing the scope of other                     disclosures required regarding the
                                         required to be disclosed. These costs                   disclosure requirements under the                     compensation committee process,
                                         will be higher to the extent companies                  amendments, such as the disclosure that               including disclosure regarding the use
                                         do not already collect this information,                was required about director                           of compensation consultants, as well as
                                         either pursuant to their corporate                      relationships under Item 404(b) of                    in the compensation committee’s
                                         governance policies or through                          Regulation S–K before today’s                         involvement with the Compensation
                                         directors’ and officers’ questionnaires.                amendments. In this regard, we believe                Discussion and Analysis through the
                                         The new rules do not require companies                  that companies will generally be                      Compensation Committee Report.
                                         to create new policies or processes for                 required to provide an amount of                         Our plain English amendments
                                         review, approval or ratification of                     information that is comparable to what                require that companies use a clear
                                         relationships with related persons.                     had been required by our rules before                 writing style to present the information
                                         However, to the extent that companies                   the amendments. However, under the                    about executive and director
                                         do create new policies or processes that                amendments the information regarding                  compensation, related person
                                         require the collection of different or                  these matters will be presented in a                  transactions, beneficial ownership and
                                         additional information, they may incur                  manner that recognizes recent changes,                some corporate governance matters that
                                         incremental costs.                                      such as the imposition of corporate                   are required to be disclosed in Exchange
                                            The amended disclosures regarding                    governance listing standards at the                   Act reports such as annual reports on
                                         director independence are similar to                    major markets.                                        Forms 10–K or 10–KSB. We believe the
                                         disclosure requirements under the                          Moreover, our amendments to the                    amended rules will result in a short-
                                         proxy rules regarding the independence                  related person transaction and director               term increase in costs for companies as
                                         of directors who are members of the                     independence disclosure requirements                  they rewrite the information required to
                                         company’s audit and nominating                          differ in certain respects from the                   be included in annual reports or
                                         committees. Thus, for companies that                    proposals, which may lessen the                       incorporated by reference from proxy or
                                         are subject to the proxy rules, the task                expected compliance costs. In response                information statements, but few
                                         of complying with the disclosure                        to commenters’ concerns, we are                       additional costs after the first year or
                                         requirement regarding director                          retaining certain exceptions to the                   two of implementation, as companies
                                         independence can be performed by the                    related person transaction disclosure                 become familiar with the organizational,
                                         same person or group of persons already                 requirements that existed under the                   language, and document structure
                                         responsible for compliance with the                     rules prior to these amendments, and                  changes necessary to comply with these
                                         rules requiring disclosure about the                    we are not requiring disclosure of                    amendments. Additional costs, if any,
                                         independence of nominating and audit                    indebtedness transactions with                        should be one-time or otherwise short-
                                         committee members. Because the rules                    significant shareholders (or their                    term.
                                         prior to these amendments already                       immediate family members). For the                       We believe that there would be little,
                                         required companies subject to the proxy                 amended disclosures under new Item                    if any, increase in the cost of complying
                                         rules to collect and disclose information               407(a), any additional compliance costs               with the beneficial ownership rule
                                         about the independence of directors                     associated with requiring companies to                amendments. A company will be
                                         who serve on the audit and nominating                   disclose the transactions, relationships              required to disclose named executive
                                         committees, this amended disclosure                     and arrangements considered by the                    officer, director and director nominee
                                         should not impose significant new costs                 board of directors in determining the                 pledges of securities, and directors’ full
                                         for the collection of information by                    independence of directors or director                 beneficial ownership of equity
                                         companies that are subject to the proxy                 nominees is mitigated to some extent                  securities, including directors’
                                         rules. The new disclosure requirement                   because the amendments require only                   qualifying shares. The company can
                                         regarding director and committee                        the disclosure of the specific type or                inquire as to this information in
                                         member independence may require                         category of transactions considered by                questionnaires it already circulates to
                                         disclosure of additional categories or                  the board of directors that are not                   the company’s officers and directors.
                                         types of director relationships.                        otherwise disclosed under the related                    For purposes of the Paperwork
                                         Additional costs may be incurred in                     person transaction disclosure                         Reduction Act, we have estimated the
                                         seeking this information. However, such                 requirement of Item 404(a). In contrast,              annual incremental increase in the
                                         costs are limited by the extent to which                under the rule proposals, disclosure of               paperwork burden for companies to
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                                         companies already identify and track                    the specific details of each such                     comply with our collection of
                                         the relationships that may be required to               transaction, relationship or arrangement              information requirements to be
                                         be disclosed for the purposes of                        would have been required. Furthermore,                approximately 783,284 hours of in-
                                         complying with pre-existing disclosure                  in response to several commenters, we                 house company personnel time and to
                                         requirements or corporate governance                    have eliminated the proposed                          be approximately $133,883,300 for the

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                                         53224             Federal Register / Vol. 71, No. 174 / Friday, September 8, 2006 / Rules and Regulations

                                         services of outside professionals. As                   purposes of the Exchange Act.                         is intended to make Exchange Act
                                         noted in the Paperwork Reduction Act                    Furthermore, Securities Act Section                   reports and proxy or information
                                         section, we have revised these estimates                2(b),596 Exchange Act Section 3(f) 597                statements incorporated by reference in
                                         both in response to comments about the                  and Investment Company Act Section                    those reports easier to understand.
                                         proposed estimates and in light of the                  2(c) 598 require us, when engaging in                 Thus, the amended rules will enhance
                                         changes we have made from the                           rulemaking where we are required to                   the reporting requirements in place
                                         proposal.594 These costs are based on                   consider or determine whether an action               before adoption of these amendments by
                                         our estimates that the annual                           is necessary or appropriate in the public             providing more effective material
                                         incremental disclosure burden imposed                   interest, to consider, in addition to the             disclosure to investors in a timely
                                         by the revisions that we adopt today                    protection of investors, whether the                  manner. We anticipate that these
                                         will average 95 hours per Form 10–K; 50                 action will promote efficiency,                       amendments will improve investors’
                                         hours per Form 10–KSB; 3 hours per                      competition, and capital formation.                   ability to make informed investment
                                         Schedule 14A and Schedule 14C; 85                          We have also discussed other impacts               and voting decisions and, therefore, may
                                         hours per Form 10; 45 hours per Forms                   of the amendments in our Cost-Benefit,                lead to increased efficiency and
                                         10–SB and SB–2; 74 hours per Form S–                    Paperwork Reduction Act and Final                     competitiveness of the U.S. capital
                                         1; 17 hours per Form S–4; 85 hours per                  Regulatory Flexibility Act Analyses. The              markets. As discussed more fully in our
                                         Form S–11; and 5 hours per Form N–2.                    amendments to Regulations S–K and S–                  Cost-Benefit Analysis, improved
                                         We estimate that the amendments to                      B, to Items 8 and 22(b) of Schedule 14A,              transparency in disclosure under these
                                         Item 22(b) of Schedule 14A and                          and to Forms N–1A, N–2, and N–3 are                   amendments could have other benefits
                                         increasing to $120,000 the former                       intended to improve the completeness                  in terms of the allocative efficiency of
                                         $60,000 threshold for disclosure of                     and clarity of executive compensation                 affected corporations with regard to the
                                         certain interests, transactions, and                    and related person transactions                       use of resources for executive
                                         relationships of each director in Forms                 disclosure available to investors and the             compensation relative to other corporate
                                         N–1A, N–2, and N–3 will not impose an                   financial markets. These amendments                   needs, as well as improvements in
                                         annual incremental disclosure burden.                   will enhance investors’ understanding                 efficiency of managerial labor markets.
                                         These estimated costs include an                        of how corporate resources are used,                     Some commenters were concerned as
                                         estimated reduction in costs attributable               and enable shareholders to better                     to whether including examples in the
                                         to current reports on Form 8–K of                       evaluate the actions of the board of                  principles-based Compensation
                                         approximately 6,458 hours of company                    directors in fulfilling their                         Discussion and Analysis disclosure item
                                         personnel time and by a cost of                         responsibilities, as well as the                      would in some way cause companies
                                         approximately $861,000 for the services                 incentives for executive officers.                    and compensation committees to feel
                                         of outside professionals, based on an                      The amendments to Form 8–K are                     obligated to conform their compensation
                                         estimate that 1,722 fewer current reports               intended to facilitate the ability of                 decision-making processes to those
                                         on Form 8–K will be filed because of                    investors and shareholders to access                  examples. As we discussed in Section
                                         more focused current reporting of                       real-time disclosure of public                        II.B.1., we emphasize that application of
                                         compensation transactions. Based on                     companies’ executive compensation                     a particular example must be tailored to
                                         these estimates solely computed fo